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Home My WebLink About2006-02-08Minutes of the Regular Joint meeting of the Finance, Administration and Human Resources Committee and Steering Committee Meeting Page 2 February 8, 2006 (5) REPORT OF THE GENERAL MANAGER Jim Ruth, Interim General Manager, reported that progress was being made in streamlining the performance appraisal process, as well as succession planning. (6) REPORT OF DIRECTOR OF FINANCE/TREASURER Director of Finance, Lorenzo Tyner, advised that a report of purchases at the Executive Management (EMT) level will be provided to the FAHR committee in March. (7) REPORT OF DIRECTOR OF HUMAN RESOURCES/PUBLIC INFORMATION OFFICE Lisa Tomko, Director of Human Resources, reported on the progress of the recruitment for the Public Information Manager position. (8) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, had no report. (9) CONSENT CALENDAR ITEMS a. Approve minutes of the December 14, 2005, Finance, Administration and Human Resources Committee meeting. b. FAHR06-01 Item pulled for discussion. c. FAHR06-02 Receive and file OSHA Incidence Rates and Workers' Compensation Claims and Costs Report. d. FAHR06-03 Recommend to the Board of Directors to receive and file report of General Manager approved purchases in amounts exceeding $50,000 in accordance with Board purchasing policies. e. FAHR06-04 Item pulled for discussion. MOTION: It was moved, seconded and duly carried to approve the recommended actions for items specified as 9(a), (c), and (d) under Consent Calendar. END OF CONSENT CALENDAR b. FAHR06-01 Receive and file Employment Status Report as of February 18, 2006. MOTION: Staff answered questions that Directors had on hiring freeze and current employment status. It was moved, seconded and duly carried to approve. Minutes of the Regular Joint meeting of the Finance, Administration and Human Resources Committee and Steering Committee Meeting Page 3 February 8, 2006 e. FAHR06-04 Recommend to the Board of Directors to receive and file the FY 2005-06 MOTION: Quarterly and Mid-Year Consolidated Financial Reports for the period ended December 31, 2005. Staff answered questions that Directors had on the financial report, in particular the increases on chemicals and utilities. It was moved, seconded and duly carried to recommend approval to the Board of Directors. (10) ACTION ITEMS a. FAHR06-05 Recommend to the Board of Directors to approve the FY 2006-07 and FY 2007-08 Budget Assumptions and direct staff to prepare the FY 2006-07 -2007-08 Budget incorporating these parameters. MOTION : Lorenzo Tyner, Director of Finance, presented detailed information on the budget assumptions, and provided answers to the Directors' questions. It was moved, seconded and duly carried to recommend approval to the Board of Directors. b. FAHR06-06 Recommend to the Board to (1) Approve a Purchase Order Contract with Lance, Soll & Lunghard, Certified Public Accountants, as the District's contracted internal auditors for FY 2005-06, for the period of March 1, 2006 through February 28, 2007, for an amount not to exceed $58,670, with an option to renew the contract for two one-year periods based on approval by the FAHR Committee; and, MOTION: (2) Direct Lance, Soll & Lunghard to perform specific internal auditing assignments as the FAHR Committee deems necessary. Directors were introduced to the agency's representatives, Mr. Kikuchi and Mr. Patel, who answered questions about the auditing firm's background and processes. Directors gave the auditors the order of priorities to follow, as well as added cell phone usage to the audit list. It was moved, seconded and duly carried to recommend approval to the Board of Directors. c. FAHR06-07 Recommend to the Board to (1) Approve an agreement with Cambridge Integrated Services, Inc. for workers' compensation third-party administration services, for a reduced amount to be determined at the February 8, 2006 FAHR Committee meeting; -or- Minutes of the Regular Joint meeting of the Finance, Administration and Human Resources Committee and Steering Committee Meeting Page4 February 8, 2006 MOTION: Direct staff to initiate a bid proposal process for workers' compensation third-party administration services. Staff recommended approval of the revised pricing agreement with Cambridge Integrated Services Group, Inc. as third-party administrator for Workers' Compensation as provided in Flat Fee Option B. It was moved, seconded and duly carried to recommend approval to the Board of Directors of the revised pricing agreement with Cambridge Integrated Services Group, Inc. for third-party administration of Workers' Compensation as provided in Flat Fee Option B. d. FAHR06-08 (1) Recommend that the Board of Directors Adopt Resolution No. MOTION: OCSD06-02, 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, a Standby Certificate Purchase Agreement, a Purchase Contract and a Remarketing Agreement in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Series 2006, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $200,000,000, Authorizing the Distribution of an Official Statement in Connection Therewith and Authorizing the Execution of Necessary Documents and Certificates and Related Actions. (2) Recommend that the Orange County Sanitation District Financing Corporation to adopt Resolution No. FC-03, 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 Certificates of Participation, Series 2006; 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. Staff and independent financial advisor, Mr. Ed Soong of Public Resources Advisory Group, answered questions from the Directors. It was moved, seconded and duly carried to recommend approval to the Board of Directors. (11) INFORMATIONAL PRESENTATIONS a. FAHR06-09 District Rate Model The Director of Finance gave a presentation on the rate model used by the Sanitation District, which identifies the allocation of funds received by ratepayers. ROLL CALL JOINT FINANCE, ADMINISTRATION AND HUMAN RESOURCES AND STEERING COMMITTEES Meeting Date: December 14, 2005 Time: 5:00 p.m. Adjourn: __ _ COMMITTEE MEMBERS Darryl Miller (Chair) Mike Duvall (Vice Chair) Bill Dalton Richard Freschi Phil Luebben Joy Neugebauer James W. Silva Mark Waldman Steve Anderson (Board Chair) Jim Ferryman (Board Vice Chair) OTHERS I Brad Hogin, General Counsel I I STAFF Jim Ruth, Interim General Manager Bob Ghirelli, Acting Director of Public Affairs Lorenzo Tyner, Director of Financeffreasurer David Ludwin, Director of Enqineerinq Jim Herberq, Director of O & M Lisa Tomko, Director of Human Resources Patrick Miles, Director of Information Technoloav Nick Arhontes, Director of Regional Assets & Services Lilia Kovac, Committee Secretary Jeff Reed Mike White c: Lenora Crane AGENDA REGULAR JOINT MEETING OF THE FINANCE, ADMINISTRATION AND HUMAN RESOURCES COMMITTEE & STEERING COMMITTEE ORANGE COUNTY SANITATION DISTRICT WEDNESDAY, FEBRUARY 8, 2006, AT 5:00 P.M. (1) ROLL CALL ADMINISTRATIVE OFFICE 10844 Ellis Avenue Fountain Valley, California 92708 www.ocsd.com (2) APPOINTMENT OF CHAIR-PRO TEM, I.F NECES.SARY (3) PUBLIC COMMENTS (4) REPORT OF COMMITTEE CHAIR (5) REPORT OF GE:NEF.iAL MA:NAGER (6) REPORT OF DIRECTOR OF FINANCE (7) HEPORT e>F DIRECTOR OF HUMAN RESOURCES/ PUBLIC INFORMATION OFFIGE (8) REPOFff OF GENERAL COUNSEL (9 ) CONSENT GALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. Approve minutes of the December 14, 2005, Finance, Administration and Human Resources Committee meeting. b. FAHR06-01 Receive and file Employment Status Report as of February 18, 2006. Book Page 12 Book Page 1 February 8, 2006 c. FAHR06-02 Receive and file OSHA Incidence Rates and Workers' Compensation Claims and Costs Report. Book Page 17 d. FAHR06-03 Recommend to the Board of Directors to receive and file report of General Manager approved purchases in amounts exceeding $50,000 in accordance with Board purchasing policies. Book Page 20 e. FAHR06-04 Recommend to the Board of Directors to receive and file the FY 2005-06 Quarterly and Mid-Year Consolidated Financial Reports for the period ended December 31, 2005. Book Page 22 END OF CONSENT CALENDAR Consideration of items deleted from Consent Calendar, if any. (10) ACTION ITEMS a. FAHR06-05 Recommend to the Board of Directors to approve the FY 2006-07 and FY 2007-08 Budget Assumptions and direct staff to prepare the FY 2006-07 - 2007-08 Budget incorporating these parameters. Book Page 70 (Lorenzo Tyner -30 minutes) b. FAHR06-06 Recommend to the Board to (1) Approve a Purchase Order Contract with Lance, Soll & Lunghard, Certified Public Accountants, as the District's contracted internal auditors for FY 2005-06, for the period of March 1, 2006 through February 28, 2007, for an amount not to exceed $58,670, with an option to renew the contract for two one-year periods based on approval by the FAHR Committee; and, (2) Direct Lance, Soll & Lunghard to perform specific internal auditing assignments as the FAHR Committee deems necessary. Book Page 87 (Lorenzo Tyner - 1 O minutes) c. FAHR06-07 Recommend to the Board to (1) Approve an agreement with Cambridge Integrated Services, Inc. for workers' compensation third-party administrative services, for a reduced amount to be determined at the February 8, 2006 FAHR Committee meeting; -or- Direct staff to initiate a bid proposal process for workers' compensation third- party administrative services. Book Page 90 (Susan Walker - 1 O minutes) 2 H:\dept\agenda\FAHR\FAH R2006\0206\03.020806 FAH R Agenda.doc Book Page 2 February 8, 2006 d. FAHR06-08 (1) Recommend that the Board of Directors Adopt Resolution No. OCSD06-_, 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, a Standby Certificate Purchase Agreement, a Purchase Contract and a Remarketing Agreement in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Series 2006, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $200,000,000, Authorizing the Distribution of an Official Statement in Connection Therewith and Authorizing the Execution of Necessary Documents and Certificates and Related Actions. (2) Recommend that the Orange County Sanitation District Financing Corporation to adopt Resolution No. FC-_, 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 Certificates of Participation, Series 2006; 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. Book Page 93 (Lorenzo Tyner -15 minutes) (11) INFORMATIONAL ITEMS a. FAHR06-09 District Rate Model Book Page 202 (Lorenzo Tyner - 1 O minutes) b. FAHR06-10 Public Information Office quarterly update Book Page 205 (Lisa Tomko - 5 minutes) (12) CLOSED SESSION ) Duririg the course of conducting the business set forth on this agenda as a regular meeting 'of the Committee, ~ [ I the Chair may convene the Committee in closed session to consider matters of pending real estate negotiations, ! 1 pending or potential litigation, or personnel matters, pursuant to Government Code Sections 54956.8, 54956.9, \ ! 54957 or 54957.6, as noted. i ) Reports relating to (a) purchase and sale of real property; (b) matters of pending or potential litigation; (c) I i employee actions or negotiations with employee representatives; or which are exempt from public disclosure i ! under the California Public Records Act, may be reviewed by the Committee during a permitted closed session ! : and are not available for public inspection. At such time as final actions are taken by the Committee on any of l i these subjects, the minutes will reflect all required disclosures of information. i ~--••...._ ....... ••••·•._.• ......................... ~~•-•unoHno••~·••oHuuooooH.HUHOHHHHu .. •• .. • .. ••••••••••••••••• .. ••••••• ... ••••••·• .. ••·•·"•· •• ..-. .•. .-. ...... .,,, ·••--~••·•••0-00-0-H ,_,_........__,,,.,,..,, .. _.,,u,y-,._., .. , ,.._., ••~·•••·••••••••••••••••••• .. •' a. Convene in closed session. 3 H:\dept\agenda\FAH R\FAH R2006\0206\03.020806 FAHR Agenda.doc Book Page 3 February 8, 2006 1. Confer with General Counsel -Pending litigation and significant exposure to litigation; Open compensation claims (Government Code Section 54956.9): Canen Darrin (2); Forman Kymberly; Givan Tyrone; Hargreaves Rich; Heller Lynda; loja Florian; Marsella Rose.; Min Dong Ju; Morris Robert; Mutz Mark; Nguyen Hoang-Oanl:1; N9uyen Thuthuy; Nunez Lydia; Parker Joan; Pelletier Steve; Rea Rory {2); Scribner Monique; Simmons Donna;. Smith Suzanne; Steiger Frank; Tran Huy; Woodside Frankie; Yokoyama Dean; Zuccolio Silvino; b. Reconvene in regular session. c. Consideration of action, if any, on matters considered in closed session. (13) OTHER BUSINESS. COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENQA FOR ACTION AND STAFF REPORT (15) FUTURE MEETING DATES The next Finance, Administration and Human Resources Committee Meeting is scheduled for March 8, 2006, at 5 p.m. (16) ADJOURNMENT 4 H:\dept\agenda\FAHR\FAH R2006\0206\03.020806 FAH R Agenda.doc Book Page4 February 8, 2006 Agenda P0stin•g: In accordance with the requirements of California Government Code Section 54954.2, this agenda has been posted in the main lobby of the District's Administrative offices not less than 72 hours prior to the meeting date and time above. All written materials relating to each agenda item are available for public inspection in the office of the Board Secretary. Items Not P0ste·d: In the event any matter not listed on this agenda is proposed to be submitted to the Committee for discussion and/or action, it will be done in compliance with Section 54954.2(b) as an emergency item or because there is a need to take immediate action, which need came to the attention of the Committee subsequent to the posting of agenda, or as set forth on a supplemental agenda posted in the manner as above, not less than 72 hours prior to the meeting date. Public Comments: Any member of the public may address the Operations, Maintenance and Technical Services Committee on specific agenda items or matters of general interest. As determined by the Chair, speakers may be deferred until the specific item is taken for discussion and remarks may be limited to three minutes. Matters of interest addressed by a member of the public and not listed on this agenda cannot have action taken by the Committee except as authorized by Section 54954.2(b). G0nsent Caleridar: All matters placed on the consent calendar are considered as not requiring discussion or further explanation, and unless a particular item is requested to be removed from the consent calendar by a Director of staff member, there will be no separate discussion of these items. All items on the consent calengar will be enacted by one action approving all motions, and casting a unanimous ballot for resolutions included on the consent calendar. All items removed from the consent calendar shall be considered in the regular order of business. The Committee Chair will determine if any items are to be deleted from the consent calendar. Items Continued: Items may be continued from this meeting without further notice to a Committee meeting held within five (5) days of this meeting per Government Code Section 54954.2(b)(3). Meeting 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 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 Board Secretary's office at (714) 593-7130 at least 72 hours prior to the scheduled meeting. Requests must specify the nature of the disability and the type of accommodation requested. Notice to Committee Members: For any questions on the agenda or to place any items on the agenda, Committee members should contact the Committee Chair or Secretary ten days in advance of the Committee meeting. Committee Chair: Committee Secretary: Interim General Manager: Director of Finance: Director of Human Resources: And Public Information Office Darryl Miller Lilia Kovac Jim Ruth Lorenzo Tyner Lisa Tomko (949) 453-5300 (714) 593-7124 lkovac@ocsd.com (714) 593-7110 jruth@ocsd.com (714) 593-7550 ltyner@ocsd.com (714) 593-7145 ltomko@ocsd.com 5 H:\dept\agenda\FAH R\FAH R2006\0206\03.020806 FAHR Agenda.doc Book Page 5 MINUTES OF FINANCE, ADMINISTRATION AND HUMAN RESOURCES COMMITTEE MEETING Orange County Sanitation District Wednesday, December 14, 2005, 5:00 p.m. A meeting of the Finance, Administration and Human Resources Committee of the Orange County Sanitation District was held on December 14, 2005, at 5:00 p.m., in the Sanitation District's Administrative Office. (1) The roll was called and a quorum declared present, as follows: FAHR COMMITTEE MEMBERS: DIRECTORS PRESENT: Darryl Miller, Chair Mike Duvall, Vice Chair Bill Dalton Rich Freschi Phil Luebben Joy Neugebauer Mark Waldman Jim Ferryman, Vice Board Chair DIRECTORS ABSENT: Steve Anderson, Board Chair James W. Silva STAFF PRESENT: Jim Ruth, Interim General Manager Lisa Tomko, Director of Human Resources Lorenzo Tyner, Director of Finance/Treasurer Bob Ghirelli, Acting Director of Public Affairs Jeff Reed, Human Resources Manager Mike White, Controller Paul Loehr, Senior Human Resources Analyst Andrew Nau, Senior Human Resources Analyst Lilia Kovac, Committee Secretary Penny Kyle, Board Secretary Bob Geggie Juanita Skillman OTHERS PRESENT: Brad Hogin, General Counsel (2) APPOINTMENT OF CHAIR PRO TEM No appointment was necessary. (3) PUBLIC COMMENTS There were no public comments. (4) REPORT OF THE COMMITTEE CHAIR Chair Miller had no report. (5) REPORT OF THE GENERAL MANAGER Jim Ruth, Interim General Manager, reported he was looking forward to working with staff that has been very cooperative. Book Page 7 Minutes of the Finance, Administration and Human Resources Committee Meeting Page2 December 14, 2005 (6) REPORT OF DIRECTOR OF FINANCE/TREASURER Director of Finance, Lorenzo Tyner, reported after a few attempts staff is in receipt of only one qualified response for internal auditing. He will be moving forward after the first of the year to bring staff's recommendation to the FAHR Committee. (7) REPORT OF DIRECTOR OF HUMAN RESOURCES Lisa Tomko, Director of Human Resources, requested that Consent Calendar Item 1 0(d) be pulled for discussion as an informational item as Item 12(d). (8) REPORT OF DIRECTOR OF PUBLIC AFFAIRS Bob Ghirelli, Acting Director of Public Affairs, had no report. (9) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, had no report. (10) CONSENT CALENDAR ITEMS a. Approve minutes of the November 9, 2005, Finance, Administration and Human Resources Committee meeting. b. FAHR05-102 Recommend to the Board of Directors to receive and file report of General Manager approved purchases in amounts exceeding $50,000 in accordance with Board purchasing policies. c. FAHR05-103 Receive and file Employment Status Report as of November 14, 2005. d. FAHR05-104 Item pulled for discussion under Informational Item (12). MOTION: It was moved, seconded and duly carried to approve the recommended actions for items specified as 1 0(a) through (c) under Consent Calendar. END OF CONSENT CALENDAR (11) ACTION ITEMS a. FAHR05-105 MOTION: Recommend to the Board of Directors to approve a one-time only non- base building payment for the Director of Technical Services in an amount not to exceed $2,679 for his service as Acting General Manager. It was moved, seconded and duly carried to recommend approval to the Board of Directors. Book Page 8 Minutes of the Finance, Administration and Human Resources Committee Meeting Page3 December 14, 2005 b. FAHR05-106 MOTION: c. FAHR05-107 MOTION: Recommend to the Board to Adopt Resolution No. OCSD 05-_, Declaration of Official Intent to Reimburse Certain of the Sanitation District's Capital Reserve Funds for Expenditures Made in Advance for FY 2005-06 Capital Improvement Projects from Proceeds of a Future Long-Term Financing. It was moved, seconded and duly carried to recommend approval to the Board of Directors. Recommend to the Board of Directors to adopt Resolution No. OCSD05- _, amending Resolution No. OCSD 98-33, amending Human Resources Policies and Procedures Manual, as amended with minor corrections. It was moved, seconded and duly carried to recommend approval to the Board of Directors. (12) INFORMATIONAL PRESENTATIONS a. FAHR05-108 b. FAHR05-109 c. FAHR05-110 Electronic Employment Application Update Lisa Tomko introduced Andrew Nau, Senior Human Resources Analyst, who gave a brief report and answered questions on the electronic employment application software and the advantages of having the software. 2005-06 Salary and Benefits Lorenzo Tyner, Director of Finance, provided an explanation on the factors that resulted in employee salary and benefit costs being 10% greater than the approved salary increases that was only 4% for the fiscal year 2004/05. Billing for septic tank users Lorenzo Tyner, Director of Finance, reviewed the District's billing procedures, the process for identifying customers that are currently using septic tanks, and the proactive approaches that are being implemented to update the District's database records. Directors requested staff prepare a map of the most concentrated areas where septic tanks are being used to be discussed further at a future meeting of the FAHR Committee. Book Page 9 Minutes of the Finance, Administration and Human Resources Committee Meeting Page4 December 14, 2005 d. FAHR05-104 Director Neugebauer reminded the Committee of previous Board discussions focusing on ways to encourage property owners to abandon their septic tanks and connect to the sewer system. She asked that the District promote its policy adopted in September 2003, which offers a five- year, no-interest annual payments for septic tank users who connect to a local sewer system within three years of lateral installation as a means to encouraging property owners to abandon their septic tanks. OSHA Incidence Rates and Workers' Compensation Claims and Costs Report. Lisa Tomko, Director of Human Resources, recognized Jim Matte, Safety Supervisor, who gave a brief report on the difference between this month's report and last month's report. Ms. Tomko also advised staff will be reviewing the report to see if changes could be more readily identified. Mr. Matte also reported that staff has been in contact with Cambridge, the third party administrator for Workers' Compensation, and hope to set up a meeting in the near future to begin contract negotiations to lower the costs, and should have an update for the FAHR Committee in February 2006. (13) CLOSED SESSION There was no closed session. General Counsel Brad Hogin advised that Item 13(a)(1) was not noticed properly and would be deferred to the next FAHR Committee meeting. He further advised that Item 13(a)(2), as listed, could not be considered in closed session; therefore, Paul Loehr, Senior Human Resources Analyst, provided a limited overview of the District's Labor- Management Program and outlined the process that takes place for updating the memoranda of understanding with the District's bargaining units. (14) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY There were none. (15) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. (16) CONSIDERATION OF UPCOMING MEETINGS The next FAHR Committee meeting is scheduled for February 8, 2006, at 5 p.m. (17) ADJOURNMENT The Chair declared the meeting adjourned at 6:25 p.m. Book Page 10 FAHR COMMITTEE Meeting Date To Bd. of Dir. 02/08/06 AGENDA REPORT Item Number Item Number FAHR06-01 Orange County Sanitation District FROM: Lisa L. Tomko, Director of Human Resources Originator: Richard Spencer, Human Resources Supervisor SUBJECT: EMPLOYMENT STATUS REPORT AS OF JANUARY 18, 2006 GENERAL MANAGER'S RECOMMENDATION Receive and file the Employment Status Report. SUMMARY The number of full-time equivalent (FTE) employees at OCSD is 601.00; actual headcount is 613. · PRIOR COMMITTEE/BOARD ACTIONS N/A PROJECT/CONTRACT COST SUMMARY N/A BUDGET IMPACT D This item has been budgeted. (Line item: ) D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. IZ] Not applicable (information item) ADDITIONAL INFORMATION SEPARATIONS: 6 Total Job Title Division Buyer Contracts, Purchasing, & Materials Management Information Technology Analyst Ill Customer & Network Support Senior Contracts Administrator Contracts, Purchasing, & Materials Management Laboratory Assistant Laboratory -Microbiology Lead Mechanic Rebuild/ Weld/ Machine/ Fabrication Services Senior Laboratory Analyst Laboratory Admin & QA H:ldeptlagenda\FAHRIFAHR2006\0206\06-01.Employmen\ Status.doc Page 1 Book Page 12 Reason Resignation Resignation Resignation Retirement Retirement Resignation NEW HIRES: 9Total Job Title Division Op~rator-ln-Training Operations, Plant 1 Operator-In-Training 0perations, Plant 2 Office Assistant Engineering & Construction Security/Emergency Planning Specialist Safety & Health General Manager (Interim) General Management Administration Information Technology Analyst Ill Programming & Database Support Administrative Assistant Contracts, Purchasing, & Materials Management Intern Engineering & Construction Intern Environmental Assessment PROMOTIONS: 12 Total Name Former Job Title Current Job Title Division Victoria Francis Engineer Senior Engineer Regional Assets & Services Admin Shane Milligan Mechanic Senior Mechanic Mechanical Maintenance & Power Production Gerardo Amezcua Plant Operator Senior Plant Operator OpE_!ration~. Plant 2 Joe Chester Senior Construction Construction Inspection Engineering & Construction lnspe_ct0r Supervisor Thys DeVries Accounting Assistant II Human Resources Assistant Workforce Support Services James Harris Associate Engineer Ill Construction Inspection Engineering & Construction Suoervlsor Wayne Mentink Information Technology Senior Information Technology Process Control Integration Analyst Ill Analvst Huan-Hoang Nguyen Instrumentation Associate Engineer 111 Engineering & Construction Technician II Robert Holdman Electrical Technician II Construction Inspector Engineering & Construction Victor Salinas Electrical Technician II Construction Inspector Engineering & Construction Theresa Evans Administrative Assistant Buyer Contracts, Purchasing, & Materials Management Paul Loehr Senior Human Human Resources Supervisor Employee & Labor Relations Resources Analyst RECLASSIFICATIONS: 7Total Name Former Job Title Current Job Title Division James Arthur Power Plant Operator I Power Plant Operator II Mechanical Maintenance & Power Production Ann Crafton Staff Analyst Senior Staff Analyst Accounting Charles Gober Mechanic Senior Mechanic Mechanical Maintenance & Power Production Arnold Lacap Mechanic Senior Mechanic Rebuild/Weld/Machine/ Fabrication Services Richard Schlegel Engineering Assistant II Engineering Data Planning Management Technician II Chris Stacklin Associate Engineer Ill Engineer Source Control Brian Tafolla Mechanic Senior Mechanic Mechanical Maintenance & Power Production H:\dept\agenda\FAHRIFAHR2006\0206\06-01.Employment Status.doc Page 2 Book Page 13 RECRUITMENT STATUS: Management has been instructed to perform a position analysis as a part of the staffing process for all current vacant positions that are in the recruitment process and for those approved in the budget for which personnel requisitions have not yet been initiated. The purpose of the position analysis is to ensure organizational need and adequate staffing justification prior to filling each and every vacant position. The process includes preparation of a Position Analysis Form as an attachment to the Personnel Requisition by the hiring Supervisor/Manager and approval by the Department Head. The documentation is forwarded directly to the General Manager for review and approval. Recruitments will resume once approval is received by Human Resources. The number of recruitments and vacancies on the attached employment status report will change accordingly. ALTERNATIVES NIA CEQA FINDINGS N/A ATTACHMENTS 1. January 18, 2006 Employment Status Report 2. FY 2005/06 Staffing Report (year to date performance compared to budgeted FTE's) H:\dept\agenda\FAHRIFAHR2006\0206\06-01.Employment Status.doc Page 3 Book Page 14 0J 0 0 ~ 'll IQ CD ...,. <JI DIV 110 General Management Admin General Management Totals 210 Finance Administration 220 Accounting 230 Contracts, Purch. & Materials Mgmt Finance Totals 310 Public Affairs Administration 320 Board Services 330 Public Information Office 340 Legislative Advocacy & Grants Public Affairs Totals 410 Regional Assets & Services Admin 420 Collection Facilities O&M 430 Facilities Maintenance Svcs Regional Assets & Services Totals 510 Human Resources Admin 520 Employee Development/Training 530 Safety & Health 540 Workforce Support Services 550 Employee & Labor Relations Human Resources Totals 610 Technical Services Admin 620 Environmental Assessment 630 Environmental Sciences Lab 640 Source Control 660 Environmental Compliance Svcs Technical Services Totals 710 Engineering Admin 740 Planning 750 Project Management Office 760 Engineering & Construction Engineering Totals 810 O&M Administration 820 O&M Process Engineering 830 Operations, Plant No. 1 840 Operations, Plant No. 2 850 Mech Main! & Power Production 860 Electrical & Instrumentation Main! Operatlons & Maintenance Totals 910 IT Administration 930 IT Customer & Network Support 940 IT Programming & Database Sys 950 IT Process Controls Integration Information Technology Totals GRAND TOTAL FTEs AUTHORIZED FTE REG 0.50 0.75 3.00 -- 3.00 -- 2.00 -- 20.00 -. 27.00 0.50 . 49.00 0.50 . 3.00 . . 5.00 0.50 . 6.00 . . 1.00 -- 15.00 0.50 - 8.00 -- 24.00 - - 30.00 . - 62.00 . - 2.00 1.00 . 3.00 . . 8.00 . - 8.00 9.50 - 4.00 0.50 . 25.00 11.00 - 2.00 -. 15.00 . . 36.00 1.00 . 40.00 . . 18.00 . . 111.00 1.00 . 3.00 . -· 16.00 . . 15.00 . 0.75 64.00 . . 98,00 . 0.75 5.00 . - 14.00 0.50 . 41.00 0.50 0.75 47.50 . . 58.00 0.50 . 54.00 0.50 - 219.50 2.00 0.75 3.00 -. 17.00 -. 12.00 . . 13.00 . - 45.00 . - 627.50 15.00 1.50 I AUTHORIZED FTE 644.00 EMPLOYMENT STATUS REPORT ACTUAL FTE Recruitments Vacancies TOTAL REG 0.50 0.75 LOA TOTAL 3.00 3.00 ---3.00 -- 3.00 3.00 ---3.00 -- 2.00 2.00 ---2.00 . - 20.00 17.00 . . -17.00 2.00 3 00 27.50 21.00 0.50 . . 21.50 7.00 6.0D 49.50 40.00 0.50 . -40.50 9.00 9.00 3.00 1.00 . -. 1.00 1.00 2 00 5.50 5.00 0.50 -. 5.50 -- 6.00 6.00 -. -6.00 . - 1.00 1.00 -. . 1.00 -- 15.50 13.00 0.50 -. 13.50 1.00 2.00 8.00 8.00 -. -8.00 - 24.00 24.00 . . -24.00 . . 30.00 27.00 . . . 27.00 -3.00 62.00 59.00 . . . 59.00 . 3.00 3.00 2.00 1.00 . . 3.00 . . 3.00 3.00 . . -3.00 . . 8.00 8.00 -. . 8.00 . 17.50 6.00 8.00 . -14.00 0.50 3.50 4.50 2.00 0.50 . . 2.50 -2,00 36.00 21.00 9.50 . . 30.50 0.50 5.50 2.00 2.00 . . . 2.00 . . 15.00 15.00 . . . 15.00 . . 37.00 33.00 1.50 . 1.00 35.50 . 1 50 40.00 40.00 . . . 40.00 . . 18.00 18.00 . . -18.00 . . 112.00 108.00 1.50 . 1.00 110.50 . 1 50 3.00 3.00 . . . 3.00 . . 16.00 16.00 --. 16.00 -. 15.75 13.00 . 0.75 -13.75 -200 64.00 58.00 -. 1.00 59.00 2.00 5.00 98.75 90.00 . 0.75 1.00 91.75 2.00 7.00 5.00 5.00 . -. 5.00 . . 14.50 10.00 0.50 -. 10.50 1.00 4.00 42.25 40.00 0.50 0.75 1.00 42.25 -. 47.50 47.00 0.50 -. 47.50 1.00 - 58.50 58.00 0.50 . . 58.50 -- 54.50 46.00 0.50 . . 46.50 1.00 8,00 222.25 206.00 2.50 0.75 1.00 210.25 3.00 12.00 3.00 2.00 --1.00 3.00 . . 17.00 15.00 . . 1.00 16.00 1.00 1 OD 12.00 11.00 . . -11.00 . 1 00 13.00 12.00 . . . 12.00 . I 00 45.00 40.00 . . 2.00 42.00 1.00 3.00 580.00 14.50 1.50 5.00 1=1 ACTUALFTE l+I Recruitments I+ Vacnnctcs (k::;;s ro'.':ruitmr.·nts) 601.00 16.50 26.50 0:, 0 0 ~ ~ l,Q CD -.a. 0) 700.00 - • • - II • - - MAR APR Authorized FTE 629.00 629.00 Actual FTE 588.00 592.00 Difference** 41.00 37.00 Recruitments 34.50 30.00 Vacancies 6.50 7.00 * Authorized FTE as of July; actual FTE as of June **Difference = Recruitments + Vacancies STAFFING REPORT ~ • • • • • • •----·---• II D-• • MAY JUN JUL* SEP OCT NOV DEC FEB 629.00 629.00 644.00 644.00 644.00 644.00 644.00 644.00 594.50 601.00 606.00 597.50 595.50 595.50 598.50 601.00 34.50 28.00 38.00 46.50 48.50 48.50 45.50 43.00 31.00 23.00 20.00 36.50 38.50 38.50 36.50 16.50 3.50 5.00 18.00 10.00 10.00 10.00 9.00 26.50 I-+-Authorized FTE -II-Actual FTE I FAHR COMMITTEE AGENDA REPORT Orange County Sanitation District FROM: Lisa L. Tomko, Director of Human Resources Originator: James Matte, Safety & Health Supervisor Meeting Date To Bd. of Dir. 02/08/2006 Item Number Item Number FAHR06-02 SUBJECT: OSHA INCIDENCE RATES AND WORKERS' COMPENSATION CLAIMS AND COSTS REPORT GENERAL MANAGER'S RECOMMENDATION Receive and file the OSHA Incidence Rates and Workers' Compensation Claims and Costs Report. SUMMARY The Safety and Health Division tracks OSHA Incidence Rates for DART(1> Cases (DART Incidence Rate) and Total Accidents (Total Injury Frequency Rate) and the District's Workers' Compensation Claims and Costs. The data for December 2005 and January 2006 are shown in the table below: January- January-January Change November December 2006 (December 2005 2005 Data to January) OCSD DART Cases 12 12 1 1 OCSD DART Rate1"'1 2.25 2.15 2.04 -0.11 OSHA Recordable Accidents District 26 28 1 1 OCSD Total Injury Frequency Ratel3> 5.05 5.01 2.04 -2.97 NOTES: (1) Days Away, Restricted or Transfer (2) Industry Average for DART is 2.80 (3) Industry Average for TIFR is 6.00 The one recordable injury for this reporting period is as follows: • On January 24 a Senior Mechanic experienced back pain after working cable while line cleaning. He sustained a back strain. Returned to work with restrictions. This injury is classified as a DART case. The Division also tracks the District's Workers' Compensation Claims and Costs. Information regarding OCSD workers' compensation claims is presented below. OCSD Workers' Compensation Claim Count (report period) H:ldept\agenda\FAHRIFAHR2006\0206\06·02.Safety.doc Revised: 06/04/03 July-December 2005 11 Book Page 17 January 2006 Data Change 0 0 Page 1 Total Open Claims Total OCSD Workers' Compensation Claim Cost PRIOR COMMITTEE/BOARD ACTIONS N/A PROJECT/CONTRACT COST SUMMARY N/A BUDGET IMPACT 26 $45,451 D This item has been budgeted. (Line item: ) 0 0.00 D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. ~ Not applicable (information item) ADDITIONAL INFORMATION 0 0.00 The District had one (1) DART case and one recordable injury for the period of January 2006. This case will be filed as a workers compensation claim but does not show on the carriers system. Therefore no cost can be associated with this case yet. The reporting period ends January 31. ALTERNATIVES N/A CEQA FINDINGS N/A ATTACHMENTS 1. OSHA Incidence Rates Reports for DART Cases and Total Injuries 2. Workers' Compensation Claims and Costs H:\deptlagenda\FAHRIFAHR200610206\06-02.Safety,doc Revised: 06104103 Book Page 18 Page 2 Safety and Health Division Workers' Compensation Claims and Costs The Workers' Compensation Claims and Costs are reported by fiscal year. The DART and Total Injury graphs shown above are calendar year rates as required for OSHA recordkeeping. All claims and medical invoices are reviewed by a third party to ensure that proper medical treatment is provided for injured employees and the costs for the treatment are within established guidelines. The medical bills reviewed for July -December 2005 totaled $64,301.60. Medical treatment costs are charged to the fiscal year in which the injury occurred. All open claims have the potential to incur additional costs. After the medical review process, the amount was reduced to $35,330.99, which resulted in savings of $28,970.61 for this reporting period. Workers Compensation Claims and Costs Fiscal Period Claim Count Open Claims Total Incurred 7 /1 /85 -6/30/86 38 0 $270,794 7 /1 /86 -6/30/87 53 0 $99,933 7 /1 /87 -6/30/88 51 0 $173,583 7 /1 /88 -6/30/89 41 0 $153,481 7 /1 /89 -6/30/90 61 0 $300,201 7/1/90-6/30/91 76 0 $121,978 7/1/91 -6/30/92 58 1 $222,885 7 /1 /92 -6/30/93 58 0 $93,198 7/1/93-6/30/94 47 0 $218,507 7/1/94-6/30/95 46 0 $276,359 7/1/95-6/30/96 46 1 $191 ,323 7 /1 /96 -6/30/97 36 0 $370,749 7 /1 /97 -6/30/98 45 1 $821,842 7 /1 /98 -6/30/99 38 2 $290,739 7 /1 /99 -6/30/00 43 2 $352,549 7 /1 /00 -6/30/01 32 2 $404,112 7/1/01 -6/30/02 30 5 $480,649 7 /1 /02 -6/30/03 18 3 $106,658 7 /1 /03 -6/30/04 15 1 $105,642 7 /1 /04 -6/30/05 19 3 $46,259 7 /1 /05 -6/30/06 11 5 YTD $45,541 "Total Incurred" includes medical bills, temporary disability payments to employees, legal costs, and a claim reserve account. H:\dept\agenda\FAHR\FAHR2006\0206\06-02.Safety Att 1.doc Book Page 19 FAHR COMMITTEE Meeting Date To Bel. of Dir. 02/08/06 02/22/06 AGE NDA REPORT Item Number Item Number FAHR06-03 Orange County Sanitation District FROM: Marc Dubois, Contracts/ Purchasing Manager SUBJECT: GENERAL MANAGER APPROVED PURCHASES GENERAL MANAGER'S RECOMMENDATION Receive and file report of General Manager approved purchases in amounts exceeding $50,000 in accordance with Board purchasing policies. SUMMARY In May 1998, the FAHR Committee and the Board approved changes to the staff purchasing authority. One of the changes was to increase the dollar threshold before Board authority was required for purchases of goods or services, excluding public works purchases, to $100,000. When approving this change, the Committee asked for periodic reports showing purchases approved by the General Manager for amounts between $50,000 and $100,000. Subsequent to receiving the initial report, the Committee requested that future reports be placed on the Consent Calendar. Vendor Name Amount Department Description/Discussion L.A Chemical, Inc. $ 64,516 Environmental Sole Source -Tank containment, Compliance piping and 12.5% bleach. Albert Grover & Associates $ 88,000 Engineering Sole Source -Traffic Analysis. JR Filanc Construction $ 87,861 Engineering Central General strainer addition. West Star Environmental $100,000 Engineering Underground storage tank rehab. Solutions-Environmental Comfort $ 97,948 Operations & P2 Headwork's power building Systems & Services Maintenance HVAC replacement project. H & H Engineering Construction $ 80,000 Engineering Sole Source -Emergency repair of asphalt. Dalke & Sons Construction, Inc. $ 64,130 Engineering Microbiology Lab Modification at Plant 1. Section 4.03.B of Resolution 04-08, the District's Delegation of Authority Resolution, authorizes the Contracts / Purchasing Manager to purchase items that have been previously authorized by the Board as identified in the annual District budget. During the budget adoption process, the lists of these items were highlighted for the Directors. For these reasons, purchases that fell into these categories are not included in this report. H:\dept\agenda\FAHRIFAHR2006\0206\06-03.GM Purchases.doc Revised: 06104/03 Book Page 20 Page 1 PRIOR COMMITTEE/BOARD ACTIONS N/A PROJECT/CONTRACT COST SUMMARY N/A BUDGET IMPACT D This item has been budgeted. (Line item: ) D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. ~ Not applicable (information item) ADDITIONAL INFORMATION N/A ALTERNATIVES N/A CEQA FINDINGS N/A ATTACHMENTS None. MD H:ldeptlagenda\FAHRIFAHR2006\0206\06-03,GM Purchases.doc Revised: 06/04/03 Book Page 21 Page2 percent in comparison with the same period last year primarily due the net increase in personnel services of $3.2 million and in chemicals of $1.0 million. Salaries and benefits have increased due to the actual staff increase of 14 employees as of December 31, along with the increases due to annual range adjustments, merit increases, and the resulting impacts on the percentage increases in employee benefits. The increase in chemicals is attributed to the increase in the cost of chemicals. The total cost per gallon is approximately $1,246 on flows of 43.3 billion gallons, or 235 million gallons per day. This level is relatively unchanged for the prior year. A further description of these costs and benchmarking with other agencies is contained on Section 1 -Page 4. d) Overall, the capital outlay costs of the Capital Improvement Program (CIP) are expected to be $266.3 million, or 96.1 percent of the budget. • Quarterly Investment Management Program Report; This section reports on financial on portfolio performance with respect to the District's funds. Both Long-Term and Liquid Operating Monies are summarized. A performance summary table can be found on page 2 of this report. The report also contains information on the national economic outlook from the District's money manager (PIMCO). In summary, there have been no significant changes to the District's financial position with respect to its investments. PIMCO notes that the Long-Term portfolio that it manages on behalf of the District returned 0.69 percent over the quarter, outperforming the Merrill Lynch 1-5 year Government Corporate Index by 57 basis points. PIMCO also notes that fixed income gained ground despite Fed tightening. However, it is also noted that the US economy will slow next year as the housing market begins to cool. A discussion of other indicates can be found in the body of the report. • Quarterly Interest Rate Exchange Agreement (Swap) Monitoring Report; There were no material changes in the previous quarter. • Quarterly Certificates of Participation (COP) Report There were no material changes in the previous quarter. The report includes various comparative charts illustrating the COP rate history. PROJECT/CONTRACT COST SUMMARY N/A H:\dept\agenda\FAHR\FAHR2006\0206\06-04.Financial Report Mid Year.doc Revised: 8/20/98 Book Page 23 Page2 BUDGET IMPACT D This item has been budgeted. D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. [:gJ Not applicable (information item) ADDITIONAL INFORMATION None. ALTERNATIVES N/A CEQA FINDINGS N/A ATTACHMENTS Attached are the following mid-year staff reports covering the period ended December 31, 2005: 1. Mid-Year Financial Report (separately bound report). 2. Quarterly Treasurer's Report. 3. Quarterly Interest Rate Exchange Agreement (Swap) Monitoring Report. 4. Quarterly Certificates of Participation (COP) Report. H:ldeptlagenda\FAHRIFAHR2006\0206\06-04.Financial Report Mid Year.doc Revised: 8/20198 BookPage24 Page 3 Quarterly Treasurer's Report For the Three Months Ended December 31, 2005 Page 2 of 3 Portfolio Performance Summary Quarter Ended December 31, 2005 Liquid Operating Monies (%) Long-Term Operating Monies(%) Total Rate of Return Benchmark!1l Total Rate of Return Benchmark!1l 3 Months 1.02 0.91 0.69 0.57 6 Months 1.90 1.72 0.89 0.42 9 Months 2.63 2.42 2.66 2.09 12 Months 3.27 3.00 2.35 1.44 Since inception 30 Sept. 95 4.19 3.77 5.69 5.52 Market Value $60.1M $214.9M Average Quality "AAA" "AAA" Cur.rent Ylefd (%) 3.4 4.0 Estimated Yield to Matl.Jrtty (%) 4.1 4.9 Quarterly Deposits (Withdrawals) $0.0M $-40.0M Estimated Annual Income $2.4M $9.BM (1) Benchmarks: • Liquid Operating Portfolio: 3-Month Treasury Bill Index • Long-Term Operating Portfolio: Merrill Lynch Corp/Govt 1-5 Year Bond Index Portfolio Market Values Comparative marked-to-market quarter-end portfolio values are shown in the following table, and in the attached bar chart. Liquid Long-Term Quarter Operating Operating Ending Monies ($M) Monies ($M) 31 Mar. 05 73.5 336.9 30 Jun. 05 39.1 342.8 30 Sep. 05 59.5 253.4 31 Dec. 05 60.1 214.9 District's Investment Account Balances as of December 31, 2005 Book Balances Estimated Investment Accounts December 31, 2005 Yield(%) State of Calif. LAIF $ 39,305,067 3.81 Union Bank Checking Account 982,378 3.89 Union Bank Overnight Sweep Account 2,565,000 3.51 PIMCO -Short-term Portfolio 59,657,835 4.14 PIMCO -Long-term Portfolio 212,851 ,602 4.74 Petty Cash 4.000 N/A TOTAL $315 365 882 4.49 Debt Service Reserves w/Trustees $ 64 623 Z26 4.18 Book Page 26 Quarterly Treasurer's Report For the Three Months Ended December 31 , 2005 Page 3 of 3 District's Cost of Fuhds on Debt Issues as of December 31 . 2005 Cost of Funds Outstanding Issue Description COP Balance 1992 Syn Fixed $100,275,000 1993 Syn Fixed 42,050,000 2000VRDO 199,000,000 2003 Fixed 280.000.000 TOTAL $621 325,QQQ Weighted Avg Cost of Funds ATTACHMENTS 1. Historical Yield Curve Graph 2. PIMCO Quarterly Report 3. Quarter End Portfolio Market Value Bar Chart Annual Interest Rate(%) 5.55 4.56 2.96 5.15 4.47 4. Summary of Performance Data and Portfolio Statistics -Liquid Operating Monies 5. Summary of Performance Data and Portfolio Statistics -L-T Operating Monies 6. Investment Transactions and Balances in LAIF 7. Asset Summary by Asset Type -Liquid Operating Portfolio 8. Asset Summary by Asset Type -Long Term Portfolio 9. Investment Listing of Liquid Operating and L-T Portfolios (Yield Analysis Report). 10. Callan Report (separate bound document) 11. PIMCO Report (separate bound document) 12. Rating Agency Comparisons Book Page27 a, 0 0 "" ~ ~ II,) 00 5.50 5.25 - 5.00 4.75 4.50 4.25 4.00 3.75 - o' 3.50 ;-3.25 ~ 3.00 > 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 -~ - - --- -- 0 E M - ----. . - - - I 0 ,_ E >, -co I HISTORICAL YIELD CURVEI --- I ~---. ------------- I . ---------~ -I -.... I ~ . ~ ---I - ~ I I . 1 ' ' ' ' ,_ ,_ ,_ ,_ ,_ ,_ ,_ ,_ >, >, >, >, >, >, >, >, N M -.:I' II) r--C, C, C, -N M -+-30-Jun-05 ___._ 30-Sep-05 -a-31-Dec-05 ] PIM C 0 January 27, 2006 Mr. Mike White, CPA Controller Orange County Sanitation District 10844 Ellis A venue Fountain Valley, CA 92708-7018 Dear Mike: The following is a description of events in the bond markets during the 4th quarter of 2005 in addition to an analysis of the strategies undertaken in the Orange County Sanitation District's Long-Term and Liquid portfolios over the period. We have also included is a section on strategies to be pursued in your portfolio during the coming months. Bond Market Recap: Fixed Income Gains Ground in 2005 Despite Fed Tightening Bonds gained ground in 2005, leaning against the headwinds of 200 basis points of Federal Reserve tightening and concern that higher energy prices would fuel inflation. The Lehman Brothers Aggregate Bond Index, a widely used index of high-grade U.S. bonds, returned 2.43 percent for the year and 0.59 percent in the fourth quarter. The benchmark ten-year Treasury yield ended the quarter at 4.40 percent, 17 basis points higher than at the start of the year and up 7 basis points over the quarter. Bond markets were dominated during 2005 by speculation about the pace and duration of the Federal Reserve's tightening cycle. The U.S. central bank raised the federal funds rate in 25 basis point increments at each of its eight meetings during the year, including twice during the final quarter. Market expectations of continued Fed tightening drove short-term rates higher and helped produce a significant flattening of the yield curve. The difference in yield between 2 and IO-year Treasuries plunged from 115 basis points at the start of 2005 to practically zero by year end. During the final week of 2005 the 2-10 year portion of the curve inverted, which has often, though not always been a harbinger of recession. As the year drew to a close, some optimism arose that the Fed might be near the end of its rate increases, which could produce a steeper yield curve. At the same time, a drop in energy prices, which had soared after the Gulf Coast hurricanes, calmed fears about inflation. Signs also emerged that higher mortgage rates and lofty valuations could finally be pinching affordability in surging property markets. Growth in new home prices decelerated and inventories of new and existing homes rose. Book Page29 Mr. Mike White, CPA Orange County Sanitation District January 27, 2006 Page2 Minutes of the Fed's November 1 meeting revealed concern about these trends from some policy makers, who discussed the risks of "going too far" and the need to change the outlook "before long". In December the Fed dropped its description of monetary policy as providing "accommodation" to the economy, though it also acknowledged that higher rates might be necessary to contain inflation. Emerging Markets, Non-U.S. Perform Best During The Year The following summarizes sector returns for the year and fourth quarter. • Mortgage-backed securities underperformed like-duration Treasuries for both the quarter and the year as yield premiums widened. A flat yield curve, which reduces "carry", or the difference between bond yields and short term borrowing rates, sidelined some important mortgage investors. These include large institutions such as money center banks, mortgage agencies such as Fannie Mae and Freddie Mac, and central banks. • Corporate bonds lagged Treasuries of similar duration for the year and the quarter. A decline in consumer confidence early in the fourth quarter associated with lingering effects of Hurricanes Rita and Katrina weighed on the sector. Non-investment grade corporates fared better than their high-grade counterparts thanks to their yield advantage in a rising rate environment. • Real return and municipal bonds were mixed. TIPS lagged versus nominal bonds during the final quarter amid declining inflation expectations. TIPS modestly outpaced like-duration nominals for the full year, however, supported by high CPI accruals. Munis, which usually outperform as rates rise, outpaced Treasuries for the year but performed more in line with Treasuries for the quarter. • Emerging market bonds were the best performing fixed income sector for the quarter and the year. The sector was supported by a stable global monetary system, continued improvement in credit quality and a growing institutional perception of emerging markets as a strategic allocation. • Most government bond markets outside the U.S. outperformed Treasuries for all of 2005 and in the final quarter. Economic growth was generally slower and rate increases milder outside the U.S. Performance Attribution: Long-Term Portfolio The Long-Term portfolio that PIMCO manages on behalf of Orange County Sanitation District returned 0.69 percent over the quarter, outperforming the Merrill Lynch 1-5 year Government Corporate Index by 57 basis points. The following points summarize returns for the quarter ended December 31, 2005. • Your portfolio outperformed its benchmark for the quarter and the year • Broad diversification helped returns for all of 2005 amid a challenging environment for bonds • Important contributors to performance for the quarter were: Book Page30 Mr. Mike White, CPA Orange County Sanitation District January 27, 2006 Page3 • Above-index duration as intermediate and longer rates fell in November and December • An underweight to corporates, which trailed Treasuries as credit premiums widened early in the quarter • Mortgage security selection, which mitigated the negative impact of a sector emphasis as mortgages lagged like-duration Treasuries • The following strategies detracted from returns: • Modest TIPS holdings, which lagged nominal bonds amid declining inflation expectations Liquid Portfolio The Liquid portfolio that PIMCO manages on behalf of Orange County Sanitation District generated a total return of 1.02 percent during the quarter, outperforming the 3-month Treasury Bill Index by 91 basis points. The following points summarize returns for the period ending December 31, 2005: • Your portfolio outperformed its benchmark for the quarter and the year • Broad diversification helped returns for all of 2005, but did not offset the negative impact of increasing short rates from Federal Reserve tightening • Use of higher yielding securities such as commercial paper and short-term notes contributed to performance Economic Outlook: U.S. Economy Will Slow Next Year As Housing Cools Off The U.S. economy will slow relative to the rest of the world, reflecting global monetary policies that are not synchronized. The Federal Reserve is nearing the end of its tightening cycle while major central banks outside the U.S., such as the European Central Bank, have only begun to tighten. A decelerating U.S. economy will limit how fast other countries can grow because expansion outside the U.S. is partially dependent on U.S. demand. Key elements of the outlook are: • As Housing Decelerates ... Housing gains have contributed significantly to U.S. growth via wealth effects on consumers, cash-out refinancings, home equity loans and job growth in real estate-related industries. Higher mortgage rates over recent months and continued pressure on real wages and incomes will crimp housing affordability in 2006, taking the froth out of the property market. The decline in housing affordability has already begun. • ... So Will Consumer Spending -As housing cools, consumer spending will grow more in line with income, thereby reducing U.S. growth. A potential offset to the negative effect of weaker consumption is corporate investment, which has been robust for the last several years. However, investment has recently begun to grow more slowly as capacity utilization has risen. PIMCO expects much of U.S. investment to continue to occur abroad in rapidly growing markets such as China. Book Page 31 Mr. Mike White, CPA Orange County Sanitation District January 2 7, 2006 Page4 • The Federal Reserve Is Nearly Done -The U.S. central bank will stop tightening early in 2006 as the soaring property market cools off and growth moderates. Yields on 1-5 year Treasuries could fall by as much as 100 basis points this year as investors anticipate that the Federal Reserve will move toward easing. • Europe Needs Pick-Up In Domestic Demand -Eurozone growth prospects have brightened amid positive momentum in business sentiment, hiring and capital spending. Resurgence in domestic demand, which has been held back by stagnant real wages, will be critical for sustaining this momentum but is not yet in evidence. European growth will get no help on the policy front as the ECB is preoccupied with asset price inflation even as core inflation remains subdued. • Japan's Recovery to Moderate -Gains in consumption followed Japan's export and investment-led recovery in 2003, but now this growth is softening as higher energy prices squeeze wages. Longer-term prospects for capital spending in Japan may be negatively affected by an expected slowdown in corporate profits. • Emerging Markets Not Yet a Factor -Consumption growth in emerging economies has potential in light of favorable demographics, higher GDP growth and accumulation of international reserves. Still, emerging market consumers will make only a marginal contribution to global growth until these economies broaden access to consumer credit and reform their banking sectors. • Benign Inflation -Inflation will remain well contained. Commodity prices are moderating after their post-Katrina bounce, and there has been relatively little pass-through of higher oil prices into core U.S. inflation. More importantly, the long-run economic trend of an expanding global labor supply (in China, India and Brazil, for example) will put downward pressure on the price of labor, making a wage-induced boost in inflation unlikely. PIMCO Will Continue To Use Multiple Tools To Add Value PIM CO will continue to take moderate risks across a variety of strategies that are expected to add value in a slowing U.S. economy. Exposures will focus mainly on the U.S., where we see better value at present. Major strategies will include: • Interest Rate Strategies -We will target duration moderately above the index given an expected slowdown in growth. More importantly, PIMCO will emphasize short to intermediate maturities in the U.S. that should outperform as the market anticipates the beginning of Fed easing. Where permitted, we will focus on similar maturities in the U.K., where we also expect short rates to fall. • Mortgage-Backed Bonds -PIMCO will retain its overweight to mortgage-backed bonds, especially pass-throughs issued by government agencies that either explicitly (in the case Book Page 32 Mr. Mike White, CPA Orange County Sanitation District January 27, 2006 Page5 of GNMA) or implicitly stand behind these securities. In a slowing economy, mortgages are a safer source of incremental yield than credit-sensitive corporate bonds. • Corporates -Valuation remains a major risk in the corporate bond market. With credit premiums near historic lows and default risk expected to rise as the economy cools, PIMCO will retain its underweight to the sector. • TIPS and Munis -In a relatively benign inflation environment, PIMCO will continue to de-emphasize TIPS on a tactical basis. We will retain modest holdings of municipal bonds as low cost insurance in case our forecast is wrong and rates move higher. With their stable base of retail investors, munis typically hold their value better than taxable bonds when rates rise. In addition, munis continue to offer relatively attractive yields compared to taxable bonds. • Emerging Markets -Most emerging economies continue to see improving credit fundamentals, which explains why many emerging issuers are now included in the high- grade Lehman Aggregate Bond Index. PIMCO will continue to emphasize this sector because of its attractive risk/return profile compared to other higher yielding alternatives. • Currency -Given PIMCO's secular forecast for a weak dollar, modest currency allocations to the yen, euro and emerging market currencies have the potential to add value. Strategy: The following list highlights the strategies that will be used in the Long Term portfolio in the coming months: • Continue to use multiple strategies that are expected to add value in a slowing U.S. economy • Target duration moderately above the index as slower growth will create downward pressure on interest rates • Emphasize mortgages, especially high quality agency-backed issues, to add yield to the portfolio • Underweight corporates; credit premiums remain near historic lows and defaults could rise as the economy cools • Retain modest defensive allocations to TIPS to hedge against interest rate uncertainty The following list highlights the strategies that will be used in the Liquid portfolio in the coming months: • Target duration moderately above the index as slower growth should create downward pressure on interest rates • Continue to hold high quality commercial paper as an additional source of safe yield • Limit corporate holdings; credit premiums remain near historic lows and defaults could rise as the economy cools Book Page 33 Orange County Sanitation District Investment Transactions and Balances in the State of California Local Agency Investment Fund December 31, 2005 Par Value Book Value Market Value Balance December 1, 2005 $24,605,067 $24,605,067 $24,605,067 Deposits: 12/9/2005 15,500,000 15,500,000 15,500,000 12/21/2005 30,000,000 30,000,000 30,000,000 Total Deposits 45,500,000 45,500,000 45,500,000 Withdrawals: 12/1/2005 (3,400,000) (3,400,000) (3,400,000) 12/7/2005 (3,400,000) (3,400,000) (3,400,000) 12/16/2005 (15,000,000) (15,000,000) (15,000,000) 12/20/2005 (9,000,000) (9,000,000) (9,000,000) Total Withdrawels (30,800,000) (30,800,000) (30,800,000) Balance December 31, 2005 $39,305,067 $39,305,067 $39,305,067 Book Page 38 Rate Yield 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 3.81 to 0 0 ~ ~ LIQUID OPER-PIMCO-OCSF07511102 Description CASH & CASH EQUIVALENTS U.S. DOLLAR INTEREST CERTIFICATES OF DEPOSIT -DOMESTIC COMMERCIAL PAPER -DISCOUNT FED HM LOAN BNK -LESS THAN I YR FEDERAL HOME LOAN MORTGAGE -LESS THAN I FNMA ISSUES -LESS THAN 1 YR MUTUAL FUNDS REPURCHASE AGREEMENTS TREASURY BILLS -LESS THAN 1 YR U.S. DOLLAR CASH & CASH EQUIVALENTS CQ FIXED INCOME SECURITIES CD W U.S. DOLLAR co BANKING & FINANCE INDUSTRIAL U.S. AGENCIES UTILITY -TELEPHONE U.S. DOLLAR FIXED INCOME SECURITIES TOTAL ASSETS -BASE: Asset Summary by Asset Type with Sectors 12/31/2005 Cost Shares Par Base 386,315.89 2.400,000.000 2,399,993.35 2,800,000.000 2,765,075.00 I 1,800,000.000 11,667,943.12 11,400,000.000 11,230,293.67 9,700,000.000 9,547,356.00 181,401.270 181,401.27 10,600,000.000 10,600,000.00 7,100,000.000 6,953,826.50 55,981,401.270 55,732,204.80 55,981,401.270 55,732,204.80 1,214,000.000 1,225,541.40 600,000.000 603,240.00 2,400,000.000 2,391,443.03 100,000.000 100,560.00 4,314,000.000 4,320,784.43 4,314,000.000 4,320,784.43 60,295,401.270 60,052,989.23 1 Report ID: GL8251 Base Currency: USD Alternate Base Currency: Exchange Rate: Status: FINAL Market Value Base % of Total Net Unrealized Gain/Loss Base 386,315.89 0.64% 0.00 2,399,993.35 4.00% 0.00 2,765,075.00 4.61% 0.00 11,667,943.12 19.43% 0.00 11,230,293.67 18.70% 0.00 9,547,356.00 15.90% 0.00 181,401.27 0.30% 0.00 10,600,000.00 17.65% 0.00 6,953,826.50 11.58% 0.00 55,732,204.80 92.82% 0.00 55,732,204.80 92.82% 0.00 1,217,494.00 2.03% -8,047.40 600,468.00 1.00% -2,772.00 2,393,563.00 3.99% 2,119.97 100,421.00 0.17% -139.00 4,311,946.00 7.18% -8,838.43 4,311,946.00 7.18% -8,838.43 60,044,150.80 100.00% -8,838.43 Workbench LONG TERM OPER-PIMCO -OCSF07522202 Description CASH & CASH EQUIVALENTS U.S. DOLLAR CASH PENDING TRADES INTEREST FED HM LOAN BNK -LESS THAN 1 YR MUTUAL FUNDS REPURCHASE AGREEMENTS U.S. DOLLAR CASH & CASH EQUIVALENTS g, FIXED INCOME SECURITIES 0 =-:- ~ tQ CD ,I=,,. 0 U.S. DOLLAR ABS -AIRPLANE RECEIVABLES ABS -HOME EQUITY ABS-STUDENT LOANS BANKING & FINANCE COLLATERALIZED MORTGAGE OBLIGATION FHLMC MULTICLASS FHLMC POOLS FNMA POOLS GNMA MULTI FAMILY POOLS GNMA SINGLE FAMILY POOLS INDUSTRIAL INFLATION INDEXED SECURITIES PVT PLACEMENTS -MORE THN 1 YR U.S. AGENCIES U.S. GOVERNMENTS UTILITY -ELECTRIC U.S. DOLLAR FIXED INCOME SECURITIES Asset Summary by Asset Type with Sectors 12/31/2005 Cost Shares Par Base -14,600,000.00 -78,995,667.96 2,346,087.94 200,000.000 199,924.44 15,746,258.020 15,746,258.02 14,600,000.000 14,600,000.00 30,546,258.020 -60, 703,397.56 30,546,258.020 -60,703,397.56 1,600,000.000 1,600,000.00 194,119.160 194,119.16 960,326.770 960,439.31 30,150,000.000 30,140,379.40 962,818.990 962,818.99 644,360.890 645,047.34 43,016.310 41,967.78 34,673,298.170 35,182,787.85 2,400,882. 940 2,393,942.37 370,027.800 387,916.20 2,000,000.000 1,998,188.00 3,362,614.000 3,408,825.42 752,000.000 826,199.84 117,037,976.680 114,499,295.77 80,518,126.090 79,375,116.78 4,050,000.000 4,043,840.00 279,719,567.800 276,660,884.21 279,719,567.800 276,660,884.21 1 Report ID: GL8251 Base Currency: USD Alternate Base Currency: Exchange Rate: Status: FINAL Market Value Base -14,600,000.00 -78,995,667.96 2,346,087.94 199,924.44 15,746,258.02 14,600,000.00 -60, 703,397.56 -60, 703,397.56 1,133,200.00 194,394.81 960,883.76 30,107,614.12 964,089.91 640,239.88 44,469.40 34,364,624.59 2,423,302.56 386,632.59 2,000,000.00 3,344,781.37 826,199.84 114,942,621.85 79,514,295.46 4,053,737.00 275,901,087.14 275,901,087.14 % of Total -6.78% -36.71% 1.09% 0.09% 7.32% 6.78% -28.21% -28.21% 0.53% 0.09% 0.45% 13.99% 0.45% 0.30% 0.02% 15.97% 1.13% 0.18% 0.93% 1.55% 0.38% 53.41% 36.95% 1.88% 128.21% 128.21% Net Unrealized Gain/Loss Base 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -466,800.00 275.65 444.45 -32,765.28 1,270.92 -4,807.46 2,501.62 -818,163.26 29,360.19 -1,283.61 1,812.00 -64,044.05 0.00 443,326.08 139,178.68 9,897.00 -759,797.07 -759,797.07 Workbench IXJ 0 0 "" ~ CQ CD ~ ~ LONG TERM OPER-PIMCO • OCSF07522202 Description TOTAL ASSETS • BASE: Asset Summary by Asset Type with Sectors 12/31/2005 Cost Shares Par Base Report ID: GL8251 Base Currency: USD Alternate Base Currency: Exchange Rate: Status: FINAL Market Value Base % of Total Net Unrealized Gain/Loss Base 310,265,825.820 215,957,486.65 215,197,689.58 100.00% -759,797.07 2 Workbench YLDAMAL YIELD ANALYSIS PAGE I 1 OCSF07511102 2005/12/31 RUH DAfl I 01/05/06 DISTRICT! LIQUID OPERATING RUM TIME I 10,48,34 ====-= ---·-----= -==-======= m ==::=_ =======:::1~ PAR VALUE YTK AT CURR!ll'l' MOODY MARUT TOTAL COST/ I TYPE SECURITY ID SECURITY DESCRIPTION BOOK YIBLD S-P PRICE MARltET VALUE I TOTAL -----------------------------------~------------------------------------------------------------ CASH & CASH EQUIVALENTS 8,600,000,00 FEDERAL HOME LN B~ CORS DISC R .000 .000 P-1 99,075 8,520,490.67 15.39 Jl3385RTS MAT 01/13/2006 A-1+ e,s20,oo.67 14.28 1,,00,000.00 FEDERAL HOME LN B~ CORS DISC .ooo .ooo P-1 98.104 1,863,979.17 J,36 31338SSQO A-1+ 1,863,979.17 3,12 300,000.00 FEDERAL BOMB LN Bit CORS DISC R .ooo .ooo P-1 98.123 294,368.00 .53 313385TJt2 MAT 02/22/2006 A-l+ 294,368,00 .49 1,000,000.00 FEDERAL BOMB LH Bit COllS DISC K .ooo .ooo P-1 98,911 989,105.28 1.78 3l3385UP9 MAT 03/22/2006 A-1+ 989,105.28 1.66 1,,00,000.00 FEDERAL HOME LH MTG CORP DXSC .ooo .ooo P-1 98.254 1,866,820.72 3,37 a:, 313397RQ6 MAT 01/10/2006 A-1+ 1,866,820.72 3.13 0 0 2,000,000.00 FRDl!!RAL BOMB LN MTG CORP DISC .ooo .ooo P-1 98.978 1,979,555.56 3.57 ~ 'JJ ll3397Slf2 MAT .01/24/2006 A-1+ 1,979,555,56 3,32 IQ 1,600,000.00 FED BONE LR MTG CORP DISC 11'1'S .ooo ,000 P-1 98.784 1,s80,sn.11 2.85 CD 313397TJO MAT 02/21/2006 A-1+ 1,580,543.11 2,65 ,1::1. I\) 2,200,000.00 FEDERAL BONE LN MTG CORP DXSC .ooo .ooo P-1 98.183 2,uo,01a.3& 3.90 3133'7'l'R2 MAT 02/28/2006 A-1+ 2,160,018,36 3.62 100,000.00 FEDERAL 110MB LN MTG CORP DISC .ooo ,000 P-1 !18,089 686,623.00 1.24 313397UF6 MAT 03/14/2006 A-1+ 686,623,00 1.15 2,soo,000.00 FEDERAL BOMB LN MTG CORP DISC .ooo ,000 P-1 98,651 2,466,267.78 4,4S 313397VC2 MAT 04/04/2006 A-1+ 2,466,267.78 4.13 soo,000.00 FBDBRAL BOMB LN M'l'G CORP DISC .ooo .ooo P-1 98.093 oo,us.u ,88 l13397WN7 MAT 05/08/2006 A-1+ 490,-4165.14 ,82 900,000.00 FEDERAL NATL Mro ASSR DISCOUIIT .ooo ,000 P-1 98,270 884,427.75 1.s9 313589SV6 MAT 1)2/08/2006 A-1+ 884,427,75 1.48 1,200,000.00 FEDERAL RATL MTG ASSR DISC RTS .ooo .ooo P-1 99.342 1,192,104.00 2,15 31359!1TA1 MAT 02/13/2006 DD 02/18/01 A-1+ 1,192,104.00 2.00 l,800,000.00 FEDERAL RATL MTG ASSR DXSCOUNT .ooo .ooo P-1 98,172 3,730,555.00 6.74 31358!1TS2 MAT 03/01/2006 A-1+ 3,730,555,00 6.25 YLDAlfAL YIJ!LD AHALYSIS PAGE t 2 OCSF07511102 2005/12/31 RUN DATE r 01/05/06 DISTRICT: LIQUID OPERATIHG RUN TIMI! I 10.48,34 =~~=~-~=----~~=:r-::--::re=-=:ei==--=:a...c-__....:e.-. -= =-nnm ~~~-=---=-~::a:= PAR VALUE Ynt AT CURRER'T MOODY HARDT TOTAL COST/ I TYP'B SECUllITY ID SECURITY DESCRIPTION 800Jt YIJ!!LD S-P PRICE MARUT VALUE I TOTAL ------------------------------------------------------------------------------------------------ 1,100,000.00 Fl!DEIUU. RA'.l'L MTG ASSR DISCOUNT .ooo .ooo P-1 98.908 1,087,988.00 1.96 313589UP6 MAT 03/22/2006 A-1+ 11087,98B,OO 1.82 1,soo,000.00 FEDERAL NATL MTG ASSN DISCOUNT ,000 .ooo P-1 !JB,596 1,478,940.00 2,67 313589VB6 MAT 04/0j/2006 A-1+ 1,478,940.00 2.48 200,000.00 FEDERAL NATL MTG ASSN DISComrt .ooo .ooo P-1 98.465 196,930,83 ,35 313589VT7 MAT 04/19/2006 A-1+ 196,930.83 .33 1,000,000.00 FE;DERAL NATL MTG ASSlf DISCOUNT .ooo .000 P-1 97.641 976,410.42 1.76 313589XMO MAT 05/31/2006 A-1+ 976,410.42 1.64 1,000,000.00 GENERAL ELEC CAP DISC ,000 .ooo P-1 98,967 989,675.00 1,78 3ti959JAR4 01/25/2006 989,675,00 1,66 tlJ 1,soo,000.00 GBBBRAL ELBC CAP DISC .ooo .ooo WR 98,633 1,775,400.00 3.20 0 36959JBG7 02/16/2006 1,775,400,00 2,98 0 ~ 3,300,000.00 U 8 TREASURY BILL .ooo .ooo P-1 97,993 3,233,754.33 S,84 ~ 912795W!O DUE 04/27/2006 DD 10/27/2005 A-1+ 3,2331 7S4.33 5.42 CQ (I) 3,800,000,00 US TREASURY BILL .ooo .ooo P•l 97,897 3,720,072.17 6,72 ,&:I. 9127!1SX:E6 DUB 06/01/2006 DD 12/01/05 A-1+ 3,720,072,17 6,24 c.., 2,400,000.00 WELLS FAR.GO BANJt RA lRSTL C/D .ooo 4,400 100.000 2,3!19,993,3S 4,33 9497P4RV7 4,4001 Ol/06/2006 DD 12/27/05 2,3!19,!193,3S 4,02 10,600,000.00 LEBMAH CAT 1 RBPO RRPO .ooo 3.400 100,000 10,,00,000.00 19.15 99446.1110 03,4001 01/03/2006 DD 12/30/05 10,600,000.00 17, 77 181,401,27 DREYFUS TREASURY CASK MGMT .ooo 4,014 AAA 100.000 181,401.27 ,32 99608S247 AAA 181,401.27 .30 ------·--------------· ----------------TOTAL CASB, CASH BQUIVALBlfTS .ooo ,154 SS,3451888,91 100.00 55,3451888,91 92,76 FIXED INCOME SECOllITIBS 100,000.00 ATlrT WIRELESS SVCS nrc SR lff .ooo 7.319 8AA2 100.421 100,560.00 2.12 00209.AADB 7,350, Ol/01/2006 DD 09/01/01 A 100,u1.oo ,17 YLDANAL YIELD ANALYSIS PAGE I 3 OCSF07511102 200S/12/31 RUM DAD t 01/05/06 DISTRICT! LIQUID OPERATING RUH TIMR I 10,48,34 ==::::::::.=--~~~:,;...,. ====-mz=-=-== =====!!:===~ PAR VALUE YTM AT CURRENT MOODY HARDT TOTAL COST/ I TYPE SECURITY ID SECURITY DESCRIPTION BOO){ YIELD S-P PRICE MARUT VALUB I TOTAL ----------·----------------------·-----------------------------------------------------------------·------ 112,000.00 BEAR STBARRS COS INC GLOBAL NT .ooo 3,012 Al 99.609 111,364,96 2,58 073902CB2 3,0001 03/30/2006 DO 02/19/03 A 111,Sfi2,0B ,19 soo,000.00 CIT GROUP INC GLOBAL SR RT .ooo 4,128 A2 99,918 499,820,00 11.58 125577AN6 4,1251 02/21/2006 DD 02/20/03 A n,,s,o.oo .84 600,000.00 DAIMLER CHRYSLER BLDG CORP RT .ooo 7,244 Al 100,078 603,240.00 13.92 233835AN7 7,2501 Ol/18/2006 DD 01/18/01 BBB 600,468.00 1.01 100,000.00 F!DERAL RONE IJf H'l'G CORP NTH .ooo 2,396 AAA 99.129 691,824,00 16.09 3128XlCU9 2,3751 05/19/2006 DD 05/19/03 AAA 693,903.00 1.16 1,100,000.00 FEDERAL NATL MTG ASSN MTN .ooo 4.268 AAA 99,980 1,699,619.03 39.41 313S9MWV1 VAR RT 05/22/2006 DD 11/22/04 AAA 1,699,660.00 2,85 tlJ 500,ooo.oo HOUSEHOLD FIN CORP RT .ooo 7,188 Al 100,859 511,620,00 11.69 0 441812FT6 7,2501 05/15/2006 DD OS/15/96 A 504,295.00 ,85 0 ~ .ooo 6,247 AAl 100.046 102,736,44 2.36 ~ 102,000.00 MERRILL LYNCH' CO INC RT S90188FC7 6,2501 01/15/2006 DD 01/20/94 A+ 102,046,92 .17 CQ Cl) ------------------------------------·-----~ TOTAL FIXED INCOME SECURITIES .ooo 4,747 4,320,784.43 100.00 .i::. 4,311,946,00 7,24 ____ ,_. ___ ------------------·-----------------'l'OTAL .ooo ,263 59,666,673.H 100.00 S9,fi57,834.91 100,00 ~--.,...,.~ =-==--===== . -· .. ~-· -. ·-:-:,· -,~<-~-:-. ~-:-:-: ->:•~·-· YLDAHAL YIELD DALYSIS PAG1l I 4 OCSF07522202 200S/12/31 RUN DATB I 01/05/06 DISTRICT1 LONG-UltM OPJ!lRATUlG RUN TIME I 10.48.34 =~==~ -= = = == PAR VALUE YTH AT CURRJ!lBT MOODY HARDT TOTAL COST/ I TYPE SECUR:ITY ID SECURITY DESCRIPTION II0()1t YIELD s-P PRICE MARDT VALUE I TOTAL __ , ____ .. ___________ ---·------·---·----·----·----------------------------------------------------- CASH, CASH EQUIVALENTS 200,000.00 FEDERAL BOMB LR Bit CONS DISC R ,000 ,000 P-1 99.962 199,924,44 .65 313385RH1 MAT 01/03/2006 A-1+ 199,924.44 .01 14,600,000.00 CS FOB CAT l RBPO RBPO .ooo 3,400 100,000 14,600,000.00 47,79 99446B999 03,4001 01/03/2006 DD 12/30/05 14,600,000.00 4.76 15,746,258.02 DREYFUS TREASURY CASS MGMT .ooo 4,014 AAA 100.000 15,746,258,02 51.54 996085247 AAA 15,746,258,02 5.14 .oo BSD1'-LATE MONEY DEPOSIT ACCT .ooo .ooo .ooo .oo .oo 996087094 VAR RT 12/31/2049 DD 06/26/97 .oo .oo to --------------------·---------------------·-- 0 TOTAL CASH & CASH KQUIVALERTS .ooo 3.619 30,546,182,46 100.00 0 30,546,182.46 9.97 ~ ~ FIXED INCOME SECURITIES ~ Cl) AIG StJNAMBRICA GLOBAL REGS .ooo 5,325 109.867 826,199,84 -11:i. 752,000.00 .29 u, U00907AAO 5,8501 08/01/2008 DD 08/08/01 826,199.84 ,27 600,000.00 CIT GROUP IRC SR RT .ooo 7,167 A2 102.909 632,688.00 .22 1255B1AA6 7,3751 04/02/2007 DD 04/01/02 A '17,453.62 .20 1,,00,000.00 CIT GROUP INC RZW SR NT .ooo s.002 A2 99,953 1,397,419.80 .so 125581AS7 5.0001 11/24/2008 DD 11/23/05 A 1,399,342,00 ,46 3,300,000.00 CIT GROUP IRC MTR f8ll00092 .ooo 4.576 A2 100,296 3,300,000.00 1,19 12560PDVO VAR RT 05/23/2008 DD 05/25/05 ,. 3,309,768.00 1.oe 1,,00,000.00 CIHGtlOUP IRC GLOBAL SR R'J! .ooo 4,309 V.1 100.015 1,,00,000.00 .58 172967CW9 VAil RT 05/02/2008 DD 05/02/05 AA-1,600,240.00 ,52 1,900,000.00 FEDERAL BOMB LIi M'l'G CORP Mffl .ooo 3,798 AAA 97,426 1,837,359.38 ,67 l128X04S5 3,7001 10/23/2008 DD 04/23/03 AAA 1,851,094.00 ,60 200,000.00 RDBRAL BONE LR MTG COltP lffll .ooo 3.448 AAA 95,420 189,236.00 ,06 312BXllfB9 3,2901 06/16/2009 DD 06/16/03 AAA 190,840.00 .06 6,342,000,00 FEDERAL ROME LN MTG CORP MTR .ooo 3,724 MA 95,189 5,994,180.94 2,18 3128X1NJ2 3.5451 07/07/2010 DD 07/07/03 MA 6,036,886.38 1.91 YLDA!fAL YIELD ARALYSIS PAGE I 5 OCSF07522202 2005/12/31 RUR DAT! t 01/0S/06 DIS'l'RICTr LONG-i'ERM OPERATING RUR TIM! t 10.49.34 =~rm-=======-===m=-== -=·= ~~ PAR VALUE YTM AT CUIUU!R'l' MOODY MARUT TOTAL COST/ I TYPB SECURITY ID SECURITY DBSCRIPTIOR BOOK YJ;BLD S-P PRICE MARKET VALUE I TOTAL -----------------·----------·----------------------------------------------------------------------------- 1,ou,000.00 F!;DERAL HOME LR MTG CORP MTN .ooo 3,183 AAA 96,147 1,015.,531.S6 ;37 3128XlRX7 3.060\ 07/15/2008 DD 07/15/03 AAA 1,024,!1127.02 ,33 6,000,000.00 FEDERAL HOME LR MTG CORP MTB .ooo 4,504 AAA 99.476 s,ino,200.00 2.16 3128X4MQ1 4,4801 0!11/09/2008 DD 0!11/19/05 AAA s,9681 560.00 1.95 1e,ooo,ooo.oo FEDERAL ROME LR MTG CORP NTlf .ooo 4,272 AAA 99,06 17,90,530.00 6.0 3128X4QC8 4,2501 04/05/2007 DD .10/05/05 AAA 17,909,280.00 5,84 ,,eoo,000.00 FEDERAL HOME LR MTG CORP MTN .ooo 4.91S AAA 99,692 9,767,611.00 3.54 Jl28X4ST9 4,9001 11/03/2008 DD 11/03/05 AAA 9,769,860.10 3,19 1,240,000.00 FEDERAL HOME LR BltS CONS BD .ooo 3.585 AAA 97.638 1,204,931,25 .43 3133MVOA4 3.5001 02/11/2008 DD 02/11/03 AAA 1,210,111.20 .40 0J 2,100,000.00 FEDERAL HOME LR BJtS CORS BD .ooo 8.917 AAA 93.076 2,565,820,00 .91 0 3133X3SQ7 VAR RT 02/27/2012 DD 02/27/04 AAA 2,513,055.75 .82 0 ~ s,000,000.00 FEDERAL BOMB LR BltS CONS BD ,000 4.087 AAA 97.86-4 4,861,328.13 1. 77 "ll 3133X3ZX4 4,0001 02/18/2009 DD 02/18/04 AAA 4,893,200.00 1,60 (Q Cb 2,400,000.00 FEDERAL BOMB LN BlCS CONS BD ,000 3,977 AAA 97,429 2,J20,soo.oo .84 ,Iii,, 3133X4R80 3.8751 03/24/2009 DD 03/24/04 AAA 2,338,296.00 .u:, 0) 120,000.00 FEDERAL BONE LR MS CORS BD .ooo 3,112 AAA 96,408 690,343,20 ,25 3133X5D70 3,000\ 04/07/2008 DD 04/07/04 AAA 694,137.60 ,23 4,250,000,00 FEDERAL HOME LR BlCS CONS BO .ooo 3,133 AAA '6,389 4,071,712.50 1.48 3133XSN95 3,020\ 04/22/2008 DD 04/22/04 AAA 4,096,532.50 1.34 1,100,000.00 FEDERAL BOMl! LR BltS CORS BD .ooo 3,107 AAA 96,873 1,us,109,39 ,59 3133XS4R6 3.0101 12/28/2007 DD 03/29/04 AAA 1,646,841.00 ,54 3,sso,ooo.oo FEDERAL ROHE LR BltS CORS DD ,000 3.685 AAA 98,373 3,475,117.19 1.26 3133X7YG3 3.625\ OB/17/2007 DD OB/17/04 AAA J,492,241,50 1.14 250,000.00 FEDERAL HOME LR BltS CONS BD .ooo 3,982 AAA 97.951 242,148,44 .oa 313JX80B6 3,9001 10/21/2008 DD 10/21/04 AAA 244,877.50 .08 780,000,00 F!D!RAL BOMB LN BKS CORS BD .ooo 4,268 AAA 98,407 759,281.25 ,27 3133X9LP3 4,2001 03/13/2009 DD 12/15/04 AAA 7671S74,fiO ,25 300,000.00 FEDERAL ROME LR BlCS CORS BD ,000 4,173 AAA 95.845 291,423.00 .10 3133X9Q4S STEP 12/15/2011 DD 12/1S/04 AAA 287,535.00 .09 '.-:•.:-: ':--.-··:-:-:-·-:-:-:-'.•: YLDANAL YIELD .ARALYSIS PAGE r 6 OCSF07522202 2005/12/31 RUN DATE I 01/05/06 DlSTRl'.CTc LORG-TBRH OPBRATIRG RUR TINE r 10.48.34 ~2::::~=e :c::r,-:e::,·=-=====::: "" = ™~-== = ----- PAR VALUE YTH AT CURRENT MOODY HARDT TOTAL COST/ I TYPE SECURITY ID SBCURI'rY DESCRIPTION BOOK YIELD S-P PRICE MARKET VALUE I TOTAL --------------------------------------------------------------------------------------------------- 1,200,000.00 FBDERAL FARM CR BXS CONS SIS .ooo 4.404 AAA 98.767 1,169,437,50 .42 31331SC69 4.3501 06/15/2009 DD 06/15/05 AAA 1,185,204.00 .39 3,000,000.00 FEDERAL HOKE LR BXS CONS BD .ooo 4.141 AAA 96,605 2,882,343,75 1.05 3133!1llN3 4,0001 03/18/2011 DD 06/19/03 AAA 2,898,150.00 ,95 16,100,000.00 FEDERAL BOMB LN' BXS CONS BD .ooo 4,085 AAA !17.926 15,659,765,63 5.71 l1339XRFJ STEP 01/16/200!1 DD 07/16/03 AAA 1S,766,086,00 5.14 380,000.00 FEDERAL BOMB LR BXS CORS BD .ooo 2,304 AAA !17.643 368,6115,60 ,13 3133!1XW26 VAR RT 07/09/2008 DD 07/09/03 AAA 371,043.40 .12 245,000,00 FEDERAL HO.MB LN 811:S CORS BD .ooo 3,655 AAA 96.570 235,550.35 .oa 31339YJD5 3,5301 01/28/200!1 DD 07/28/03 AAA 236,596.50 ,08 a, 150,000.00 FEDERAL BOMB LN BXS CONS BD .ooo 3,628 AAA !16 ,479 144,081,00 .OS 0 31339YL67 3,5001 01/30/2009 DD 07/30/03 AAA 144,718,50 .05 0 ~ FEDERAL UOME LR BltS CORS BD .ooo 3.547 AAA !IB.678 ~ 100,000.00 '7,922.00 .OJ 3133!1YQF2 STEP 07/30/2008 DD 07/30/03 AAA !18,678,00 .03 CQ Cl) 1,010,000.00 FEDERAL BOMI! LR mes CONS BD .ooo 4,396 AAA !lfi,U4 1,001,019.80 .37 ,I:. 3l339Y3U4 4,2401 07/02/2013 DD 07/02/03 AAA 1,0ll,!150,80 ,34 " 175,000,00 FEDERAL BOMB LR BltS CONS BD .ooo 3,344 AAA !15.688 166,745.25 .06 31339Y6F4 3,200\ 01/14/2009 DD 07/14/03 AAA 167,454.00 .05 43,016.31 FBLMC GROUP t7B-6064 .ooo 5,338 AAA 103,378 U,!167,78 .01 31348SWZJ 6.3841 01/01/2029 DD 12/01/97 AAA U,U!l,40 .01 2,350,000.00 FEDERAL RATL M'l'G ASSR DEBS .ooo 5,236 AAA 100.260 2,385,461.50 .es 3135!1MJX2 5.2501 06/15/2006 DD 06/22/01 AAA 2,356,110.00 ,77 ,,aoo,000.00 FEDERAL ffA'l'L MTG ASSR DEBS .ooo 3,Ul AAA !15.237 6,575,736.00 2.34 3135!1MUQ4 3,125\ 03/16/2009 DD 03/16/04 AAA 6,476,116.00 2.11 1s,ooo,ooo.oo FEDERAL RA'1'L N'1'G ASSR .ooo 3,276 AAA !19,205 14,870,4.00.00 S,39 31359KXQ1 3,2501 07/31/2006 DD 01/25/05 AAA 14,880,750.00 4.86 621,000,00 PEDER.AL RATL MTG ASSN MTR .ooo 3.:z,e AAA !18,543 599,653.13 .22 3136F5AV3 VAR llT OB/18/2011 DD 02/20/04. AAA 611,952,03 .20 2so,ooo.oo PBDBRAL KA'1'L MTG ASSN HEDIUK .ooo 3,681 AAA 96,430 239,167,50 ,OB 3136FSMR9 3.5501 04/07/2009 DD 04/07/04 AAA 2U,075,00 .08 YLDANAL YIELD AHALYSIS PAGE ' 7 OCSF07522202 2005/12/31 RUN DATE I 01/05/06 OISTRICT1 LONG-TERM OPERATING RUN TIME I 10.48.34 =~~~-==:::;~=====-~ -===-=== = ™=&:::.&:4..==-=, =-=-=·~-==-- PAR VALUE YTN AT CURRBRT MOODY MARD'l' 'l'OTAI. COST/ I TYPE SECURITY ID SECURITY DESCRIPTION BOOK YIELD S-P PRICE MARltET VALUE I TOTAL ------~--~---------·----------------·-·----------------------------------------------------··-·-·--- 521,614.34 FNMA POOL 10254510 .ooo 5.046 AAA 99.082 537,262,76 .18 3137lltVB4 5,0001 11/01/2017 DD 10/01/02 AAA 516,825,')2 .17 111,943.98 FNMA POOL 10254631 ,000 5,046 AAA 99,081 115,302.31 .04 3137lltY47 5,0001 02/01/2018 DD 01/01/03 AAA 110,915.21 .04 101,411,40 FNMA POOL f0254760 .ooo 5,046 AAA ,,.080 104,453.75 .03 31371KSV9 5.0001 06/01/2018 DD OS/01/0J AAA 100,478.42 ,03 46,290.73 FHMA POOL tD2S4866 .ooo 5,047 AAA 99.073 47,679.46 ,01 31J71LCB3 S,0001 09/01/2018 DD 08/01/03 AAA 45,861.61 .01 344,095.10 FNMA POOL 10254907 .ooo 5,047 AAA 99,069 344,09S,10 .12 31371LDLO 5,0001 10/01/2018 DD 09/01/03 AAA 340,891.57 ,11 lXJ 245,868.04 FRMA POOL f02SUSJ .ooo 5,047 AAA '9,065 20,018.24 .08 0 0 31371LE21 5,0001 11/01/2018 DD 10/01/03 AAA 243,569.17 .OB ~ ~ 664,095.22 FNMA POOL 10254987 .ooo 5,045 AAA 99,10s 672,603,95 ,23 IQ 31371LF46 5.0001 12/01/2018 DD 11/01/03 AAA 658,151.98 .21 (D .ooo 5.868 .1:1,,. 104,592,87 FNMA POOL 10323980 AAA 102,242 10,,201.so .03 00 31374T2MO 6,0001 04/01/2014 DD 09/01/99 AAA 106,937.84 .03 80,434,39 FNMA POOL 10357430 .ooo S.046 AAA 99,080 81,339.27 .02 3l376JCA7l S.0001 09/01/2018 DD 09/01/03 AAA 79,694.39 .03 32,297,09 FIOMA POOL 10456482 .ooo S.868 AAA 102,241 33,720,16 .01 31381CCT2 6,0001 02/01/2014 DD 02/01/99 AAA 33,020,B7 ,01 89,801.79 FNMA POOL •0509649 .ooo 5.868 AAA 102,2H 93,758.68 .03 31383QEWO 6,0001 09/01/2014 DD 09/01/99 All '1,816.94 .03 82,105.43 FNMA POOL 10535451 .ooo 5,868 AAA 102,243 BS,723,21 .OJ 31384VJQ8 6,0001 06/01/2015 DD 07/01/00 AAA 83,947.05 ,03 240,165.83 FBMA POOL f05553'3 .ooo 5,046 AAA 99,081 247,370.80 .oe 31385W5Yl 5.0001 04/01/2018 OD 03/01/03 AAA 237,958.71 .08 201,616.67 FNMA POOL 10555545 .ooo 5.04' AAA 99,081 207,665.18 ,07 313BSXl!S2 S,0001 06/01/2018 DD 05/01/03 AAA 199,763.81 .07 687,488.86 FNMA POOL 105S5621 .ooo 5,04S AAA '9,105 695,223,10 ,24 31385XG68 5.0001 07/01/2018 OD 06/01/03 AAA 681,336.26 .22 :-:-: ~-:-··.~-•~-: ~ :.;,:, .· :,· . YLDARAL YIELD ANALYSIS PAGE I 8 OCSF07522202 2005/12/31 ROH DAT! : 01/05/06 DlSTRlCTt LOHG-TBRM OPERATING ROH TIMI!: t 10,48,34 ====-:+--=::st:3.........-wr:~==~~-==-=== -=rn:mc: ..,...,....... ~~===-= PAR VALUE YTN AT CURRBRT MOODY MARUT TOTAL COST/ I TYPE SECURlff ID SECURITY DESCRIPTION 8001{ YlBLD 8-P PRICE MARKBT VALUE I TOTAL ---·---------------·------------·--·--·-·---·------------ ------------------------------------ 386,280.22 FNMA POOL 10681309 .ooo 5,046 AAA 99,081 397,868.62 ,13 313!11Y3S4 5.0001 02/01/2018 DD 02/01/03 AAA 382,730.30 ,12 46,347.91 FNMA POOL 10681334 .ooo 5,046 AAA 99,081 47, 738,36 .01 31391Y4Tl 5,0001 02/01/2018 DD 01/01/03 AAA 45,921,97 .01 279,806.31 FRMA POOL 10684798 .ooo 5,538 AAA 99,311 279,565,86 .10 31400DX31 5.500\ 03/01/2033 DD 03/01/03 AAA 277,878,44 ,09 248,573,14 FNMA POOL f06U908 .ooo 5,0H AAA 99,080 251,758,01 .08 31400D3Rl 5,0001 06/01/2018 DD 05/01/03 AAA 246,286,27 .OB 137,052,14 FRMA POOL 10685200 .ooo 5,046 AAA 99,081 ll8,808,14 .04 31400!GH7 5,0001 03/01/2018 DD 03/01/03 AAA 135,792,63 ,04 a, 209,509,76 FNMA POOL 10686318 .ooo 5,046 AAA 99,081 215,795.05 ,07 0 31400FPB7 5,000\ 03/01/2018 DD 03/01/03 AAA 207,584,37 .07 0 ~ ~ 82,010,61 FNMA POOL 10688739 .ooo 5,046 AAA 99,080 H,417-0,93 ,02 31400JEL9 5,0001 06/01/2018 DD 06/01/03 AAA 81,256,11 .03 CQ Cl) 78,646,90 FlfMA POOL 10(;89859 .ooo 5,041; AAA 99,080 79,654, 56 .oz .II,, 31400ltMG8 S,0001 05/01/2018 DD 05/01/03 AAA 77,923,35 ,03 (0 427,432 .OS FNMA POOL 10693834 .ooo 5.046 AAA 9.9.081 U0,254.9.9 ,15 31400PYH 5,0001 03/01/2018 DD 03/01/03 AAA 423,503.95 .ic 161, 7'6,36 FNMA POOL 106'5852 .ooo s.ou AAA 99.080 166,650.25 .05 31400SBVO 5.0001 05/01/2018 DD 05/01/03 AAA 1'0,307.83 ,05 585,040,87 FNMA POOL f0695B8' .ooo 5,046 AAA ,,.090 602,592.11 .21 3lt00SC23 S.0001 05/01/2018 DD 05/01/03 AAA 57!>1 6S8.49 ,19 1S711S6,38 FNMA POOL 10702210 .ooo 5.045 AAA 99,105 161,871,07 ,05 3lt01ADP9 5,0001 05/01/2018 DD 05/01/03 AAA 155,749.93 .os 94,620,73 fflMA POOL 10702328 ,ooo 5,046 AAA 99,080 95,833.05 .03 31401ARD2 5,0001 05/01/2018 DD 04/01/03 AAA 93,750,22 .03 213,619,89 FNMA POOL 10709148 .ooo S,046 AAA 99,080 220,028.50 .07 31401BZH7 S,0001 06/01/2018 DD 06/01/03 AAA 211,654.59 ,07 448,647,07 FHHA POOL 10709360 .ooo 5,046 AAA 99,080 454,395.36 .16 31401JB56 5,0001 07/01/2018 DD 06/01/03 AAA tU,519,52 ,1S YLDANAL YI.ELD AIJALYSIS PAGE I , OCSF07522202 2005/12/31 RUH DATE : 01/05/06 DISTRICT: LONG-TERM OPERATING RUH TIME. I 10.48.34 =-=~~-:Z:~-=== =rm =rm-=====~-==--==:a=...a: PAR VALUE YTM AT CURRENT MOODY MARDT 'l'OTAL COST/ I TYPB SECURITY ID SECURITY DESCRIPTION BOOlt YIELD S-P PRICE HARDT VALUE I 'l'OTAL -----·------------------------------------------------------------------------------------------------- 81,871,68 FNMA POOL 10709826 .ooo 5,046 AAA 99.080 82,920,65 ,02 31401JSP4 5,0001 06/01/2018 DD 06/01/03 AAA 81,118,46 .03 168,879.29 FNMA POOL t0709917 .ooo 5,046 AAA 99.080 171,043,07 ,06 31401JVJ4 5,0001 06/01/2018 DD 06/01/03 AAA 167,325,60 ,05 .uo,,os.01 FRMA POOL 10710235 .000 5,046 AAA ,,.oao 423,233.01 .14 ll40lltBC8 S,0001 06/01/2018 DD 06/01/03 AAA 407,125,48 .13 167,523.52 FNMA POOL 10713365 .ooo 5.046 AAA 99,080 169,60,90 .06 31401RQS1 5.0001 07/01/2018 DD 07/01/03 AAA 165,982,30 .05 519,385,98 FNMA POOL 10720319 .ooo 5,046 AAA 99.080 526,040.63 .18 31401WG45 5,0001 07/01/2018 DD 07/01/03 AAA 514,607,63 .17 l'lJ 1,754,783.20 FNMA POOL 10720369 .ooo 5.045 AAA ,,.105 1,807,426.70 ,63 0 31401WJWO 5,0001 06/01/2018 DD 06/01/03 AAA 1,739,079,98 ,57 0 ~ ~ 227,644.64 FNMA POOL 10721629 .ooo S,046 AAA 99,080 234,474.00 ,08 31401XVW4 5,0001 07/01/2018 DD 06/01/03 AAA 225,550.31 ,07 IQ (1) 179,670,18 FNMA POOL 10723487 .ooo 5,046 AAA 99,080 181,691.49 .06 u, 31402AXQ4 5,0001 06/01/2018 DD 06/01/03 AAA 178,017,21 .06 c:::, 2,604,108,!119 FNMA POOL 10725530 .ooo 5,048 AAA 9!11.043 2,639,508.59 .93 31402DA75 5,0001 06/01/201!11 DD 05/01/04 AAA 2,579,181.94 .84 303,089.79 FNMA POOL 10729601 ,000 5.047 AAA 99,076 306,973.14 .10 ll402RRW3 5,0001 07/01/2018 DD 07/01/03 AAA 300,289.24 .10 21,363.30 PRMA POOL 10732873 .ooo 5.047 AAA '9,065 27,713.88 .oo 31402MFN5 5,0001 11/01/201B DD 10/01/03 AAA 27,107.45 .01 883,688,42 F!fMA POOL 10735227 .ooo 5.545 AAA 99.189 891,144.54 .31 314D2QYY1 5.5001 02/01/2035 DD 01/01/05 AAA 876,521.71 .2, 483,256.36 FRHA POOL 10737130 .ooo 5,047 AAA 99,073 489,448.07 ,17 31402S4P9 5,0001 10/01/2018 DD 10/01/03 AAA 478,776,S7 ,16 40S,461,!IIO FNMA POOL 10738211 .ooo 5,045 AAA 99.105 410,656.91 .u 31402UDQ2 S.0001 10/01/2018 DD 10/01/03 AAA 401,833,27 ,13 143,938.19 FNMA POOL 10738487 .ooo 5,047 AAA 99,065 145,782.40 .OS 314021JNC2 5,0001 10/01/2018 DD 10/01/03 AAA 142,592.37 .os •.• -:-. -:-· ,: ,:-:-~ .-.: :· :,: >:-: : .. : .. -: :->': '• '. :-:··•:<.: :-~-:-. : :-:-: "<".." :,:::-:-·-: ·-: YLDANAL YIELD MfALYSIS PAGE I 10 OCSF07522202 2005/12/31 RUN DATZ I 01/05/06 DISTRICT! LORG-DRM OPERATING RUN TIMB I 10.48.34 =-~--======~:::=z = ====---=e --~==-= =-=-====~= PAR VALUE Y'l'M AT CURRENT MOODY MAMBT TOTAL COST/ I TYPE SBCURITY ID SECURITY DESCRIPTION 800:K YIELD S-P PRICE HARDT VALUE I TOTAL --------------------·------·-·-·----·--·-------·------------------------------------------------- 1,703,415.30 FNKl\ POOL t0740457 .ooo S.045 All 99,105 1,726,571.10 .61 31402\lfTHB 5,0001 10/01/2018 DD 10/01/03 AAA 1,fi88,170.79 .ss 595,644.05 FNMA POOL t0740471 ,000 5.045 AAA 99.105 603,275.72 .21 31402WT40 S.0001 10/01/2018 DD 10/01/03 AAA S90,313,.U ,19 577,368.27 PIIMA POOL f07407H .ooo 5,047 AAA 99,073 584,765.80 .20 31402WSR1 5.0001 10/01/2018 DD 11/01/03 AAA 572,016,07 .19 27,646.66 FNMA POOL f0743B68 .ooo 5,045 AI\A '9,105 21l,000.88 .oo 31403BMR1 5,0001 11/01/2018 DD 10/01/03 AAA 27,399.24 .01 807,875.00 FNMA POOL 10744008 .ooo 5,046 All 99,080 818,225.91 .29 31403BR54 5,0001 07/01/2018 DD 09/01/03 All 800,442,55 .26 IXJ 121,214.0 PRMA POOL 10744316 .ooo 5,045 AAA 99.105 122,767.55 ,04 0 0 314038314 5,0001 09/01/2018 DD 09/01/03 All 120,129.70 ,04 :ii;, ~ 233,478.16 FNMA POOL 10741914 .ooo 5,047 All 99.065 236,469.62 ,08 tQ 31403F3XO 5.0001 11/01/2018 DD 11/01/03 AAA 231,295.14 .08 Cl) UI 143,140.69 FNMA POOL 10748400 .ooo S,04S AAA 99.105 lU,974.69 .os ~ 31403GRR9 5.0001 08/01/2018 DD 09/01/03 AAA 141,859.67 .05 718,834.85 FRMA POOL 10748899 .ooo 5,045 AAA 99,105 728,044.93 .2s 31403G7LO 5,0001 12/01/2018 DD 11/01/03 AAA 712,401,73 ,23 1,562,54'.40 FRMA POOL 10750377 .ooo 5,045 All 99,105 1,582,569.56 .56 31403JUA2 5.0001 11/01/2018 DD 11/01/03 AAA 1,548,565.55 ,51 1,320,281,37 FNMA POOt 10750380 ,000 5,045 AAA 99,105 1,3:17,203.56 .n ll403JUD6 5.0001 11/01/2018 DD 11/01/03 AAA 1,308,471.62 .u 117,207,07 FRMA POOL 10750445 .ooo s.ocs AAA 9'.105 118,708,78 .o-t 31403JWl!2 5.0001 11/01/2018 DD 11/01/03 AAA 116,158,14 .04 595,216,U FRHA POOL 10751960 .000 5,045 AAA 99,105 602,842.41 .21 31403LMH1 5,0001 12/01/2018 DD 11/01/03 AAA S89,889,37 ,19 626,883.08 'FRMA POOL 10753425 .ooo 5.047 AAA 99.062 634,131.41 .22 31403RA23 5,0001 11/01/2018 DD 11/01/03 AAA 621,002.92 ,20 U3,579.16 FNMA POOL 10755165 .ooo 5,047 All 99,062 449,262.52 .15 31403Q6A3 S,0001 12/01/2018 DD 11/01/03 AAA 439,418.39 .u YLDAHAL YIELD ARALYSIS PAGE I 11 OCSF07S22202 2005/12/31 RUN DATE t 01/05/06 DISTRICT• LONG-TBRM OPERATING RUN' TIME I 10.48.34 =---======~--=rm =--~-====~-™ ~==-== PAR VALUE YTM AT CURRERT MOODY HARDT TOTAL COST/ I TYPE SECURITY ID SECURITY DESCRIPTION BOOK YIELD S-P PRICE MARDT VALOB I TOTAL -----------~------------------------------------------------------------------------------------- 763,436.65 F!IMA POOL 10756372 .ooo 5.047 AAA 99.062 772,263.89 .27 31403SJR8 5,0001 11/01/2018 DD 11/01/03 AAA 756,275.61 .25 2,657,621,41 FNMA POOL 10784251 .ooo 5,049 AAA 99,021 2,693,748,46 .95 3140SBH46 5.0001 11/01/2019 DD 11/01/04 AAA 2,631,603.30 ,86 77B,192,44 FNMA POOL 10799670 .ooo s.oso AAA 99,018 78B,771,00 .27 31405BJP4 5,0001 12/01/2019 DD 12/01/04 AAA 770,550.59 ,25 794,969.63 FRMA POOL f0792432 .000 5,049 AAA 99,025 B051776.25 .28 31405LLM9 5.0001 10/01/2019 DD 10/01/04 AAA 7871218.U .26 774,589.07 FNMA POOL f0794195 .ooo 5,049 AAA 99,021 785,118,65 .27 31405NltG9 5,0001 11/01/2019 DD 11/01/04 AAA 767,005.84 .25 Ill ]38,914.14 FNMA POOL 10800370 .000 5.050 AAA 99,019 :ua,s4J,46 .12 0 3U05VF!t8 S.000\ 12/01/2019 DD 11/01/04 AAA 335,586.00 .11 0 ~ "ll 211,222.20 FNMA POOL 10800998 .ooo 5,546 AAA 99,176 270,989,14 .o, 3140SV3F2 5.5001 11/01/2034 DD 11/01/04 AAA 268,987.33 .09 (Q Cl) 1,039,765,39 FNMA POOL 10803923 .ooo 5,050 AAA 99.014 l,053,899.70 ,37 U'I 31406AD41 5,0001 12/01/2019 DD 12/01/04 AAA 1,029,513.30 .34 I\,) 315,318.57 FNMA POOL 10808933 .ooo 5,546 AAA 99,163 316,046,73 ,11 31406FV24 5.soot 01101/2035 DD 01101/05 AAA 313,670,98 .10 297,842.02 FNMA POOL toeonso .ooo 5.546 AAA 99.176 297,586.06 .10 31406GEX3 5,5001 12/01/2034 DD 01/01/05 AAA 295,387,80 .10 309,392.78 FNMA POOL 10814930 .ooo 5.554 AAA 99,027 309,126.89 .11 31406RLK8 5.5001 04/01/2035 DD 04/01/05 AAA 306,383,12 ,10 321,982.09 FNMA POOL #0815923 ,000 5,547 AAA 99,158 321,705.39 .11 31406PPG8 5.5001 03/01/2035 DD 03/01/05 AAA 319,271.00 .10 309,241.60 FRMA POOL 10819566 .ooo 5.547 AAA 99.158 308,975.85 .11 31406TOT1 5,5001 04/01/2035 Db 04/01/05 AAA 306,637,79 ,10 315,040,22 FNMA POOL 10822731 ,000 5.547 AAA 99.158 314,769.48 .11 31406XAB5 5.5001 05/01/2035 DD 05/01/05 AAA 312,387.58 .10 318,496.88 FNMA POOL f0823232 '.ooo 5,547 AAA 99,158 318,223.15 .11 31406XSV5 5.5001 06/01/2035 DD 05/01/05 AAA 315,815.14 .10 .... ,. •.• ·: ~•: •• 4 • -: ;-·-. •.- : • •:· .. ·.'-'. ~ : ._, :-: ~ ... --. :, ;•: YLDAHAL YIBLD ARALYSIS PAGE t 12 OCSF07522202 2005/12/31 RUN DATE t 01/05/06 DISTRICT! LONG-TERM OPERATING RUN TIME I 10,48,34 =~----==::=.~ --= =-== ~===== PAR VALUE H'M AT CURRl!RT MOODY .HARDT TOTAL COST/ I TYPE SECURITY ID SECURITY DESCRIPTION BOOK YIELD S-P PRICE MARll'l' VALUE I TOTAL -··-------------·--------·----·-·--------·-·---·--·-------------------------------------------------------- 900,000,00 FLORIDA PWR CORP SR RT SER A .ooo 4.882 A3 ,,.,n ,00,000.00 .32 341099CF4 VAR RT 11/14/2009 DD 12/13/05 BBB-e,9,112.00 ,29 7,020.48 GRMA POOL f0421JR!J .ooo 6.219 AAA 104.513 7,368,22 .oo 36206UC23 6.5001 04/15/2026 DD 04/01/96 AAA 7,337,31 .oo 11,848.98 GNMA POOL f044995l .ooo 6.234 AAA 104.259 12,US,96 .oo 36208FWLO 6,5001 01/15/2028 DD 01/01/98 AAA 12,353.58 .oo 24,593,20 GNMA POOL 10456815 .ooo 6,220 AAA 104.506 25,811.33 .oo 36209BTA6 6.500\ 06/15/2028 DD 06/01/98 AAA 25,701.37 ,01 39,485.84 GNMA POOL 10468052 .ooo 6,220 AAA 104.503 U,441.62 .01 36209CSM4 6,5001 07/15/2028 DD 07/01/9B AAA 41,263.89 .01 OJ 110,838.11 GNMA POOL 10476041 .ooo 6,220 AAA 104.506 116,154,90 .04 0 36209MZB7 6,5001 06/15/2028 DD 06/01/98 AAA 115,832.48 .04 0 ~ 6,221 104,489 ~ ,o,en,14 GRMA POOL tOt78626 .ooo AAA 95,238.50 ,03 362090VT9 6,5001 01/15/2029 DD 01/01/99 AAA 94,958.10 ,03 la Cl) 28,288.32 GNMA POOL f0480S98 .ooo 6,220 AAA 104,495 29,645,26 ,01 u, 36209S3F6 6.5001 10/15/2028 DD 10/01/98 AAA 29,559.88 .01 Co) 5, 778,14 GNMA POOL 10512235 ,000 6. 2.22 AAA 104,460 6,064.34 ,00 36211GBC6 6,5001 11/15/2029 DD 11/01/99 AAA 6,035.85 .oo 51,2'5,59 GHMA P'OOL 10514326 .ooo 6,222 AAA 104,472 53,756.11 .01 36211JLF2 6,S001 07/15/2029 DD 07/01/99 AAA 53,589.53 .02 117,699.91 GNMA II POOL 10080395 .ooo 4,323 All 101,213 116,633,26 ,04 36225CNM4 VAR R'l' 04/20/2030 DD 04/01/00 AAA 119,127.61 .04 1,026,535,84 GNMA II POOL 1080408:X .ooo 4,322 AAA 101,215 1,016,110.09 .37 36225CR28 VAR RT 05/20/2030 DD 05/01/00 AAA 1,039,008.25 .34 992,582.81 GBMA II POOL fOOB0965 .ooo 4,'76 AAA 100.545 991,962,H .36 36225DCB8 VAR R'r 07/20/2034 DD 07/01/04 AAA !1!17,992,3!1 .33 1,300,000.00 GEIU'!RAL Br.EC CO RT .ooo 4,523 AAA 99,937 1,300,000.00 .47 369604BB8 VAR RT 12/09/200B DD 12/09/05 AAA 1,2'9,181.00 .42 3,000,000.00 GENERAL BLEC CAP MTN 'l'R007Ui .ooo 4,530 AAA !19,968 l,000,000.00 1.08 36962GT53 VAR RT 12/12/2008 DD 12/12/05 AAA 2,999,040.00 .98 YLDAHAL Y:IELD ANALYSIS PAGE t 13 OCSF07522202 2005/12/31 RU'fl' DA'R I 01/05/06 DISTRICT! LOHG-Tl!RM OPERATIRG RU'fl' TUIB I 10,48,34 -·-===:-T::--·......,c::::u::c·=~-= = -====-===--=mr==-= ·==m:=:e PAR VALU2 Ynl AT C1JRR!RT MOODY MARD:T 'l'OTAL COST/ I TYPE SECURITY ID SECURITY DBSCRIPTIOR BOOlt YIELD 8-P PRICE MA!UO!:T VALUE I TOTAL ----------------------------------------------·------------------------------------------------------------- 4,250,000,00 GOLDMAN SACUS GRP .ooo 4,803 AA3 100.343 4,250,000.00 1,54 38143UBD2 VAR RT 06/28/2010 DD 06/28/05 A+ 4,264,577,50 1.39 1,300,000.00 HSBC FIR CORP RT .ooo 4,618 Al 100,078 1,300,000.00 .47 40429CCU4 VAR RT 09/15/2008 DD 09/15/05 A 1,301,014,00 ,42 3,000,000.00 HSBC FIR CORP MTN f ~ 00007 ,000 4,561 Al 99.968 2,995,830.00 1.08 40429JAG2 VAR RT 05/10/2010 DD 05/10/05 A 2,999,040,00 ,98 2,000,000.00 LEHMAH BROTHERS TR 100596 .ooo 4,283 Al 100.015 2,000,000 .• 00 ,72 52517PCSB VAR RT 10/22/2008 DD 10/24/05 A+ 2,000,Joo.oo ,65 1,100,000.00 MORGAN STANLEY .ooo 4,258 AA3 100,109 1,101,639,00 .39 617468ll2 VAR RT 01/12/2007 DD 01/13/04 A+ 1,101,199.00 ,36 t:n 3,200;000.00 MORGAN STARLBY NT .ooo 3,992 AA3 97.062 3,149,248,00 1.12 0 61746BALO 3,8751 01/15/2009 DD 01/13/04 A+ l,1051 984,00 1.01 0 ~ 1,400,000.00 PUBLIC SVC ELKC & GAS CO 1ST ,000 4,628 Al 100.015 1,400,000,00 .so ~ 744567FN3 VAR RT 06/23/2006 DD 06/25/04 ,._ 1,400,210.00 ,46 CQ 194,119,Hi RESID!RTIAL ASSET 03-RSll AIIB ,000 4,702 AAA 100,142 194,119, 16 ,07 Cl) ~ 760985lt83 VAR RT 12/25/2033 DD 12/30/03 AAA 194,394.81 .06 1,eoo,000.00 SLM CORP MTR f TR 00067 ,000 ol,39S A2 100.343 1,eos,0.o10.oo .65 784ol2FCUO VAR RT 07/25/2008 DD 07/26/04 A 1,806,174.00 .59 960,326.77 St.M S~l>EBT LR TR 04-6 A2 ,000 4.238 AAA 100,058 960,U.!l,31 ,34 78442GHA1 VAR RT 01/25/2013 DD 06/30/04 AAA '60,883,76 ,31 2,300,000.00 SALOMON SMITH MTR f SR 00206 .ooo 4,02 AAl 100.187 2,308,514.60 ,83 79548EJP8 VAR RT 05/18/2007 DD 05/28/02 2,JOol,301,00 .75 2,498,126.09 SBA GTD DEV PARTR 2001-2oc 1 .ooo 6,035 AAA 105,050 2,498,126.09 ,95 83162CLJO 6.3401 03/01/2021 AAA 2,624,291.46 .8' 962,818,9' SBA GTD PARTR CTFS SBIC-PS 01 ,000 6,631 AAA 100,132 ,n,e1e.,, ,34 831641DD4 6.6401 02/10/2011 DD 02/21/01 lllR '64,089.91 ,31 2,000,000.00 TOYOTA MTR CR MTR fTR00413 .ooo 4.310 AAA 100.000 1,998,188,00 ,72 89233PTE6 VAR RT 09/18/2006 DD 03/16/05 AAA 2,000,000.00 .65 1,600,000.00 UNITED AIRLS PASSTBR.U 01-1 C .ooo 9.645 WR 70.825 1,600,000.00 ,41 .!109317BC2 6,8311 03/01/2010 DD 08/22/01 A-1,133,200.00 ,37 ~-': •• 0 :-:-•,7 :-· ···-:-:-: :,:,:-:• ;.: :-: • :-·•·,• ·.•:.:-:-:::·:·:-:·: YLDAHAL YIBtD ABALYSIS PAGE I 14 OCSF07522202 2005/12/31 RUM DATE I 01/05/06 DISTRICT: LONG-TERM OPERATING RUR TIMI! a 10.48.34 -----:i::~-==--=:== = = ===-=e-: mrm . .::t.=:a=-= PAR VALUE YTM AT CURR.ERT MOODY MARDT 'l'ODL COST/ I TYPB SECURITY ID SECURITY DESCRIPTIOR BOOK YIELD S-P PRICE MARUT VALIJB I TOTAL ----------------------------------------------------------------------------------------------------- 10,900,000.00 US TREASURY NOTES ,000 3.469 AAA 97.280 10,sn,,s2.22 3.84 !112828BT6 3,3751 12/15/2008 DD 12/15/03 AAA 10,603,520.00 3.46 107,800.00 US TREASURY INFLATION INDEXED .000 2.011 AAA 9',460 110,005.37 ,03 9128288W9 2.0001 01/15/2014 DD 01/15/04 AAA 107,217,88 ,03 3,254,814.00 US TREASURY INFLATION IRDBX RT ,000 2.011 AAA 9',4170 3,298,820,05 1.17 912828CP3 2.0001 07/15/2014 DD 07/15/04 AAA 3,237,563.49 1.06 10,500,000.00 US TREASURY ROTES .ooo 2,915 AAA 98.6410 10,363,036.74 3,75 '12828DD9 2,8751 11/30/2006 DD 11/30/04 AAA 10,357,200.00 3.38 5,920,000,00 US TREASURY NOTES .ooo 3,611 AAA '6,920 5,741,342.82 2.07 9l2828DE7 3.5001 12/15/2009 DD 12/15/04 AAA 5,737,664.00 1,87 a, 11,200,000.00 US TREASURY NOTES .000 3,781 AAA 99,180 11,113,138.18 4.02 0 !112828DQO 3.7501 03/31/2007 Db 03/31/05 AAA 11,108,160,00 3.62 0 ~ 11,000,000.00 US TREASURY ROTES .ooo 3,544 AAA '8,770 10,869,183,60 3,93 ~ !J12828DW7 3,S001 05/31/2007 DD 05/31/05 AAA 10,8641,700.00 3.55 IQ 20,000,000.00 US TREASURY ROTES .000 3,666 AAA !18.8'0 19,781,324.80 7.16 CD <JI 91282BDY3 3,6251 06/30/2007 DD 06/30/05 AAA 19,778,000.00 6.4S <JI e,100,000.00 US TREASURY ROTBS .ooo 4,025 AAA 99.370 8,044,809,20 2.91 912B2821'3 4,0001 08/31/2007 DD 08/31/05 AAA B,048,970,00 2.63 400,000.00 US TREASURY MS .ooo 3,956 AAA 97,950 390,203.13 ,14 !112828!Gl 3,8751 09/15/2010 DD 09/15/05 AAA .391,800.00 ,13 1,,so,000.00 VIRGIRIA EI.BC & P1fR 01 SER A .ooo s. 737 Al 100.218 1,74l,B40,00 .63 927804!HO S.7501 03/31/2006 OD 03/27/01 BBB 1,753,815.00 .57 644,360.89 FRLMC NULTICLASS MTG SER 23 A 6.316 4,495 AAA 99,360 US,047,34 .23 3133'1.'CHS VAR M! 08/15/2032 DD 12/01/97 AAA 6410,239,88 .21 373,226.41 GNHA GTD REMIC TR 2000-9 FB 6,320 4.829 AAA 100,848 373,226.41 .13 3B37R4RX9 VAR RT 02/16/2030 AAA 376,391,37 .12 150,336,65 GHMA II POOL f080088K 6,705 4,325 All 101.148 153,625,25 .05 3622SCC20 7,3751 06/20/2027 DD 06/01/97 AAA 152,062,51 .os 113,727, 73 GHMA II POOL 10080023 6,992 5,063 AAA 101,217 115,611.33 .04 3622SCAZ9 VAR RT 12/20/2026 DD 12/01/96 AAA 115,111.80 ,04 OJ 0 0 ~ l CD U'I 0) YLDANAL OCSF07522202 DISTRICT! LOIIG-T!!RN OPERATING YIBLD ANALYSIS 2005/12/31 PAGE RUR DATE RUii TIME 15 01/05/06 I 10.48.34 :s:tt::~-=::=:== .----===== ~ = -==z --=-== =-a:.:..:..:=m= ==========-= .... -===== PAR VALUE SECURITY ID SECURITY DESCRIPTIOM 2,100,000.00 FEDERAL NATL MTG ASSN DEBS 31359MEY5 6,6251 09/15/2009 DD 09i01/99 925,750,27 WMP/HTJRTOOR PAIGE too0-11150 302998GB3 7,5001 12/01/2030 DD 10/21/99 TOTAL FIXED INCOME SECURITIES 'l'OTAL YTM AT CURRENT MOODY BOOX YIELD S-P 7.113 6.230 AAA AAA 7.684 7.458 AAA AAA -------------.004 4.270 -------------- .004 4,268 MARltET PRICE 106.332 100.559 'l'O'rAL COST/ Ml\Rltl!T VALUE 2,030,133.00 2,232,972.00 905,644.13 930,924.10 ---·-------------·-276,660,884.21 275,901,087,14 -----------------307,207,066.67 306,447,20,60 :==s='!!!I!======--== \ TYPE I TOTAL .ao .73 .33 .30 100.00 90.02 100.00 100.00 s=:~aaa• Rating Agency Comparisons A summary of investment grade ratings are listed below. More complete descriptions of Moody's and Standard & Poor's ratings are included in the following pages. Quality/Grade Moody's Standard Fitch & Poor's Best Quality Aaa AAA AAA High Quality Aa1 AA+ AA+ Aa2 AA AA Aa3 AA-AA- Upper Medium Grade A1 A+ A+ - A2 A A A3 A-A- Baa1 BBB+ BBB+ Medium Grade Baa2 BBB BBB Baa3 BBB-8881 Moody's -Investment Grade "Aaa" -Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. "Aa" -Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. "A" -Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal Book Page 57 and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. "Baa" -Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds in the Aa, A, and Baa are also assigned "1", "2" or "3" based on the strength of the issue within each category. Accordingly, "A 1" would be the strongest group of A securities and "A3" would be the weakest A securities. Ba, B, Caa, Ca, and C Bonds that possess one of these ratings provide questionable protection of interest and principal ("Ba" indicates some speculative elements; "B" indicates a general lack of characteristics of desirable investment; "Caa" represents a poor standing; "Ca" represents obligations which are speculative in a high degree; and "C" represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default. Standard and Poor's -Investment Grade AAA -Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA -Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree. A -Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB -Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Standard and Poor's -Speculative Grade Rating Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation and "C" the highest. While such debt will likely have some quality and protective characteristics these are outweighed by major uncertainties or major exposures to adverse conditions. BB -Debt rated "BB" has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely Book Page 58 interest and principal payments. The "BB" rating category is also used for debt subordinated to senior debt that is assigned an actual or implied "BBB" rating. B -Debt rated "B" has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The "B" rating category is also used for debt subordinated to senior debt that is assigned an actual or implied "BB" or "BB" rating. CCC -Debt rated "CCC" has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The "CCC" rating category is also used for debt subordinated to senior debt that is assigned an actual or implied "B" or "B" rating. CC -The rating "CC" typically is applied to debt subordinated to senior debt that is assigned an actual or implied "CCC" debt rating. C -The rating "C" typically is applied to debt subordinated to senior debt which is assigned an actual or implied "CCC" debt rating. The "C" rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. Cl -The rating "Cl" is reserved for income bonds on which no interest is being paid . D -Debt rated "D" is in payment default. The "D" rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. NR -Indicates no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy. Book Page 59 Quarterly Swap Report For the Three Months Ended December 31, 2005 Page 2 of 4 Results: No new hedging products have been entered into by the District since the last report covering the period ended September 30, 2005. As stated above, the District utilizes only two hedging product agreements, the AIG Swap agreement entered into in 1992, and the Soc Gen Swap Agreement, entered into in 1993. Requirement Summarize any planned hedging product transactions and the impact of such transactions on the District; a description of each outstanding Hedging Product agreement, including a summary of its terms and conditions, the notional amount, volume, rates, maturity, the estimated market value of each agreement, the method of procurement (competitive or negotiated), and the full name, description and credit ratings of the agreement's counterparty and if necessary, its applicable guarantor. Results: The District currently is not planning any additional hedging product transactions at this time. Requirement List any amounts which were required to be paid and received, and any amounts which actually were paid and received under each outstanding hedging product over the last quarter; Results: Following are the amounts that were actually paid and received under the District's two swap agreements. All amounts required to be paid and received were actually paid and received. October Paid by the District to the Swap Provider 1992 Certificates AIG Swap Paid by the Swap Provider on behalf of the District Book Page 61 1993 Certificates Soc Gen Swap $ 141,550.00 $ (73,550.88) Quarterly Swap Report For the Three Months Ended December 31, 2005 Page 3 of 4 November Paid by the District to the Swap Provider Paid by the Swap Provider on behalf of the District December Paid by the District to the Swap Provider Paid by the Swap Provider on behalf of the District Requirement $ 141 ,550.00 $ (86,766.99) $141,550.00 $( 100,860.75) List any credit enhancement, liquidity facility or reserves associated therewith including an accounting of all costs and expenses incurred, whether or not in conjunction with the procurement of credit enhancement or liquidity facilities under each outstanding Hedging Product. Results: Credit Enhancements, liquidity facility or reserves associated with the 1992 Certificates AIG Swap: -Lloyds Bank Standby Purchase Agreement Commitment fees for the quarter ended December 31, 2005: $63,115.40 Credit Enhancements, liquidity facility or reserves associated with the 1993 Certificates Soc Gen Swap: -Soc Gen Irrevocable Letter of Credit Fee: No costs or expenses were incurred during the quarter ended December 31, 2005. Credit Enhancements, liquidity facility or reserves associated with the 2000 Certificates: -Dexia Public Finance Bank Standby Certificate Purchase Agreement Commitment Fee for the quarter ended October 31, 2005: $68,308.28 Requirement An assessment of the counterparty risk, termination risk, and other risks associated therewith, which shall include the value of the collateral posted by counterparties and the District, the aggregate marked-to-market value for each counterparty and relative exposure compared to other counterparties, and a calculation of the District's Value at Risk for each counterparty. Results: The counter party risk and termination risk has been calculated by Public Resources Advisory Group (PRAG). PRAG used the value at risk methodology in determining the Book Page 62 Quarterly Swap Report For the Three Months Ended December 31, 2005 Page 4 of 4 county party risk at maximum exposure over the term of the Swap Agreements. Counterparty exposure limits are important because they create diversification, so if any one counterparty goes bankrupt, the District's total loss would be limited to only one counterparty. The termination risk is what the District would have to pay the counterparty upon a termination of the Swap Agreement. Following are the counterparty risk and termination risk as of December 31, 2005: Counterparty Risk Termination Risk Requirement 1992 Certificates AIG Swap 1993 Certificates Soc Gen Swap $ 231,498 $2,070,892 $ 8,043,709 $2,246,509 The report shall also include a copy of this Policy in the quarter after it is adopted or subsequently modified. Results: No modifications have been made to the Policy since its adoption. H:\dept\agenda\FAHR\FAHR2006\0206\06-04.Financial Report Mid Year-Att 3.doc Book Page 63 Quarterly COP Report For the Three Months Ended December 31, 2005 Page 2 of 2 Staff has monitored variable interest rate issues of other agencies since the inception of our program. The attached charts are described in the "Additional Information" section of this agenda report. They are provided monthly to compare our actual interest rates to a composite index, and to other selected issuers of similar credit quality, and with COP issues of similar amounts. Many variables affect interest rates, but staff expects our rates to be among the lowest. Additional Information The first graph entitled, "OCSD COP Rate History Report," shows the actual variable and fixed interest rates paid on each of the daily, weekly, and monthly rate COPs since the last report, and the effective fixed rate for the two refunding issues which are covered by an interest rate exchange agreement commonly called "swap." The second graph, a bar chart entitled, "Comparative Daily COP Rate History Report," shows the performance of the District's Daily Rate COPs as compared to a composite index rate, which represents the average rate of six similar variable rate daily reset borrowings. The third graph, a bar chart entitled, "COP Daily Rate History, Comparison of Highest & Lowest Rates," compares the performance (monthly average interest rate) of the District's Daily Rate COPs with the highest and lowest monthly average rates from among six similar variable rate daily reset COPs. The fourth attachment is a tabular table entitled, "COP Rate History, Comparison of Monthly Averages," shows the monthly variable interest rate performance of the District's Daily Rate COPs as compared to the composite index. Estimated annual interest payments calculated for a standard $100 million par amount, are also shown. Variable rates historically rise at the end of each calendar quarter, and especially at year-end, because of business taxes and liquidity requirements. The rates tend to decline to prior levels immediately in the following month. Staff maintains continuous rate monitoring and ongoing dialog with the remarketing agents to keep the Committee fully informed about developments in the program as they may occur. Attachments 1. Graph -OCSD COP Daily Rate History Report 2. Graph -Comparative Daily COP Rate History Report 3. Graph -COP Rate History, Comparison of Highest & Lowest Rates 4. Tabular -COP Rate History, Comparison of Monthly Averages H:\dept\agenda\FAHR\FAHR2006\0206\06-04.Financial Report Mid Year-Att 4.0.doc Book Page 65 I-0::: 0 a. w 0::: > 0::: 0 I- C/J -:I: u, w 0 11 I- <( 0 N 0::: ... a. a, 0 .c o E a, > CJ -I a, -c <( C w > -I-<( 0::: <( fl. ~ 0 0 0 0 -:i I I I I I I I r I I I I I r I I I I I I I l I r I I 0 0 C'.i I l I I I I (%) 3.1~ Book Page 67 I I I I I I I I I I I I I so'oaa - SO 'AON - SO'PO - so'das so'onv so '1nr so'unr SO 'ABV\I SO 'JdV - SO 'JBV\I - so'qa.:1 so'uer 0 ~ w 0 I-~ X w 0 ~ w I- U) 0 a. ~ 0 (..) • 0 0 0 N "'C C tll M g, rJ) Q) "i en a. 0 (..) 0 en (..) 0 • DAILY COP RA TE HISTORY COMPARISON OF MONTHLY AVERAGES JAN 2005 -DEC 2005 OCSD $218.6M $46M Series 2000 Series 93 Ref PaineWebber . Paine Webber Jan-05 1.70 1.70 Feb-05 1.76 1.76 Mar-05 1.86 1.86 Apr-05 2.42 2.42 May-05 2.88 2.88 Jun-05 2.23 2.23 Jul-05 2.11 2.11 Aug-05 2.26 2.26 Sep-05 2.38 2.38 Oct-05 2.50 2.50 Nov-05 2.83 2.83 Dec-05 2.96 2.96 AVERAGE 2.32% 2.32% ESTIMATED ANNUAL INTEREST PAYMENTS PER $100M PAR AMOUNT $ 2,324,167 I $ 2,324, 167 I $ * FOOTNOTE Composite index consists of the following COP transactions: . IRWD, Series 86-COP, 88, 95, $106.1M, Citigroup . IRWD, Series C-Ref 93-B, 85-B, $62.1 M, Lehman Brothers . IRWD, Series 91, 93, 85, $93.0M, PaineWebber Composite Index* 1.69 1.74 1.84 2.40 2.87 2.22 2.08 2.24 2.37 2.48 2.81 2.92 2.31%_ 2,305,000 . IRWD, Series 89, C-Ref 93-A, C-Ref 95, $70.9M, Merrill Lynch . Western Riverside Co. Reg. Wastewater Auth., Series 96, $25.4M, PaineWebber . Orange Co., Irvine Coast Asst. Dist. 88-1, $94.5M, J.P. Morgan Book Page 69 FAHR COMMITTEE Meeting Date To Bel. of Dir. 02/08/06 02/22/06 AGENDA REPORT Item Number Item Number Orange County Sanitation District FROM: Lorenzo Tyner, Director of Finance Originator: Michael D. White, Controller FAHR06-05 SUBJECT: Consideration of Budget Assumptions, Fiscal Policy Statements, and Budget Calendar for Preparation of the FY 2006-07 and FY 2007-08 Budget years. GENERAL MANAGER'S RECOMMENDATION Approve the FY 2006-07 and FY 2007-08 Budget Assumptions and direct staff to prepare the FY 2006-07 -2007-08 Budget incorporating these parameters. SUMMARY Each year the FAHR Committee establishes the Budget Assumptions, approves updates to the Fiscal Policies, as appropriate, and develops the Budget Calendar for preparation of the annual budget. Staff will make a brief presentation at the Committee meeting. PROJECT/CONTRACT COST SUMMARY N/A BUDGET IMPACT D This item has been budgeted. (Line item: ) D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. 1Z! Not applicable (information item) ATTACHMENTS 1. Preliminary Budget Assumptions (Pages 2 through 6) 2. Budget Calendar (Pages 7 through 10) 3. Fiscal Policy (Pages 11 through 18) H:\deptlagenda\FAHRIFAHR2006\0206\06.05.Budget Assumptions.doc Book Page 70 Page 1 I Tasks Responsibility Event/Due Date -PHASE I-BUDGET PREPARATION CIP -Call for Projects Issued Engineering 09/12/05 CIP -Database, Forms & Instruction Manual Developed CIP Process Team 09/28/05 CIP -Oversight Ad Hoc Committee Initial Review of Engineering October 2005 Current (FY 2005-06) Budget CIP -Training for FY 2006-07 CIP Validation Engineering As Needed CIP -Budget Preparation Training (CIP Database) Financial Planning As Needed CIP -Draft CLR Level 2 & AM Assessment Questions CIP Budget 10/10/05 Forms for New Projects Submitted to Engineering Coordinators CIP-Final CLR Level 2 & Supporting Documents for CIP Budget 10/24/05 New Projects Submitted to Engineering Coordinators CIP -Updated CLR2 & BRE Forms for Ongoing CIP Budget 10/24/05 Projects Not in Construction Submitted to Engineering Coordinators CIP-Review Project Submittals & Make "Go/No Go" Supervisors / 11 /04/05 -12/08/05 Decision Managers CIP -Review Project Submittals & Finalize EMT 12/12/05 -02/02/06 Preliminary Budget Assumptions Identified. Financial Planning 01/13/06 Preliminary Budget Assumptions Presented to EMT Financial Planning 01/16/06 Draft Budget Calendar Presented to EMT Financial Planning 01/16/06 Update to Strategic Initiatives Finalized MT & EMT 01/23/06 Budget Assumptions Presented to FAHR Committee Budget Team 02/08/06 Preparation for Budget Kickoff/ Training Session: Financial Planning 01/25/06 • Salary and benefit calculations downloaded to Excel worksheets • Develop line item worksheets with mid-year actual expense • Prepare/update budget instruction manual Budget Kickoff/ Training Session: Financial Planning 01/31/06 • Distribute budget manual update • Conduct budget training session • Distribute budget worksheets for each division including -Prior year actual, Current year budget, and Six months of current year actual amounts CIP -CIP Database Opened for Input Financial Planning 01/23/06 H:ldepl\agenda\FAHR\FAHR2006\0206\06_05.Budget Assumptions_doc Page2 Book Page 71 Budget Assumptions/Parameters Presented to Other Budget Team OMTS-02/01 /06 Committees PDC -02/02/06 Tasks Responsibility Event/Due Date Mid-Year Financial Report to FAHR Finance Department 02/08/06 Operating Divisional Budgets: New Position/ Additional Divisional Budget 02/13/06 Employee Decision Packages Due to Financial Planning· Coordinators (Julie Matsumoto, Ext. 7564) Operating Divisional Budgets: Equity Adjustment & Divisional Budget 02/13/06 Position Reclassification Decision Packages Due to Coordinators Human Resources (Ann Sullivan, Ext. 7143) Operating Budget: Training Request Forms Due to Divisional Budget 02/13/06 Human Resources (Richard Spencer, Ext. 7164) Coordinators Capital Equipment Budget: Vehicle Capital Equipment Divisional Budget 02/13/06 Decision Packages Due to Fleet Services (Chuck Coordinators Forman, Ext. 7647) Capital Equipment Budget: Computer Capital Divisional Budget 02/13/06 Equipment Decision Packages Due to Information Coordinators Technology (Rich Castillon, Ext. 7283) Critical Goals, Strategic Planning and Five Year EMT 02/22/06 Staffing Plan -Steering Committee Meeting Mid-Year Financial Report to Board Finance Department 02/22/06 CIP -Project Request with Project Information Entered GIP Budget 02/22/06 in CIP Database Completed Coordinators CIP -Request Review -On-Line Supervisors/Managers 02/22/06 -03/01 /06 & Department Heads Division Budget Packages Due to Financial Planning: Divisional Budget 02/27/06 • Projection of current year actual operating costs Coordinators • Proposed operating costs for 2006-07 • Operating Budget Expense Detail • Preliminary Contractual Material & Services Form • Capital equipment decision Packages (other than computer and vehicle decision packages which were due on 02/09/06) • New program decision packages GIP -Request Finalization and Division Manager Division Managers 03/02/06 Review Completed Complete the Compilation of the Preliminary Division Financial Planning 03/03/06 Budget Document H:\depllagenda\FAHRIFAHR200610206\06,05,Budget Assumptions.doc Page 3 Book Page 72 Tasks Responsibility Event/Due Date CIP -Request Finalization and Department Approval Department Heads 03/03/06 CIP -New Project Numbers Assigned Planning Division 03/03/06 CIP-Completed CIP Budget Delivered to Finance CIP Budget 03/06/06 Coordinators PHASE II -BUDGET REVIEW Divisional Budgets -Distribution of Preliminary Line Item Financial Planning 03/06/06 Requested Budgets to Department Heads and Managers CIP -Committee Review CIP Committee 03/06/06 CIP -Resource Availability Review Engineering & O&M 03/06/06 CIP -Review Workshop Financial Planning & 03/09/06 Department Heads CIP -General Manager and Designee(s) Approval General Manager 03/16/06 Divisional Budgets -Budget Review Meetings with GM, General Mgrs. Office, 03/13/06-03/17/06 Budget Staff, and Department Representatives -review Financial Planning, & budget & initial decision packages Division Coordinators Divisional Budgets -Performance Budget Documents Divisional Budget 03/24/06 Due to Financial Planning (Julie Matsumoto): Coordinators • Organization Charts • Performance Results (2004-05) • Performance Measures (2005-06) CIP Schedules Through 2020 Completed Financial Planning 03/30/06 Divisional Budgets -Completion of Preliminary Budget Financial Planning 03/31/06 and Compilation into Departmental Budgets Board Holds First Reading of Sewer Service User Fee Board of Directors 04/26/06 Schedule for 2005-06 H:\dept\agenda\FAHA\FAHA2006\0206\06.05.Budget Assumptions.doc Page4 Book Page 73 PHASE Ill -BUDGET PRESENTATION CIP-Oversight Ad Hoc Committee Review of Budget Engineering March 2006 CIP -Final CIP Budget Document Preparation and Financial Planning 04/10/06 Incorporation into Final Budget Document Initial -Proposed Budget finalized Financial Planning 04/26/06 Initial -Proposed 2005-06 Budget Presented to Financial Planning OMTS -05/03/06 Committees PDC -05/04/06 FAHR -05/10/06 Tasks Responsibility Event/Due Date General Manager's Budget Message Completed General Manager/ 05/12/06 Financial Planning Approval of General Manager's Budget Message General Manager 05/15/06 Final -Proposed Budget to Printer Financial Planning 05/17/06 Board Holds "Public Hearing" for Rate Schedule Board of Directors 05/24/06 Ordinance Board Adopts Sewer User Fee Schedule for 2006-07 Board of Directors 05/24/06 PHASE IV -BUDGET DELIBERATIONS Final Draft -Proposed 2006-07 Budget Presented to Financial Planning PDC -06/01/06 Committees OMTS-06/07/06 F AHR -06/14/06 Public Hearing & Board Adoption Board of Directors 06/28/06 PHASE V -DISTRIBUTION OF BUDGET Final line item budget and equipment budgets Financial Planning 07/10/06 distributed to Departments PHASE VI -BUDGET DEBRIEFING Budget Debriefing Financial Planning 07/19/06 • Global changes that occurred in this year's budget. • Changes since the Department's original submittal. • Changes that occurred as a result of Board action . • Results of Budget Survey . • Overview of Budget Monitoring with PeopleSoft Enterprise One Software and review of Budget Coordinator's Responsibility. • Overview of CIP Budget Monitoring . • Suggestions for Budget Process Improvements . H:ldept\agenda\FAHR\FAHR2006\0206\06.05 Budget Assumptions.doc Page 5 Book Page 74 2006/07 -2007/088 Preliminary Budget Assumptions -Highlights Economic Assumptions • Inflation for Orange County is projected to be approximately four percent*. Accordingly, the District will use four percent for both 2006-07 and 2007-08. *(Chapman University December 2005 Economic and Business Review) Revenue Assumptions • Per the Board-approved five-year plan, the district rate for a single-family residence (SFR) will increase 20% in 2006-07 and 2007-08, to $181.00 and $217.00, respectively. • Rate adjustment notification is not required as no one-year rate increase will exceed 20%. • Any change in Board direction regarding this assumption will be included in the final budget. Note: Each $1 increase in SFR rate will generate approximately $900,000 per year. • Following a 2-year period of 40% State reductions, property taxes will be budgeted to increase from $36 million to $56 million (54%). Operating Assumptions • Average daily flow for the next two fiscal years is projected to be the same as the 2004-05 projection of 250 million gallons per day (mgd). The 2004-05 final flow was 243 mgd. • All existing secondary treatment facilities will be operated and maintained at full capacity. • Interim disinfection facilities will be operated and be maintained at existing levels and cost. • Operating expense increases are expected in authorized personnel, personnel salaries, natural gas, chemicals and bio-solids management. Staffing Assumptions • Additional staffing requests, not to exceed 1 %, are anticipated for 06-07 and 07-08. • A 5% vacancy factor will be budgeted for 2006-07 and 2007-08 for authorized positions. • Salary adjustments, based on the MOUs, will result in increases between 4%-5%. Reserve Assumptions • Current reserve policy was reviewed by the District's financial adviser, Public Resources Advisory Group (PRAG), and Board during FY 2003-04 with no changes. Debt Financing Assumptions -Certificates of Participates (COP) • The District will continue to COPs as it primary method of financing its capital program. COP funds will only be used for capital expenses. • The District will issue COPs of $205 million and $275 in 2006-07 and 2007-08 respectively. Capital Improvement Program (CIP) Assumptions • The FY 2006-07 and FY 2007-08 CIP Cash flow is based on the current Validated CIP. • Any cost adjustments to the CIP will be estimated and reflected as soon as possible. • The baseline CIP for FY 2006-07 and FY 2007-08 is $282M and $356M, respectively. • The budget will reflect any new recommendations of the CIP Ad Hoc Committee or the General Manager that are approved by the Board. H:\dep\\agenda\FAHA\FAHA2006\0206\06.05.Budge\ Assumptions.doc Page 6 Book Page 75 2006-07 and 2007-08 Preliminary Budget Assumptions Economic Assumptions • 4% inflation assumption projected for 2006 by Chapman University within their December 2005 Economic Forecast Report. The budget will include a 4% for 2006-07 and 2007-08. Revenue Assumptions • Board ratification of Year 4 of the 5 year sewer service user fee rate schedule. • Per the Board-approved five-year plan, the district rate for a single-family residence (SFR) will increase 20% in 2006-07 and 2007-08, to $181.00 and $217.00, respectively. • Each $1 increase in SFR rate will generate approximately $900,000 per year. • Rate adjustment notification is not required as any rate increase will not exceed 20%. • Capital Facilities Capacity Charge (CFCC), adopted in March of 2004, only captures "additional growth" infrastructure costs. Existing facility, improved treatment, RRR, and support CIP will be captured through user fees. • A rate study to be completed in May of 2006 will adjust CFCC Fee as a result of escalation of the CIP to mid-point of construction in FY 05-06 and lowering the flow projects out to 2020. • The rate study and resulting CFCC fee will consider the impact from the change in flow projections for SAWPA and IRWD. • Use 4,000 EDU connections for each year as that is the average for the past 1 O years. • Annexation Fee captures both net current assets and equivalent property tax allocations totaling $4,235 per acre. • Annexable property is minimal in our service area. Therefore, no income is budgeted. • Following a 2-year period of 40% State Reductions, property taxes will be budgeted to increase 54% over last year. • A 2% Assessed Valuation (AV) increase is authorized by the State Constitution and is included in the 54% increase. • Additional AV increases to market value are authorized as property is sold at a higher value. • A 54% increase in total AV would generate approximately $19.5 million over the prior year. • A 5% increase in property taxes over FY 2006-07 will be budgeted for FY 2007-08. • Interest income will be budgeted at 4% of the average cash and investment balance for both FY 2006-07 and FY 2007-08. • $205 million COP Debt Issuance is scheduled for FY 2006-07 in order to assist in the funding of the $282M in CIP outlay scheduled for FY 2006-07. • $275 million COP Debt Issuance is scheduled for FY 2007-08 in order to assist in the funding of the $356M in CIP outlay scheduled for FY 2007-08. • Permit User rates for flow, BOD and SS will be updated in accordance with the Rate Study. H:\deptlagenda\FAHRIFAHR2006\0206\06.05.Budget Assumptions.doc Page 7 Book Page 76 2006-07 and 2007-08 Preliminary Budget Assumptions Operating Assumptions • The District will continue to treat dry weather urban run off up to 4 mgd for free with a 1 O mgd maximum. • All existing secondary treatment facilities will be operated and maintained at full capacity during 2006-07 and 2007-08. • Interim short-term disinfection facilities will continue to operated and maintained at existing levels and cost. • Operating expense increases are expected in authorized personnel, personnel salaries, natural gas, chemicals and bio-solids management. • Average daily flow for the next two fiscal years is projected to be the same as the 2004-05 projection of 250 mgd. This is 18 mgd below the Interim Strategic Plan Update projection and 15 mgd above the first 6 months this year. The 2004-05 final flow was 243 mgd. • Authorized Staffing will be no lower than the current authorization of 644.0 FTEs. • Minimal additional staffing requests, not to exceed 1 %, are anticipated for 06-07 and 07-08. • Vacant positions at 12/31/05 will be projected at 50% step 1 for FY 2005-06. • 5% vacancy factor will be budgeted for 2006-07 and 2007-08 for authorized positions. The actual vacancy factor for 2004-05 was approximately 7%. • 2003-04 MOUs for OCEA, Local 501 and SPMT will be included in the budget. • Salary adjustments, based on the current Memorandums of Understanding (MOUs) and Board Policy, are as follows:: -Represented Groups -4.6% Merit; (Max) 4.0% Pay Range -Unrepresented Groups -4.6% Merit; (Max) 4.0% Pay Range • Training will continue to be budgeted at 2% of the salary budget and will be centralized in Human Resources and Employee Development. • The General Manager Contingency will be budgeted at 1 % of the total budget for materials and½ for re-appropriations, respectively. • Resources for Strategic Initiatives will be included in the budget Reserve Assumptions • The 5-year rate plan, currently in Year 3, will be included. • Current reserve policy was reviewed by the District's financial adviser, Public Resources Advisory Group (PRAG), and Board during FY 2003-04 with no changes. • Continue to maintain reserve levels adequate to hedge variable rate COPs. • Include a listing of the various reserve types and rationales in the budget document. H:ldapt\agenda\FAHR\FAHR2006\0206\06.05.Budgat Assumptions.doc Page 8 Book Page 77 2006-07 and 2007-08 Preliminary Budget Assumptions Capital Improvement Program Assumptions • The FY 2006-07 and FY 2007-08 CIP Cash flow Budget based on the Validated CIP is still valid. Recent price increases will be added or estimated as soon as possible. The baseline CIP for FY 2006-07 and FY 2007-08 is $282 million and $356 million, respectively. • The FY 06-07 and 07-08 CIP Budget will reflect any new recommendations of the CIP Ad Hoc Committee or the General Manager. Debt Financing • Continuation COP issuance as needed to fund GIP and to maintain necessary reserves. • COPS will only be used for the CIP and capital expenses, not for operating expenses. • Capital financing plans including less borrowing and higher user fees will be considered. • Borrowing is proposed only for facilities that are funded by all users (replacement, rehab, improved treatment). H:\deptlagenda\FAHRIFAHR2006\0206\06.05.Budget Assumptions.doc Page 9 Book Page 78 Fiscal Policy Fiscal Policy Statement General Financial Goals To maintain a financially viable Sanitation District that can maintain an appropriate level of wastewater treatment services. To maintain financial flexibility by adapting to local and regional economic changes. To maintain and enhance the sound fiscal condition of the District. To ensure that the value added by every program and activity within the District is proportional to its cost; and to eliminate those programs and activities that do not contribute to the District's mission. To provide training opportunities to the greatest extent possible for available jobs within the organization for those employees working in programs or activities that have been reduced or eliminated. To provide employees with cross-training opportunities in order to achieve multi-tasking capabilities. Operating Budget Policies The District will adopt a balanced budget by June 30 of each year. The budget will be used as a fiscal control device as well as a financial plan. Budget preparation and monitoring will be performed by each division within the District, the organizational level of accountability and control. The Director of Finance will prepare a budget calendar no later than January of each year. An annual operating budget will be developed by conservatively projecting revenues and expenditures for the current and forthcoming fiscal years. During the annual budget development process, the existing programs will be thoroughly examined to assure removal or reduction of any services or programs that could be eliminated or reduced in cost. H:\deptlagenda\FAHA\FAHA2006\0206\06.05.Budget Assumptions.doc Completed ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Book Page 79 In Progress Comments Page 10 Fiscal Policy Fiscal Policy Statement Current operating revenues will be sufficient to support current operating expenditures. Annual budgets including reserves will provide for adequate design, construction, maintenance and replacement of District capital plant and equipment. The District will maintain all physical assets at a level adequate to protect the District's capital investment and to minimize future maintenance and replacement costs. The District will project equipment replacement and maintenance needs for the next five years and will update this projection each year. From this projection a maintenance and replacement schedule will be developed and followed. The District will avoid budgetary and accounting procedures that balance the current budget at the expense of future budgets. The District will forecast its expenditures and revenues for each of the next five years and will update this forecast at least annually. Revenue Policies Because revenues are sensitive to both local and regional economic conditions, revenue estimates adopted by the Board of Directors must be conservative. Staff will estimate annual revenues by an objective, analytical process that utilizes trend, judgmental, and statistical analysis as appropriate. Ad valorem property tax revenues of the District will be dedicated to debt service. Sewer Service User Fees will be projected for each of the next ten years and this projection will be updated annually. Expenditure Policies The District will maintain a level of expenditures that provides for the health, safety and welfare of the residents of the community. H:\dept\agenda\FAHRIFAHR2006\0206\06.05.Budget Assumptions.doc Book Page BO Completed In Progress Comments ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Page 11 Fiscal Policy Fiscal Policy Statement The District will set fees and user charges at a level that fully supports the total direct and indirect costs of operations, capital improvements, and debt service requirements not covered by reserves. Capital Improvement Budget Policies The District will make all capital improvements in accordance with an adopted and funded capital improvement program. The adopted capital improvement program will be Completed ✓ based on need. ✓ The District will develop an annual five-year plan for capital improvements, including design, development, implementation, and operating and maintenance costs. All capital improvement projects approved in the annual operating budget are approved at the budgeted amounts through the completion of the project. The Board of Directors approves both the individual project total budget and the projected cash outlays for all capital improvement projects for the current fiscal year. Staff will identify the estimated costs, potential funding sources and project schedule for each capital project proposal before it is submitted to the Board of Directors for approval. Staff will identify the estimated on-going future Operating and Maintenance costs, as well as staffing requirements upon completion for each capital project proposal before it is submitted to the Board of Directors for approval. The District will use intergovernmental assistance and other outside resources whenever possible to fund capital improvements providing that these improvements are consistent with the Capital Improvement Plan and District's priorities, and that the future operating and maintenance costs of these improvements have been included in the budget. Staff will coordinate development of the capital improvement budget with the development of the operating budget. All operations and maintenance resources required to implement the CIP have been considered and appropriately reflected in the operating budget for the year the CIP is to be implemented. H:\dept\agenda\FAHRIFAHR2006\0206\06.05.Budget Assumptions.doc Book Page 81 ✓ ✓ ✓ ✓ ✓ In Progress ✓ Comments Strategic Plan projects needs through 2020. Included within the Asset Management Program's Phase I implementation over the next three years. Page 12 Fiscal Policy Fiscal Policy Statement Cost tracking for components of the capital improvement program will be updated quarterly to ensure project completion against budget and established time lines. Asset Management Policy In order to provide for the systematic planning, acquisition, deployment, utilization control, and decommissioning of capital assets, the following policies have been established: • The condition, performance, utilization, and cost of assets will be recorded down to the maintenance managed item component level. • A detailed planned maintenance program is in place to ensure that the assets, facilities and systems perform to their design criteria and meet their design lives. • A system is in place to blend planned and unplanned activity to optimize the cost against the asset performance requirements. • Reliability Centered Maintenance techniques will be used to optimize the maintenance plans and to identify any design alterations that are economically justified. • Current levels of asset management service in terms of quantity and quality of service including condition, function/size/type, regulatory requirements, reliability, and repair response times have been determined and documented. • The full economic cost is charged on all asset management activities. • Asset Management maintains appropriate pricing and funding strategies that match the needs of the business to ensure sustainability. • Asset Management considers the real growth of the District's service area and the way in which demands for service will change in the future, including population, unit demand, demographics, changing customer expectations, and changing regulatory requirements. H:\dept\agenda\FAHR\FAHR2006\0206\06.05.Budget Assumptions.doc Book Page 82 Completed In Progress ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Comments A Strategic Plan was approved by the Board in 12/02 for development of a state-of-the art Asset Management (AM) Program. In April 2004, the Board approved a staff driven approach for the implementation of advanced management practices. Page 13 Fiscal Policy Fiscal Policy Statement Completed In Progress Comments • Monitoring and reporting is performed on the condition, performance and functionality of the District's assets against prescribed service levels and regulatory ✓ requirements. • A condition/function index is linked with customer expectations at a cost that are customers are willing to ✓ pay. • Future level of service options available and their ✓ associated costs are constantly analyzed. • An assessment of the relative risks and costs of benefits is derived for all investments in capital works, ✓ maintenance, and operations. • Individual asset management decisions are made only when the cost of all programs has been analyzed and the funding needs or the whole organization is known together with the knowledge of its impact on rates. ✓ • Necessary renewal programs to sustain the existing levels of service and condition or assets, as identified through the best appropriate process, is approved ahead of new ✓ capital works and scrv ices. • New capital assets for new works and services are approved only with the commitment of the recurrent (operations and maintenance) funding necessary to ✓ sustain the new works and services. • The financial. social. and environmental aspects of asset ✓ management will he reported on annually. Vehicle Replacement Policy In order to provide sal'e. rcliahlc transportation appropriate to the work to be performed. the following policies have been established: • The newest vehicles will he used for those purposes requiring the highest annual mileage. ✓ • Vehicles will he replaced when they are 10 years old or have accumulated 100,000 miles. ✓ • A vehicle may he replaced in advance of the above criteria if ii can he reallocated to a low mileage use ✓ between the plants. • Electric carts arc to be utilized for in-plant only uses . ✓ H:\dept\agenda\FAHA\FAHA20D6\0206\06_Q5.Budget Assumptions.doc Page 14 Book Page 83 Fiscal Policy Fiscal Policy Statement • Electric vehicles are to be utilized for all between plant uses. • CNG vehicles are to be utilized within the County (pump station runs, Source Control inspections, etc). • CNG vehicles or bi-fuel vehicles are to be utilized to travel outside of Orange County (i.e., Environmental Compliance Monitoring of biosolids application sites, etc). Short-Term Debt Policies The District may use short-term debt to cover temporary or emergency cash flow shortages. All short-term borrowing will be subject to Board approval by resolution. The District may utilize Board approved intra-agency loans rather than outside debt instruments to meet short-term cash needs. Intra-agency loans will be permitted only if an analysis of the affected Revenue Areas indicates funds are available and the use of these funds will not impact current operations. The principal, along with interest at the prevailing rate as established by the District's Treasurer, will be paid to the lending Revenue Area. Long-Term Debt Policies Proceeds from long-term debt will not be used for current on- going operations. Before any new debt is issued, the impact of debt service payments on total annual fixed costs will be analyzed. Develop and maintain a board adopted debt policy. H:\deptlagenda\FAHRIFAHR2006\0206\06.05.Budge\ Assumptions.doc BookPage84 Completed ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ In Progress Comments Page 15 Fiscal Policy Fiscal Policy Statement Accumulated Funds & Reserve Policies A cash flow/contingency reserve will be established to (1) fund operations and maintenance expenses for the first half of the fiscal year prior to the receipt of taxes and user fee revenues, (2) provide for non-recurring, unanticipated expenditures, and (3) fund the annual debt service principal payments and semi-annual interest payments due in August of each year. The level of this reserve will be the sum of (a) an amount equal to six months of the total District Operating costs, (b) ten percent of the District's Operating costs, and ( c) the total of all annual debt service payments due in the month of August for each year. A capital improvement reserve will be maintained to fund approximately 50 percent of the average annual capital outlay plus the entire projected cost of funding specific near-term projects. A renewal/replacement reserve will be maintained to fund the District's renewal, rehabilitation and replacement requirement costs associated with the District's existing capital plant and collection system over the next twenty years. The reserve was initially set at $50 million in 1998-99 and, with an assumed interest rate level of five percent and annual increments, will grow to meet 30 percent of the identified demands to 2030. Self-insurance reserves for property (fire, flood, and earthquake), general liability, and workers' compensation will be maintained at a level which, together with purchased insurance policies, FEMA Disaster reimbursement funding, and State Disaster Assistance payments would adequately protect the District. Based on a potential infrastructure loss of $495 million, the reserve level has been set at $57 million. Investment Policies The District's Treasurer will annually submit an investment policy to the Board of Directors for review and adoption. The investment policy will emphasize safety and liquidity before yield. H:\dept\agenda\FAHAIFAHA2006\0206\D6.05.Budget Assumptions.doc Completed ✓ ✓ ✓ ✓ ✓ ✓ Book Page 85 In Progress Comments Page 16 Fiscal Policy Fiscal Policy Statement Accounting, Auditing, and Financial Reporting The District's accounting and financial reporting systems will be maintained in conformance with generally accepted accounting principles and standards promulgated by the Governmental Accounting Standards Board. A fixed asset system will be maintained to identify all District's assets, their condition, historical cost, replacement value, and useful life. Quarterly financial reports will be submitted to the Board of Directors and will be made available to the public. Full disclosure will be provided in the general financial statements and bond representations. The District will maintain a good credit rating in the financial community. An annual audit will be performed by an independent public accounting firm with the subsequent issue of an official Comprehensive Annual Financial Report, including an audit opinion and a management letter. H:\dept\agenda\FAHR\FAHR2006\0206\06.05.Budget Assumptions.doc Book Page 86 Completed In Progress ✓ ✓ ✓ ✓ ✓ ✓ Comments District Received AA rating in 2000 Page 17 FAHR COMMITTEE Meeting Date To Bel. of Dir. 02/08/06 02/22/06 AGENDA REPORT Item Number Item Number Orange County Sanitation District FROM: Lorenzo Tyner, Director of Finance Originator: Mike White, Controller FAHR06-06 SUBJECT: Selection of the District's Contracted Internal Auditing Firm GENERAL MANAGER'S RECOMMENDATION (1) Approve a Purchase Order Contract with Lance, Soll & Lunghard, Certified Public Accountants, as the District's contracted internal auditors for fiscal year 2005-06, for the period of March 1, 2006 through February 28, 2007, for an amount not to exceed $58,670, with an option to renew the contract for two one-year periods based on approval by the FAHR Committee; and, (2) Direct Lance, Soll & Lunghard to perform specific internal auditing assignments as the FAHR Committee deems necessary. SUMMARY Selection of Contracted Internal Auditors At the direction of the Committee, staff solicited a request for proposal (RFP) to provide 600 hours of Internal Auditing Services for fiscal year 2005-06, with the option of auditing the following two years at the Committee's discretion. The RFP was submitted to the following firms specializing in providing auditing services for local governments: Caporicci & Larson Diehl, Evans & Co. McGladrey & Pullen Teaman, Ramirez & Smith Charles Z. Fedak & Co. Lance, Soll & Lunghard Rogers, Anderson, Malody & Scott Vavrinek, Trine, Day & Co. Of these eight, only Lance, Soll & Lunghard provided a bid. Caporicci & Larson declined to bid because they prefer to focus on providing independent financial auditing services. Diehl, Evans & Co. and Vavrinek, Trine & Day declined to bid due to their current workloads and the timing of the District's request. No response was received from the other four firms. An Evaluation Team comprised of the Director of Finance, Controller, and Accounting Manager was established, and interviewed the sole bidder, Lance. Soll & Lunghard. Following the interview, the entire Evaluation Team concluded that Lance, Soll & Lunghard was very qualified to serve as the District's internal auditors based on the following observations: H:\dept\agenda\FAHR\FAHR2006\0206\06.06.lntemal Audijing Fim, Selection.doc Revised: 06/04/03 Book Page 87 Page 1 1. The firm has provided auditing services to local governments for over 75 years and has been consistently been named one of the "Top Accounting Firms" in Orange County by the Orange County Business Journal. 2. They provided extensive examples on internal auditing services provided to other governmental clients. 3. They described in detail their thoroughness in conducting internal auditing services. Therefore, the Evaluation Team recommends appointment of Lance, Soll & Lunghard to provide internal auditing services for FY 2005-06. Recommended Areas to Be Considered in Future Internal Audits Although staff has no knowledge of any improprieties or irregularities within the accounting or operational activities of the District, following are typical areas the Committee may want to consider in future internal audits: 1. Comprehensive review of all key Accounting policies, procedures, and processes to ensure that all related internal controls are well designed, properly implemented, and adequately maintained. 2. Contract Management. 3. Groundwater Replenishment System billings from the Orange County Water District. 4. Proper billings to end users, including permittees. 5. Expenditures conform to District Ordinances, Resolutions, policies and procedures. 6. Employee Expense Reports conform to Board Ordinances and Resolutions. 7. Employee Salaries and Benefits conform to Board Ordinances and Resolutions. 8. Credit Card purchases conform to policies and procedures. 9. District Contributions are Board approved. 10. District memberships conform to policies and procedures. Staff recommends that the Committee direct the District's contracted internal auditors to perform a preliminary analysis on the first item listed above and report back to the committee in March 2006. Staff believes that the contracted internal auditors should first focus on item one because strong accounting policies and procedures, and internal controls are the foundation to safeguarding assets and ensuring public trust. All of the following listed areas of potential concern are in essence compliance testing against the established accounting policies, procedures, and practices. If their preliminary analysis indicates the potential of audit findings, request that they also bring back to the Committee in March the appropriate audit scope and an estimate on the total number of audit hours required for this assignment. PROJECT/CONTRACT COST SUMMARY Lance, Soll & Lunghard submitted an all-inclusive maximum bid of $58,670 for 600 hours of internal auditing services: H:\dept\agenda\FAHR\FAHR2006\0206\06.06.lntemal Auditing Firm Selection.doc Revised: 06/04/03 Book Page BB Page 2 BUDGET IMPACT [8J This item has been budgeted. (Line item: ) D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. D Not applicable (information item) ADDITIONAL INFORMATION N/A ALTERNATIVES N/A CEQA FINDINGS N/A ATTACHMENTS None. H:ldept'agenda\FAHR\FAHR2006\0206\06.06.lntemal Auditing Firm Selection.doc Revised: 06/04/03 Book Page 89 Page 3 FAH R COMMITTEE AGE NDA REPORT Orange County Sanitation District FROM: Lisa L. Tomko, Director of Human Resources Originator: James Matte, Safety & Health Supervisor Meeting Date 02/08/2006 Item Number FAHR06-07 SUBJECT: WORKERS' COMPENSATION THIRD PARTY ADMINISTRATION COSTS-CAMBRIDGE INTEGRATED SERVICES GENERAL MANAGER'S RECOMMENDATION 1. Approve an agreement with Cambridge Integrated Services, Inc. for workers' compensation third-party administration services, for a reduced amount be de determined at the February 8, 2006 FAHR Committee meeting; -or - · To Bel. of Dir. 02/22/2006 Item Number 2. Direct staff to initiate a bid proposal process for workers' compensation third-party administration services. SUMMARY At the October 12, 2005 FAHR Committee meeting, staff was directed to review costs and services associated with the third party administration of OCSD workers' compensation claims. OCSD currently contracts with Cambridge Integrated Services for third party administration of workers' compensation claims. OCSD currently pays $26,000.00 for bundled, flat rate services that include: • Managed Care o Bill review, o Preferred Provider Organization (PPO), o Second level review, o Prescription Rx, o Telephonic case management, o Field case management, o Utilization review -inpatient and outpatient o Peer review • Claims Administration o Claims Processing o Benefit Payments o Claims Investigation o Litigation Support o Subrogation o Setting Reserve Allocation o Medical Treatment Coordination o Escrow Administration Revised: 06/04/03 H:\dept\agenda\FAHR\FAHR2006\0206\06.07.Cambridge Integrated Svcs TPA.doc Book Page 90 o Employee Interface The structure of the service is for an annual flat rate for bundled services up to 30 claims per year. There is a provision in the contract that if OCSD exceeds 30 claims per year that Cambridge can ask that the contract be re-evaluated. The contract is effective until July 2007. Based on OCSD's experience over the last few years, OCSD has significantly under run the 30 claims per year trigger. Given this pattern of loses, OCSD has asked Cambridge to re-evaluate the bundled flat rate that is currently in effect. Cambridge has agreed to re-evaluate the contract. Cambridge is re-evaluating our current rate based on District experience history, and is identifying both a bundled flat rate and an unbundled, per claim basis for TPA coverage. Cambridge is providing cost estimates for TPA services in the following manner: 1 . Bundled Flat rate services 2. Unbundled flat rate services 3. Bundled per claim rate service 4. Unbundled per claim rate There are other firms that provide third party administration services. Any bid proposal process will require firms to bid in the same structure and will be reported to the FAHR Committee in the same manner. PRIOR COMMITTEE/BOARD ACTIONS October 12, 2005, direction was given to staff to review and negotiate costs for services associated with the third party administration of OCSD workers' compensation claims. PROJECT/CONTRACT COST SUMMARY N/A BUDGET IMPACT D This item has been budgeted. (Line item: ) D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. [gl Not applicable (information item) ADDITIONAL INFORMATION N/A ALTERNATIVES 1. Maintain the current bundled flat rate service fee of $ 26,000.00 per year. Revised: 06/04/03 H:\dept\agenda\FAHR\FAHR2006\0206\06.07,Cambridge Integrated Svcs TPA,doc Book Page 91 CEQA FINDINGS N/A ATTACHMENTS None H:\dept\agenda\FAHR\FAHR2006\0206\06.07.dRAFT Cambridge Integrated Svcs TPA.doc Revised: 06/04/03 H:\deptlagenda\FAHRIFAHR2006\0206106.07.Cambridge Integrated Svcs TPA.doc Book Page 92 - FAHR COMMI TTEE AGENDA REPORT Orange County Sanitation District FROM: Lorenzo Tyner, Director of Finance Originator: Mike White, Controller SUBJECT: CERTIFICATES OF PARTICIPATION (COPs), SERIES 2006 GENERAL MANAGER'S RECOMMENDATION Meeting Date To Bel. of Dir. 02/08/06 02/22/06 Item Number Item Number FAHR06-08 (1) Recommend that the Board of Directors Adopt Resolution No. OCSD06-_, 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, a Standby Certificate Purchase Agreement, a Purchase Contract and a Remarketing Agreement in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Series 2006, Authorizing the Execution and Delivery of such Certificates Evidencing Principal in an Aggregate Amount of Not to Exceed $200,000,000, Authorizing the Distribution of an Official Statement in Connection Therewith and Authorizing the Execution of Necessary Documents and Certificates and Related Actions. (2) Recommend that the Orange County Sanitation District Financing Corporation to adopt Resolution No. FC-_, 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 Certificates of Participation, Series 2006; 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. SUMMARY The Board of Directors has previously authorized the execution and delivery of $200 million of new Certificates of Participation and the hiring of a financing team. The independent financial advisor is Public Resources Advisory Group and the bond counsel and disclosure counsel is Orrick, Herrington & Sutcliffe. Woodruff, Spradlin & Smart, our General Counsel, has also been assisting staff. The purpose of the financing is to provide a portion of the funding required for the capital improvement program of 2005-06 and 2006-07. None of the proceeds will be used for operations and maintenance needs. This financing is included in the 2005-06 approved budget. The financing is structured as new variable-rate Certificates of Participation. While the Daily Rate Mode and Weekly Rate Mode are in effect, Owners of the Certificates may elect to have their Certificates purchased at a purchase price equal to the principal amount thereof, without premium, plus any accrued but unpaid interest to the Purchase Date. Subject to certain termination events, payment of the purchase price will be funded by a Standby Certificate Purchase Agreement by and between DEPFA BANK Pie, acting through its New York Branch and the District, who were selected through a competitive bid process. H:\deptlagenda\FAHR\FAHR2006\0206\06.08.COP 2006 Series.doc Revised: 06/04/03 Book Page 93 Page 1 The financing is structured as new variable-rate Certificates of Participation. While the Daily Rate Mode or the Weekly Rate Mode are in effect, Owners of the Certificates may elect to have their Certificates purchased at a purchase price equal to the principal amount thereof, without premium, plus any accrued but unpaid interest to the purchase date. Subject to certain termination events, payment of the purchase price will be funded by a Standby Certificate Purchase Agreement by and between DEPFA BANK Pie, acting through its New York Branch and the District. DEPFA BANK Pie was selected through a competitive bid process. The draft documents for the financing will have been distributed to the rating agencies before the FAHR Committee meeting. These documents will be presented to the OCSD Financing Corporation on February 22, 2006, 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 meeting. A current Financing Schedule is attached. PRIOR COMMITTEE/BOARD ACTIONS September 26, 2001: Adoption of Debt Policy February 23, 2005: Renewed Consultant Agreement with Public Resources Advisory Group for an additional two years beginning with FY 2004-05. August 24, 2005: Directed staff to initiate procedures to issue up to $200 million in new variable-rate Certificates of Participation (COP) debt. August 24, 2005: Authorized the General Manager to negotiate and enter a Consultant Services Agreement with Orrick, Herrington & Sutcliffe to provide bond counsel services. November 16, 2005: Board Appointment of Bear, Stearns & Co., Inc. as the District's Underwriter/Remarketing Agent for the COP debt. December 21, 2005: Approve Resolution declaring District's intent to reimburse ourselves for capital outlays from a future long-term financing. PROJECT/CONTRACT COST SUMMARY The Consultant Services Agreements with PRAG and Orrick total a not-to-exceed amount of $235,000. This is approximately 0.12% of the COP issue. These and other costs, such as printing the Official Statement, underwriters' discount, rating agency fees and trustee's fees will be paid from the proceeds of the borrowing. The current annual fees of the provider of the liquidity under the Standby Certificate Purchase Agreement, the Remarketing Agent and the Trustee are $320,750. The $200 million that is borrowed will be repaid with interest over the next 30 years. The total interest cost is expected to be less than 5.00% (or less th;:in approximately $200 millicim)•. Some of the interest cost will be offset by interest earnings while the funds are waiting to be used. BUDGET IMPACT 181 This item has been budgeted. (Line item: H:ldeptlagenda\FAHR\FAHR2006\0206\06.08.COP 2006 Series.doc Revised: 06/04/03 Book Page 94 Page2 D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. D Not applicable (information item) ADDITIONAL INFORMATION 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 AN INSTALLMENT PURCHASE AGREEMENT, A TRUST AGREEMENT, A STANDBY CERTIFICATE PURCHASE AGREEMENT, A PURCHASE CONTRACT AND A REMARKETING AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2006, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $200,000,000 AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL STATEMENT IN CONNECTION THEREWITH AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND CERTIFICATES 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 CERTIFICATES OF PARTICIPATION, SERIES 2006; 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." Copies of the Resolutions are enclosed with the agenda along with the Preliminary Official Statement. To reduce reproduction and postage expenses, copies of the other documents are not included, but will be available electronically to the Committee members prior to the meeting. Following is a chart listing the remaining steps to be completed for the issuance of the COP Series 2006 debt issuance: • Develop rating agency presentation February • Conduct rating agency presentations • Finalize debt service and cash flow modeling • Board approval of legal and disclosure documents H:ldeptlagenda\FAHRIFAHR2006\0206\06.08.COP 2006 Series.doc Revised: 06/04/03 Book Page 95 Page 3 • Marketing and Sale of the COPs ·through a Negotiated Sale Process March • Execute $200 million Variable-Rate COP issue • Investment of Bond Proceeds • Debt Administration ALTERNATIVES Do not issue new certificates of participation, but increase user fees to fund the capital improvement program. CEQA FINDINGS N/A ATTACHMENTS 1. Draft Resolution of OCSD 2. Draft Resolution of the OCSD Financing Corporation 3. Preliminary Official Statement H:ldeptlagenda\FAHRIFAHR2006\0206\06.08.COP 2006 Series.doc Revised: 06/04/03 Book Page 96 Page4 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, A STANDBY CERTIFICATE PURCHASE AGREEMENT, A PURCHASE CONTRACT AND A REMARKETING AGREEMENT IN CONNECTION WITH THE EXECUTION AND DELIVERY OF ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2006, AUTHORIZING THE EXECUTION AND DELIVERY OF SUCH CERTIFICATES EVIDENCING PRINCIPAL IN AN AGGREGATE AMOUNT OF NOT TO EXCEED $200,000,000 AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL STATEMENT IN CONNECTION THEREWITH AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND CERTIFICATES AND RELATED ACTIONS 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, in order 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 "Installment Payments") to be made by the District pursuant to an Installment Purchase Agreement (such Installment Purchase Agreement, 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 "Installment Purchase Agreement"); WHEREAS, the Corporation proposes to assign without recourse certain of its rights under and pursuant to the Installment Purchase Agreement to Deutsche Bank National Trust Company, as trustee (the "Trustee"), pursuant to a Trust Agreement among the Trustee, the Corporation and the District (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 herein as the "Trust Agreement"); WHEREAS, in consideration of such assignment and the execution and entering into of the Trust Agreement, the Trustee will execute and deliver Orange County Sanitation District Certificates of Participation, Series 2006 (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments, and the interest thereon, payable under the Installment Purchase Agreement; WHEREAS, in order to provide a source of payment for the purchase of Certificates tendered by the owners thereof when such purchase is required in accordance with the terms of the Trust Agreement, the District proposes to enter into a Standby Certificate Purchase Agreement with DEPFA Bank plc, New York Branch (the "Bank"), pursuant to which the Bank H:\DEPT\AGENDA \FAHR\F AHR2006\0206\06.08.COP 2006 SERIES-A IT I .DOC Book Page 97 will provide a standby purchase facility (such Standby Certificate Purchase Agreement, 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 "Standby Agreement"); WHEREAS, Bear, Stearns & Co. Inc. (the "Underwriter"), has submitted to the District a proposal to purchase the Certificates in the form of a Purchase Contract ( such Purchase Contract, 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 "Purchase Contract"); WHEREAS, in order to provide for the remarketing of Certificates tendered pursuant to the terms of the Trust Agreement, the District proposes to enter into a Remarketing Agreement with Bear, Stearns & Co. Inc. (such Remarketing Agreement, 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 "Remarketing Agreement"); WHEREAS, a form of the Official Statement to be distributed in connection with the public offering of the Certificates has been prepared (such 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 "Official Statement"); WHEREAS, there have been prepared and submitted to this meeting forms of: (a) the Installment Purchase Agreement; (b) the Trust Agreement; ( c) the Standby Agreement; ( d) the Purchase Contract; ( e) the Remarketing Agreement; and (f) the Official Statement; 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 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; NOW, THEREFORE, the Board of Directors of the Orange County Sanitation 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 of Directors") so finds. DOCS LA 1:515301.2 41758-IOGHl 2 Book Page 98 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 of Directors, and such other member of the Board of Directors as the Chair may designate, the General Manager of the District, the Director of Finance of the District, and such other officer of the District as the Director of Finance 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 the Installment Purchase Agreement 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 the 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 and shall not result in a final Installment Payment later than February 1, 2037. 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 the Trust Agreement 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 the Trust Agreement by such Authorized Officer. 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 principal of and interest on the Installment Payments as specified in the Trust Agreement as finally executed, are hereby authorized and approved. Section 5. The Standby 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 the Standby Agreement 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 the Standhy Agreement by such Authorized Officer. Section 6. The Purchase Contract, 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 arc, and each of them is, hereby authorized and directed, for and in the name of the District, to execute and deliver the Purchase Contract 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 the Purchase Contract by such Authorized Officer; provided, however, that the underwriter's discount for the sale of the Certificates shall not exceed 0.1 % of the aggregate amount of principal evidenced by the Certificates. Section 7. The Remarketing 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. DOCSLAl:515301.2 41758-I0GHI 3 Book Page 99 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 the Remarketing Agreement 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 the Remarketing Agreement by such Authorized Officer. Section 8. The Official Statement, in substantially the form presented 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 the Official Statement 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 the Official Statement by such Authorized Officer. The use by the Underwriter of the Official Statement in connection with the offering and sale of the Certificates is hereby authorized and approved. Section 9. 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 agreements or documents referenced in this Resolution. Section 10. 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 11. This Resolution shall take effect immediately upon its adoption. DOCSLAl:515301.2 41758-10 GHI 4 Book Page 100 PASSED AND ADOPTED at a regular meeting held February 22, 2006. ATTEST: APPROVED: DOCSLAl:515301.2 41758-lOGHl Secretary General Counsel Chair 5 Book Page 101 ST A TE OF CALIFORNIA ) ) ss COUNTY OF ORANGE ) I, _________ , Secretary of the Board of Directors of the Orange County Sanitation District, do hereby certify that the foregoing Resolution No. OCSD _-___ _ was passed and adopted at a regular meeting of said Board on the 22nd day of February, 2006, by the following vote, to wit: AYES: NOES: ABSTENTIONS: ABSENT: IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District this __ day of ____ , 2006. · DOCSLAl:515301.2 41758-l0GHl Book Page 102 Secretary RESOLUTION NO. ___ _ 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 CERTIFICATES OF PARTICIPATION, SERIES 2006, 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 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, in order 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 "Installment Payments") to be made by the District pursuant to an Installment Purchase Agreement (such Installment Purchase Agreement, 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 "Installment Purchase Agreement"); WHEREAS, the Corporation proposes to assign without recourse certain of its rights under and pursuant to the Installment Purchase Agreement to Deutsche Bank National Trust Company, as trustee (the "Trustee"), pursuant to a Trust Agreement among the Trustee, the Corporation and the District (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 herein as the "Trust Agreement"); WHEREAS, in consideration of such assignment and the execution and entering into of the Trust Agreement, the Trustee will execute and deliver Orange County Sanitation District Certificates of Participation, Series 2006 (the "Certificates"), evidencing direct, undivided fractional interests in the Installment Payments, and the interest thereon, payable under the Installment Purchase Agreement; WHEREAS, there have been prepared and submitted to this meeting forms of: (a) the Installment Purchase Agreement; and (b) the Trust Agreement; H:\DEPT\AGENDA \FAHR\F AHR2006\0206\06.08.COP 2006 SERJES-A TI 2.DOC Book Page 103 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 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 Orange County Sanitation District Financing 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 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 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 the Installment Purchase Agreement 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 the 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 and shall not result in a final Installment Payment later than February 1, 2037. 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 the Trust Agreement 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 the Trust Agreement by such Authorized Officer. 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 Installment Payments, and the interest thereon, as specified in the Trust Agreement as finally executed, are hereby authorized and approved. Section 5. The officers 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 execution and delivery of the Certificates and the transactions contemplated by the agreements or documents referenced in this Resolution. DOCSLAl:515304.2 41758-I0GHI 2 Book Page 104 Section 6. All actions heretofore taken by the officers 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. PASSED AND ADOPTED at a meeting held.February 22, 2006. ATTEST: APPROVED: DOCSLAl:515304.2 41758-10 GHI Secretary General Counsel President 3 Book Page 105 STATE OF CALIFORNIA ) ) ss COUNTY OF ORANGE ) I, ______ , Secretary of the Board of Directors of the Orange County Sanitation District Financing Corporation, do hereby certify that the foregoing Resolution No. ____ _ was passed and adopted at a meeting of said Board on the 22nd day of February, 2006, by the following vote, to wit: AYES: NOES: ABSTENTIONS: ABSENT: IN WITNESS WHEREOF, I have hereunto set my hand this _ day of ___ _ 2006. DOCSLAl:515304.2 41758-l0GHI Secretary, Orange County Sanitation District Financing Corporation Book Page 106 NEW ISSUE-BOOK-ENTRY-ONLY OH&S 1/27/06 Draft Ratings: Moody's: " " and "_" Standard & Poor's "_" and "_" Fitch "_" and "_" (See "RATINGS" herein) In the opinion of Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, 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 on the Installment Payments paid by the District under the Installment Purchase Agreement and received by the owners of the Certificates is excluded from gross income for federal income tax purposes under Section I03 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Special Counsel, such interest is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Special Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest evidenced by, the Certificates. See ''TAX MATTERS" herein. Dated: Date of Delivery $200,000,000 ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2006 Price: 100% CUSIP No. __ t Due: February 1, 2036 The Orange County Sanitation District Certificates of Participation, Series 2006 (the "Certificates") 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 Installment Purchase Agreement, dated as of March I, 2006 (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 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 District's Wastewater System (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 the Installment Payments, and payments of interest thereon, and certain other payments required to be made in accordance with the Installment Purchase Agreement, solely from Net Revenues, is absolute and unconditional. See "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES" herein. The proceeds of the Certificates will be used to (i) finance the acquisition, construction and installation of certain improvements to the District's Wastewater System (the "Project") (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 "PLAN OF FINANCE" herein. The Certificates will initiaJJy bear interest at the Daily Rate Mode and be executed and delivered in denominations of $100,000 and a whole multiple of $5,000 in excess thereof. While in the Daily Rate Mode and Weekly Rate Mode, the interest evidenced by the Certificates will be computed on the basis of the actual days elapsed and a J65 or 366-day year, as applicable, and interest evidenced by the Certificates will be payable on the first Business Day of each calendar month, commencing on April 3, 2006. While the Daily Rate Mode and Weekly Rate Mode are in effect, Owners of the Certificates (other than Provider Certificates (described herein)) may elect to have their Certificates (or portions thereof in Authorized Denominations) purchased at a purchase price equal to the principal amount thereof, without premium, plus any accrued but unpaid interest to the Purchase Date (the "Purchase Price"). Subject to certain termination events described herein, payment of the Purchase Price will be funded by a Standby Certificate Purchase Agreement, dated as of March I, 2006 (the "Initial Standby Agreement"), by and between t Copyright 2005, American Bankers Association. CUSIP data herein is provided by Standard and Poor's, CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Service. CUSIP numbers are provided for convenience of reference only. The District and the Underwriter take no responsibility for the accuracy of such numbers. H:\dept\agenda\FAHR\FAHR2006\0206\06.08.COP 2006 Series-Att 3.PStlrflFPage 107 DEPFA BANK pie, Acting through its New York Branch (the "Provider") and the District. The Provider's obligation to purchase Certificates under the Initial Standby Agreement will terminate immediately without any action on the part of the Provider upon certain events of default. See "INITIAL ST AND BY AGREEMENT -Events of Default" and "-Consequences of Events of Default" herein. The Certificates are being delivered in fully registered form and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). Purchasers will not receive Certificate · repres nting their interest in the Cert.iii. ates purchased. PaymcnLs of principal, premium, if any, purchase price and interest on U,e Certificate wm by payable by Deut ·cbe Bank ational Trust Company to OTC, which is obligated in turn to remit such principal, premium, if any, purchase price and interest to the DTC Participants for subsequent disbursement to the Beneficial Owners of the Certificates, as more fully described herein. See "THE CERTIFICATES" and APPENDIX D -"BOOK-ENTRY SYSTEM" herein. The Certificates are subject to optional and mandatory sinking fund prepayment prior to maturity as more fully described herein. See "THE CERTIFICATES -Prepayment Provisions" herein. The Certificates are also subject to mandatory tender for purchase in certain circumstances, including conversion to a different Mode, all as more particularly described herein. See "THE CERTIFICATES -Mandatory Tender Provisions" herein. 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 PAY ABLE, 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 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 DISTRICT OR THE STATE OF CALIFORNIA, 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. SEE "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES" HEREIN. This cover page contains information intended for quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used in this cover page shall have the meanings given such terms herein. The Certificates will be offered when, as and (f executed and received by the Underwriter, subject to the approval by Orrick, Herrington & Sutcliffe LLP, Special Counsel. Certain legal matters will be passed upon for the Underwriter by its counsel, Hawkins Delafield & Wood LLP, Los Angeles, California. Certain legal matters will be passed upon for the District and the Corporation by Woodruff, Spradlin & Smart, a Professional Corporation, Orange, California and for the District by Orrick, Herrington & Sutcliffe LLP as Disclosure Counsel to the District. Certain legal matters will be passed upon for the Provider by Nixon Peabody LLP. Public Resources Advisory Group, Los Angeles, California has served as financial advisor to the District in connection with the execution and delivery of the Certificates. It is anticipated that the Certificates in definitive form will be available for delivery through the facilities of DTC in New York, New York on or about March_. 2006. Bear, Stearns & Co. Inc. Dated: February _, 2006 DOCSLA I :510217 .5 Book Page 108 MAP OF THE DISTRICT Pending H:\dept\agenda\FAHR\FAHR2006\0206\06.08.COP 2006 Series-Alt 3.POS.DOC Book Page 109 ORANGE COUNTY SANITATION DISTRICT Harry Sidhu -Anaheim Roy Moore -Brea Patsy Marshall -Buena Park Phil Luebben -Cypress Board of Directors Charles Antos -Orange Larry Crandall -Fountain Valley Don Bankhead -Fullerton Norman Z. Eckenrode -Placentia Alberta Christy -Santa Ana Charles Antos -Seal Beach David Shawver -Stanton Doug Davert -Tustin Bill Dalton -Garden Grove Rich Freschi -Villa Park Michael Duvall -Yorba Linda Jill Hardy -Huntington Beach Sukhee Kang -Irvine James M. Ferryman-Costa Mesa Sanitary District Joy L. Neugebauer -Midway City Sanitary District Darryl Miller-Irvine Ranch Water District Steve Anderson -La Habra Mark Waldman-La Palma Ken Parker -Los Alamitos Tod Ridgeway -Newport Beach Jim Silva -Member of the Orange County Board of Supervisors DOCSLAl:510217.5 Executive Management of the District James D. Ruth, Interim General Manager Lorenzo Tyner, Director of Finance David A. Ludwin, Director of Engineering Robert P. Ghirelli, PhD., Director of Technical Services James Herberg, Director of Operations & Maintenance Patrick B. Miles, Director of Information Technology Lisa M. Tomko, Director of Human Resources Special Services Special Counsel and Disclosure Counsel Orrick, Herrington & Sutcliffe LLP Los Angeles, California District General Counsel Bradley R. Hogan Woodruff, Spradlin & Smart, a Professional Corporation Orange, California Financial Advisor Public Resources Advisory Group Los Angeles, California Trustee Deutsche Bank National Trust Company Los Angeles, California Book Page 11 o 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 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 Underwriter 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 Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. 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 part, 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 Underwriter in connection with any reoffering may over-allot or effect transactions which stabilize or maintain the market price of the 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 Underwriter in connection with any reoffering may offer and sell the Certificates to certain dealers, institutional investors and others at a price lower than the public offering price stated on the cover page hereof and such public offering price may be changed from time to time by the Underwriter. Certain statements included or incorporated by reference in this Official Statement constitute 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. DOCSLAl:510217.5 Book Page 111 TABLE OF CONTENTS Page INTRODUCTION .................................................................................................................................... 1 General ....................................... ·-· .................................................................................................. 1 The District. .................................................................................................................................... 2 Security and Sources of Payment for the Certificates .................................................................... 2 Interest Rate Modes ........................................................................................................................ 3 Optional Tender Right ............................................................................ ·-• ...................................... 3 Prepayment and Mandatory Tender Provisions ............................................................................. 4 Initial Standby Agreement······································································································-······ 4 Tax Matters .................................................................................................................................... 5 Miscellaneous ................................................................................................................................. 5 PLAN OF FINANCE ................................................................................................................................ 6 SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES ..................................................... 6 THE CERTIFICATES ............................................................................ _ .................................................. 6 General ........................................................................................................................................... 6 Optional Tender Provisions ............................................................................................................ 8 Mandatory Tender Provisions ......................................................................................................... 9 Purchase of Certificates ................................................................................................................ 11 Conversion to Other Modes ......................................................................................................... 12 Prepayment Provisions ................................................................................................................. 15 SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES ........................................ 18 Installment Payments ................................................................................................................... 18 Net Revenues ............................................................................................................................... 19 Rate Stabilization Account. .......................................................................................................... 21 Allocation of Revenues ................................................................................................................ 21 Rate Covenant .............................................................................................................................. 21 Reserve Fund ................................................................................................................................ 22 Limitations on Issuance of Additional Obligations ...................................................................... 23 Insurance ...................................................................................................................................... 25 Allocation of Installment Payments ............................................................................................. 26 INITIAL STANDBY AGREEMENT ..................................................................................................... 27 General ......................................................................................................................................... 28 Events of Default. ...................................................................................................... -................... 28 DOCSLA 1:510217 .5 -i- Book Page 112 TABLE OF CONTENTS ( continued) Page Consequences of Events of Default.. ............................................................................................ 30 THE PROVIDER .................................................................................................................................... 30 THE DISTRICT .................................................................................................................................... 31 Background .................................................................................................................................. 31 Organization and Administration ................................................................................................. 32 Services ........................................................................................................................................ 33 Service Area ................................................................................................................................. 33 Employees .................................................................................................................................... 34 Retirement Plan ............................................................................................................................ 35 Post-Employment Benefits ........................................................................................................... 35 Risk Management. ............................................................................................................. ·-· ......... 36 Existing Facilities ......................................................................................................................... 36 Permits, Licenses and Other Regulations ..................................................................................... 37 Capital Improvement Program ..................................................................................................... 38 Groundwater Replenishment System ........................................................................................... 41 Preferred Level of Treatment ....................................................................................................... 42 Biosolids Management ................................................................................................................. 42 Urban Runoff ............................................................................................................................ _ ... 43 Integrated Emergency Response Program ................................................................................... 44 DISTRICT REVENUES ......................................................................................................................... 45 Sewer Service Charges ................................................................................................................. 45 Additional Revenues .................................................................................................................... 47 Wastewater Treatment History ..................................................................................................... 49 Customers ..................................................................................................................................... 49 Assessed Valuation ...................................................................................................................... 51 Tax Levies and Delinquencies ................................................... _ .................................................. 51 Budgetary Process ......................................................................................................................... 52 Reserves·························································································-················--···························· 53 Summary of Operating Data ........................................................................................................ 55 Projected Operating Data ............................................................................................................. 55 Management's Discussion and Analysis of Operating Data ......................................................... 56 Investment of District Funds ........................................................................................................ 57 DOCS LA I :510217 .5 -ii- Book Page 113 TABLE OF CONTENTS ( continued) Page FINANCIAL OBLIGATIONS ............................................................................................................... 58 Existing Indebtedness ................................................................................................................... 58 Anticipated Financings ................................................................................................................. 60 Direct and Overlapping Bonded Debt.. ........................................................................................ 61 THE CORPORATION ...................................................................................... -...................................... 63 LIMITATIONS ON TAXES AND REVENUES ................................................................................... 63 Article XIIIA of the California Constitution ................................................................................ 63 Legislation Implementing Article XIIIA ...................................................................................... 63 Article XIIIB of the California Constitution ................................................................................ 64 Proposition 62 .............................................................................................................................. 65 Article XIIIC and Article XIIID of the California Constitution ................................................... 65 LEGAL MA TIERS ................................................................................................................................ 67 FINANCIAL ADVISOR ........................................................................................................................ 67 ABSENCE OF LITIGATION ................................................................................................................. 67 FINANCIAL STATEMENTS ................................................................................................................ 67 TAX MA TIERS .................................................................................................................................... 68 NO CONTINUING DISCLOSURE OBLIGATION .............................................................................. 69 RATINGS ················································································· ........... ,_ ....................................... 69 UNDERWRITING ................................................................................................................ _ .................. 70 MISCELLANEOUS ............................................................................................................................... 70 APPENDIX A -COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2005 .................................................................................................................... A-1 APPENDIX B -THE COUNTY OF ORANGE-ECONOMIC AND DEMOGRAPHIC INFORMATION ...................................................................................................... B-1 APPENDIX C-SUMMARY OF PRINCIPAL LEGAL DOCUMENTS ............................................ C-1 APPENDIX D -BOOK-ENTRY ONLY SYSTEM ............................................................................. D-1 APPENDIX E -FORM OF APPROVING OPINION OF SPECIAL COUNSEL. ............................... E-1 DOCSLAl:510217.5 -iii- Book Page 114 OFFICIAL STATEMENT $200,000,000 ORANGE COUNTY SANITATION DISTRICT CERTIFICATES OF PARTICIPATION, SERIES 2006 INTRODUCTION This introduction contains only a brief summary of certain of the terms of the Certificates being offered and a brief description of the 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 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. General This Official Statement, including the cover page and all appendices hereto, p~ovides certain information concerning the sale and delivery of $200,000,000 aggregate principal amount of the Orange County Sanitation District Certificates of Participation, Series 2006 (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 March 1, 2006 (the "Installment Purchase Agreement"), to be entered into 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 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 income and revenue received by the District from the operation or ownership of the District's Wastewater System (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 Certificates are to be executed and delivered pursuant to a Trust Agreement, dated as of March 1, 2006 (the "Trust Agreement"), by and among the District, the Corporation and Deutsche Bank National Trust Company, as trustee (the "Trustee"). Proceeds from the sale of the Certificates will be used by the District to ( i) finance the acquisition, construction and installation of certain improvements to its Wastewater System (the "Project") (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 "PLAN OF FINANCE" herein. The Certificates will be executed and delivered in the form of fully registered certificates, dated as of the date of initial delivery thereof and will mature on February 1, 2036. Interest evidenced by the Certificates is payable, while the Certificates are in the Daily Rate Mode or the Weekly Rate Mode, the first Business Day of each calendar month, commencing on April 3, 2006, and while the Certificates are in the Extended Rate Mode or the Fixed Rate Mode, each February 1 and August 1 (each, an "Interest Payment Date"). See "THE CERTIFICATES" herein. The Certificates will be initially delivered only in book-entry form and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"), which will act as securities depository for the Certificates. The Certificates will initially bear interest at a Daily Rate and will be executed and delivered in DOCSLAl :510217.S Book Page 115 denominations of $100,000 and a whole multiple of $5,000 in excess 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 tum, will make payments pursuant to its procedures as described under APPENDIX D -"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 provides service to an area with a population of approximately 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 243 million gallons per day ("mg/d") of wastewater. See "THE DISTRICT," "DISTRICT REVENUES" AND "FINANCIAL OBLIGATIONS" herein. Security and Sources of Payment for the Certificates 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. Currently, the District has Senior Obligations Outstanding evidenced by four series of certificates of participation and two related interest rate swap agreements, payable on a parity with the Installment Payments under the Installment Purchase Agreement. The two swap agreements were executed by the predecessor special districts in connection with the execution and delivery of certain Outstanding Senior Certificates. The payments under these swap agreements are payable on a parity with the Installment Payments under the Installment Purchase Agreement and other Senior Obligations, as provided in the Master Agreement. See "FINANCIAL OBLIGATIONS -Existing Indebtedness" herein and APPENDIX C -"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS -Master Agreement" attached hereto. The term "Existing Senior Obligations" as used in this Official Statement refers to the 1992 Agreement for Acquisition and Construction (defined herein), the 1992 Swap (defined herein), the 1993 Agreement for Acquisition and Construction (defined herein), the 1993 Swap (defined herein), the 2000 Installment Purchase Agreement (defined herein) and the 2003 Installment Purchase Agreement (defined herein), 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 which may be made payable on 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 "Obligations." 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 Obligations for such Fiscal Year and (b) Net Operating Revenues equal to 100% of Debt Service on all DOCSLAl:510217.5 -2- Book Page 116 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. 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, 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 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 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. Interest Rate Modes The Certificates will initially bear interest at the Daily Rate Mode. Upon satisfaction of certain conditions provided in the Trust Agreement, the Certificates may be converted to the Weekly Rate Mode, the Extended Rate Mode or the Fixed Rate Mode (each, a "Mode"). Interest on the Certificates during the Daily Rate Mode and Weekly Rate Mode will be payable on each Interest Payment Date, commencing on April 3, 2006. See "THE CERTIFICATES" herein. Optional Tender Right While the Daily Rate Mode is in effect, Owners of Certificates (other than Provider Certificates) may elect to have their Certificates (or portions thereof in Authorized Denominations) purchased at a purchase price equal to the principal amount thereof, without premium, plus any accrued but unpaid interest to the Purchase Date ("Purchase Price") on any Business Day upon delivery of a written notice of tender meeting the requirements set forth in the Trust Agreement to the Remarketing Agent and the Trustee not later than 9:45 a.m. (New York City time) on such Business Day. While the Weekly Rate Mode is in effect, Owners of Certificates (other than Provider Certificates) may elect to have their Certificates (or portions thereof in Authorized Denominations) purchased at the Purchase Price on any Business Day upon delivery of a written notice of tender meeting the requirements set forth in the Trust Agreement to the Remarketing Agent and the Trustee not later than 5:00 p.m. (New York City time) on a Business Day not less than seven days prior to the Purchase Date. See "THE CERTIFICATES -Optional Tender Provisions." Bear, Stearns & Co. Inc. has initially been appointed remarketing agent (the "Remarketing Agent") for the Certificates under the terms of that remarketing agreement dated as of March 1, 2006 between the District and the Remarketing Agent (the "Remarketing Agreement"). The principal office of Bear, Stearns & Co. Inc., Remarketing Agent for the Certificates, is 383 Madison Avenue, 11th Floor, New York, New York 10179, telephone (212) 272-4930 and facsimile (212) 272-2514. The Remarketing Agent may resign or be removed as remarketing agent by the District in accordance with the terms of the Remarketing Agreement. DOCSLAl:510217.5 -3- Book Page 117 Prepayment and Mandatory Tender Provisions The Certificates will be subject to mandatory sinking fund and optional prepayment prior to maturity as more fully described herein. See "THE CERTIFICATES -Prepayment Provisions" herein. The Certificates are also subject to mandatory tender for purchase in certain circumstances, including conversion to a different Mode, all as more particularly described under the caption "THE CERTIFICATES -Mandatory Tender Provisions" herein. Initial Standby Agreement Subject to certain termination events upon an Event of Default, payment of the Purchase Price of the Certificates will be funded by the Standby Certificate Purchase Agreement, dated as of March 1, 2006 (the "Initial Standby Agreement") to be entered into by and between the District and DEPFA Bank plc, acting through its New York Branch (the "Provider"). The Initial Standby Agreement is subject to termination upon notice to the Owners of mandatory tender for purchase under certain circumstances as provided in the Initial Standby Agreement. See "THE CERTIFICATES -Mandatory Tender Provisions" and "Initial Standby Agreement" herein. The Initial Standby Agreement and any Alternate Standby Agreement will be an obligation of the Provider to pay to the Trustee upon request made with respect to the Certificates in accordance with the terms thereof (i) an amount, not exceeding the aggregate principal evidenced by the Certificates, sufficient to pay the principal portion of the Purchase Price of Certificates delivered or required to be delivered to the Trustee for purchase, and (ii) an amount sufficient to pay the interest portion of the Purchase Price of Certificates delivered to the Trustee for purchase, which amount (A) during the Daily Rate Mode and the Weekly Rate Mode, will be an amount equal to the amount of interest that would accrue during a period of 34 days computed at the Maximum Rate, and (B) during the Extended Rate Mode, will be an amount equal to the amount of interest that would accrue during a period of 365 days computed at the actual Extended Rate for such Extended Rate Period. The Provider's obligation to purchase Certificates under the initial Standby Agreement will terminate immediately without any action on the part of the Provider under certain circumstances defined to be a Termination Event. "Termination Events" consist of: (i) failure of the District to pay when due principal or interest evidenced by the Certificates; (ii) default by the District in the payment of amounts owed by it in respect of the Certificates or in respect of the principal of or interest on any of its Certificates or default by the District in the payment of any Senior Obligations in an aggregate amount in excess of $10,000,000 (or, with respect to any Senior Obligations owed to the Provider, in any amount), as and when the same will become due, or default under any mortgage, agreement or other instrument under or pursuant to which such Senior Obligations are incurred or issued, and continuance of such default beyond the period of grace, if any, allowed with respect thereto which, in any such case, would give rise to the right of acceleration of any such Certificate or Senior Obligations; (iii) entry or filing of any judgment, writ or warrant of attachment or of any similar process in an amount in excess of $10,000,000 against the District or against any of its property and which is of such consequence as will impair the ability of the District to conduct its business and failure of the District, to vacate, bond, stay or contest in good faith such judgment, writ, warrant of attachment or other process or failure to pay or satisfy such judgment within 60 days; (iv) the District will commence a voluntary case or other proceeding seeking liquidation, reorganization, dissolution, rehabilitation or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or will consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or will make a general assignment for the benefit of creditors, or will fail generally to pay its debts as they become due, or will take any corporate action to authorize any of the foregoing; (v) appointment of a trustee in bankruptcy, custodian or receiver for the District or all or part of its property and failure to obtain discharge of such within 30 days after such appointment; (vi) an involuntary case or other DOCS LA I :510217 .5 -4- Book Page 11 B proceeding will be commenced against the District seeking liquidation, reorganization, dissolution, rehabilitation or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law or under any other law of the State of California now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property and such involuntary case or other proceeding will remain undismissed or unstayed for a period of 60 days; or the District or any court or governmental authority having jurisdiction over the District will have declared a moratorium or taken similar action with respect to any of the District's debts; (vii) (a) the Initial Standby Agreement or any provision thereof or (b) any provision of any agreement, instrument or document evidencing any Senior Obligations of the District or pursuant to which any such Debt has been issued or incurred which relates to or affects any security provided to the holder thereof or the payment thereof or constitutes an event of default or similar provision thereunder will at any time for any reason cease to be valid and binding on the District or will be declared to be null and void by any court or governmental authority having jurisdiction over the District in each case pursuant to a final judgment or order or the validity or enforceability of any of the foregoing will be contested by the District; or (viii) the ratings, if any, assigned by Fitch, Moody's and S&P to Senior Obligations or debt secured by Senior Obligations will, in any such case, be withdrawn ( other than by reason of maturity, optional prepayment or defeasance of such debt), suspended, reduced below "BBB-", "Baa3" and "BBB- ", respectively, or revoked. See "INITIAL STANDBY AGREEMENT -Events of Default" and "- Consequences of Events of Default" herein. The Initial Standby Agreement relates only to the Certificates and will not, under any circumstances, provide for the payment of principal and interest evidenced by, or the Purchase Price of, Additional Obligations or Outstanding Senior Obligations. Tax Matters For a description of the tax status of interest with respect to the Certificates, see "TAX MATTERS" herein and see the complete copy of the Special Counsel opinion set forth in Appendix E hereto. Miscellaneous The Certificates will be offered when, as and if executed and delivered, and received by the Underwriter, subject to the approval as to their legality by Special Counsel and certain other conditions. It is anticipated that the Certificates in definitive form will be available for delivery through the facilities of DTC on or about March _, 2006. The Certificates are initially exempt from the rules of the Securities and Exchange Commission relating to continuing disclosure of annual financial information and certain material events. See "NO CONTINUING DISCLOSURE OBLIGATION." The District's Comprehensive Annual Financial Reports are available on the District's website at http://www.ocsd.com. The information on such website is not incorporated herein by such reference or otherwise. The descriptions herein of the Trust Agreement, the Master Agreement, the Installment Purchase Agreement and the Initial Standby 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 Deutsche Bank National Trust Company, Global Transaction Banking, Trust & Securities Services, 300 South Grand Avenue, 41st Floor, Los Angeles, California 90071, Attention: Corporate Trust. DOCSLAI :510217.5 -5- Book Page 119 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 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 North County Yard, Bushard Trunk Sewer, Gisler-Redhill Trunk Sewer, Magnolia Trunk Sewer, Bay Bridget Pump Station, Bitter Point Pump Station, Ellis A venue Pumps Station, Rocky Point Pump Station, Head works at Plant 2, Primary Clarifiers at Plant 1, Primary Treatment System at Plant 2 Secondary Treatment System at Plant 1, Activated Sludge at Plant 1, Trickling Filters at Plant 1 and 2; Sludge Digester at Plant 1, Sludge Dewatering at Plant 1 and 2, Truck Wash and Dewatering Beds at Plant 1, Primary sludge Feed System at Plant 2, Digester at Plant 2, Effluent Pump Station Annex, Groundwater Replenishment System, and Odor Control Facilities. 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 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. SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES The sources and uses of funds with respect to the delivery of the Certificates are shown below. Sources Certificate Proceeds Total Sources Acquisition Fund Reserve Fund Underwriter's Discount Costs of Issuance (l) Total Uses (ll Costs of issuance include, among other things, fees of rating agencies, initial fees of the Provider and the Trustee and Special Counsel fees. THE CERTIFICATES General The Certificates will be prepared in the form of fully registered Certificates in Authorized Denominations. The Certificates will initially evidence interest at the Daily Rate and while in a Daily Rate Mode or Weekly Rate Mode, will be delivered in denominations of $100,000 and a whole multiple of $5,000 in excess thereof. So long as the Certificates are in the DTC book-entry system, the interest, principal and prepayment premiums, if any, due with respect to the Certificates will be payable by the DOCSLA I :510217 .5 -6- Book Page 120 Trustee, or its agent, to OTC or its nominee. DTC, in tum, will make payments pursuant to its procedures as described under APPENDIX D -"BOOK-ENTRY SYSTEM" herein. Purchasers of Certificates will not receive physical certificates representing their ownership interests in the Certificates purchased. Payments of principal and interest evidenced by the Certificates are payable directly to OTC by Deutsche Bank National Trust Company, as trustee. Upon receipt of payments of such principal and interest, OTC will in tum distribute such payments to the beneficial owners of the Certificates. So long as the Certificates are in the OTC 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 OTC or its nominee. OTC, in tum, will make payments pursuant to its procedures as described under APPENDIX D -"BOOK-ENTRY SYSTEM" herein. So long as the Certificates are in the OTC book-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 OTC or its nominee. OTC, in tum, will make payments pursuant to its procedures as described under APPENDIX D - "BOOK-ENTRY SYSTEM" herein. The Certificates will be dated the date of initial delivery and will mature on February 1, 2036. During the Daily Rate Mode and Weekly Rate Mode, payment of interest with respect to the Certificates will be payable on the first Business Day of each calendar month commencing on April 3, 2006 (each, an "Interest Payment Date"). While the Certificates are in the Daily Rate Mode or the Weekly Rate Mode, interest evidenced by the Certificates will be computed on the basis of the actual days elapsed and a 365 or 366-day year, as applicable. Upon satisfaction of the requirements provided in the Trust Agreement, the Certificates may be converted to the Weekly Rate Mode, Extended Rate Mode or the Fixed Rate Mode as provided in the Trust Agreement. Notwithstanding the foregoing, the interest on Installment Payments evidenced by Provider Certificates will accrue at the Bank Rate, calculated as provided in the Trust Agreement. See APPENDIX C-"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS -Trust Agreement." The Certificates will initially be in the Daily Rate Mode until converted to another Mode as provided in the Trust Agreement or until becoming Provider Certificates (at which time they will evidence interest at the Bank Rate until such time as they are no longer Provider Certificates). Pursuant to the Trust Agreement, the Certificates may be in the Daily Rate Mode, Weekly Rate Mode, Extended Rate Mode or Fixed Rate Mode. See APPENDIX C -"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS -Trust Agreement" for a description of the Extended Rate Mode and the Fixed Rate Mode. Daily Rate Periods will be for one day. Weekly Rate Periods will be from Thursday of each week to but excluding Thursday of the following week, except that (i) in the case of a conversion of the Certificates to a Weekly Rate Mode from an Extended Rate Mode, the initial Weekly Rate Period upon such conversion will be from the Conversion Date to but excluding Thursday of the following week, (ii) in the case of a conversion of the Certificates from a Weekly Rate Mode to an Extended Rate Mode, the last Weekly Rate Period will end on the Conversion Date, and (iii) in the case the Weekly Rate Mode is in effect as of the stated Principal Payment Date for the Certificates, the last Weekly Rate Period will end on such stated Principal Payment Date. The Remarketing Agent will determine the Daily Rate for each Daily Rate Period that is a Business Day not later than 9:30 a.m. (New York City time) on such Business Day. The Daily Rate for any Daily Rate Period that is not a Business Day will be the Daily Rate established for the immediately preceding Business Day. The Remarketing Agent will determine the Weekly Rate for each Weekly Rate Period not later than 5:00 p.m. (New York City time) on the last Business Day which is immediately prior to the commencement date of the Weekly Rate Period to which such Weekly Rate relates. The Daily Rate or Weekly Rate so determined will be the lowest rate of interest which, in the judgment of the DOCSLAl:510217.5 -7- Book Page 121 Remarketing Agent, would cause the Certificates to produce as nearly as practicable a bid equal to the principal evidenced thereby, plus accrued interest evidenced thereby, under prevailing market conditions as of the date of determination of such Daily Rate or Weekly Rate. Notwithstanding the foregoing, in no event will any Daily Rate or Weekly Rate exceed the Maximum Rate. As defined in the Trust Agreement, "Maximum Rate" means, with respect to any Certificate, prior to the Fixed Rate Conversion Date therefor, 12% per annum and, thereafter, the highest rate of interest allowed by law. Notice of Daily Rates will be given by the Remarketing Agent to the Trustee by facsimile, electronic transmission or other similar means of communication (followed by notice in writing by an authorized officer of the Remarketing Agent) not later than 9:30 a.m. on the date of determination. Notice of Weekly Rates will be given by the Remarketing Agent to the Trustee by facsimile, electronic transmission or other similar means of communication (followed by notice in writing by an authorized officer of the Remarketing Agent) not later than 5:00 p.m. on the date of determination. The Trustee will inform the Owners of the Certificates and the Provider of each Daily Rate and Weekly Rate upon request. All determinations of Daily Rates and Weekly Rates as provided in the Trust Agreement will be conclusive and binding upon the District, the Trustee, the Provider and the Owners of the Certificates. The District, the Trustee, the Provider and the Remarketing Agent will not be liable to the Owner of any Certificate for failure to give any notice required above or for failure of the Owner of any Certificate to receive any such notice. No Variable Rate Period may extend beyond the Expiration Date. No Variable Rate Period may extend beyond the stated Principal Payment Date of the Certificates. Optional Tender Provisions Optional Tenders While Daily Rate Mode in Effect. While the Daily Rate Mode is in effect, Owners of Certificates (other than Provider Certificates) may elect to have their Certificates (or portions thereof in Authorized Denominations) purchased at the Purchase Price on any Business Day upon delivery of a written notice of tender meeting the requirements set forth in the Trust Agreement to the Remarketing Agent and the Trustee not later than 9:45 a.m. (New York City time) on such Business Day. Not later than 10:00 a.m. on the date of receipt of any such notice of tender, the Trustee will notify the Provider and the Remarketing Agent of the principal evidenced by Certificates or portions thereof to be tendered and remarketed and that such Certificates or portions thereof are to be tendered and remarketed on such date. Such notice will be given by telephone, telegram, telecopy, telex or other similar communication and will be promptly confirmed in writing. Optional Tenders While Weekly Rate Mode in Effect. While the Weekly Rate Mode is in effect, Owners of Certificates (other than Provider Certificates) may elect to have their Certificates (or portions thereof in Authorized Denominations) purchased at the Purchase Price on any Business Day upon delivery of a written notice of tender meeting the requirements set forth in the Trust Agreement to the Remarketing Agent and the Trustee not later than 5:00 p.m. (New York City time) on a Business Day not less than seven days prior to the Purchase Date. Not later than 4:30 p.m. on the Business Day immediately following the date of receipt of any notice of tender, the Trustee will notify the Provider of the principal evidenced by Certificates or portions thereof to be tendered and remarketed and the date on which such Certificates or portions thereof are to be tendered and remarketed. Such notice will be given by telephone, telegram, telecopy, telex or other similar communication and will be promptly confirmed in writing. DOCSLAI :510217.5 -8- Book Page 122 Notice of Optional Tender While Daily Rate Mode or Weekly Rate Mode in Effect. Each notice of tender: (i) must be delivered to the Trustee at its Principal Office and the Remarketing Agent at its principal office and be in form satisfactory to the Trustee; (ii) will state (A) the principal evidenced by the Certificate or portion of the Certificate to be purchased and the CUSIP number thereof, (B) that the Owner irrevocably demands purchase of such Certificate or portion thereof, (C) that such Certificate or portion thereof is to be purchased on such Business Day, (D) payment instructions, and (E) if such tender is through a Participant, the DTC participant number for such Participant and the name, telephone number and telecopy number of a contact person at such Participant; and (iii) will automatically constitute (A) an irrevocable offer to sell the Certificate or portion thereof to which the notice relates on the Purchase Date to any purchaser selected by the Remarketing Agent, at the Purchase Price, (B) an irrevocable authorization and instruction to the Trustee to effect transfer of such Certificate or portion thereof upon payment of such Purchase Price to the Trustee on the Purchase Date, (C) an irrevocable authorization and instruction to the Trustee to effect the exchange of the Certificate to be purchased in whole or in part for other Certificates evidencing principal in an equal aggregate amount so as to facilitate the sale of such Certificate or portion thereof, and (D) an acknowledgment that such Owner will have no further rights with respect to such Certificate or portion thereof upon payment of the Purchase Price by the Trustee on the Purchase Date, except for the right of such Owner to receive such Purchase Price upon surrender of such Certificate to the Trustee. The determination of the Trustee as to whether a notice of tender has been properly delivered pursuant to the foregoing provisions will be conclusive and binding upon the Owner, the Certificate Insurer, the Provider, the Swap Provider and the Remarketing Agent. Remarketing of Tendered Certificates While Daily Rate Mode or Weekly Rate Mode in Effect. The Remarketing Agent will offer for sale and use its best efforts to find purchasers for all Certificates or portions thereof properly tendered. The terms of any sale by the Remarketing Agent of tendered Certificates will provide for the purchase of the remarketed Certificates at the Purchase Price and the payment of such Purchase Price to the Trustee by the Remarketing Agent in immediately available funds against delivery of the remarketed Certificates to the Trustee at or before 11: 15 a.m. on the Purchase Date. Notwithstanding the foregoing, the Remarketing Agent will not offer for sale any Certificate if (i) notice of any optional or mandatory prepayment or any conversion from the Daily Rate Mode or the Weekly Rate Mode, as applicable, to another Mode has been given to the Owner of such Certificate pursuant to the provisions of the Trust Agreement, or (ii) any defeasance of such Certificate in accordance with the provisions of the Trust Agreement has occurred, unless the Remarketing Agent has advised the person in writing to whom the offer is made of such occurrence and the effect of the same on the rights of the Owner of such Certificate, including, but not limited to, the rights of such Owner to tender such Certificate, as described in the conversion notice from the Trustee to the Owner of such Certificate. Mandatory Tender Provisions On Conversion Dates. The Certificates will be subject to mandatory tender for purchase on each proposed Conversion Date for which notice of conversion has been given to the Owners of the Certificates in accordance with the provisions of the Trust Agreement, and the Owners will not be entitled to retain such Certificates. Notice of conversion to another Mode will be given to the Owners in the manner provided with respect to optional conversion between Variable Rate Modes in the Trust Agreement. Notice of conversion to the Fixed Rate Mode will be given to the Owners in the manner provided with respect to conversion to the Fixed Rate Mode therein. The provisions with respect to purchase of tendered Certificates therein will be applicable to the purchase, payment for and registration and delivery of tendered Certificates. Any Certificate not tendered for purchase on any such proposed Conversion Date, as required in the Trust Agreement will be deemed tendered and purchased on such proposed Conversion Date, and thereafter the Owner thereof will have no further rights under the Trust Agreement except to receive such Purchase Price. DOCSLAl:510217.5 -9- Book Page 123 On the Business Day on which the notice is mailed, the Trustee will notify the Remarketing Agent and the Provider by telephone, telegram, telecopy, telex or other similar communication of the aggregate principal evidenced by Certificates to be tendered for purchase on the proposed Conversion Date. The Remarketing Agent will offer for sale and use its best efforts to find purchasers for the Certificates to be tendered. The terms of any sale of such tendered Certificates by the Remarketing Agent will provide for the purchase of the remarketed Certificates at the Purchase Price and the payment of such Purchase Price to the Trustee by the Remarketing Agent in immediately available funds against delivery of the remarketed Certificates to the Trustee at or before 11: 15 a.m. on the proposed Conversion Date. Upon Expiration or Substitution of Standby Agreement or Event of Default with Respect Thereto. Prior to conversion of the Certificates to the Fixed Rate Mode, the Certificates will be subject to mandatory tender for purchase at the Purchase Price: (i) on the last Business Day which is at least five days prior to stated expiration date of the Initial Standby Agreement or any Alternate Standby Agreement (the "Standby Agreement"), or such stated expiration date as it may be extended from time to time as provided in the Standby Agreement, or any earlier date on which the Standby Agreement will terminate, expire or be cancelled (the "Expiration Date"); (ii) on the fifth Business Day following the Trustee's receipt of a Notice of Mandatory Tender from the Provider; and (iii) if the Certificates are in the Daily Rate Mode or the Weekly Rate Mode, on the last Business Day which is at least five days prior to the substitution of an Alternate Standby Agreement for the Standby Agreement pursuant to the provisions of the Trust Agreement. The Owners may not elect to retain their Certificates in the event of mandatory tender upon expiration or substitution of liquidity facility or event of default, as described above. Notice of mandatory tender of the Certificates, stating the date on which and time at which the Certificates are required to be tendered for purchase, will be given by first class mail, postage prepaid by the Trustee to the Owners of the Certificates not less than five Business Days prior to the date on which the Certificates are to be purchased pursuant to the provisions of the Trust Agreement as described in paragraphs (i) or (iii) immediately above, or as soon as practicable, but in no event less than two Business Days, after the Trustee's receipt of a Notice of Mandatory Tender from the Provider, with respect to a purchase pursuant to paragraph (ii) under "Upon Expiration or Substitution of Standby Agreement or Event of Default with Respect Thereto" above. A copy of such notice will be sent to the District, the Remarketing Agent and the Provider. Notice having been so given, such mandatory tender will occur on the date provided in such notice whether or not an Alternate Standby Agreement is provided after such initial notice has been given. The Remarketing Agent will offer for sale and use its best efforts to find purchasers for the Certificates to be tendered and will inform prospective purchasers whether the Standby Agreement will be replaced with an Alternate Standby Agreement. In the case of replacement of the Standby Agreement, the Remarketing Agent will inform prospective purchasers of the identity of the Provider providing such Alternate Standby Agreement and of the ratings to be in effect on the Certificates following such substitution. The terms of any sale by the Remarketing Agent of tendered Certificates will provide for the purchase of the remarketed Certificates at the Purchase Price and the payment of such Purchase Price to the Trustee by the Remarketing Agent in immediately available funds against the delivery of the remarketed Certificates to the Trustee at or before 11:15 a.m. on the Purchase Date. Notwithstanding the DOCSLAI :510217.5 -10- Book Page 124 foregoing, the Certificates will not be offered for sale unless the Standby Agreement or an Alternate Standby Agreement is in place at the time of the remarketing. Purchase of Certificates Procedures for Purchase. At or before 10:30 a.m. on each Purchase Date for Certificates in the Daily Rate Mode optionally tendered pursuant to the Trust Agreement, the Remarketing Agent will notify by telephone, telegram, telecopy, telex or other similar communication to the Trustee and the Provider of the principal evidenced by tendered Certificates which have been remarketed and of the names, addresses and taxpayer identification numbers of the purchasers and the denominations of remarketed Certificates to be delivered to each purchaser. At or before 3:30 p.m. on the Business Day immediately preceding each Purchase Date (other than a Purchase Date for Certificates in the Daily Rate Mode optionally tendered pursuant to the Trust Agreement), the Remarketing Agent will notify by telephone, telegram, telecopy, telex or other similar communication to the Trustee and the Provider of the principal evidenced by tendered Certificates which have been remarketed and of the names, addresses and taxpayer identification numbers of the purchasers and the denominations of remarketed Certificates to be delivered to each purchaser. On the Purchase Date, the Trustee will make a request for purchase in accordance with the terms of the Standby Agreement at the times and to the extent necessary to timely pay the Purchase Price with regard to the Certificates for which remarketing proceeds have not been paid to the Trustee; and the Trustee will hold the moneys received pursuant to such draw under the Standby Agreement in trust in a separate segregated account for the benefit of the Owners of such tendered Certificates. The Remarketing Agent will pay to the Trustee, on the Purchase Date, all amounts representing proceeds of the remarketing of tendered Certificates, such payments to be made in the manner and at the time specified in the Trust Agreement. All such proceeds will be held by the Trustee in trust in a separate segregated account for the benefit of the person or entity which has delivered such moneys until the Certificates purchased with such moneys have been delivered to such person or entity. The District and the Corporation will not have any right, title, or interest in or to remarketing proceeds held by the Remarketing Agent or the Trustee or proceeds of a draw on the Standby Agreement. The Provider has agreed under the Standby Agreement to pay, on or before 2:00 p.m. on the Purchase Date (so long as the request for purchase thereunder is made prior to 11:30 a.m.), the Purchase Price to the Trustee of such Certificates that have not been remarketed. Before 3:00 p.m. on the Purchase Date and upon receipt by the Trustee of 100% of the aggregate Purchase Price of the tendered Certificates, the Trustee will pay the Purchase Price of such Certificates to the Owners thereof at its Principal Office or by bank wire transfer. Such payments will be made in immediately available funds. Payments of such Purchase Price are to be made from the following sources in the order of priority indicated: (i) the proceeds of the sale of the Certificates which have been remarketed by the Remarketing Agent; and (ii) Certificates. moneys paid pursuant to the Standby Agreement to pay the Purchase Price of All Certificates to be purchased on any date will be required to be delivered to the Principal Office of the Trustee at or before 11: 15 a.m. on the Purchase Date. If the Owner of any Certificate or portion thereof that is subject to purchase pursuant to the Trust Agreement fails to surrender such Certificate to the Trustee for purchase on the Purchase Date, and if the Trustee is in receipt of the Purchase Price therefor, such Certificate or portion thereof will nevertheless be deemed purchased on the Purchase Date and ownership of such Certificate or portion thereof will be transferred to the purchaser thereof as provided in the Trust Agreement. Any Owner who fails to deliver a Certificate for purchase as DOCSLAl:510217.5 -11- Book Page 125 required above will have no further rights with respect thereto except the right to receive the Purchase Price therefor upon presentation and surrender of said Certificate to the Trustee. All money held by the Trustee for the payment of the Purchase Price of Certificates will be held in separate segregated accounts and will be held uninvested. Insufficient Funds for Purchases. If the moneys available for purchase of Certificates pursuant to the Trust Agreement are inadequate for the purchase of all Certificates which are tendered on any Purchase Date, each Certificate subject to such purchase will continue in the same Mode as in effect with respect thereto on the day prior to the Purchase Date to the date on which the earliest of the following occurs: (i) the date of conversion of the Certificates to the Fixed Rate Mode; (ii) the date on which any default by the Provider under the Standby Agreement has been cured; or (iii) the date on which an Alternate Standby Agreement meeting the requirements of the Trust Agreement has been obtained. Upon the occurrence of an event listed above, (i) the Trustee will immediately (but no later than the end of the next succeeding Business Day) return all tendered Certificates to the Owners thereof and notify all Owners of Certificates in writing of the Mode to be effective with respect thereto (which will be the rate applicable to the Mode in effect with respect to the Certificates on the day prior to the Purchase Date), and (ii) the Trustee will return all moneys received for the purchase of such Certificates to the persons who provided such moneys. Restriction on Remarketing of Certificates to District or Corporation. So long as the Standby Agreement is in effect, no Certificate tendered pursuant to the Trust Agreement will be remarketed to the District or the Corporation; provided, however, that the Trustee will not be required to monitor the actions of the Remarketing Agent to insure that it does not sell Certificates to the District or the Corporation. Book-Entry Tenders. Notwithstanding any other provision of the Trust Agreement to the contrary, all tenders for purchase during any period in which the Certificates are registered in the name of the Nominee (or the nominee of any successor Depository) will be subject to the terms and conditions set forth in the Letter of Representations and any notices and regulations promulgated by DTC. Subject to such terms, conditions, notices and regulations, the Certificates may be tendered by means of a book- entry credit of such Certificates to the account of the Remarketing Agent; provided, however, that under certain circumstances notice of tender will be given by a Participant on behalf of the beneficial owner of such Certificates, and, provided further, that, if the Remarketing Agent notifies the Trustee that such Certificates have been remarketed pursuant to the Trust Agreement, such Certificates may be treated as being tendered upon a book-entry transfer of such Certificates from the account of the tendering party to the credit of the account of the purchaser of such Certificates. Conversion to Other Modes Optional Conversion Between Variable Rate Modes. Subject to the provisions of the Trust Agreement, the District may convert the Certificates from the then current Variable Rate Mode to another Variable Rate Mode. In the case of conversion from the Daily Rate Mode to another Variable Rate Mode, the Conversion Date will be an Interest Payment Date for the Daily Rate Mode. In the case of conversion from the Weekly Rate Mode to another Variable Rate Mode, the Conversion Date will be an Interest Payment Date for the Weekly Rate Mode. In the case of a conversion from the Extended Rate Mode to DOCSLAI :510217.5 -12- Book Page 126 another Variable Rate Mode, the Conversion Date will be the day following the last day of the Extended Rate Period. At the direction of the District, the Remarketing Agent will give written notice of any conversion to the Trustee and the Provider not less than five Business Days prior to the date on which the Trustee is required to notify the Owners of the conversion pursuant to the Trust Agreement. Such notice will specify (i) the proposed Conversion Date, (ii) the Mode to which the conversion will be made, and (iii) in the case of conversion to the Extended Rate Mode, the initial Extended Rate Period. Not less than 10 days prior to any such proposed Conversion Date, the Trustee will mail a written notice of the conversion to all of the Owners of Certificates. A copy of such notice will be sent to the District and the Provider. Such notice will set forth (i) the information set forth above, (ii) the Interest Payment Dates for the new Mode, (iii) in the case of conversion to the Extended Rate Mode, the initial Extended Rate Period, (iv) the dates on which the Remarketing Agent will determine and the Trustee will notify the Owners of the Variable Rate for the Variable Rate Period commencing on the Conversion Date, (v) that the Certificates are subject to mandatory tender for purchase (without the right to retain) on the proposed Conversion Date at a Purchase Price equal to the principal evidenced thereby plus accrued interest evidenced thereby, and (vi) that the Certificates will be deemed purchased on the proposed Conversion Date, and thereafter the Owner will have no further rights under the Trust Agreement except to receive such Purchase Price. The Variable Rate for the Variable Rate Period commencing on the Conversion Date will be determined by the Remarketing Agent in the manner and on the date provided in the Trust Agreement. In addition to determining the Extended Rate, the Remarketing Agent will determine a Weekly Rate at the time specified in the Trust Agreement, and give notice thereof to the Trustee and the Provider, which Weekly Rate will take effect, if required, pursuant to the Trust Agreement. Notwithstanding the delivery of notice of the conversion pursuant to the Trust Agreement, conversion to a new Variable Rate Mode will not take effect if: (i) the Remarketing Agent fails to determine a Variable Rate for the new Variable Rate Mode; (ii) any notice required by the Trust Agreement is not given when required; (iii) there is not delivered to the District, the Trustee and the Provider an Opinion of Counsel, dated as of the Conversion Date, to the effect that such conversion will not, in and of itself, adversely affect the exclusion from gross income of interest evidenced by the Certificates for federal income tax purposes; (iv) such notice of conversion is rescinded by the District by written notice of such rescission to the Trustee, the Provider and the Remarketing Agent, which written notice is delivered prior to the applicable Conversion Date (if the Trustee receives notice of such rescission prior to the time the Trustee has given notice to the Owners of the Certificates, then such notice of conversion will be of no force and effect; if the Trustee receives notice of such rescission after the Trustee has given notice to the Owners of the Certificates, then the Certificates will automatically convert to the Weekly Rate Mode; any purchases of Certificates scheduled or required to take place on the proposed effective date of any Mode (being also the effective date of the automatic conversion to the Weekly Rate Mode as provided in the Trust Agreement) will take place on such date; no Opinion of Counsel will be required in connection with any automatic conversion to the Weekly Rate Mode as provided in the Trust Agreement); (v) upon such conversion, the amount on deposit in the Reserve Fund, together with the amount available under all Reserve Facilities, would not be at least equal to the Reserve Requirement; (vi) in the case of conversion to an Extended Rate Mode, any Certificates in the Extended Rate Mode would be Provider Certificates, unless the Provider consents; or (vii) in the case of conversion to an Extended Rate Mode, the Trustee has not received a written notice from each of the Rating Agencies then maintaining a rating of the Certificates that the conversion to such Extended Rate Mode will not have an adverse effect on such Rating Agency's rating of the Certificates. DOCSLAl :510217.S -13- Book Page 127 Except if notice of conversion is rescinded by the District, in any such event, the Certificates will automatically be converted to the Weekly Rate Mode on the date such conversion was to be made, provided that any mandatory tender for purchase pursuant to the provisions of the Trust Agreement relating to mandatory tenders on Conversion Dates will nevertheless be carried out if notice of the conversion pursuant to the Trust Agreement has been given to the Owners of the Certificates. No cancellation of a conversion pursuant to the Trust Agreement will constitute an event of default under the Trust Agreement. If the Remarketing Agent fails to determine the New Variable Rate, the Weekly Rate for such Certificates will be the per annum rate of interest determined on each Wednesday (or if such day is not a Business Day, the immediately preceding Business Day) by the Trustee which is 80% of the current bond equivalent yield for 91 day United States Treasury Bills sold at the last United States Treasury auction occurring prior to such day, which yield will be calculated in accordance with standard practices in the banking industry on the basis of the discount rates at which such bills were sold, but such rate must not exceed the Maximum Rate. Not less than 20 days (or such shorter period approved by the parties to receive the same) prior to the proposed Conversion Date, the District will give written notice to the Trustee, the Remarketing Agent and the Provider, setting forth (i) the election to convert the Certificates to the Fixed Rate Mode, and (ii) the proposed Conversion Date. As a condition of any such conversion, the Trustee, the Provider and the Remarketing Agent will receive concurrently with the notice, a letter from counsel that it expects to be able to deliver on the Conversion Date an Opinion of Counsel to the effect that such conversion will not, in and of itself, adversely affect the exclusion from gross income of interest evidenced by the Certificates for federal income tax purposes. The Trustee will mail a notice of the proposed conversion to all of the Owners of the Certificates. A copy of such notice will be sent to the District and the Provider. Such notice will be mailed not less than 10 days prior to the proposed Conversion Date. Such notice will set forth the proposed Conversion Date and state (i) that the Certificates are subject to mandatory tender for purchase (without the right to retain) on the proposed Conversion Date at a Purchase Price equal to the principal evidenced thereby plus accrued interest evidenced thereby, and (ii) that the Certificates will be deemed purchased on the proposed Conversion Date, and thereafter the Owner will have no further rights under the Trust Agreement except to receive such Purchase Price. The Remarketing Agent will determine the Fixed Rate for the Certificates by not later than 3:30 p.m. on the last Business Day that is at least five days prior to the Conversion Date. The Fixed Rate for Certificates will be the lowest rate (not in excess of the Maximum Rate) which, in the judgment of the Remarketing Agent as of the date of determination and under prevailing market conditions, would cause the Certificates to produce as nearly as practicable a bid equal to the principal evidenced thereby, plus accrued interest evidenced thereby. Not later than 4:00 p.m. on the date of determination of the Fixed Rate, the Remarketing Agent will notify the Trustee by facsimile, electronic transmission or other similar means of communication (promptly confirmed in writing) of the Fixed Rate so determined. Such determinations will be conclusive and binding upon the District, the Trustee, the Provider and the Owners of the Certificates. The Trustee will notify the District and the Provider by telephone (promptly confirmed in writing), telegram, telecopy, telex or other similar means of communication of the Fixed Rate so determined. The Remarketing Agent will offer for sale at par and use its best efforts to find purchasers for the Certificates required to be tendered upon conversion to the Fixed Rate Mode. The terms of any sale by the Remarketing Agent of such Certificates will provide for the sale thereof at par and the payment of the Purchase Price by the Remarketing Agent to the Trustee in immediately available funds against the delivery of the remarketed Certificates to the Trustee at or before 11: 15 a.m. on the Purchase Date. DOCSLAl:510217.5 -14- Book Page 128 Notwithstanding the delivery of notice of conversion, conversion to the Fixed Rate Mode will not take effect if: (i) the District withdraws such notice of conversion not later than the Business Day preceding the date on which the Fixed Rate is to be determined; (ii) the Remarketing Agent fails to determine the Fixed Rate; (iii) any notice required by the Trust Agreement is not given when required; (iv) there is not delivered to the District, the Trustee and the Provider an Opinion of Counsel, dated as of the Conversion Date, to the effect that such conversion will not, in and of itself, adversely affect the exclusion from gross income of interest evidenced by the Certificates for federal income tax purposes; (v) upon such conversion, the amount on deposit in the Reserve Fund, together with the amount available under all Reserve Facilities, would not be it least equal to the Reserve Requirement; or (vi) upon such conversion, any Certificates in the Fixed Rate Mode would be Provider Certificates, unless the Provider consents. In any of such events, the Certificates will automatically be converted to a Weekly Rate Mode which will commence on the date such conversion was to be made, provided that the mandatory tender for purchase in connection with such conversion will nevertheless be carried out if notice of the conversion to the Fixed Rate Mode has been given to the Owners of the Certificates. Withdrawal of a conversion notice will be given by the District to the Trustee, the Remarketing Agent and the Provider, by telephone, promptly confirmed in writing. No cancellation of a conversion to the Fixed Rate Mode pursuant to the Trust Agreement will constitute an event of default under the Trust Agreement. If the Certificates are converted to a Weekly Rate Mode, and the Remarketing Agent fails to determine a Weekly Rate, the Weekly Rate will be the per annum rate of interest determined on each Wednesday (or if such day is not a Business Day, the immediately preceding Business Day) by the Trustee which is 80% of the current bond equivalent yield for 91 day United States Treasury Bills sold at the last United States Treasury auction occurring prior to such day, which yield will be calculated in accordance with standard practices in the banking industry on the basis of the discount rate at which such bills were sold, but must not exceed the Maximum Rate. Once the District has effectively exercised its option to convert the Certificates to the Fixed Rate Mode pursuant to the Trust Agreement, the District will have no further option to convert the Certificates to any other Mode, and the Certificates will no longer be subject to tender for purchase. Prepayment Provisions Optional Prepayment. While the Daily Rate Mode or the Weekly Rate Mode is in effect, the Certificates will be subject to prepayment prior to their stated Principal Payment Date, on any Interest Payment Date, at the option of the District, as a whole or in part in Authorized Denominations, from and to the extent of prepaid Installment Payments paid pursuant to the Installment Purchase Agreement, at a prepayment price equal to the principal evidenced thereby, plus accrued interest evidenced thereby to the date fixed for prepayment, without premium. While the Extended Rate Mode is in effect, the Certificates will be subject to prepayment prior to their stated Principal Payment Date, on the day following the last day of each Extended Rate Period, at the option of the District, as a whole or in part in Authorized Denominations, from and to the extent of DOCSLAl:510217.S -15- Book Page 129 prepaid Installment Payments paid pursuant to the Installment Purchase Agreement, at a prepayment price equal to the principal evidenced thereby, plus accrued interest evidenced thereby to the date fixed for prepayment, without premium. Provider Certificates will be subject to prepayment prior to their stated Principal Payment Date, on any date, at the option of the District, as a whole or in part, from and to the extent of prepaid Installment Payments paid pursuant the Insta11ment Purchase Agreement, at a prepayment price equal to the principal evidenced thereby, plus accrued interest evidenced thereby, without premium. While the Fixed Rate Mode is in effect, the Certificates will be subject to prepayment prior to their stated Principal Payment Date, on any date during the periods indicated in the following table, at the option of the District, as a whole or in part in Authorized Denominations, from and to the extent of prepaid Installment Payments paid pursuant to the Installment Purchase Agreement, at the fo1lowing prepayment prices applicable for the periods indicated, plus accrued interest evidenced thereby to the date fixed for prepayment: Original Length of Fixed Rate Period More than 10 Years More than 8 years but not more than 10 years More than 5 years but not more than 8 years 5 years or less Commencement of Prepayment Period 8th anniversary of commencement of Fixed Rate Period 6th anniversary of commencement of Fixed Rate Period 4th anniversary of commencement of Fixed Rate Period No prepayment Prepayment Price as a Percentage of Principal 102% declining by 1 % on each succeeding anniversary of the first day of the prepayment period until reaching 100% and thereafter 100% 101 % until the first anniversary of the first day of the prepayment period and 100% from said first anniversary and thereafter 100% Mandatory Sinking Account Prepayment. The Certificates are subject to prepayment prior to their stated Principal Payment Date, in part, from Mandatory Sinking Account Payments, on each February 1 specified below, at a prepayment price equal to the principal evidenced thereby, plus accrued interest evidenced thereby to the date fixed for prepayment, without premium. The principal evidenced by such Certificates to be so prepaid and the dates therefor shall be as follows: t Stated Principal Payment Date. Date (February 1) 2o_t Mandatory Sinking Fund Amount The amount of each such prepayment will be reduced in the event and to the extent that Installment Payments payable on the corresponding Installment Payment Date are prepaid from any DOCSLAl:510217.5 -16- Book Page 130 source of funds available to the District pursuant to the Installment Purchase Agreement, and applied to the optional prepayment of Certificates under the Trust Agreement. Selection of Certificates for Prepayment. Whenever less than all the Outstanding Certificates are to be prepaid on any one date, the Trustee will select such Certificates to be prepaid by lot in any manner that the Trustee deems fair and appropriate, which decision will be final and binding upon the District, the Corporation, the Provider and the Owners. Notwithstanding the foregoing, all Provider Certificates will be prepaid prior to the prepayment of any other Certificates. The Trustee will promptly notify the 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. Notice of Prepayment. When prepayment of Certificates is authorized pursuant to this Article, the Trustee will give notice, at the expense of the District, of the prepayment of the Certificates. The notice of prepayment will 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 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 will further state that on the specified date there will 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 will cease to accrue and be payable. The Trustee will take the following actions with respect to such notice of prepayment: At least 30 but not more than 45 days prior to any prepayment date, notice of prepayment will be given 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. At least 30 days before each prepayment date, notice of prepayment will also be given by (a) first-class mail, postage prepaid, (b) confirmed facsimile transmission, or (c) overnight delivery service, to DTC. At least 30 days before each prepayment date, notice of prepayment will also be given by (a) first-class mail, postage prepaid, or (b) overnight delivery service, to the information services specified in the Trust Agreement. The actual receipt by an Owner or by any of the securities depositories or information services specified in the Trust Agreement of any notice of such prepayment will not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein will 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. With respect to any notice of any optional prepayment of Certificates such notice may state that such prepayment is conditional upon receipt by the Trustee, on or prior to the date fixed for such prepayment, of moneys that, together with other available amounts held by the Trustee, are sufficient to pay the prepayment price of, and accrued interest evidenced by, the Certificates to be prepaid, and that if such moneys will not have been so received said notice will be of no force and effect and the Certificates will not be required to be prepaid. 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 will not be made and the Trustee will, 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 DOCSLA I :SI 0217 .S -I?- Book Page 131 notice of prepayment was given, that such moneys were not so received and that there will be no prepayment of Certificates pursuant to such notice of prepayment. A certificate by the Trustee that notice of prepayment has been given to Owners or to any of the securities depositories or information services specified above as herein provided will 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. The Trustee will give notice of prepayment of any Certificates to be prepaid upon receipt of a Written Request of the District (which request will be given to the Trustee at least 45 days prior to the date fixed for prepayment). 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 will 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 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 t)le 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. 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 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 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. Pursuant lo 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 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, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments, payments of interest thereon, and other payments will not be subject to reduction whether offset or otherwise and will not be conditional upon the performance or nonperformance by any party of any agreement or any cause whatsoever. DOCSLAl:510217.S -18- Book Page 132 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. Currently, the District has Senior Obligations Outstanding evidenced by four series of certificates of participation and related interest rate swap agreements, payable on a parity with the Installment Payments under the Installment Purchase Agreement. The two swap agreements were executed by the predecessor special districts in connection with the execution and delivery of certain Outstanding Senior Certificates. The payments under these swap agreements are payable on a parity with the Installment Payments under the Installment Purchase Agreement and other Senior Obligations, as provided in the Master Agreement. See "FINANCIAL OBLIGATIONS -Existing Indebtedness" herein and APPENDIX C-"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS-Master Agreement" attached hereto. Under the Trust Agreement, the Corporation transfers, conveys and assigns to the Trustee, for the benefit of the Owners, all of the Corporation's rights, title and interest under the Installment Purchase Agreement (excepting its rights to indemnification thereunder), including the right to receive Installment Payments, and the interest thereon, from the District and the right to exercise any remedies provided therein in the event of a default by 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 the Trust Agreement. All Installment Payments, and the interest thereon, will be paid directly by the District to the Trustee, and if received by the Corporation at any time will be deposited by the Corporation with the Trustee immediately upon the receipt thereof. In order to secure the respective rights of the Owners to the payments required to be made thereto as provided under the Trust Agreement, 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 thereunder ( other than amounts on deposit in the Rebate Fund, remarketing proceeds held by the Remarketing Agent or the Trustee and proceeds of a draw on the Standby Agreement). This pledge will constitute a first lien on the amounts on deposit in such funds and accounts. 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 Agreement, solely from Net Revenues and other funds provided for in the Installment Purchase Agreement, and does not constitute a debt of the District, 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, 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. See "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 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 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 DOCSLAI :510217.5 -19- Book Page 133 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 "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, will not include payments under the IRWD Agreement); provided, however, that (i) Revenues will be increased by the amounts, if any, transferred during such period from the Rate Stabilization Account to the Revenue Account and will be decreased by the amounts, if any, transferred during such period from the Revenue Account to the Rate Stabilization Account, and (ii) Revenues will include Capital Facilities Capacity Charges collected during such period to the extent that such Capital 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. See "DISTRICT REVENUES -Additional Revenues" herein. 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 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 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 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. 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 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 Subordinate Obligations, see "FINANCIAL OBLIGATIONS -Existing Indebtedness" herein. 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, will 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. DOCSLAl:510217.5 -20- Book Page 134 Rate Stabilization Account In order to avoid fluctuations in its fees and charges of the Wastewater System, from time to time the 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 Operations Costs as and when the same will 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. Allocation of Revenues In order 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 as the District deems necessary or appropriate, be transferred from the Rate Stabilization Account and 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 payment of which is not immediately required) as and when the same will be due and payable. After having paid, or having made provisions for the payment of, Maintenance and Operations Costs, the District will 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: (1) Senior Obligation Payment Account; (2) Senior Obligation Reserve Funds; (3) Subordinate Obligation Payment Account; (4) Subordinate Obligation Reserve Funds; and (5) Rate Stabilization Account. Amounts required or permitted to be deposited or transferred as described in items 2, 3, 4 and 5 above, will not be so deposited or transferred unless the District will have determined that there will be sufficient Net Revenues available to make the required deposits or transfers on the dates on which such deposits or transfers are required to be made as described above. So long as the District has 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 which the District funds may be legally applied. For additional information, see APPENDIX C - "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS-Master Agreement." 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 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 DOCS LA 1:510217 .5 -21- Sook Page 135 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 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 the Revenues anticipated to be derived in such Fiscal Year and the expenditures anticipated to be paid or provided for therefrom in such Fiscal Year, 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. 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, (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; provided, however, that for purposes of calculating the Reserve Requirement, interest on Installment Payments evidenced by Certificates in a Variable Rate Mode will be deemed to accrue at a rate per annum of 5.00%. Amounts in the Reserve Fund may be used to pay principal and interest evidenced by the Certificates to the extent that amounts in the Principal Account and Interest Account are insufficient therefor. The Reserve Fund will be funded with a portion of the net proceeds of the Certificate in the amount of $ _____ , which amount is sufficient to satisfy the Reserve Requirement. See "SOURCES AND USES OF PROCEEDS OF THE CERTIFICATES" and APPENDIX C-"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS-Trust Agreement." 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, will be at least equal to the Reserve Requirement; provided, however, that, prior to any such substitution, the Trustee will have received written approval of such Reserve Facility from the Provider. Moneys for which a Reserve Facility has been substituted as provided herein will 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 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 will be deposited in the Reserve Fund. 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 Trustee will 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 will make a claim for payment under such Reserve Facility, in accordance with DOCSLA I :510217 .5 -22- Book Page 136 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 or Mandatory Sinking Account 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 or Mandatory Sinking Account Payment Date, the Trustee will 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 will 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 Principal Account. Moneys, if any, on deposit in the Reserve Fund will be withdrawn and applied by the Trustee for the final payment of principal and interest evidenced by the Certificates. 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 will 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 will, as and to the extent necessary, liquidate any investments purchased with such amounts. If and to the extent that more than one Resf;!rve Facility is credited to the Reserve Fund to satisfy a portion of the Reserve Requirement, drawings thereunder, and repayment of expenses with respect thereto, will be made on a pro-rata basis (calculated by reference to the policy limits available thereunder). In the event of any transfer from the Reserve Fund or the making of any claim under any Reserve Facility, the Trustee will, within five days thereafter, provide written notice to the District of the amount and the date of such transfer or claim. The Trustee will, from amounts received from the District pursuant 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 will 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 will promptly notify the District in writing if the amount on deposit is less than the Reserve Requirement. If, as a result of the payment of principal or interest evidenced by the Certificates or otherwise, the Reserve Requirement is reduced, amounts on deposit in the Reserve Fund in excess of such reduced Reserve Requirement will be transferred to the Installment Payment Fund. On any date on which Certificates are defeased in accordance with the Trust Agreement, the Trustee will, 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. Limitations on Issuance of Additional Obligations 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 the Master Agreement: DOCSLAl:510217.5 -23- Book Page 137 (1) Upon the incurrence of such Senior Obligations, no Event of Default will be continuing under the Master Agreement; and (2) Subject to the provisions of the Master Agreement, the District will have received either one of the following: DOCSLAl:510217.5 (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): (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 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 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 (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: (A) Net Revenues will amount to 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 will amount 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 or will go into effect prior to the end of such two Fiscal Year period, (y) customers expected to be added to -24- Book Page 138 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 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 prov1s1ons 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. 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 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 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 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 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. The District may at any time incur Reimbursement Obligations with respect to Senior Obligations. Subordinate Obligations. The District may at any time incur Subordinate Obligations upon 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 The District will procure and maintain or cause to be procured and maintained casualty insurance 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 advisable or necessary to protect its interests and the interests of the Corporation. See "THE DISTRICT - DOCSLAI:510217.5 -25- Book Page 139 Risk Management" and APPENDIX C -"SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - Master Agreement" herein. Allocation of Installment Payments Table 1 below sets forth the Installment Payments, together with the estimated interest thereon, assuming the only prepayments made are the mandatory prepayments described under "THE CERTIFICATES -Prepayment Provisions" herein. Also set forth are the payments due on Outstanding Senior Obligations. DOCSLAI:510217.5 -26- Book Page 140 Fiscal Year Ending June30 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 Table 1 Estimated Installment Payments of the District Installment Payments Principal Interest Outstanding Senior Obligations Pavments Principal Interest0 > Total (1) Assumes __ % for all un-hedged variable rate obligations and actual swap rates for swapped 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, 2005" herein. INITIAL STANDBY AGREEMENT The following is a summary of certain provisions of the Initial Standby Agreement. This summary does not purport to be comprehensive. The Initial Standby Agreement relates only to the Certificates and will not, under any circumstances, provide for the payment of the Purchase Price of Additional Obligations or any Outstanding Senior Obligations. Reference should be made to the Initial DOCSLAl:510217.S -27- Book Page 141 Standby Agreement for its complete terms. Capitalized te-rms used under this heading not defined elsewhere in this Official Statement will have the meanings set forth in the Initial Standby Agreement. Genera) Subject to the terms and conditions of the Initial Standby Agreement, the Provider agrees from time to time during the Commitment Period (as defined in the Initial Standby Agreement) to purchase, at the Purchase Price, with its own funds in immediately available funds, Certificates which are in the Daily Rate Mode or the Weekly Rate Mode and which are not Bank Certificates or Certificates owned by or on behalf of, or for the account of, the District or any of its Affiliates or their successors and assigns which are tendered pursuant to (i) an optional tender or (ii) a Mandatory Purchase and which the Remarketing Agent has been unable to remarket. The Initial Standby Agreement expires on the earliest of the following: (i) the later of (a) 5:00 p.m. New York time on [March_, 2013] or, if such day is not a Business Day, the Business Day next preceding such day and (b) 5:00 p.m. New York time on the last day of any extension of such date pursuant to the Initial Standby Agreement or, if such day is not a Business Day, the Business Day next preceding such day; (ii) the date on which the Provider receives notice from the Trustee that no Certificates are Outstanding; (iii) 4:00 p.m. New Yark time on the second (2nd) Business Day following the Fixed Rate Date; (iv) 4:00 p.m. New York time on the seventh (7th) Business Day following the date on which a Notice of Mandatory Tender is received by the Trustee, or if such day is not a Business Day, the next following Business Day; (v) the date on which the Provider receives notice from the Trustee that the Available Commitment has been reduced to zero pursuant to the Initial Standby Agreement; (vi) the date on which there will occur a Termination Event; and (vii) at 5:00 p.m. New York time on the second (2nd) Business Day following the date on which an Alternate Standby Agreement becomes effective in accordance with the terms of the Trust Agreement. Events of Default The occurrence of any of the following events (including the expiration of any specified time) will constitute an "Event of Default," unless waived by the Provider in writing: (i) failure of the District to pay when due (a) principal or interest on the Certificates, or (b) any other amount due under the Initial Standby Agreement or under the Trust Agreement, the Master Agreement, the Installment Purchase Agreement, the Custody Agreement, the Remarketing Agreement, the Certificates and any exhibits, instruments or agreements relating thereto (the "Related Documents"); (ii) the District will fail to observe or perform certain specified covenants or agreements contained in the Initial Standby Agreement; (iii) failure of the District to observe or perform any of the covenants, conditions or provisions of the Initial Standby Agreement (other than as specified in (i) and (ii) above) and to remedy such failure within 30 days after receipt by the District of written notice of such failure; (iv) any representation or warranty made by the District herein, in any Related Document or in any certificate, financial or other statement furnished by the District pursuant to the Initial Standby Agreement will prove to have been untrue or incomplete in any material respect when made; (v) (a) default by the District in the payment of amounts owed by it in respect of the Certificates or in respect of the principal of or interest on any of its Certificates or default by the District in the payment of any Senior Obligations in an aggregate amount in excess of $10,000,000 (or, with DOCSLA I :510217 .5 -28- Book Page 142 respect to any Senior Obligations owed to the Provider, in any amount), as and when the same will become due, or default under any mortgage, agreement or other instrument under or pursuant to which such Senior Obligations are incurred or issued, and continuance of such default beyond the period of grace, if any, allowed with respect thereto which, in any such case, would give rise to the right of acceleration of any such Certificate or Senior Obligations; or (b) default by the District in the payment of any Debt in an aggregate amount in excess of $10,000,000 (or, with respect to any Debt owned to the Provider, in any amount), as and when the same will become due, or default under any mortgage, agreement or other instrument under or pursuant to which such debt is incurred or issued, and continuance of such default beyond the period of grace, if any, allowed with respect thereto which, in any such case, would give rise to the right of acceleration of any such Debt; (vi) any event of default will have occurred and be continuing under any Related Document; (vii) entry or filing of any judgment, writ or warrant of attachment or of any similar process in an amount in excess of $10,000,000 against the District or against any of its property and which is of such consequence as will impair the ability of the District to conduct its business and failure of the District, to vacate, bond, stay or contest in good faith such judgment, writ, warrant of attachment or other process or failure to pay or satisfy such judgment within 60 days; (viii) the District will commence a voluntary case or other proceeding seeking liquidation, reorganization, dissolution, rehabilitation or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or will consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or will make a general assignment for the benefit of creditors, or will fail generally to pay its debts as they become due, or will take any corporate action to authorize any of the foregoing; (ix) appointment of a trustee in bankruptcy, custodian or receiver for the District or all or part of its property and failure to obtain discharge of such within 30 days after such appointment; (x) an involuntary case or other proceeding will be commenced against the District seeking liquidation, reorganization, dissolution, rehabilitation or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law or under any other law of the State of California now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property and such involuntary case or other proceeding will remain undismissed or unstayed for a period of 60 days; or the District or any court or governmental authority having jurisdiction over the District will have declared a moratorium or taken similar action with respect to any of the District's debts; (xi) (a) the Initial Standby Agreement or any provision thereof or (b) any provision of any agreement, instrument or document evidencing any Senior Obligations of the District or pursuant to which any such Debt has been issued or incurred which relates to or affects any security provided to the holder thereof or the payment thereof or constitutes an event of default or similar provision thereunder will at any time for any reason cease to be valid and binding on the District or will be declared to be null and void by any court or governmental authority having jurisdiction over the District in each case pursuant to a final judgment or order or the validity or enforceability of any of the foregoing will be contested by the District; (xii) the ratings, if any, assigned by any two of Fitch, Moody's and S&P (or if only one such Rating Agency is then rating the Certificates, such Rating Agency) to Senior Obligations or debts secured DOCSLA I :510217 .5 -29- Book Page 143 by Senior Obligations will, in any case, be withdrawn, suspended or reduced below "A3," "A-" and "A-," respectively, and within 60 days of the later of such reductions the District will not have effected the conversion of the Certificates to a Fixed Rate Mode and paid all amounts due under the Initial Standby Agreement; or (xiii) the ratings, if any, assigned by Fitch, Moody's and S&P to Senior Obligations or debt secured by Senior Obligations will, in any such case, be withdrawn (other than by reason of maturity, optional prepayment or defeasance of such debt) suspended, reduced below "BBB-," "Baa3" and "BBB-" respectively, or revoked. Consequences of Events of Default Upon the occurrence and continuance of any Event of Default the Provider may: (i) give written notice of such Event of Default (a "Notice of Mandatory Tender") to the Trustee, the District and the Remarketing Agent and request the Trustee to give notice of mandatory tender for purchase of Certificates in accordance with their terms and prohibit the remarketing of the Certificates, thereby causing the Provider's obligations under the Initial Standby Agreement to terminate at the close of business on the seventh Business Day thereafter; (ii) give written notice of such Event of Default to the Trustee and directing the Trustee to effect the optional prepayment of all Provider Certificates in accordance with the Trust Agreement; in the event that the Provider will have given a Notice of Mandatory Tender to the Trustee, the Provider will remain obligated to purchase Certificates that are tendered as a result thereof and any Certificates so purchased by the Provider will likewise be subject to optional prepayment in accordance with the Trust Agreement; (iii) cure any default, event of default; or event of non performance under the Initial Standby Agreement or under any of the Related Documents (in which event the District will reimburse the Provider therefore); and (iv) take any other action or remedy permitted by law to enforce the rights of the Provider under the Initial Standby Agreement and under the Certificates and any Related Document. Notwithstanding clauses (i), (ii), (iii) or (iv) as described above, the Provider's obligation to purchase Certificates under the Initial Standby Agreement will terminate immediately without any action on the part of the Provider upon the occurrence of a Termination Event (clauses (i)(a), (v)(a), (vii), (viii), (ix), (x), (xi) or (xiii) above under the caption "Events of Default.") The rights and remedies of the Provider specified in the Initial Standby Agreement are for the sole and exclusive benefit, use and protection of the Provider, and the Provider is entitled, but will have no duty or obligation to the District, the Trustee, the Certificateholders or otherwise, (i) to exercise or to refrain from exercising any right or remedy reserved to the Provider under the Initial Standby Agreement, or (ii) to cause the Trustee or any other party to exercise or refrain from exercising any right or remedy available to it under any of the Related Documents. THE PROVIDER The following information has been provided by the Provider ( at times referred to hereinafter as "DEPFA ") for use in this Official Statement. Such information is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the District, the Corporation or the Underwriter. This information has not been independently verified by the District, the Corporation or the Underwriter. No representation is made by the District, the Corporation or the Underwriter as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof. DOCSLAl:510217.5 -30- Book Page 144 DEPFA BANK pie ("DEPFA") is the parent company of the DEPFA BANK plc group of companies comprising DEPFA and its consolidated subsidiaries (the "Group"). DEPFA will act through its New York Branch, which is licensed by the Banking Department of the State of New York as an unincorporated branch of DEPFA BANK pie, Dublin. DEPFA is based in Dublin and has a banking license issued under the Irish Central Bank Act, 1971 (as amended) and is supervised by the Financial Regulator. It is registered in the Irish companies Registration Office with company number 348819 and its shares are listed on the Frankfurt Stock Exchange. DEPFA has a network of subsidiaries, branches and offices across many European countries, as well as in North America and Asia. The Group provides a broad range of products and services to public sector entities, from governmental budget financing and financing of infrastructure projects to placing of public sector assets and investment banking and other advisory services. The Group has direct client contacts with many state entities and focuses on those public sector entities involved in large volume business. The Group advises individual public sector borrowers on their international capital market transactions and preparations for the ratings process. As of December 31, 2004, DEPFA had total consolidated assets of Euro 190.4 billion, shareholders' equity of Euro 1.9 billion and consolidated net income of Euro 540 million, determined in accordance with the United States generally accepted accounting principles (US GAAP). DEPFA maintains its records and prepares its financial statements in Euro. At December 31, 2004, the exchange rate was 1.0000 Euro equals 1.3621 United States dollars. Such exchange rate fluctuates from time to time. [DEPFA is rated "Aa3" long-term and "P-1" short-term by Moody's, "AA-" long-term and "A- l+" short-term by S&P, and "AA-" long-term and "Fl+" short-term by Fitch. On April 18, 2005, Fitch confirmed DEPFA's long term and short term rating. On November 25, 2005, S&P confirmed DEPFA's long term and short term rating. On December 2, 2005, the long-term ratings of DEPFA were placed on Watch List for review for possible downgrade by Moody's, although DEPFA's short-term ratings have not been affected.] DEPP A will provide without charge a copy of its most recent publicly available annual report. Written requests should be directed to: DEPFA BANK pie, New York Branch, 623 Fifth Avenue, 22nd Floor, New York, New York 10022, Attention: General Manager. The delivery of this information shall not create any implication that the information contained or referred to herein is correct as of any time subsequent to its date. In addition, updated financial information may be found from the DEPFA website at: www.depfa.com. The information on such website is not incorporated herein by such reference or otherwise. THE DISTRICT Background 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 approximately 2.5 million people in the northern and central portion of the County by treating 243 mg/d of wastewater. The District serves approximately 77% of the County population in approximately 471 square miles, or 59% of the County. 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 DOCSLAI:510217.5 -31- Book Page 145 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 sanitation districts -Districts 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 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"), the Board of Supervisors of Orange County (the "County Board") passed Resolution No. 98-140 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 structures, reduce the size of the Board, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. The consolidation was effective on July 1, 1998. 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 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 an administrative organization composed of a Board of Directors 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. Organization and Administration The District is independent of and overlaps other formal political jurisdictions. There are many 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. Several board committees, made up of members of the Board of Directors, consider topics for action by the Board and make recommendations to the Board. The Chair and the Vice Chair of the Board are elected every year by a majority of the Board, and serve at the pleasure of the majority of the Board. The District has a general manager, general counsel, administrative and operating staff, with offices located at Reclamation Plant No. 1 in Fountain Valley. The District currently employs an DOCSLAl:510217.5 -32- Book Page 146 administrative and operating staff of over 600 under the direction of the Interim General Manager, James D. Ruth. Mr. Ruth replaces the former general manager, who served in that capacity for five years. James D. Ruth, is currently serving as the District's Interim 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 has 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 11 years. Lorenzo Tyner, is the District's Director of Finance and Treasurer. 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. David A. Ludwin, P.E., is the District's Director of Engineering, and has been employed by the District since ] 995. Robert P. Ghirelli, Ph.D., has served as Director of Technical Services for the District since ] 998. Robert J. Ooten, P.E., serves as the Director of Operations and Maintenance and has served the District for seventeen years. Patrick B. Miles is the District's Director of Information Technology and joined the District in 1998. Lisa M. Tomko is the District's Director of Human Resources and has been employed by the District since 1996. Services 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 Areas" 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 treatment plants. The District has never experienced an interruption in its services. The District's staff are responsible for operating and maintaining the District's infrastructure, although some operations are provided by external contractors. All supplies, including chemicals which are essential to the operation and maintenance of the facilities of the District, are in plentiful supply. In addition, the District has sufficient standby systems in the event of equipment failures or system outages. Service Area The map on the inside cover page 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 limits have come to overlap District boundaries. The District current! y serves an approximately 4 71 square-mile area including 23 of the County's 33 cities and unincorporated areas of the County. The District serves a population of approximately 2.5 million residents and owns sanitary sewerage facilities with a replacement value of approximately $5.38 billion. DOCSLAl:510217.S -33- Book Page 147 Table 2 below sets forth the estimated populations of cities and unincorporated areas served by the District as of June 30, 2005. Table 2 Estimated Populations of Cities and Unincorporated Areas Served by the Orange County Sanitation District As of June 30, 2005 City Population Anaheim 345,300 Brea 39,600 Buena Park 81,100 Costa Mesa 113,400 Cypress 48,900 Fountain Valley 57,350 Fullerton 135,700 Garden Grove 172,050 Huntington Beach 200,800 Irvine 180,800 La Habra 61,800 La Palma 16,100 Los Alamitos 12,000 Newport Beach 83,100 Orange 137,750 Placentia 50,300 Santa Ana 351,700 Seal Beach 25,300 Stanton 38,800 Tustin 70,900 Villa Park 6,200 Westminster 92,300 Yorba Linda 65,600 Cities Subtotal 2,386,850 Unincorporated Areas 81,000 Total 2,467,850 Source: State of Cali rornia Department of Finance, Demographic Research Unit and Orange County Sanitation District. Employees As of June 30, 2005, the District had 605 full-time equivalent ("FTE") staff positions and 644 FTE's budgeted for Fiscal Year 2005-06. Certain employees in the District are represented by recognized employee organizations, which include the following: the Orange County Employee Association ("OCEA"), the International Union of Operating Engineers -Local 501 ("Local 501 ") and the Supervisory Professional Management Team ("SPMT"). As of July 1, 2005, represented employees were as follows: 103 positions were represented by the OCEA, 198 were represented by Local 501 and 258 were represented by SPMT. Agreements with each of these bargaining units are effective through June 30, 2007. The OCEA has represented various bargaining units since 1979. Local 501 has represented the operations and maintenance bargaining unit since October 1985. SPMT has represented the professional and supervisory bargaining unit since 1991. DOCSLAl:510217.5 -34- Book Page 148 For a description of the Orange County Employee's Retirement System, in which the District 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 Ended June 30, 2005, set forth in Appendix A. The District has no significant or unusual liabilities and costs associated with other employee benefits, such as vacation, sick leave and other post-employment benefit liabilities. Retirement Plan The District participates in the Orange County Employee's Retirement System (OCERS), a 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 Employees Retirement Law of 1937, and provides members with retirement, death, disability, and cost- of-living benefits. All District full-time employees 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 193 7, the total years of service under OCERS, and the employee's classification as a Tier I or Tier II member. As of July 1, 2005, the formula to calculate 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 three for Tier II employees. Benefits fully vest on reaching five years of service. OCERS also provides death and disability benefits. 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 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. For the fiscal years ended June 30, 2005, 2004, and 2003, the required contribution equaled the contribution actually made. For the fiscal years ended June 30, 2005, 2004, and 2003, the District's required contribution as a percent of covered payroll was 12.37%, 9.15% and 5.50% respectively, which amounts included amortization of Unfunded Accrued Actuarial Liability ("UAAL"). For the fiscal year ended June 30, 2005, total payroll costs of employees covered by OCERS was $44,669,861. Currently, OCERS has an aggregate UAAL ratio of 69.15%, for a total UAAL of $2.34 billion. For more information regarding OCERS and the District's retirement plan as of June 30, 2005, see Note 7 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30, 2005 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://www.ocers.org. The information on such website is not incorporated herein by such reference or otherwise. Post-Employment Benefits On June 21, 2004, the Governmental Accounting Standards Board ("GASB") approved Statement No. 45 (GASB 45), accounting standards for other (than pensions) postemployment benefits ("OPEB"). Accounting for these benefits -primarily postretirement medical -can have significant impacts on state and local government (including the District) financial statements. GASB 45 effective dates are phased DOCSLAl:510217.5 -35- Book Page 149 in, similar to GASB's Statement No. 34 which was implemented in recent years. The first effective Fiscal Year for the District is Fiscal Year 2007-08. District Staff is of the opinion that potential OPEB liability will not have a material impact on the District's operational results. Risk Management As of July 1, 2005, the District has in force basic all risk property and casualty insurance, 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 $50 million. The self-insured portion for property damage covering 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 perils of earthquakes. See "DISTRICT REVENUES -Reserves." The District also maintains outside comprehensive boiler and machinery insurance, including business interruption insurance, with a $100 million per occurrence combined limit with deductibles ranging from $25,000 to $350,000. The District is substantially self-insured for general liability coverage with a $250,000 self-insured deductible, but has excess general liability coverage to $25 million per occurrence. 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, 2005 that would materially affect the financial position of The District. For more information regarding the District's insurance coverage as of June 30, 2005, see Note 1 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30, 2005 set forth in Appendix A. Existing Facilities The District's Wastewater System presently consists of two wastewater treatment plants, an influent metering and diversion structure, 18 pump stations, various interplant pipelines and connections, and the ocean outfall facilities. The District's Wastewater System includes approximately 428 miles of sewers within 12 trunk sewer systems, 152 miles of local sewers located within Revenue Area No. 7, two treatment plants, two discharge outfa11s and two emergency weir outlets. The existing treatment plants have a rated primary treatment capacity of 306 million ga11ons per day, including standby capacity. Treatment Plant No. 1 ("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 15 million gallons per day ("mg/d") of secondary treated effluent is conveyed to an Orange County Water District (the "OCWD") plant for tertiary treatment prior to ground water recharge. 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. The District employs several phases in the treatment of wastewater. The first phase, preliminary treatment, removes debris such as eggshells, sand and biodegradable items. See, also "Preferred Level of Treatment" and "Biosolids Management" below. In the next phase, primary treatment, wastewater is DOCSLAl :510217.5 -36- Book Page 150 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 half 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 half is sent to secondary treatment for further processing. During secondary treatment, the wastewater is placed in aeration basins to which naturally occurring bacteria are added 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 then pumped through the ocean outfall pipe that extends five miles offshore. Table 3 below sets forth the treatment plants' current and future treatment capacities. Plant No. 1 Plant No. 2 Aggregate Treatment Plant Facilities Table 3 Wastewater System Treatment Capacities (MG/D) 2004-05 Existing Primary Existing Secondary Planned Actual Flows Treatment Capacity Treatment Capacity Total Capacity0l 88 155 243 138 168 306 75 90 165 170 150 320 (1) 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. The District 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. I. The treated wastewater from Plant No. 1 flows by gravity to the outfall system through interconnecting lines. The combined Plant No. 1 and Plant No. 2 effluent is then pumped through a 120- inch diameter ocean outfall which is 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. The 120-inch outfall has a capacity of 480 million gallons per day at high tide. A smaller 78-inch diameter outfall that terminates at a shallower depth is still maintained, although it is reserved for use in emergencies. This smaller outfall is estimated to have a capacity of approximately 230 million gallons a day. There is an interplant gas pipeline between Plant No. 1 and Plant No. 2 which 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 results in efficient gas utilization. Permits, Licenses and Other Regulations 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 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 DOCSLAI :510217.5 -37- Book Page 151 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. The District has discharged treated wastewater into the Pacific Ocean under a permit issued by 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, expired on June 8, 2003. In July 2002, the Board of Directors approved a change from the existing level of treatment, a blend of 50 percent advanced primary and 50 percent 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 treat 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 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 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 will take approximately 7 years to complete. But ocean discharge permits are issued for five (5) years, and the EPA has no authority to waive the discharge limits requirements or grant a longer permit (except per Sec. 30l(h)). The alternative was to voluntarily seek a consent decree concurrently with the issuance of the new ocean discharge permit. This negotiated consent decree (the "Consent Decree") approves the schedule and decrees that no penalties will be imposed for discharges that exceed the secondary treatment limits during the period of construction. The Consent Decree was signed by the District, EPA, and the RWQCB and filed with the U.S. District Court on November 15, 2004. The South Coast Air Quality Management District ("AQMD") is the regional governmental 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 specific 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 addition, the District has implemented an air quality risk reduction program which includes a twenty-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. Capital Improvement Program The Master Plan. The District's 1989 master plan consisted of a 30-year plan of action for managing wastewater activities to the year 2020, entitled "2020 Vision, Action Plan for Wastewater Management and Environmental Protection 1990-2020" (the "Master Plan"). The Master Plan integrated DOCSLA I :510217 .5 -38- Book Page 152 research facilities planning, environmental analysis, toxic control, water conservation and reclamation, 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 the creation of a uniform land use classification system and a map of the District's service area. Land use designations and unit flow factors were used to project wastewater flows in the District's trunk sewers for then 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 following twenty years, including projections through the assumed "build-out" of the District's service 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 "size 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 conservation and reclamation programs were reevaluated. Interim Strategic Plan. In June 2002, a new, or Interim Strategic Plan Update (the "Interim Strategic Plan" herein) 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-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 Water Act secondary treatment standards. The District currently estimates that it will take 7 years and additional capital improvement costs of $679 million to reach secondary treatment discharge standards. Secondary treatment discharge standards are scheduled to be reached in 2013. In the interim, the District will DOCSLAl:510217.S -39- Book Page 153 operate the plants to maximize available secondary treatment and to reduce effluent biochemical oxygen demand and suspended solid discharges below currently allowed limits. The current 50 percent secondary portion will 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 2020. Average flow rates at both treatment pJants were projected to increase to 321 million gallons a day by 2020 (194 million gallons a day of treatment at Plant No. 1 and 127 million gallons a day at Plant No. 2), up 34% from the Fiscal Year 2003-04 flow. In combination with the Interim Strategic Plan, the District developed its current Capital Improvement Program ("CIP"). The District expects to meet future demands on the Wastewater System through the CIP. This program has been developed to atisfy anticipated regulatory requirements increased population, additionaJ treatment requirements, conservation, energy and other resource savings considerations, odor control improvements, and air quality protection needs. Over the next 18 years, the District's CIP will accomplish: • Major rehabilitation of the existing headworks, primary treatment, secondary treatment, outfall pumping, and solids handling facilities at both treatment plants. • Replace and rehabilitate 17 of the District's outlying pumping stations, and 44 trunk sewer improvement projects. • Fund cooperative projects to help cities upgrade their sewer systems. • Disinfect the District's ocean discharge to reduce bacterial levels below State bathing standards. • Reclaim 70 millions of gallons per day of the District's effluent, or nearly one-third of the total daily flow (Groundwater Replenishment System). • Achieve full secondary treatment standards. CIP Valida1io11 Study. In preparation of each year's Budget, the District conducts an Annual CIP Validation Study to ensure that the scopes of the projects were necessary, and that the cost estimates were accurate. As a result of the completion of the CIP Validation Study and the Secondary Treatment Peer Review in the spring of 2005, a revised CIP was developed to meet secondary treatment standards as quickly as possible while providing for increased flows and rehabilitation and refurbishment of existing facilities. As identified within the Interim Strategic Plan, and verified through the CIP Validation Study and Secondary Treatment Review, $679 million of additional capital improvements over the next 7 years are needed to reach full secondary standards. The CIP Validation Study resulted in a revised CIP consisting of 115 large capital projects managed by the Engineering Department over a 15 year period at a total cost of $2.57 billion. The CIP cash flows over the next ten years is projected to be $2.4 billion; an annual average of nearly $240 million. Implementation of full secondary treatment standards is scheduled to be completed on or before December 31, 2012. DOCSLAl:510217.S -40- Book Page 154 Of the Fiscal Year 2005-06 proposed CIP cash flow budget of $277 .1 million, the largest cash outlay within the plant facilities is $84.8 million for the Groundwater Replenishment System (GWRS), with a total project cost of $251. 7 million. The effluent pumping station annex is expected to require $21.5 million in Fiscal Year 2005-06, with a total project cost of $63.7 million. Another $14.8 million is being proposed for the activated sludge plant rehabilitation at Plant No. 1, with a total project cost of $50.3 million. Two of the larger Collection System related projects include the $53.6 million Bushard Trunk Sewer Rehabilitation and the $17 .5 million Gisler-Redhill North Trunk Improvements, with current year proposed cash outflows of $7.8 million and $9.3 million, respectively. These five projects represent 48.8% of the total Fiscal Year 2005-06 proposed CIP cash flow budget of $277 .1 million. Table 4 Estimated Capital Costs through 2020 (ll Project Collection System Capacity Collection System Repair, Rehabilitation, Replacement Treatment Plant Capacity Additional Secondary Treatment Improved Treatment GWRS Treatment Plant Repair, Rehabilitation, Replacement Support Facilities Total Validated Capital Improvement Program Cost $ 301,853,400 423,940,600 77,618,250 578,067,750 141,878,100 156,841,000 806,485,800 79,601,700 $2,566,286,600 (1) All costs are estimated as of 2005 and are derived from the Validated Capital Improvement Program. Source: Orange County Sanitation District. Groundwater Replenishment System The District has taken a multi-jurisdictional approach to planning for capital facilities because many of the methods for reducing or managing flows involve other jurisdictions. One such project is the GWRS. In March 2001, the District entered into an agreement with the OCWD to design and construct Phase 1 of the Groundwater Replenishment System ("GWRS"). This cost of this project is to be paid equally (50 percent shares) by each agency. The GWRS is a 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 GWRS is planned for three phases, Phase 1 will produce approximately 72,000 acre-feet per year of recycled water by June 2007, Phase 2 will increase the total capacity to 112,000 acre- feet by the year 2010, and Phase 3 will increase the total capacity to 145,600 acre-feet by the year 2020. Following the completion of Phase 1, the extent of the District's commitment to date, the GWRS will have the capacity to divert up to 100 million gallons per day of flow from the District's ocean discharge. As of June 30, 2005, the total estimated cost of GWRS Phase 1 was $503.32 million. Of this amount, up to $92.50 million may be reimbursed through grants from the U.S. Environmental Protection Agency, the U.S. Bureau of Reclamation, the State Water Resources Control Board, and others. The District's estimated gross and net share is $251.66 million and $205.41 million, respectively. Costs incurred by the District through June 30, 2005 total $67 .11 million. DOCSLAl:510217.5 -41- Book Page 155 Pref erred Level of Treatment In July 2002, the Board of Directors approved a change from the existing level of treatment, a blend of 50 percent advanced primary and 50 percent 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, (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. 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 then apply sodium bisulfate to remove any remaining chlorine prior to releasing the treated wastewater to the ocean. In order to protect the animal life living in the ocean, the District continues to take measures to limit the chlorine residual to a very low level-essentially non-detectable. This mode of disinfection is anticipated to occur for the short- term, possibly three years, while the District studies, designs and constructs permanent facilities, and considers alternate disinfection technologies. Beginning in Fiscal Year 2002-03, the addition of disinfection treatment required an annual outlay of $7 million in additional chemicals within the joint 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 Environmental Protection Agency ("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 DISTRICT -Permits, Licenses and Other Regulations." The District estimates that it will take approximately 7 years and require additional capital improvement costs of approximately $679 to add additional secondary treatment capacity to the Wastewater System. In addition, based upon the District's most recent projections, upon completion of facilities necessary to meet secondary treatment standards, operating costs will increase by approximately $7 .2 million annually. In the interim, the District will operate the plants to maximize available secondary treatment and to reduce effluent biochemical oxygen demand and suspend solid discharges below those currently allowed limits. Each year, the current 50 percent secondary portion will increase incrementally as operations change and new facilities are constructed and placed in service over the next ten years. Biosolids Management The District produces approximately 650 tons of digested and dewatered (Class B) biosolids per day. By 2020, the District's biosolids production is projected to increase by 30 percent, to 310,000 tons annually. The District relies on land application of its Class A chemically-stabilized biosolids in both Kem County and on its ranch in Kings County, California; on land application of Class B biosolids in Arizona; composting Class A biosolids in Riverside County, California and in Arizona, and landfiling Class B biosolids at two landfills in Yuma County, Arizona. Counties throughout California and Arizona have developed, or are in the process of developing, ordinances that severely restrict or ban the land application of Class B biosolids. Kem and Kings Counties banned land application of Class B biosolids. At the time of this writing, the "Florez" bill (Senate Bill 29) which gives the Kem County Board of Supervisors the discretion to ban importation of all biosolids was approved the California Senate 26-9, and was forwarded onto the Assembly. It has become clear that certain land application options currently available to the District are anticipated to be eliminated due to these developments. DOCSLAI :S 10217 .5 -42- Book Page 156 The dynamic regulatory issues, land application ordinances and bans, and public perception challenges have prompted the District to develop a Long-Range Biosolids Management Plan. This plan was approved by the Board in December 2003. The goal is 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 Plan recommendations included new in-plant technologies to reduce the volume of biosolids, explore the production of Class A biosolids products, and move into the energy and fuel production and compost markets. In April 2005, the Board approved a contract with EnerTech Environmental, Inc. to convert the District's biosolids to a renewable fuel at EnerTech's proposed Regional Biosolids Processing Facility in Rialto, California. The EnerTech solution is a relatively new, patented heat treatment process. The process 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 area cement kilns and other fuel users. Residual ash from the fuel combustion becomes part of the cement product, resulting in no residual waste product liability. EnerTech proposes to finance, design, construct, and operate this 625 ton per day facility. Several local governmental agencies have previously committed approximately 275 tons per day of biosolids to this project and this project has now become economically viable with the commitment of 200 tons of biosolids per day from the District. Also in April 2005, the Board approved the amendment of the existing memorandum of understanding ("MOU") with South Orange County Wastewater Authority ("SOCWA") for preliminary facility design, permitting, and community relations activities for the development of a composting facility at the Prima Deshecha Landfill in South Orange County. For the past two years under the previous existing MOU, SOCW A and the District have been working with the Orange County Integrated Waste Management Department's Biosolids Committee to site an enclosed biosolids and green waste composting facility at the Prima Deshecha Landfill in South Orange County. The proposed "South Orange County Composting Facility" would take in approximately 100 to 110 tons of Class B biosolids daily from the District and SOCW A and, combined with like amounts of wood chips and yard trimmings, produce approximately 65 to 75 tons of compost per day. The MOU reflects a 50-50 participation commitment and ownership in the facility between SOCW A and the District, and consent to initiate and fund the tasks for the initial planning, permitting and concept design of the project. The cost of the beneficially reuse biosolids are expected to increase by about $3 million per year starting in Fiscal year 2006-07. The Fiscal year 2005-06 budget for biosolids management is $10.0 million. Urban Runoff For a two-month period during the summer of 1999, eight miles of beaches in Huntington Beach were closed by the OCHCA due to excessive levels of bacteria in the water. A three-month interagency source investigation did not identify a definitive source of the contamination, but determined that the District was not at fault. Although the initial "signature" of the pollution strongly suggested sewage contamination, the investigation concluded that none of the District's facilities caused the excessive bacteria levels and that there was no adverse impact on the capacity of the Wastewater System. In June 2002, the District's charter was amended by an act of the State Legislature to include permissive language authorizing the diversion and management of dry weather urban runoff flows. This charter change will allow the District, in its discretion, 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. DOCSLAl:510217.5 -43- Book Page 157 As noted above, in July 2002, the Board of Directors approved the implementation of full secondary standards. The District is currently discharging treated wastewater into the Pacific Ocean under a permit issued by the EPA and the RWQCB on May 6, 1998 and currently under an administrative grant of permission until the EPA/RWQCB issue a new permit to replace it. 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 the EPA and the RWQCB. See "THE DISTRICT-Permits, Licenses and Other Regulations." Integrated Emergency Response Program Growing awareness of the threat to public utilities from natural disasters such as earthquakes, floods and other perils has made preparedness for these and other events a high priority for the planners, engineers, and managers of the District. In recognition of the potential damage which could occur in the wake of a major earthquake, 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 preparing for, and responding to, emergencies. The District also has analyzed disaster preparedness issues and policies within the Strategic Plan. Earthquakes are considered to be the most potentially devastating natural disaster events which confront the District. The disaster preparedness plan included in the Strategic Plan reviews 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 on the 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 event, would probably result in less damage in the District's service area due to the distance of the fault from most of the service area. However, damage from such a major earthquake on the San Andreas fault would be extensive. Also, the plan indicates that an M 7.0 earthquake on the Newport-Inglewood fault within five miles of the District's sewerage facilities could cause major destruction to those facilities. The disaster preparedness plan in the Strategic Plan indicates 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 Strategic Plan analyzes the vulnerability of the sanitary sewerage facilities and operations of the District and plans a risk reduction program wherein the vulnerability of many of the District's sanitary sewerage facilities to an earthquake can be reduced by recommended retrofit construction measures. The Strategic Plan also recommends that designs of existing major structures which were constructed prior to development of current seismic design standards be reviewed and the structures strengthened, if necessary. Pursuant to the Strategic Plan, all recent and future projects have been, and will be, designed to the same high earthquake construction code standards as set for other essential services, such as hospitals and fire stations. 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 3-foot to 6-foot high walls, built to federal standards. 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 consider any of such events to be a significant threat to the Wastewater System. DOCSLA I :SI 0217 .S -44- Book Page 158 The Strategic Plan also makes recommendations regarding fire protection of the Wastewater System and most of the structures at Plant No. 1 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 Strategic Plan and the IERP can be reviewed at the District's office. DISTRICT REVENUES Sewer Service Charges General. The District has the power to establish fees and charges for services of the Wastewater System. Such fees 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 the District's rate structure to determine whether its then current sewer service user fees (now known as "Sewer Service Charges") were equitable among residences and industry. This review resulted in a proposal to expand the number of non-residential user categories from one to twenty-three 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 single-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. In May 2002, the Board adopted District Ordinance No. OCSD 18 (the "2002 Ordinance") which was effective on July 1, 2002. The 2002 Ordinance included a rate increase of $7.50 per year, or 9.4%, for all ratepayers to $87 .50 per year. On July 2, 2003, the Board 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 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. In May 2005, the Board adopted Ordinance No. OCSD-26 increasing the Fiscal Year 2005-06 single family residential rate 31 %, from $115.00 to $151.00 for such year. Annual increases are ordered to be subject to reaffirmation by the affirmative vote of 2/3 of the members of the Board prior to implementation of any such change for each fiscal year. The resulting increases in sewer rates for each fiscal year are well below the average annual sewer rate of $244.00 per year currently being charged according to a survey of 217 agencies conducted by the Association of Metropolitan Sewage Agencies. This increase was necessary in order to meet the District's cash flow needs due to the addition of disinfection treatment and other operating requirements. As discussed under the caption "THE DISTRICT -Capital Improvement Program," the CIP Validation Study in the Spring of 2005 developed a capital improvement program to meet secondary treatment standards as quickly as possible while providing for increased flows and rehabilitation and refurbishment of existing facilities. Over the next ten years, the CIP cash flow needs will be $2.4 billion; an annual average of nearly $240 million. 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 payments from the Irvine Ranch Water District DOCSLAl:510217.5 -45- Book Page 159 (the "IRWD") which directly collects fees from customers through a monthly billing procedure m Revenue Area No. 14. The District has covenanted in the Master Agreement to fix, prescribe and collect fees and charges to satisfy certain coverage requirements as further described under "SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES -Rate Covenant" herein. Residential Sewer Service Charges. 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. In accordance with the 2002 Ordinance and the noticed public hearing held at that time which 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 adopted Ordinance No. OCSD-26 increasing the Fiscal Year 2005-06 single family residential rate 31 %, from $115.00 to $151.00 for such year for all ratepayers, except those located in Revenue Area 14. The average total of fees and charges for Revenue Area No. 14 are $70.80 per year per single-family residential unit and are levied and collected directly by the IRWD on a monthly basis. The IRWD subsequently pays fees to the District on a quarterly basis pursuant to the IRWD Agreement. This increase was necessary in order to meet the District's cash flow needs. Table 5 below sets forth a seven- year comparison of the Sewer Service Charge rate for single-family residences. Table 5 Annual Sewer Service Charges Single Family Residence Rate Five Year Rate Schedule Fiscal Years 1999-00 through 2005-06 Fiscal Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Sewer Service Charge $ 81.02 78.00 80.00 87.50 100.00 115.00 151.00 Source: Orange County Sanitation District. Table 6 below sets forth Fiscal Year 2005-06 total average yearly Sewer Service Charge for single-family residences within the District, together with the tax comparable total average annual Sewer Service Charge, within the jurisdictions of certain other cities and districts within the State. DOCSLAJ :510217.5 -46- Book Page 160 Table 6 Comparison of Total Sewer Service Charges for Single-Family Residences<3) For The Year Ended June 30, 2005 Annual Average Dry Sewer Weather Flow Service Treatment Entity (mg/d) Charge Level 0> San Diego Los Angeles (City) East Bay MUD Sacramento Orange County Sanitation DistrictC2> Los Angeles (County) (1) Treatment Level Categories: "l" -Primary treatment. 168 $393 432 256 80 198 155 185 250 151 522 140 "2" -Advanced primary or primary with some secondary treatment. "3" -Secondary treatment. "4" -Advanced secondary or secondary with some tertiary treatment. "5" -Tertiary treatment. 2 4 4 3 2 4 Collection Responsibility <4> Yes Yes No No No No (2) Orange County Sanitation District Sewer Services Charges adjusted to Fiscal Year 2005-06. Property Tax Income <4> No No Yes Yes Yes Yes (3) Source: 2004-05 Wastewater User Charge Survey Report by the California State Water Resources Control Board. (4) Source: 2002 Survey by the Association of Metropolitan Sewage Agencies. 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 2005-06 were approximately $11.0 million. Industrial Sewer Service Charges are applied to both the operating and capital funds. Additional Revenues The District has several sources of additional revenue, including property taxes, Capital Facilities Capacity Charges, capacity rights, permit and inspection fees and interest earnings. 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. County property tax revenue allocated to the District have risen over the past five years, except for a minor decline in Fiscal Year 2002-03. Property tax revenues were $35.6 million in Fiscal Year 1999-00, $38.4 million in Fiscal Year 2000-01, $41.1 million in Fiscal Year 2001-02, $44.6 million in Fiscal Year 2002-03, $46.9 million in Fiscal Year 2003-04 and $35.7 million in Fiscal Year 2004-05. 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 current fiscal crisis and the implementation of the first year of a two-year 40% secured property tax shift away from independent special districts. This 40% reduction for Fiscal Year 2004-05 was somewhat offset by the continuing upturn in the real estate market. Total assessed valuations increased over the DOCSLAl:510217.5 -47- Book Page 161 prior year by 8.5%, and the full value of these increases was received on all non-secured property tax distributions. The District expects property tax revenues of $36.0 million in Fiscal Year 2005-06. Current projections indicate that property tax revenues received by the District are expected to increase by approximately 54% in fiscal year 2006-07 and then 5% each year thereafter. The apportionment of the ad valorem tax is pursuant to a revenue program adopted by the District in April 1979 to comply with the EPA, the RWQCB, legal and contractual requirements and Board policy. 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 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 $2,890 per residential unit (three-bedroom)~ however, under the current industrial use ordinance, additional Capital Facilities Capacity Charges can be imposed on industrial users who place larger than average demand on the Wastewater System. Member cities and sanitary districts collect Capital Facilities Capacity Charges 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. On December 15, 1999, the Board approved District Ordinance No. OCSD 99-11 (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 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. Pursuant to an agreement with the IRWD, the IRWD is not required to pay Capital Facilities Capacity Charges and in exchange, the IRWD provides funding to the District for the construction costs of certain wastewater collection, transmission, treatment and disposal facilities to be used by the IRWD and is obligated to make certain payments to the District for certain services arising from the Wastewater System (including any standby or availability charges). Sale of Capacity. The District has entered into agreements with the Santa Ana Watershed Project Authority ("SA WPA") 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, SA WPA has purchased and paid for 30 million gallons a day of capacity rights in the District's Santa Ana River Interceptor and 13 million gallons a day 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 order to remove dairy farm wastes and accommodate future urban development. Salts in the washwater generated from the cleaning of cows 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 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 SARI line. See "THE DISTRICT -Capital Improvement Program" herein. DOCSLAI :510217.5 -48- Book Page 162 Wastewater Treatment History The average yearly influent flow to the District has remained relatively stable for the preceding five years. The wastewater flow for Fiscal Year 2000-01 was 246 mg/d and for Fiscal Year 2004-05 was 243 mg/d. The highest flow rate experienced was during El Nino 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 2000-01 through 2004-05 and the projected number of customers served by the District for the Fiscal Years 2005-06 through 2009-10, identified in Equivalent Dwelling Units ("EDUs"), are set forth in Table 7 below. Table 7 Historical and Projected Equivalent Dwelling Units Fiscal Years 2000-01 through 2009-10 Historical Fiscal Year EDUs 2000-01 883,603 2001-02 898,031 2002-03 897,757 2003-04 884,169 2004-05 893,501 Projected Fiscal Year EDUs<ll 2005-06 910,469 2006-07 914,111 2007-08 917,767 2008-09 921,438 2009-10 925,124 (1) EDU growth during the projection period is estimated at approximately 0.4% per annum. Source: Orange County Sanitation District. Table 8 below shows the number of residential and commercial customers and industrial customers and the approximate percentages of Sewer Service Charge revenues derived from the combined residential and commercial use and industrial use for the last seven fiscal years. DOCSLAl:510217.5 -49- Book Page 163 Table 8 Number of Accounts and Revenues by Customer Class for the Fiscal Years Ending June 30 Residential/Commercial Industrial Number of Percentage Equivalent of Sewer Percentage of Single-Service Number of Sewer Service Family Total Charge Customer Charge Total Dwellings Revenue Revenues Accounts Revenues Revenue 1998-99 882,103 $ 61.6 89% 678(() 11% 7.8 1999-00 919,072 72.0 89 649 11 9.1 2000-01 883,603 64.5 91 596 9 6.6 2001-02 898,031 70.3 90 573 10 7.5 2002-03 897,757 77.0 92 603 8 6.3 2003-04 860,156 86.0 92 530 8 7.5 2004-05 860,634 99.0 90 568 10 10.5 (1) Pursuant to RAC recommendations, certain industrial users were reassigned to the general user fee program beginning in Fiscal Year 1998-99. Source: Orange County Sanitation District. The ten largest industrial customers of the District for the Fiscal Year ended June 30, 2005 are shown in Table 9 below. These industrial customers paid a total of $5,328,203 for services of the District, or approximately 49% of the District's $10,941,000 total revenues received from industrial customers, and approximately 4.41 % of the District's total Sewer Service Charge revenues of $120,917,000. Table 9 Largest Customers of the District for the Fiscal Year Ended June 30, 2005 User MPC Foods. Inc. Alstyle Apparel -Activewear Mfg. Kimberly-Clark Worldwide, Inc. Stremicks Heritage Foods, LLC Disneyland Resort-Disneyland Park House Foods America Corp. Disneyland Resort-DCA Van Law Food Products, Inc. Seven-Up Bottling Company Expo Dyeing & Finishing, Inc. TOTAL Source: Orange County Sanitation District. DOCSLAl:510217.5 Sewer Service Charges $ 881,089 793,035 727,318 591,308 569,661 540,548 411,368 359,771 235,146 218,959 $5,328,203 -50- Sook Page 164 Percentage of Total Sewer Service Charge Revenues 0.73% 0.66 0.60 0.49 0.47 0.45 0.34 0.30 0.19 0.18 4.41% Assessed Valuation The assessed valuation of property in the County is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Due to changes in assessment required under State Constitution Article XIIIA, the County assessment roll no longer purports to be proportional to market value. See "LIMITATIONS ON TAXES AND REVENUES" herein. Generally, property can be reappraised to market value only upon a change in ownership or completion of new construction. The assessed value of property that has not incurred a change of ownership or new construction must be adjusted annually to reflect inflation at a rate not to exceed 2% per year based on the State consumer price index. In the event of declining property value caused by substantial damage, destruction, economic or other factors, the assessed value must be reduced temporarily to reflect market value. For the definition of full cash value and more information on property tax limitations and adjustments, see "LIMITATIONS ON TAXES AND REVENUES" herein. The County Assessor determines and enrolls a value for each parcel of taxable real property in the County every year. The value review may result in a reduction in value. Taxpayers in the County also may appeal the determination of the County Assessor with respect to the assessed value of their property. Table 10 below shows a seven-year history of assessed valuations in the District since Fiscal Year 1998-99. Over the years shown, assessed valuations in the District have increased at an average rate of approximately 8% per fiscal year. Table 10 Assessed Valuations of Property in the District Fiscal Years 1998-99 through 2004-05 (Secured Roll) Fiscal Year 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 ($ Billions) Value 134.7 145.6 159.3 173.4 188.9 201.4 219.2 % Change 4.96 8.13 9.40 8.85 8.91 6.66 8.85 Source: County of Orange Auditor-Controller. 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 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 100% 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 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 DOCSLAl:510217.5 -51- Book Page 165 remains in effect, the participating entities, such as the District, no longer experience delinquent taxes. 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 years, the County has experienced delinquencies of Sewer Service Charges in the District of approximately 2%. Unpaid taxes become delinquent after December 10 and April 10, respectively, and a ten percent 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 penalty of one and one-half percent per month to the time of redemption. If taxes are unpaid for a period of five years or more, the tax-defaulted property is subject to sale by the County Treasurer-Tax Collector. Property taxes on the unsecured roll are due as of the January 1 lien date and become delinquent, if unpaid, on August 31. A ten percent 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 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 Clerk 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 lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the taxpayer. Table 11 below shows a seven-year history of the District's ad valorem total property tax and Sewer Service Charge levies and collections and, notwithstanding the Teeter Plan described above which provides for the County's financing of annual delinquencies, information with respect to outstanding delinquencies in prior years collected in current fiscal years and the percent of delinquencies to the total tax and Sewer Service Charge levies. Table 11 Total Property Tax and Sewer Service Charge Levies in the District for Fiscal Years 1998-99 through 2004-05 Fiscal Year 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Total Tax and Sewer Service Charge Levy $ 98,267,000 107,794,000 105,646,000 112,087,000 122,210,000 134,132,000 152,745,000 Source: Orange County Auditor-Controller's Office. Budgetary Process The District's operating fund 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 DOCSLAl :510217.5 -52- Book Page 166 eight allocations, with the largest receipts in December and April. The District operates on a Fiscal Year beginning each July 1. The operating fund budgets include funds to cover the dry period of each tax year, i.e., 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 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. The District's annual budget preparation process begins in January of each year and concludes in 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. 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 adjustment is a transfer which does not change the total appropriated amount and does not require Board 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 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 In 1997, the District revised its reserve policy and established eight separate categories for its reserve funds. The following table sets forth actual reserves at June 30, 2004 and 2005, and projected reserves at June 30, 2006, for each fund. Increases to the Capital Improvement Program Reserve and Debt Service Required Reserves are attributable principally to the funding of projected CIP cash flow and the Reserve Fund for the Certificates. DOCSLA 1:510217 .5 -53- Book Page 167 Table 12 Reserves at June 30, 2004, 2005 and 2006 Cash Flow Requirements Reserve Operating Expenses Certificate of Participation Payments Operating Contingencies Reserve Capital Improvement Program Reserve Catastrophe and Self Insurance Capital Replacement and Refurbishment Debt Service Required Reserves Rate Stabilization Reserve Total * Projected. Source: Orange County Sanitation District. June 30, 2004 $71 340 57 50 88 $606 June 30, 2005 $108 191 57 51 65 $472 June 30, 2006• $63 62 13 162 57 52 81 $490 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 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 service expenses due in the subsequent fiscal year. The Operating Contingency Reserve was established 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 ten percent of the District's annual operating budget. The Capital Improvement Reserve was established 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. 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 $57 million. The Short-Term Capital Fund Reserve was created for specific short-term capital improvements such as the GWRS. The Capital Replacement/Renewal Reserve was established to provide thirty percent of the funding to replace or refurbish the current collection, treatment and disposal facilities. The current replacement value of these facilities is estimated to be approximately $5 .38 billion. The initial reserve level for this fund was established at $50 million and is augmented by interest earnings and a portion of the annual Sewer Service Charges. Debt Service Reserves are controlled by a trustee pursuant to the provisions of certificates of participation issues and is not available for the general needs of the District. The Rate Stabilization Reserve accumulates all available funds which exceed the targets for all other reserves. The Rate Stabilization Reserve is a separate fund from the Rate Stabilization Account established under the Trust Agreement. These funds are applied to future years' needs and must be maintained at specified levels. There is currently no established target for this reserve and, because the reserves of all other funds have not been exceeded, the reserve level for this reserve fund is zero for Fiscal Years 2003-04 through 2005-06. See APPENDIX A -"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2005" herein. DOCSLA I :510217 .5 -54- Book Page 168 Summary of Operating Data Set forth in Table 13 below is a summary of historic operating results for the District for Fiscal Years 2000-01 through 2004-05. The information presented in the summary should be read in conjunction with the financial statements and notes. See APPENDIX A -"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2005" herein. Table 13 Summary of Historical District Revenues and Expenses and Other Financial Information For Fiscal Years 2000-01 Through 2004-05 ($ Millions) 2000-01 2001-02 2002-03 Revenues: Sewer Service Charges0 l $ 64.5 $ 70.3 $ 77.0 Industrial Sewer Service 6.6 7.5 6.3 Charges Revenue Area No. 14 Fees 2.0 2.2 3.2 Ad Valorem Taxes 38.4 41.1 44.6 Interest Earnings 39.4 27.8 25.9 Capital Facilities Capacity Charges<2l 7.3 10.6 10.1 Other Revenues 2.5 2.5 3.4 Total Revenues $160.7 $162.0 $170.5 Operations and Maintenance Expenses 62.3 68.6 79.7 Net Revenuei3l $ 98.4 $ 93.4 $ 90.8 Debt Service $ 30.5 $ 23.4 $ 22.4 CIP Outlay $ 59.8 $ 83.9 $112.9 Ending Reserves<4l $440.5 $429.7 $394.0 Coverage Ratios<3J 3.23x 3.99x 4.05x (1) Net of rebates, if any, to commercial users. (2) Prior to January 1, 2000, these charges were referred to as connection fees. (3) Calculated in accordance with the Trust Agreement. (4) Excludes any Debt Service Reserve Funds. Source: Orange County Sanitation District. Projected Operating Data 2003-04 $ 86.0 7.5 5.8 46.9 6.8 9.0 4.0 $166.0 95.4 $ 70.6 $ 34.l $149.5 $518.0 2.07x 2004-05 $ 99.0 10.5 6.9 35.7 15.1 9.8 6.1 $183.2 101.8 $ 81.4 $ 37.9 $187.9 $407.0 2.15x Set forth in Table 14 below are projected operating results for the District for Fiscal Years 2005- 06 through 2009-10. These projections assume the number of projects and scheduled build out set forth in the CIP Validation Study, increased sewer service rates for Fiscal Year 2005-06 and projected increased sewer service rates 2006-07 to 2009-10. Principal expenditure components of these projections are the Interim Strategic Plan and CIP Validation Study, which identified 115 large capital projects managed by the Engineering Department over an 15 year period at a total cost of $2.57 billion, and include over $1.6 billion in the next five years. The District's CIP cash flow budget for Fiscal Year 2005- 06 is $277.1 million, an increase of $89.2 million from the prior year total. This CIP budget finances joint works treatment and disposal system improvement projects, and collection system improvement projects. This increase is attributable to the additional infrastructure needs identified in the Interim Strategic Plan DOCSLAl:510217.5 -55- Book Page 169 and in the CIP Validation Study. The preparation of such projections was based upon certain assumptions and certain forecasts with respect to conditions that may occur in the future. While the District believes that these assumptions and forecasts are reasonable for the purposes of the projected selected operating data, it makes no representations that they will in fact occur. To the extent that actual future conditions differ from those assumed herein, the data will vary. Table 14 Summary of Projected District Revenues and Expenses and Other Financial Information for Fiscal Years 2005-06 through 2009-10 ($ Millions) 2005-06 2006-07 2007-08 2008-09 2009-10 Revenues: Sewer Service Charges $133.9 $161.0 $193.7 $219.5 $247.3 Industrial Sewer Service Charges 12.8 14.1 15.5 16.5 17.5 Revenue Area No. 14 Fees 29.4 17.2 21.6 24.8 20.1 Ad Valorem Taxes 36.0 55.6 58.3 61.3 64.3 Interest Earnings 19.0 19.6 20.6 22.3 24.1 Grants 6.0 2.4 4.0 Capital Facilities Capacity Charges 8.8 8.8 8.8 8.8 8.8 Other Revenues 6.9 6.7 6.7 6.7 6.7 Total Revenues $252.8 $285.4 $329.2 $359.9 $388.8 Operations and Maintenance Expenses 117.8 126.3 136.5 147.6 160.2 Net Revenuesm $135.0 $159.1 $192.7 $212.3 $228.6 Debt proceeds $200.0 $205.0 $275.0 $325.0 $220.0 Debt Service $ 48.6 $ 61.8 $ 77.5 $ 97.0 $114.9 CIP Outlay $277.1 $282.3 $356.4 $389.6 $290.7 Ending Reserves12 ' $408.8 $409.9 $418.3 $439.0 $463.2 Coverage Ratios' 1' 2.78x 2.57x 2.49x 2.19x 1.99x (1) Calculated in acrnrdance with the Trust Agreement. (2) Excludes any Dehl Servic.:e Reserve Funds. Source: Orange County Sanitation District. Management's Discussion and Analysis of Operating Data The District's Fiscal Year 2005-06 total operating and capital improvement budget is $455.1 million, a 17.67c increase over the prior year budget of $386.9. This increase is primarily attributable to increased cash outlays for construction projects as the District moves towards reaching secondary treatment standards by the target date of December 31, 2012, as specified by the Board's July 2002 resolution and in keeping with the terms and conditions of its ocean discharge permit and related Consent Decree. The Fiscal Year 2005-06 operations budget for the collection, treatment, and disposal of wastewater is $117.8 million, an $8.6 million, or 7.8% increase from the prior year budget of $109.2 million. This increase is primarily attributable to the proposed increase in personnel costs due mostly to the aggressive capital improvement program, totaling $2.4 billion over the next 10 years. Personnel costs are being proposed for increase at 5.9%, or $3.9 million. Another significant increase is in operating DOCSLAl:510217.5 -56- Book Page 170 expenses, up $2.7 million or 15.2%, due primarily to the combined increases in chemicals for treatment, odor control, and disinfection totaling $2.5 million. These chemical increases are due to price increases of 34% offset by staffs optimization of treatment facilities that has decreased usage by 16%. The cost per million gallons of wastewater treated, an industry-wide performance measurement, is expected to increase in Fiscal Year 2005-06 to $1,246, a $101, or 8.8% increase over the prior year projection of $1,145. Wastewater flow through the treatment system is expected to increase from the projected 244 million gallons per day (mgd) in Fiscal Year 2004-05 to 250 mgd in Fiscal Year 2004-05, a 2.5% increase. The total CIP cash flow budget is proposed at $277 .1 million, a 20% increase from the prior year budget of $231.2 million. This revised amount is based on a valuation study of the CIP conducted by staff to ensure the appropriateness of all capital projects and the accuracy of the cost estimates. The revised CIP consisting of 115 large capital projects and 33 special projects over a 15 year period at a total cost of $2.57 billion. The CIP Validation Study and Secondary Treatment Review conducted in the spring of 2003 developed a capital improvement program to meet secondary treatment standards as quickly as possible while providing for increased flows and rehabilitation and refurbishment of existing facilities. At that time, the ten year CIP cash flow projections were $2.2 billion, or an average of $220 million per year. Based on that study, the Board adopted Ordinance No. OCSD-20 that increased the sanitary sewer service 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, $115, $132, $152, and $175 annually. After the completion of the CIP Validation Study for Fiscal Year 2005-06 that increased the new ten year CIP cash flow projects to $2.4 billion, or an average of $240 million per year, the Board adopted Ordinance No. OCSD-276 increasing the Fiscal Year 2005-06 single family residential rate 31 % from $115 to $151 for such year. Annual increases are ordered to be subject to reaffirmation by the affirmative vote of 2/3 of the members of the Board of Directors prior to implementation of any such charge for each fiscal year. See "DISTRICT REVENUES -Sewer Service Charges." Investment of District Funds State statutes authorize the District to invest in obligations of the United States Government, state 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. The District's funds are managed by an external money manager, Pacific Investment Management Company ("PIMCO") Mellon Trust ("MelJon Trust") serves as the District's independent custodian bank for its investment program. Callan Associates ("Callan") serves as the District's independent advisor. At June 30, 2005, the District's externally managed fund consisted of short-term investment portfolio of $38,860,994.99 with an average maturities of 120 days, and a long-term investment portfolio of $339,301,396.89 with average maturities of 2.7 years. Investments consist of United States government securities, corporate bonds and commercial paper. The District's portfolio contains no reverse purchase agreements. Deposits in banks are maintained in financial institutions which provide deposit protection on the bank balance from the Federal Depository 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 deposits. DOCSLA 1:510217 .5 -57- Book Page 171 The District's Investment Policy requires that the District invest public funds in a manner which ensures the safety and preservation of capital while meting 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. For more information regarding the District's investment portfolio as of June 30, 2005, see Note 2 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30, 2005 set forth in Appendix A. FINANCIAL OBLIGATIONS Existing Indebtedness The District has the power and authority to incur debt pursuant to Section 4764 of the Act. In September 1992, the State Legislature enacted Senate Bill 844 which reduced the special district ad valorem property tax revenues not pledged to debt service by 35%. As a result, the District dedicated all future property tax revenues to the payment of debt service on their current and future outstanding debt issues. The District has no outstanding general obligation bonds. Currently the District has Senior Obligations Outstanding payable on a parity with the Installment Payments under the Installment Purchase Agreement. The table below describes the District's outstanding certificates of participation as of July 1, 2005. Outstanding Certificates of Participation Debt at July 1, 2005 Principal Issue Outstanding Final Amount Date Balance Maturity 1992 Certificates $160,600,000 12/3/92 $100,275,000 8/1/13 1993 Certificates 46,000,000 9/2/93 42,050,000 8/1/16 Series 2000 Certificates 218,600,000 8/13/00 199,000,000 8/1/30 Series 2003 Certificates 280,000,000 8/26/03 280,000,000 2/1/33 Total Long-Term Debt $705,200,000.00 $621,325,000.00 In connection with the execution and delivery of the above-referenced outstanding certificates of participation, the district entered certain installment purchase agreements, or equivalent documents providing for the payment of installment payments or similar payments. In December 1992, the District caused the execution and delivery of certain certificates of participation which were subsequently designated as the Orange County Sanitation Refunding Certificates of Participation, 1992 Series (the "1992 Certificates"). In connection with the 1992 Certificates, the District entered into an agreement for acquisition and construction (the "1992 Agreement for Acquisition and Construction"), a Standby Certificate Purchase Agreement, dated as of January 30, 1996, as amended (the "1992 Standby Agreement"), by and among the District, the Trustee and [Lloyds Bank] (the "1992 Bank") in order to provide for payment of the purchase price of tendered and unremarketed 1992 Certificates, and an Interest Rate Swap Agreement, as amended (the "1992 Swap") with AIG Financial Products Corp. (the "1992 Swap Provider"). For a description of the terms of and certain risks associated with the 1992 Swap see Note 5 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30, 2005, set forth in Appendix A. Payments of principal and interest evidenced by the 1992 Certificates are secured by a municipal bond insurance policy issued by Ambac Assurance DOCSLAl :510217.5 -58- Sook Page 172 Corporation ("Ambac"). The 1992 Certificates require annual payments of principal and interest (calculated at a rate of 5.55% per annum) ranging from $6,786,829 to $20,596,110. In September 1993, the District caused the execution and delivery of certain certificates of participation which were subsequently designated as the Orange County Sanitation Refunding Certificates of Participation, 1993 Series (the "1993 Certificates"). In connection with the execution and delivery of the 1993 Certificates, the District entered into an agreement for acquisition and construction (the "1993 Agreement for Acquisition and Construction"), a Reimbursement Agreement, dated as of September 1, 1993, as amended (the "1993 Standby Agreement"), and ah interest rate swap agreement, as amended (the "1993 Swap") with Societe Generale, New York Branch (the "1993 Swap Provider") whereby through the maturity date of the 1993 Certificates, the 1993 Swap Provider agreed, subject to the terms of the 1993 Swap, to pay to the District a floating amount equal to the interest rate evidenced by the 1993 Certificates and the District agreed to pay to the 1993 Swap Provider a fixed amount. For a description of the terms of and certain risks associated with the 1993 Swap see Note 5 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30, 2005, set forth in Appendix A. Payments of principal and interest evidenced by the 1993 Certificates are secured by a municipal bond insurance policy issued by Ambac. The 1993 Certificates require annual payments of principal and interest (calculated at the fixed swap rate of 4.56% per annum) ranging from $1,352,700 to $9,307,480. In August 2000, the District caused the execution and delivery of the 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 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 1, 2000 (the "2000 Standby Agreement"), by and among the District, the Trustee and Dexia Credit Local, acting through its New York Agency (the "2000 Bank"). On August 2003, the District caused the execution and delivery of the Orange County Sanitation District Certificates of Participation, Series 2003 (the "2003 Certificates") evidencing $280,000,000 aggregate principal amount. In connection with the execution and delivery of the 2003 Certificates, the District entered into an installment purchase agreement (the "2003 Installment Purchase Agreement"). The interest rate on the 2003 Certificates is fixed and ranges from 5.00% to 5.25%. Payments of principal and interest evidenced hy the 2003 Certificates are secured by a municipal bond insurance policy issued by Financial Guaranty Insurance Company, doing business in California as FGIC Insurance Company ("FGIC"). The amounts payable by the District under the 1992 Agreement for Acquisition and Construction, the 1993 Agreement for Acquisition and Construction, the 2000 Installment Purchase Agreement, the 2003 Installment Purchase Agreement, the 1992 Swap and the 1993 Swap constitute Senior Obligations under the Master Agreement and are on a parity with the District's payment obligations with respect to the Certificates. The 1992 Standby Agreement, the 1993 Standby Agreement and the 2000 Standby Agreement each constitutes a Credit Facility Agreement and a Credit Facility. The obligation of the District to repay amounts drawn on or paid under the 1992 Standby Agreement, the 1993 Standby Agreement and the 2000 Standby Agreement, 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 respect to a Senior Obligation; provided, however, that no portion of any such obligation shall be deemed to be a Reimbursement DOCSLAl:510217.5 -59- Book Page 173 Obligation if the payment thereof would duplicate any amount payable to the provider of such standby agreement as owner of a certificate. In the event Ambac makes any payment of principal and interest evidenced by the 1992 Certificates and the 1993 Certificates, Ambac will become fully subrogated to the rights to payment with respect to such certificates. In the event FGIC makes any payment of principal and interest evidenced by the 2003 Certificates, FGIC will become fully subrogated to the rights to payment with respect to such certificates. For more information regarding the District's outstanding indebtedness and interest rate swaps as of June 30, 2005, see Notes 4 and 5 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for Fiscal Year Ended June 30, 2005 set forth in Appendix A. Anticipated Financings Over the next ten years, the District projects $2.4 billion in future wastewater treatment improvements and in future collection system capital improvements. Sixty percent of these improvements are expected to be funded through current revenues and the balance will be funded through the issuance of new debt. The District expects to cause to be executed and delivered approximately $1 .4 billion in certificates of participation over the next ten years. Payments with respect to any such indebtedness are expected to be executed and delivered as Additional Obligations under the Master Agreement on a parity with the Installment Payments. DOCSLA I :5102 I 7 .5 -60- Book Page 17 4 Direct and Overlapping Bonded Debt The Table 16 below presents the aggregate direct and overlapping bonded debt of the District as of December 31, 2005. Table 16 Direct and Overlapping Bonded Debt of the District as of December 31, 2005 ORANGE COUNTY SANITATION DISTRICT 2005-06 Assessed Valuation (Land & Improvements Only): Redevelopment Incremental Valuation: Adjusted Assessed Valuation: $241,849,995,272 26,425.360.358 $215,424,634,915 OVERLAPPING TAX AND ASSESSMENT DEBT (Based on redevelopment adjusted all property assessed valuation of $221,268,184,347): Orange County Teeter Plan Obligations Metropolitan Water District of Southern California Coast Community College District North Orange County Joint Community College District Rancho Santiago Community College District Brea-Olinda and Laguna Beach Unified School Districts Newport-Mesa Unified School District Placentia-Yorba Linda Unified School District Saddleback Valley Unified School District Santa Ana Unified School District Tustin Unified School District School Facilities Improvement District No. 2002-1 Anaheim Union High School District Fullerton Joint Union High School District Huntington Beach Union High School District School Districts City of Anaheim Irvine Ranch Water District Improvement Districts Rossmoor Community Services District Special Tax Obligations Bonita Canyon Community Facilities District No. 98-1 Irvine Unified School District Community Facilities District No. 86-1 Tustin Unified School District Community Facilities District No. 88-1 and 97-1 Orange County Community Facilities District No. 87-4 Other Community Facilities Districts Orange County Assessment Districts City of Irvine 1915 Act Bonds City of Tustin 1915 Act Bonds Other 1915 Act Bonds TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT (continued) DOCSLAl:510217.5 -61- Book Page 175 % Applicable 71.832% 15.110 99.525 97.059 98.200 97.858 & 10.973 100. 98.689 11.256 100. 98.844 100. 91.194 99.013 97.608-100. 99.100 Various 100. 100. 100. 100. 99.974 Various 100. 100. 100. Various Debt 12/31/05 $ 88,874,142 63,369,829 102,230,952 235,119,605 206,906,581 29,019,956 104,770,000 95,079,108 10,594,147 135,923,187 10,764,112 115,308,955 57,664,620 202,440,786 200,236,997 6,114,470 167,725,324 715,000 43,615,000 194,385,000 161,322,675 66,537,433 279,369,298 101,079,296 735,464,169 59,039,000 29,528,000 $3,503,197,642 (continued from previous page) DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations Orange County Pension Obligations Orange County Board of Education Certificates of Participation Orange County Transit District Authority Coast Community College District Certificates of Participation South Orange County Cbmrnunity College District Certiucates of Participation Brea-Olinda Unified School District Cerliftcates of Participalion Orange Unified School District Certificates of Participation Santa Ana Unified School District Certificates of Participation Other Unified School District Certificates of Participation Union High School District Certificates of Participation School District Certificates of Participation City of Anaheim General Fund Obligations City of Fullerton General Fund Obligations City of Huntington Beach General Fund and Judgment Obligations City of Irvine General Fund Obligations City of Santa Ana General Fund Obligations Other City General Fund Obligations Orange County Sanitation District Certificates of Participation Irvine Ranch Water District Certificates of Participation Municipal Water District of Orange County Water Facilities Corporation Yorba Linda County Water District Certificates of Participation Orange County Fire Authority TOT AL GROSS OVERLAPPING GENERAL FUND DEBT Less: Orange County Transit District Authority (80% self-supporting) City of Anaheim self-supporting obligations Other City self-supporting obligations MWDOC Water Facilities Corporation (100% self-supporting) TOT AL NET OVERLAPPING GENERAL FUND DEBT GROSS COMBINED TOT AL DEBT NET COMBINED TOTAL DEBT % Applicable 71.832% 71.832 71.832 71.832 99.525 34.495 97.858 96.729 100. Various Various Various 99.100 100. 99.969 100. 100. Various 100. 89.144 66.566 97.697 45.114 Debt 12/31/05 $607,459,519 71,628,211 14,294,568 1,774,250 7,160,824 13,596,204 30,883,985 50,603,776 46,105,928 30,701,807 59,529,008 64,333,013 650,376,520 33,274,367 86,169,419 37,540,000 130,107,630 179,687,620 130,370,000 39,401,648 18,774,940 10,038,367 7.520,504 $2,321,332, l 08 1,419,400 620,579,172 9,094,147 18.774.940 $1,671,464,449 $5,824,529,750(1) $5,174,662,091 (]) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Ratios to: Total Overlapping Tax and Assessment Debt Combined Direct Debt ($130,370,000) Gross Combined Total Debt Net Combined Total Debt 2005-06 Land and Improvement Assessed Valuation 1.45% Adjusled Land & Improvement 0.06% 2.70% 2.40% STATE CHOOL BUILDING AID REPAYABLE AS OF 6/30/05: $7,825,560 Source: California Municipal Statistics DOCSLA I :5102 I 7 .5 -62- Book Page 176 Adjusted All Property Assessed Valuation 0.06% 2.63% 2.34% THE CORPORATION The Corporation was organized June 19, 2000 as a nonprofit public benefit corporation pursuant 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 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 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. The District's Director of Finance and other District employees are available to provide staff support to the Corporation. The Corporation has not entered into any material financing arrangements other than 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. 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 XIIIA 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 June 3, 1986) on bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-third of the voters on such indebtedness, and (iii) bonded indebtedness incurred 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 appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 197 5 assessment." This full cash value may be increased at a rate not to exceed two percent per year to account for inflation. Article XIIIA has subsequently been amended to permit reduction of the "full cash value" base in the event of declining property values caused by damage, destruction or other factors, to provide that there would be no increase in the "full cash value" base in the event of reconstruction of property damaged or destroyed in a disaster, and in other minor or technical ways. Legislation Implementing Article XIIIA 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 DOCSLAl:510217.5 -63- Book Page 177 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 two percent 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 the definition of "appropriations subject to limitation," including debt service on indebtedness existing or 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 1978-79 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 over the subsequent two years. "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- tax funds. Not included in the Article XIIIB limit are appropriations for the debt service costs of bonds 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. The appropriations limit for the District in each year is based on the District's limit for the prior 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, DOCSLAl:510217.S -64- Book Page 178 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. As amended by Proposition 111, 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 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 111 had been in effect. The District does not anticipate that any such appropriations limitations will impair its ability to make Installment Payments as required by the Installment Purchase Agreement. Proposition 62 On November 4, 1986, California voters adopted Proposition 62, a statutory initiative which amended the California 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 must be 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. Most of the provisions of Proposition 62 were affirmed by the 1995 California Supreme Court decision in Santa Clara County 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 On November 5, 1996, the voters of the State approved Proposition 218, the so-called "Right to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of local, including the District, to levy and collect both existing and future taxes, assessments, fees and charges. Proposition 218 became effective on November 6, 1996. Senate Bill 919 was enacted to provide certain implementing provisions for Proposition 218 and became effective July 1, 1997. The District is unable to predict whether and to what extent Proposition 218 may be held to be constitutional or how its terms will be interpreted and applied by the courts. Proposition 218 could substantially restrict the District's ability to raise future revenues and could increase the District's costs to hold elections, calculate fees and assessments, notify the public and defend its fees and assessments in court. Further, as described below, Proposition 218 provides for broad initiative powers to reduce or repeal assessments, fees and charges. This initiative power is not limited by the terms of Proposition 218 to fees imposed after November 6, 1996 and absent other legal authority could result in retroactive reduction in any existing taxes, assessments or fees and charges, However, other than any impact resulting from the exercise of this initiative power, presently the District does not DOCSLAl:510217.5 -65- Book Page 179 believe that the potential financial impact on the financial condition of the District as a result of the provisions of Proposition 218 will adversely affect the District's ability to pay the principal of and interest on the Installment Payments evidenced by the Certificates as and when due. Article XIIID of Proposition 218 also adds several provisions affecting "fees" and "charges" which are defined as "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by a local agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service." All new and, after June 30, 1998, existing property related fees and charges must conform to requirements prohibiting, among other things, fees and charges which (i) generate revenues exceeding the funds required to provide the property related service, (ii) are used for any purpose other than those for which the fees and charges are imposed, (iii) are for a service not actually used by, or immediately available to, the owner of the property in question, or (iv) are used for general governmental services, including police, fire or library services, where the service is available to the public at large in substantially the same manner as it is to property owners. Further, before any property related fee or charge may be initially imposed or increased, written notice must be given to the record owner of each parcel of land affected by such fee or charge. The District must then hold a hearing upon the proposed imposition or increase of such property based fee, and if written protests against the proposal are presented by a majority of the owners of the identified parcels, the District may not impose or increase the fee or charge. Moreover, except for fees or charges for sewer, water and refuse collection services, no property related fee or charge may be imposed or increased without majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds voter approval by the electorate residing in the affected area. 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 $87.50 per year. In May 2003, the Board approved consideration of a 15% rate increase a year, for each year, over the following five years. This level of increase was considered 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 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 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 on the fee increase as described above. After the completion of the CIP Validation Study for Fiscal Year 2005-06 that increased the new ten year CIP cash flow projects to $2.4 billion, or an average of $240 million per year, the Board adopted Ordinance No. OCSD-26 increasing the Fiscal Year 2005-06 single family residential rate 31%, from $115 to $151 for such year. The 31 % increase represented the increase permitted under the protest hearings on the fee increase which was held in 2003. Annual increases under the Ordinance are subject to reaffirmation by the affirmative vote of 2/3 of the members of the Board of Directors prior to implementation of any such change for each fiscal year. See "DISTRICT REVENUES -Sewer Service Charges" herein. 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 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 then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be DOCSLAI :SI 0217 .S -66- Book Page 180 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. LEGAL MATTERS The validity of the Certificates and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Special Counsel. A complete copy of the proposed form of Special Counsel opinion is contained in Appendix E hereto. Special Counsel, in its capacity as Special Counsel, undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the Underwriter by its counsel, Hawkins Delafield & Wood LLP, Los Angeles, California. Certain legal matters will be passed upon for the Provider by Nixon Peabody LLP. Certain legal matters will be passed upon for the District and the Corporation by Woodruff, Spradlin & Smart, a Professional Corporation, Orange, California and for the District by Orrick, Herrington & Sutcliffe LLP as Disclosure Counsel to the District. FINANCIAL ADVISOR The District has 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 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 the Official Statement but makes no guaranty, warranty or other representation respecting accuracy and completeness of the information contained in the Official Statement. ABSENCE OF LITIGATION 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, threatened against the District affecting the existence of the District or the titles of its directors or 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 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 in 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 know ledge 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 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, including the District's ability to make Installment Payments. FINANCIAL STATEMENTS The basic financial statements of the District included in Appendix A to this Official Statement have been audited by Conrad & Associates, L.L.P., independent certified public accountants. See DOCSLAI:510217.5 -67- Book Page 181 APPENDIX A -"COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2005" herein. The report issued for the year ended June 30, 2004, received the Government Finance Officer's Association Certificate of Achievement for "Excellence in Financial Reporting" for the 11th consecutive year. The audited financial statements, including the footnotes thereto, should be reviewed in their entirety. Conrad & Associates, L.L.P. 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 statements made in this Official Statement, and no opinion is expressed by Conrad & Associates, L.L.P. with respect to any event subsequent to its report dated September 9, 2005. Conrad & Associates, L.L.P. replaced the District's most recent outside auditor, Moreland & Associates, Inc., which completed a several year audit engagement with the District with the delivery of its report with respect to Fiscal Year 2002-03. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, 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, interest evidenced by the Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. Special Counsel is of the further opinion that interest evidenced by Certificates is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such interest evidenced by the Certificates is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Special Counsel is set forth in Appendix F hereto. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest evidenced by the obligations such as the Certificates. The District and the Corporation has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest evidenced by the Certificates will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest evidenced by the Certificates being included in gross income for federal income tax purposes, possibly from the date of original execution and delivery of the Certificates. The opinion of Special Counsel assumes the accuracy of these representations and compliance with these covenants. Special Counsel has not undertaken to determine ( or to inform any person), whether any actions taken ( or not taken), or events occurring ( or not occurring), or any other maters coming to Special Counsel's attention after the date of execution and delivery of the Certificates may adversely affect the value of, or the tax status of interest evidenced by, the Certificates. The interest rate and certain requirements and procedures contained or referred to in the Trust Agreement, the Master Agreement, the Installment Purchase Agreement, the Tax Certificate to be entered into by the District on the date of execution and delivery of the Certificates, and other relevant documents may be changed and certain actions (including, without limitation, prepayment of the Certificates) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Special Counsel expresses no opinion as to any Certificate or the interest evidenced thereby if any such change occurs or action is taken or omitted upon the advice or approval of special counsel other than Orrick, Herrington & Sutcliffe LLP. Although Special Counsel is of the opinion that interest evidenced by the Certificates is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest evidenced by, the DOCSLAI:510217.5 -68- Book Page 182 Certificates may otherwise affect a Beneficial Owner's federal, state or local tax liability. The nature and extent of these other tax consequences depend upon the particular tax status of the Beneficial Owner or the Beneficial Owner's other items of income or deduction. Special Counsel expresses no opinion regarding any such other tax consequences. Future legislation, if enacted into law, or clarification of the Code, may cause interest evidenced by the Certificates to be subject, directly or indirectly, to federal income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the Certificates. Prospective purchasers of the Certificates should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Special Counsel expresses no opinion. The opinion of Special Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Special Counsel's judgment as to the proper treatment of the Certificates for federal income tax purposes. It is not binding on the Internal Revenue Service ("IRS") or the courts. Furthermore, Special Counsel cannot give and has not given any opinion or assurance about the future activities of the District, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The District has covenanted, however, to comply with the requirements of the Code. Special Counsel's engagement with respect to the Certificates ends with the execution and delivery of the Certificates, and, unless separately engaged, Special Counsel is not obligated to defend the District or the Beneficial Owners regarding the tax-exempt status of the Certificates in the event of an audit examination by the IRS. Under current procedures, parties other than the District and its appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the District legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to selection of the Certificates for audit, or the course or result of such audit, or an audit of obligations presenting similar tax issues may affect the market price for, or the marketability of, the Certificates, and may cause the District or the Beneficial Owners to incur significant expense. NO CONTINUING DISCLOSURE OBLIGATION The Certificates arc initially exempt from the rules of the Securities and Exchange Commission relating to continuing disclosure of annual financial information and certain material events. In connection with the execution and delivery of prior issues of certificates, the District covenanted to provide or cause to be provided, to each nationally recognized municipal securities information repository for purposes of Rule I 5c2-I 2(b)(5) ("Rule 15c2-12(b)(5)") adopted by the Securities and Exchange Commission (collectively, the "Repositories") certain annual financial information and operating data relating to the District and, in a timely manner, notice of certain material events. The District has never failed to comply in all material respects with any continuing disclosure undertakings with regard to Rule l 5c2-l 2(b )(5) to provide annual reports or notices of material events. Holders and Beneficial Owners of the Certificates may obtain from the Repositories such information as provided by the District. RATINGS Moody's Investors Service, Inc., ("Moody's"), Standard & Poor's Ratings Services, a Division of The McGraw Hill Companies, Inc., ("S&P"), and Fitch Ratings ("Fitch") have assigned the Certificates the long-term credit ratings of"_," "_" and "_," respectively, and the short-term liquidity ratings of DOCSLAl:510217.5 -69- Book Page 183 "_," "_" and"_," respectively. Such short-term liquidity ratings are based upon the understanding that the Initial Standby Agreement will be delivered by the Provider concurrently with the delivery of the Certificates. Fitch Ratings, Moody's Investors Service and Standard & Poor's have also assigned underlying municipal bond ratings of "_," "_," and "_" to the Certificates. 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: Fitch Ratings, One State Street Plaza, New York, New York 10004; Moody's Investors Service, 99 Church Street, New York, New York 10017; and Standard & Poor's Ratings Group, 55 Water Street, New York, New York 10041. There is no assurance that any such 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 market price of the Certificates. UNDERWRITING The Certificates are to be purchased by Bear, Stearns & Co. Inc. (the "Underwriter"). The Underwriter has agreed to purchase the Certificates at a price of $ ____ (reflecting the principal amount of the Certificates less an underwriter's discount of $ ___ ___, The Contract of Purchase related to the Certificates provides that the Underwriter will purchase all the Certificates if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the Contract of Purchase, including the approval of certain legal matters by Special Counsel and certain other conditions. The Certificates may be offered and sold to certain dealers (including dealers depositing said Certificates into investment trusts) and others at prices lower than the initial public offering price, and the public offering price may be changed from time to time by the Underwriter. MISCELLANEOUS 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. The execution and delivery of this Official Statement has been duly authorized by the District. ORANGE COUNTY SANITATION DISTRICT By: ---------------- Chair of the Board of Directors DOCSLAl:510217.S -70- Book Page 184 DOCSLA 1:510217 .5 APPENDIX A COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2005 A-1 Book Page 185 APPENDIXB THE COUNTY OF ORANGE-ECONOMIC AND DEMOGRAPHIC INFORMATION The County is bordered on the north by Los Angeles County on the east by Riverside County on the southeast by San Diego County and on the west and southwest by the Pacific Ocean. Approximately 42 miles of ocean shoreline provide beaches. marinas and other recreational areas for use by residents and visitors. The climate in the County is mild, with an average annual rainfall of 13 inches. Population The County is the second most populous county in the State and the fifth most populous in the nation. During the period 1996 through 2005, the population of the County increased by approximately 16.4%, compared to 15.6% for the State and 11.8% for the United States. TABLEB-1 COUNTY OF ORANGE, STATE OF CALIFORNIA AND UNITED STATES POPULATION GROWTH Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 <ll as of January I or each year. c2> as of July 1 or each year. Orange Countv<ll State of California()) 2,590,100 31,617,000 2,625,300 31,837,000 2,672,800 32,207,000 2,724,500 32,657,000 2,776,100 33,140,000 2,846,289 33,876,086 2,891,023 34,441,561 2,940,713 35,088,671 2,983,757 35,691,442 3,022,613 36,271,091 3,056,865 36,810,358 United States of Americac2> 262,803,276 265,228,572 267,783,607 270,248,003 272,690,813 282,192,162 285,102,075 287,941,220 290,788,976 291,655,404 296,410,404 Source: Orange Co111II_\' mu/ S1a1,· <f Califomia Statistics -Califomia State Department of Finance, Demographic Research Unit. U11i1ed Sillies Sw1is1ics -Population Estimates Program, Population Division, U.S. Census Bureau. Public Schools (Elementary and Secondary) Public instruction in the County is provided by twelve elementary school districts, three high school districts and twelve unified (combined elementary and high school) districts. For the 2004-05 academic year, the largest district, the Santa Ana Unified School District, had 61,693 students enrolled. Public school enrollment for the academic calendar years 2000-01 through 2004-05 is presented in Table B-2. DOCSLA I :510217 .5 B-1 Book Page 186 Grade Level K-8 9-12 Total Enrollment 2000-01 352,290 141.888 494.178 TABLEB-2 COUNTY OF ORANGE PUBLIC SCHOOL ENROLLMENT 2001-02 358 608 144.743 503.351 2002-03 361,184 150,92 1 51 .105 Source: Califomia Department of Education, Educational Demographics Unit. Colleges and Universities 2003-04 360,996 154.468 515,464 2004-05 354,841 158.903 511744 The County has a number of top-rated, college-level educational institutions, including the University of California at Irvine and California State University at Fullerton, several private colleges, universities and law schools and four community college districts. Employment The following table summarizes the historical numbers of workers in the County for the past five years by industry. TABLEB-3 COUNTY OF ORANGE INDUSTRY EMPLOYMENT AND LABOR FORCE -ANNUAL A VERA GE 2000 2001 2002 2003 Farm 7,600 7,100 7,300 7,200 Natural Resources and Mining 600 600 600 500 Construction 77,000 80,700 79,200 83,700 Manufacturing 216,700 208,500 190,800 183,900 Wholesale Trade 80,800 83,900 82,400 83,200 Retail Trade 147,800 150,100 151,400 152,800 Transportation, Warehousing and 30,400 30,400 28,700 29,000 Utilities Information 41,500 40,200 36,800 35,200 Financial Activities 100,800 105,900 110,200 122,200 Professional and Business Services 248,800 248,400 248,800 252,600 Educational and Health Services 112,800 114,600 118,400 126,300 Leisure and Hospitality 140,700 154,300 155,400 158,600 Other Services 44,200 45,200 45,900 46,700 Government 146,600 150.900 155,100 154,200 Total All Industriesc> Ll26,500 Ll-2!!.SJ.10 1,411.000 1.438_.l_fB (I) The unemployment rates are calculated using unrounded data. Data may not add due to rounding. Source: Califomia Employment Development Department. DOCSLAl:510217.S B-2 Book Page 187 2004 6,900 600 91,800 183,300 82,100 153,000 29,200 33,500 131,200 259,700 130,400 164,600 47,000 153,200 ).466.90 Major Employers TABLEB-4 COUNTY OF ORANGE MAJOR EMPLOYERS Employer Name Walt Disney Company County of Orange University of California, Irvine Boeing Company St. Joseph Health System Albertsons Inc. Tenet Healthcare Corporation YUM! Brands Inc. SBC Communications, Inc. Target Corp. Source: 0. C. Business Journal Book of Lists 2004. Labor Force, Employment and Unemployment Number of Employees 21,000 17,597 15,500 11,160 8,975 8,700 8,389 6,500 5,658 5,436 Table B-5 summarizes the labor force, employment and unemployment figures over the period 2000 through 2004 for the County and the State. DOCSLAl :510217.5 B-3 Book Page 188 Year and Area 2000 Orange County California 2001 Orange County California 2002 Orange County California 2003 Orange County California 2004 Orange County California TABLEB-5 COUNTY OF ORANGE AND STATE OF CALIFORNIA LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT YEARLY AVERAGE Labor Force Em(!lovment U nem(!IOifilent 1,481,900 1,429,500 52,400 16,869,700 16,034,100 835,600 1,512,200 1,452,700 60,200 17,150,100 16,217,500 932,600 1,530,200 1,453,500 76,700 17,326,900 16,165,100 1,161,800 1,556,500 1,481,700 74,800 17,414,000 16,223,500 1,190,500 1,586,500 1,518,900 67,600 17,552,300 16,459,900 1,092,400 Source: California Emp/o_,men/ Development Department. Personal Income Unemployment Rate 3.5 5.0 4.0 5.4 5.0 6.7 4.8 6.8 4.3 6.2 Table B-6 summarizes the total effective buying income for the County, the State and the United States for 2000 through 2004. DOCSLA I :510217 .5 B-4 Book Page 189 Area 2000 Orange County California United States 2001 Orange County California United States 2002 Orange County California United States 2003 Orange County California United States 2004 Orange County California United States TABLEB-6 COUNTY OF ORANGE, STATE OF CALIFORNIA AND UNITED STATES PERSONAL INCOME (In Thousands) Total Median Household Effective Bu_ying Income* Effective Buving Jncome* -~--·::.:..• ,-r.J. . 48,027,189 42,715 524,439,600 36,483 4,399,998,035 34,618 62,568,674 53,277 650,521,407 43,532 5,303,481,498 38,365 60,602,515 49,726 647,879,427 42,484 5,340,682,818 38,035 63,712,940 50,755 674,721,020 42,924 5,466,880,008 38,201 66,473,235 51,823 705,108,410 43,915 5,692,909,567 39,324 Source: Sales and Marketing Management "Survey of Buying Power". * "Effective Buying Income," also referred to as "disposable" or "after tax" income, consists of personal income less personal tax and certain non-tax payments. Personal income includes wages and salaries, other labor-related income (such as employer contributions to private pension funds), and certain other income (e.g. proprietor's income; rental income; dividends and interest; pensions; Social Security; unemployment compensation; and welfare assistance). Deducted from this total are personal taxes (federal, state and local), certain non-Lax payments (e.g. fines, fees and penalties), and personal contributions to a retirement program. DOCSLAJ :510217.5 B-5 Book Page 190 Taxable Sales Table B-7 summarizes the annual volume of taxable transactions from 2000 to 2004. TABLEB-7 COUNTY OF ORANGE TAXABLE TRANSACTIONS Type of Business 2000 Apparel stores group $1,364,366 General merchandise group 4,334,887 Specialty stores group 5,119,964 Food stores group 1,509,744 Eating and drinking groups 3,535,316 Household group 1,486,155 Building material group 2,013,714 Automotive group 7,378,529 All other retail stores group 742,314 Retail Stores Totals 27,484,989 Business & Personal Services 2,625,459 All Other Outlets 14,352,012 TOT AL ALL OUTLETS $44,462,460 Source: California State Board of Equalization. (IJ Data available through Third Quarter, 2004. Housing Characteristics (In Thousands) 2001 2002 $1,446,572 $1,508,011 4,432,881 4,618,932 4,999,099 4,837,212 1,534,244 1,551,611 3,749,604 3,884,388 1,501,585 1,722,573 2,157,196 2,275,964 7,957,760 8,482,604 739,760 765,523 28,518,701 29,646,818 2,673,666 2,615,150 13,402,947 12,607,188 $44,595,314 $44,869,156 2003 2004<ll $ 1,697,120 $ 2,596,965 4,855,674 7,298,475 5,085,612 7,831,970 1,574,528 2,377,919 4,149,117 6,409,138 1,985,255 3,053,109 2,480,249 3,996,268 9,651,049 15,079,058 809,093 1,300,220 32,287,697 49,943,122 2,699,250 4,131,475 12,530,119 19,302,805 $47,517,066 $73,377,402 The total number of housing units in the County was estimated by the California State Department of Finance to be 1,013,842 as of January 1, 2005. This compares to 1,003,904 reported by the Department of Finance in January 2004. According to California Association of Realtors, the median resale price of single-family dwelling units in Orange County was $704,150 in May 2005. Building Permits The total valuation of residential building permits issued in the County reached $2.2 billion in 2004, which represents about a 7.4% increase relative to 2003. Table B-8 provides a summary of residential building pennit valuations and the number of new dwelling units authorized in the County during the period 2000 through 2004. DOCSLAI:510217.5 B-6 Book Page 191 TABLEB-8 COUNTY OF ORANGE BUILDING PERMIT ACTIVITY 2000-04 (In Thousands) 2000 2001 2002 2003 2004 Valuation: Residential $2,210,776 $1,905,316 $2,328,119 $2,076,977 $2,243,645 Non-Residential 1,762,141 1,349.604 1,208,626 1,005,547 1,132,846 Total $3,972,917 $3,254,921 3,536,746 $3,082,525 $3,376,491 New Housing Units: Single Family 6,794 5,925 6,423 5,565 4,395 Multiple Family 5,573 2,721 5,597 3,746 4,927 Total 12,367 8,646 12,020 9,311 9,322 Source: Construction Industry Research Board. Water Supply Maintaining the County's water supply is the responsibility of the Orange County Water District ("OCWD"), manager of the County's groundwater basin, and the Municipal Water District of Orange County ("MWDOC"), the County's largest manager of imported water. More than 60% of the County's water is from local groundwater sources; the rest is imported. The County's natural underground reservoir is sufficient to carry it through temporary shortfall periods, but local supplies alone cannot sustain the present population. Recreation and Tourism The County is a tourist center in Southern California because of the broad spectrum of amusement parks and leisure, recreational and entertainment activities that it offers. These tourist attractions are complimented by the year-round mild climate. Along the County's Pacific Coast shoreline are five state beaches and parks, five municipal beaches and five County beaches. There are two small-craft docking facilities in Newport Harbor, a third located at Sunset Beach and a fourth at Dana Point. Other major recreational and amusement facilities include Disneyland, Disney's California Adventure, Knott's Berry Farm and the Spanish Mission of San Juan Capistrano. Also located within the County are the Anaheim Convention Center, Edison International Field of Anaheim, Arrowhead Pond of Anaheim, Orange County Performing Arts Center, Verizon Wireless Amphitheater and the Art Colony at Laguna Beach with its annual art festival. The Anaheim Convention Center is located adjacent to Disneyland. It is situated on 53 acres and is one of the largest convention centers on the West Coast. Table B-9 summarizes the number of conventions held in the County, as well as attendance for the period 1995 through 2004. DOCSLAl:510217.5 B-7 Book Page 192 TABLEB-9 COUNTY OF ORANGE CONVENTION ACTIVITY Year Conventions Attendance 1995 341 919,616 1996 385 914,806 1997 431 979,259 1998* 450 750,698 1999* 473 767,689 2000 470 858,593 2001 489 959,000 2002 547 1,008,171 2003 590 1,093,787 2004 666 1,211,476 Source: Anaheim/Orange County Visitor and Convention Bureau, 2005. * A portion of the decrease in 1998 and 1999 from attendance and expenditure levels of prior years is attributable to the effects of the construction of Disney's California Adventure theme park and related infrastructure projects. Transportation The County is situated in the most heavily populated area in California and has access to excellent roads, rail, air and sea transportation. The Santa Ana Freeway (Interstate 5) provides direct access to downtown Los Angeles and connects with the San Diego Freeway (Interstate 405) southeast of the City of Santa Ana, providing a direct link with San Diego. The Garden Grove Freeway (State 22) and the Riverside Freeway (State 91) provide east-west transportation, linking the San Diego Freeway, Santa Ana Freeway and the Newport Freeway (State 55). The Newport Freeway provides access to certain beach communities. Drivers in the County have access to two toll road systems of the Transportation Corridor Agencies. The San Joaquin Toll Road (73) runs from Costa Mesa to San Juan Capistrano connecting to the 405 and 5 interstate freeways. The Eastern and Foothill Toll Roads (241, 261 and 133) connect the County to the 91 freeway in the north and the 5 freeway, City of Irvine other South County cities, as well as Laguna Canyon Road. The Transportation Corridor Agencies are planning to extend 241 to connect to the 5 freeway near San Clemente. Rail freight service is provided by the Burlington Northern Santa Fe Railway and the Union Pacific Railroad Company. Amtrak provides passenger service to San Diego to the south, Riverside and San Bernardino Counties to the east, and Los Angeles and Santa Barbara to the north. Metro Link provides passenger service to San Bernardino and Riverside counties to the east, the City of Oceanside to the south and Los Angeles County to the north. Bus service is provided by Greyhound Bus Lines. The Orange County Transportation Authority provides bus service between most cities in the County. Most interstate common carrier truck lines operating in California serve the County. The John Wayne Airport, owned and operated by the County, is the only commercial service airport in the County. It is approximately thirty-five miles south of Los Angeles, between the cities of Coast Mesa, Irvine, Newport Beach and Santa Ana. Major airlines, including Alaska, Aloha, America DOCSLA I :510217 .5 B-8 Book Page 193 West, American, Continental, Delta, Frontier, Northwest, Southwest and United fly from the airport to major cities throughout the country. In 2004, approximately 9.2 million passengers were served. In 1993, the Defense Base Realignment and Closure Commission directed the closure of Marine Corps Air Station (MCAS) El Toro ("El Toro" or "the base") effective July 1999. In November 1994, County voters approved Measure A, an initiative that amended the County General Plan to designate land at EI Toro for a commercial airport. In April 1995, the County was designated by the federal government as the Local Redevelopment Authority (LRA) for base planning. In December 1996, the Orange County Board of Supervisors, acting as the LRA, adopted the Community Reuse Plan and certified the supporting Environmental Impact Report 563. The adopted Community Reuse Plan, which included a commercial airport as its dominant feature, was subsequently submitted to the Department of Navy as the County's preferred Reuse Plan for El Toro. Further planning efforts culminated in the preparation of the Airport System Master Plan and Environmental Impact Report (EIR) 573. The planning phase was completed on October 23, 2001, when the Board of Supervisors acting as the LRA approved the ASMP and certified EIR 573 as complete. Opponents of the County's airport plan filed a lawsuit challenging EIR 573. On March 5, 2002, County voters adopted Measure W, the Orange County Central Park and Nature Preserve Initiative. Measure W repeals Measure A and amends the County General Plan to prohibit aviation uses and limit future development for the unincorporated portion of El Toro to park, open space, nature preserve and education and compatible uses. In light of the passage of Measure W, the County has discontinued all work related to the planning or development of a commercial airport at El Toro. The parties to the lawsuit challenging EIR 573 have entered into a stipulation staying that litigation, pending further action by the County. The City of Irvine has approved by the Local Agency formation Commission (LAFCO) to annex to the City the property that comprises the former MCAS El Toro. The County will no longer have jurisdiction over development plans for MCAS El Toro. Natural Disasters; Seismic Activity/Fires Natural disasters, including floods, fires and earthquakes, have been experienced in the County. Seismic records spanning the past half century and historic records dating from the 1700s through the early 1900s indicate that the County is a seismically active area. The State Office of Emergency Services indicates that significant tremors are likely to occur in several fault zones during the next 50 to 100 years, including a tremor of 7.0 on the Richter scale within the Newport-Inglewood fault system. The chance of a Richter 7 .0 earthquake occurring is estimated to be 1 to 2% in any year. For this reason, local building codes require that structures be designed to withstand the expected accelerations for the area without collapsing or suffering severe structural damage. Maps published by the State Department of Conservation indicate that portions of the County may be subject to the risk of earthquake-induced landslides or liquefaction. DOCSLAJ :510217.5 B-9 Book Page 194 APPENDIXC SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Pending DOCSLAl:510217.5 C-1 Book Page 195 APPENDIXD BOOK-ENTRY ONLY SYSTEM The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Certificates, payment of principal of and interest on the Certificates to Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the Certificates, and other Certificates-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, but the District and the Corporation take no responsibility for the completeness or accuracy thereof. The Depository Trust Company -Book-Entry Only System The Depository Trust Company ("DTC"), New York, NY, will act 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 name 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, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, PICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. 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 tum 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 DOCSLAl:510217.S D-1 Book Page 196 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 ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial 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 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 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 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. Prepayment notices shall be sent to DTC. If less than all of the Certificates within an issue are 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. 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 Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Prepayment proceeds, distributions, and dividend payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the District or the Trustee on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, nor its nominee, the Trustee, 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. DOCSLAl:510217.5 D-2 Book Page 197 A Beneficial Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Tender or Remarketing Agent, and shall effect delivery of such Certificates by causing the Direct Participant to transfer the Participant's interest in the Certificates, on DTC's records, to the Tender or Remarketing Agent. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Certificates to the Tender or Remarketing Agent's DTC account. 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 OTC 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 shall be registered in such names as are requested in a certificate of the District, in accordance with the Trust Agreement. 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 Indenture, 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 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. Whenever any Certificates shall be surrendered 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 DOCSLAl:510217.5 D-3 Book Page 198 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. DOCSLAI :510217.5 D-4 Book Page 199 APPENDIXE FORM OF APPROVING OPINION OF SPECIAL COUNSEL Upon the execution and delivery of the Certificates, Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, proposes to render its final approving opinion with respect to the Certificates in substantially the following form: [Date of Deli very] Orange County Sanitation District 10844 Ellis A venue Fountain Valley, California Ladies and Gentlemen: Orange County Sanitation District Certificates of Participati.on, Series 2006 (Final Opinion) We have acted as special counsel in connection with the execution and delivery of Orange County Sanitation District Certificates of Participation, Series 2006 evidencing principal in the aggregate amount of $200,000,000 (collectively, the "Certificates"). In such connection, we have reviewed the Master Agreement for District Obligations, dated as of August 1, 2000 (the "Master Agreement"), by and between the Orange County Sanitation District (the "District") and the Orange County Sanitation District Financing Corporation (the "Corporation"), the Installment Purchase Agreement, dated as of March 1, 2006 (the "Installment Purchase Agreement"), by and between the District and the Corporation, the Trust Agreement, dated as of March 1, 2006 (the "Trust Agreement"), by and among the District, the Corporation, and Deutsche Bank National Trust Company, as trustee (the "Trustee"), the Tax Certificate of the District, dated the date hereof (the "Tax Certificate"), opinions of counsel to the District, the Corporation, the Trustee and others, certificates of the District, the Corporation, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Installment Purchase Agreement. Certain agreements, requirements and procedures contained or referred to in the Master Agreement, the Installment Purchase Agreement, the Trust Agreement, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Certificates) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to any Certificate or the interest on the Installment Payments evidenced thereby if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than ourselves. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Our engagement with respect to the Certificates has concluded with their execution and delivery, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any DOCSLA I :SI 0217.S E-1 Book Page 200 parties other than the District. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, referred to in the first paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Master Agreement, the Installment Purchase Agreement, the Trust Agreement and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Installment Payments evidenced by the Certificates to be included in gross income for federal income tax purposes. In addition, we call attention to the fact that the rights and obligations under the Certificates, the Master Agreement, the Installment Purchase Agreement, the Trust Agreement and the Tax Certificate and their enforceability are subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitations on legal remedies against public bodies such as the District in the State of California. We express no opinion with respect to the enforceability of any indemnification, contribution, penalty, choice of law, choice of forum or waiver provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the real or personal property described in the Master Agreement or the Installment Purchase Agreement or the accuracy or sufficiency of the description contained therein of any such property. Finally, we express no opinion herein with respect to the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Certificates. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Master Agreement, the Installment Purchase Agreement and the Trust Agreement have been duly executed and delivered by, and constitute valid and binding obligations of, the District. 2. 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, solely from Net Revenues and other funds provided for in the Installment Purchase Agreement lawfully available therefor. 3. Assuming due authorization, execution and delivery of the Trust Agreement and the Certificates by the Trustee, the Certificates are entitled to the benefits of the Trust Agreement. 4. Interest on the Installment Payments paid by the District under the Installment Purchase Agreement and received by the registered owners of the Certificates 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. Such interest is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the accrual or receipt of such interest or the ownership or disposition of the Certificates. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP per DOCSLA I :510217 .5 E-2 Book Page 201 FAHR COMMITTEE AGENDA REPORT Orange County Sanitation District FROM: Lorenzo Tyner, Director of Finance/Treasurer SUBJECT: DISTRICT RATE MODEL GENERAL MANAGER'S RECOMMENDATION Informational item. SUMMARY Meeting Date 02-09-06 Item Number FAHR06-09 At a previous Finance, Administration and Human Resources (FAHR) Committee Meeting, the Committee members requested additional information regarding the District current rate model. To Bel. of Di~. Item Number Currently, aspects of the District's rate model are currently under review by an independent consultant, Bartle Wells Associates. The draft results of that review will be available for presentation in March. Based on the results of this study, we have selected Carollo Engineers to perform an update to the rate model that will be used to renew the District's user fee ordinance for FY 2006-07. However, as a prelude to that discussion, I would like to provide some information regarding the District's current revenues, including fee income obtained as a result of the current rate model. The 2005-06 Adopted Budget includes approximately $465 million in new revenue. This revenue can be divided into three distinct categories: Fees, General Income and Debt. Fees General Income Debt $155 million (33%) $109 million (23%) $200 million (43%) $465 million Total A) Fees -$155 million (33%) 1) General User Fees $134 million User fees are ongoing fees for service paid by customers connected to the sewer system. A property owner, or user, does not pay user fees until connected to the sewer system and receiving services. Once connected, a user is responsible for his share of the system's costs, both fixes and variable, in proportion to his Book Page 202 demand on the system. These fees are for both Single Family Residences (SFR) and Multiple Family Residences (MFR). 2) Permit User Fees $13 million Fees paid by large industrial and commercial properties owners connected to the sewer system. These fees are for the owner's share of the system's costs, both fixes and variable, in proportion to his demand on the system. Since the inception of the Permit User Fee program in 1970, users of the District's system that discharge high volumes or high strength wastewater have been required to obtain a discharge permit and pay extra fees for the costs of service. The fees are initially calculated on the basis of actual flow, Biochemical- Oxygen Demand (BOD), and Suspended Solids (SS) discharge to the sewer and subsequently reduced by the actual property taxes they have paid to the District. This practice was intended to ensure that these users paid their actual cost of service through a combination of user tees and property taxes. 3) Connection Fees $9 million The connection fee is a one-time fee equal to the cost necessary to physically connect a property to the District's system, including but not limited to, installation of meters, meter boxes, pipelines and appurtenances to make the connection and which and fee does not exceed the actual cost of labor and materials, and overhead for the installation of those facilities. B) General Income -$99 million (23%) 1) Property Taxes $36 million The County is permitted by State law (Proposition 13) to levy taxes at 1 percent of full market value (at time of purchase) and can increase the assed value no more than two percent per year. The District receives a share of the basic levy proportionate to what was received in the 1976 to 1978 period less $3.5 million, the amount that represents the State's permanent annual diversion from special districts to school districts that began in 1992-93. The District's share of the one percent ad valorem property is dedicated for the payment of COP debt service. The apportionment of the ad valorem tax is pursuant to the Revenue Program of the Environmental Protection Agency and the State Water Resources Control board and in accordance with COP documents and Board policy. 2) Interest $19 million Interest earnings are generated from the investment of accumulated reserves consisting of a cash flow/contingency, a capital improvement, a renewal/replacement, and a self-insurance reserve. 3) Other $53 million Irvine Ranch Water District-$29M ($23M Capital Charges & $6M O&M Charges) Equity Sale -$9M ($4M Joint Operating Revenues, $3M Capacity Sale to SAWPA) Capital Improvement Program (CIP) Reimbursement-$6M Book Page 203 C) Debt -$200 million (43%) 1) Certificates of Participation (COP) Rates Certificates of Participation (COPs) are the District primary mechanism for financing capital projects. COPs are repayment obligations based on a lease or installment sale agreement. COPs are not viewed as "debt" by the State of California, but rather a share in an installment arrangement where the District serves as the purchaser. As the capital program winds down, and the District issues less debt, fees will represent a larger percentage of the District's cash flow. Fees are generated according to the District current rate model. As previously mention, results of an independent review of the rate model will be available in March. Important elements of the review will include: 1) Review the fees and charges levied by OCSD and make recommendations regarding the fees and charges based on applicable legal and regulatory standards. 2) Review the appropriate allocation of costs for operating, maintaining refurbishing, and replacing facilities to serve existing users and the costs of expanding facilities to serve future users. 3) Review that the allocation and amount of costs of providing service is adequately based on appropriate costs of service principals and applicable legal standards. 4) Review that the allocation of costs, including non-assignable costs, between flow, bio-chemical demand (BOD), and suspended solids (SS) is appropriate. 5) Review that the costs of providing full secondary treatment and the groundwater replenishment system are appropriate and allocated equitably. Upon the completion of this review, staff will present the findings and other recommendations. LT Book Page 204 FA HR COMM ITTEE Meeting Date To Bel. of Dir. 02/08/2006 AGE NDA RE PORT Item Number Item Number FAHR06-10 Orange County Sanitation District FROM: Lisa L. Tomko, Director of Human Resources Originator: Sonja Morgan, Principal Public Information Specialist SUBJECT: Public Affairs Strategic Plan FY 2005-2006 Quarterly Update GENERAL MANAGER'S RECOMMENDATION For information only. SUMMARY This quarterly review provides an update on the objectives from the FY 2005-2006 Strategic Plan. PRIOR COMMITTEE/BOARD ACTIONS Strategic Plan FY 2005-2006 received and filed by the Board on June 8, 2005. Quarterly update presented to FAHR in October 2005. PROJECT/CONTRACT COST SUMMARY N/A BUDGET IMPACT D This item has been budgeted. (Line item: ) D This item has been budgeted, but there are insufficient funds. D This item has not been budgeted. cgj Not applicable (information item) ADDITIONAL INFORMATION Board Services Objectives: 1. Board Information a. Documented all Board and Committee proceedings. b. Reviewed OCSD's official actions on a monthly basis to ensure compliance with OCSD policies. c. Maintained current Board and Committee meeting and submittal calendars on internal/external web sites. H:\dept\agenda\FAHRIFAHR2006\0206106, 1 a.Public Information Ortly Update.doc Revised: 2/1/2006 Book Page 205 Page 1 d. Uploaded all Board and Committee action documentation for access by the public, making Board actions visible in a timely manner. e. Updated agenda report procedures in preparation for bi-annual training. f. Maintained mailing lists based on requirements. g. Achieved 100 percent success in mailing of Board and Committee packages, five to seven days in advance of meeting. h. Completed Board of Directors' survey with 80% response. Survey indicates directors are satisfied with the current Board and Committee formats. i. Maintained current archiving of district action-related materials. 2. Records Management a. Fall Records Cleanup Days were held November 8 -10, with 17 divisions participating. Division 630 was the cleanup winner, and the onsite shredding bins were a great success. b. Twelve Public Record Act Requests were processed, and the requestor notified within 24 hours of the status of their request. One request remains on hold, awaiting payment of the copying fees. c. Juanita Skillman, Records Management Specialist, presented at the CSDA Conference in Long Beach on "Retention Scheduling for Special Districts." 3. Other Administrative Services a. User group for Meeting Services held and the Meeting Planner Form revised with suggestions from the group. Public Information Office Objectives: 4. Biosolids a. Responded to media requests within requested deadline, including: the Bakersfield Californian, Orange County Register and National Public Radio station KPCC. One article and one radio interview resulted from these inquires. b. Updated informational biosolids collateral materials. c. Updated MyOCSD and www.ocsd.com. d. Provided project support for Compost Use Program by developing collateral and presentation materials for upcoming Compost Workshop in February. 5. Community Educatibh and Outreach a. Scheduled four community events including Kids' Conference on Watersheds, Childrens' Water Festival, QC Science and Engineering Fair and H:\deptlagenda\FAHR\FAHR2006\0206\06.1 0.Public Information Qrtly Update.doc Resised: 2/1/2006 Book Page 206 Page2 CoastKeeper Watershed Expert Panel to be conducted in the third and fourth quarters. b. Scheduled Sewer Science programs for Tustin High School, Edison High School and Century High School to be conducted in the third and fourth quarters. c. Provided 21 tours to 287 visitors during the second quarter. d. Maintained an average of 25 volunteers through the Volunteer Incentive Program. Recruited six new guides, of which three have been trained to date. 6. Construction/Capital Improvement Program (CIP) Outreach a. Thirty calls regarding projects were received and successfully addressed through the Construction Hotline. b. Eleven notifications were distributed to over 7,000 residents and businesses. c. Updated collateral materials, fact sheets and Web site with current construction information. 7. External Communications a. Updated Web site with current information including news stories, press releases and reports. b. Updated the press kit materials. c. Worked closely with the media to respond to requests for information. d. Completed communication sections of Sewer System Management Plan in support of WDR/SSMP requirements. e. Working closely with Source Control division to expand FOG Outreach Program in Tustin and Unincorporated areas, specifically targeting "Hot Spots" in residential and high-density housing areas. f. Wrote and distributed five press releases, including: 11/29/2005: OCSD Receives FEMA Assistance 11/22/2005: Holiday Dinners that Stick to Your Ribs Not Your Pipes 11/25/2005: GWR System Wins Prestigious Governor's Award 11/17/2005: OCSD Board Appoints New Interim General Manager 11/16/2005: OCSD Wins Prestigious Award 10/05/2005: Orange County Sanitation District Names New Director of Finance g. Developed and published a "Year End Review" brochure for FY 2004-2005 summarizing programs and initiatives highlighting OCSD's commitment to protecting the public health and environment. H:\dept\agenda\FAHRIFAHR2006\0206\06.10.Public Information Ortly Update.doc Revised: 2/1/2006 Book Page 207 Page3 8. Groundwater Replenishment System a. Successfully worked with the Orange County Water District (OCWD) to secure a new GWR System public relations firm by November 2005. b. Continually working with OCWD and public relations consultants to inform Orange County constituents about GWR System. This includes participating in monthly public affairs and steering committee meetings. 9. Internal Communications a. Updated content on MyOCSD with over 50 articles. b. Published three News Pipeline issues. c. Communications Assessment was conducted in May 2005 to evaluate our internal communications efforts and to identify the areas that had potential for improvement. • The initial results provided the framework for the modifications that took place over a six-month period. (Final report included) • In November, a follow-up assessment was conducted to measure the effectiveness of the modifications that were made as a result of the May 2005 assessment. 10. Unifying Strategies a. Asset Management -Continue to implement elements identified in the Asset Management Communications Plan, including writing and posting information on internal and external Web sites. b. Watershed Management Program -Supported launch of OCSD's watershed program initiative on MyOCSD (internal Web site.) c. Workplace Communications -This initiative has been identified as core business and was therefore removed from the Unifying Strategies. Future reporting will be listed under internal communications. d. Business Plan -Assisted with the development of an agency-wide three-year staffing plan. This agency-wide effort is currently underway. Legislative Advocacy and Grants Division Objectives: 11 . Legislative Advocacy a. Participated in weekly legislative meetings. b. Tracked bills and legislative activities. c. Developed a legislative agenda. H:\deptlagenda\FAHRIFAHR2006\0206\06.10 Public Information Ortly Update.doc Revised: 2/1/2006 Book Page 208 Page4 ALTERNATIVES N/A CEQA FINDINGS N/A ATTACHMENTS None H:\dept\agenda\FAHRIFAHR2006\0206\06.10.Public Information Ortly Update.doc Revised: 2/1/2006 Book Page 209 Page 5 , 3. Approve Revision C (see attached) which allows for a $2,500 Annual Administration Fee and each claim billed at a rate of $1310 per Indemnity case and $140 per Medical Only case. 4. Direct staff to initiate a bid proposal process for workers' compensation third party administration services. !Cambridge ~ Integrated Services Group, Inc. Confidential Renewal Proposal Orange County Sanitation District Pricing Effective Through July 1, 2007 All Services Are Life of Contract Services Provided Fee Basis Current Package Workers Compensation $26,500 Flat Annual Fee Indemnity Up to 30 claims of any type included in flat Medical Only fee. Telephonic Intake Included A. Revision: Flat Fee Option A Workers Compensation $16,000 Flat Annual Fee Indemnity Up to 1 O Indemnity claims included; Additional billed at $1310 per claim Medical Only Up to 20 Medical Only claims included; Additional billed at $140 per claim Intake Unlimited Fax or Email Intake Up to 30 Telephonic Intake reports included Additional Telephonic reports billed at $24 per claim B. Revision: Flat Fee Option B Workers Compensation $11,500 Flat Annual Fee Indemnity Up to 7 Indemnity claims included; Additional billed at $1310 per claim Medical Only Up to 14 Medical Only claims included; Additional billed at $140 per claim Intake Unlimited Fax or Email Intake Up to 21 Telephonic Intake reports included Additional Telephonic reports billed at $24 per claim a Cambridge ~ Integrated Services Group, Inc. C. Revision: Per-Claim Option C Workers Compensation Indemnity Medical Only Administration Fee Intake Confidential Renewal Proposal $1,310 Per claim $ 140 Per claim $2,500 Annual Administration Fee Unlimited Fax or Email Intake Telephonic Intake billed at $24 per claim BILLING & PAYMENT The Claims Administration Fee is currently billed in 4 equal quarterly installments, beginning at the inception date of the contract. Ovation Query fees of $1000 per user, per year, are billed with the first quarterly installment. SW H:\dept\hr\open\FORMS\Staff Report -Blank.doc Key Meetings Dates FY06-07 & FY07-08 Budget Development Meeting (cont'd) Regularly Scheduled Board Meeting Regularly Scheduled Board Meeting • Board 1st Reading of Sewer Service User Fee Schedule for FY05-06 April FAHR Committee Meeting • Initial review of the major budget elements Additional FAHR Budget Meeting (tentative) • Continued review of the major budget elements Date 03/22/06 04/26/06 04/12/06 04/19/06 Key Meetings Dates FY06-07 & FY07-08 Budget Development Meeting (cont'd) Initial -Proposed FY05-06 Budget Regularly Scheduled Board Meeting Date OMTS -05/03/06 PDC -05/04/06 FAHR -05/10/06 05/24/06 • Board Holds "Public Hearing" for Rate Schedule Ordinance • Board Adopts Sewer User Fee Schedule for FY06-07 Final Draft -Proposed FY06-07 Budget PDC -06/01/06 OMTS -06/07 /06 FAHR -06/14/06 Public Hearing & Board Adoption of Budget 06/28/06 Assumptions FY06-07 & FY07-08 Budget Development Econ.omic: • Inflation for Orange County is projected to be approximately 4°/o* Revenue: • Single-family residence (SFR) user rate will increase 20°/o in FY06-07 & FY07-08 • Any change in Board direction regarding this assumption will be included in the final budget Assumptions FY06-07 & FY07-08 Budget Development Operating: • Average daily flow is projected to be unchanged from FY04-05 projection of 250 MGD • All existing secondary treatment facilities will be operated and maintained at full capacity • Interim disinfection facilities will be operated and be maintained at existing levels and cost • Operating expenses will increase in most areas are expected Assumptions FY06-07 & FY07-08 Budget Development Staffing: • Additional staffing requests, not to exceed 1 °/o, are anticipated for FY06-07 & FY07-08 • A 5°/o vacancy factor will be budgeted for FY06-07 & FY07-08 for authorized positions • Salary adjustments, based on the MOUs, will result in increases between 4°/o-5°/o Assumptions FY06-07 & FY07-08 Budget Development Reserves: • Current reserve policy is unchanged Debt Financing -Certificates of Participates (COP): • OCSD will continue to COPs as it primary method of financing its capital program • OCSD will issue COPs of $205M and $275M in FY06-07 & FY07-08, respectively Assumptions FY06-07 & FY07-08 Budget Development Capital Improvement Program (CIP): • FY06-07 & FY0?-08 CIP Cash flow is based on the current Validated CIP • The baseline CIP for FY06-07 & FY07-08 is $282M and $356M, respectively FY 2005-06 Mid-Year Comprehensive Annual Financial Report Orange County Sanitation District Collection, Treatment, and Disposal Net Operating Costs • 47.5% ($53.99M) of budget expended • 8.9% ($4.4M) of increases • Total operating costs expected to remain at or below budget Mid-Year Joint Operating Results • Salaries, Wages and Benefits 50o/o of budget • Staffing -44 FTEs (7% below 644 approved) • Operating Expenses $1.0M higher than last year • $8.9M chemicals (largest expense item), 43% of $21 M budget • Contractual Services 50o/o ($7.2M) of $14.4M budget • $10.02M solids removal costs • Professional Servrces 26.6o/o ($1.2M) of $4.4M budget Mid-Year Joint Operating Results (cont'd} • Utilities 66°/o ($4M) of $6 .0?M budget • Util•ities are estimated exceed the budget by $492,000 • Purchasing electricity for power production to supplement digester gas for Central Generation • Lower natural gas costs, higher electricity costs • Other Non-Operating Expenses 92°/o ($2.5M) of $2.7M • $2.4M cooperative projects grant program ($2.5M budget) Mid-Year Joint Operating Results (cont'd) Major Revenues: • Service Fees 44°/o ($62M) • Property Taxes 45o/o ($16M) • Permittee User Fees 63o/o ($BM), estimated to exceed by $1 .6M • Treatment and Disposal Revenue 73°/o ($3M), estimated to exceed by $2M • Capacity Rights and Debt Proceeds no activity Comparative Treatment Costs Partial Total (O&M, Compliance, Lab) Cost I MG Cost / MG San Diego ................... $ 1,621 City of Los Angeles ....... $ 1,261 Modesto ..................... $1,252 OCSD ........................ $ 1,246 ....... $ 731 LA County San District .................... $ 767 rev 2/02/06 Questions? ,,. Visit Our Website: www.OCSD.com Background Orange Count Sanitation District Communications Assessment Results May 2005 The Orange County Sanitation District strives to enhance communication with our employees so that OCSD's mission, goals and programs are understood and supported. The primary efforts of internal communications are designed to maintain close relationships with our employees in order to boost morale and performance. A communications assessment is a tool (in this case a survey) that measures the effectiveness of current communication efforts. This assessment focused mainly on internal communications. An assessment looks at the current communications efforts and provides information to aid in planning for the future. Assessments are also used to help identify areas where new communication programs could be established to better meet employee information needs or modify existing programs to make them more effective. There have been three prior audits of this type conducted at OCSD. The first was in January 1996 with a "mini audit" conducted six months later, the second was conducted in May 1997 and a third one in 1999. Unfortunately, there are no original records of the above mentioned audits. The following response rates were reported (based on available data): 1996 Unknown Research 1997 34% 1999 Approximately 50% The development of the 2005 Communications Assessment utilized past OCSD surveys, research of other public and private organizations, analysis of research methods and informational interviews with OCSD employees. With today's advanced technology, the optimum method to deliver this survey was by utilizing an online resource -Survey Monkey. This would provide the ability for fast response and immediate results. However, after conducting the research and interviewing the employees, it was discovered that although the online survey is a great tool and could save time on analyzing the results, it was not a tool that OCSD employees were ready to use. Employees were apprehensive about completing an online survey due to the tracking capabilities the internet provides and the presumable lack of anonymity. 1-1 :\dcpt\pa\330\Projcct Manugcment\PROJECTS\J\pprovcd\Comm Aud it JC\Documcnts\Results\052005 _ Cornmtmications Assessment Report.doc Therefore, the method we chose was hard copies, tracked only by division numbers. Survey Method The goal of the 2005 Communications Assessment was to increase the response rate and to capture responses that were uninhibited and honest. It was based on these goals that the decision to conduct the assessment in a hard copy format was decided. The survey method and distribution is outlined below: 1. Develop a plan for the communications assessment that includes: a. Distribution methods b. Incentives for participation c. Reporting options 2. Attend a Manager's meeting to discuss: a. Need for the assessment b. Importance of management support c. Importance of staff participation 3. Distribute to Administrative Assistants: a. Employee surveys with 2 raffle tickets and; b. Cover letter stating the importance of the employee participation that was signed by the Public Information Office. 4. Provide a separate letter to the Administrative Assistants with directions on how to distribute surveys to ensure confidentiality. 5. Provide individual incentives (gift certificates to various locations) to those who participated in the survey. 6. Provide group incentives (pizza party) to divisions that obtained a 100 percent response rate. 2005 Results Our overall response rate was 65 percent. It appears that for the most part, employees feel they are receiving a sufficient level of reliable information from a variety of sources (see attachment for a complete list of results.) What will Change Despite the high marks received in many areas from the 2005 Communications Assessment, there is always room for improvement. The Public Information Office (PIO) will focus on making modifications to areas where the results of the assessment showed room for improvement. As a result of the assessment, modifications to the internal communications program will be implemented immediately. H:\dept\pa\330\Project Management\PROJECTS\Approved\Comm Audit JC\Documents\Results\052005 _ Communications Assessment Report.doc In November, after 6 months from the initial Communications Assessment, we will conduct a follow-up assessment to determine if the modifications implemented improved the communications efforts. Modifications to the Internal Communications program to take place throughout the next six months are: 1. Media Coverage: I am satisfied with the information I receive about OCSD in the news (newspaper coverage, i.e.: the Register, LA Times, etc.) May 2005 results: Never-don't care 4% Never -but I would like to 5% Rarely 11% Sometimes 31 % Most of the time 38% Always 11% Past practice: The PIO sends an OCSD News Alert to the Board of Directors, EMT, Supervisors, Managers, and project staff, alerting them that the media (i.e.: reporters) will be writing an article on an OCSD-related topic. The purpose of the OCSD News Alert is to notify people in advance of the publication of an article. This provides an outlet to share information relayed to the reporter with the employees and the Board of Directors prior to seeing it published in the paper. After publication of the article, the PIO will distribute the article to the same people the OCSD News Alert went to with any corrections, modifications or clarification needed. Modified approach: Starting in July, as a result of the findings of the 2005 Communications Assessment, "All OCSD" News Alerts are posted to MyOCSD under "OCSD in the News." In addition, all articles published that are business-related and mention the Orange County Sanitation District, are posted on MyOCSD under "OCSD in the News." Distribution of OCSD News Alerts will continue to the OCSD Board of Directors, EMT, Managers and Supervisors. H:\dept\pa\330\Project Management\PROJECTS\Approved\Comm Audit JC\Documents\Results\052005 _ Communications Assessment Report.doc The EMT, Managers and Supervisors will receive the purpose and intent of OCSD News Alerts. The PIO will provide this information so there is a clear understanding of the expectation to forward the OCSD News Alerts to staff as they see fit. 2. MyOCSD (Intranet) May 2005 results: I visit MyOCSD ... More than once a day At least once a day Few times a week Once a week Rarely Past practice: 23% 27% 26% 15% 9% Previously when an employee launched Internet Explorer, MyOCSD opened as the homepage. Modified approach: Effective in August, MyOCSD is the first page that displays when logging onto an OCSD computer. May 2005 results: Do you feel MyOCSD maintains a good balance of information regarding (please check the boxes that apply): Soft news within OCSD Hard news within OCSD Current practice: Too Much 13% 2% Good Balance 79% 66% Need More 9% 32% Most of the stories on MyOCSD homepage come from the employees. Employees are usually willing to send fun stories about the babies, weddings and personal/professional accomplishments. Employees may not be aware that in order to get recognition, advertise or provide information to other employees regarding projects, they simply send the information to the PIO and we will write the story. Modified approach: The PIO will take a more active approach to identify hard news to post on MyOCSD. The PIO will write an article to solicit hard news stories to research. 3. Unifying Strategies: H:\dept\pa\330\Project Management\PROJECTS\Approved\Comm Audit JC\Documents\Results\052005 _ Communications Assessment Report.doc May 2005 results: I have an understanding of the Unifying Strategies. May 2005 results: Never heard anything I've heard about them Somewhat Completely 11% 22% 46% 21% If you have heard about the Unifying Strategies, where did you get the information? Unifying Strategies poster 23% "All Hands" meeting 25% News Pipeline 13% MyOCSD 11% Supervisor 9% Manager 11% EMT member 8% In the next six months, the PIO will focus on communicating the Unifying Strategies. Current practice : While in the development stages, limited communications has taken place in regards to the Unifying Strategies. This is an ongoing strategic planning process with frequent changes. The current practice has been to make announcements when needed. Modified approach: The PIO will develop a plan by October 31, 2005 with objectives, tactics and goals that are measurable regarding the understanding and knowledge of the Unifying Strategies. In the meantime, information will be developed and distributed via EMT, Managers, Supervisors, MyOCSD and Pipeline regarding the Unifying Strategies. The purpose is to accomplish agency-wide understanding of the process and to continue engaging the employees in this effort. What is Next Using the assessment conducted in May 2005 as a benchmark, a follow-up assessment will take place in November 2005. This follow-up assessment will measure the effectiveness of the modifications to the internal communications program as described above. Improvements will continue to be made as needed. H:\dept\pa\330\Project Management\PROJECTS\Approved\Comm Audit JC\Documents\Results\052005 _ Communications Assessment Report.doc Communications Assessment Graphs May 2005 In the past year, communications throughout OCSD has improved. Disagree 18% Highly disagree 1% Highly agree 12% Agree 69% 22% I have an understanding of the Unifying Strategies. Never heard anything 11% Somewhat 46% Completely 21% If you have heard about the Unifying Strategies, where did you get the information? Unifying Strategies poster 23% "All Hands" meeting 25% News Pipeline 13% EMT member 8% MyOCSD 11% Supervisor 9% Rarely 11% Sometimes 15% I attend Blake's All Hands Meetings. Never 10% Most of the time 30% Always 34% I receive beneficial information from Blake's "All Hands" meetings. Sometimes 24% Rarely 9% Never 7% Always 25% 35% Sometimes 31% I receive information from The News Pipeline. Rarely 5% Never 2% Always 25% 37% I receive information from the Bulletin Boards in the hallways. Rarely 34% Never 13% Always 5% Most of the time 9% Sometimes 39% I am satisfied with the information I receive about OCSD's future plans. /want more 35% Not interested 3% No 12% Yes 50% I am satisfied with the information I recieve about Management philosophy. /want more 27% Not interested 9% No 24% I am satisfied with the information I receive about news of other departments/divisions. /want more 35% Not interested 6% No 20% /want more 17% No 10% I am satisfied with the infomation I receive about OCSD's community involvement. Not interested 8% 65% No 10% I am satisfied with the information I receive about personnel changes/promotions /want more 13% Not interested 5% 72% I am satisfied with the information I recieve about human interest news on co-workers via MyOCSD. /want more 11% No 5% Not interested 9% 75% I am satisfied with the information I receive about general OCSD information. I want more 21% No 9% Not interested 3% 67% I am satisfied with the information I receive about OCSD in the news (newspaper coverage, i.e.: the Register) Sometimes 31% Never- butlwou/d like to Never- don't care 4% Always 11% 38% I would rate the overall content of the News Pipeline ... Poor 3% Good 65% Excellent Only selected articles 19% About half of it 10% When I receive The News Pipline, I read ... Little, if any, of it 7% I usually don't read it 3% All of it Almost all of it 33% The online News Pipeline keeps me up to date with OCSD news ... Sometimes 32% Never 2% Always 13% 45% MyOCSD -the new online version 60% How would you like to receive the News Pipeline? Hard Copy -the old format 40% Once a week 15% Few times a week 26% Rarely 9% I visit MyOCSD ... More than once a day 23% At least once a day 27% Sometimes 27% MyOCSD keeps me up to date with OCSD news ... Rarely 6% Never 1% Always 14% 52% 16-20 years 17% How long have you been with OCSD? 21 years or more 11% 11-15 years 25% Less than a year 7% 6-10 years 15% 1-5 years 25% Which of the following describes your job classification? Professional 35% Maintenance 19% Administrative/ Clerical 11% Technical Supervisor/Manager/D epartment Head 12% In the near future, we'll be conducting a short version of this survey to track our progress. How would you prefer to receive it? Hard copy 43% Online 57% A few of the questions that were used to gather the data are listed below, as well as a side-by-side comparison of the results from both assessments. For a complete list of questions and responses, see the appendix. 1. Media Coverage: I am satisfied with the information I receive about OCSD in the news (newspaper coverage, i.e.: the Register, LA Times, etc.) Never -don't care Never -but I would like to Rarely Sometimes Most of the time Always 2. MyOCSD (Intranet) I visit MyOCSD ... More than once a day At least once a day Few times a week Once a week Rarely May 2005 4% 5% 11% 31% 38% 11% May 2005 23% 27% 26% 15% 9% December 2005 4% 3% 8% 21% 50% 14% December 2005 32% 35% 16% 6% 4% Do you feel MyOCSD maintains a good balance of information regarding (please check the boxes that apply): Too Much Good Balance Need More May '05 Dec '05 May '05 Dec j05 May '05 Dec '05 Soft news within OCSD 13% 8% 79% 73% 9% 19% Hard news within OCSD 2% 2% 66% 57% 32% 41% H:\dept\pa\330\Project Management\PROJECTS\Approved\Comm Audit JC\Documents\Follow Up Assessment\0 I 0306 _Followup Communications Assessment Report.doc 3. Unifying Strategies: I have an understanding of the Unifying Strategies. May 2005 December 2005 Never heard anything 11% 3% I've heard about them 22% 20% Somewhat 46% 60% Completely 21% 17% If you have heard about the Unifying Strategies, where did you get the information? May 2005 December 2005 Unifying Strategies poster 51% 46% "All Hands" meetinQ 57% 55% News Pipeline 29% 30% MyOCSD 24% 36% Supervisor 21% 26% ManaQer 24% 27% EMT member 18% 19% What is Next? The responses we received demonstrated the need to continue improvement with MyOCSD to try to maintain a balance of hard (business-related) news and soft (human-interest) news. This effort will continue. The Public Information Office will continue to conduct assessments on a regular basis and make modifications to our internal communications program, as needed and deemed appropriate. H:\dept\pa\330\Project Management\PROJECTS\Approved\Comm Audit JC\Documents\Follow Up Assessment\010306_Followup Communications Assessment Report.doc I receive information from MyOCSD (Intranet) May 2005 Rarely 7% Never 1% Most of the time 37% December 2005 Sometimes 16% Most of the time 46% Rarely Never 3% 2% May 2005 60% Poor 1% I would rate the overall content of MyOCSD ... December 2005 58% Poor 2% Once a week 15% Few times a week 26% May 2005 Rarely 9% I visit MyOCSD ... December 2005 More than once a day Few times a Rarely 0.044 At least once a day 0.352 More than once a day 0.324 Sometimes May 2005 Rarely 6% Never 1% MyOCSD keeps me up to date with OCSD news ... 52% December 2005 Sometimes 16% Rarely 5% Never 2% Most of the time 56% Always 21% If you have heard about the Unifying Strategies where did you get the information ( circle all that apply) Unifying Strategies poster 50% May 2005 EMT member 18% News Pipeline 29% December 2005 Unifying Strategies poster 46% meeting 55% EMT member 19% News Pipeline 30% May 2005 21 years or more 11% 11-15 years 25% How long have you been with OCSD? Less than a year 7% 1-5 years 25% 6-10 years 15% December 2005 21 years of more 12% 11-15 years 24% Less than a year 6% 1-5 years 25% 6-10 years 16% Investment Management Program Orange County Sanitation District Strategy Review for the Period September 30, 2005 -December 31 , 2005 rrrrrrrrrrrrrrr~~~~~~~~;;;777777171111111111 A company of Allianz @) Global Investors Investment Management Program Orange County Sanitation District Strategy Review for the Period September 30, 2005 -December 31, 2005 rrrrrrrrrrrrrr ,-,- ~ l r __ ,__......,_......,......, ............. ....,_ \ ) , I I I ) J ' 7 ~ 77777171111111 Biographical Information John M. Miller, CFA Mr. Miller is a Senior Vice President and account manager, with a focus on institutional client servicing. In addition to those responsibilities, he manages the training and development of investment professionals new to the account management group. He joined PIMCO in 1999. Prior to that, he was an officer in the U.S. Army, achieving the rank of Captain. Mr. Miller holds a bachelor's degree in economics from the United States Military Academy, West Point and an MBA from the Harvard Business School. Christine Telish, CFA Ms. Telish is a Vice President and account manager, with a focus on institutional client servicing. She is also a member of PIMCO's municipal team, providing specialized servicing for tax-sensitive accounts. She joined PIMCO in 1994, and has seventeen years of finance, accounting, and investment experience. Ms. Telish holds a bachelor's degree in finance, real estate and law from California State Polytechnic University and an MBA from the University of California, Irvine. rr. rrrr~~r~-r-~~----------------~~~7~~~~~~~~1. ~ , > • I 1 ( j ) , I 1 ) J ) I • ) ) •J , Agenda I. Introduction, Performance & Market Review II. Economic Outlook & Strategy 111. Organizational Update PIM C 0 r~~rr-rr~r-r--------------~----~~-----~-~--1 '-" l I.._ ~ ~ l ~ i l ( ' I , , ' I I ) ~ j ) ) _) J ; ) ,,) ' Performance Review As of December 31, 2005 Orange County Sanitation District Liquid Operating Portfolio Market Value as of Dec. 2004 $ 73,088,641 Contributions / Withdrawals (15,000,000) Net Investment Earnings* Market Value as of Dec. 2005 $ Since Inception 1,984,148 60,072,789 7 6 ' 5 ,-... l 4 II) C L-.a 3 ~ ' 2 1 0 I-L , - 96 97 Performance •orange c X Annual Liquid 0~ --citigroup ,_ .. L ---~JlJl . 98 99 00 01 02 03 04 05 09/30/95 10 Yrs. 5 Yrs. 3 Yrs. 1 Yr. 9 Mos. 6 Mos. 3 Mos. Before Fees(%) Citigroup 3-Month Treasury Bill Index(%) 4.2 3.8 4.1 2.6 3.7 2.2 1.9 3.3 2.6 1.8 3.0 2.4 * Includes income and realized/unrealized gains and losses; all periods longer than one year are annualized. 4 1.9 1.0 1.7 0.9 PIM C 0 r rr, rrrrrrrrrr~-----------------~~~~~~~~~~,~1. '-c , . I_ ~ , , I v J ) I ) I I ) J ) ii ~ ,) ,) , Portfolio Strategy: Position for Slowing Economy • Anticipate end of Fed tightening cycle and steeper yield curve Interest Rate Strategies Sectors Strategies -Slightly above index duration -Focus on short and intermediate maturities • Mortgages: Overweight and emphasize coupon selection • Corporates: Underweight as credit spreads remain tight • TIPS: Retain small allocation to hedge against interest rate uncertainty 8 PIM C 0 r r-rr--r-r-i:.: l l, l rrr---------------------------.--} -------~7 ,) j Building on Fixed Income Expertise to Meet Client Needs Strategy Description Assets Traditional: Total Return Long Duration Moderate Duration Low Duration Enhanced Cash Money Market Stable Value Sector-Specific: Credit: Investment Grade Corporates High Yield Diversified Income CBO/CLO Mortgages Global Emerging Markets Municipals Real Return: Real Return Commodity Real Return All Asset, All Asset All Authority Real EstateReal Return Equity PLUS: StocksPLUS® and Stocks PLUS® Total Return Absolute Return Strategies PIMCO's flagship style: Core/ Core Plus Focus on long-term bonds Total return with intermediate duration Total return with shorter duration Active cash management and LIBOR-based strategies Maximize income while preserving capital Strategies that use book value wrappers High quality corporate bond portfolios Emphasis on uppertiers of high yield market Global credit combining corporate and emerging markets debt Collateralized bonds/loan obligations Emphasis on management of mortgage pass-throughs Non-U.S. and global approaches Focus on solid credits with improving economic fundamentals Tax-efficient total return management TIPS and other inflation-hedging strategies Commodity-linked exposure backed by a bond portfolio Tactical allocation among PIMCO funds Real Estate-linked exposure backed by a bond portfolio Combines passive equity index exposure with active bond management Libor based Absolute Return vehicles, includes private placement investments ~-- $205.1 19.7 5.8 19.8 12.5 14.1 19.2 9.7 21.0 2.8 5.2 9.2 120.1 17.2 8.6 33.7 12.5 11.0* 0.1 32.0 13.5 Total Assets Under Management: $594.0 B Assets as of December 31, 2005. PIMCO now includes the assets that it manages for third-party clients of its German affiliate, Allianz Dresdner Global Investors Germany. Potential differences in asset totals are due to rounding. • All Asset strategies are invested in PIMCO Funds; these assets are not included in the individual strategies. 10 PIM C 0 r r L L L L L L L Callan Associates Inc. Investment Measurement Service Quarterly Review Orange County Sanitation District December 31, 2005 The following report was prepared by Callan Associates Inc. ("CAI") using information from sources that include the following: fund trustee(s); fund custodian(s); investment manager(s); CAI computer software; CAI investment manager and fund sponsor database; third party data vendors; and other outside sources as directed by the client. CAI assumes no responsibility for the accuracy or completeness of the information provided, or methodologies employed, by any information providers external to CAI. Reasonable care has been taken to assure the accuracy of the CAI database and computer software. In preparing the following report, CAI has not reviewed the risks of individual security holdings or the compliance/non-compliance of individual security holdings with investment policies and guidelines of a fund sponsor, nor has it assumed any responsibility to do so. Copyright 2006 by Callan Associates Inc. r L L L L L L L L L Capital Markets Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Active Management Overview Market Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Domestic Fixed-Income ...................................................... 18 Asset Class Risk and Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Investment Manager Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Investment Manager Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Manager Analysis PIMCO-Liquid Operating Monies PIMCO-Liquid Operating Fund Bond Portfolio Characteristics Portfolio Characteristics Detail .............................................. 23 24 25 26 Disclosures ................................................................ 27 Ill r r II \;[\\ '1 ORf.:.. l 111( \1,0 \II \'\I\ I L L January 27, 2006 Mr. Michael D. White Controller Orange County Sanitation Districts 10844 Ellis A venue Fountain Valley, California 92728 RE: December 31, 2005 Quarterly Performance Report Dear Mike, Tue December 31, 2005 Quarterly Performance Report for the District's investment portfolio is attached This letter provides a qualitative summary of the most important points covered in the report. Market Overview Santa Claus never came to the U.S. stock market this December. A fourth quarter stock rally derailed after short-term Treasury yields (two-year) surpassed longer ones (five-year and 10- year), the first time since 2000. The last four times the yield curve became inverted, a recession followed. The S&P 500, a broad market indicator of US stocks, advanced 2.1 % for the quarter, and 4.9% for the year. Despite solid earnings and economic growth, escalating oil prices and the Iraq war plagued U.S. markets all year. Not surprisingly, energy was the best performing sector of the S&P 500 for 2005. Overseas market were more robust than domestic, and the emerging markets were especially rewarding. In December, the Fed increased short-term interest rates to 4.25%, its eighth rate hike of the year. For the quarter, the Lehman Aggregate Bond Index rose 0.59%, which is less than the coupon income. 2005 ended with the Treasury yield curve slightly inverted Tue disconnect between short and long-term yields in a rising interest rate environment prompted Fed Chairman Alan Greenspan earlier this year to call it a "conundrum." Returns for the bond market were led by the Treasury sector (+2.79%) for 2005. The dollar, helped by the U.S. interest rate hikes, came roaring back in 2005 to record its best performance in four year, climbing more than 14% versus the Euro and 15% against the Yen. Tue return in the portion of the bond market where the District invest, the defensive portion, was also affected by interest rate movements this past quarter. The Merrill 1-5 Year Corp/Govt bond index has a return for the quarter of 0.56%, bringing the year's return to 1.43%. That return lagged the cash return, as represented by the 90-Day Treasury bill return, at 3.07% for the year. r r [ L L L L L L L L L Mr. Michael White January 27, 2006 Page2 Manager Results The Liquid Operating Money account, managed by PIMCO, produced a 0.97% return for the quarter, slightly better than the return on the 90-day Treasury bill (0.92%), and higher than the prior quarter. For the calendar year, the portfolio gained 3.21 %, which is, again, above the 90-day Treasury bill return (3.07%). Over longer time periods, the portfolio ranks in the top decile of Callan's Money Market Mutual Funds Database, on an after-fee basis. As of December 31, 2005, the portfolio's yield is 4.1%, up from 3.8% in the prior quarter. The Liquid Operating Money account out performed the Long Term Operating Fund for both the quarter and the year. The Liquid Operating Money account was a direct beneficiary of the increases in short term interest rates that occurred over the course of the year, while existing holdings of 3-5 year securities in the other portfolio suffered some capital depreciation. The Long Term Operating Fund, also managed by PIMCO, produced a 0.85% return for the quarter, outperforming the Merrill 1-5 Year Gov/Corp index at 0.56%. A lower than benchmark duration contributed to out performance. The Fund has consistently performed in the top quartile over longer time periods in Callan's Defensive Fixed Income Style Group. The return for the quarter as calculated by Callan is higher than that reported by the manager (0.85% vs. 0.69%), and is the result of higher market values reported by the custodian ($279k). This discrepancy is common in bond portfolios, and is expected to wash out over time. It means that the Callan return is likely to lag the manager's return for the next quarter. Our policy is to use the custodian as the independent source of valuations. The Long Term Fund continues to hold one security rated below the 'A' rating minimum of your policy, based on Moody's ratings. The security is issued by United Airlines, a company in bankruptcy. A listing of the five lowest rated securities is provided on page 23 of the report. As for sector guidelines, the Fund has less than 30% invested in corporate notes, and the combination of asset backed securities and mortgages remains below 20%. Please do not hesitate to call me if you have any questions. Yours truly, Ruthann C. Moomy, Ph.D., CF A Senior Vice President r Mr. Michael White January 27, 2006 Page4 UPCOMING CALLAN EVENTS The Center for Investment Training: The "Callan College" • March 6-8 in San Francisco • March 27-29 in New York-Manager Session • May 1-3 in San Francisco The "Callan College" is designed to help participants learn all aspects of the investment management process and their role within it. R ECENT R~ E RCH P APERS/ U 1 ARIES • Farmland Investing: An Overview -By Bill Howard, CF A • The Basis for the Small Cap Alpha Phenomenon -Why Have Institutional Small Cap Portfolios Consistently Out-Performed the Market? -By Gregory C. Allen and Kelly S. Cliff, CFA • Observations & Opinions Winter 2005-2006: Implementing and Monitoring Asset- Allocation Funds • 2005 October Regional Breakfast Workshop Summary: "Investing to Match Liabilities" • 2005 October Regional Breakfast Workshop Presentation: "Investing to Match Liabilities" DC INSTITUTE RESEARCH • Reexamining the Default Option in a Defined Contribution Plan -By Matt Beck, CF A and Jason Ellement, FSA, CF A • 2005 October Defined Contribution Workshop: "Paternalism in Plan Design: A Debate about the Role of the Plan Sponsor" U.S.EQUITY Style Median and Index Returns* for Periods ended December 31, 2005 Last Last Last 3 Last 5 Last 10 Last 15 Quarter Year Years Years Years Years Large Cap-Broad Style 2.54 7.45 15.75 1.76 10.20 12.65 Large Cap-Growth Style 3.60 6.98 13.27 -3.16 9.05 11.99 Large Cap-Value Style 2.25 8.24 17.47 5.24 10.64 12.94 Aggressive Growth Style 3.47 9.24 19.92 -0.12 9.28 14.66 Contrarian Style 1.76 7.74 17.80 6.93 11.40 13.84 Core Style 2.31 7.07 15.15 1.40 10.20 12.14 Yield Style 1.61 7.80 16.38 6.27 10.51 12.70 f S&P 1500 2.12 5.66 15.24 1.48 9.47 11.97 S&P500 2.09 4.91 14.39 0.54 9.07 11.52 NYSE 2.11 9.39 17.98 4.18 10.34 12.23 Dow Jones lndust1ials 2.06 1.72 11.14 2.02 9.79 12.32 r Mid Cap-Broad Style 2.58 11.43 21.53 7.62 13.26 15.59 Mid Cap-Growth Style 3.71 12.92 20.81 -0.90 10.41 14.54 r Mid Cap-Value Style 1.92 9.97 21.82 11.61 13.80 16.09 S&P MidCap 400 3.34 12.56 21.15 8.60 14.36 15.98 f Small Cap-Broad Style 1.69 7.55 23.08 9.88 12.50 15.54 Small Cap-Growth Style 2.49 7.39 20.07 2.70 9.61 14.84 Small Cap-Value Style 1.26 9.10 24.19 15.96 15.65 17.54 r S&P SmallCap 600 0.39 7.68 22.38 10.76 12.16 15.17 Russell 2000 1.13 4.55 22.13 8.22 9.26 13.04 NASDAQ 2.73 2.13 18.89 -1.75 8.13 13.34 r. ~ Consumer Staples 0.15 3.58 8.08 1.74 7.16 10.08 Consumer Discretionary 1.62 -4.78 14.65 6.35 9.35 I 1.69 L Industrials 4.99 4.04 17.72 2.10 10.16 I 1.82 Energy -6.88 33.68 30.26 13.43 15.38 13.56 Materials 9.47 5.40 18.85 9.80 7.40 9.67 Information Technology 1.62 1.62 15.31 -7.26 6.85 I I .49 l Utilities -5.94 15.20 21.60 -0.06 7.99 9.93 Financials 7.85 6.66 16.21 5.39 14.15 17.72 Telecommunications -0.31 -5.75 6.61 -8.34 Health Care 1.52 7.47 9.34 -1.92 L l U.S. Equity Index Characteristics as of December 31, 2005 L S&P1500 S&PS00 S&P400 S&P600 Russell 3000 Cap Range 46-370,344 665 -370,344 423-14,582 46-3,700 11-371,737 Numberoflssues 1.500 500 400 600 2.994 L % ofS&P 1500 100% 87% 9% 4% Wtd Avg Mkl Cap $77.7B $88.5B $4.0B $1.4B $72.9B Price/Book Ratio 2.9 2.9 2.7 2.4 2.9 P/E Ratio (forecasted) 15.0 14.9 16.4 15.8 15.6 Dividend Yield 1.7% 1.8% 1.1% 0.9% 1.7% 5-Yr Earnings (forecasted) 12.2% 11.8% 14.9% 15.0% 12.5% L * Returns less than one year are not annualized. ** Returns prior to IQ03 are based upon Callan Broad Market's sector returns. L ,, ":;,'/"·'"'.~(),JC CAPITAL MARKET",;," CALLAN ASSOCIATES r U.S. FIXED INCOME Style Median and Index Returns* for Periods ended December 31, 2005 Last Last Last3 Last 5 Last 10 Last 15 r Quarter Year Years Years Years Years Core Bond Style 0.64 2.78 3.98 6.04 6.33 7.61 r'l!! Core Bond Plus Style 0.71 2.96 5.21 6.41 6.69 8.25 LB Aggregate 0.59 2.43 3.62 5.87 6.16 7.26 LB Govt/Credit 0.60 2.37 3.74 6.11 6.17 7.37 LB Govt 0.67 2.65 2.83 5.38 5.94 7.07 LB Credit 0.49 l.96 4.94 7.11 6.45 8.00 Citi Broad Investment Grade 0.65 2.57 3.75 5.93 6.19 7.31 [ Extended Maturity Style 0.82 5.11 6.67 8.41 7.60 9.55 LB Gov/Credit Long 0.93 5.34 6.58 8.32 7.44 9.17 [ LB Gov Long 1.01 6.61 5.70 7.59 7.40 9.14 LB Credit Long 0.84 3.76 7.81 9.49 7.43 9.13 ,, .. lntennediate Style 0.56 1.95 3.14 5.48 5.96 6.86 LB Intermediate Aggregate 0.55 2.01 3.18 5.50 5.97 6.85 LB Gov/Credit Intermediate 0.51 1.58 2.97 5.49 5.80 6.73 LB Gov Intermediate 0.59 l.68 2.10 4.82 5.50 6.40 r LB Credit Intermediate 0.39 1.42 4.11 6.41 6.20 7.51 Defensive Style 0.70 2.14 2.10 4.17 5.15 5.95 r Active Cash Style 0.89 3.06 1.96 3.02 4.47 5.04 Money Market Funds (net of fees) 0.86 2.65 1.36 1.82 3.50 3.75 ML Treasury 1-3 Year 0.68 J.66 1.49 3.66 4.79 5.49 90-day Treasury Bills 0.92 3.07 1.84 2.34 3.84 4.06 High Yield Style 1.23 3.53 12.84 8.56 7.62 11.08 LB High Yield 0.68 2.74 13.77 8.85 6.54 10.39 (_ ML High Yield Master 0.66 2.81 13.15 8.75 6.80 10.15 Mortgages Style 0.63 2.86 3.79 5.82 6.55 7.48 LBMBS 0.60 2.61 3.46 5.44 6.18 7.02 LB ABS 0.58 2.09 3.03 5.45 5.99 LBCMBS 0.49 1.82 3.52 6.96 '-~ LB Muni 0.73 3.51 4.43 5.59 5.71 6.74 LB Muni 1-IOYear 0.47 l.68 2.97 4.60 4.91 LB Muni 3 Year 0.28 0.87 1.78 3.70 4.18 4.93 L U.S. Fixed-Income Index Characteristics as of December 31, 2005 Yield Modified Adj. Average %of %of Lehman Brothers Indices to Worst Duration Maturity LBG/C LB Aggregate L LB Aggregate 5.08 4.57 7.11 100.00% 100.00% LB Govt/Credit 4.84 5.15 7.68 100.00% 59.80% Intermediate 4.75 3.63 4.38 79.17% 47.34% Long-Term 5.16 10.92 20.22 20.83% 12.46% I LB Govt 4.55 4.71 6.56 60.85% 36.39% L!. LB Credit 5.28 5.84 9.42 39.15% 23.41% LB Mortgage 5.50 3.64 6.46 34.94% I LB Asset-Backed 5.02 2.60 2.99 1.27% LB Commercial Mortgage 5.12 4.63 5.62 3.99% Ll LB Corp High Yield 8.25 4.53 8.10 * Returns less than one year are not annualized. /,,,,er/; !"·"", CIJJ, CAPITAL MARKET,,,,,,,, CALIAN ASSOCIATES f L LONG TERM OPERATING FUND PORTFOLIO CHARACTERISTICS DETAIL DECEMBER 31, 2005 Weighted Average Portfolio Characteristics Total Fund, By Asset Class and By Sector Ending Percent Market of Effective Effective Sector Value Portfolio Cou11on Maturity Total Fund $302,778,432 100.0% 4.12 Asset Backed $1,981,516 0.7% 4.90 Afincies $114,529,253 37.8% 4.01 C Os $374,049 0.1% 4.87 Credit $37,283,735 12.3% 4.69 Mortgages $37,845,867 12.5% 5.03 Treasunes $80,217,829 26.5% 3.46 Non-Convertible Bonds $272,232,250 89.9% 4.09 Cash Equivalents $30,546,182 10.1% 4.37 5 Largest Holdings Ending Market Name Sector United St:itc.s Treas Nts. Dtd 00095 Treasuries Federal Home Ln Mtg Corp Medium Term Nts Fed Book En!Jgencie Federal Home Ln Bks Agencies Federal Natl Mtg Assn Agencies United States Treas Nts Treasuries Value $19,778.000 $18,092.030 $16,061 ,253 $15,085,229 $1 1,108,160 2.27 1.13 2.42 2.65 2.06 4.11 2.07 2.49 0.25 Percent of Portfolio 6.5% 6.0% 5.3% 5.0% 3.7% 5 Lowest Rated Holdings (Moody's Rating) Name Sector Federal Home Ln Bks Agencies United Aids Psthru Trs 6.831% 911/08 2001-1 CtfCI C Credit Small Business Admin Gtd Partn Ctfs 6.64% 211/11 Ser Sbi~ncics Public Svc Elec & Gas Co Credit Florida Pwr Corp Credit Ending Market Value $246,773 $1,136,236 $974,774 $1,401,830 $902,030 Percent of Portfolio 0.1 % 0.4% 0.3% 0.5% 0.3% 5 Longest Duration Holdings Name Sector Federal Home Ln Bks Agencies Small Business Admin Gtd Dev Partn Ctf 3/1121 Deb Ser 20o.g&cies United States Treas Nts Trea~urics Fed Horne Ln Bks Cons Bd 06119/2003 Agencies Goldman Sachs Group Inc Credit Ending Market Value $1,054,509 $2,677,075 $396.424 $2,932,483 $4,266,853 Percent of .Portfolio 0.3% 0.9% 0.1% 1.0% 1.4% 5 Holdings with Highest Effective Yield nme United Airls Psthru Trs 6.831%911/082001-1 CtfCI C Fnma Pool# 822731 Fnma Pool# 823232 Fnma Pool # 808933 Fnma Pool # 735227 ector Credit Mortgages Mortgages Mortgages Mortgages Ending Market Value SI, 136,236 $31 3,831 $3 ,17,275 $3,15,121 $880.572 Percent of Portfolio 0.4% 0.1% 0.1% 0.1% 0.3% Yield 4.73 3.33 4.78 4.84 5.29 5.28 4.31 4.77 4.37 Effective Yield 4.41 4.74 4.74 4.53 4.45 Effective Yield 4.78 21.16 4.76 4.63 4.88 Effective Yield 5.16 5.27 4.36 5.04 4.86 Effective Yield 21.16 5.74 5.72 5.71 5.67 OA OA Duration Convexitv Oualitv 1.94 (0.23) 0.99 O.Q3 2.21 (0.15) 0.05 (0.02) 1.91 0.01 3.06 l.47) 1.70 0.04 2.12 (0.25) 0.25 0.00 OA OA Duration Convexity 1.44 0.03 1.20 0.02 2.77 0.09 0.55 0.01 1.19 0.02 OA OA Duration Convexity 2.41 (0.57) 2.24 0.06 0.07 0.00 0.25 0.00 0.25 0.00 OA OA Duration Convexity 52 3 (0.63) 4.50 0.00 4.20 0.21 4.11 (0.73) 3.96 0.00 OA OA Duration Convexitv 2.24 0.06 3.21 (2.85) 3.53 (2.90) 2.66 (2.43) 3.57 (2.89) Aaa Aal Agcy Trs~ Aa 'i';cy rsy Aaa Aaa Ounlitv Trsy Agcy Aaa Agcy Trsy Qualifv NIA NIA NIA A3 A3 Quality Agcy Aaa Trsy AX~~ Quality NIA Agcy Agcy Agcy Agcy * All Statistics shown on the page are dependent on the securities in the portfolio being recognized (by their Cusip) and priced. In this case 99% of the securities in the portfolio (by market value) were recognized and priced. Orange County Sanitation District Ell Confidential -For Callan Client Use Only The list below represents those investment management organizations who purchased educational and/or consulting services from a division of Callan Associates as of December 31, 2005. Educational services includ.e those provided by the Callan Investments Institute and/or the "Callan College." Consulting services include manager consulting services provided by our Institutional Consulting Group, financial intermediary consulting services provided by our Independent Adviser Group and/or consulting to a manager's retirement plan provided by our Fund Sponsor Consulting Group. In no way do these relationships affect the outcome or process J:>y which any of Callan's services are conducted. Because Callan's client list of investment managers changes periodically, the information below may not reflect very recent changes that are not yet updated in our database. You are welcome to request a list of Callan's investment manag.er clients at any time. Manager Name Stone Ridge Investment Partners Stratton Management Systematic Flri_anqJal Management T, Rowe Prlce Assoc(ales, Inc. TAL Global Advisors ltd. Taplin, Canida & Habacht T~ompson, Siegel & Walmsley, inc. Thrivent Financial for Lutherans TtAA-CREF Tim1;1sSquare Capital Managem1;1nt, LLC Todd Investment Advisors, Inc. Trusco Qapltal Managern.em, Inc. TCW Asset Management Company UBS Union Bank of Californ1a USAllianz Investor Se.rvices, LLC U.S. Trust Asset Management Vanguard Group (The) Victory Capital Managemont Inc. WEDGE Capital Mana~emenl Wedgewood Partners. l~c. Wellington Management Company, LLP Wells Capllal Man·agernent We~tworth, 8auser and V[olich WestAM Westeln Asset Management Company Westfield Capl\al Management Westwood Management i:l:orporatlon William Blair & Co .. Inc. William D. Witter, Inc. Educational Services Page4ot5 y y y y y ,y y y y y y y y y y y y Consulting Services y y y y y y y y y y y y y y y y y y y y L L In October 1998, Callan's affiliate, Alpha Management, Inc. ("Alpha"), a registered broker-dealer, was acquired by BNY Brokerage, Inc. (formerly known as BNY ESI & Co.), a subsidiary of The Bank of New York Company, Inc. (collectively "BNY'). In that transaction, BNY purchased for cash the assets of Alpha. BNY and Callan also entered into a Services Agreement which provided that for a period of eight years (through 2006), BNY would make an annual service fee payment in a fixed amount to Callan. 92 percent of whloh was condllioned upon Callan achieving gross consulting revenues In excess of a specified amount during the preceding calendar year, which lhr,ishold amount was d,itermlned by reference trJ Callan's 1998 gross consulting revenues and remains in the same throughout the elght years. Essentially, payment of this 92% was conditioned upon Callan remaining In business through 2006. The remaining eight percent of the annual payment to Callan was conditioned upon BNY receiving gross commissions during the preceding annual period of a specified minimum amount from Callan clients that use Callan services and pay for all or a portion of Callan services through directed brokerage and soft dollar arrangements with BNY. The minimum amount of gross commissions necessary to satisfy this obligation remains the same throughout the eight years and was determined by reference to Alpha's business with Callan clients during 1998. Both of these minimum thresholds have been met easily for all the years following the execution of the Services Agreement and, the amount of the annual payment does not increase regardless of how much Callan's consulting revenues or BNY's gross commissions from Callan clients might exceed the minimum threshold. Callan has been advised by BNY that since 2000, BNY has not been tracking either Callan gross consulting revenues or BNY gross commissions as they relate to the 1998 Services Agreement and, for all practical purposes, both Callan and BNY have considered these annual payments as fixed. In addition, under the terms of the Services Agreement, Callan is obligated to advise all of its plan sponsor clients on an annual basis, and at the outset of a new relationship, of BNYs status as its preferred broker in those instances where the plan sponsor client chooses to pay Callan's fees through commissions paid to BNY for brokerage transactions, and to provide BNY with some of the same client information as was provided to Alpha prior to the sale. Notwithstanding such obligation to so advise its plan sponsor clients, all clients are advised that they are free to conduct brokerage, and to establish directed brokerage arrangements, with any broker of their choice. Calla n's fees for any services provided to its plan sponsor clients are always expressed and paid in hard dollars and are the same without regard to the brokerage arrangements which may have been made between the plan sponsor client and its broker. As to its investment manager clients, Callan is obligated to advise them that if they choose to pay Callao's fees through broker's commissions, BNY is its exclusive broker for that purpose and that the use of a third party brokerage firm for soft dollar arrangements may fall outside of the safe harbor under Section 28(e) of the Securitles Exchange Act of 1934. In addition, if payment for Callan services is received from a third party broker, Callan is to advise the Investment manager client of the exclusive brokerage arrangement with Callan and Inform BNY of the payment. As with its plan sponsor clients, Callan receives the same payment for its services regardless of whether payment comes from BNY, from a third party brokerage firm, or from the investment manager client. In summary, nothing in the Services Agreement affects the options available to a Callan client for payment of Callao's fees, which are always quoted and paid in hard dollars regardless of the method of payment selected by the plan sponsor or investment manager client. Those options are as follows: By paying cash via check or wire transfer. By electing to direct brokerage transactions to BNY. At the client's request. BNY will pay invoices submitted by Callan for its services to such client. By entering into a contract for services directly with BNY to acquire Callan's services from BNY. BNY will then contract with Callan for such services and will pay invoices submitted to it by Callan for such services. By selecting any brokerage operation of its choice as a means to pay Callan's fees; although the use of a broker other than BNY by an investment manager may not be consistent with the Section 28(e) safe harbor. 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