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12-044 Agreement, Magis Advisors for Financial Advisory Services on Potential Refinancing of the City’s 2002 Certificate of Participation
NEW ISSUE —FULL BOOK ENTRY RATING: S &P: "AA +" See "RATING" herein In the opinion of Quint & Thimmig LLP, San Francisco, California, Special Counsel, subject to compliance by the City with certain covenants, interest with respect to the Certificates is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but such interest is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In addition, in the opinion of Special Counsel, interest with respect to the Certificates is exempt from personal income taxation imposed by the State of California. See "TAX MATTERS" herein. $43,940,000 CERTIFICATES OF PARTICIPATION (2012 Refinancing Project) Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the CITY OF CUPERTINO (Santa Clara County, California) As the Rental for Certain Property Pursuant to a Lease Agreement with the Cupertino Public Facilities Corporation Dated: Date of Delivery Due: July 1, as set forth below The $43,940,000 Certificates of Participation (2012 Refinancing Project) (the "Certificates "), are being executed and delivered to provide funds to (a) refinance various public capital improvements throughout the geographic boundaries of the City and, in particular, to refund the City's outstanding Certificates of Participation (2002 Refinancing and Capital Improvement Project), (b) fund a reserve fund for the Certificates, and (c) pay costs incurred in connection with executing and delivering the Certificates. The Certificates will evidence direct, undivided fractional interests of the owners thereof in Lease Payments (as defined herein) to be made by the City of Cupertino, California (the "City ") to the Cupertino Public Facilities Corporation (the "Corporation ") for the use and occupancy of the Property (as defined herein) under and pursuant to a Lease Agreement, dated as of May 1, 2012, by and between the Corporation and the City (the "Lease Agreement "). The Corporation will assign its right to receive Lease Payments from the City under the Lease Agreement and its right to enforce payment of the Lease Payments when due or otherwise protect its interest in the event of a default by the City thereunder to The Bank of New York Mellon Trust Company, N.A., Los Angeles, California, as trustee (the "Trustee "), for the benefit of the registered owners of the Certificates. The Certificates will be executed and delivered in book -entry form only, and will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (referred to herein as "DTC "). Purchasers of the Certificates (the "Beneficial Owners ") will not receive physical certificates representing their interest in the Certificates. Interest with respect to the Certificates accrues from their date of delivery, and is payable semiannually by check mailed on each January 1 and July 1, commencing January 1, 2013. The Certificates may be executed and delivered in denominations of $5,000 or any integral multiple thereof. Payments of principal and interest with respect to the Certificates will be paid by the Trustee to DTC for subsequent disbursement to DTC Participants who will remit such payments to the Beneficial Owners of the Certificates. (See "THE CERTIFICATES — Book - Entry -Only System" herein). The Certificates are subject to redemption, as described herein. The City will covenant in the Lease Agreement to make all Lease Payments due under the Lease Agreement, subject to abatement during any period in which by reason of damage or destruction of the Property, or by reason of eminent domain proceedings with respect to the Property, there is substantial interference with the use and occupancy by the City of the Property or any portion thereof. The City will covenant in the Lease Agreement to take such action as may be necessary to include all Lease Payments in its annual budgets and to make the necessary annual appropriations for all such Lease Payments. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT CONSTITUTES A DEBT OR INDEBTEDNESS OF THE CITY OR THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATIONS OR RESTRICTION OR AN OBLIGATION FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. MATURITY SCHEDULE CUSIPt Prefix: 231210 Maturity Principal Interest Price or CUSIPt Maturity Principal Interest Price or CUSIPt (July 1 Amount Rate Yield Suffix (July 1 Amount Rate Yield Suffix 2013 $1,920,000 0.350% 100% FL4 2022 $2,425,000 3.000% 2.400 %c FV2 2014 2,040,000 0.500 100 FM2 2023 2,500,000 3.000 2.600c FWO 2015 2,055,000 2.000 0.750 FNO 2024 2,575,000 3.000 2.750c FX8 2016 2,090,000 2.000 1.050 FP5 2025 2,655,000 3.000 2.900c FY6 2017 2,135,000 2.000 1.200 FQ3 2026 2,730,000 3.000 100 FZ3 2018 2,180,000 2.000 1.500 FR1 2027 2,815,000 3.000 3.080 GA7 2019 2,220,000 3.000 1.650 FS9 2028 2,900,000 3.000 3.150 GB5 2020 2,290,000 3.000 1.900 FT7 2029 2,985,000 3.000 3.200 GC3 2021 2,355,000 3.000 2.100c FU4 2030 3,070,000 3.125 3.250 GD1 c Priced to the July 1, 2020, par call date. The Certificates were sold pursuant to competitive bidding on May 9, 2012, to Citigroup Global Markets Inc., at a true interest cost of 2.798743 %. The cover page contains certain information for general reference only. It is not a summary of all the provisions of the Certificates. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. See "RISK FACTORS" herein for a discussion of special risk factors that should be considered, in addition to the other matters set forth herein, in evaluating the investment quality of the Certificates. The Certificates will be offered when, as and if delivered and received by the Underwriter subject to approval by Quint & Thimmig LLP, San Francisco, California, as Special Counsel. Certain matters will be passed upon for the City by the City Attorney. Certain matters will be passed upon for the City by Quint & Thimmig LLP, San Francisco, California, as Disclosure Counsel. It is anticipated that the Certificates will be available for delivery to DTC in New York, New York, on or about May 23, 2012. Dated: May 9, 2012 t Copyright 2012, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by the CUSIP Global Services, operated by Standard & Poor's. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. CUSIP numbers have been assigned by an independent company not affiliated with the City and are included solely for the convenience of the registered owners of the Certificates. The City is not responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Certificates or as included herein. The CUSIP number for a specific maturity is subject to being changed after the delivery of the Certificates as a result of various subsequent actions including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Certificates. CITY OF CUPERTINO, CALIFORNIA Cupertino City Hall 10300 Torre Avenue Cupertino, CA 95014 -3202 (408) 777 -3200 Fax: (408) 777 -3366 http://www.cupertino.org CITY COUNCIL Mark Santoro, Mayor Orrin Mahoney, Vice Mayor Gilbert Wong, Council Member Barry Chang, Council Member Rod G. Sinks, Council Member CITY OFFICIALS David Knapp, City Manager's Carol Atwood, Administrative Services Director David Woo, Finance Director Grace Schmidt, Acting City Clerk Carol Korade, City Attorney SPECIAL SERVICES Financial Advisor Magis Advisors Newport Beach, California Special Counsel and Disclosure Counsel Quint & Thimmig LLP San Francisco, California Trus tee The Bank of New York Mellon Trust Company, N.A. Los Angeles, California *Mr. Knapp, City Manager of the City since 2000, has announced that he will become the City Manager of the City of Highland Park, Illinois, effective as of May 11, 2012. Amy Chan, retired city manager of the City of Sunnyvale, has been selected to serve as Interim City Manager until a permanent city manager is selected. The City has retained a recruitment firm to find a permanent city manager, a process that is expected to be completed by the end of 2012. No dealer, broker, salesperson or other person has been authorized to give any information or to make any representation other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of the Certificates by a person in any jurisdiction in which it is unlawful for such person to make an offer, solicitation or sale. 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, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information set forth herein has been obtained from the City and from other sources and is believed to be reliable but is not guaranteed as to accuracy or completeness. The information and expressions of opinions herein are subject to change without notice and neither the 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 City since the date hereof. This Official Statement is submitted in connection with 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 City. All summaries of the Certificates, the Lease Agreement, the Trust Agreement, the Assignment Agreement, the Site and Facility Lease, or other documents, are made subject to the provisions of such documents and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the Director Finance for further information. See "INTRODUCTION —Other Information." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER 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 MAY OFFER AND SELL THE CERTIFICATES TO CERTAIN DEALERS, INSTITUTIONAL INVESTORS AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SUCH PUBLIC OFFERING PRICES 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. No assurance is given that actual results will meet the City's forecasts in any way. Neither the City nor the Corporation is obligated to issue any updates or revisions to the forward - looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur or do not occur. The execution, sale and delivery of the Certificates has not been registered under the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, in reliance upon exemptions provided thereunder by Sections 3(a)(2) and 3(a)(12), respectively, for the issuance and sale of municipal securities. The City maintains a website. Unless specifically indicated otherwise, the information presented on such website is not incorporated by reference as part of this Official Statement and should not be relied upon in making investment decisions with respect to the Certificates. TABLE OF CONTENTS INTRODUCTION................................. ............................... 1 General............................................... ............................... 1 Source of Payment for the Certificates ......................... 2 TheCity .............................................. ............................... 2 Continuing Disclosure ..................... ............................... 2 Summaries of Documents ............... ............................... 3 Other Information ............................ ............................... 3 SOURCES AND USES OF FUNDS .... ............................... 3 PLAN OF FINANCING ...................... ............................... 4 THE PROPERTY ................................... ............................... 4 SEMI - ANNUAL DEBT SERVICE ...... ............................... 2 THE CERTIFICATES ........................... ............................... 3 General............................................... ............................... 3 Redemption....................................... ............................... 3 Transfer and Exchange of Certificates .......................... 4 Book -Entry Only System ................. ............................... 5 SOURCE OF PAYMENT FOR THE CERTIFICATES .... 6 General............................................... ............................... 6 Lease Payments; Covenant to Appropriate ................. 6 Insurance........................................... ............................... 6 Abatement......................................... ............................... 7 EminentDomain ............................... ............................... 8 Reserve Fund .................................... ............................... 8 Optional Prepayment ....................... ............................... 8 Mandatory Prepayment from Net Proceeds of Sales and Use Taxes ....................... ............................... Insurance, Title Insurance or Eminent Domain ........ 9 Substitution or Release of Site or Facility .................... 9 Amendment of Lease Agreement ............................... 11 THECITY ............................................ ............................... 11 CITY FINANCIAL INFORMATION .............................. 13 Financial Statements ...................... ............................... 13 Budgetary Process .......................... ............................... 13 City Financial Management Policies .......................... 16 Current Investments ...................... ............................... 17 Principal Sources of General Fund Revenues ........... 17 PropertyTaxes ................................ ............................... 19 Sales and Use Taxes ....................... ............................... 22 Motor Vehicle In -Lieu Tax ............ ............................... 23 General Fund Revenues and Expenditures ............... 25 Dissolution of Redevelopment Agencies ................... 27 OTHER FINANCIAL INFORMATION ......................... 28 Labor Relations ............................... ............................... 28 Risk Management ........................... ............................... 28 Employee Retirement Plans .......... ............................... 29 Other Post Employment Benefits . ............................... 32 Short -Term Obligations ................. ............................... 34 Long -Term Obligations ................. ............................... 34 Overlapping Debt ........................... ............................... 34 THE CORPORATION ....................... ............................... 35 CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS ........................... ............................... 36 Article XIIIA of the California Constitution .............. 36 Article XIIIB of the California Constitution ............... 37 Proposition 218 ............................... ............................... 38 Proposition 1A of 2004 ................... ............................... 39 Proposition22 ................................. ............................... 40 Proposition26 ................................. ............................... 40 Future Initiatives ............................ ............................... 41 RISK FACTORS .................................. ............................... 41 Lease Payments Are Not Debt ..... ............................... 41 Valid and Binding Covenant to Budget and 52 Appropriate................................... ............................... 42 Abatement....................................... ............................... 42 Risk of Uninsured Loss .................. ............................... 42 EminentDomain ............................. ............................... 43 Hazardous Substances ................... ............................... 43 Earthquakes..................................... ............................... 43 Bankruptcy...................................... ............................... 44 Limitations on Remedies ............... ............................... 44 Risk of Tax Audit ............................ ............................... 45 Revenue Concentration ................. ............................... 45 State Budgets ................................... ............................... 45 Loss of Tax Exemption .................. ............................... 50 Limited Secondary Market ............ ............................... 50 Changes in Law .............................. ............................... 50 Taxability Risk ................................ ............................... 51 ABSENCE OF LITIGATION ............. ............................... 51 CONTINUING DISCLOSURE ......... ............................... 51 FINANCIAL ADVISOR .................... ............................... 52 LEGAL MATTERS ............................. ............................... 52 TAXMATTERS ................................... ............................... 52 UNDERWRITING .............................. ............................... 54 RATING............................................... ............................... 54 FINANCIAL STATEMENTS ............ ............................... 55 ADDITIONAL INFORMATION ..... ............................... 55 APPENDIX A GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2011 APPENDIX C INVESTMENT POLICY OF THE CITY APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS APPENDIX F DTC'S BOOK -ENTRY ONLY SYSTEM APPENDIX G FORM OF CONTINUING DISCLOSURE CERTIFICATE 580 80 280 680 880 m m m m $43,940,000 CERTIFICATES OF PARTICIPATION (2012 Refinancing Project) Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the CITY OF CUPERTINO as the Rental for Certain Property Pursuant to a Lease Agreement with the Cupertino Public Facilities Corporation INTRODUCTION This introduction does not purport to be complete and reference is made to the body of this Official Statement, appendices and the documents referred to herein for more complete information with respect to matters concerning the captioned Certificates. Potential investors are encouraged to read this entire Official Statement. Capitalized terms used and not defined in this Introduction shall have the meanings assigned to them elsewhere in this Official Statement and in APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS DEFINITIONS. General This Official Statement, including the cover page and appendices hereto, is provided to furnish information in connection with the execution, sale and delivery of $43,940,000 aggregate principal amount of Certificates of Participation (2012 Refinancing Project) (the "Certificates ") . The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of May 1, 2012 (the "Trust Agreement "), by and among the City of Cupertino (the "City "), the Cupertino Public Facilities Corporation (the "Corporation ") and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee "). Proceeds of the Certificates will be used to (a) to refinance various public capital improvements throughout the geographic boundaries of the City and, in particular, to provide for the refunding of the City's outstanding Certificates of Participation (2002 Refinancing and Capital Improvement Project) (the "2002 Certificates "), (b) fund a reserve fund for the Certificates, and (c) pay delivery costs incurred in connection with the execution, delivery and sale of the Certificates. See "PLAN OF FINANCING." The City will lease certain existing property (collectively, the "Property ") to the Corporation pursuant to a Site and Facility Lease, dated as of May 1, 2012 (the "Site and Facility Lease "). The Corporation will lease the Property back to the City pursuant to a Lease Agreement, dated as of May 1, 2012 (the "Lease Agreement "). The Certificates are payable solely from and secured by certain lease payments ('"Lease Payments ") to be made by the City to the Corporation pursuant to the Lease Agreement. See "SOURCE OF PAYMENT FOR THE CERTIFICATES" and "THE PROPERTY." Interest with respect to the Certificates is payable on January 1 and July 1 of each year, commencing January 1, 2013. The Certificates will mature in the amounts and on the dates and be payable at the interest rates shown on the cover of this Official Statement. See "THE CERTIFICATES." The Certificates will be delivered in fully registered form only, in the name of Cede & Co., as nominee of the Depository Trust Company, New York, New York ( DTC will act as the depository for the Certificates and all payments due with respect to the Certificates will be made to Cede & Co. Ownership interests in the Certificates may be purchased only in book - entry form. See "THE CERTIFICATES—Book-Entry Only System" and APPENDIX F DTC'S BOOK -ENTRY ONLY SYSTEM. Source of Payment for the Certificates The Certificates represent direct, undivided fractional interests of the Owners thereof in the Lease Payments to be paid by the City to the Corporation pursuant to the Lease Agreement. Lease Payments are calculated to be sufficient to permit the payment of the principal and interest with respect to the Certificates when due. The Lease Payments are payable by the City from its general fund for the right to use and possess the Property. The Lease Payments are subject to abatement during any period in which by reason of damage or destruction there is substantial interference with the use and occupancy by the City of the Property or any portion thereof. The City will covenant under the Lease Agreement to take such action as necessary to include the Lease Payments in its annual budget and to make all necessary appropriations therefor (subject to abatement under certain circumstances described in the Lease Agreement). Pursuant to an Assignment Agreement, dated as of May 1, 2012 (the "Assignment Agreement "), by and between the Corporation and the Trustee, the Corporation will assign to the Trustee, for the benefit of the Owners of the Certificates, certain of its rights under the Lease Agreement, including its right to receive Lease Payments from the City for the purpose of securing the payment of principal and interest with respect to the Certificates. See "SOURCE OF PAYMENT FOR THE CERTIFICATES" and "RISK FACTORS." A Reserve Fund equal to the Reserve Requirement will be funded from the proceeds of the Certificates. Money in the Reserve Fund will be used by the Trustee in the event amounts in the Lease Payment Fund are insufficient to pay principal and /or interest with respect to the Certificates. See "SOURCE OF PAYMENT FOR THE CERTIFICATES Reserve Fund." THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT DOES NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT CONSTITUTES AN INDEBTEDNESS OF THE CITY OR THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATIONS. The City The City is located in Santa Clara County (the "County ") at the southern end of the San Francisco Bay Peninsula, approximately 11 miles northwest of San Jose and approximately 42 miles south of San Francisco. The City limits encompass approximately 13 square miles. As of January 1, 2011, the population of the City was approximately 58,747. See "THE CITY," "CITY FINANCIAL INFORMATION" and APPENDIX A GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY. Continuing Disclosure The City will covenant in a Continuing Disclosure Certificate to prepare and deliver an annual report to the Municipal Securities Rulemaking Board (the "MSRB ") through the MSRB's Electronic Municipal Market Access system. See "CONTINUING DISCLOSURE" and APPENDIX G FORM OF CONTINUING DISCLOSURE CERTIFICATE. -2- Summaries of Documents This Official Statement contains descriptions of the Certificates, the Trust Agreement, the Site and Facility Lease, the Lease Agreement, the Assignment Agreement and various other agreements and documents. The descriptions and summaries of documents herein do not purport to be comprehensive or definitive and reference is made to each such document for the complete details of all terms and conditions. All statements herein are qualified in their entirety by reference to each such document and, with respect to certain rights and remedies, to laws and principles of equity relating to or affecting creditors' rights generally. Copies of the various documents described herein are available for inspection during business hours at the corporate trust office of the Trustee at 700 South Flower Street, Suite 500, Los Angeles, CA 90017. Other Information This Official Statement speaks only as of its date as set forth on the cover hereof, the information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the City since the date hereof . Unless otherwise expressly noted, all references to internet websites in this Official Statement, including without limitation, the City's website, are shown for reference and convenience only and none of their content is incorporated herein by reference. The information contained within such websites has not been reviewed by the City and the City makes no representation regarding the accuracy or completeness of the information therein. SOURCES AND USES OF FUNDS The following table shows the estimated sources and uses of the proceeds from the sale of the Certificates and other moneys: TABLE 1 Sources Par Amount of the Certificates Plus: Net Original Issue Premium Less: Underwriter's Discount Plus: City Equity Contribution Total Sources Uses $43,940,000.00 883,838.90 (614,392.37) 21537,571.88 $46,747,018.41 Deposit to Escrow Fund (1) $44,897,800.40 Deposit to Reserve Fund (2) 11586,818.75 Deposit to Delivery Costs Fund �3� 262,399.26 Total Uses $46,747,018.41 Amounts deposited in the Escrow Fund will be used to defease the 2002 Certificates. See PLAN OF FINANCING. (2) The sum deposited in the Reserve Fund is equal to the Reserve Requirement being an amount equal to 50% of maximum annual Lease Payments c3� Delivery Costs include fees and expenses of the financial advisor, special counsel, disclosure counsel and the Trustee, printing expenses, rating fees, title insurance and other costs. -3- PLAN OF FINANCING Proceeds of the Certificates will be used to (a) provide for the defeasance and refunding of the 2002 Certificates, (b) fund the Reserve Fund, and (c) pay delivery costs incurred in connection with the execution, delivery and sale of the Certificates. A portion of the net proceeds of the Certificates will be used to refund, on a current basis, the 2002 Certificates. Under terms of an Escrow Deposit and Trust Agreement, dated as of the date of delivery of the Certificates, by and between the City and The Bank of New York Mellon Trust Company, N.A., as escrow bank, an escrow fund (the "Escrow Fund ") will be established. At closing, the total amount required to pay the principal and interest with respect to the 2002 Certificates to and including June 12, 2012, and to redeem all outstanding 2002 Certificates on June 12, 2012, at a redemption price equal to 100% of the principal amount of the 2002 Certificates, plus accrued interest to the date of redemption, will be deposited in the Escrow Fund. THE PROPERTY Pursuant to the Site and Facility Lease, the City will lease the Property to the Corporation. Pursuant to the Lease Agreement, the Corporation will, in turn, lease the Property back to the City. See APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS Site and Facility Lease and APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS Lease Agreement. The Property consists of: • City Hall and Administrative Offices: two story office building; 23,040 sq. ft., built 1965; reinforced concrete, fully sprinklered. Insured value: $6.2 million (structure only) • Cupertino Community HalllCity Council Chambers: one story multi- purpose building; 6,516 sq. ft., built 2004; wood frame structure, fully sprinklered. Insured value: $2.1 million (structure only) • Cupertino Library: two story, special purpose building (Class A); 53,864 sq. ft., built 2004; steel frame structure, fully sprinklered. Insured value: $22.3 million (structure only) • Land: 9.75 acres at corner of Torre Avenue and Rodrigues Street, the site of the above three buildings. Fee owned by the City. Appraised value: $23.4 million. Total value of all leased assets: $54 million Photos of these facilities are shown on the following page. For a description of certain terms of the Lease Agreement see "SOURCE OF PAYMENT FOR THE CERTIFICATES" and APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT. Pursuant to the Lease Agreement, the City may substitute the Property, in whole or in part, by other properties, upon the satisfaction of certain conditions. For more information regarding the substitution of property see "SOURCE OF PAYMENT FOR THE CERTIFICATES Substitution or Release of Site or Facility" and APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS Lease Agreement. The City has not granted any security interest in the Property for the benefit of the Certificates and there is no remedy of foreclosure on the Property upon the occurrence of an Event of Default under the Lease Agreement. For a discussion of remedies upon an Event of Default under the Lease Agreement, see "RISK FACTORS Limitations on Remedies." -4- Cu !rs SEMI- ANNUAL DEBT SERVICE The following table shows the scheduled semi- annual debt service for the Certificates: TABLE 2 Interest Payment Date (1) Principal Interest Total 1/1/13 $ 687,643.15 $ 687,643.15 7/1/13 $ 1,920,000 567,778.75 2,487,778.75 1/1/14 564,418.75 564,418.75 7/1/14 21040,000 564,418.75 21604,418.75 1/1/15 559,318.75 559,318.75 7/1/15 21055,000 559,318.75 21614,318.75 1/1/16 538,768.75 538,768.75 7/1/16 21090,000 538,768.75 21628,768.75 1/1/17 517,868.75 517,868.75 7/1/17 211351000 517,868.75 21652,868.75 1/1/18 496,518.75 496,518.75 7/1/18 211801000 496,518.75 21676,518.75 1/1/19 474,718.75 474,718.75 7/1/19 212201000 474,718.75 2,694,718.75 1/1/20 441,418.75 441,418.75 7/1/20 21290,000 441,418.75 21731,418.75 1/1/21 407,068.75 407,068.75 7/1/21 2,355,000 407,068.75 21762,068.75 1/1/22 371,743.75 371,743.75 7/1/22 21425,000 371,743.75 21796,743.75 1/1/23 335,368.75 335,368.75 7/1/23 2,500,000 335,368.75 2,835,368.75 1/1/24 297,868.75 297,868.75 7/1/24 2,575,000 297,868.75 2,872,868.75 1/1/25 259,243.75 259,243.75 7/1/25 2,655,000 259,243.75 2,914,243.75 1/1/26 219,418.75 219,418.75 7/1/26 21730,000 219,418.75 2,949,418.75 1/1/27 178,468.75 178,468.75 7/1/27 2,815,000 178,468.75 2,993,468.75 1/1/28 136,243.75 136,243.75 7/1/28 2,900,000 136,243.75 3,036,243.75 1/1/29 92,743.75 92,743.75 7/1/29 2,985,000 92,743.75 3,077,743.75 1/1/30 47,968.75 47,968.75 7/1/30 3,070,000 47,968.75 3,117,968.75 TOTAL $43,940,000 $13,133,759.40 $57,073,759.40 (1) Principal and interest payments with respect to the Certificates on each January 1 and July 1 are derived from Lease Payments made by the City on the preceding December 15 and June 15. The July 1 payments are derived from the City prior fiscal year budget. -2- THE CERTIFICATES General The Certificates will be executed and delivered in the aggregate principal amount and will mature on the dates and interest with respect thereto will be payable at the rates per annum as set forth on the cover of this Official Statement. The Certificates will be delivered in the form of fully registered Certificates without coupons in the denomination of $5,000 or any integral multiple thereof. Interest with respect to the Certificates will be calculated on the basis of a 360 - day year of twelve 30 -day months and will be payable on January 1 and July 1 of each year, commencing January 1, 2013 (each an "Interest Payment Date "), until maturity or earlier redemption thereof. The Certificates will be initially executed, delivered and registered in the name of "Cede & Co." as nominee of DTC and will be evidenced by one Certificate maturing on each of the maturity dates in a denomination corresponding to the total principal therein designated to mature on such date. See "THE CERTIFICATES—Book-Entry Only System." Interest with respect to the Certificates will be payable from the Interest Payment Date next preceding the date of execution thereof, unless: (i) it is executed as of an Interest Payment Date, in which event interest with respect thereto shall be payable from such Interest Payment Date; or (ii) it is executed after a Regular Record Date (i.e., the close of business on the 15th day of the month preceding each Interest Payment Date, whether or not such 15th day is a Business Day) and before the following Interest Payment Date, in which event interest with respect thereto shall be payable from such Interest Payment Date; or (iii) it is executed on or before December 15, 2012, in which event interest with respect thereto will be payable from its dated date; provided, however, that if, as of the date of execution of any Certificate, interest is in default with respect to any Outstanding Certificates, interest represented by such Certificate shall be payable from the Interest Payment Date to which interest has previously been paid or made available for payment with respect to the Outstanding Certificates. Payment of defaulted interest shall be paid by check mailed to the Owners as of a special record date to be fixed by the Trustee in its sole discretion, notice of which shall be given to the Owners not less than ten (10) days prior to such special record date. Payment of interest due with respect to any Certificate on any Interest Payment Date will be made to the person appearing on the Registration Books as the Owner thereof as of the Regular Record Date immediately preceding such Interest Payment Date, such interest to be paid by check mailed on the Interest Payment Date by first class mail to such Owner at his or her address as it appears on the Registration Books as of such Regular Record Date or, upon written request filed with the Trustee prior to the Regular Record Date by an Owner of at least $1,000,000 in aggregate principal amount of Certificates, by wire transfer in immediately available funds to an account in the United States designated by such Owner in such written request. Any such written request shall remain in effect until rescinded in writing by the Owner. The principal and redemption price with respect to the Certificates at maturity or upon prior redemption shall be payable by check denominated in lawful money of the United States of America upon surrender of the Certificates at the Principal Corporate Trust Office. Redemption Optional Redemption. The Certificates maturing on or before July 1, 2020, are not subject to optional redemption prior to maturity. The Certificates maturing on and after July 1, 2021, are subject to optional redemption in whole or in part on any date in such order of maturity as shall be designated by the City (or, if the City shall fail to so designate the order of redemption, in pro rata among maturities) and by lot within a maturity, on or after July 1, 2020, at a redemption price equal to the principal amount of the Certificates to be redeemed, together -3- with accrued interest, without premium, to the date fixed for redemption, from the proceeds of the optional prepayment of Lease Payments made by the City pursuant to the Lease Agreement. Extraordinary Redemption from Net Proceeds of Insurance, Title Insurance, Condemnation or Eminent Domain Award. The Certificates are subject to extraordinary redemption in whole on any date or in part on any Interest Payment Date from the Net Proceeds of an insurance, title insurance, condemnation or eminent domain award, to the extent credited towards the prepayment of the Lease Payments by the City pursuant to the Lease Agreement, in such order of maturity as shall be designated by the City (or, if the City shall fail to so designate the order of redemption, in pro rata among maturities) and by lot within a maturity, at a redemption price equal to the principal amount of the Certificates to be redeemed, together with accrued interest to the date fixed for redemption, without premium. Selection of Certificates for Redemption. Whenever provision is made in the Trust Agreement for the redemption of Certificates and less than all of the Outstanding Certificates are to be redeemed, the Trustee will select Certificates for redemption from the Outstanding Certificates not previously called for redemption in such order of maturity as will be designated by the City (and, in lieu of such designation, pro rata among maturities) and by lot within a maturity. The Trustee will select Certificates for redemption within a maturity by lot in any manner which the Trustee will, in its sole discretion, deems appropriate. For purposes of such selection, Certificates will be deemed to be composed of $5,000 portions and any such portion may be separately redeemed. The Trustee will promptly notify the City in writing of the Certificates so selected for redemption. Selection by the Trustee of Certificates for redemption will be final and conclusive. Notice of Redemption. Unless waived in writing by any Owner of a Certificate to be redeemed, notice of any such redemption will be given by the Trustee on behalf and at the expense of the City, by mailing a copy of a redemption notice by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption, to such Owner of the Certificate or Certificates to be redeemed at the address shown on the Registration Books or at such other address as is furnished in writing by such Owner to the Trustee; provided, however, that neither the failure to receive such notice nor any defect in any notice will affect the sufficiency of the proceedings for the redemption of the Certificates. Effect of Redemption. If notice of redemption has been given as described above, the Certificates or portions of Certificates so to be redeemed will, on the redemption date, become due and payable at the redemption price therein specified, and from and after such date, interest with respect to such Certificates or portions of Certificates will cease to be payable. Partial Redemption of Certificate. Upon surrender of any Certificate redeemed in part only, the Trustee will execute and deliver to the Owner thereof a new Certificate or Certificates of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Certificate surrendered and of the same interest rate and the same maturity. Transfer and Exchange of Certificates The registration of any Certificate may, in accordance with its terms, be transferred upon the Registration Books by the person in whose name it is registered, in person or by his or her attorney duly authorized in writing upon surrender of such Certificate for cancellation at the Principal Corporate Trust Office, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, duly executed. Whenever any Certificate or Certificates shall be surrendered for registration of transfer, the Trustee shall execute and deliver a new Certificate or Certificates for like aggregate principal amount in authorized denominations. The City shall pay any costs of the Trustee incurred in connection with such transfer, except that the -4- Trustee may require the payment by the Certificate Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer. The Trustee shall not be required to transfer (i) any Certificates or portion thereof during the period between the date fifteen (15) days prior to the date of selection of Certificates for redemption and such date of selection, or (ii) any Certificates selected for redemption. Certificates may be exchanged, upon surrender thereof, at the Principal Corporate Trust Office for a like aggregate principal amount of Certificates of other authorized denominations of the same maturity. Whenever any Certificate or Certificates shall be surrendered for exchange, the Trustee shall execute and deliver a new Certificate or Certificates for like aggregate principal amount in authorized denominations. The City shall pay any costs of the Trustee incurred in connection with such exchange, except that the Trustee may require the payment by the Certificate 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 exchange (i) any Certificate or any portion thereof during the period between the date fifteen (15) days prior to the date of selection of Certificates for redemption and such date of selection, or (ii) any Certificate selected for redemption. Book -Entry Only System The Certificates will be initially executed, delivered and registered as one fully registered certificate for each maturity, without coupons, in the name of Cede & Co., as nominee of DTC. DTC will act as securities depository of the Certificates. Individual purchases may be made in book -entry form only, in the principal amount of $5,000 and integral multiples thereof. Purchasers will not receive physical certificates representing their interest in the Certificates purchased. Principal and interest will be paid to DTC which will in turn remit such principal and interest to its participants for subsequent disbursement to the beneficial owners of the Certificates as described herein. So long as DTC's book -entry system is in effect with respect to the Certificates, notices to Owners of the Certificates by the City or the Trustee will be sent to DTC. Notices and communication by DTC to its participants, and then to the beneficial owners of the Certificates, will be governed by arrangements among them, subject to then effective statutory or regulatory requirements. See APPENDIX F DTC'S BOOK -ENTRY ONLY SYSTEM. In the event that such book -entry system is discontinued with respect to the Certificates, the City will cause the Trustee to execute and deliver replacements in the form of registered certificates and, thereafter, the Certificates will be transferable and exchangeable on the terms and conditions provided in the Trust Agreement. In addition, the following provisions would then apply: Payment of interest due with respect to any Certificate on any Interest Payment Date will be made to the person appearing on the Registration Books as the Owner thereof as of the Regular Record Date immediately preceding such Interest Payment Date, such interest to be paid by check mailed on the Interest Payment Date by first class mail to such Owner at his or her address as it appears on the Registration Books as of such Regular Record Date or, upon written request filed with the Trustee prior to the Regular Record Date by an Owner of at least $1,000,000 in aggregate principal amount of Certificates, by wire transfer in immediately available funds to an account in the United States designated by such Owner in such written request. Any such written request will remain in effect until rescinded in writing by the Owner. The principal and redemption price with respect to the Certificates at maturity or upon prior redemption shall be payable by check denominated in lawful money of the United States of America upon surrender of the Certificates at the Principal Corporate Trust Office. -5- SOURCE OF PAYMENT FOR THE CERTIFICATES General Each Certificate represents a direct, undivided fractional interest in the Lease Payments. Pursuant to the Lease Agreement, the City will lease the Property from the Corporation and agree to make Lease Payments. See "THE PROPERTY." Upon satisfaction of certain conditions set forth in the Lease Agreement, the City may substitute the Property with other properties. See "Substitution or Release of Site or Facility" below. As security for the Certificates, the Corporation will assign to the Trustee for the payment of principal and interest with respect to the Certificates, the Corporation's rights, title and interest in the Lease Agreement (with certain exceptions), including the right to receive Lease Payments to be made by the City under the Lease Agreement. The Lease Payments are designed to be sufficient, in both time and amount, to pay when due, the principal and interest with respect to the Certificates. The Lease Payments are payable by the City from any source of legally available funds. THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT DOES NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT CONSTITUTES AN INDEBTEDNESS OF THE CITY OR THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATIONS. Lease Payments; Covenant to Appropriate Pursuant to the Lease Agreement, the City has agreed to make Lease Payments for the lease of the Property which are calculated to be sufficient to pay principal and interest due with respect to the Certificates. Lease Payments will be made by the City to the Trustee on June 15 and December 15 in each year, in advance of the corresponding July 1 and January 1 Interest Payment Dates. The City will also pay as additional payments ("'Additional Payments "), amounts required for the payment of all costs and expenses incurred by the City to comply with the provisions of the Trust Agreement and the Lease Agreement or in connection with the execution and delivery of the Certificates. The City has covenanted under the Lease Agreement to take such action as may be necessary to include all Lease Payments and Additional Payments in its annual budget and to make the necessary annual appropriations for all such payments. Under certain circumstances described under the Lease Agreement, however, Lease Payments are subject to abatement during periods of substantial interference with the City's use and occupancy of the Property or any portion thereof. See "SOURCE OF PAYMENT FOR THE CERTIFICATES Abatement." Insurance The City is required to keep or cause to be kept casualty insurance against loss or damage by fire and lightning, with extended coverage and vandalism and malicious mischief insurance, in an amount at least equal to one hundred percent (100 %) of the replacement cost of the Property. Such insurance shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. The City is not required by the Lease Agreement to maintain earthquake coverage with respect to the Property and the City does not expect to purchase such coverage. I on To insure against loss of rental income caused by perils mentioned above, the City is required to maintain, or cause to be maintained throughout the term of the Lease Agreement, rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of any part of the Property as a result of any of the hazards described above in an amount equal to two times the maximum annual Lease Payments. Public liability and property damage insurance coverage is required in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $100,000 (subject to a deductible clause of not to exceed $5,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the City and may be maintained in the form of insurance maintained through a joint exercise of powers authority created for such purpose or in the form of self - insurance by the City. The net proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to which the insurance proceeds shall have been paid. The City shall provide, from moneys in the Delivery Costs Fund or at its own expense, on the Closing Date, a CLTA title insurance policy in the amount of not less than the principal amount of the Certificates, insuring the City's leasehold estate in the Property, subject only to Permitted Encumbrances. See APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS LEASE AGREEMENT Insurance. Abatement Pursuant to the Lease Agreement, Lease Payments will be abated during any period in which, by reason of damage or destruction, there is substantial interference with the use and occupancy by the City of the Property or any portion thereof (other than certain portions of the Property which have been modified by the City as described in the Lease Agreement) to the extent to be agreed upon by the City and the Corporation and communicated by a City Representative to the Trustee. The parties agree that amounts of the Lease Payments under such circumstances shall not be less than the amounts of the unpaid Lease Payments as are then set forth in an exhibit attached to the Lease Agreement, unless such unpaid amounts are determined to be greater than the fair rental value of the portions of the Property not damaged or destroyed (giving due consideration to the factors identified related to fair rental value as discussed in the Lease Agreement), based upon the opinion of an MAI appraiser with expertise in valuing such properties, or based upon any other appropriate method of valuation, in which event the Lease Payments will be abated such that they represent said fair rental value. Such abatement will continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction as communicated by a City Representative to the Trustee. In the event of any such damage or destruction, the Lease Agreement will continue in full force and effect and the City waives any right to terminate the Lease Agreement by virtue of any such damage and destruction. Notwithstanding the foregoing, there will be no abatement of Lease Payments under the Lease Agreement to the extent that (a) the proceeds of rental interruption insurance or (b) amounts in the Reserve Fund and/or the Insurance and Condemnation Fund and/or the Lease Payment Fund are available to pay Lease Payments which would otherwise be abated under the Lease Agreement. See "SOURCE OF PAYMENT FOR THE CERTIFICATES Insurance," APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS Lease Agreement Insurance and APPENDIX E SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS Lease Agreement Abatement of Lease Payments in the Event of Damage or Destruction. Eminent Domain Pursuant to the Lease Agreement, if all of the Property is taken permanently under the power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the term of the Lease Agreement will cease as of the day possession is taken. If less than all of the Property is taken permanently, or if all of the Property or any part thereof is taken temporarily under the power of eminent domain, (1) the Lease Agreement will continue in full force and effect and will not be terminated by virtue of such taking and the parties waive the benefit of any law to the contrary, and (2) there will be a partial abatement of Lease Payments as a result of the application of the Net Proceeds of any eminent domain award to the prepayment of the Lease Payments under the Lease Agreement, in an amount to be agreed upon by the City and the Corporation and communicated to the Trustee such that the resulting Lease Payments represent fair consideration for the use and occupancy of the remaining usable portion of the Property, except to the extent of special funds, such as amounts in the Reserve Fund available for the payment of Lease Payments. The Net Proceeds of such eminent domain award are required to be applied to the redemption of Certificates as provided in the Lease Agreement and the Trust Agreement. Reserve Fund The Trust Agreement provides that the Trustee will establish and maintain a reserve fund (the "Reserve Fund"'). Pursuant to the Trust Agreement, immediately after the execution and delivery of the Certificates, the amount deposited in the Reserve Fund will equal the "Reserve Requirement." Except as otherwise expressly provided in the Trust Agreement, all money in the Reserve Fund will be held in trust as a reserve for the payment when due of the Lease Payments on behalf of the City. "Reserve Requirement" means an amount equal to 50% of the maximum annual Lease Payments, which amount shall be $1,586,818.75 on the Closing Date. The amount of the Reserve Requirement shall not be reduced unless the Certificates are partially refunded, in which such amount shall be reduced to an amount equal to 50% of the maximum annual Lease Payments relating to the Certificates not so refunded. Optional Prepayment Pursuant to the Lease Agreement, the City has an option to prepay the principal components of the Lease Payments in full, by paying the aggregate unpaid principal components of the Lease Payments, or in part, in a prepayment amount equal to the principal amount of Lease Payments to be prepaid, together with accrued interest to the date fixed for prepayment, together with the premium set forth for the redemption of Certificates. See "THE CERTIFICATES Redemption Optional Redemption." Said option may be exercised with respect to Lease Payments due on and after June 15, 2021, in whole or in part on any date, commencing June 15, 2020. In the event of prepayment in part, the partial prepayment will be applied against Lease Payments in such order of payment date as will be selected by the City. Lease Payments due after any such partial prepayment will be in the amounts set forth in a revised Lease Payment schedule which will be provided by, or caused to be provided by, the City to the Trustee and which will represent an adjustment to the schedule set forth in the Lease Agreement taking into account said partial prepayment. The Trustee agrees to notify the Corporation in the event of any prepayment of Lease Payments, as provided in the Trust Agreement. Mandatory Prepayment from Net Proceeds of Insurance, Title Insurance or Eminent Domain The City will be obligated to prepay the Lease Payments, in whole on any date or in part on any Lease Payment Date, from and to the extent of any Net Proceeds of an insurance, title insurance or condemnation award with respect to the Property theretofore deposited in the Lease Payment Fund for such purpose pursuant to the Lease Agreement and the Trust Agreement. The City and the Corporation agree that such Net Proceeds will be applied first to the payment of any delinquent Lease Payments, and thereafter will be credited towards the City's obligations under the mandatory prepayment provisions of the Lease Agreement. Lease Payments due after any such partial prepayment will be in the amounts set forth in a revised Lease Payment schedule which will be provided by, or caused to be provided by, the City to the Trustee and which will represent an adjustment to the schedule set forth in the Lease Agreement taking into account said partial prepayment. See "THE CERTIFICATES- Redemption—Extraordinary Redemption from Net Proceeds of Insurance, Title Insurance, Condemnation or Eminent Domain Award." Substitution or Release of Site or Facility Substitution of Site or Facility. The City shall have, and is granted, the option at any time and from time to time during the Term of the Lease Agreement to substitute other land (a "Substitute Site ") and /or a substitute facility (a "Substitute Facility ") for the Site (the "Former Site "), or a portion thereof, and/or the Facility (the "Former Facility "), or a portion thereof, provided that the City shall satisfy all of the following requirements (to the extent applicable) which are hereby declared to be conditions precedent to such substitution: (i) If a substitution of the Site, the City shall file with the Corporation and the Trustee an amendment to the Site and Facility Lease which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site; (ii) If a substitution of the Site, the City shall file with the Corporation and the Trustee an amendment to the Lease Agreement which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site; (iii) If a substitution of the Facility, the City shall file with the Corporation and the Trustee an amendment to the Site and Facility Lease which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility; (iv) If a substitution of the Facility, the City shall file with the Corporation and the Trustee an amendment to the Lease Agreement which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility; (v) The City shall certify in writing to the Corporation and the Trustee that such Substitute Site and /or Substitute Facility serve the purposes of the City, constitutes property that is unencumbered, subject to Permitted Encumbrances, and constitutes property which the City is permitted to lease under the laws of the State; (vi) The City delivers to the Corporation and the Trustee evidence (which maybe insurance values or any other reasonable basis of valuation and need not require an appraisal) that the value of the Property following such substitution is equal to or greater than the Outstanding principal amount of the Certificates and confirms in writing to the Trustee that the indemnification provided pursuant to the Trust Agreement applies with respect to the Substitute Site and /or Substitute Facility; 01 (vii) The Substitute Site and /or Substitute Facility shall not cause the City to violate any of its covenants, representations and warranties made herein and in the Trust Agreement, as evidenced by an officer's certificate delivered to the Trustee; (viii) The City shall obtain an amendment to the title insurance policy required pursuant to the Lease Agreement which adds thereto a description of the Substitute Site and deletes therefrom the description of the Former Site; (ix) The City shall provide notice of the substitution to any rating agency then rating the Certificates which rating was provided at the request of the City or the Corporation; and (x) The City shall furnish the Corporation and the Trustee with a written opinion of Bond Counsel, which shall be an Independent Counsel, stating that such substitution does not cause the interest components of the Lease Payments to become subject to federal income taxes or State personal income taxes. Release of Site. The City shall have, and is granted, the option at any time and from time to time during the Term of the Lease Agreement to release any portion of the Site, provided that the City shall satisfy all of the following requirements which are hereby declared to be conditions precedent to such release: (i) The City shall file with the Corporation and the Trustee an amendment to the Site and Facility Lease which describes the Site, as revised by such release; (ii) The City shall file with the Corporation and the Trustee an amendment to the Lease Agreement which describes the Site, as revised by such release; (iii) The City delivers to the Corporation and the Trustee evidence (which may be insurance values or any other reasonable basis of valuation and need not require an appraisal) that the value of the Property, as revised by such release, is equal to or greater than the Outstanding principal amount of the Certificates and confirms in writing to the Trustee and the Corporation that the indemnification provided pursuant to the Trust Agreement applies with respect to the Site, as revised by such release; (iv) Such release shall not cause the City to violate any of its covenants, representations and warranties made herein and in the Trust Agreement, as evidenced by an officer's certificate delivered to the Trustee; (v) The City shall obtain an amendment to the title insurance policy required pursuant to the Lease Agreement which describes the Site, as revised by such release; and (vi) The City shall provide notice of the release to any rating agency then rating the Certificates which rating was provided at the request of the City or the Corporation. Release of Facility. The City shall have, and is hereby granted, the option at any time and from time to time during the Term of the Lease Agreement to release any portion of the Facility, provided that the City shall satisfy all of the following requirements which are hereby declared to be conditions precedent to such release: (i) The City shall file with the Corporation and the Trustee an amendment to the Site and Facility Lease which describes the Facility, as revised by such release; -10- (ii) The City shall file with the Corporation and the Trustee an amendment to the Lease Agreement which describes the Facility, as revised by such release; (iii) The City delivers to the Corporation and the Trustee evidence (which maybe insurance values or any other reasonable basis of valuation and need not require an appraisal) that the value of the Property, as revised by such release, is equal to or greater than the Outstanding principal amount of the Certificates and confirms in writing to the Trustee and the Corporation that the indemnification provided pursuant to the Trust Agreement applies with respect to the Facility, as revised by such release; (iv) Such release shall not cause the City to violate any of its covenants, representations and warranties made herein and in the Trust Agreement, as evidenced by an officer's certificate delivered to the Trustee; and (v) The City shall provide notice of the release to any rating agency then rating the Certificates which rating was provided at the request of the City or the Corporation. Amendment of Lease Agreement The Corporation and the City may, at any time, amend or modify any of the provisions of the Lease Agreement, but only (a) with the prior written consent of the Owners of a majority in aggregate principal amount of the Outstanding Certificates, or (b) without the consent of any of the Owners, but only if such amendment or modification is for any one or more of the following purposes: (i) to add to the covenants and agreements of the City contained in the Lease Agreement, other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power reserved in the Lease Agreement to or conferred upon the City; (ii) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in the Lease Agreement, or in any other respect whatsoever as the Corporation and the City may deem necessary or desirable, provided that, in the opinion of Special Counsel, such modifications or amendments will not materially adversely affect the interests of the Owners; or (iii) to amend any provision thereof relating to the Code, to any extent whatsoever but only if and to the extent such amendment will not adversely affect the exclusion from gross income of interest with respect to the Certificates under the Code, in the opinion of Special Counsel. THE CITY The City is located in the County, at the southern end of the San Francisco Bay Peninsula, approximately 11 miles northwest of San Jose and approximately 42 miles south of San Francisco. The City is bordered by the cities of San Jose, Saratoga, Sunnyvale, Santa Clara and Los Altos. The City was incorporated on October 10, 1955 as a general law city. The City, located in the heart of the Silicon Valley, was born from a community of farmers. In 1955, when Cupertino officially became the 13th city in Santa Clara County, its population was about 2,000 and its geographical area encompassed 3.79 square miles. Today, with a population of approximately 58,747 and city limits stretching across 13 square miles, the -11- City is considered to be one of the San Francisco Bay Area's most prestigious cities in which to live and work. Among the many factors that make the City so desirable are the City's highly acclaimed educational programs, its vibrant business environment, its convenient access to major transportation systems and its attractive well - planned neighborhoods. The excellent reputation of the City's schools has also been an attraction for families wishing to settle in close proximity to jobs in the County. The City occupies the geographic center of Silicon Valley. The City is the world headquarters for major corporations such as Apple, Seagate Technology, Verigy and Durect Corporation, and houses sixty high -tech firms. The City has thirteen shopping centers including its own regional mall, Vallco. With Hewlett - Packard, a primary employer, leaving the City in 2012, Apple purchased their properties as part of 155 acres acquired for construction of a second corporate campus that will accommodate 12,000 people. The City is reviewing their plans for approximately three million square feet of offices, research, parking and other facilities. The City's geographic location is a major factor affecting its economic position. The City is served by a network of freeways; Interstate 880 connects the City with the Oakland International Airport and the Port of Oakland. Interstates 280 and 680 provide access to the peninsula and eastern regions of the San Francisco Bay Area and State Route 17 serves to connect the City with the Pacific Coast at Santa Cruz. All of these interstate highways connect to U.S. 101, a major north -south highway linking San Francisco and Los Angeles. Besides the City's proximity to San Francisco and the Silicon Valley and its transportation access, other factors contribute to its attractiveness to businesses, and their ability to attract and retain quality employees. These factors include the low crime rate, moderate climate, well - educated labor pool, excellent schools, housing stock, community parks, public facilities and high median income households. The City Council is made up of five members, elected at large, serving four -year terms. The Mayor is selected for a one -year term from among the members of the City Council. The City operates under a council - manager form of government. The City Council appoints the City Manager, City Attorney and City Treasurer. The City has 163 authorized full -time benefited employee positions. City departments include Administration (City Council, commissions, city manager, city attorney); Administrative Services (finance, human resources, information technology, city clerk, neighborhood watch, emergency preparedness, code enforcement); Community Development (planning, building, and economic development); Parks and Recreation; Public Works (engineering, maintenance, transportation, solid waste, and storm drain management); and Public and Environmental Affairs. Police service is provided by a City contract with the Santa Clara County Sheriff's Department, and fire service is provided by a separate taxing entity, the Santa Clara County Fire District. Assisting the City Council are several citizen advisory commissions/ committees which include housing, telecommunications, fine arts, library, planning, audit, parks and recreation, bicycle and pedestrian, teen, economic development, strategic planning, and public safety. Members of the volunteer boards are appointed by the City Council and vacancies are announced so that interested residents may apply for the positions. Residents are kept informed about city services and programs through the Cupertino Scene, a monthly newsletter; The City Channel, Cupertino's government access cable TV channel; and the city's website. -12- Cupertino Union School District serves 18,000 students in a 26 square mile area that includes Cupertino and portions of five other cities. The district has 20 elementary schools and five middle schools, including several choice programs. The Fremont Union High School District serves 10,000 students in a 42 square mile area covering all of Cupertino, most of Sunnyvale and portions of San Jose, Los Altos, Saratoga, and Santa Clara. See APPENDIX A GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY for a general description of the City as well as certain demographic and statistical information. CITY FINANCIAL INFORMATION Financial Statements The City's accounting policies conform to generally accepted accounting principles. The audited financial statements also conform to the principles and standards for public financial reporting established by the Governmental Accounting Standards Board. Basis of Accounting and Financial Statement Presentation. The government -wide financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due. Audited Financial Statements. The City retained the firm of Macias Gini & O'Connell LLP, Walnut Creek, California (the "City's Auditor "), to examine the general purpose financial statements of the City as of and for the year ended June 30, 2011. The audited financial statements for fiscal year ended June 30, 2011, are included in APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2011. The City has not requested, and the City's Auditor has not provided, any review or update of such financial statements in connection with their inclusion in this Official Statement. The City has selected a new firm, Maze and Associates Accountancy Corporation, to become the City's auditor, starting with the financial statements for the fiscal year ending June 30, 2012. The City has been awarded the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association of the United States and Canada for each of the past seventeen years. Budgetary Process The City Council adopts an annual budget with appropriations for all City funds prior to the beginning of the fiscal year, which begins on July 1 of each year. The City Council has the legal authority to amend the budget at any time during the fiscal year. The City maintains budgetary controls to ensure compliance with legal provisions embodied in the appropriated budget approved by the City Council. The level of budgetary control (that is, the level at which -13- expenditures cannot legally exceed the appropriated amount) for the City's operating budget is the program area within each fund, and for the capital improvement budget it is each individual capital improvement project within each fund. For the operating budget, the City Manager has the authority to move appropriations between accounts (without dollar limitation) within a budget program and within the same fund as long as the transfers are within the same program area. For the capital improvement program, the City Manager has the authority to transfer appropriations (with no dollar limitation) between capital projects within the same fund as long as the transfers are within the responsibility of the same department. All other appropriation changes require the approval of the City Council. All appropriations lapse at the end of the fiscal year unless specific carryovers are approved by the City Council. -14- The following table shows the City's budget and actual results for general fund revenues and expenditures for fiscal years 2009 -10 and 2010 -11 and the adopted budget for fiscal year 2011 -12. Revenues: Taxes Use of money and property Intergovernmental Licenses and permits Charges for services Fines and forfeitures Other Amounts available for appropriation Charges for appropriation (outflows): Current: Administration Law enforcement Public and environmental affairs Administrative services Recreation services Community development Public works Total charges for appropriations Excess of revenues over expenditures Other financing sources (uses) Proceeds from sale of capital assets Transfers in Transfers out Total other financing 37,887,799 35,578,223 (2,309,576) 1,517,004 8,565,636 1,494,522 4,062,641 4,289,549 3,560,750 35,293,802 2,593,997 991,512 1,469,004 8,384,310 1,487,265 3,733,414 4,003,764 3,069,287 48,000 181,326 7,257 329,227 285,785 491,463 32,956,092 2,337,710 2,622,131 28,134 487,015 (504,497) sources (uses) TABLE 3 Change in fund balance $(51789,376) $(61265,739) $(476,363) City of Cupertino year 221196,857 Fund balance, end of year General Fund Budget Summary Source: City of Cupertino Finance Department. Fiscal Years 2009 -10 through 2011 -12 FY09 -10 FY09 -10 FY09 -10 FY10 -11 FY10 -11 FY10 -11 Final Budget Actual Variance Final Budget Actual Variance $30,858,503 $29,532,759 $(1,325,744) $331600,875 $36,176,232 $2,575,357 891,000 685,490 (205,510) 1,188,000 727,983 (460,017) 4921296 625,523 133,227 582,000 689,239 107,239 31210,000 2,583,131 (626,869) 2,610,000 2,901,944 291,944 11434,000 1,333,729 (100,271) 1,652,000 11944,609 292,609 902,000 736,239 (165,761) 920,000 695,666 (224,334) 37,887,799 35,578,223 (2,309,576) 1,517,004 8,565,636 1,494,522 4,062,641 4,289,549 3,560,750 35,293,802 2,593,997 991,512 1,469,004 8,384,310 1,487,265 3,733,414 4,003,764 3,069,287 48,000 181,326 7,257 329,227 285,785 491,463 32,956,092 2,337,710 2,622,131 28,134 487,015 (504,497) sources (uses) (8,383,373) (81887,870) (504,497) Change in fund balance $(51789,376) $(61265,739) $(476,363) Fund balance, beginning of year 221196,857 Fund balance, end of year $15,931,118 Source: City of Cupertino Finance Department. -15- 40,652,875 43,194,554 2,541,679 1,611,139 8,884,396 1,497,263 4,335,491 4,480,147 3,850,000 37,191,750 3,461,125 1,528,070 8,434,885 1,497,263 3,695,076 4,117,477 3,237,643 33,662,443 9,532,111 - 1,055,449 337,482 337,482 83,069 449,511 640,415 362,670 612,357 3,529,307 6,070,986 1,055,449 (6,711,801) (5,656,352) 1,055,449 $(3,250,676) 3,875,759 $7,126,435 15,931,118 $19,806,877 FY11 -12 Budget $36,414,000 969,000 555,000 2,618,000 1,552,000 650,000 43,118,000 1,741,000 8,980,000 1,658,000 4,542,000 4,244,000 4,134,000 37,510,000 5,608,000 35,000 (6,396,000) $(1,048,000) City Financial Management Policies The City Council has adopted a comprehensive set of financial management policies to provide for: (i) establishing targeted general fund reserves; and (ii) the prudent investment of City funds. The City's practice is to incur debt only after deliberation over the effect of such debt on the City's General Fund and other resources of the City, and in those circumstances where the use of debt would be appropriate to the scale and economic life of the asset being financed and the accumulation or availability of reserves to fund the capital requirement. The City last issued debt in 2002 (the 2002 Certificates), which is being refinanced with the proceeds of the Certificates. Reserves Policy. The following table shows the City's reserve policy guidance, actual reserves for fiscal year 2010 -11 and proposed reserves for fiscal year 2011 -12. TABLE 4 RESERVES BY Policy FY 2010 -11 FY 2011 -12 CATEGORY: Guidance Actual Proposed Economic Uncertainty I $12,500,000 $12,500,000 $12,500,000 Economic Uncertainty II 11400,000 11400,000 11400,000 Utility User Tax 534,000 Capital Improvement 51000,000 11354,346 735,000 Infrastructure 1,100,000 1,000,000 1,100,000 Undesignated 500,000 3,380,279 559,000 $20,500,000 $20,168,625 $16,294,000 RESERVES BY FUND: General (1) Capital Improvement Total $141400,000 17,814,279 $141459,000 61100,000 21354,346 11835,000 $20,500,000 $20,168,625 $16,294,000 Source: City of Cupertino Finance Department. (1) Excludes encumbrances. Investment Policy. The investment of funds of the City (except pension and retirement funds) is made in accordance with the City's Investment Policy, most recently approved on February 7, 2012 (the "Investment Policy "), and section 53601 et seq. of the California Government Code. The Investment Policy is subject to revision at any time and is reviewed at least annually to ensure compliance with the stated objectives of safety, liquidity, yield, and current laws and financial trends. All amounts held under the Trust Agreement are invested at the direction of the City in Permitted Investments, as defined in the Trust Agreement, and are subject to certain limitations contained therein. See APPENDIX C INVESTMENT POLICY OF THE CITY and APPENDIX D SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS TRUST AGREEMENT Investments. -16- Current Investments The assets of the City's investment portfolio, as of January 31, 2012, are shown in the following table: TABLE 5 City of Cupertino Investment Portfolio (As of January 31, 2012) Par Type Value U.S. Treasury Notes $37,000,000 California Local Agency Inv. Fund (LAIF) 598,090 Money Market Mutual Funds 13,195,819 Cash on Hand 21591,714 Total cash and investments $53,385,623 Source: City of Cupertino. Principal Sources of General Fund Revenues Sales taxes were the single largest revenue source to the general fund in fiscal year 2010- 11, representing approximately 33% of revenues, followed by property taxes representing approximately 27 %. These sources represented an aggregate of approximately 60% of the general fund revenues for fiscal year 2010 -11. For a discussion of potential State Budget impacts on general fund revenues, see " State Budgets." For a discussion of sales tax revenues and property taxes, see " Sales Tax" and " Ad valorem Property Taxation." In addition, the City receives the following local taxes: Utility User Tax. The utility tax, which was approved by voters in 1990, is assessed on gas, electric and telecommunication service provided within the City's jurisdiction at a rate of 2.4% of user charges. The tax is for general City purposes. In March 2002, voters approved an extension of the utility tax from a sunset date of 2015 to 2030. In order to be consistent with existing collection practices and maintain current revenues, voters approved a November 2009 ordinance to update the tax with modern telecommunication technologies. Franchise Taxes. The City levies a 2% to 10% franchise tax on revenues collected by gas, electric, water, cable and solid waste franchises. Transient Occupancy Taxes. The City levies a transient occupancy tax on hotel facilities located in the City at the rate of 12% of room revenues. In November 2011, voters approved a rate increase from 10% to 12 %. Four hotels operate in the City with a fifth under construction. The tax is for general City purposes. Property Transfer Taxes. A documentary stamp tax is assessed for recordation of real property transfers. Construction Tax. An excise tax is imposed on the construction of buildings and mobile home lots in the City. Depending on the building use, the tax rate is $590.16 per dwelling unit, $2.54 or $1.27 per square foot of building area, or $198.67 per room, as of April 1, 2012. This general purpose tax is adjusted quarterly by the consumer price index. -17- Business License Tax. Any entity that conducts business in the City is required to obtain a business license. The entity pays a minimum tax of $119 per year for the license. This general purpose tax is adjusted annually by the consumer price index. The following table shows the City's general fund tax revenues by source for the most recent five fiscal years: TABLE 6 City of Cupertino Tax Revenues By Source Source: City of Cupertino Finance Department. In addition, the City receives the following general fund revenues: Licenses and Permits. These revenues consist primarily of building construction permit fees. Fines, Forfeitures and Penalties. These revenues include parking citations and other fines for municipal code violations. Use of Money and Property. These revenues consist primarily of investment earnings and rental/ concession income. Charges for Services. The City charges fees for plan checking, building inspection and a variety of other municipal services. Actual Actual Actual Actual Budget Source 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 Property Taxes $ 6,893,098 $ 7,441,895 $ 6,018,460 $ 7,245,342 $ 7,501,000 Property tax in lieu of motor vehicle fee 3,894,502 41299,902 41420,912 414041795 41450,000 Sales taxes 13,154,749 14,139,190 91930,530 14,539,243 141283,000 Transient Occupancy Tax 21711,590 21140,274 211421137 21536,501 21590,000 Utility User Tax 31175,724 31205,073 31271,452 31227,942 31540,000 Franchise Tax 21547,439 21618,125 21597,930 21841,344 21860,000 Other Taxes 11486,395 11017,417 11151,337 11381,065 1,1901000 Total Tax Revenues $34,863,497 $36,861,876 $29,532,758 $36,176,232 $36,414,000 Source: City of Cupertino Finance Department. In addition, the City receives the following general fund revenues: Licenses and Permits. These revenues consist primarily of building construction permit fees. Fines, Forfeitures and Penalties. These revenues include parking citations and other fines for municipal code violations. Use of Money and Property. These revenues consist primarily of investment earnings and rental/ concession income. Charges for Services. The City charges fees for plan checking, building inspection and a variety of other municipal services. The following table illustrates other revenue sources: TABLE 7 City of Cupertino Other Revenue Sources Source: City of Cupertino Finance Department. Property Taxes When Proposition 13 passed in 1978, it froze property tax rates at their current levels. This action created problems for cities such as the City that at the time had low property tax rates. Section 98 of the California Revenue and Taxation Code was passed to correct this situation giving these cities what is referred to as Tax Equity Allocation (TEA). In exchange for trial court funding, counties had to provide at least seven percent of property taxes to these cities with Educational Revenue Augmentation Fund (ERAF) impacts backfilled by the state. However, the County did not receive enough trial court funding to offset increasing the TEA to seven percent for the City and three other effected cities in the County. Consequently, legislation was enacted which limited the four cities to 55% of what other TEA cities in the state receive. In 2006, Assembly Bill 117 repealed the 55% limit, however the four cities were required to remit the County's higher ERAF rate to the State on TEA funds so that the State budget would not be impacted. As a result the City is still being apportioned less than seven percent of property taxes. State legislation has been introduced to phase out the higher ERAF rate requirement for the four cities. Tax Levies, Collections and Delinquencies. Property taxes are levied by the County for each fiscal year on taxable real and personal property which is situated in the County. Property taxes collected in advance are recorded as deferred revenue and recognized as revenue in the year they become available. The County levies, bills and collects property taxes for the City. Property taxes paid to the City by the County within 60 days after the end of the fiscal year are "available" and are, therefore, recognized as revenue. For assessment and collection purposes, property is classified either as "secured" or "unsecured" and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll containing State /assessed public utilities property and property the taxes on which are a lien on real property sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll." Secured and unsecured property taxes are levied based on the assessed value as of January 1, the lien date, of the preceding fiscal year. Secured property tax is levied on October 1 and due in two installments, on November 1 and March 1. Collection dates are December 10 and April 10 which are also the delinquent dates. At that time, delinquent accounts are assessed a penalty of 10 %. Accounts that remain unpaid on June 30 are charged an additional 1.5% per month. Such property may thereafter be redeemed by payment of a penalty of 1.5% per month -19- Actual Actual Actual Actual Budget Source 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 Licenses and Permits $2,656,017 $2,740,463 $2,583,131 $2,901,944 $2,618,000 Fines and Forfeitures 722,087 761,320 736,239 695,666 650,000 Use of Money and Property 2,015,653 11163,492 685,490 727,983 969,000 Intergovernmental 659,487 4211238 625,523 689,239 555,000 Charges for Services 11363,196 11265,509 11333,729 11944,609 11552,000 Other /Miscellaneous 85,388 79,042 81,352 58,881 100,000 Total Other Revenues $7,501,828 $6,431,064 $6,045,464 $7,018,322 $6,444,000 Source: City of Cupertino Finance Department. Property Taxes When Proposition 13 passed in 1978, it froze property tax rates at their current levels. This action created problems for cities such as the City that at the time had low property tax rates. Section 98 of the California Revenue and Taxation Code was passed to correct this situation giving these cities what is referred to as Tax Equity Allocation (TEA). In exchange for trial court funding, counties had to provide at least seven percent of property taxes to these cities with Educational Revenue Augmentation Fund (ERAF) impacts backfilled by the state. However, the County did not receive enough trial court funding to offset increasing the TEA to seven percent for the City and three other effected cities in the County. Consequently, legislation was enacted which limited the four cities to 55% of what other TEA cities in the state receive. In 2006, Assembly Bill 117 repealed the 55% limit, however the four cities were required to remit the County's higher ERAF rate to the State on TEA funds so that the State budget would not be impacted. As a result the City is still being apportioned less than seven percent of property taxes. State legislation has been introduced to phase out the higher ERAF rate requirement for the four cities. Tax Levies, Collections and Delinquencies. Property taxes are levied by the County for each fiscal year on taxable real and personal property which is situated in the County. Property taxes collected in advance are recorded as deferred revenue and recognized as revenue in the year they become available. The County levies, bills and collects property taxes for the City. Property taxes paid to the City by the County within 60 days after the end of the fiscal year are "available" and are, therefore, recognized as revenue. For assessment and collection purposes, property is classified either as "secured" or "unsecured" and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll containing State /assessed public utilities property and property the taxes on which are a lien on real property sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll." Secured and unsecured property taxes are levied based on the assessed value as of January 1, the lien date, of the preceding fiscal year. Secured property tax is levied on October 1 and due in two installments, on November 1 and March 1. Collection dates are December 10 and April 10 which are also the delinquent dates. At that time, delinquent accounts are assessed a penalty of 10 %. Accounts that remain unpaid on June 30 are charged an additional 1.5% per month. Such property may thereafter be redeemed by payment of a penalty of 1.5% per month -19- to the time of redemption, plus costs and a redemption fee. If taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by the County Treasurer. Unsecured property tax is levied on July 1 and due on July 31, and has a collection date of August 31 which is also the delinquent date. A 10% penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5:00 p.m. on October 31, an additional penalty of 1.5% attaches to them on the first day of each month until paid. The taxing authority has four ways of collecting delinquent unsecured personal property taxes: (1) bringing 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 lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Clerk and County Recorder's office in order to obtain a lien on certain property of the taxpayer; and (4) seizing and selling personal property, improvements, or possessory interests belonging or assessed to the assessee. Assessed Valuation. All property is assessed using full cash value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, nonprofit hospitals and charitable institutions. Future assessed valuation growth allowed under Article XIIIA (new construction, certain changes of ownership, 2% inflation) will be allocated on the basis of "situs" among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and schools will share the growth of "base" revenues from the tax rate area. Each year's growth allocation becomes part of each agency's allocation in the following year. The passage of Assembly Bill 454 in 1987 changed the manner in which unitary and operating nonunitary property is assessed by the State Board of Equalization. The legislation deleted the formula for the allocation of assessed value attributed to such property and imposed a State - mandated local program requiring the assignment of the assessment value of all unitary and operating non - unitary property in each county of each State assessee other than a regulated railway company. The legislation established formulas for the computation of applicable county -wide rates for such property and for the allocation of property tax revenues attributable to such property among taxing jurisdictions in the county beginning in fiscal year 1988 -89. This legislation requires each County to issue each State assessee, other than a regulated railway company, a single tax bill for all unitary and operating nonunitary property. Assessment Appeals. Property tax values determined by the County Assessor may be subject to appeal by property owners. Assessment appeals are annually filed with the Assessment Appeals Board for a hearing and resolution. The resolution of an appeal may result in a reduction to the County Assessor's original taxable value and a tax refund to the applicant/ property owner. Each assessment appeal could result in a reduction of the taxable value of the real property, personal property or possessory interest of the property which is the subject of the appeal. Alternatively, an appeal may be withdrawn by the applicant or the Assessment Appeals Board may deny or modify the appeal at a hearing or by stipulation. Effect of Delinquencies and Foreclosures on Property Tax Collections. As described above, once an installment of property tax becomes delinquent, penalties are assessed commencing on the applicable delinquency date until the delinquent installment(s) and all assessed penalties are paid. In the event of foreclosure and sale of property by a mortgage holder, all past due property taxes, penalties and interest are required to be paid before the property can be transferred to a new owner. -20- The level of default and foreclosure activity has affected certain homeowners nationwide. Within the State, the greatest impacts to date are in regions of the Central Valley, the Inland Empire, and other areas in the State where the large numbers of new mortgages were originated in more affordable areas. The increased level of default and foreclosure activity has resulted in downward pressure on home prices in the affected areas. Set forth in the table below are assessed valuations for secured and unsecured property within the City for the five most recent fiscal years. TABLE 8 City of Cupertino Assessed Valuations Fiscal Year Local Secured Utility Unsecured Total 2007 -08 $11,512,949,952 $417,564,226 $11,930,514,178 2008 -09 12,637,622,059 $1,390,000 533,413,228 13,172,425,287 2009 -10 12,979,346,158 11390,000 5641277,611 13,545,013,769 2010 -11 13,017,910,372 11390,000 476,332,025 13,495,632,397 2011 -12 13,219,574,367 11390,000 5271795,261 13,748,759,628 Source: California Municipal Statistics, Inc. Santa Clara County only provides secured tax charge and delinquency information for general obligation bond debt service levies. Since the City does not have any general obligation bonds outstanding, there is no information to report. Teeter Plan. The Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the "Teeter Plan ") has been adopted by 53 of the 58 counties, including the County, as provided for in section 4701 et seq. of the California Revenue and Taxation Code. Under the Teeter Plan, each participating local agency, including cities, levying property taxes in a county receives the amount of uncollected taxes credited to its fund, in the same manner as if the amount credited had been collected. In return, the county receives and retains delinquent payments, penalties and interest as collected, that would have been due the local agency. However, although a local agency receives the total levy for its property taxes without regard to actual collections, to the extent of a reserve established and held by its county for this purpose, the basic legal liability for property tax deficiencies at all times remains with the local agency. The Teeter Plan is to remain in effect unless the county board of supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the county, the board of supervisors receives a petition for its discontinuance from two - thirds of the participating revenue districts in the county. The board of supervisors may, after holding a public hearing on the matter, discontinue the procedures under the Teeter Plan with respect to any tax levying agency in its county. Thus, so long as the County maintains its policy of collecting taxes pursuant to said procedures and the City meets the Teeter Plan requirements, the City will receive 100% of the annual installments levied without regard to actual collections in the City. There is no assurance, however, that the County Board of Supervisors will maintain its policy of apportioning taxes pursuant to the aforementioned procedures. In 1978, the voters of the State passed Proposition 8, a constitutional amendment to Article XIIIA that allows a temporary reduction in assessed value when real property suffers a decline in value. A decline in value occurs when the current market value of real property is less than the current assessed (taxable) factored base year value as of the lien date, January 1. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS Article XIIIA of the California Constitution." -21- Principal Taxpayers. The following table sets forth the principal secured property taxpayers in the City as of fiscal year 2011 -12, the most current information available. TABLE 9 City of Cupertino Largest Local Secured Property Tax Payers Fiscal Year 2011 -12 Source: California Municipal Statistics, Inc. (1) 2011 -12 Local Secured Assessed Valuation: $13,219,574,367. Sales and Use Taxes A sales tax is imposed on the privilege of consuming personal property in California. California does not tax services. The tax rate is established by the State Legislature, and is presently 7.25 %, statewide. In addition, many of California's cities, counties, towns and communities have special taxing jurisdiction to impose a transaction (sales) or use tax. These so- called district taxes increase the tax rate in a particular area by adding the local option tax to the statewide tax. These district taxes can vary up to 1%, and more than one district tax may be in effect for a particular location. As of April 1, 2012, the Santa Clara Valley Transportation Authority collects a 0.5% district tax, and the Santa Clara County Transit District collects an additional 0.5% district tax. The City's share of sales tax is approximately 1% when one considers the combined City share of 0.75% and the State's 0.250% Fiscal Recovery Funding (Triple -Flip swap) explained below. With the enactment of the Triple Flip, the City now receives the 0.250% as reclassified revenue through property tax as an in lieu remittance, the payment of which heretofore coincides with the County property tax calendar. The State collects and administers the tax, and makes distributions on taxes collected within the City as follows: -22- 2011 -12 % of Property Owner Primary Land Use Assessed Valuation Total (1) 1. Campus Holdings Inc. Office Building $ 545,464,480 4.13% 2. Apple Computer Inc. Office Building 440,1201324 3.33 3. Cupertino City Center Buildings Office Building 95,1521610 0.72 4. Vallco Shopping Mall LLC Shopping Center 92,573,571 0.70 5. Irvine Company LLC Apartments 711194,693 0.54 6. ECI Two Results LLC Industrial 64,836,485 0.49 7. Villa Serra Apartments LP Apartments 61,926,014 0.47 8. Rocktino Fee LLC Office Building 61,822,271 0.47 9. Cupertino Village LP Shopping Center 54,910,380 0.42 10. 500 Forbes LLC Commercial Land 54,850,604 0.41 11. Seagate Technology LLC Office Building 521479,909 0.40 12. Berg Family Partners LP Office Building 52,342,382 0.40 13. WW Dasc Owner LLC Office Building 44,331,319 0.34 14. SFERS Real Estate Corp. Apartments 43,001,856 0.33 15. MOF II Tantau Holdings Inc. Office Building 38,079,933 0.29 16. PPC Siena LLC Apartments 37,005,262 0.28 17. Cupertino Office Partners LLC Office Building 36,460,180 0.28 18. Forge- Homestead LP Apartments 36,225,115 0.27 19. Cupertino Property Development I LLC Shopping Center 35,805,835 0.27 20. DB RE California Residential 1, LLC Apartments 321103,066 0.24 TOTAL OF TOP 20 $1,950,686,289 14.76% Source: California Municipal Statistics, Inc. (1) 2011 -12 Local Secured Assessed Valuation: $13,219,574,367. Sales and Use Taxes A sales tax is imposed on the privilege of consuming personal property in California. California does not tax services. The tax rate is established by the State Legislature, and is presently 7.25 %, statewide. In addition, many of California's cities, counties, towns and communities have special taxing jurisdiction to impose a transaction (sales) or use tax. These so- called district taxes increase the tax rate in a particular area by adding the local option tax to the statewide tax. These district taxes can vary up to 1%, and more than one district tax may be in effect for a particular location. As of April 1, 2012, the Santa Clara Valley Transportation Authority collects a 0.5% district tax, and the Santa Clara County Transit District collects an additional 0.5% district tax. The City's share of sales tax is approximately 1% when one considers the combined City share of 0.75% and the State's 0.250% Fiscal Recovery Funding (Triple -Flip swap) explained below. With the enactment of the Triple Flip, the City now receives the 0.250% as reclassified revenue through property tax as an in lieu remittance, the payment of which heretofore coincides with the County property tax calendar. The State collects and administers the tax, and makes distributions on taxes collected within the City as follows: -22- TABLE 10 City of Cupertino Sales Tax Rates State General Fund 3.9375% State and Local Revenue Fund (2011) 1.0625 State Fiscal Recovery (to the City) 0.2500 State Local Public Safety Fund 0.5000 State Local Revenue Fund 0.5000 City General Fund 0.7500 County Transportation 0.2500 Subtotal 7.250% Santa Clara Valley Transportation Authority 0.5000 Santa Clara County Transit District 0.5000 Total 8.2500% The State's actual administrative costs with respect to the portion of sales taxes allocable to the City are deducted before distribution and are determined on a quarterly basis. On March 2, 2004, voters approved a statewide bond initiative formally known as the "California Economic Recovery Act." This act authorized the issuance of $15 billion of Economic Recovery Bonds to finance ongoing State budget deficits, which are payable from a fund established by the redirection of tax revenues known as the "Triple Flip." The State issued $11.3 billion of Economic Recovery Bonds prior to June 30, 2004. Under the "Triple Flip," one - quarter of local governments' one percent share of the sales tax imposed on taxable transactions within their jurisdiction is being redirected to the State. In an effort to eliminate the adverse impact of the sales tax revenue redirection on local government, State legislation provides for certain property taxes to be redirected to local government. Because these property tax monies were previously earmarked for schools, the legislation provides for schools to receive other State general fund revenues. It is expected that the swap of sales taxes for property taxes will terminate once the Economic Recovery Bonds are repaid, which is currently expected to occur in approximately 9 to 13 years. See "RISK FACTORS State Budget Information" herein. Motor Vehicle In -Lieu Tax Vehicle license fees are assessed in the amount of 2% of a vehicle's depreciation market value for the privilege of operating a vehicle on California's public highways. A program to offset (or reduce) a portion of the vehicle license fees ( paid by vehicle owners was established by Chapter 322, Statutes of 1998. Beginning January 1, 1999, a permanent offset of 25% of the VLF paid by vehicle owners became operative. Various pieces of legislation increased the amount of the offset in subsequent years to the existing statutory level of 67.5% of 2% (resulting in the current effective rate of 0.65 %). This level of offset was estimated to provide tax relief of $3.95 billion in the fiscal year 2003 -04. In connection with the offset of the VLF, the Legislature authorized appropriations from the State general fund to "b ackf ill" the offset so that the local governments, which receive all of the vehicle license fee revenues, would not experience any loss of revenues. The legislation that established the VLF offset program also provided that if there were insufficient general fund moneys to fully backfill the VLF offset, the percentage offset would be reduced proportionately (i.e., the license fee payable by drivers would be increased) to assure that local governments would not be disadvantaged. In June 2003, the State Director of Finance ordered the suspension of VLF offsets due to a determination that insufficient general fund moneys would be available for this purpose, and, beginning in October 2003, VLF paid by vehicle owners were restored to the 1998 level. However, the offset suspension was rescinded by the Governor on November 17, -23- 2003, and offset payments to local governments resumed. Local governments received backfill payments totaling $3.80 billion in fiscal year 2002 -03. Backfill payments totaling $2.65 billion were expected to be paid to local governments in fiscal year 2003 -04. The State -local agreement also provided for the repayment in August 2006 of approximately $1.2 billion in backfill that was not received by local governments during the time period between the suspension of the offsets and the implementation of higher fees. This repayment obligation was codified by Proposition 1A, which was approved by voters in the November 2004 general election and was repaid early by the State in August 2005. For a description of Proposition 1A, see "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS Proposition 1A." Beginning in fiscal year 2004 -05, the State -local agreement permanently reduced the VLF rate to 0.65% and replaced the backfill with a like amount of property taxes. Subsequent to fiscal year 2004 -05, each City's "property tax in -lieu of VLF" increased proportionally to increases in such city's assessed valuation. However, in fiscal years 2004 -05 and 2005 -06, the State "shifted" $700 million in city and county taxes to the State's General Fund. The following table sets forth the Motor Vehicle License Fees and Property Tax In -Lieu of VLF received by the City for the last four fiscal years. TABLE 11 City of Cupertino Property Tax In -Lieu of VLF 2007 -08 2008 -09 2009 -10 2010 -11 Motor Vehicle License Fees $ 266,789 $ 171,621 $ 166,440 $ 259,289 Property Tax In -Lieu of VLF 3,894,502 41299,902 41420,901 414041795 TOTAL $411611291 $41471,523 $4,587,341 $4,664,084 Source: City of Cupertino Finance Department. Senate Bill 89 was signed into law as part of the State's Fiscal Year 2011 -12 Budget Act. SB 89 increases motor vehicle license fees ( by $12. This new funding source "frees up" $300 million of VLF revenue that had been used to fund DMV operations. Under the provisions of SB 89, this money is transferred to a new Local Law Enforcement Services Account ( to fund law enforcement grants. In addition, beginning July 1, 2011, SB 89 transfers the remaining VLF revenue previously allocated to cities to the LLESA. Instead of cities receiving $130 million in VLF revenues, under SB 89 they would only receive $75 million in earmarked grants. This has the effect of reducing the City's revenues by $240,000 in FY 11 -12. -24- General Fund Revenues and Expenditures The following two tables summarize the General Fund Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balance of the City's general fund for the fiscal years 2007 -08 through 2010 -11. TABLE 12 City of Cupertino General Fund Balance Sheet Fiscal Years 2007 -08 through 2010 -11 Fiscal Year Ended June 30, Assets: Cash and investments Receivables: Accounts Interest Intergovernmental - State Proposition 1A Loans Prepaid items Due from other funds Advance to other funds Other assets Total assets Liabilities and Fund Balances: Liabilities: Accounts payable and accruals Accrued payroll and benefits Deposits Advance from other funds Unearned revenue Deferred revenue Total liabilities Fund balance: (pre -GASB 54 implementation) Reserved for: Encumbrances Advances to other funds Prepaid items Loans receivable Public access television Unreserved, reported in: General Fund Total fund balance Total liabilities and fund balance Fund balance: (post- GASB 54 implementation) Nonspendable Restricted Assigned Unassigned Total fund balance Total liabilities and fund balance Source: City of Cupertino. 2008 2009 2010 2011 $18,243,676 $22,615,824 $18,294,292 $23,173,690 21147,855 11759,822 31197,767 21604,221 47,183 1,419,497 11299,556 11222,918 11204,540 953,070 22,082 71003 73,474 70,880 11457,512 837,629 39,788 263,324 31884 31884 31884 31884 $23,437,889 $26,447,080 $22,813,745 $28,272,425 $117771465 $2,373,835 $2,878,151 $3,541,911 303,385 372,983 440,206 523,084 11669,210 11484,816 11608,232 11993,988 5041497 5041497 21,346 18,589 32,044 482,571 11419,497 11419,497 31771,406 41250,223 61882,627 81465,548 429,909 263,324 22,082 1,299,556 654,043 16,997,569 1 n iii AC)n $23,437,889 -25- 497,484 7,003 1,222,918 597,878 19,871,574 nn I ni c)rn $26,447,080 436,166 73,474 1,204,540 594,110 13,622,828 nni 1 r- $22,813,745 1,023,950 663,254 14,739,394 3,380,279 1 n nni nrnrn $28,272,425 Fund Balance Reporting Changes. Fund balance is a financial measure that represents the difference between a fund's assets and liabilities. The objective of fund balance reporting is to isolate that portion of fund balance that is unavailable to support the following period's budget. Governmental Accounting Standards Board ( Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions ( 54 "), which is effective for periods beginning after June 15, 2010, significantly changed how this information is reported in governmental financial statements. Prior to the adoption of GASB 54, fund balances were either classified as reserved or unreserved. In addition, some governments identified part of unreserved fund balance as "designated." The City implemented GASB 54 in fiscal year 2010 -11. GASB 54 requires reporting of fund balance using a hierarchy of fund balance classifications based primarily on the extent to which governments are bound by constraints on the financial resources reported in the funds. The hierarchy of five possible classifications of fund balance is: (1) Non - spendable Fund Balance: amounts that cannot be spent due to form, including inventories, prepaid amounts, long -term loan and notes receivables, and/or property held for resale; and, amounts that must be maintained intact legally or contractually (corpus or principal of a permanent fund); (2) Restricted Fund Balance: amounts constrained for a specific purpose by external parties, constitutional provision or enabling legislation. (Note: this is the same definition used by GASB No. 34, Basic Financial Statements —and Management's Discussion and Analysis —for State and Local Governments, for restricted net assets.); (3) Committed Fund Balance: amounts constrained for a specific purpose by a government using its highest level of decision - making authority, such as the City Council, and which would require action by the same group to remove or change the constraints placed on the resources; (Note that such action must occur prior to year -end, but the amount can be determined in the subsequent period); (4) Assigned Fund Balance: for the general fund, amounts constrained for the intent to be used for a specific purpose by a governing board or a body or official that has been delegated authority to assign amounts; (Note that for governmental funds other than the general fund, this includes any remaining positive amounts not classified as non - spendable, restricted or committed); and (5) Unassigned Fund Balance: amounts not classified as non - spendable, restricted, committed or assigned. The general fund is the only fund that would report a positive amount in unassigned fund balance. -26- TABLE 13 City of Cupertino General Fund Statement of Revenues, Expenditures and Changes in Fund Balance Fiscal Years 2007 -08 through 2010 -11 On December 30, 2011, the California Supreme Court issued its decision in the case of California Redevelopment Association v. Matosantos, finding ABx1 26 ( 26 "), a trailer bill to the 2011 -12 State budget, to be constitutional. As a result, all redevelopment agencies in California were dissolved as of February 1, 2012, and all net tax increment revenues, after payment of -27- Fiscal Year Ended June 30, 2008 2009 2010 2011 Revenues: Taxes $33,863,497 $34,861,876 $29,532,759 $36,176,232 Use of money and property 2,015,653 11163,492 685,490 727,983 Intergovernmental 659,487 4211238 625,523 689,239 Licenses and permits 21656,017 21740,463 21583,131 21901,944 Charges for services 1,363,196 11265,509 11333,729 1,944,609 Fines and forfeitures 722,087 761,320 736,239 695,666 Other revenue 85,388 79,042 81,352 58,881 Amounts available for appropriation 41,365,325 411292,940 35,578,223 43,194,554 Charges for appropriation (outflows): Administration 11351,273 11336,921 11469,004 11528,070 Law enforcement 71456,661 8,133,168 8,384,310 8,434,885 Public information/ environmental affairs 11169,247 11486,443 114871265 114971263 Administrative services 31797,156 31634,043 31733,414 31695,076 Recreation services 31745,244 31789,260 41003,764 411171477 Community development 31417,590 31209,030 31069,287 31237,643 Public works 10,073,546 10,687,626 10,809,048 1111521029 Total charges for appropriations 31,010,717 321276,491 32,956,092 33,662,443 EXCESS OF REVENUES OVER EXPENDITURES 10,354,608 91016,449 21622,131 91532,111 OTHER FINANCING SOURCES (USES): Proceeds from sale of capital assets 11055,449 Transfers in 1,300,165 623,925 487,015 3371482 Transfers (out) 18,334,750 (7,110,000) (9,374,885) (7,049,283) Total other financing sources (uses) 17,034,585 (61486,075) (81887,870) (51656,352) NET CHANGE IN FUND BALANCE (61679,977) 21530,374 (61265,739) 31875,759 BEGINNING FUND BALANCE 26,346,460 19,666,483 221196,857 15,931,118 ENDING FUND BALANCE $19,666,483 $221196,857 $15,931,118 $19,806,877 Source: City of Cupertino. Dissolution of Redevelopment Agencies On December 30, 2011, the California Supreme Court issued its decision in the case of California Redevelopment Association v. Matosantos, finding ABx1 26 ( 26 "), a trailer bill to the 2011 -12 State budget, to be constitutional. As a result, all redevelopment agencies in California were dissolved as of February 1, 2012, and all net tax increment revenues, after payment of -27- redevelopment bonds debt service and administrative costs, will be distributed to cities, counties, special districts and school districts. The Court also found that ABx1 27, a companion bill to AB 26, violated the California Constitution, as amended by Proposition 22. ABx1 27 would have permitted redevelopment agencies to continue operations provided their establishing cities or counties agreed to make specified payments to school districts and county offices of education, totaling $1.7 billion statewide. The City's redevelopment agency, established in 2000, had no bonded indebtedness, no property ownership and had relatively few outstanding public improvement and affordable housing obligations. The annual $250,000 administrative cost allowance allocated to the City, as successor agency, to wind -down these outstanding agreements, covers the previous administrative costs that the City was spending on redevelopment agency activities. However, the administrative costs allowance will end after the outstanding agreements expire, and the City's General Fund may be impacted with all or a portion of the administrative costs. OTHER FINANCIAL INFORMATION Labor Relations Most City employees are represented by two labor union associations, the principal one being the unaffiliated Cupertino City Employees' Association, which represents approximately 39% of all City employees. Approximately 70% of all permanent City employees are covered by negotiated agreements with management, confidential, and city attorney employees being unrepresented. The City has never had an employee work stoppage. Negotiated agreements have the following expiration dates: TABLE 14 City of Cupertino Negotiated Employee Agreements Contract Number of Bargaining Unit Expiration Date Employees Cupertino City Employees' Association June 30, 2012 64 Operating Engineers Local 3 June 30, 2012 50 Source: City of Cupertino Finance Department. Risk Management The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters for which the City carries insurance. However, the Property that is the subject of the Lease Agreement is not insured against earthquake risk. General and Property Liability Insurance. The City is self - insured for the first $250,000 of general and property liability for each occurrence, and the excess (up to $10,000,000 for each occurrence and annual aggregate) is covered through the City's participation in the Association of Bay Area Governments Pooled Liability Assurance Network (ABAG PLAN). The risk pool consists of 31 agencies within the San Francisco Bay Area. The stated purpose of the ABAG PLAN is to provide certain levels of liability insurance coverage, claims management, risk management services, and legal defense to its participating members. ABAG PLAN is governed by a Board of Directors, which comprises officials appointed by each participating member. Premiums paid to ABAG are subject to possible refund based on the results of actuarial studies and approval by the Board of Directors. Complete financial statements for ABAG PLAN may be obtained from their offices at the following address: ABAG PLAN, Finance Department, P.O. Box 2050, Oakland, CA 94604. Premiums are revised each year based on the City's claims experience and risk exposure. For the year ended June 30, 2011, the City paid ABAG PLAN premiums of $182,583. Workers Compensation Insurance. The City belongs to the CSAC Excess Insurance Authority (EIA), a joint power authority which provides excess workers' compensation liability claims coverage above the City's self - insured retention of $500,000 per occurrence. Losses above the self - insured retention are pooled with excess reinsurance purchased to a $50,000,000 statutory limit. EIA was established in 1979 for the purpose of creating a risk management pool for all California public entities. EIA is governed by a Board of Directors consisting of representatives of its member public entities. Complete financial statements for EIA may be obtained from their offices at the following address: CSAC Excess Insurance Authority, Finance Department, 75 Iron Point Circle, Suite 200, Folsom, CA 95630. For the year ended June 30, 2011, the City paid premiums of $50,033 to EIA. It is the City's practice to obtain biennial actuarial studies for the self-insured workers' compensation liability. The claims liabilities included in the workers' compensation internal service fund is based on the results of actuarial studies and include amounts for claims incurred but not reported and loss adjustment expenses. Claim liabilities are calculated considering the effects of inflation, recent claim settlement trends, including frequency and amount of payouts, and other economic and social factors. Inflation of 2.5 %, annual rate of return of 3 %, claim severity increase at 2.5% were assumed. In the current year, management used actuarial estimates based on an 80% confidence level. Settlements have not exceeded insurance coverage in the past three years. See APPENDIX B— COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2011 —Notes to Basic Financial Statements —NOTE 10. Employee Retirement Plans Plan Description. Substantially all City employees are eligible to participate in pension plans offered by California Public Employees Retirement System (CalPERS), an agent multiple employer defined benefit pension plan which acts as a common investment and administrative agent for its participating member employers. CalPERS provides retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. The City's employees participate in the Miscellaneous Employee Plan of the City of Cupertino (the "Plan "). Benefit provisions under the Plan are established by State statute and City resolution. Benefits are based on years of credited service and compensation. Audited annual financial statements are available from CalPERS at www.calpers.ca.gov. -29- Funding Policy. The contribution requirements of Plan members and the City are established by and may be amended by CalPERS. The City is required to contribute at an actuarially determined rate. Based on the June 30, 2009 actuarial report, the Plan's provisions and benefits in effect at June 30, 2012, are summarized as follows: Benefit vesting schedule Benefit payments Eligible retirement age Benefits, as a % of annual salary multiplied by years of service and annual salary Required employee contribution rates Required employer contribution rates 5 years service Monthly for life 50 with at least 5 years of credited service 2%-2.7% 8% 20.690% (increased from 16.751% in prior year) The City covered 75% of the employees' required payroll contributions for fiscal year 2011. The City uses the actuarially determined percentages of payroll to calculate and pay 100% of the required contributions to CalPERS. This results in no net pension obligations or unpaid contributions. The following tables are extracted from the City's most recent Actuarial Valuation Report, as of June 30, 2010, for the Plan. The tables show required contributions to the Plan as determined by the CalPERS actuary for fiscal years 2011 -12 and 2012 -13, as well as the funded status of the Plan as of June 30, 2009 and June 30, 2010. Also shown is a table showing the history of the valuation of the Plan for the periods ending June 30, 2006 through June 30, 2010. The contribution rate for the Fiscal Year 2012 -13 is projected by the actuary in the Actuarial Valuation Report. Required Contributions (1) Projected Funded Status Present Value of Projected Benefits Entry Age Normal Accrued Liability Actuarial Value of Assets (AVA) Unfunded Liability (AVA) Market Value of Assets (MVA) Unfunded Liability (MVA) Funded Status (MVA) Fiscal Year 2012 -2013 $1,401,612 1,479,035 $2,880,647 10.25% 10.81% 21.06% As of June 30, 2009 As of June 30, 2010 $90,473,209 74,955,504 57,934,851 17,020,653 42,327,575 32,627,929 56.50% -30- $96,213,199 79,939,987 61,358,259 18,581,728 48,283,300 31,656,687 60.40% Fiscal Year 2011 -2012 Employer Contribution Required (in Projected Dollars) Payment for Normal Cost $112841279 Payment on the Amortization Bases 11373,197 Total $2,657,476 Employer Contribution Required (Percentage of Payroll) Payment for Normal Cost 10.00% Payment on the Amortization Bases 10.69% Total 20.69% (1) Projected Funded Status Present Value of Projected Benefits Entry Age Normal Accrued Liability Actuarial Value of Assets (AVA) Unfunded Liability (AVA) Market Value of Assets (MVA) Unfunded Liability (MVA) Funded Status (MVA) Fiscal Year 2012 -2013 $1,401,612 1,479,035 $2,880,647 10.25% 10.81% 21.06% As of June 30, 2009 As of June 30, 2010 $90,473,209 74,955,504 57,934,851 17,020,653 42,327,575 32,627,929 56.50% -30- $96,213,199 79,939,987 61,358,259 18,581,728 48,283,300 31,656,687 60.40% Valuation History Annual Pension Cost. The required contribution was determined as part of the June 30, 2009 actuarial valuations using the entry age normal method. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses), (b) projected annual salary increases ranging from 3.25% to 14.45% and (c) 3.25% per year cost -of- living adjustments. Both (a) and (b) included an inflation component of 3.0 %. The actuarial value of CalPERS assets was determined using techniques that smooth the effects of short -term volatility in the market value of investments over a fifteen -year period. The excess of the total actuarial accrued liability over the actuarial value of Plan assets is called the unfunded actuarial accrued liability. Funding requirements are determined by adding the normal cost and an amortization of the unfunded liability as a level percentage of assumed future payrolls. Initial unfunded liabilities are amortized over a closed period that depends on the Plan's date of entry into CalPERS. Subsequent Plan amendments are amortized as a level percentage of pay over a closed 20 -year period. Gains and losses that occur in the operation of the Plan are amortized over a 30 -year rolling period, which results in an amortization of about 6% of unamortized gains or losses each year. Recent Annual Pension Costs, which equal the Annual Required Contribution to CalPERS, were as follows: Annual Percent of Pension Cost APC Fiscal Year (APC) Contributed 6/30/2009 $1,835,521 100% 6/30/2010 1,841,350 100% 6/30/2011 2,088,898 100% The City has only miscellaneous employee groups participating in CalPERS and does not have the public safety employee plans. The City has adopted a Policy Statement on Local Government Retirement Benefits that addresses rising pension costs and has resolved to meet and confer with employee bargaining groups to discuss implementing a second tier lower cost retirement benefit plan for new employees hired. See APPENDIX B— COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30,2011—Notes to Basic Financial Statements —NOTE 11. At the March 14, 2012 meeting, the CalPERS Board of Administration approved a recommendation to lower the CalPERS discount rate assumption, or the rate of investment return the pension fund assumes, from 7.75% to 7.50 %. This will increase public agency employer rates for fiscal year 2013 -14. Public agency employer contribution rates are estimated to increase by approximately 1.0% to 2.0% of payroll for Miscellaneous Plans, such as the City's. These increases are to be phased in over a period of two years beginning in fiscal year 2013 -14. The City's preliminary estimate of the future effect of this change, based on its payroll data for FY 2009 -2010, ranges from $124,280 per year to as much as $248,561 per year based on that -31- Actuarial Market Value of Value of Funded Funded Annual Valuation Accrued Assets Assets Ratio Ratio Covered Date Liability (AVA) (MVA) (AVA) (MVA) Payroll 6/30/2006 $541287,591 $44,876,584 $471742,657 82.70% 87.90% $10,133,914 6/30/2007 59,241,300 50,157,077 581092,800 84.70% 98.10% 10,751,350 6/30/2008 65,337,134 54,571,233 55,583,004 83.50% 85.10% 11,009,984 6/30/2009 74,955,504 57,934,851 42,327,575 77.30% 56.50% 11,668,964 6/30/2010 79,939,987 61,358,259 48,283,300 76.80% 60.40% 12,428,055 Annual Pension Cost. The required contribution was determined as part of the June 30, 2009 actuarial valuations using the entry age normal method. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses), (b) projected annual salary increases ranging from 3.25% to 14.45% and (c) 3.25% per year cost -of- living adjustments. Both (a) and (b) included an inflation component of 3.0 %. The actuarial value of CalPERS assets was determined using techniques that smooth the effects of short -term volatility in the market value of investments over a fifteen -year period. The excess of the total actuarial accrued liability over the actuarial value of Plan assets is called the unfunded actuarial accrued liability. Funding requirements are determined by adding the normal cost and an amortization of the unfunded liability as a level percentage of assumed future payrolls. Initial unfunded liabilities are amortized over a closed period that depends on the Plan's date of entry into CalPERS. Subsequent Plan amendments are amortized as a level percentage of pay over a closed 20 -year period. Gains and losses that occur in the operation of the Plan are amortized over a 30 -year rolling period, which results in an amortization of about 6% of unamortized gains or losses each year. Recent Annual Pension Costs, which equal the Annual Required Contribution to CalPERS, were as follows: Annual Percent of Pension Cost APC Fiscal Year (APC) Contributed 6/30/2009 $1,835,521 100% 6/30/2010 1,841,350 100% 6/30/2011 2,088,898 100% The City has only miscellaneous employee groups participating in CalPERS and does not have the public safety employee plans. The City has adopted a Policy Statement on Local Government Retirement Benefits that addresses rising pension costs and has resolved to meet and confer with employee bargaining groups to discuss implementing a second tier lower cost retirement benefit plan for new employees hired. See APPENDIX B— COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30,2011—Notes to Basic Financial Statements —NOTE 11. At the March 14, 2012 meeting, the CalPERS Board of Administration approved a recommendation to lower the CalPERS discount rate assumption, or the rate of investment return the pension fund assumes, from 7.75% to 7.50 %. This will increase public agency employer rates for fiscal year 2013 -14. Public agency employer contribution rates are estimated to increase by approximately 1.0% to 2.0% of payroll for Miscellaneous Plans, such as the City's. These increases are to be phased in over a period of two years beginning in fiscal year 2013 -14. The City's preliminary estimate of the future effect of this change, based on its payroll data for FY 2009 -2010, ranges from $124,280 per year to as much as $248,561 per year based on that -31- estimate. Details of the phase -in have yet to be developed by CalPERS. The measured impact of the change in the discount rate assumption will be known when the CalPERS Actuarial Office completes the June 30, 2011 actuarial valuations in fall of 2012. The CalPERS June 30, 2011 valuations will set the employer rates that take effect on July 1,2013. In June 2011, GASB issued an exposure draft entitled Accounting and Financial Reporting for Pensions (amending GASB Statement No. 27) that would change the standards used by governments that provide pension benefits to employees. Most of the proposed changes would apply to "defined benefit plans" such as the CalPERS plan in which the City participates. The public comment period closed September 30, 2011, and the GASB plans to deliberate and issue a final statement regarding reporting by June 2012. Under current reporting standards, a government participating in a multiple employer plan, such as CalPERS, is required to report a "pension liability" as the difference between an employer's contractually required contribution and the employer's actual contributions. The exposure draft, as currently written, would require a "net pension liability" be reported differently by governments on their financial statements. The "net pension liability" would be the future pension obligation, minus the value of the assets set aside in a pension plan to pay benefits to current employees, retirees, and their beneficiaries. The exposure draft further defines the methods and assumptions used to measure the net pension liability and expenses. The City is unable to estimate the effect of these proposed changes on its financial reporting until the GASB issues final guidance. Other Post Employment Benefits Plan Description. Permanent employees who retire under the City's CalPERS retirement plan are, pursuant to their respective collective bargaining agreements, eligible to have their medical insurance premiums paid by the City. Retirees receive the amount necessary to pay the cost of his/her enrollment, including the enrollment of his/her family members, in a health benefit plan provided by CalPERS up to the maximum received by active employees in their respective bargaining unit. The City contracts with CalPERS for this insured - benefit plan established under the state Public Employees' Medical and Hospital Care Act (PEMHCA). The plan offers employees and retirees three CalPERS' self - funded options, setup as insurance risk pools, or offers various third -party insured health plans. The plan's medical benefits and premium rates are established by CalPERS and the insurance providers. The City contribution is established by City resolution. Retirees and active employees pay the difference between the premium rate and the City's contribution. Premiums and City contributions are based on the plan and coverage selected by actives and retirees, with the City's potential contribution ranging from zero to $1,326 per month per employee or retiree. The responsibility for benefit payments has transferred to the insurers and the City does not guarantee the benefits in the event of default by the insurers. A comprehensive annual financial report of CalPERS, inclusive of their benefit plans, is available at www.calpers.ca. ov. The City participates in the Public Agency Retirement System (PARS) Public Agencies Post Retirement Health Care Plan Trust Program (PARS Trust), an agent- multiple employer irrevocable trust established to fund other postemployment benefits. The PARS Trust is approved by the Internal Revenue Code Section 115 and invests funds in equity, bond, and money market mutual funds. Copies of PARS Trust annual financial report may be obtained from PARS at 4350 Von Karman Avenue, Suite 100, Newport Beach, CA 92660. A separate report for the City's portion of the PARS Trust is available at the City's Finance Department. -32- An employee is eligible for lifetime medical benefits under the OPEB Plan, along with his /her spouse or declared domestic partner at the time of retirement, if all criteria listed below are met: • The employee was hired or the City Council member was elected prior to August 1, 2004, and the employee has five or more full -time years of service and the City Council member has five or more years of elected service with the City of Cupertino; or • The employee was hired or the City Council member was elected on or after August 1, 2004, and the employee has ten or more full -time and/or elected years of CalPERS service, five years of which must be from the City of Cupertino; and • The employee is eligible for retirement as defined under the CalPERS retirement system; and • The employee retires from the City of Cupertino. In addition, the eligible employee's dependent children at the time of retirement who are under 23 years old are eligible for medical benefits. In addition to extending the eligibility of dependents from age 23 to age 26 in accordance with the recent healthcare reform act, effective July 1, 2010, employees that retire or resign from service with the City of Cupertino and who are not eligible for retiree medical benefits can continue on the City's medical and dental plans provided that they pay the premiums in full. Funding Policy. The contribution requirements to the OPEB Plan are established through budget adoption and may be amended by the City Council. The cost of the benefits provided by the OPEB Plan is currently being paid by the City on a fully pre- funded basis. The City has expressed intent to fully fund the annual required contribution (ARC) each year. Based on the actuarial valuation date of January 1, 2011, the annual required contribution rate is 14.20% of annual covered payroll. For the year ended June 30, 2011, the City contributed $2,000,000 to the PARS Trust and paid $688,723 in healthcare premium payments to fully pre -fund OPEB Plan. Annual OPEB Cost. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of certain events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The City has reduced future OPEB costs by introducing a lower cost second tier of OPEB benefits in 2004, reserving funds for OPEB since 2004, establishing and funding a separate trust fund for OPEB liabilities in 2010, and capping City payments toward OPEB insurance premiums since 2002, subject to employee bargaining group agreements. The following table shows the history of the valuation of the plan for the periods ending January 1, 2007, January 1, 2009, and January 1, 2011. Actuarial Valuation Actuarial Date Asset Value 1/1/2007 1/1/2009 1/1/2011 $711438,341 Unfunded Actuarial Actuarial Accrued Accrued of Covered Liability Liability Funded (Entry Age) (UAAL) Ratio $21,981,544 $21,981,544 0.0% $18,069,366 $18,069,366 0.0% $20,869,058 $13,430,717 35.6% -33- UAAL as Percentage Covered of Covered Payroll Payroll $111118,000 197.7% $11,892,000 151.9% $121724,000 105.6% See APPENDIX B— COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2011 —Notes to Basic Financial Statements —NOTE 12. Short -Term Obligations The City currently has no outstanding short -term obligations. Long -Term Obligations The 2002 Certificates will be refunded with the proceeds of this issue. The City has no other outstanding general fund indebtedness. Overlapping Debt Set forth below is a direct and overlapping debt report (the "Debt Report ") prepared by California Municipal Statistics, Inc. and effective March 1, 2012. The Debt Report is included for general information purposes only. The City has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith. The Debt Report generally includes long -term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the City in whole or in part. Such long -term obligations generally are not payable from revenues of the City (except as indicated) nor are they necessarily obligations secured by land within the City. In many cases, long -term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. The contents of the Debt Report are as follows: (1) the first column indicates the public agencies which have outstanding debt as of the date of the Debt Report and whose territory overlaps the City; (2) the second column shows the respective percentage of the assessed valuation of the overlapping public agencies identified in column 1 which is represented by property located in the City; and (3) the third column is an apportionment of the dollar amount of each public agency's outstanding debt (which amount is not shown in the table) to property in the City, as determined by multiplying the total outstanding debt of each agency by the percentage of the City's assessed valuation represented in column 2. -34- TABLE 15 City of Cupertino Direct and Overlapping Bonded Debt as of March 1, 2012 2011 -12 Assessed Valuation: $13,748,759,628 Redevelopment Incremental Valuation: 83,317,937 Adjusted Assessed Valuation: $13,665,441,691 OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 3 /1 /12 Santa Clara County 5.092% $ 16,131,456 Foothill- DeAnza Community College District 13.865 88,083,553 West Valley Community College District 0.640 11350,156 Santa Clara Unified School District 2.050 9,042,448 Fremont Union High School District 29.932 78,004,321 Cupertino Union School District 48.980 59,105,408 El Camino Hospital District 1.393 11981,960 Santa Clara Valley Water District Benefit Assessment District 5.092 6,794,765 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $260,494,067 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Santa Clara County General Fund Obligations 5.092% $ 39,253,464 Santa Clara County Pension Obligations 5.092 19,504,133 Santa Clara County Board of Education Certificates of Participation 5.092 640,574 Foothill -De Anza Community College District Certificates of Participation 13.865 21718,233 West Valley- Mission Community College District General Fund Obligations 0.640 422,304 Santa Clara Unified School District Certificates of Participation 2.050 266,090 City of Cupertino Certificates of Participation 100. 44,010,000 (1) Santa Clara County Vector Control District Certificates of Participation 5.092 193,496 Midpeninsula Regional Open Space Park District Certificates of 7.806 10,809,336 Participation TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $117,817,630 COMBINED TOTAL DEBT $378,311,697 (2) Ratios to 2011 -12 Assessed Valuation: Total Overlapping Tax and Assessment Debt 1.89% Ratios to Adjusted Assessed Valuation: Total Direct Debt ($44,010,000) 0.32% Combined Total Debt 2.77% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/11: $0 Source: California Municipal Statistics, Inc. (1) Amount indicated is the issue to be refunded with the proceeds of the Certificates. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non - bonded capital lease obligations. THE CORPORATION The Corporation is a nonprofit, public benefit corporation duly organized and existing under the laws of the State of California and is entitled to purchase personal and real property and to sell or lease such property, to contract for construction and improvements and to execute operating agreements regarding such property. The Corporation was formed for the purpose of providing financial assistance to public entities by acquiring, constructing, developing and -35- refinancing certain facilities for the use and benefit of the public. The Corporation has no liability to the Owners of the Certificates. CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS Article XIIIA of the California Constitution On June 6, 1978, California voters approved an amendment (commonly known as both Proposition 13 and the Jarvis -Gann Initiative) to the California Constitution. This amendment, which added Article XIIIA to the California Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property 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 newly constructed, or when a change in ownership has occurred after the 1975 assessment." The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or a reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to one percent of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two - thirds of the votes cast by the voters voting on the proposition. Legislation enacted by the California Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. In conformity with this procedure, all taxable property value included in this Official Statement (except as noted) is shown at 100% of assessed value and all general tax rates reflect the $1 per $100 of taxable value. Tax rates for voter approved bonded indebtedness and pension liability are also applied to 100% of assessed value. The voters of the State subsequently approved various measures which further amended Article XIIIA. One such amendment generally provides that the purchase or transfer of (i) real property between spouses or (ii) the principal residence and the first $1,000,000 of the Full Cash Value of other real property between parents and children, do not constitute a "purchase" or "change of ownership" triggering reappraisal under Article XIIIA. Other amendments permitted the State Legislature to allow persons over the age of 55 who meet certain criteria or "severely disabled homeowners" who sell their residence and buy or build another of equal or lesser value within two years in the same county, to transfer the old residence's assessed value to the new residence. Other amendments permit the State Legislature to allow persons who are either 55 years of age or older, or who are "severely disabled," to transfer the old residence's assessed value to their new residence located in either the same or a different county and acquired or newly constructed within two years of the sale of their old residence. In the November 1990 election, the voters approved an amendment of Article XIIIA to permit the State Legislature to exclude from the definition of "new construction" certain additions and improvements, including seismic retrofitting improvements and improvements utilizing earthquake hazard mitigation technologies constructed or installed in existing buildings after November 6, 1990. Article XIIIA has also been amended to provide that there would be no increase in the Full Cash Value base in the event of reconstruction of the property damaged or destroyed in a disaster. -36- Section 51 of the California Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently "recapture" such value (up to the pre- decline value of the property) at an annual rate higher than 2 %, depending on the assessor's measure of the restoration of value of the damaged property. Section 4 of Article XIIIA also provides that cities, counties and special districts cannot, without a two - thirds vote of the qualified electors, impose special taxes, which has been interpreted to include special fees in excess of the cost of providing the services or facility for which the fee is charged, or fees levied for general revenue purposes. Both the California State Supreme Court and the United States Supreme Court have upheld the validity of Article XIIIA. Article XIIIB of the California Constitution On November 6, 1979, California voters approved Proposition 4, the Gann Initiative, which added Article XIIIB to the California Constitution. In June 1990, Article XIIIB was amended by the voters through their approval of Proposition 111. Article XIIIB of the California Constitution limits the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted annually for changes in the cost of living, population and services rendered by the governmental entity. The "base year" for establishing such appropriation limit is fiscal year 1978 -79. Increases in appropriations by a governmental entity are also permitted (1) if financial responsibility for providing services is transferred to the governmental entity, or (2) for emergencies so long as the appropriations limits for the three years following the emergency are reduced to prevent any aggregate increase above the Constitutional limit. Decreases are required where responsibility for providing services is transferred from the government entity. Appropriations subject to Article XIIIB include generally any authorization to expend during the fiscal year the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. Appropriations subject to limitation pursuant to Article XIIIB do not include debt service on indebtedness existing or legally authorized as of January 1, 1979, on bonded indebtedness thereafter approved according to law by a vote of the electors of the issuing entity voting in an election for such purpose, appropriations required to comply with mandates of courts or the Federal government, appropriations for qualified outlay projects, and appropriations by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to any entity of government from (1) regulatory licenses, user charges, and user fees to the extent such proceeds exceed the cost of providing the service or regulation, (2) the investment of tax revenues and (3) certain State subventions received by local governments. 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 the City 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 amended in June 1990, the appropriations limit for the City in each year is based on the limit for the prior year, adjusted annually for changes in the costs 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 City's -37- option, either (1) the percentage change in California per capita personal income, or (2) the percentage change in the local assessment roll for the jurisdiction due to the addition of nonresidential new construction. The measurement of change in population is, at the City's option, either (1) the percentage change in City population, or (2) the percentage change in County population. Article XIIIB permits any government entity to change the appropriations limit by vote of the electorate in conformity with statutory and Constitutional voting requirements, but any such voter - approved change can only be effective for a maximum of four years. The City's appropriation limit was $70,733,348 for fiscal year 2009 -10 and $69,805,324 for fiscal year 2010 -11, which is well above the total City budget amounts for both years.. Proposition 218 On November 5, 1996, the voters of the State approved Proposition 218, a constitutional initiative, entitled the "Right to Vote on Taxes Act" ('"Proposition 218 "). Proposition 218 added Articles XIIIC and XIIID to the California Constitution and contained a number of interrelated provisions affecting the ability of local governments, including the City, to levy and collect both existing and future taxes, assessments, fees and charges. The City 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 City's ability to raise future revenues and could subject certain existing sources of revenue to reduction or repeal, and increase the City's costs to hold elections, calculate fees and assessments, notify the public and defend its fees and assessments in court. However, the City does not presently believe that the potential financial impact on the City as a result of the provisions of Proposition 218 will adversely affect the City's ability to pay its debt obligations and perform its other obligations payable from the General Fund as and when due. Article XIIIC requires that all new local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes of the City require a majority vote and taxes for specific purposes, even if deposited in the City's General Fund, require a two - thirds vote. Further, any general purpose tax that the City imposed, extended or increased without voter approval after December 31, 1994 may continue to be imposed only if approved by a majority vote in an election held within two years of November 5, 1996. The City has not enacted, imposed, extended or increased any tax without voter approval since January 1, 1995. These voter approval requirements of Proposition 218 reduce the flexibility of the City to raise revenues through General Fund taxes, and no assurance can be given that the City will be able to impose, extend or increase such taxes in the future to meet increased expenditure requirements. Article XIIIC also expressly extends to voters the power to reduce or repeal local taxes, assessments, fees and charges through the initiative process, regardless of the date such taxes, assessments, fees or charges were imposed. This extension of the 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. SB 919 provides that the initiative powers extended to voters under Article XIIIC likely excludes actions construed as impairment of contracts under the contract clause of the United States Constitution. SB 919 provides that the initiative power provided for in Proposition 218 "shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after November 6, 1998, assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights" protected by the United States Constitution. However, no assurance can be given that the voters of the City will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges that currently are deposited into the City's General Fund. Further, "fees" and "charges" are not defined in Article XIIIC or SB 919, and it is unclear whether these terms are intended to have the same meanings for purposes of Article XIIIC as they do in Article XIIID. Accordingly, the scope of the initiative power under Article XIIIC could include all sources of General Fund monies not received from or imposed by the federal or State government or derived from investment income. The initiative power granted under Article XIIIC of Proposition 218, by its terms, applies to all local taxes, assessments, fees and charges. The City is unable to predict whether the courts will ultimately interpret the initiative provision to be limited to property related local taxes, assessments, fees and charges. No assurance can be given that the voters of the City will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges which are deposited into the City's General Fund. The City believes that in the event that the initiative power was exercised so that all local taxes, assessments, fees and charges which may be subject to the provisions of Proposition 218 are reduced or substantially reduced, the financial condition of the City, including its General Fund, would be materially adversely affected. As a result, there can be no assurances that the City would be able to pay the Lease Payments as and when due or any of its other obligations payable from the General Fund. Article XIIID of Proposition 218 adds several new requirements to make it more difficult for local agencies to levy and maintain "assessments" for municipal services and programs. "Assessment" is defined in Proposition 218 and SB 919 as any levy or charge upon real property for a special benefit conferred upon the real property. This includes maintenance assessments imposed in City service areas and in special districts. In most instances, in the event that the City is unable to collect assessment revenues relating to specific programs as a consequence of Proposition 218, the City will curtail such services rather than use amounts in the General Fund to finance such programs. Accordingly, the City anticipates that any impact Proposition 218 may have on existing or future taxes, fees, and assessments will not adversely affect the ability of the City to pay the Lease Payments as and when due. However, no assurance can be given that the City may or will be able to reduce or eliminate such services in the event the assessments that presently finance them are reduced or repealed. Article XIIID also adds several provisions, including notice requirements and restrictions on use, 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 government upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service." The annual amount of revenues that are received by the City and deposited into its General Fund which may be considered to be property related fees and charges under Article XIIID of Proposition 218 is not substantial. Accordingly, presently the City does not anticipate that any impact Proposition 218 may have on future fees and charges will not adversely affect the ability of the City to pay the Lease Payments as and when due. However, no assurance can be given that the City may or will be able to reduce or eliminate such services in the event the fees and charges that presently finance them are reduced or repealed. Additional implementing legislation respecting Proposition 218 may be introduced in the State legislature from time to time that would supplement and add provisions to California statutory law. No assurance may be given as to the terms of such legislation or its potential impact on the City. Proposition 1A of 2004 Proposition 1A, proposed by the Legislature in connection with the 2004 -05 Budget Act, approved by the voters in November 2004 and generally effective in 2007 -08 Fiscal Year, -39- provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year, as set forth under the laws in effect as of November 3, 2004. Any change in the allocation of property tax revenues among local governments within a county must be approved by two - thirds of both houses of the Legislature. Proposition 1A provides, however, that beginning in Fiscal Year 2008 -09, the State may shift to schools and community colleges up to 8% of local government property tax revenues, which amount must be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the shift is approved by two - thirds of both houses and certain other conditions are met. Such shifting occurred in the 2009 -10 Fiscal Year. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also provides that if the State reduces the VLF rate then in effect, 0.65 percent of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition 1A requires the State, beginning July 1, 2005, to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or 25 community colleges, in any year that the State does not fully reimburse local governments for their costs to comply with such mandates. Proposition 1A may result in increased and more stable City revenues. The magnitude of such increase and stability is unknown and would depend on future actions by the State. However, Proposition 1A could also result in decreased resources being available for State programs. This reduction, in turn, could affect actions taken by the State to resolve budget difficulties. Such actions could include increasing State taxes, decreasing spending on other State programs or other action, some of which could be adverse to the finances of the City. See "RISK FACTORS State Budgets" for information relating to Proposition 1A and the suspension of Proposition 1A in the State's 2009 -10 budget. Proposition 22 Proposition 22, entitled "The Local Taxpayer, Public Safety and Transportation Protection Act," was approved by the voters of the State in November 2010. Proposition 22 eliminates or reduces the State's authority to (i) temporarily shift property taxes from cities, counties and special districts to schools, (ii) use vehicle license fee revenues to reimburse local governments for State - mandated costs (the State will have to use other revenues to reimburse local governments), (iii) redirect property tax increment from redevelopment agencies to any other local government, (iv) use State fuel tax revenues to pay debt service on State transportation bonds, or (v) borrow or change the distribution of State fuel tax revenues. Proposition 26 On November 2, 2010, the voters passed Proposition 26, which amends the State Constitution to require that certain state and local fees be approved by two - thirds of each house of the Legislature instead of a simple majority, or by local voters. The change in law affects regulatory fees and charges such as oil recycling fees, hazardous materials fees and fees on alcohol containers. Proposition 26 included a provision that repealed State laws enacted between January 1, 2010, and November 2, 2010, that raised fees by a simple majority vote unless they were approved again by two - thirds of each house of the Legislature. The repeal become effective November, 2011. -40- The Legislative Analyst's Office was unable to specify Proposition 26's anticipated fiscal impact, but it estimated that passage of Proposition 26 would reduce government revenues and spending over time by up to billions of dollars annually compared to what otherwise would have occurred. Future Initiatives Article XIIIA, Article XIIIB, Proposition 218, Proposition 1A and Proposition 22 were each adopted as measures that qualified for the ballot pursuant to the State's initiative process. From time to time, other initiative measures could be adopted, which may place further limitations on the ability of the State, the City or local districts to increase revenues or to increase appropriations which may affect the City's revenues or its ability to expend its revenues. RISK FACTORS This section provides a general overview of certain risk factors which should be considered, in addition to the other matters set forth in this Official Statement, in evaluating an investment in the Certificates. This section is not meant to be a comprehensive or definitive discussion of the risks associated with an investment in the Certificates, and the order in which this information is presented does not necessarily reflect the relative importance of various risks. Potential investors in the Certificates are advised to consider the following factors, among others, and to review this entire Official Statement to obtain information essential to the making of an informed investment decision. Any one or more of the risk factors discussed below, among others, could lead to a decrease in the market value and/or in the marketability of the Certificates. There can be no assurance that other risk factors not discussed herein will not become material in the future. Lease Payments Are Not Debt The obligation of the City to make the Lease Payments under the Lease Agreement does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The obligation of the City to make Lease Payments does not constitute a debt of the City, the State of California or any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. Although the Lease Agreement does not create a pledge, lien or encumbrance upon the funds of the City, the City is obligated under the Lease Agreement to pay the Lease Payments from any source of legally available funds and the City has covenanted in the Lease Agreement that, for so long as the Property is available for its use, it will make the necessary annual appropriations within its budget for the Lease Payments. The City is currently liable and may become liable on other obligations payable from general revenues, some of which may have a priority over the Lease Payments, or which the City, in its discretion, may determine to pay prior to the Lease Payments. The City has the capacity to enter into other obligations payable from the City's general fund, without the consent of or prior notice to the Owners of the Certificates. To the extent that additional obligations are incurred by the City, the funds available to make Lease Payments may be decreased. In the event the City's revenue sources are less than its total obligations, the City could choose to fund other municipal services before making Lease Payments. The same result could occur if, because of State constitutional limits on expenditures, the City is not permitted to appropriate and spend all of its available revenues. The City's appropriations, however, have never exceeded the limitations on appropriations under Article XIIIB of the -41- California Constitution. For information on the City's current limitations on appropriations, see "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS — Article XIIIB of the California Constitution." Valid and Binding Covenant to Budget and Appropriate Pursuant to the Lease Agreement, the City covenants to take such action as may be necessary to include Lease Payments due in its annual budgets and to make necessary appropriations for all such payments. Such covenants are deemed to be duties imposed by law, and it is the duty of the public officials of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform such covenants. A court, however, in its discretion may decline to enforce such covenants. Upon delivery of the Certificates, Special Counsel will render its opinion (substantially in the form of APPENDIX D —FORM OF OPINION OF SPECIAL COUNSEL) to the effect that, subject to the limitations and qualifications described therein, the Lease Agreement constitutes a valid and binding obligation of the City. Abatement In the event of loss or substantial interference in the use and possession by the City of all or any portion of the Property caused by material damage, title defect, destruction to or condemnation of the Property, Lease Payments will be subject to abatement. In the event that such component of the Property, if damaged or destroyed by an insured casualty, could not be replaced during the period of time that proceeds of the City's rental interruption insurance will be available in lieu of Lease Payments, or in the event that casualty insurance proceeds or condemnation proceeds are insufficient to provide for complete repair or replacement of such component of the Property or redemption of the Certificates, there could be insufficient funds to make payments to Owners in full. Reduction in Lease Payments due to abatement as provided in the Lease Agreement does not constitute a default thereunder. It is not possible to predict the circumstances under which such an abatement of rental may occur. In addition, there is no statute, case or other law specifying how such an abatement of rental should be measured. For example, it is not clear whether fair rental value is established as of commencement of the lease or at the time of the abatement. If the latter, it may be that the value of the Property is substantially higher or lower than its value at the time of the execution and delivery of the Certificates. Abatement, therefore, could have an uncertain and material adverse effect on the security for and payment of the Certificates. Risk of Uninsured Loss The City covenants under the Lease Agreement to maintain certain insurance policies on the Property. See "SOURCE OF PAYMENT FOR THE CERTIFICATES Insurance." These insurance policies do not cover all types of risk, and the City need not obtain insurance except as available on the open market from reputable insurers. For instance, the City does not covenant to maintain earthquake insurance. The Property could be damaged or destroyed due to earthquake or other casualty for which the Property is uninsured. Additionally, the Property could be the subject of an eminent domain proceeding. Under these circumstances an abatement of Lease Payments could occur and could continue indefinitely. There can be no assurance that the providers of the City's liability and rental interruption insurance will in all events be able or willing to make payments under the respective policies for such loss should a claim be made under such policies. Further, there can be no assurances that amounts received as proceeds from insurance or from condemnation of the Property will be sufficient to redeem the Certificates. -42- Under the Lease Agreement the City may obtain casualty insurance which provides for a deductible up to $250,000. Should the City be required to meet such deductible expenses, the availability of general fund revenues to make Lease Payments may be correspondingly affected. The City is not obligated under the Lease Agreement to procure and maintain, or cause to be procured and maintained, earthquake insurance on the Property. Depending on its severity, an earthquake could result in abatement of Lease Payments under the Lease Agreement. See " Abatement." Eminent Domain If the Property is taken permanently under the power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the term of the Lease Agreement will cease as of the day possession is taken. If less than all of the Property is taken permanently, or if the Property or any part thereof is taken temporarily, under the power of eminent domain, (a) the Lease Agreement will continue in full force and effect and will not be terminated by virtue of such taking, and (b) there will be a partial abatement of Lease Payments as a result of the application of net proceeds of any eminent domain award to the prepayment of the Lease Payments, in an amount to be agreed upon by the City and the Corporation such that the resulting Lease Payments represent fair consideration for the use and occupancy of the remaining usable portion of the Property. The City covenants in the Lease Agreement to contest any eminent domain award which is insufficient to either: (i) prepay the Lease Payments in whole, if all the Property is condemned; or (ii) prepay a pro rata share of Lease Payments, in the event that less than all of the Property is condemned. Hazardous Substances The existence or discovery of hazardous materials may limit the beneficial use of the Property. In general, the owners and lessees of the Property may be required by law to remedy conditions of such parcel relating to release or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as "CERCLA" or the "Superf and Act," is the most well known and widely applicable of these laws, but California laws with regard to hazardous substances are also similarly stringent. Under many of these laws, the owner or lessee is obligated to remedy a hazardous substance condition of the property whether or not the owner or lessee had anything to do with creating or handling the hazardous substance. Further it is possible that the beneficial use of the Property may be limited in the future resulting from the current existence on the Property of a substance currently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the current existence on the Property of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method in which it is handled. All of these possibilities could significantly limit the beneficial use of the Property. The City is unaware of the existence of hazardous substances on the Property site which would materially interfere with the beneficial use thereof. Earthquakes The City is not legally obligated under the Lease Agreement to maintain, or cause to be maintained, earthquake insurance on the Property and no assurance is made that any earthquake insurance will be maintained. If there were to be an occurrence of severe seismic -43- activity in the City, there could be substantial damage to and interference with the City's right to use and occupy all or a portion of the Property, which could result in Lease Payments being subject to abatement. Additionally, severe seismic activity in the City could impact the City's general fund expenditures. See "CERTAIN RISK FACTORS Abatement" above. Bankruptcy The City is a unit of State government and therefore is not subject to the involuntary procedures of the United States Bankruptcy Code (the "Bankruptcy Code "). However, pursuant to Chapter 9 of the Bankruptcy Code, the City may seek voluntary protection from its creditors for purposes of adjusting its debts. In the event the City were to become a debtor under the Bankruptcy Code, the City would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding. Among the adverse effects of such a bankruptcy might be: (i) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the City or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the City; (ii) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (iii) the existence of unsecured or court - approved secured debt which may have a priority of payment superior to that of Owners of Certificates; and (iv) the possibility of the adoption of a plan for the adjustment of the City's debt (a "Plan ") without the consent of the Trustee or all of the Owners of Certificates, which Plan may restructure, delay, compromise or reduce the amount of any claim of the Owners if the Bankruptcy Court finds that the Plan is fair and equitable. In addition, the City could either reject the Lease Agreement or assume the Lease Agreement despite any provision of the Lease Agreement which makes the bankruptcy or insolvency of the City an event of default thereunder. In the event the City rejects the Lease Agreement, the Trustee, on behalf of the Owners of the Certificates, would have a pre - petition claim that may be limited under the Bankruptcy Code and treated in a manner under a Plan over the objections of the Trustee or Owners of the Certificates. Moreover, such rejection would terminate the Lease Agreement and the City's obligations to make payments thereunder. Limitations on Remedies The rights of the Owners of Certificates are subject to the limitations on legal remedies against cities in the State, including applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors' rights generally, now or hereafter in effect, and to the application of general principles of equity, including concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. Under Chapter 9 of the Bankruptcy Code (Title 11, United States Code), which governs the bankruptcy proceedings for public agencies such as the City, there are no involuntary petitions in bankruptcy. If the City were to file a petition under Chapter 9 of the Bankruptcy Code, the Owners of Certificates and the Trustee could be prohibited from taking any steps to enforce their rights under the Lease Agreement, and from taking any steps to collect amounts due from the City under the Lease Agreement. All legal opinions with respect to the enforcement of the Lease Agreement and the Trust Agreement will be expressly subject to a qualification that such agreements may be limited by bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting creditors' rights generally and by applicable principles of equity if equitable remedies are sought. -44- Risk of Tax Audit In December 1999, as a part of a larger reorganization, the Internal Revenue Service (the "Service "), commenced operation of its Tax Exempt and Government Entities Division (the "TE / GE Division "), as the successor to its Employee Plans and Exempt Organizations division. The new TE /GE Division has a subdivision that is specifically devoted to tax - exempt bond compliance. Public statements by Service officials indicate that the number of tax - exempt bond examinations (which would include securities such as the Certificates) is expected to increase significantly under the new TE / GE Division. There is no assurance that if an examination of the Certificates was undertaken that it would not adversely affect the market value of the Certificates. See "TAX MATTERS." The City has not been contacted by the Service regarding the examination of any of its bond transactions. Revenue Concentration The City is highly dependent on sales tax revenues, especially sales tax revenues generated from so- called business -to- business transactions. The City's sales tax revenues are generated from four principal economic categories: (1) business -to- business, including electronic equipment and software manufacturers and distributors (approximately 73% of projected sales tax revenues in FY 2011 -12); (2) general retail (approximately 12% of projected sales tax revenues); (3) food products (approximately 9% of projected revenues); and, (4) other sources (approximately 6% of projected sales tax revenues). Because the City is home to numerous high -tech companies, many of which engage in taxable transactions, the City is vulnerable to downturns in the high -tech industry, whether such downturns are isolated to the industry or result from general economic downturns. The City handles this vulnerability through its adopted reserve policy. For example, current City policy establishes two levels of reserves of fund balance in its General Fund, "Economic Uncertainty I" and "Economic Uncertainty II." The first reserve category is the larger of the two and is designed to protect against economic downturns and major unforeseen outlays. The second category is designed to buffer the City's financial resources against unplanned shifts of funds to the State to address the State's budget deficits. The City's current established policy guidance for these two categories is $12.5 million and $1.4 million, respectively. Sales tax revenues account for approximately one -third of the City's estimated General Fund revenues in the adopted fiscal year 2011 -12 budget, and projected sales tax revenues in fiscal year 2011 -12 are approximately $14.28 million. The City believes that it is well protected against sudden, unplanned disruptions to this important revenue source. See Table 4 in "CITY FINANCIAL MANAGEMENT POLICIES" and Table 12 in "GENERAL FUND REVENUES AND EXPENDITURES" for additional information regarding the City's established policy. State Budgets The following information concerning the State's budgets has been obtained from publicly available information which the City believes to be reliable; however, the City does not guaranty the accuracy or completeness of this information and has not independently verified such information. Furthermore, it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Bonds is payable by or the responsibility of the State of California. State Budget. The State of California is experiencing significant financial and budgetary stress. State budgets are affected by national and state economic conditions and other factors over which the City has no control. The State's financial condition and budget policies affect communities and local public agencies throughout California. To the extent that the State budget process results in reduced revenues to the City, the City will be required to make -45- adjustments to its budget. Each State budget contains a number of measures which impact the City's finances. The State's fiscal year begins on July 1 and ends on June 30. The annual budget is proposed by the Governor by January 10 of each year for the next fiscal year (the "Governor's Budget "). Under State law, the annual proposed Governor's Budget cannot provide for projected expenditures in excess of projected revenues and balances available from prior years. Following the submission of the Governor's Budget, the California Legislature takes up the proposal. Under the California State Constitution, money may be drawn from the Treasury only through an appropriation made by law. The primary sources of the annual expenditure authorizations is the Budget Act as approved by the Legislature and signed by the Governor. Prior to the November 2, 2010 California General Election, the Budget Act required approval by a two - thirds majority vote of each House of the Legislature. On November 2, 2010, California voters passed Proposition 25, which amended this legislative vote requirement to a simple majority. The Governor may reduce or eliminate specific line items in the Budget Act or any other appropriations bill without vetoing the entire bill. Such individual line item vetoes are subject to override by a two - thirds majority vote of each House of the Legislature. Appropriations also may be included in legislation other than the Budget Act. Bills containing appropriations (except for K -14 education) must be approved by a two - thirds majority vote in each House of the Legislature and be signed by the Governor. Bills containing K -14 education appropriations only require a simple majority vote. Continuing appropriations, available without regard to fiscal year, may also be provided by statute or the State Constitution. Funds necessary to meet an appropriation need not be in the State Treasury at the time such appropriation is enacted; revenues may be appropriated in anticipation of their receipt. 2011112 Adopted State Budget. On June 28, 2011, the State Legislature passed, and on June 30, 2011 the Governor signed, the State budget for Fiscal Year 2011/12. The adopted State budget assumed that revenues would be an additional $4 billion higher than projected in the May Revision, and contains a "trigger" mechanism pursuant to which certain expenditure reductions will be made without further legislative action in the event that the newly projected revenues are not expected to be realized (as determined by the State Director of Finance). The adopted budget does not contain the tax extensions proposed in the May Revision. On December 13, 2011, the State Director of Finance determined that State revenues had fallen short of targets and implemented the trigger mechanism. In connection with the adopted State Budget for Fiscal Year 2011/12, the legislation was enacted providing for significant changes to the current funding mechanism for redevelopment agencies. In addition, the adopted State Budget for Fiscal Year 2011/12 changed the allocation of certain VLF funds for local public safety. Governor's Proposed 2012113 Budget. On January 5, 2012 Governor Brown announced his proposed budget for Fiscal Year 2012/13 (the "Proposed 2012/13 Budget ") which includes a total of $10.3 billion in cuts and revenues to balance the budget and creates a $1.1 billion reserve. The Proposed 2012/13 Budget assumes a budget deficit of approximately $9.2 billion and that voters will pass the Governor's ballot measure proposed for the November 2012 election to raise taxes by approximately $7 billion. The ballot measure proposes an income tax increase of up to 2% on high- income earners for five years and a temporary one -half cent sales tax increase. If passed, this measure will provide new revenues to schools and constitutionally protect the 2011 realignment funds for local public safety, as well as generating an estimated -46- $6.9 billion through Fiscal Year 2012/13. After accounting for the increased Proposition 98 minimum guarantee, the measure would provide $4.4 billion in net benefit to the General Fund budget and prevent deeper cuts to schools, protect local public safety funding, and assist in balancing the budget. The proposed ballot measure would also provide some constitutional protection for the funds dedicated in 2011 to counties and local law enforcement to fund the realignment of various State responsibilities to the local level. Should the voters reject the tax measure in November, the Proposed 2012/13 Budget provides for an additional $5.4 billion in trigger cuts that would affect K -12 schools (in the amount of approximately $4.8 billion), higher education, courts, fire protection and a variety of parks services. areas: Items in the Proposed 2012/13 Budget affecting California cities include the following Public Safety. The Proposed 2012/13 Budget maintains state subvention grants for law enforcement, including funding the Citizens Option for Public Safety program and county sheriffs programs. However, there are no additional allocations in the Proposed 2012/13 Budget for frontline law enforcement to mitigate impacts of public safety realignment. In addition, the Proposed 2012/13 Budget provides for partial restoration of the Department of justice Division of Law Enforcement programs, through the creation of the California Bureau of Special Investigations, however this action is subject to significant cuts in the event the Governor's ballot measure does not pass in November of 2012. If those trigger cuts are engaged, there would also be a 10% reduction to CalFire State response capabilities that would include reductions to the air response program and fire station closures. Realignment. While the 2011 Public Safety Realignment is proceeding as planned in the 2011/12 State Budget, several modifications have been made in the Proposed 2012/13 Budget including a change between counties and the Division of Juvenile Justice which would begin on January 1, 2013 when the Division of Juvenile Justice will no longer accept new juvenile inmates. Instead, counties will assume juvenile inmate supervision duties and would receive $10 million in planning grants for Fiscal Year 2012/13. The 2011 trigger cuts imposed on county juvenile inmate contracts with the Division of Juvenile Justice, which dramatically increased the cost for counties, will be suspended and likely eliminated to provide additional resources for the new population to remain under county supervision. Corrections. The Proposed 2012/13 Budget includes additional grants for State Senate Bill 678 programs to counties, awarded to agencies that maintain custody over felony probationers rather than returning them to prison; increases alternative custody options for low -risk female offenders with prior serious or violent offenses, such as GPS monitoring with savings through reduced housing costs transferred to fund treatment programs for this population; continued conversion and repurposing of existing facilities from female to male inmate facilities, and ongoing study in need for youth to adult facility conversion. • Economic Development. The Proposed 2012/13 Budget proposes the introduction of legislation to reform the enterprise zone program and legislation to move to a mandatory single sales factor for apportioning multistate business income. In addition, the Proposed 2012/13 Budget would apply $4.1 million in State General Fund money to further the work of the Governor's Office of Business and Economic Development. • Employee Relations. The Proposed 2012/13 Budget would implement a surcharge on employers to fund unemployment insurance interest payments for loans received from the Federal Unemployment Account to pay unemployment insurance benefits and -47- would account for the increases in employee wages that have occurred since the requirements were last adjusted in 1992. In addition, the Proposed 2012/13 Budget would decrease the Governor's discretionary Workforce Investment Act funding, which reflects a 10% reduction in federal discretionary funding and would increase the Labor and Workforce Development Fund by $2.3 million to expand education and outreach efforts. Transportation. The Proposed 2012/13 Budget continues the use of "weight fees" to offset State transportation- related debt service costs, providing State general fund relief totaling $349.5 million. In addition, under the Gas Tax Swap implemented in 2010 (which provides for the gasoline excise tax to be adjusted each year to keep the Gas Tax Swap revenue neutral), the actual Fiscal Year 2012/13 rate will be set by the State Board of Equalization prior to March 1, 2012. Environment. If the Governor's ballot measure is not approved in November of 2012, the trigger cuts would include a 20% reduction in flood control programs (including f loodplain mapping and risk awareness programs and a reduction of all seasonal lifeguards) and elimination of 20% of park rangers. However, the core functions by the Department of Fish and Game would be retained, including permitting and data collection and monitoring activities of sensitive endangered species. In addition, the Proposed 2012/13 Budget includes a framework to invest proceeds from Cap and Trade fees to reduce greenhouse gases consistent with State Assembly Bill 32 and includes funding for local government programs including the following: funding to reduce emissions through energy efficiency, clean and renewable distributed energy generation, including local public buildings; funding to reduce emissions through the development of state -of- the -art systems to move goods and freight, deploy advanced technology vehicles and vehicle infrastructure, advanced biofuels and low - carbon and efficient public transportation; funding to reduce emissions associated with water use and supply, land and natural resource conservation and management, and sustainable agriculture; and funding to reduce emissions through strategic planning and development of major infrastructure including transportation and housing. Restructuring and Reorganizing State Government. The Proposed 2012/13 Budget includes a comprehensive package of reorganizations and eliminations of two state agencies, 39 state entities and nine programs. Of particular interest to cities are the following restructuring proposals: transfers of the Department of Resources, Recycling and Recovery ("'CalRecycle") back to the California Environmental Protection Agency; reducing the number of Regional Water Boards from nine to eight as well as reducing the number of members on the boards from nine to seven; eliminating the State Geology and Mining Board and transfer its responsibilities to various existing offices. As it relates to transportation agencies, the Proposed 2012/13 Budget consolidates CalTrans, Department of Motor Vehicles ( the High Speed Rail Authority, the Highway Patrol, the California Transportation Commission and the Board of Pilot Commissioners into a newly created Transportation Agency; and eliminates the Office of Traffic Safety, which distributes federal grants to State, county, city and other entities, and would transfer duties to the DMV. In addition, a new agency will include the departments of Consumer Affairs, Housing and Community Development, Fair Employment and Housing, Alcoholic Beverage Control, and the new restructured Department of Business Oversight. The California Emergency Management Agency and California Technology Agencies would be under the newly created Government Operations Agency and the California Highway Patrol would be moved under the newly created Transportation Agency. Also, various behavioral health programs would be consolidated, including Parolee Service Network, formerly under the Department Mental Health and Department of Alcohol and Drug Programs, to the Department of Health Care Services and the DMV would be moved to the State Transportation Agency. The Fair Employment and Housing Agency would be moved under a newly created Business and Consumer Services Agency; the Public Employees' Retirement System would moved to become under the newly created Government Operation Agency; the Fair Employment and Housing Commission would be eliminated and its functions transferred to the Department of Fair Employment and Housing. LAO Overview of Proposed 2012113 Budget. The LAO's "2012/13 Budget: Overview of the Governor's Budget," released on January 11, 2012 (the "'2012/13 LAO Report "), recognizes that the Governor's proposed tax initiative is the cornerstone of the Proposed 2012/13 Budget which includes proposals to restructure education finance, reduce social services and child care programs substantially, and implement trigger cuts -- primarily affecting schools - -if voters do not approve the tax measure. The 2012/13 LAO Report also recognizes that the Governor's plan would continue the difficult task of restoring the State budget to balance, but the difficulty in knowing how much taxable income will be attributable to high- income Californians makes the State's revenue estimates a bigger question than usual. With regard to the Governor's major proposals, the LAO believes that the Governor's education restructuring proposals would institute lasting improvements to the system, and that, while his social services and child care proposals have merit, they involve considerable drawbacks as well, given potentially severe impacts on affected families. Moreover, the 2012/13 LAO Report states that while the Governor's tax initiative would improve the financial outlook of public education over the next several years, his trigger plan would create significant uncertainty for educational institutions in their planning for Fiscal Year 2012/13. This uncertainty is likely to be particularly problematic for schools, as most will feel compelled to build their Fiscal Year 2012/13 budgets assuming the trigger cuts will be implemented. This means schools in Fiscal Year 2012/13 likely will implement most, if not all, of the reductions that many hope to avoid. Given this, the LAO believes the State Legislature should be very deliberate in structuring a workable trigger package and designing tools to help public agencies respond to potential trigger cuts. In particular, the LAO recommends that the State Legislature be cautious in setting the size of the trigger reduction; determining the specific reductions to impose; and designing tools for public agencies respond to the trigger cuts. Information relating to the Governor's Proposed Budget is available at the State Department of Finance website at http://www.ebudget.ca.gov. The Governor's Proposed Budget begins a lengthy process of negotiation with the State legislature, and the adopted State Budget for Fiscal Year 2012/13 could differ significantly from the Governor's Proposed Budget. As part of the process for developing a State budget, the Department of Finance also prepares an update to the Governor's Budget containing a revised estimate of General Fund revenues for the current and ensuing fiscal years, any proposals to adjust expenditures to reflect updated revenue estimates, and all proposed adjustments to Proposition 98, and submits it to the Legislature by May 14 of each year. This update is referred to as the "May Revision." The Legislature typically waits for the May Revision update before final budget decisions are made on major programs such as Education, Corrections, and Health and Human Services. Ongoing State Budget Risks. The State's financial difficulties may affect the amount and timing of payments to or for the benefit of cities of funds provided by the State. From time to time, some of the State's budget solutions may increase the financial stress of cities and other local governments because they (1) decrease local revenues (particularly the property tax, road improvement funding, public safety or other categorical funded initiatives) or (2) directly or indirectly increase demand for local programs (such as public safety or indigent health programs). There can be no assurances that the State's financial difficulties will not materially adversely affect the financial condition of the City. -49- The financial condition of the State is subject to a number of other risks in the future, including particularly potential significant increases in required state contributions to the Public Employees' Retirement System, increased financial obligations related to other post - employment benefits, and increased debt service. As noted above, the State is facing significant financial stress. There can be no assurances that, as a result of the current or any future State financial stress, the State will not significantly reduce or delay revenues to local governments (including the City) or shift financial responsibility for programs to local governments as part of its efforts to address the State financial difficulties. Aside from AB X1 26 described above no new proposals to reduce or delay material sources of revenues to cities were included in the adopted Fiscal Year 2011/12 Budget. However, in Fiscal Years 2008/09 and 2009/10 the State either deferred payments or issued IOU's which could not immediately be cashed. No prediction can be made by the City as to what measures the State will adopt to respond to the current or potential future financial difficulties. The City cannot predict the final outcome of future State budget negotiations, the impact that such budgets will have on the City's finances and operations or what actions will be taken in the future by the State Legislature and Governor to deal with changing State revenues and expenditures. Current and future State budgets will be affected by national and State economic conditions and other factors, including the current economic downturn, over which the City has no control. There can be no assurances that State actions to respond to State financial difficulties will not adversely affect the financial condition of the City. Loss of Tax Exemption As discussed under the caption "TAX MATTERS," in order to maintain the exclusion from gross income for federal income tax purposes of the interest with respect to the Certificates, the City has covenanted in the Lease Agreement not to take any action, or fail to take any action, if such action or failure to take such action would adversely affect the exclusion from gross income of interest with respect to the Certificates under section 103 of the Code. Interest with respect to the Certificates could become includable in gross income for purposes of Federal income taxation retroactive to the date the Certificates were delivered, as a result of acts or omissions of the City in violation of the Code. Should such an event of taxability occur, the Certificates are not subject to early redemption and will remain outstanding to maturity or until prepaid under the optional redemption or mandatory sinking fund redemption provisions of the Trust Agreement. Limited Secondary Market As stated herein, investment in the Certificates poses certain economic risks which may not be appropriate for certain investors, and only persons with substantial financial resources who understand the risk of investment in the Certificates should consider such investment. There can be no guarantee that there will be a secondary market for purchase or sale of the Certificates or, if a secondary market exists, that the Certificates can or could be sold for any particular price. Changes in Law There can be no assurance that the electorate of the State will not at some future time adopt additional initiatives or that the Legislature will not enact legislation that will amend the laws or the Constitution of the State resulting in a reduction of the general fund revenues of the City and consequently, having an adverse effect on the security for the Certificates. -50- Taxability Risk As discussed under the caption "TAX MATTERS," interest with respect to the Certificates could become includable in gross income for purposes of federal income taxation retroactive to the date the Certificates were delivered, as a result of future acts or omissions of the City in violation of its covenants in the Lease Agreement. There is no provision in the Certificates or the Trust Agreement for special redemption or acceleration or for the payment of additional interest should such an event of taxability occur, and the Certificates will remain outstanding until maturity or until redeemed under one of the other redemption provisions contained in the Trust Agreement. In addition, as discussed under the caption "TAX MATTERS," Congress is or may be considering in the future legislative proposals, including some that carry retroactive effective dates, that, if enacted, would alter or eliminate the exclusion from gross income for federal income tax purposes of interest on municipal bonds, such as the Certificates. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal tax legislation. The City can provide no assurance that federal tax law will not change while the Certificates are outstanding or that any such changes will not adversely affect the exclusion of interest with respect to the Certificates from gross income for federal income tax purposes. If the exclusion of interest with respect to the Certificates from gross income for federal income tax purposes were amended or eliminated, it is likely that the market price for the Certificates would be adversely impacted. ABSENCE OF LITIGATION At the time of delivery of and payment for the Certificates, the City will certify that there is no action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court or regulatory agency, public board, or body pending or threatened against the City or the Corporation affecting their existence or the titles of their respective officers or seeking to restrain or to enjoin the issuance, sale, or delivery of the Certificates, or 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, any agreement entered into between the City and any purchaser of the Certificates, the Lease Agreement, the Trust Agreement, the Assignment Agreement, the Site and Facility Lease or any other applicable agreements or any action of the City or the Corporation contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement or any amendment or supplement thereto, or contesting the powers of the City or the Corporation or their authority with respect to the Certificates or any action of the City or the Corporation contemplated by any of said documents, nor, to the knowledge of the City or the Corporation, is there any basis therefor. CONTINUING DISCLOSURE Pursuant to Rule 15c2 -12 of the Securities and Exchange Commission (the "Rule "), the City has entered into an agreement with The Bank of New York Mellon Trust Company, N.A., as Trustee and Dissemination Agent (the "Dissemination Agent "), for the benefit of holders of the Certificates to provide certain financial information and operating data relating to the City and the balances of funds relating to the Certificates, by not later than April 1 of each fiscal year commencing with the report for the 2011 -12 fiscal year (the "Annual Information "), and to provide notices of the occurrence of certain enumerated events, if deemed by the City to be material. The Annual Information and notices of material events will be filed by the City or the Dissemination Agent, with the Municipal Securities Rulemaking Board (the "MSRB "), via its -51- Electronic Municipal Market Access ('"EMMA") system. The nature of the information to be provided in the Annual Information and the notices of material events is set forth in APPENDIX G FORM OF CONTINUING DISCLOSURE CERTIFICATE. The City has not failed to comply in any material respect with any of its prior undertakings to provide continuing disclosure. FINANCIAL ADVISOR The City has retained Magis Advisors, Newport Beach, California, as financial advisor (the "Financial Advisor ") in connection with the planning, sale and delivery of the Certificates. The fees of the Financial Advisor are not contingent upon the delivery of the Certificates. The Financial Advisor is an independent advisory firm and is not engaged in the business of underwriting, trading or distributing municipal or other public securities. LEGAL MATTERS All legal matters in connection with the execution and delivery of the Certificates are subject to the approval of Quint & Thimmig LLP, San Francisco, California, Special Counsel. Special Counsel's opinion with respect to the Certificates will be substantially in the form set forth in APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL. Certain legal matters will also be passed on for the City by Quint & Thimmig LLP, as Disclosure Counsel, and for the City by Carol Korade, Esq., City Attorney. The fees and expenses of Special Counsel and Disclosure Counsel are contingent upon the execution and delivery of the Certificates. TAX MATTERS Federal tax law contains a number of requirements and restrictions which apply to the Certificates, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the proper use of bond proceeds and the facilities financed therewith, and certain other matters. The City has covenanted to comply with all requirements that must be satisfied in order for the interest with respect to the Certificates to be excludable from gross income for federal income tax purposes. Failure to comply with certain of such covenants could cause interest with respect to the Certificates to become includable in gross income for federal income tax purposes retroactively to the date of delivery of the Certificates. Subject to the City's compliance with the above referenced covenants, under present law, in the opinion of Quint & Thimmig LLP, Special Counsel, interest with respect to the Certificates is excludable from the gross income of the owners thereof for federal income tax purposes, and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but interest with respect to the Certificates is taken into account, however, in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In rendering its opinion, Special Counsel will rely upon certifications of the City with respect to certain material facts within its knowledge. Special Counsel's opinion represents its legal judgment based upon its review of the law and the facts that it deems relevant to render such opinion and is not a guarantee of a result. The Internal Revenue Code of 1986, as amended (the "Code "), includes provisions for an alternative minimum tax ( for corporations in addition to the corporate regular tax in certain cases. The AMT for a corporation, if any, depends upon the corporation's alternative -52- minimum taxable income ( "AMTI "), which is the corporations' taxable income with certain adjustments. One of the adjustment items used in computing the AMTI of a corporation (with certain exceptions) is an amount equal to 75% of the excess of such corporation's "adjusted current earnings" over an amount equal to its AMTI (before such adjustment item and the alternative tax net operating loss deduction). "Adjusted current earnings" would generally include certain tax - exempt interest, but not interest with respect to the Certificates. Ownership of the Certificates may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, corporations subject to the branch profits tax, financial institutions, certain insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred (or continued) indebtedness to purchase or carry tax - exempt obligations. Prospective purchasers of the Certificates should consult their tax advisors as to applicability of any such collateral consequences. The issue price (the "Issue Price ") for each maturity of the Certificates is the price at which a substantial amount of such maturity of the Certificates is first sold to the public. The Issue Price of a maturity of the Certificates may be different from the price set forth, or the price corresponding to the yield set forth, on the cover page hereof. Owners of Certificates who dispose of Certificates prior to the stated maturity (whether by sale, redemption or otherwise), purchase Certificates in the initial public offering, but at a price different from the Issue Price, or purchase Certificates subsequent to the initial public offering, should consult their own tax advisors. If a Certificate is purchased at any time for a price that is less than the Certificate's stated redemption price at maturity (the "Reduced Issue Price "), the purchaser will be treated as having purchased a Certificate with market discount subject to the market discount rules of the Code (unless a statutory de minimis rule applies). Accrued market discount is treated as taxable ordinary income and is recognized when a Certificate is disposed of (to the extent such accrued discount does not exceed gain realized) or, at the purchaser's election, as it accrues. Such treatment would apply to any purchaser who purchases a Certificate for a price that is less than its Revised Issue Price. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of such Certificate. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Certificates. An investor may purchase a Certificate at a price in excess of its stated principal amount. Such excess is characterized for federal income tax purposes as "bond premium" and must be amortized by an investor on a constant yield basis over the remaining term of the Certificate in a manner that takes into account potential call dates and call prices. An investor cannot deduct amortized bond premium relating to a tax - exempt bond. The amortized bond premium is treated as a reduction in the tax - exempt interest received. As bond premium is amortized, it reduces the investor's basis in the Certificate. Investors who purchase a Certificate at a premium should consult their own tax advisors regarding the amortization of bond premium and its effect on the Certificate's basis for purposes of computing gain or loss in connection with the sale, exchange, redemption or early retirement of the Certificate. There are or may be pending in the Congress of the United States legislative proposals, including some that carry retroactive effective dates, that, if enacted, could alter or amend the federal tax matters referred to above or affect the market value of the Certificates. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to bonds issued prior to enactment. Prospective purchasers of the Certificates should consult their own tax advisors regarding any pending or proposed federal tax -53- legislation. Special Counsel expresses no opinion regarding any pending or proposed federal tax legislation. The Service has an ongoing program of auditing tax exempt obligations to determine whether, in the view of the Service, interest on such tax exempt obligations is includable in the gross income of the owners thereof for federal income tax purposes. It cannot be predicted whether or not the Service will commence an audit of the Certificates. If an audit is commenced, under current procedures the Service may treat the Issuer as a taxpayer and the Owners may have no right to participate in such procedure. The commencement of an audit could adversely affect the market value and liquidity of the Certificates until the audit is concluded, regardless of the ultimate outcome. Payments of interest with respect to, and proceeds of the sale, redemption or maturity of, tax exempt obligations, including the Certificates, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any Certificate owner who fails to provide an accurate Form W -9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any Certificate owner who is notified by the Service of a failure to report any interest or dividends required to be shown on federal income tax returns. The reporting and backup withholding requirements do not affect the excludability of such interest from gross income for federal tax purposes. In the further opinion of Special Counsel, interest with respect to the Certificates is exempt from California personal income taxes. Ownership of the Certificates may result in other state and local tax consequences to certain taxpayers. Special Counsel expresses no opinion regarding any such collateral consequences arising with respect to the Certificates. Prospective purchasers of the Certificates should consult their tax advisors regarding the applicability of any such state and local taxes. The complete text of the final opinion that Special Counsel expects to deliver upon the delivery of the Certificates is set forth in APPENDIX D FORM OF OPINION OF SPECIAL COUNSEL. UNDERWRITING The Certificates will be purchased by Citigroup Global Markets Inc., as underwriter (the "Underwriter "), at an aggregate purchase price of $44,209,446.53 (consisting of the $43,940,000.00 aggregate principal amount of the Certificates, plus net original issue premium of $883,838.90, less an Underwriter's discount of $614,392.37). The initial public offering prices stated on the cover of this Official Statement may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Certificates to certain dealers (including dealers depositing bonds into investment trusts), dealer banks, banks acting as agent and others at prices lower than said public offering prices. RATING Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ( has assigned the rating of "AA +" to the Certificates. Such rating reflects only the view of S&P and any desired explanation of the significance of such rating should be obtained from S&P at the following address: 55 Water Street, New York, NY 10041, (212) 208 -8000. Generally, a rating agency bases its rating on the information and materials furnished to it and on -54- investigations, studies and assumptions of its own. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by S&P if, in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price for the Certificates. FINANCIAL STATEMENTS The City's Audited Financial Statements for fiscal year ended June 30, 2011, which include the City's 2010 -11 audited financial statements and the City's Auditor's Report regarding such financial statements, are set forth in APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2011. The City's Auditor was not requested to consent to the inclusion of its report in Appendix B and it has not undertaken to update financial statements included in Appendix B. No opinion is expressed by the City's Auditor with respect to any event subsequent to its report. ADDITIONAL INFORMATION All of the preceding summaries of the Certificates, the Trust Agreement, the Lease Agreement, the Assignment Agreement, the Site and Facility Lease, and other documents are made subject to the provisions of such documents respectively and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the City for further information in connection therewith. This Official Statement does not constitute a contract with the purchasers of the Certificates. Any statements made in this Official Statement involving matters of opinion or estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. References are made herein to certain documents and reports which are brief summaries thereof which 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. The City will furnish a certificate dated the date of delivery of the Certificates, from an appropriate officer of the City, to the effect that to the best of such officer's knowledge and belief, and after reasonable investigation, (i) neither the Official Statement or any amendment or supplement thereto contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; (ii) since the date of the Official Statement, no event has occurred which should have been set forth in an amendment or supplement to the Official Statement which has not been set forth in such an amendment or supplement, and the Certificates, the Trust Agreement, the Lease Agreement, the Assignment Agreement, the Site and Facility Lease, and other applicable agreements conform as to form and tenor to the descriptions thereof contained in the Official Statement; and (iii) the City has complied with all the agreements and has satisfied all the conditions on its part to be performed or satisfied under the Trust Agreement at and prior to the date of the issuance of the Certificates. -55- The execution and delivery of the Official Statement by the City have been duly authorized by the City Council on behalf of the City. CITY OF CUPERTINO By /s/ Carol A. Atwood Administrative Services Director -56- APPENDIX A GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY AND THE COUNTY Population Population figures for the City, the County and the State for the last five years are shown in the following table. CITY OF CUPERTINO, COUNTY OF SANTA CLARA, STATE OF CALIFORNIA Population Estimates Year 2007 2008 2009 2010 2011 City 55,078 55,551 55,840 58,227 58,747 Source: State Department of Finance estimates (as of January 1) County 1,805,314 1,837,075 1,857,621 1,781,427 1,797,375 Appendix A Page 1 State 37,559,440 37,883,992 38,292,687 38,648,090 37,510,766 Employment The County's unemployment rate has consistently been one of the lowest in California, and continues to be among the lowest level of all Bay Area Counties at 8.7% as of December 2011, compared to the State unemployment level of 10.9% during the same month. The table below illustrates unemployment levels in the City compared to the County, State and national unemployment levels for the past five years. CITY OF CUPERTINO, COUNTY OF SANTA CLARA, STATE OF CALIFORNIA AND UNITED STATES CIVILIAN LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT ANNUAL AVERAGES (1) Appendix A Page 2 Civilian Labor Unemployment Year Area Force Employment Unemployment Rate 2006 City 23,200 22,500 700 2.8 County 823,600 786,700 36,900 4.5 State 171718,500 16,851,600 866,900 4.9 United States 1511428,000 1441427,000 71001,000 4.6 2007 City 23,700 23,000 700 3.0 County 845,100 805,600 39,500 4.7 State 17,970,800 17,011,000 959,800 5.3 United States 153,124,000 146,047,000 71078,000 4.6 2008 City 24,300 23,400 900 3.8 County 869,700 818,000 51,800 6.0 State 18,251,600 16,938,300 11313,200 7.2 United States 1541287,000 145,362,000 81924,000 5.8 2009 City 24,000 22,300 11700 7.1 County 874,300 776,900 971400 11.1 State 18,250,200 16,163,900 21086,200 11.4 United States 1541142,000 139,877,000 141265,000 9.3 2010 City 24,000 22,300 11700 7.2 County 875,800 785,600 90,200 10.3 State 18,176,200 15,916,300 21259,900 12.4 United States 153,889,000 139,064,000 14,825,000 9.6 Source: California Employment Development Department for County and State figures. United States Bureau of Labor Statistics for United States figures. Appendix A Page 2 Personal Income The County enjoys one of the highest levels of effective buying income in the Bay Area and in the entire United States. The table below compares the City effective income with that of the County, the State and the United States. COUNTY OF SANTA CLARA, STATE OF CALIFORNIA AND UNITED STATES EFFECTIVE BUYING INCOME Source: Nielsen Claritas, Inc. Appendix A Page 3 Total Effective Median Household Buying Income Effective Year Area (000's Omitted Buying Income 2006 City $ 21010,685 $85,232 County 49,261,000 65,458 California 7641120,962 46,275 United States 61107,092,244 411255 2007 City $ 211341133 $87,395 County 52,377,985 671498 California 814,894,438 48,203 United States 61300,794,040 411792 2008 City $ 21188,480 $89,134 County 53,987,635 68,929 California 832,531,445 48,952 United States 61443,994,426 42,303 2009 City $ 21234,530 $90,492 County 55,561,405 71,077 California 844,823,319 49,736 United States 61571,536,768 43,252 2010 City $ 21250,630 $88,299 County 53,692,143 68,047 California 801,393,027 471177 United States 61365,020,076 41,368 2011 City $ 21481,825 $871781 County 5414911135 67,801 California 814,578,457 47,062 United States 61438,704,663 411253 Source: Nielsen Claritas, Inc. Appendix A Page 3 Employment by Industry Over the past several decades, the County has evolved from a bedroom community for San Francisco businesses to a more self - sufficient, diversified business community. The County has developed a community of small entrepreneur businesses that are service, professional, technical and scientific in operation. The tables below illustrates the continued growth of the County's employment base and the contribution of the key economic sectors. Industry Employment Total Wage and Salary Total Farm Total Nonfarm Goods Producing Natural Resources and Mining Construction Manufacturing Subtotal Goods Producing Service Providing Trade, Transportation and Utilities Information Financial Activities Professional and Business Services Education and Health Services Leisure and Hospitality Other Government Subtotal Service Providing 879,800 Santa Clara County 905,200 847,500 843,100 31800 Wage and Salary Employment by Industry 31700 31500 31500 Annual Average (1) 896,500 901,500 844,000 839,500 2006 (2) 2007 (2) 2008 (2) 2009 (3) 2010 (3) Civilian Labor Force 823,600 8451100 869,700 874,300 875,800 Civilian Employment 786,700 805,600 818,000 776,900 785,600 Civilian Unemployment 36,900 39,500 51,800 971400 90,200 Civilian Unemployment Rate 4.5% 4.7% 6.0% 11.1% 10.3% Industry Employment Total Wage and Salary Total Farm Total Nonfarm Goods Producing Natural Resources and Mining Construction Manufacturing Subtotal Goods Producing Service Providing Trade, Transportation and Utilities Information Financial Activities Professional and Business Services Education and Health Services Leisure and Hospitality Other Government Subtotal Service Providing 879,800 900,300 905,200 847,500 843,100 31800 31900 31700 31500 31500 876,000 896,500 901,500 844,000 839,500 300 300 300 200 200 44,900 45,500 42,800 33,400 31,500 160,600 163,800 165,200 153,300 150,100 205,800 209,600 208,200 186,900 181,800 134,500 137,300 135,300 1241200 122,500 371400 39,500 421200 41,500 43,800 36,700 36,800 341200 311200 30,500 170,300 176,600 178,000 160,700 161,600 99,700 102,500 1071200 108,400 110,600 73,700 75,300 76,600 73,500 73,200 24,300 24,600 25,000 241100 25,100 93,600 94,300 94,900 93,400 90,600 670,200 686,900 693,300 6571100 657,800 Source: State of California Information Division, Employment Development Department, Labor Market. (1) The unemployment rate is calculated using unrounded data. Totals may not add up due to independent rounding. Not seasonally adjusted. (2) Based on a 2009 benchmark. (3) Based on a 2010 benchmark. Appendix A Page 4 Employer Apple, Inc. Hewlett - Packard Compaq Cupertino Union School District Foothill /DeAnza Community College District Fremont Union High School District Arc Sight Inc. Oracle Chordiant Software Trend Micro Inc. Target Stores Sears Symantec Honeywell - Measurex City of Cupertino Major Employers Fiscal Year 2010 -11 Fiscal Year 2001 -02 512 Percentage 500 Percentage Number of of Total City Number of of Total City Employees Employment Employees Employment 12,000 12.00% 61000 9.70% 31000 3.00% 41682 7.60% 21500 4.10% 11490 1.50% 11500 2.40% 11290 1.30% 11341 2.20% 837 0.80% 735 1.20% 512 0.50% 500 0.50% 285 0.30% 250 0.30% 220 0.20% 150 0.20% 270 0.40% 294 0.50% 400 0.60% 220 0.40% Sources: InfoUSA.com, Cupertino Union School District, Fremont Union High School District, Foothill /DeAnza Community College District, CA Employment Development Department Labor Market Information, US Census Bureau Construction Activity The level of construction activity in the City and the County as measured by total building permit valuations and the annual unit total of new residential and nonresidential permits since 2006 are shown below. CITY OF CUPERTINO BUILDING PERMIT ACTIVITY Building Permit Valuations For Years 2006 through 2010 (000s) nnni nnnn nnnn nnnn nnn n Valuation (in thousands) Residential Non - residential Total Valuation (1) New Dwelling Units: Single Family Multiple Family Total Units $92,849 $87,899 $621428 $21,879 $311174 1 r A 7 r i r17 el nnn rnr nnn 1 1 r7 nn n A n n rn 78 84 65 21 24 An An Source: Construction Industry Research Board (1) Totals may not add up due to independent rounding. Appendix A Page 5 Santa Clara County Building Permit Valuations 2005 to 2010 (In millions) Source: Construction Industry Research Board. (1) Totals may not add up due to independent rounding. Santa Clara County Number of New Dwelling Units 2005 to 2010 New New Year Residential Non - Residential Total (1) 2005 $1,537.3 $11287.8 $2,825.1 2006 11652.9 11534.2 31187.1 2007 11378.2 11986.2 31361.3 2008 11052.4 11915.0 21967.4 2009 578.7 11187.8 11766.5 2010 11085.9 11155.6 21241.5 Source: Construction Industry Research Board. (1) Totals may not add up due to independent rounding. Santa Clara County Number of New Dwelling Units 2005 to 2010 Source: Construction Industry Research Board. Appendix A Page 6 Single Multiple Year Family Family Total 2005 21577 31295 51872 2006 21257 31928 61185 2007 21063 21520 41583 2008 11259 21419 31678 2009 667 450 11117 2010 826 31627 41453 Source: Construction Industry Research Board. Appendix A Page 6 Commercial Activity The following table presents retail and total taxable transactions for the City from 2005 through 2010. Apparel Stores General Merchandise Stores Specialty Stores �1> Food Stores Eating and Drinking Places Home Furnishings and Appliances Building Materials Automotive Service Stations (2) Other Retail Stores Total Retail Stores All Other Outlets Total All Outlets (3) City of Cupertino Taxable Transactions by Sector (Dollars in Thousands) 2005 2006 2007 2008 $ 20,290 $ 18,521 $ 18,265 $ 15,811 149,867 145,657 151,064 140,203 26,150 26,027 29,278 30,555 97,818 1061705 112,295 109,737 14,405 9,499 9,760 91608 21902 31241 31130 31145 571248 58,080 641172 67,099 65,659 711488 2611497 210,299 $ 434,339 $ 439,218 $ 649,461 $ 586,458 606,221 716,273 879,978 876,541 $1,040,560 $11155,491 $1,529,439 $1,462,999 Source: California Board of Equalization, Taxable Sales in California (Sales & Use Tax). (1) Starting 2007, Specialty Stores Group is included in "Other Retail Stores" Group. (2) Starting 2007, Service Stations is reported separately from "Automotive." (3) Totals may not add up due to independent rounding. City of Cupertino Taxable Transactions by Sector (Dollars in Thousands) Retail and Food Services Motor vehicle and parts dealers Bldg material and garden equip and supplies Food and beverage stores Gasoline stations Clothing and clothing accessories stores General merchandise stores Food services and drinking places Other retail group Total retail and food services All Other Outlets Total All Outlets ?nnQ (1) ?nl n (2) $ 31016 $ 21767 14,096 15,436 311404 32,875 50,972 61,019 28,175 30,624 118,669 109,671 103,109 1121432 211,525 247,395 560,967 6121219 734,689 11046,937 $11295,656 $1,659,157 Source: California Board of Equalization, Taxable Sales in California (Sales & Use Tax). (1) Starting in 2009, categories were revised from prior years. (2) Most recent annual data available. Appendix A Page 7 Santa Clara County Taxable Transactions By Sector Fiscal Year 2004 -05 through 2008 -09 (Dollars in Thousands) Source: State Board of Equalization, Taxable Sales in California (Sales & Use Tax). (1) Most recent annual data available. (2) Totals may not add up due to independent rounding. Appendix A Page 8 2005 2006 2007 2008 2009�1� Apparel Stores $ 1,169.1 $ 1,264.2 $ 1,334.0 $ 1,422.7 $ 1,690.2 General Merchandise Stores 21839.9 21979.4 31112.5 21946.5 21272.2 Specialty Stores 31377.9 31674.3 31201.3 21387.9 21315.8 Food Stores 830.5 849.3 890.3 868.6 975.1 Eating and Drinking Places 21440.4 21645.8 21813.5 21876.8 21705.1 Home Furnishings and Appliances 850.6 879.9 901.2 11068.5 427.4 Building Materials 11577.2 11659.8 11581.9 11356.5 11165.0 Automotive /Service Stations 5,289.9 5,534.3 5,788.7 5,236.0 4,084.2 Other Retail Stores 528.1 552.9 11166.8 11149.8 621.4 Total Retail Stores $18,903.5 $20,039.9 $20,790.3 $19,313.3 $16,385.2 Business and Personal Services 11214.6 11265.3 11244.4 11111.8 128.9 All Other Outlets 10,075.7 10,968.0 11,628.8 11,849.2 11,042.5 Total All Outlets (2) $30 193 8 $32 9719 $33 663 4 $32 974,1 (07,497 7 Source: State Board of Equalization, Taxable Sales in California (Sales & Use Tax). (1) Most recent annual data available. (2) Totals may not add up due to independent rounding. Appendix A Page 8 APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE YEAR ENDED JUNE 30, 2011 The Auditor was not requested to consent to the inclusion of its report in this Appendix B and it has not undertaken to update financial statements included in this Appendix B. No opinion is expressed by the Auditor with respect to any event subsequent to its report. Appendix B THIS PAGE INTENTIONALLY LEFT BLANK COMPREHENSIVE ANNUAL FINANCIAL REPORT— THIS PAGE INTENTIONALLY LEFT BLANK CITY OF CUPERTINO, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2011 PREPARED BY: CITY OF CUPERTINO ADMINISTRATIVE SERVICES DEPARTMENT FINANCE DIVISION THIS PAGE INTENTIONALLY LEFT BLANK CITY OF CUPERTINO Comprehensive Annual Financial Report For the Year Ended June 3 0, 2011 Table of Contents INTRODUCTORY SECTION Pie Tableof Contents ................................................................................................................... ............................... i Letterof Transmittal ............................................................................................................ ............................... iii OrganizationChart ............................................................................................................. ............................... viii City Council and Directory of City Officials ...................................................................... ............................... ix Commissionsand Committees ............................................................................................. ............................... x Certificate of Award for Excellence in Financial Reporting .............................................. ............................... xi FINANCIAL SECTION IndependentAuditor's Report ........................................................................................... ..............................1 Management's Discussion and Analysis (Unaudited) ..................................................... ..............................3 Basic Financial Statements: Government -wide Financial Statements: Statementof Net Assets .................................................................................... ............................... 19 Statementof Activities ...................................................................................... ............................... 20 Fund Financial Statements: Governmental Funds: BalanceSheet ..................................................................................................... ............................... 21 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets - Governmental Activities ......................................... ............................... 22 Statement of Revenues, Expenditures and Changes in Fund Balances .............. ............................... 23 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities - Governmental Activities .......................................... ............................... 24 Statement of Revenues, Expenditures and Changes in Fund Balances — Budget to Actual - General Fund ..................................................................... ............................... 25 Proprietary Funds: Statementof Fund Net Assets ............................................................................ ............................... 26 Statement of Revenues, Expenses and Changes in Fund Net Assets ................. ............................... 27 Statementof Cash Flows .................................................................................... ............................... 28 Fiduciary Funds: Statement of Fiduciary Assets and Liabilities .................................................... ............................... 29 Notes to Basic Financial Statements ...................................................................... ............................... 31 Required Supplementary Information (Unaudited): Schedules of Funding Progress ............................................................................ ............................... 63 CITY OF CUPERTINO Comprehensive Annual Financial Report For the Year Ended June 3 0, 2011 Table of Contents FINANCIAL SECTION (Continued) P� Other Supplementary Information: Statement of Revenues, Expenditures, and Changes in Fund Balance — Budget and Actual - Public Facilities Corporation Debt Service Fund ............. ............................... 66 Nonmaj or Governmental Funds: CombiningBalance Sheet .................................................................................. ............................... 68 Combining Statement of Revenues, Expenditures and Changesin Fund Balances ............................................................................... ............................... 70 Statements of Revenues, Expenditures and Changes in Fund Balances — Budget and Actual ............................................. ............................... 72 Internal Service Funds: Combining Statement of Net Assets .................................................................. ............................... 76 Combining Statement of Revenues, Expenses and Changesin Fund Net Assets ............................................................................ ............................... 77 Combining Statement of Cash Flows ................................................................. ............................... 78 Agency Fund: Statement of Changes in Assets and Liabilities — Special Assessment District . ............................... 80 STATISTICAL SECTION Financial Trends: Net Assets by Component — Last Nine Fiscal Years ................................................. ............................... 83 Changes in Net Assets — Last Nine Fiscal Years ....................................................... ............................... 84 Fund Balances of Governmental Funds — Last Nine Fiscal Years ............................ ............................... 86 Changes in Fund Balance of Governmental Funds — Last Nine Fiscal Years .......... ............................... 87 Revenue Capacity: Assessed and Estimated Actual Value of Taxable Property — Last Ten Fiscal Years ............................. 88 Property Tax Rates — All Overlapping Governments — Last Ten Fiscal Years ........ ............................... 89 Principal Property Taxpayers — Current Year and Nine Years Ago ......................... ............................... 90 Property Tax Levies and Collections — Last Ten Fiscal Years .................................. ............................... 91 Debt Capacity: Ratio of Outstanding Debt by Type — Last Ten Fiscal Years .................................... ............................... 92 Directand Overlapping Bonded Debt ....................................................................... ............................... 93 Legal Debt Margin Information — Last Ten Fiscal Years .......................................... ............................... 94 Ratio of General Bonded Debt Outstanding — Last Ten Fiscal Years ....................... ............................... 95 Demographic and Economic Information: Demographic and Economic Statistics — Last Ten Fiscal Years ............................... ............................... 96 Principal Employers — Current Year and Nine Years Ago ........................................ ............................... 97 Operating Information: Full -Time Equivalent City Employees by Function/Program — Last Ten Fiscal Years .......................... 98 Operating Indicators by Function/Program — Last Seven Fiscal Years .................... ............................... 99 Capital Asset Statistics by Function/Program — Last Ten Fiscal Years ..................... ............................100 COMMUNITY PROFILE INTRODUCTORY SECTION THIS PAGE INTENTIONALLY LEFT BLANK November 10, 2011 CITY OF CUPERTINO CITY HALL 10300 TORRE AVENUE • CUPERTINO, CA 95014 -3202 (408) 777 -CITY • WWW.CUPERTINO.ORG To the Citizens of Cupertino, Honorable Mayor, Members of the City Council, and City Manager It is our pleasure to submit the Comprehensive Annual Financial Report (CAFR) for the City of Cupertino (the City) for the fiscal year ended June 30, 2011. The report is prepared in accordance with generally accepted accounting principles (GAAP) set by the Governmental Accounting Standards Board (GASB). The report presents City information on an entity -wide basis and on a more detailed fund level basis. The fund -level reports emphasize the City's major funds. A Management Discussion and Analysis (MD &A) presents a comparative analysis of current and prior year results, changes in financial position, a comparison of actual versus budget, financial highlights, trends, and disclosure of any known significant events or decisions that affect the financial condition of the City. This transmittal letter is designed to complement the MD &A, and should therefore be read in conjunction with it. The MD &A is required supplementary information and is found in the Financial Section of the CAFR. The accuracy of the data presented and the completeness and fairness of the presentations, including all disclosures, are the responsibility of the management of the City. To provide a reasonable basis for making these representations, management has established a comprehensive internal control framework that is designed to protect the City's assets and provide sufficient, reliable information for the proper preparation of these financial statements. We believe the data is accurate in all material respects and is presented in a manner that fairly sets forth the City's financial position. Furthermore, we believe that all disclosures necessary to enable the reader to gain an understanding of the City's financial activity have been included. REPORTING ENTITY This CAFR includes all component units and funds of the City. It reports all activities for which the City is considered to be financially accountable. The general governmental funds support a full range of services, including law enforcement, community development, recreation, public works, public and environmental affairs, and general administration. This financial report incorporates data for the City of Cupertino and its component units, the Cupertino Public Facilities Corporation and the Cupertino Redevelopment Agency. The City operates under a Council -City Manager form of government. There are five council members, including the Mayor, who serve staggered four -year terms. The City Council appoints the City Manager who is responsible for the daily administration of City affairs. The City Council also appoints the City Attorney and the City Treasurer. All other employees are appointed by the City Manager. rm ECONOMIC CONDITIONS The City of Cupertino is located in Santa Clara County at the southern end of the San Francisco Bay Peninsula. The City is comprised of 13 square miles and is bordered by the cities of San Jose, Saratoga, Sunnyvale, Santa Clara and Los Altos. It has a residential population of 5 8,3 02 and a daytime workforce of 99,623. Situated at the west end of Silicon Valley, Cupertino has earned the reputation of a balanced community with a healthy climate for business and well maintained residential neighborhoods, community parks and public facilities. The excellent reputation of Cupertino's schools has been a major attraction for families wishing to settle in close proximity to jobs in Silicon Valley. The City recognizes the importance of quality school facilities and programs to all Cupertino residents, and works in partnership with the schools in many programs affecting education and youth. National surveys rank the City high in education levels, median household incomes, and registered patent numbers. Cupertino is the corporate headquarters of almost twenty companies including Apple, Seagate Technology, Verigy, Durect Corporation, and ArcSight, and houses sixty high - tech firms. Other major employers include DeAnza College, one of the largest single- campus community colleges in the country, the Fremont Union High School District, and Cupertino Union School District. With Hewlett- Packard, a primary employer, leaving the City in 2012, Apple purchased their properties as part of 155 acres acquired for a major expansion between Interstate 280, Homestead Road, Wolfe Road and Tantau Avenue. Apple has submitted plans for a new circular - shaped research building at the site that will accommodate 12,000 people. In 2011, ten million square feet of office and research and development space existed with vacancy rates of 10.7% for office and 8.1 % for research and development. The City's unemployment rate of 7.3% falls below the statewide rate of 12.2 %. City retail space encompasses 3.6 million square feet, with over 160 eating establishments. The 1.2 million square feet Vallco Shopping Mall comprises most of the City's redevelopment agency area and features two levels of enclosed shopping, three anchor stores, a 16- screen AMC theatre, a bowling center, ice rink, and international food court. A new Western Athletic Health Club is being built within the existing Sears store at the mall. In spite of earlier additions and remodel, the shopping center continues to underperform. Macy's, JCPenney, Target, Sears, and Whole Foods Market are leading City retailers. A local restaurant association promotes the City as a regional dining destination. The assessed value of properties in the City grew by 1.87% from 2010 to 2011, a reversal of the 0.36% decline experienced from 2009 to 2010. Cupertino ranked seventh in this percentage change out of the sixteen cities and unincorporated area in the county. The number of City properties receiving a reduction in assessed value increased from 2,901 to 2,934, but the dollar cost of the reductions fell from $530 million to $510 million, as the county continues to adjust tax rolls based on home prices. Moreover, the cost of living index adjustment for all assessed values experienced a 0.753% increase for 2011 compared to a 0.237% cut for 2010. The City's popular school districts and high median income levels allowed it to avoid the steep property value declines suffered in other regions during the housing recession. Apple is the leading assessed value property owner in the City and is in the top twenty -five, county -wide, for iv business personal property assessment. The WW DASC Owner LLC office property in Cupertino is ranked sixth in the county for 2011 -12 assessed value growth due to ownership change. Looking forward, cities in the county are seeing increases in assessed value due to changes in ownership and higher assessed values per new building permit. Cupertino has a high 73% of its sales taxes coming from business -to- business commerce, compared to California and San Francisco Bay Area averages of 18% and 21% respectively. Three companies comprise a large part of that sector and one of those companies, Hewlett- Packard is leaving the City. Conversely, the City is not as diversified into retail, food products, and transportation as the state and Bay Area. The City's fiscal strategic plan, part of the City's adopted budget, supports the redevelopment of the Vallco Shopping Mall and recommends that quality retail components be incorporated into future developments. The following chart shows City sales tax variations over the past ten years, reflecting two recessions and the volatility of the business -to- business and company concentration. Sales Tax Trend Commercial development activity picked up in 2011 led by initial plan submittals for the expanded Apple campus along with tenant improvement work in various office buildings. Homestead Square and Cupertino Crossroads retail center improvement projects and the new 123 -room Hyatt Place hotel are undergoing development or building review. On the other hand, continuing postponement of major commercial or residential projects approved in recent years, such as the mixed -use Main Street Cupertino complex, the 24,455 sq. ft. retail expansion of Cupertino Village, the 10,582 sq. ft. retail building at Tantau Avenue and Stevens Creek Blvd., the 51,000 sq. ft. mixed -use building and 122 -room hotel at the Oaks Shopping Center, the 19.8 acre One Results Way office campus redevelopment, and the Rose Bowl mixed -use project, has deferred potential construction, permit, park, and housing fees. The City's pension and retiree medical unfunded actuarial accrued liabilities are discussed in the Notes to the Basic Financial Statements. The City must pay CalPERS, the state's government pension system, annually to reduce this long -term liability. Cupertino's pension actuarial valuation report of June 2009 reports a pension unfunded liability of $17,021,000 with annual payments to CalPERS of $2,089,000 in 2010 -11 and $2,657,000 in 2011 -12, with ongoing increases after that because of CalPERS' investment losses and changes to the assumptions used in their actuarial studies. Most Bay Area Peninsula cities, including Cupertino, have agreed to work toward reducing pension benefits for new hires to address the long -term rising costs. As of the January 2011 health cost actuarial valuation report, the City has a retiree medical unfunded liability of $13,431,000 that requires an annual contribution of $1.9 million in 2010 -11 and 2011 -12 in order to fund it. The City has been setting aside monies annually for health costs since 2004, accumulating $9 million in an irrevocable trust and $840,000 in City reserves as of June 30, 2011. v Regarding other fiscal strategies, because the City contracts out police services to the County Sheriff and because fire protection is handled by a special district, the City avoids the high pension, capital, and operating costs of a City- operated public safety function. The City caps its contributions to employee health insurance premiums and works with its bargaining units to come up with labor agreements that benefit both the City and employees. A build -up of operating reserves from strong revenue years, such as 2010 -11, along with a traditional under - spending of budgets, enables the City to withstand the weak revenue years that periodically occur, such as in 2009 -10. ECONOMIC INITIATIVES The recessions and the departure of a major company, Hewlett- Packard, demonstrates the need for diversification of the City's revenue base and a long -term balance of revenues and expenditures as described in the City's Fiscal Strategic Plan. The City needs to find other revenues to mitigate the fluctuating nature of sales taxes, hotel taxes, user fees, and state grabs of local taxes in times of budget distress. It needs to reduce the concentration of sales taxes among its top companies and top economic sector, the volatile business -to- business area. Legislation raising the City's property tax share, the opening of a regional sales office of a major technology provider, and the update of the utility user tax are successes of the strategic plan. Voters approved a two percent increase in the transient occupancy tax rate this month. The City is studying further increases of the property tax share, pursuing a storm drain tax increase to eliminate the General Fund subsidy, and looking at the value of its water system ownership. Nevertheless, other tax or fee initiatives in the plan have incurred opposition to their implementation. The City's Community Development department strives to generate revenues by recruiting and retaining retail, by finding office tenants, facilitating development, branding and outreaching to new business, revising policies, coordinating with regional organizations, and promoting economic vitality. The City has taken advantage of stimulus opportunities from grant programs for streets, parks, energy efficiency, housing improvements, and emergency preparedness. The City has installed streetlight and irrigation systems that save utility costs and energy. As part of its service delivery automation and streamlining initiative, Cupertino has digitized documents and restructured the agenda for City Council meetings. Plans to enhance building and planning permit usage on the Internet will bring City Hall closer to the customer at reduced cost. The fiscal strategic plan promotes the streamlining and repositioning of the workforce as opportunities arise along with decreasing expenditures and risk exposure by requiring that developers maintain new open space associated with their projects and that private and public capital projects be added only if ongoing maintenance is funded. State budget deficits continue to pressure City resources. Despite a state law that prevents raids and borrowings of city taxes, the state proposed an elimination of all city redevelopment agencies unless they paid a large share of their taxes to schools and special districts. While the courts review an appeal of the proposal, Cupertino's redevelopment agency has opted to continue its existence and pay the taxes. ACCOUNTING AND BUDGETARY CONTROL In developing and evaluating the City's accounting system, consideration is given to the adequacy of internal accounting controls. The City's controls are designed to provide reasonable, but not absolute, assurance regarding the safeguarding of assets against losses from unauthorized use or disposition and the reliability of financial records for preparing financial statements and maintaining accountability of assets. The concept of reasonable assurance recognizes that the costs of a control should not exceed the benefits likely to be derived and that the evaluation of costs and benefits requires estimates and judgments by management. The City's budget is a detailed operating plan that identifies estimated costs and results in relation to estimated revenues. The budget includes 1) the programs, projects, services and activities to be provided Vi during the fiscal year; 2) estimated revenue available to finance the operating plan; and 3) the estimated spending requirements of the operating plan. The budget represents a process through which policy decisions are made, implemented and controlled. INDEPENDENT AUDIT City ordinance requires an annual audit of the financial records by an independent certified public accounting firm selected by the City Council and its audit committee. Macias Gini and O'Connell LLP audited the City's Basic Financial Statements, and their opinion thereon is included in the Financial Section of this report. CERTIFICATE OF ACHIEVEMENT The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Cupertino for its CAFR for the year ended June 30, 2010. In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized CAFR. This report must satisfy both GAAP and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that the current report continues to meet the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. ACKNOWLEDGMENTS v. I would like to express my appreciation to the City employees, City Manager, and the members of the City Council for their interest in conducting the financial operations of the City in a responsible manner. Special thanks go to Tina Mao, Yulia Rumalean, and Richard Wong of the Finance staff for their continued support and dedication. Special recognition goes to Jennifer Chang, Liz Nunez, and David Woo for their efforts in the preparation and production of this report. Reviewed by, Carol A. Atwood Director of Administrative Services Vii Gilbert Wong Mayor CITY OF CUPERTINO, CALIFORNIA Fiscal Year 2010 -11 CITY COUNCIL Kris Wang Councilmember Mark Santoro Vice Mayor Orrin Mahoney Councilmember Barry Chang Councilmember DIRECTORY OF CITY OFFICIALS David W. Knapp - City Manager Carol Korade — City Attorney Carol Atwood — Director of Administrative Services Timm Borden — Director of Public Works Mark Linder — Director of Parks and Recreation Aarti Shrivastava - Director of Community Development ix CITY OF CUPERTINO, CALIFORNIA Fiscal Year 2010/11 COMMISSIONS AND COMMITTEES AUDIT COMMITTEE PARKS &RECREATION COMMISSION Myoung Kang Mark Santoro Stanley Stemkoski Garrett Wade Barry Chang HOUSING COMMISSION Harvey Barnett Jimmy Chien Radha Kulkarni Nicole Maroko Raj eev Raman FINE ARTS COMMISSION KC Chandratreya Jessi Kaur Russell Leong Raj eswari Mahaliagan Marvin Spielman PUBLIC SAFETY COMMISSION Nina Daruwalla Andy Huang Craig Lee Daniel Nguyen Tamara Pow TEEN COMMISSION Jacqueline Do Ashley Ding Anand Hemmady Dana Luj ack Greg Pommier Sanika Puranik Hadar Sachs Kailash Sundaram Madeline Yip TECHNOLOGY, INFORMATION & COMMUNICATIONS COMMISSION Peter Friedland Wallace Iimura Jitendra Jadhav Rod Livingood Reena Nadkarni x David Fung David Greenstein David Lee Darcy Paul Marcia St. Clair LIBRARY COMMISSION Rose Grymes Adrian Kolb Ronald Miller Ann Stevenson Susanna Tsai PLANNING COMMISSION Paul Brophy Clinton Brownley Winnie Lee Marty Miller Don Sun BICYCLE PEDESTRIAN COMMISSION William Chan Mark Fantozzi Ashish Kolli Jill Mitsch Alan Takahashi ECONOMIC DEVELOPMENT Carol Atwood Paul Brophy Timm Borden Paula Davis Mike Foulkes David Knapp Orrin Mahoney Aarti Shrivastava Kris Wang John Zirelli FISCAL STRATEGIC COMMITTEE Gilbert Wong Mark Santoro Carol Atwood Roger Lee Julia Lamy Aarti Shrivastava David Woo Certificate of Achievemeirat for Excellence in Financial Reporting Presented to City of Cupertino California For its Comprehensive .Annual Finanei l Report for the Fiscal Year Ended June 3 0� 2010 .A Certificate of : Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United Mates and Canada to government units and public employee retirement systems whose comprehensive annual financial reports AFR achieve the highest standards in government accounting and financial reporting. F . . A- STAM AND tMA President ..: Executive Director xi NOTES FINANCIAL SECTION NOTES 0 CAWdflM PUN& Sacramento * Walnut Creek * Oakland * Los Angeles/ a rrtu ry C irty * Newport Beach * San Diego ENVKP84cm City Council City of Cupertino, California Independent Auditor's Report We have audited the accompanying financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Cupertino, California (the City), as of and for the year ended June 30, 2011, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Cupertino, California as of June 3 0, 2011, and the respective changes in financial position and, where applicable, cash flows thereof, and the respective budgetary comparison for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1(1) to the basic financial statements, effective July 1, 2010, the City adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. As discussed in note 9(e) to the basic financial statements, the California State Legislature has enacted legislation that is intended to provide for the dissolution of redevelopment agencies in the State of California. The effects of this legislation are uncertain pending the result of certain lawsuits that have been initiated to challenge the constitutionality of this legislation. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and the schedules of funding progress, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by GASB, who considers it to be an essential part of financial reporting for placing the basic financial statements in the appropriate operational, economic, or historical context. 3K= S Strom 2121 N. Ca I ifomis BW. 505 1 4th Street 2029 Cerrtixy Park East 4675 MacArthur Ct. 225 Broady Suite 300 Suite 750 5th Floor Suite 5W Suite 6W Suite 1750 Sacramento Walnut Creek Oakland Loa Angeles Newport Beach San Diego CA 95816 CA 94596 CA 94612 CA 90067 CA 92660 CA 92101 We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's financial statements as a whole. The introductory, other supplementary information, statistical , and community profile sections are presented for purposes of additional analysis and are not a required part of the financial statements. The other supplementary information is the responsibility of management and was derived from and relates directly to the underlying auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is stated in all material respects in relation to the financial statements as a whole. The introductory, statistical, and community profile sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express no opinion or provide any assurance on them. Walnut Creek, California November 10, 2011 2 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 This describes the City of Cupertino's financial performance for the year. Please read it in conjunction with the accompanying Transmittal Letter and Basic Financial Statements. 2010 -11 FINANCIAL HIGHLIGHTS • Governmental activity revenues were $49,552,000, up significantly from $46,152,000 in 2009 -10. • Governmental activity expenses were $48,105,000 in 2010 -11, up from $46,223,000 in the prior year. • Revenues from business -type activities were $6,433,000 in current year, down from $6,575,000 in the prior year. • Expenses of business -type activities were $5,728,000 in current year, down slightly from $5,808,000 in the prior year. • Governmental net assets increased $1,447,000 while business -type net assets rose $705,000. • General Fund revenues of $43,195,000 represented a large increase of $7,617,000 from the prior year; General Fund expenditures increased $706,000 to $33,662,000 in 2010 -11. • The General Fund incurred expenditure budget savings of $3,529,000 with revenues surpassing budget by $2,542,000. • Including proceeds from sale of capital assets and transfers, the General Fund balance grew by $3,876,000 to end the year at $19,807,000. OVERVIEW OF THE FINANCIAL STATEMENTS The Basic Financial Statements comprise the City -wide Financial Statements and the Fund Financial Statements; these two sets of financial statements provide two different views of the City's financial activities and position. The City -Wide Financial Statements provide a long -term view of the City's activities as a whole, and comprise the Statement of Net Assets and the Statement of Activities. These statements are prepared on the accrual basis, which means they measure the flow of all economic resources of the City as a whole. The accrual basis of accounting is similar to the accounting used by most private sector companies. The Statement of Net Assets provides information about the financial position of the City as a whole, including all its capital assets and long -term liabilities. The Statement of Activities provides information about all the City's revenues and all its expenses, with the emphasis on measuring net revenues or expenses for each of the City's programs. The Statement of Activities explains in detail the change in Net Assets for the year. Over time, increases or decreases in net assets can be indicators of whether the financial condition of the City is improving or deteriorating. All of the City's activities are grouped into Governmental activities and Business -type activities, as explained below. The Statement of Net Assets and the Statement of Activities provide a summary of these two types of activities for the City as a whole. • Governmental activities Most of the City's basic services are considered to be governmental activities, including public works, law enforcement, community development, recreation, public & environmental affairs, and general administration. These services are supported by general City revenues such as property, sales and other taxes, and by specific program revenues such as developer fees and grants. The City's governmental activities include the activities of a separate legal entity, the Cupertino Redevelopment Agency, because the City is considered to be financially accountable for the Agency. The Cupertino Public Facilities Corporation, from which the City leases its major facilities through the payment of long -term debt, is also included as a component unit. 3 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 • Business -type activities All the City's enterprises are reported here, including solid waste management and some of the City's recreational operations. Unlike governmental services, these services are supported by charges paid by users based on the amount of the service they use. The Fund Financial Statements report the City's operations in more detail than the government -wide statements and focus primarily on the short -term activities of the City's General Fund and other major funds. The Fund Financial Statements measure only current revenues, expenditures, assets, and liabilities; they exclude long -term assets and liabilities. Because these statements focus on the near -term inflows and outflows of spendable resources, such information may be useful in evaluating near -term financing requirements. The Fund Financial Statements provide detailed information about each of the City's most significant funds, called major funds. Cupertino's Fund Financial Statements include governmental, enterprise and internal service funds as discussed below. Each major fund is presented individually, with all non -major funds summarized and presented only in a single column. Subordinate schedules, which follow the Notes to Basic Financial Statements, present the detail of these nonmajor funds. Major funds present the significant activities of the City for the year, and may change from year to year as a result of changes in the pattern of City's activities and public interest. For example, the Capital Improvement Projects Fund may or may not appear as a major fund depending on the volume of construction activity in a certain year. Governmental Fund financial statements are prepared on the modified accrual basis, which means they measure only current financial resources and uses. They present essentially the same functions reported as governmental activities in the government -wide financial statements. However, capital assets and other long -lived assets, along with long -term liabilities, are not presented in the Governmental Fund financial statements. Reconciliations are provided to facilitate a comparison between governmental funds and governmental activities statements to allow a better understanding of the long -term impact of the government's near -term financial decisions. Enterprise and Internal Service Fund financial statements are prepared on the full accrual basis and include all their assets and liabilities, current and long -term. Enterprise funds are used to report the same functions presented as business -type activities in the government -wide financial statements, and in more detail in the fund financial statements. Since the City's Internal Service Funds provide goods and services only to the City's governmental and business -type activities, their activities are reported only in total at the fund level. Internal Service Funds may not be major funds because their revenues are derived from other City funds. These revenues are eliminated in the City -wide financial statements and any related profits or losses are returned to the activities which created them, along with any residual net assets of the Internal Service Funds. For this City, internal service activities predominantly benefit governmental rather than business -type functions, and are therefore included within governmental activities in the government -wide financial statements. Comparisons of budget and actual financial information are included in the Basic Financial Statements for the General Fund and other major Special Revenue Funds. Since none of the City's Special Revenue Funds are considered major funds, budgetary comparison schedules for these funds are included in this document as supplemental information only. Fiduciary Fund statements provide financial information about the activity of an assessment district. The City acts strictly as an agent for the district holding amounts collected from property owners, prior to transferring the money to the districts' bond trustees. The City's fiduciary activities are reported in the separate Statement of Fiduciary Assets and Liabilities and the Agency Funds Statement of Changes in Assets and Liabilities. These activities are excluded from the City's other financial statements because the City cannot use these assets to finance its own operations. 4 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 The Notes to Basic Financial Statements provide additional detail that is essential to a full understanding of the information provided in the government -wide and fund financial statements. CITY -WIDE FINANCIAL ACTIVITIES This analysis focuses on the net assets and changes in net assets of the City's Governmental Activities (Tables 1 and 2) and Business -Type Activities (Tables 3 and 4) presented in the City -wide Statement of Net Assets and Statement of Activities that follow. The Change in Net Asset Tables 2 and 4 show activity from a revenue and expense perspective. Governmental Activities Table 1 Condensed Statement of Net Assets at June 30 (in thousands) Assets: Cash and investments Other assets Capital assets Total assets Liabilitie s: Long term debt Other liabilities Total liabilities Net assets: Invested in capital assets, net of debt Restricted Unrestricted Total net assets Governmental Activities 2011 2010 $ 43,353 $ 41,700 1105 10,391 tia 711a I ti5 015 719.777 171 R_nn6 44,010 45,510 14,130 12,311 r%R 1 in r%7 R1.1 120,724 120405 7,779 092 1111 1 ")A 111 MR S 1619632 S 1609185 The City's net assets from governmental activities rose 1% from the prior year. The following significant changes within asset, liability, and net asset categories occurred: • Tax receipts and proceeds from the sale of the City's equity share in the City Manager's residence, net of capital project spending and retiree health trust contributions, were the primarily cause of the cash and investments increase. • The trust contribution and higher revenue accruals increased other assets. Increase in accounts payable and development permit deposits increased other liabilities. • Scheduled principal payments on the 2002 certificates of participation lowered long -term debt by $1,50000. 9 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 As the Sources of Revenue chart above shows, property and sales taxes make up more than half of governmental revenue. The Functional Expenses chart below includes only current year expenses with Public Works action on streets, facilities, parks and storm drains comprising the largest activity. The chart does not include capital outlays or principal payments on debt. Capital outlays are instead shown as additions to capital assets and principal payments are reported as long -term liability reductions. Functional Expenses, Governmental Activities 2010 -11 Interest Administration 4% 4% 6 Public & Environmental Affairs 3% CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 The Statement of Activities presents program revenues, expenses, and general revenues. These are all elements of the Changes in Governmental Net Assets summarized in the next table. Table 2 Condensed Changes in Net Assets For The Year Ended June 30 (in thousands) 7 Governmental Activities 2011 2010 Expenses: Administration $ 100 $ 1,912 Law enforcement 8,435 8,385 Public and environmental affairs 1,626 1,653 Administrative services 3094 400 Recreation services 4,529 4,445 Community development 5062 4,351 Public works 1907 19,320 Interest on long term debt 2,032 2,077 Total expenses 489105 469223 Revenues Program revenues: Charges for services 6,533 5,631 Operating contributions and grants 2,351 2,043 Capital grants and contributions 1073 5,511 Total program revenues 10,857 13,185 General revenues: Taxes: Property tax 7297 7,489 Property tax in lieu of motor vehicle fee 4,405 4,421 Incremental property tax 1252 1,323 Sales tax 14,539 9031 Transient occupancy tax 2,537 2,142 Utility user tax 3228 3,271 Franchise tax 2,841 2,598 Other taxes 1,491 1,212 Intergovernmental, unrestricted Motor vehicle license fee 259 166 Investment earnings 259 295 Gain on sale of capital assets 497 - Miscellaneous 90 119 Total general revenues 3805 32067 Total revenues 499552 469152 Change in net assets 19447 (71) Beginning net assets, as previously reported 160,185 143,293 Prior period adjustment for easements - 16063 Beginning net assets, as restated 160,185 160,256 Ending net assets $ 161,632 $ 1609185 7 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 City -wide Governmental Revenues Table 2 shows that total governmental revenues climbed $3,400,000 or 7% over of last year, finishing at $49,55200. Sales taxes improved $4,608,000 or 46% over last year to finish up at $14,539,000. Quarterly tax collections all exceeded the prior year, with growth in the business -to- business sector, led by Apple, Inc., driving the increase. Business -to- business, historically a volatile sector, comprised 73% of sales taxes, far exceeding San Francisco Bay Area and State averages. The City's sales tax per capita of $294 tops other County cities. The timing of a sales tax consulting agreement that is payable out of a percentage of revenues also partially effected the variance. Positive revenue growth in the first quarter of this fiscal year was offset by a tax liability increase for the agreement in the last quarter of the prior fiscal year. All property taxes, including incremental taxes for the Redevelopment Agency, fell $279,000 or 2% from last year. As allowed by recent State law, the City Council passed an ordinance on September 20, 2011 electing to continue the Agency's existence with payments of $529,000 to schools and special districts in 2011 -12 and approximately $134,000 per year after that. Grants and contributions, both operating and capital related, decreased a combined $3,230,000 or 43% from 2009 -10. The current year grants received includes an Energy Efficiency and Conservation Block Grant, a Stevens Creek Corridor Park Roberti - Z'berg Harris grant, Homeland Security Department grant and easement contributions. Last year included Stevens Creek, pavement resurfacing and Don Burnett Bicycle- Pedestrian Bridge (formerly Mary Avenue Bicycle Footbridge) grants from federal, state, and local sources such as the American Recovery and Reinvestment Act, SAFETEA -LU, Proposition 1B bonds, Park Bond Act, and Santa Clara Valley Transportation Authority. Gain on sale of capital assets of $497,000 for 2010 -11 represents gain from the sale of the City's equity share in the City Manager's residence. Charges for services increased $902,000 or 16% reflecting building and development application growth including Apple Inc.'s new corporate headquarters and several tenant improvements. City -wide Governmental Expenses City -wide governmental expenses in Table 2 rose $1,882,000 or 4% above 2009 -10. Community Development and Public Works rose. Administration, Law Enforcement, Administrative Services, Public & Environmental Affairs, Recreation Services, Administrative Services, and Interest on Long Term Debt were relatively stable. Administration decreased $52,000 or 3% this year. Lower accrued leave, internal service, and depreciation costs offset higher community grant, support and outreach costs. Administrative Services declined 2% or $86,000 because of lower internal service costs. Community Development expenses rose $1,611,000 or 37% because of new Redevelopment Agency outlays, including a $1 million contribution to the Santa Clara County Housing Trust, and additional Community Development Block Grants for affordable housing, such as those for Senior Housing Solutions' Price Avenue and for Maitri transitional housing. Public Works expenses went up $347,000 or 2% over the prior year reflecting higher depreciation expenses from completed projects and budgeted increases for maintenance, repair and engineering. 8 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Annual interest on the 2002 certificates of participation decreased $45,000 or 2% according to its debt service schedule. Change in Net Assets City -wide governmental revenues in excess of expenses and accompanying net asset increase of $1,447,000 significantly outperformed the $71,000 decrease of last year, mostly due to the revenue rise. Business Type Activities Business -type activities in the City -wide Financial Statements include the City's four enterprise funds. Enterprise funds are used to account for recreational and solid waste management operations that are financed and operated in a manner similar to private business enterprises where the intent is that the costs of providing services and facilities to the general public on a continuing basis can be financed or recovered primarily through user fees. The major proprietary funds section of this report provides more information on business -type results. Business -type net assets totaled $10,557,000 at June 30, 2011, an increase of $705,000 from the prior year with unrestricted net assets rising $715,000 and capital assets decreasing by $10,000. Overall revenues of $6,433,000 this year were $142,000 or 2% lower than last year with Blackberry Farm and Resources Recovery revenue declines partially offset by Sports Center and Recreation Programs revenue growth. Expenses for all business -type activities were essentially flat at $5,728,000. A $705,000 net asset increase fell below the $767,000 increase of 2009 -10, with lower operating incomes from the Sports Center and Blackberry Farm countered by improved operating margins from the Resources Recovery and Recreation Program enterprises. Table 3 Condensed Statement of Net Assets at June 30 (in thousands) Assets: Cash and investments Other assets Capital assets Total assets Other liabilities Total liabilities Net assets: Invested in capital assets Unrestricted Total net assets 9 Business Type Activities 2011 2010 $ 10,394 $ 9,762 389 348 77R 7RR 119561 109898 11004 11046 1.004 1.046 778 788 91779 91064 S 109557 S 99852 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Table 4 Condensed Changes in Net Assets For The Year Ended June 30 (in thousands) MAJOR GOVERNMENTAL FUNDS General Fund General Fund Revenues General Fund revenues of $43,195,000 ended up $2,542,000 or 6% above the final budget and $2,653,000 above the original budget for the year ended June 30, 2011. This was $7,617,000 or 21% above last year. Except for utility taxes, fines and forfeitures, and other, all categories exceeded the prior year, with sales taxes and property taxes accounting for $5,819,000 of the increase. Similarly, sales taxes accounted for $2,421,000 of the amount exceeding budget. Table 5 displays year -to -year variations, while Table 6 shows budget versus actual differences. Property taxes ended the year at $11,650,000, up 12% or $1,211,000 from last year. However, it fell under the final and original budget by $426,000. Revenues were up because last year's result includes a deferral of $1,419,000 in property taxes that was borrowed by the State under Proposition IA. If that deferral is excluded, then current year receipts were up $208,000 from last year. Proposition IA requires that the State repay the taxes to the City by June 30, 2013 with 2% annual interest; accordingly, this loan is carried as a receivable and deferred revenue. Higher tax receipts this year resulted from cost of living and property assessment increases allowed per State statute. Weakness in residential and commercial real estate markets affected these trends, but because of the City's popular local school districts and healthy business occupancy rates, assessed values have been impacted less severely relative to other cities in the County. 10 Business Type Activities 2011 2010 Expenses: Resources recovery $ 11801 $ 21018 Blackberry farm 457 457 Sports center 1,717 1,478 Recreation programs 11753 11855 Total expenses 59728 59808 Revenues Program revenues: Charges for services 61362 6,501 Operating contributions and grants - 7 Total program revenues 61362 6,508 General revenues: Investment income 71 67 Total revenues 69433 69575 Change in net assets 705 767 Beginning net assets 91852 9,085 Ending assets $ 109557 $ 99852 MAJOR GOVERNMENTAL FUNDS General Fund General Fund Revenues General Fund revenues of $43,195,000 ended up $2,542,000 or 6% above the final budget and $2,653,000 above the original budget for the year ended June 30, 2011. This was $7,617,000 or 21% above last year. Except for utility taxes, fines and forfeitures, and other, all categories exceeded the prior year, with sales taxes and property taxes accounting for $5,819,000 of the increase. Similarly, sales taxes accounted for $2,421,000 of the amount exceeding budget. Table 5 displays year -to -year variations, while Table 6 shows budget versus actual differences. Property taxes ended the year at $11,650,000, up 12% or $1,211,000 from last year. However, it fell under the final and original budget by $426,000. Revenues were up because last year's result includes a deferral of $1,419,000 in property taxes that was borrowed by the State under Proposition IA. If that deferral is excluded, then current year receipts were up $208,000 from last year. Proposition IA requires that the State repay the taxes to the City by June 30, 2013 with 2% annual interest; accordingly, this loan is carried as a receivable and deferred revenue. Higher tax receipts this year resulted from cost of living and property assessment increases allowed per State statute. Weakness in residential and commercial real estate markets affected these trends, but because of the City's popular local school districts and healthy business occupancy rates, assessed values have been impacted less severely relative to other cities in the County. 10 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Sales taxes jumped $4,608,000 or 46% above last year to finish at $14,539,000. It exceeded the final budget by $2,421,000 or 20 %, with the original budget similar to the final. Quarterly tax collections all exceeded the prior year, with growth in the business -to- business sector, led by Apple, Inc., driving the increase. Business -to- business, historically a volatile sector, comprised 73% of sales taxes, far exceeding San Francisco Bay Area and State averages. The City's sales tax per capita of $294 tops other County cities. The timing of a sales tax consulting agreement that is payable out of a percentage of revenues also partially effected the variance. Positive revenue growth in the first quarter of this fiscal year was offset by a tax liability increase for the agreement in last quarter of the prior fiscal year. Future revenues will be impacted when Hewlett - Packard, a major sales tax provider, leaves the City in 2012. The City's four hotels paid $2,537,000 in transient occupancy taxes this year; $395,000 or 18% over last year's performance. It was 21% or $443,000 better than the final and original budget. Average revenue per available room for all four hotels rose from $85 to $101 reflecting the pickup in business travel to companies located in the City. The City has placed on the November 2011 election ballot a measure to increase the City's transient occupancy tax rate from 10% to 12% of the room charge. The City's 2.4% utility user tax on telecommunication, gas, and electric services dropped 1% from last year. This $3,228,000 in revenues was $205,000 or 6% under the original and final budget as wireless and energy receipts fell in the second half of the year. Franchise taxes of $2,841,000 from electric, gas, water, solid waste, and cable utilities rose 9% from last year and 7% from original and final budget due to new public access cable fees and a new solid waste franchise agreement. Other taxes include business license, construction, and property transfer taxes. The County assesses the transfer tax, at $1.10 per $1,000 in sales price, upon recording the ownership change, and gives the City one -half of the tax. The sale of the Hewlett- Packard property to Apple, Inc. for the latter's new corporate campus caused other taxes to grow 20% or $230,000 from 2009 -10 figures and 13% or $157,000 higher than the final and original budget. Licenses and permits finished at $2,902,000, rising 12% or $319,000 from 2009 -10. It was 11% or $292,000 above the final and original budget. Tenant improvement activity picked up in the last quarter of the year for retail projects. Zoning, planning, and engineering review fees comprise three- quarters of the charges for services category, with non - enterprise recreational programs encompassing the rest. The category improved from $1,334,000 last year to $1,945,000 this year, a 46% rise. It finished $293,000 or 18% over the final and original budget. Initial entitlement fees for Apple's new corporate headquarters were received in June. Intergovernmental revenues of $689,000 rose 10% or $63,000 from last year, exceeding the final budget by 18% or $107,000. Additional motor vehicle license fees partially offset by lower grant revenues caused the year -to -year fluctuations while higher than expected Association of Bay Area Government grants, State mandated cost reimbursements, and vehicle license fees caused the budget variance. The final budget increased $29,000 from the original amount because of a new grant to reduce smoking. General Fund cash is invested as part of the City's pooled investment portfolio. Investment returns of the pool are allocated to the Fund based on the Fund's monthly cash balance. These returns plus the renting of City facilities comprise use of money and property revenues that rose 6% from 2009 -10, to finish at $728,000. However, current results were $460,000 or 39% under budget expectations. Rent income rose 9% over last year from increased recreational and public facility usage. The continued low interest rate environment and the portfolio's concentration in safe short -term Treasuries because of market turmoil and credit risk, has kept investment returns at a steady, but relatively low amount for the last two years. Since interest rates did not increase as anticipated and purchases of traditional, higher - yielding instruments such 11 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 as Federal agencies and the Local Agency Investment Fund did not occur as proposed, the interest income fell below budget. A further explanation of the investment picture for the year is in Note 2 of the Basic Financial Statements. Fines and forfeitures fell 5% or $40,000 off of prior year and $224,000 or 24% below budget; to complete the year at $696,000 due to lower fine assessments by courts. Proceeds from sale of capital assets represents proceeds received from the sale of the City's equity share in the City Manager's residence that is not budgeted for current year. Transfers into the General Fund dropped 31% from $487,000 last year to $337,000 this year. There were fewer surplus dollars returned to the General Fund from project savings in the Capital Project Improvement Fund. The budget for transfers was adjusted accordingly depending on project savings realized during the year. Table 5 Revenue Changes General Fund, Fiscal 2011 vs. 2010 (in tho us ands) Revenue by Source Taxes: Property Sales Transient occupancy Utility user Franchise Other Use of money & property Intergovernmental Licenses and permits Charges for services Fines and forfeitures Other Total revenues Other financing sources: Proceeds from sale of capital assets Transfers in Total other financing sources Increase /(Decrease) Fiscal 2011 From Fiscal 2010 Amount % of Total Amount Percent $ 11,650 27% $ 1,211 12% 14,539 34% 408 46% 2,537 6% 395 18% 3,228 7% (43) -1 % 2,841 7% 243 9% 1,381 3% 230 20% 728 2% 42 6% 689 2% 63 10% 2002 7% 319 12% 1045 5% 611 46% 696 2% (40) -5% 59 0% (22) -27% $ 43,195 100% $ 7,617 21% $ 1,055 76% $ 1,055 100% 337 24% (150) -31% $ 1,392 100% $ 905 186% 12 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Table 6 Revenue Budget and Actual Comparisons General Fund, 2010 -11 (in thousands) General Fund Expenditures Fiscal 2010 -11 overall expenditures, at $33,662,000, were $706,000 or 2% higher than last year's total of $32,956,000. However, this result came in 9% or $3,529,000 under the final budget and $2,405,000 below the original budget. Year -to -year and budget versus actual results by General Fund department are described below and in Tables 7 and 8. Administration expenditures of $1,528,000 rose 4% or $59,000 over last year while finishing $83,000 or 5% under final budget. The increase reflected more community grants, support, and outreach over last year. Law Enforcement sheriff contract costs of $8,435,000 were under the final budget by $450,000 or 5 %. The budget contains dollars for anticipated service levels and unexpected events or incidences. By the end of the year, the actual rate of general law enforcement, service requests, emergency calls, patrol, and investigations may bring budget savings as it did in 2010 -11. Having the Sheriff contract helps the City contain public safety costs as reflected in the steadiness of the expenditures with the previous year. Funds for school traffic safety was carried over from the previous year and added to the original budget. Public and Environmental Affairs expenditures of $1,497,000 were flat on a budget and year -to -year basis. Administrative Services outlays were comparatively unchanged from a year ago and finished 15% or $640,000 under final budget. Most of the budget savings were realized in finance, city clerk, human resources and insurance. The final budget was $131,000 higher than the original budget due to the new transient occupancy tax ballot measure, new legislative and grants assistance, and leadership program, litigation, and code enforcement budgets carried over from the prior year. 13 Budgeted Amounts Over /(Under) Original Final Actual Final Taxes: Property $ 12,076 $ 121)076 $ 11,650 $ (426) Sales 12,036 12,118 14,539 21421 Transient occupancy 2,094 21094 2,537 443 Utility user 3433 3,433 3,228 (205) Franchise 2,656 2,656 2,841 185 Other 1,224 1224 1!1381 157 Use of money & property 1,188 1,188 728 (460) Intergovernmental 553 582 689 107 Licenses and permits 2,610 2,610 2,902 292 Charges for services 1,652 1,652 045 293 Fines and forfeitures 920 920 696 (224) Other 100 100 59 (41) Total revenues $ 401542 $ 401653 $ 43,195 $ 21542 Other financing sources Proceeds from sale of capital assets $ - $ - $ 1,055 $ 11055 Transfers in 265 337 337 - Total other financing sources $ 265 $ 337 $ 1,392 $ 1,055 General Fund Expenditures Fiscal 2010 -11 overall expenditures, at $33,662,000, were $706,000 or 2% higher than last year's total of $32,956,000. However, this result came in 9% or $3,529,000 under the final budget and $2,405,000 below the original budget. Year -to -year and budget versus actual results by General Fund department are described below and in Tables 7 and 8. Administration expenditures of $1,528,000 rose 4% or $59,000 over last year while finishing $83,000 or 5% under final budget. The increase reflected more community grants, support, and outreach over last year. Law Enforcement sheriff contract costs of $8,435,000 were under the final budget by $450,000 or 5 %. The budget contains dollars for anticipated service levels and unexpected events or incidences. By the end of the year, the actual rate of general law enforcement, service requests, emergency calls, patrol, and investigations may bring budget savings as it did in 2010 -11. Having the Sheriff contract helps the City contain public safety costs as reflected in the steadiness of the expenditures with the previous year. Funds for school traffic safety was carried over from the previous year and added to the original budget. Public and Environmental Affairs expenditures of $1,497,000 were flat on a budget and year -to -year basis. Administrative Services outlays were comparatively unchanged from a year ago and finished 15% or $640,000 under final budget. Most of the budget savings were realized in finance, city clerk, human resources and insurance. The final budget was $131,000 higher than the original budget due to the new transient occupancy tax ballot measure, new legislative and grants assistance, and leadership program, litigation, and code enforcement budgets carried over from the prior year. 13 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Non - enterprise Recreation expenditures ended up $363,000 or 8% below final budget, but exceeded last year's spending by $113,000 or 3 %. The year -to -year rise was in line with the budgetary increase. Most operational areas realized budget savings but, in particular, the senior travel program and Blackberry Farm comprised 70% of the savings. The travel program's cost of trips sold came in under budget. Blackberry Farm had staff vacancy and contract service cost savings. Community Development costs of $3,238,000 were $612,000 or 16% below the final budget due to personnel savings in current planning and building code enforcement divisions and contract service savings in mid and long -term planning. Costs grew 6% or $169,000 from last year in order to process more planning and building applications. Increases for municipal code changes, regional housing need studies, and economic development made the final budget 5% higher than the original. Public Works maintenance, repair, and engineering expenditures of $11,152,000 rose 3% or $343,000 over the prior year. It was $1,381,000 or 11% under final budget due to staff vacancies, lower -than- expected maintenance costs on traffic signals, parks, and City Hall and lower engineering design & traffic study costs. Outstanding purchase and job orders and a school traffic safety budget carried over from last year comprised the $594,000 increase from original to final budget. Transfers out of the General Fund dropped from $9,375,000 in 2009 -10 to $7,049,000 in 2010 -11, as finally budgeted, with $3,533,000 for ongoing debt service, $1,500,000 for ongoing retiree health obligations, $750,000 for ongoing road maintenance, $432,000 for capital project reserves, $225,000 for ongoing accrued leave payouts, $474,000 for new information technology and equipment, including a new permitting system, and a $135,000 subsidy for storm drain improvement. The decrease from 2009 -10 resulted primarily from lower capital project and retiree health funding. The transfers budget increased during the fiscal year for the permitting system and capital project reserves. Table 7 Expenditure Changes from Prior Year General Fund, Fiscal 2011 vs. 2010 (in thousands) 14 Increase /(Decrease) Fiscal 2011 From Fiscal 2010 Se rvice Area Amount % of Total Amount Pe rce nt Administration $ 11528 5% $ 59 4% Law enforcement 8,435 25% 51 1% Public and environmental affairs 11497 4% 10 1% Administrative services 31695 11% (39) -1% Recreation services 41117 12% 113 3% Community development 31238 10% 169 6% Public works 111152 33% 343 3% Total expenditures $ 3302 100% $ 706 2% Transfers out $ 7,049 100% $ (2,326) -25% 14 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Table 8 Expenditure Budget and Actual Comparison General Fund, 2010 -11 Se rvice Area Administration Law enforcement Public and environmental affairs Administrative services Recreation services Community development Public works Total expenditures Transfers out General Fund Balance (in thousands) B udg a to d Amo unts Unde r Original Final Actual Final $ 11608 $ 1,611 $ 11528 $ 83 81784 805 8,435 450 1,437 1,497 11497 - 4,205 41335 3,695 640 41427 41480 4,117 363 31667 3,850 3,238 612 111939 12,533 111152 1,381 $ 361067 $ 371191 $ 331662 $ 31529 $ 61725 $ 7,049 $ 71049 $ - At June 30, 2011, the General Fund reported a total ending fund balance of $19,807,000, up 24% or $3,876,000 from the prior year. The City assigns $12,500,000 of this for general economic uncertainty, $1,400,000 for state budget actions that impact City revenues, $534,000 for capital projects funded by utility user taxes, and $306,000 of purchase orders. $1,024,000 represents non - spendable rehabilitation and employee housing loan receivables and prepaid expenses. $663,000 is restricted for public access programming. Finally, $3,380,000 is unassigned as of June 30, 2011, but intended for future budget actions and capital projects. The fund balance rise resulted from revenues exceeding expenditures by $9,533,000 and proceeds from sale of capital assets of $1,055,000 offset by a net transfer out of $6,712,000. The unassigned fund balance benefitted from most of the increase jumping from $207,000 a year ago to $3,380,000 at June 30, 2011. The fund balance growth allowed the City to increase to $1,400,000 for the amount set -aside for State takeaways of City taxes. The utility user tax balance was drawn down by $382,000 during the year for capital project use. Loan payoffs reduced loan receivables by $252,000. Encumbrance decreased by $130,000 when compared to prior year. Public access programming funds increased $69,000. Fund balance comparisons reflect the new classifications required by accounting guidance. Public Facilities Corporation This fund accounts for the payments of principal and interest on the 2002 certificates of participation, which refinanced the long -term debt that funded many of the City's major parks and facilities. As in previous years, General Fund transfers into the fund cover the debt service payments of $3,533,000. Capital Improvement Projects All of the City's non - enterprise capital projects are in this fund, except for the Stevens Creek Corridor Park, which is a separate major fund, and the Don Burnett Pedestrian - Bicycle Bridge, which is a part of Other Governmental Funds. Outlays for park, facility, traffic, and energy efficiency projects rose from $1,359,000 in 2009 -10 to $2,609,000 in 2010 -11, as streetlight and irrigation energy retrofits, Scenic 15 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Circle access, Garden Gate Safe Routes to Schools, Community Hall audio visual upgrades, and traffic signal battery backups were new projects worked on this year. A $439,000 Federal stimulus grant for the energy retrofits was received this year, more than the $116,000 in smaller grants earned last year. The General Fund, Stevens Creek Corridor Park, and Recreation Programs provided $929,000 in funding this year compared to $2,482,000 the previous year to finance projects that may occur over multiple years. Completed project cost savings of $537,000 were returned to the General Fund and Recreation Programs compared to $487,000 last year. As of June 30, 2011, the Capital Improvement Fund has $3,547,000 assigned to capital projects including $495,000 in purchase orders, $1,000,000 for infrastructure reserves, and $1,354,000 for capital project reserves. Stevens Creek Corridor Park This fund contains three capital projects. The $13,577,000 Stevens Creek Corridor Park Phase One segment to completely re- design the picnic grounds at Blackberry Farm, re -align and restore the natural habitat of the creek, renovate the swimming pool facilities, and build the creek trail, completed major construction and re- opened to the public on July 4, 2009. Outlays for this segment fell to $160,000 during 2010 -11 compared to $923,000 the previous year as this year's work consisted of providing additional improvements to the area facilities. The Corridor Park's Phase Two, with an initial $200,000 budget for designing a trail extension to Stevens Creek Boulevard, began with $37,000 in expenditures for 2009 -10 and $88,000 in 2010 -11. A third project, the $685,000 Blackberry Farm infrastructure upgrade, kicked off with $33,000 spent in 2009 -10 and $78,000 in 2010 -11 for design. The General Fund, the Recreation Programs fund, Park Dedication fund, and State and local grants finance the projects. Reflecting the winding -down of the project, the City recorded fewer Phase One cost - reimbursement grant receipts, with $349,000 received this year compared to $2,294,000 the prior year. To help fund their respective budgets, the infrastructure upgrade project received a $303,000 transfer from the General Fund and Phase Two received a $200,000 transfer from the Park Dedication fund last year. With Phase One nearly completed and Blackberry Farm infrastructure design underway, $172,000 in realized budget savings from both projects were transferred into Capital Improvement Project Fund reserves this year whereupon they will be re- budgeted into 2011 -12 Phase Two work. Another $125,000 from the Blackberry Farm project was temporarily transferred to the Scenic Circle project within the Capital Improvement Project fund, with reserves restoring the money to Blackberry Farm in 2011 -12. The transfers out caused much of the 2010 -11 assigned project fund balance decrease of $274,000 and the unrestricted cash decrease of $312,000. Other assets and liabilities decreased by $400,000 from a year ago due to grant revenues recognized from the subsequent receipt of a prior year receivable and due to the release of contract retentions held in escrow. MAJOR PROPRIETARY FUNDS Resources Recovery The City renewed its Recology solid waste franchise agreement for five years commencing in November 2010 with a minor revenue rate increase and a restructuring of how the City and franchisee share revenues and costs. Accordingly, this solid waste enterprise fund experienced a 9% comparative yearly decrease in residential and commercial pickup revenues, offset by 12% lower contract expenses for collection, landfill disposal, and recycling. Operating income improved from $93,000 last year to $129,000 this year. With interest earnings, net assets increased by $172,000, outperforming the $134,000 growth of last year, to end the year with a $6,003,000 unrestricted balance. 16 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Blackberry Farm City employees, with a teaching professional on contract, staff the City -owned Blackberry Farm golf course and pro shop. Golfing green fees declined to a higher degree that the previous year, as the older demographics of golf course users continued to negatively impact rounds played and purchases of group packages prior to this year's fee increase impacted early current year sales. Operating revenues of $448,000 in 2010 -11 represented a 21% or $121,000 fall from the prior year. Expenses were unchanged at $457,000 this year with minimal staffing levels maintained at the course and water costs kept steady until a capital project can get underway that will look at cost - saving irrigation alternatives. $400,000 transferred from Recreation Programs during the year will finance the project. With lower revenues, the golf course incurred a $9,000 operating loss compared to $112,000 in operating income last year. Offset with the $406,000 coming from transfers and interest income, net assets increased $397,000, an improvement over the $115,000 of last year. At June 3 0, 2011, unrestricted net assets were $910,000. Cupertino Sports Center Tennis lesson, membership, fitness class and rent revenues of $1,723,000 rose by $145,000 or 9% over last year, resulting from more lesson revenues generated by the private tennis program operator. With contract instructor, facility support, and maintenance costs growing by $239,000 or 16 %, operating income fell to $6,000 in 2010 -11, off of the $100,000 produced in 2009 -10. After adding -in interest earnings, the increase in net assets of $10,000 brought ending unrestricted net assets to $369,000 by year- end. The Sports Center completed a tennis court resurfacing project during the fiscal year. Recreation Programs Cultural events, youth and teen programs, sports, dance and fitness classes generated $2,260,000 in revenues, which was flat compared to last year, for this enterprise operating out of the Quinlan Community Center, Monta Vista Recreation Center, McClellan Ranch, Creekside Park building, eight school sites, and various parks. Ongoing program expenses, including full -time administrative and programming staff, part -time activity leaders, and class instructors on contract decreased $102,000 or 5% from 2009 -10. The Quinlan Center interior upgrade project began in 2010 -11 with $29,000 in design costs. Operating income improved to $507,000 compared to $395,000 a year ago. The fund transferred $400,000 to the Blackberry Farm fund's golf course irrigation project. A $200,000 transfer to the Capital Improvement Project fund for an environmental education facility was returned after the project was re- prioritized and wrapped into next year's McClellan Ranch master plan. After adding interest earnings and net transfers out, the fund ended up with an increase in net assets of $126,000 and an unrestricted net asset balance of $2,497,000 that is intended for future capital, equipment, insurance, and reserve needs. CAPITAL ASSETS At June 30, 2011 the City had $165,512,000, net of depreciation, invested in a broad range of capital assets used in governmental and business -type activities, as shown in Table 9 and in Note 6 to the Basic Financial Statements. While the City's capital asset total was relatively unchanged, current year major capital additions includes streetlight retrofits, storm water easement, and street and pedestrian projects. The sale of the City's equity share in the City Manager residence and overall depreciation offset the additions. 17 CITY OF CUPERTINO Management's Discussion and Analysis (Unaudited) For the Year Ended June 30, 2011 Table 9 Capital Assets, Net o f D e pre c iatio n, at June 30 (in thousands) Business -Type Activities Buildings 257 285 Improvements other than buildings 435 387 Machinery and equipment 86 116 Total Business -Type Activities 778 788 Total City $ 1651512 $ 1661703 DEBT ADMINISTRATION The City's only long -term debt liability comes from $56,640,000 in Certificates of Participation (COPs) issued in 2002 by the Cupertino Public Facilities Corporation. The certificates refunded previously issued COPs that financed the Wilson Park, Blackberry Farm, and Fremont Older site, the Memorial Park expansion, the Quinlan Community Center construction, and the City Hall remodel. It provided capital for the new library opened in 2004. The serial, fixed interest rate debt ranging from 2% to 5% requires annual debt payments of $3,532,000 that are covered by the General Fund. The June 30, 2011 outstanding principal of $44,010,000 is due to be paid off by 2030. More information can be found in Note 7 to the Basic Financial Statements. CONTACTING THE CITY'S FINANCIAL MANAGEMENT This Comprehensive Annual Financial Report is intended to provide a general overview of the City's finances. Further information can be provided by the City of Cupertino Finance Department, 10300 Torre Avenue, Cupertino CA 95014, phone (408) 777 -3220, or by the City website at www.cupertino.org. 18 2011 2010 Governmental Activities: Land $ 601471 $ 601806 Easements 191105 171939 Buildings 231961 257589 Improvements other than buildings 17,042 18,173 Machinery and equipment 1,195 1,377 Roads, curbs, gutters, sidewalks, medians and bridges 341511 34,519 Streetlights 11777 85 Storm drain structures and mains 51304 5,981 Traffic signals 11368 1446 Total Governmental Activities 1641734 1657915 Business -Type Activities Buildings 257 285 Improvements other than buildings 435 387 Machinery and equipment 86 116 Total Business -Type Activities 778 788 Total City $ 1651512 $ 1661703 DEBT ADMINISTRATION The City's only long -term debt liability comes from $56,640,000 in Certificates of Participation (COPs) issued in 2002 by the Cupertino Public Facilities Corporation. The certificates refunded previously issued COPs that financed the Wilson Park, Blackberry Farm, and Fremont Older site, the Memorial Park expansion, the Quinlan Community Center construction, and the City Hall remodel. It provided capital for the new library opened in 2004. The serial, fixed interest rate debt ranging from 2% to 5% requires annual debt payments of $3,532,000 that are covered by the General Fund. The June 30, 2011 outstanding principal of $44,010,000 is due to be paid off by 2030. More information can be found in Note 7 to the Basic Financial Statements. CONTACTING THE CITY'S FINANCIAL MANAGEMENT This Comprehensive Annual Financial Report is intended to provide a general overview of the City's finances. Further information can be provided by the City of Cupertino Finance Department, 10300 Torre Avenue, Cupertino CA 95014, phone (408) 777 -3220, or by the City website at www.cupertino.org. 18 CITY OF CUPERTINO Statement of Net Assets June 30, 2011 Assets: Cash and investments Restricted cash and investments Receivables: Accounts Interest Intergovernmental - State Proposition IA Loans Prepaid items and other assets Land held for housing development Net OPEB assets Capital assets: Nondepreciable Depreciable, net of accumulated depreciation Total assets Liabilities: Accounts payable and accruals Accrued payroll and benefits Deposits Unearned revenue Compensated absences: Due in one year Due in more than one year Claims payable: Due in one year Due in more than one year Long -term debt: Due in one year Due in more than one year Total liabilities Net Assets: Invested in capital assets, net of related debt Restricted for: Special revenue projects Affordable housing Public access television Debt service Total restricted net assets Unrestricted Total net assets Governmental Business -Type $ 4018371507 $ 1013941377 $ 5112311884 215151072 - 215151072 311951082 3701865 315651947 681473 181074 861547 114191497 - 114191497 117281904 - 117281904 921712 - 921712 6151000 - 6151000 415651406 - 415651406 7915761112 - 7915761112 8511581093 7771521 8519351614 21917711858 1115601837 23113321695 616941247 3151521 710091768 5791244 491067 6281311 119931988 - 119931988 4821571 5941552 110771123 341927 - 341927 216921858 451089 217371947 3881594 - 3881594 112631359 - 112631359 115451000 - 115451000 4214651000 - 4214651000 5811391788 110041229 5911441017 12017241205 7771521 12115011726 410461498 - 410461498 310101648 - 310101648 6631254 - 6631254 C O '1 1 I C O '1 1 I 7177816 1 3 - 717781613 3311291252 917791087 4219081339 01 K 1 ti2 1) non 0 i n ccti KAQ 01 77 1 QQ K 7Q See accompanying notes to basic financial statements. 19 CITY OF CUPERTINO Statement of Activities For the Year Ended June 30, 2011 See accompanying notes to basic financial statement; 20 Net (Expense) Revenue and Program Revenues Changes in Net Assets Operating Capital Charges for Grants and Grants and Governmental Business -type Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Governmental Activities: Administration $ 1,860,451 $ 1501 $ 91,788 $ - $ (1,752,862) $ - $ (1,752,862) Law enforcement 8,43405 797,757 125,090 - (7,512,038) - (7,512,038) Public and environmental affairs 1,625,876 - - - (1,625,876) - (1,625,876) Administrative services 3,993,654 - - - (3,993,654) - (3,993,654) Recreation services 4,528,968 1,020,159 - - (3,508,809) - (3,508,809) Community development 5,961,774 4,149,620 695,929 - (1,116,225) - (1,116,225) Public works 1906,598 549,065 1,438,480 1,972,951 (15,706,102) - (15,706,102) Interest on long - term debt 2,032,464 - - - (2,032,464) - (2,032,464) Total governmental activities 48,104,670 6,532,402 2,351,287 1,972,951 (37,248,030) - (37,248,030) Business -type activities: Resource recovery 1,801,599 1,931,076 - - - 129,477 129,477 Blackberry farm 457,065 447,797 - - - (9,268) (9,268) Cupertino sports center 1,716,741 1,722,700 - - - 5,959 5,959 Recreation programs 1,753,156 2,260,296 - - - 507,140 507,140 Total business -type activities 5,728,561 6,361,869 - - - 633,308 633,308 Total $ 53,833,231 $ 12,894,271 $ 2,351,287 $ 1,972,951 (37,248,030) 633,308 (36,614,722) General revenues: Taxes: Property taxes 7,296,970 - 7,296,970 Property tax in lieu of motor vehicle fe( 4,404,795 - 4,404,795 Incremental property tax 1,251,777 - 1,251,777 Sales taxes 14,539,243 - 14,539,243 Transient occupancy tax 2,536,501 - 2,536,501 Utility user tax 3,227,942 - 3,227,942 Franchise tax 2,841,344 - 2,841,344 Other taxes 1,491,316 - 1,491,316 Intergovernmental, unrestricted Motor vehicle license fec 259,289 - 259,289 Investment earnings 259,217 71,486 330,703 Gain on sale of capital assets 497,385 - 497,385 Miscellaneous 88,980 - 88,980 Transfers 15 (15) - Total general revenues 38,694,774 71,471 38,766,245 Change in net assets 1,446,744 704,779 2,151,523 Net assets, beginning of yeas 160,185,326 9,851,829 170,037,155 Net assets, end of year $161,632,070 $ 10,55608 $172,188,678 See accompanying notes to basic financial statement; 20 Assets: Cash and investments Restricted cash and investments Receivables: Accounts Interest Intergovernmental - State Proposition IA Loans Prepaid items Land held for housing development Other assets Total assets Liabilities and Fund Balances: Liabilities: Accounts payable and accruals Accrued payroll and benefits Deposits Advance from other funds Unearned revenue Deferred revenue Total liabilities Fund balances: Nonspendable Restricted Assigned Unassigned Total fund balances Total liabilities and fund balances CITY OF CUPERTINO Governmental Funds Balance Sheet June 30, 2011 Public Capital Facilities Improvement General Corporation Proj ects Stevens Creek Other Corridor Governmental Park Funds Total $ 23,173,690 $ 58,213 $ 3,788,060 $ 698,010 $ 5,769,660 $ 33,487,633 2,515,072 - - - 2,515,072 204,221 - 233,100 - 348,761 3,186,082 47,183 - - - 8,283 55,466 1,419,497 - - - - 1,419,497 953,070 - - - 775,834 1,728,904 7000 - - - - 7000 - - - - 61500 61500 3,884 - - - - 3,884 $ 28,272,425 $ 2,573,285 $4X1,160 $ 698,010 $ 7,517,538 $ 43,082,418 $ 3,541,911 $2,515,072 $ 241,374 $ 7,076 $ 365,416 $ 6,670,849 52304 - - - 28,774 551,858 1,993,988 - - - - 1,993,988 504,497 - - - - 504,497 482,571 - - - - 482,571 1,419,497 - 233,100 - 186,253 1,838,850 8,465,548 2,515,072 474,474 7,076 580,443 12,042,613 1,023,950 - - - 61500 1,638,950 663,254 58,213 - - 6,255,893 6,977,360 14,739,394 - 3,54606 690,934 66,202 19,043,216 3,380,279 - - - - 3,380,279 19,806,877 58,213 3,54606 690,934 6,937,095 31,039,805 $ 28,272,425 $ 2,573,285 $4X1,160 $ 698,010 $ 7,517,538 $ 43,082,418 See accompanying notes to basic financial statements. 21 CITY OF CUPERTINO Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets - Governmental Activities June 30, 2011 Total fund balances reported on the governmental funds balance sheet $ 31,03905 Amounts reported for governmental activities in the statement of net assets are different from those reported in the governmental funds above because of the following: Capital assets: Capital assets used in governmental activities are not current assets or financial resources and therefore are not reported in the governmental funds. 16301,518 Allocation of internal service funds net assets: Internal service funds are used by management to charge the costs of activities such as information technology, insurance, equipment acquisition and maintenance, and certain employees' benefits to governmental funds. The assets and liabilities of the internal service funds are therefore included in governmental activities in the statement of net assets. 11,604,782 Receivables not available: Certain receivables are not available to pay for current period expenditures and therefore are deferred in the governmental funds. 1,838,850 Long -term liabilities: The liabilities below are not due and payable in the current period and therefore are not reported in the governmental funds: Certifications of participation (44,O 1 O,000) Compensated absences (2,642,885) Net assets of governmental activities $161,632,070 See accompanying notes to basic financial statements. 22 CITY OF CUPERTINO Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 3 01 2011 Revenues: Taxes Use of money and property Intergovernmental Licenses and permits Charges for services Fines and forfeitures Other Total revenues Expenditure: Current: Administration Law enforcement Public and environmental affairs Administrative services Recreation services Community development Public works Capital outlay Debt service: Principal Interest and fiscal charges Total expenditures Excess (deficiency) of revenues over (under) expenditures Other financing sources (uses) Proceeds from sale of capital assets Transfers in Transfers out Total other financing sources (uses) Change in fund balances Fund balances, beginning of year Fund balances, end of year 915321111 (31532,464) (21168,957) 231062 (11968,499) 118851253 110551449 - - - Stevens 110551449 3371482 315331000 9291000 Public Capital Creek Other - (537,467) (297,000) Facilities Improvement Corridor Governmental (297,000) General Corporation Proj ects Park Funds Total $ 3611761232 $ - $ - $ - $ 1,406,067 $ 3715821299 7271983 - - - 641052 7921035 6891239 - 4391640 3491165 210651597 315431641 219011944 - - - - 219011944 119441609 - - - 3661607 213111216 6951666 - - - - 6951666 581881 - - - 151000 731881 4311941554 - 4391640 3491165 319171323 4719001682 115281070 - - - - 115281070 814341885 - - - - 814341885 114971263 - - - - 114971263 316951076 - - - - 316951076 411171477 - - - - 411171477 312371643 - - - 214551898 516931541 1111521029 - - - 110821697 1212341726 - - 216081597 3261103 213471227 512811927 - 115001000 - - - 115001000 - 210321464 - - - 210321464 3316621443 315321464 216081597 3261103 518851822 4610151429 915321111 (31532,464) (21168,957) 231062 (11968,499) 118851253 110551449 - - - - 110551449 3371482 315331000 9291000 - 8851000 516841482 (71049,283) - (537,467) (297,000) - (71883,750) (51656,352) 31533,000 3911533 (297,000) 8851000 (11143,819) 318751759 536 (11777,424) (273,938) (110831499) 7411434 15,931,118 571677 513241110 9641872 810201594 3012981371 $ 1918061877 $ 581213 $ 3,546,686 $ 6901934 $ 6,937,095 $ 3110391805 See accompanying notes to basic financial statements. 23 CITY OF CUPERTINO Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities - Governmental Activities For the Year Ended June 3 01 2011 Net change in fund balances - total governmental funds $ 7411434 Amounts reported for governmental activities in the statement of activities are different because of the following: Capital assets transactions: Governmental Funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is capitalized and allocated over their estimated useful lives and reported as depreciation expense. Expenditures for capital assets reported as: Capital outlay 512811927 Public works 3261460 Easement received during the year 111661398 Less current year depreciation (71325,562) Net effect of sales /disposal of capital assets (558,064) Long term debt transactions: Repayment of bond principal is an expenditure in the governmental funds, but in the statement of net assets the repayment reduces long -term liabilities. 115001000 Accrual of noncurrent items: The amounts below included in the statement of activities do not provide or (require) the use of current financial resources and therefore are not reported as revenues or expenditures in governmental funds (net change): Change in compensated absences (194,746) Change in deferred revenue (69,450) Allocation of internal service funds' activities: Internal service funds are used by management to charge the costs of activities, such as information technology, insurance, equipment acquisition and maintenance, and employees' benefits to individual funds. The portion of the net revenue (expense) of these Internal Service Funds arising out of their transactions with governmental funds is reported with governmental activities. Change in net assets - internal service funds 5781347 Change in net assets of governmental activities $ 114461744 See accompanying notes to basic financial statements. 24 CITY OF CUPERTINO General Fund Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual For the Year Ended June 30, 2011 Revenues: Taxes Use of money and property Intergovernmental Licenses and permits Charges for services Fines and forfeitures Other Amounts available for appropriation Charges for appropriation (outflows): Current: Administration Law enforcement Public and environmental affairs Administrative services Recreation services Community development Public works Total charges for appropriations Excess of revenues over expenditures Other financing sources (uses) Proceeds from sale of capital assets Transfers in Transfers out Total other financing sources (uses) Change in fund balance Fund balance, beginning of year Fund balance, end of year Budgeted Amounts Original Actual Final Amounts $ 3315191000 $ 3316001875 111881000 111881000 5531000 5821000 216101000 216101000 116521000 116521000 9201000 9201000 1001000 1001000 4015421000 4016521875 116081502 1,611,139 817841597 818841396 114361734 114971263 412041559 413351491 414261903 414801147 316661722 318501000 1119391167 1215331314 3610671184 3711911750 414741816 314611125 2651000 3371482 (61725,000) (71049,283) (61460,000) (61711,801) $ (11985,184) $ (312501676) Variance with Final Budget Positive (Negative) $ 3611761232 $ 215751357 7271983 (460,017) 6891239 1071239 219011944 2911944 119441609 2921609 6951666 (224,334) 581881 (41,119) 4311941554 215411679 115281070 831069 814341885 4491511 1,497,263 - 3,695,076 6401415 411171477 3621670 312371643 6121357 1111521029 113811285 See accompanying notes to basic financial statements. 25 3316621443 315291307 915321111 610701986 110551449 110551449 337,482 - (7,049,283) - (5,656,352) 110551449 318751759 $ 711261435 15,931,118 $ 19, 806, 877 CITY OF CUPERTINO Proprietary Funds Statement of Fund Net Assets June 30, 2011 See accompanying notes to basic financial statements. 26 Business -type Activities - Enterprise Funds Governmental Cupertino Activities - Resources Blackberry Sports Recreation Internal Service Recovery Farm Center Programs Totals Funds Assets: Current assets: Cash and investments $518611492 $ 9431789 $ 6281819 $219601277 $1013941377 $ 713491874 Accounts receivable 2571546 113 67 1131139 3701865 91000 Interest receivable 101394 11672 11115 41893 181074 131007 Prepaid items - - - - - 171948 Total current assets 611291432 9451574 6301001 310781309 1017831316 713891829 Noncurrent assets: Advances to other funds - - - - - 5041497 Net OPEB assets - - - - - 415651406 Capital assets: Depreciable, net of accumulated depreciation 371186 251864 1131044 6011427 7771521 9321687 Total noncurrent assets 371186 251864 1131044 6011427 7771521 610021590 Total assets 611661618 9711438 7431045 316791736 1115601837 1313921419 Liabilities: Current liabilities: Accounts payable and accruals 1171277 81470 1491017 401757 3151521 231398 Accrued payroll and benefits 61119 41282 91857 281809 491067 271386 Compensated absences - - - - - 341927 Claims payable - - - - - 3881594 Unearned revenue - - 831163 5111389 5941552 - Total current liabilities 1231396 121752 2421037 5801955 9591140 4741305 Noncurrent liabilities: Compensated absences, net of current portion 31225 231065 181799 - 451089 491973 Claims payable, net of current portion - - - - - 112631359 Total liabilities 1261621 351817 2601836 5801955 110041229 117871637 Net assets: Invested in capital assets 371186 251864 1131044 6011427 7771521 9321687 Unrestricted 610021811 9091757 3691165 214971354 917791087 1016721095 Total net assets $ 6,039,997 $ 9351621 $ 4821209 $ 3,098,781 $ 1015561608 $11,604,782 See accompanying notes to basic financial statements. 26 CITY OF CUPERTINO Proprietary Funds Statement of Revenues, Expenses and Changes in Fund Net Assets For the Year Ended June 30, 2011 Operating revenues: Charges for services Other Total operating revenues Operating expenses: Salaries and benefits Materials and supplies Contractual services Insurance claims and premium Depreciation Total operating expenses Operating income (loss) Nonoperating revenues: Investment income Income (loss) before transfers Transfers in Transfers out Change in net assets Net assets, beginning of year Net assets, end of year $ 6,039,997 $ 9351621 $ 4821209 $ 3,098,781 $ 1015561608 $ 1116041782 See accompanying notes to basic financial statements. 27 Business -type Activities - Enterprise Funds Governmental Cupertino Activities - Resources Blackberry Sports Recreation Internal Service Recovery Farm Center Programs Totals Funds $ 1,916,054 $ 4321646 $ 1,720,521 $ 2,260,296 $ 613291517 $ 218401201 151022 151151 21179 - 321352 - 1,931,076 4471797 117221700 212601296 613611869 218401201 1841756 1361393 3141476 4411414 110771039 218881894 61547 791576 2081753 1641957 4591833 3871323 116061945 2401158 111661505 110641539 410781147 4521612 - - - - - 3671029 31351 938 271007 821246 1131542 4211663 118011599 4571065 117161741 117531156 517281561 415171521 1291477 (91268) 51959 5071140 6331308 (11677,320) 421497 61164 31627 191198 711486 561384 1711974 (31104) 91586 5261338 7041794 (11620,936) - 4001000 - 1991985 5991985 211991283 - - - (600,000) (600,000) - 171,974 3961896 91586 1261323 7041779 5781347 518681023 5381725 4721623 219721458 918511829 1110261435 $ 6,039,997 $ 9351621 $ 4821209 $ 3,098,781 $ 1015561608 $ 1116041782 See accompanying notes to basic financial statements. 27 CITY OF CUPERTINO Proprietary Funds Statement of Cash Flows For the Year Ended June 30, 2011 Cash flows from noncapital financing activities: Transfers in - 40000 - 199,985 599,985 2,199,283 Transfers out - - - (600,000) (600,000) - Cash flows provided by (used in) noncapital financing activities - 40000 - (400,015) (15) 2,199,283 Cash flows from capital and related financing activities: Acquisition of capital assets - Business -type Activities - Enterprise Funds (66,446) Governmental (349,419) Cash flows from investing activities: 652 Cupertino (23,137) (9,000) Activities - - Resources Blackberry Sports Recreation 14,305 Internal Service 43,377 Recovery Farm Center Programs Totals Funds Cash flows from operating activates: Cash and cash equivalents, beginning of year 5,659,856 574,627 612,293 2,915,476 9,762,252 Cash received from customers $ 2,008,231 $ 44704 $ 1,718,854 $ 2,210,447 $ 6,385,216 $ 2,831,201 Cash payments to suppliers for goods and services (1,654,393) (327,683) (1,381,032) (1,274,833) (4,637,941) (869,075) Cash payments for employees (184,305) (132,827) (309,908) (438,657) (1,065,697) (3,679,046) Cash payments for judgment and claims - - - - - (351,034) Net cash provided by (used in) operating activities 169,533 (12,826) 27,914 496,957 681,578 (2,067,954) Cash flows from noncapital financing activities: Transfers in - 40000 - 199,985 599,985 2,199,283 Transfers out - - - (600,000) (600,000) - Cash flows provided by (used in) noncapital financing activities - 40000 - (400,015) (15) 2,199,283 Cash flows from capital and related financing activities: Acquisition of capital assets - (22,504) (13,900) (66,446) (102,850) (349,419) Cash flows from investing activities: 652 (100,831) (23,137) (9,000) - - Interest received 32,103 4,492 2,512 14,305 53,412 43,377 Net change in cash and cash equivalents 201,636 369,162 16,526 4401 632,125 (174,713) Cash and cash equivalents, beginning of year 5,659,856 574,627 612,293 2,915,476 9,762,252 7,524,587 Cash and cash equivalents, end of year $ 5,861,492 $ 943,789 $ 628,819 $ 2,960,277 $ 10,394,377 $ 7,349,874 Reconciliation of operating income (loss) to net cash provided by (used in) operating activities: Operating income (loss) Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation Contributions to an irrevocable trust for current year's annual OPEB cost Change in assets and liabilities: Accounts receivable Prepaid items Net OPEB assets Accounts payable and accruals Accrued payroll and benefits Unearned revenue Compensated absences Claims payable Net cash provided by (used in) operating activities $ 129,477 $ (9,268) $ 5,959 $ 507,140 $ 633,308 $ (1,677,320) 3,351 938 2707 82,246 113,542 42103 77,155 (113) 652 (100,831) (23,137) (9,000) - - - - - 1,149 - - - - - (818,723) (40,901) (7,949) (5,774) (45,337) (99,961) (32,304) 965 624 2,045 2,757 6,391 3,244 - - (4,498) 50,982 46,484 - (514) 2,942 2,523 - 4,951 25,327 - - - - - 18,010 See accompanying notes to basic financial statements. 28 CITY OF CUPERTINO Statement of Fiduciary Assets and Liabilities June 30, 2011 Agency Fund Assets: Cash and investments $ 811403 Total assets $ 811403 Liabilities: Deposits $ 811403 Total liabilities $ 811403 See accompanying notes to basic financial statements. 29 This page left intentionally blank. 30 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Reporting Entity The City of Cupertino, California (the City) was incorporated on October 3, 1955, under the laws of the State of California. The City operates under a Council - City Manager form of government and provides services through the following departments: Administrative Services, Community Development, City Manager, Parks and Recreation, Public and Environmental Affairs, and Public Works /Engineering. Fire services are provided by the Santa Clara County Fire District, and the City contracts with the Santa Clara County Sheriffs Department for police services, and with Recology for garbage and recycling services. The accompanying basic financial statements include all funds and boards and commissions that are controlled by the City Council. The basic financial statements include the City's blended component units, entities for which the City is considered to be financially accountable. A blended component unit, although a legally separate entity, is in substance, part of the City's operations and so data from this unit is combined with the City. Blended component units - The Cupertino Public Facilities Corporation (the Corporation) was incorporated in May 1986, under the Nonprofit Public Benefit Corporation Law of the State of California. The Corporation was organized as a nonprofit corporation for the purpose of assisting the City in the acquisition, construction, and financing of public improvements which are of public benefit to the City. The Corporation, after acquiring certain properties from the City, leases these back to the City. The lease money provides the funds for the debt service for the Certificates of Participation issued by the Corporation to acquire the properties. The Cupertino Redevelopment Agency (the Agency) was formed in 2000 under the California Health & Safety Code to assist in the elimination of areas considered to be in a blighted condition. The City Council acts as the Board of Directors of the Corporation and the Agency. The Mayor and Vice Mayor of the City have been elected President and Vice President, respectively, of the Corporation. The City Clerk has been elected Secretary, and the City's Director of Administrative Services has been appointed Treasurer of both entities. The Corporation does not issue separate financial statements, since it is reported separately in the City's basic financial statements. The Agency's separate report is available from the City of Cupertino's website at www.cupertino.org. (b) Measurement Focus, Basis of Accounting and Basis of Presentation The City's basic financial statements are prepared in conformity with accounting principles generally accepted in the United States. The Governmental Accounting Standards Board (GASB) is the acknowledged standard setting body for establishing accounting and financial reporting standards followed by governmental entities in the United States. 31 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Measurement Focus, Basis of Accounting and Basis of Presentation (Continued) Government -wide Statements - The Statement of Net Assets and the Statement of Activities display information about the primary government (the City) and its component units. These statements include the financial activities of the overall City government, except for fiduciary activities. These statements distinguish between the governmental and business -type activities of the City. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions. Business -type activities are financed in whole or in part by fees charged to external parties. The Statement of Activities presents a comparison between expenses and program revenues for each segment of the business -type activities of the City and for each function of the City's governmental activities. Expenses include direct and indirect types. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. Indirect expenses such as depreciation, information technology, insurance and equipment replacement are included in expenses for individual activities and functions. Program revenues include (a) charges paid by the recipients of goods or services offered by the programs and (b) grants and contributions that are restricted to meeting the operational or capital needs of a particular program. Revenues that are not classified as program revenues, including taxes, are presented as general revenues. Program revenues and direct expenses related to interfund services are included and indirect expenses funded by interfund transfers are excluded from the Statement of Activities. The Statement of Net Assets eliminates interfund balances between governmental funds and interfund balances between proprietary funds. Fund Financial Statements - The fund financial statements provide information about the City's funds, including fiduciary funds and blended component units. Separate statements for each fund category — governmental, proprietary, and fiduciary — are presented. The emphasis of fund financial statements is on major individual governmental and enterprise funds, each of which is displayed in a separate column. All remaining governmental funds are aggregated and reported as nonmajor funds. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as subsidies and investment earnings, result from nonexchange transactions or ancillary activities. Major Funds - The City's major governmental and enterprise funds are identified and presented separately in the fund financial statements. All other funds, called nonmajor funds, are combined and reported in a single column, regardless of their fund type. Major funds are defined as funds, which have either assets, liabilities, revenues or expenditures in excess of ten percent of their fund -type total and five percent of the aggregate total for both governmental funds and enterprise funds. The General Fund is always a major fund. The City may select other funds it believes should be presented as major funds. 32 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Measurement Focus, Basis of Accounting and Basis of Presentation (Continued) The City reported the following major governmental funds in the accompanying financial statements: • The General Fund is the general operating fund of the City. It is used to account for all financial resources except those that are required to be accounted for in another fund. • The Public Facilities Corporation Debt Service Fund accounts for the payments of principal and interest on certificates of participation issued to provide for the financing of City Hall, Library, Wilson Park, Memorial Park, and other City facilities. • The Capital Improvement Projects Fund accounts for activities related to the acquisition or construction of major capital facilities. • The Stevens Creek Corridor Park Capital Projects Fund accounts for the design and construction of the Stevens Creek Corridor Park projects. The City reports all its enterprise funds as major funds in the accompanying financial statements: • The Resources Recovery Fund accounts for activity related to the collection, disposal, and recycling of solid waste. A private company has been issued an exclusive franchise to perform these services. • The Blackberry Farm Fund accounts for activities related to the municipal golf course. • The Cupertino Sports Center Fund accounts for the operation and maintenance of the Cupertino Sports Center. • The Recreation Programs Fund accounts for activities of the City's community centers and park facilities. The City also reports the following fund types: Internal Service Funds. These funds account for workers' compensation, management information systems maintenance and replacement, equipment maintenance and replacement, retiree health costs, accrued leave payouts, and long -term disability coverage; all of which are provided to other departments on a cost - reimbursement basis. Fiduciary Fund. The City acts as an agent for repayment of certain special assessment debt described in Note 7. This fund accounts for the tax assessments used for bond payments. Basis of Accounting - The government -wide and proprietary financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. 33 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Measurement Focus, Basis of Accounting and Basis of Presentation (Continued) Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The City considers all revenues reported in the governmental funds to be available if the revenues are collected within sixty days after year -end. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on long -term debt which are recognized as expenditures to the extent the City has provided financial resources to a debt service fund for payment of these liabilities that mature early in the following year. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds from long -term debt and acquisitions under capital leases are reported as other financing sources. Unearned revenues are considered on a full accrual basis, while deferred revenues are based on the modified accrual measure. Fiduciary financial statements consisting of agency funds, report only assets and liabilities, and therefore have no measurement focus. They recognize receivables and payables on a full accrual basis. Property taxes, transient occupancy taxes, utility taxes, franchise taxes, interest and special assessments are susceptible to accrual. Other receipts and taxes are recognized as revenue when the cash is received. Sales taxes collected and held by the state at year end on behalf of the City are also recognized as revenue. Sales taxes consulting payments which are contingent on revenues collected are netted against the related revenues. Under the terms of grant agreements, the City may fund certain programs with a combination of cost - reimbursement grants, categorical block grants, and general revenue. The City's policy is to first apply restricted grant resources to such programs, followed by general revenues if necessary. Grant revenues are recognized after eligibility and billing occurs, but may be deferred if not received within sixty days of year -end. Because of the cost - reimbursement and recognition nature of some grants, certain capital project funds may carry deficit fund balances until billing and receipt of grants. The City may also front the capital outlays with cash advances from other funds. Non - exchange transactions, in which the City gives or receives value without directly receiving or giving equal value in exchange, include property taxes, grants, entitlements, and donations. On the accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied or assessed. Revenue from grants is recognized as described above. Entitlement and donation revenues are recognized when cash is received. Private - sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government -wide statements for the business -type activities and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of GASB. Governments also have the option of following subsequent private- sector guidance for business -type activities and enterprise funds, subject to the same limitation. The City has elected not to follow subsequent private- sector guidance. 34 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Budgetary Practices The budget of the City is a detailed operating plan which identifies estimated costs and results in relation to estimated revenues. The budget includes (1) the programs, projects, services and activities to be provided during the fiscal year; (2) estimated revenue available to finance the operating plan; and (3) the estimated spending requirements of the operating plan. The budget represents a process through which policy decisions are made, implemented and controlled. The City prohibits expending funds for which there is no legal appropriation. Operating appropriations lapse at fiscal year end. In May of each year, the City Manager submits to the City Council a proposed budget for the fiscal year beginning July 1. Public hearings on the proposed budget are held during the month of June and the budgets for all fund types are legally adopted by Resolution prior to June 30. Original budget amounts are presented on the accompanying budgetary statements include these legally adopted amounts. The City's legal level of budgetary control is at the functional level. The City Manager is responsible for controlling the City's expenditures in accordance with the adopted budget. The City Manager is authorized to transfer appropriations within functional expenditure classifications. Any revision which requires transfers between functional expenditure classifications or increases total appropriations must be approved by the City Council. Requests for additional personnel or capital outlay also require the approval of the City Council. Budgets for governmental funds are adopted on a basis consistent with generally accepted accounting principles. Budget information is presented for the general, special revenue and debt service funds only. Capital projects funds are budgeted on a long -term project -by- project basis and, hence, budgets for these funds are not presented in the basic financial statements. (d) Cash and Investments The City pools its cash resources, consisting of cash and investments, of all funds for investment except for restricted funds generally held by an outside fiscal agent. Cash amounts are reported net of outstanding warrants. Investments are stated at fair value. (e) Capital Assets Capital assets are recorded at cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at their estimated fair value on the date donated. Public domain (infrastructure) capital assets consisting of roads, bridges, curbs, gutters, medians, sidewalks, drainage and lighting systems have been capitalized and depreciated. Capital assets are defined as assets with an initial individual cost of more than $5,000 for general capital assets and $100,000 for intangible assets. 35 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (e) Capital Assets (Continued) Depreciation is recorded using the straight -line method over the following useful lives: Years Buildings 15-25 Improvements 10-15 Vehicles 4-10 Street equipment 3-20 Water equipment 3-50 Office equipment 3 - 5 Road, curbs, gutters, sidewalks, medians and bridges 30-40 Streetlights 20 Storm drain structure and mains 40 Traffic signals 20 Major outlays for capital assets and improvements are capitalized as projects are constructed. For enterprise funds, interest incurred during the construction phase is reflected in the capitalized value of the asset constructed, net of interest earned on the invested proceeds over the same period. Some capital assets may be acquired using federal and state grant funds, or they may be contributed by developers or other governments. These contributions are accounted for as revenues at the time the capital assets are contributed. (f) Land Held for Redevelopment Land held for redevelopment of $615,000 at June 30, 2011 is stated at the lowest of historical cost, net realizable value determined upon the execution of disposition and development agreement, or agreed - upon sales price. The land was purchased using federal grant funds for housing activities. (g) Claims Payable Claims and judgments payable are accrued when the liability is incurred and the amount can be reasonably estimated. Claims and judgments payable are recorded in an internal service fund for workers' compensation and long -term disability, and other claims and judgments are recorded in the General Fund or enterprise funds, as appropriate. (h) Compensated Absences Compensated absences comprise vested accumulated vacation and sick leave. The City's liability for compensated absences is recorded in governmental or business -type activities as appropriate. The liability for compensated absences is determined annually. For all governmental funds, amounts expected to be "permanently liquidated," such as what is due to be paid because of a realized employment action, are recorded as fund liabilities; the long -term portion is recorded in the Statement of Net Assets. 36 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Compensated Absences (Continued) Compensated absences are liquidated by the fund that has recorded the liability. The long -term portion of governmental activities compensated absences are liquidated primarily by the General Fund, using the Compensated Absences and the Long -Term Disability internal service fund to account for termination payouts. The changes in compensated absences for the year ended June 30, 2011 were as follows: All property taxes are levied and collected by the County of Santa Clara. Secured taxes are levied on July 1, are due in two installments on November 1 and February 1 and become delinquent after December 10 and April 10. Unsecured taxes are levied on July 1 and become delinquent on August 31. The lien date for secured and unsecured property taxes is January 1. The City, in fiscal year 1993 -94, adopted an alternative method of property tax distribution (the "Teeter Plan "). Under this method, the City receives 100% of its secured property tax levied in exchange for foregoing any interest and penalties collected on delinquent taxes. The City receives remittances as a series of advances made by the County during the year. (j) Interfund Transactions Interfund loans and balances related to unsettled service transactions are reported as receivables and payables as appropriate, and are subject to elimination upon consolidation of similar fund types, and are referred to as either "due to /from other funds" (i.e., the current portion of inter -fund loans and unsettled service transactions) or "advances to /from other funds" (i.e., the non - current portion of Interfund loans). Any residual balances outstanding between the governmental activities and the business -type activities are reported in the government -wide financial statements as "internal balances ". Services provided or used, deemed to be at market or near market rates, are treated as revenues and expenditures or expenses. Transactions constituting reimbursements to a fund for expenditures /expenses initially made from it that are properly applicable to another fund, are recorded as expenditures /expenses in the reimbursing fund and as reductions of expenditures /expenses in the fund that is reimbursed. All other Interfund transactions are treated as transfers. Transfers between governmental or proprietary funds are netted as part of the reconciliation to the government -wide presentation. 37 Govermental Business -Type Activities Activities Total Balance, beginning of year $ 215071712 $ 401138 $ 215471850 Additions 114321761 301000 114621761 Payments (11212,688) (25,049) (11237,737) Balance, end of year 217271785 451089 217721874 Less current portion (34,927) - (34,927) Non - current portion $ 21692,858 $ 451089 $ 217371947 (i) Property Tax Calendar All property taxes are levied and collected by the County of Santa Clara. Secured taxes are levied on July 1, are due in two installments on November 1 and February 1 and become delinquent after December 10 and April 10. Unsecured taxes are levied on July 1 and become delinquent on August 31. The lien date for secured and unsecured property taxes is January 1. The City, in fiscal year 1993 -94, adopted an alternative method of property tax distribution (the "Teeter Plan "). Under this method, the City receives 100% of its secured property tax levied in exchange for foregoing any interest and penalties collected on delinquent taxes. The City receives remittances as a series of advances made by the County during the year. (j) Interfund Transactions Interfund loans and balances related to unsettled service transactions are reported as receivables and payables as appropriate, and are subject to elimination upon consolidation of similar fund types, and are referred to as either "due to /from other funds" (i.e., the current portion of inter -fund loans and unsettled service transactions) or "advances to /from other funds" (i.e., the non - current portion of Interfund loans). Any residual balances outstanding between the governmental activities and the business -type activities are reported in the government -wide financial statements as "internal balances ". Services provided or used, deemed to be at market or near market rates, are treated as revenues and expenditures or expenses. Transactions constituting reimbursements to a fund for expenditures /expenses initially made from it that are properly applicable to another fund, are recorded as expenditures /expenses in the reimbursing fund and as reductions of expenditures /expenses in the fund that is reimbursed. All other Interfund transactions are treated as transfers. Transfers between governmental or proprietary funds are netted as part of the reconciliation to the government -wide presentation. 37 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (k) Statement of Cash Flows For purposes of reporting cash flows for the City's proprietary funds, pooled cash and investments are considered cash equivalents as the proprietary funds can access pooled cash and investments in a manner similar to a demand deposit account. (Z) Effects of New Pronouncements During the year ended June 30, 2011, the City implemented the following GASB Statement: In March 2009, GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The objective to this Statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. This Statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The initial distinction in reporting fund balance information is identifying amounts that are considered nonspendable, such as fund balance associated with prepaid items. This Statement provides for additional classification as restricted, committed, assigned and unassigned based on the relative strength of the constraints that control how specific amounts can be spent. The details for the governmental fund balance classifications prescribed under this Statement are separately discussed in Note 8. The City is currently analyzing its accounting practices to determine the potential impact on the financial statements for the following GASB Statements: In December 2010, GASB issued Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements. This Statement addresses how to account for and report service concession arrangements (SCAB), a type of public- private or public - public partnership that state and local governments are increasingly entering into. Common examples of SCAB include long -term arrangements between a transferor (a government) and an operator (governmental or nongovernmental entity) in which the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset in exchange for significant consideration and the operator collects and is compensated by fees from third parties. Application of this Statement is effective for the City's fiscal year ending June 30, 2013. In December 2010, GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus. GASB Statement No. 61 is designed to improve financial reporting for governmental entities by amending the requirements of GASB Statement No. 14, The Financial Reporting Entity, and GASB Statement No. 34, Basic Financial Statements -and Management's Discussion and Analysis for State and Local Governments, to better meet the needs of users and address reporting entity issues that have come to light since these statements were issued in 1991 and 1999, respectively. GASB Statement No. 61 improves the information presented about the financial reporting entity, which is comprised of a primary government and related entities (component units) and amends the criteria for blending — reporting component units as if they were part of the primary government — in certain circumstances. Application of this Statement is effective for the City's fiscal year ending June 30, 2013. 38 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (l) Effects of New Pronouncements (Continued) In December 2010, GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre - November 30, 1989 FASB and AICPA Pronouncements. The objective of this Statement is to incorporate into the GASB's authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements. This Statement also supersedes Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting. The requirements of this Statement are effective for the City's fiscal year ending June 30, 2013. In June 2011, GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. This Statement also amends the net asset reporting requirements in Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments, and other pronouncements by incorporating deferred outflows of resources and deferred inflows of resources into the definitions of the required components of the residual measure and by renaming that measure as net position, rather than net assets. The requirements of this Statement are effective for the City's fiscal year ending June 30, 2013. In June 2011, GASB issued Statement No. 64, Derivatives Instruments: Application of Hedge Accounting Termination Provisions — an amendment of GASB Statement No. 53. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. This Statement sets forth criteria that establish when the effective hedging relationship continues and hedge accounting should continue to be applied. The requirements of this Statement are effective for the City's fiscal year ending June 30, 2013. (m) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from those estimates. 39 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 2 — CASH AND INVESTMENTS The City's pooled idle funds are invested pursuant to investment policy guidelines adopted by the City Council. The objectives of the policy are to invest funds to the fullest extent possible and to invest in accordance with the provisions of the California Government Code with the priority of safety, liquidity and yield. The policy addresses the safekeeping of securities, types of investment instruments, diversification, maturities, reporting requirements, and internal control. The City maintains a cash and investment pool that is available for use by all funds. Each fund type's portion of this pool is displayed on the financial statements as "cash and investments." (a) Policies California law requires banks and savings and loan institutions to pledge government securities with a market value of 110% of the City's cash on deposit, or first trust deed mortgage notes with a market value of 150% of the deposit, as collateral for these deposits. Under California law, this collateral is held in a separate investment pool by another institution in the City's name and places the City ahead of general creditors of the institution. The City and its fiscal agents invest in individual investments and in investment pools. Individual investments are evidenced by specific identifiable securities instruments, or by an electronic entry registering the owner in the records of the institution issuing the security, called the book entry system. Security instruments owned by the City are held in safekeeping by a third party custodian acting as agent for the City under the terms of a custody agreement. The City's investments are carried at fair value. The City adjusts the carrying value of its investments to reflect their fair value at each fiscal year end, and it includes the effects of these adjustments in investment income for that fiscal year. (b) Classification The City's total cash and investments, at fair value, are presented on the accompanying financial statements in the following allocation: Cash and investments Restricted cash and investments: Held by Fiscal Agent for bond repayments Total cash and investments 40 Primary Agency Government Funds Total $ 51231,884 $ 81,403 $ 51,313,287 2.515.072 - 2.515.072 $ 53,746,956 $ 81,403 $ 53,828,359 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 2 —CASH AND INVESTMENTS (Continued) (c) Authorized Investments by the City The City's Investment Policy and the California Government Code allow the City to invest its pooled idle funds in the following, under limits and provisions that address interest rate risk, credit risk, and concentration of credit risk. This does not include the City's investments of debt proceeds held by fiscal agents that are governed by the provisions of debt agreements of the City. Minimum Maximum Maximum Maximum Credit Percentage of Investment in Authorized Investment Type Maturity Quality Portfolio One Issuer U.S. Treasury Obligations 5 years N/A None None U.S. Agency Securities * 5 years N/A None None California Local Agency Investment Up to $50 N/A N/A None Fund (LAIF) million Non - negotiable Certificates of 5 years N/A 30% * * * 10% of portfolio; Deposits (time deposits) 5% of issuer's net worth. ** State of California registered state 5 years N/A None None warrants, treasury notes, or bonds California local agency bonds, notes, 5 years N/A None None warrants, or other obligations Bond issued by the local agency 5 years N/A None None Bankers' Acceptances 180 days N/A 40% None 10% of portfolio; Commercial Paper 270 days A- 1 +/P -1 25% 5% of issuer's net worth; 10% of outstanding p ap er of is suer. 10°/ of ortfolio Negotiable Certificates of Deposit 5 years N/A 30% ° p ' 5% of issuer's net worth. ** Repurchase Agreements 1 year N/A None 10% of portfolio; 5% of issuer's net worth. ** Medium Term Corporate Notes 5 years A or better 30% 10% of portfolio; 5% of issuer's net worth. ** Money market mutual funds investing in U.S. Treasury, Government Agency securities or repurchase 5 years Aaa/AAA 20% None agreements collaterized by U.S. Treasury or Government Agency securities * Securities issued by agencies of the federal government such as the Government National Mortgage Association (GNMA), the Federal Farm Credit System (FFCB), the Federal Home Loan Bank (FHLB), the Federal National Mortgage Association (FNMA), the Student Loan Marketing Association (SLMA), and the Federal Home Loan Mortgage Corporation (FHLM C). ** Represents restriction in which the City's investment policy is more restrictive than the California Government Code. * * * 30% maximum % of portfolio if using a private sector entity to assist in the placement of the time deposits. No maximum for others. 41 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 2 —CASH AND INVESTMENTS (Continued) (d) Authorized Investments by Debt Agreements The City must maintain required amounts of cash and investments with trustees or fiscal agents under the terms of certain debt issues. These funds are unexpended bond proceeds or are pledged reserves to be used if the City fails to meet its obligations under these debt issues. The California Government Code requires these funds to be invested in accordance with City ordinances, bond indentures or State statutes. The City's Investment Policy allows investments of bond proceeds to be governed by provisions of the related bond indentures. The following identifies the investment types that are authorized for investments held by fiscal agents under the terms of the bond indentures of the related debt is sue : 42 Minimum Maximum Maximum Credit Percentage of Authorized. Investment Type Maturity Quality Portfolio U.S. Treasury obligations N/A N/A None Federal agencies obligations which represent full faith N/A N/A None and credit of the U. S. Direct federal agencies obligations which are not fully N/A N/A None guaranteed by the full faith and credit of the U. S. U.S. dollar denominated deposit accounts, federal funds and 360 days 13-1, A 1 +, A 1 None bankers' acceptances with domestic commercial banks Commercial Paper 270 days P 1, A 1 None Money market funds N/A Aaam or AAAn-rG None Pre- refunded municipal obligations that are not callable Highest rating prior to maturity or as to which irrevocable instructions N/A category None have been given to call on the date specified in the notice General obligations of states N/A AZ A None Investment agreements or other forms of investments, including repurchase agreements, approved by the N/A N/A None financial guaranty insurance carrier. Califomia Loca I Agency Investment Fund (LAIF) N/A N/A Up to $50 million Shares in a California common law trust established pursuant to Title 1, Division 7, Chapter 5 ofthe California Government Code which invests exclusively in investments permitted by N/A N/A None Section 53635 of Title 5, Division 2, Chapter of the California Government Code, as it may be amended 42 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 2 —CASH AND INVESTMENTS (Continued) (e) Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment the greater the sensitivity of its fair value to changes in market interest rates. Information about the sensitivity of the fair values of the City's investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the following table that shows the distribution of the City's investments by maturity or earliest call date: Investment Type Pooled investments U.S. Treasury Securities Local Agency Investment Fund Money Market Mutual Funds Total pooled investments Investment held by fiscal agent Money Market Mutual Funds Total investments Cash in banks and on hand Total cash and investments $ 1304,091 $ 19,673,497 $ 1800,790 51,558,378 7 769 9R1 $ 53,828,359 The City is a participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The Local Investment Advisory Board (Board) has oversight responsibility for LAIF. The Board consists of five members as designated by State Statute. The City reports its investment in LAIF at the fair value amount provided by LAIF, which is the same as the value of the pool share. The balance is available for withdrawal on demand, and is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAIF's investment portfolio are U.S. Treasuries, Federal Agency obligations, time deposits, negotiable certificates of deposits, commercial paper, corporate bonds, and security loans. As of June 30, 2011, the total amount recorded by all participating public agencies in LAIF was approximately $24.0 billion. Of that amount, 94.99% was invested in non - derivative financial products and 5.01% in structured notes and asset backed securities. These investments had weighted average maturity of 237 days. Money market mutual funds are available for withdrawal on demand. At June 30, 2011, money market mutual funds in the pooled investment and held by fiscal agent had weighted average maturity of approximately 48 days and 19 days, respectively. 43 Maturities in Less Than 3 to 12 1 to 5 3 Months Months Years Total $ 4041680 $ 19,077,260 $ 181080,790 $ 41J62,730 - 5961237 - 596,237 71284,339 - - 71284,339 11,289,019 1916731497 18,080,790 49,043,306 ?51507? - - ?51507 ?. $ 1304,091 $ 19,673,497 $ 1800,790 51,558,378 7 769 9R1 $ 53,828,359 The City is a participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The Local Investment Advisory Board (Board) has oversight responsibility for LAIF. The Board consists of five members as designated by State Statute. The City reports its investment in LAIF at the fair value amount provided by LAIF, which is the same as the value of the pool share. The balance is available for withdrawal on demand, and is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAIF's investment portfolio are U.S. Treasuries, Federal Agency obligations, time deposits, negotiable certificates of deposits, commercial paper, corporate bonds, and security loans. As of June 30, 2011, the total amount recorded by all participating public agencies in LAIF was approximately $24.0 billion. Of that amount, 94.99% was invested in non - derivative financial products and 5.01% in structured notes and asset backed securities. These investments had weighted average maturity of 237 days. Money market mutual funds are available for withdrawal on demand. At June 30, 2011, money market mutual funds in the pooled investment and held by fiscal agent had weighted average maturity of approximately 48 days and 19 days, respectively. 43 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 2 —CASH AND INVESTMENTS (Continued) (fi (9) Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the actual rating as of June 30, 2011 for each investment type, including those with fiscal agents, as provided by Moody's ratings: Investment Type Ratings Total Money Market Mutual Funds Exempt from credit rating disclosure: U.S. Treasury Securities Not rated: Local Agency Investment Fund Total investments Concentration of Credit Risk Aaam $ 9,799,411 Exempt 411162,730 Not rated 596,237 $ 5115581378 The City's investment policy contains certain limitations on the amount that can be invested in any one issuer. In certain categories, these limitations are more restrictive than those required by California Government Code Sections 53600 et seq. Excluding those issued or explicitly guaranteed by the U.S. government and investments in the Local Agency Investment Fund and mutual funds, the City did not have investments that represent 5% or more of total City -wide investments at June 30, 2011. NOTE 3 — PROPOSITION lA BORROWING BY THE STATE OF CALIFORNIA Under the provisions of Proposition IA and as part of the 2009 -10 budget package passed by the California state legislature on July 28, 2009, the State of California borrowed 8% of the amount of property tax revenue, including those property taxes associated with the in -lieu motor vehicle license fee, the triple flip in lieu sales tax, and supplemental property tax, apportioned to cities, counties and special districts (excluding redevelopment agencies). The State of California is required to repay this borrowing plus interest by June 30, 2013. The amount of this borrowing pertaining to the City was $1,419,497. This borrowing by the State of California was recognized as a receivable in the accompanying basic financial statements. Under the modified accrual basis of accounting, the borrowed tax revenues are not permitted to be recognized as revenue in the governmental fund financial statements until the tax revenues are received from the State of California (expected to be fiscal year 2012 -13). In the government -wide financial statements, the tax revenues were recognized in the fiscal year for which they were levied (fiscal year 2009 -10). 44 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 4 — LOANS RECEIVABLE (a) Related Party Loans In conjunction with the City's executive housing assistance program, loans totaling $849,360 have been provided to two executive managers. These 40 -year loans bear an interest rate equal to the 11 th District Cost of Funds at the time of the loan, and require bi- weekly principal and interest payments. In addition, there is a two percent deferral on the interest rate for the first five years of the loan, at which time the interest rate may be adjusted to the current 11th District Cost of Funds for the remainder of the loan. During the year ended June 30, 2011, one of the loans was repaid and the balance remaining on the outstanding loan was $464,914 at June 30, 2011. (b) Housing Program Loans On June 30, 1995, the City loaned $821,000 to Community Housing Developers, a California nonprofit public benefit corporation. The note bears interest at three percent per annum, compounded annually, payable to the extent of surplus cash, and all unpaid principal and interest due June 30, 2035. At June 3 0, 2011, the balance remaining on the loan was $82 1, 000. On June 6, 1996, the City loaned $320,000 to Cupertino Community Services, a California nonprofit public benefit corporation. The note bears interest at three percent per annum and due on July 14, 2026. At June 3 0, 2011, the balance on the loan was $251,069. In addition to these loans, the City has $191,921 in housing and other loans receivable at June 30, 2011. These loans bear interest at 3 to 6 percent and are due by June 30, 2025. 45 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 5 - INTERFUND TRANSACTIONS Transfers between funds during the fiscal year ended June 30, 2011 were as follows: The reasons for these transfers are set forth below: (A) For annual lease payment related to the 2002 Certificates of Participation debt issue. (B) To fund various capital improvements projects. (c) To fund operating expenditures of the Environmental Management Special Revenue Fund ($135,000) and street maintenance expenditures ($750,000). (D) To fund management information systems, equipment, compensated absences, and retiree medical expenses. (E) To return capital projects savings back to General Fund. (F) To provide and return funds for the environmental education facility project. (G) To fund golf course irrigation project. Internal Balances — The government wide financial statements had no net interfund receivables and payable remaining after the elimination of all such balances within governmental and business -type activities. Advance to and advance from other funds During fiscal year ended June 30, 2010, the Equipment Internal Service Fund loaned the General Fund $504,497 for payment of the Prop IA borrowing by the State of California. The General Fund is expected to repay the funds upon receipt of the repayment from the State of California during fiscal year ended June 30, 2013. 46 Amount Fund Making Transfers Fund Receiving Transfers Transferred General Fund Public Facilities Corporation Debt Service Fund $ 3,533,000 (A) Capital Improvement Projects Fund 432,000 (B) Nonmajor governmental funds 88500 Internal Service Funds 21199,283 Capital Improvement Projects Fund General Fund 337,482 (E) Recreation Programs Fund 1991985 (F) Stevens Creek Corridor Park Capital Project Fund Capital Improvement Projects Fund 29700 (B) Recreation Programs Fund Capital Improvement Projects Fund 200,000 (F) Blackberry Farm Fund 4001000 (G) Total interfund transfers $ 8.483.750 The reasons for these transfers are set forth below: (A) For annual lease payment related to the 2002 Certificates of Participation debt issue. (B) To fund various capital improvements projects. (c) To fund operating expenditures of the Environmental Management Special Revenue Fund ($135,000) and street maintenance expenditures ($750,000). (D) To fund management information systems, equipment, compensated absences, and retiree medical expenses. (E) To return capital projects savings back to General Fund. (F) To provide and return funds for the environmental education facility project. (G) To fund golf course irrigation project. Internal Balances — The government wide financial statements had no net interfund receivables and payable remaining after the elimination of all such balances within governmental and business -type activities. Advance to and advance from other funds During fiscal year ended June 30, 2010, the Equipment Internal Service Fund loaned the General Fund $504,497 for payment of the Prop IA borrowing by the State of California. The General Fund is expected to repay the funds upon receipt of the repayment from the State of California during fiscal year ended June 30, 2013. 46 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 6 - CAPITAL ASSETS A summary of changes in capital assets is as follows: Business -type activities Capital assets, being depreciated: Buildings Balance, - $ - $ 293,372 Balance, 389,511 July 1, 2010 Additions Retirements June 30, 2011 Governmental activities - 272,088 Total capital assets, being depreciated 954,971 102,850 Capital assets, not being depreciated: Less accumulated depreciation for: Land $ 60,806,081 $ - $ (335,112) $ 60,470,969 Easements 17,938,745 1,166,398 - 19,105,143 Total capital assets, not being depreciated 78,744,826 1,166,398 (335,112) 79,576,112 Capital assets, being depreciated: Total capital assets, being depreciated, net 788,213 (10,692) - 777,521 Buildings 40,998,928 143,239 (393,870) 40,748,297 Improvements other than buildings 39,684,798 782,866 - 40,467,664 Machinery and equipment 7,576,532 349,419 (57,547) 7,868,404 Roads, curbs, gutters, sidewalks, medians and bridges 121,612,009 2,834,755 - 124,446,764 Streetlights 6,596,456 1,697,633 - 8,294,089 Storm drain structure and mains 31,799,233 117,227 - 31,916,460 Traffic signals 6,034,208 32,667 - 6,066,875 Total capital assets, being depreciated 254,302,164 5,957,806 (451,417) 259,808,553 Less accumulated depreciation for: Buildings (15,410,360) (1,548,043) 170,918 (16,787,485) Improvements other than buildings (21,668,745) (1,756,695) - (23,425,440) Machinery and equipment (6,199,057) (531,448) 57,547 (6,672,958) Roads, curbs, gutters, sidewalks, medians and bridges (86,936,007) (2,999,682) - (89,935,689) Streetlights (6,511,832) (4,823) - (6,516,655) Storm drain structure and mains (25,817,840) (794,981) - (26,612,821) Traffic signals (4,587,859) (111,553) - (4,699,412) Total accumulated depreciation (167,131,700) (7,747,225) 228,465 (174,650,460) Total capital assets, being depreciated, net 87,170,464 (1,789,419) (222,952) 85,158,093 Governmental activities, capital assets, net $ 165,915,290 $ (623,021) $ (558,064) $ 164,734,205 Business -type activities Capital assets, being depreciated: Buildings $ 293,372 $ - $ - $ 293,372 Improvements other than buildings 389,511 102,850 - 492,361 Machinery and equipment 272,088 - - 272,088 Total capital assets, being depreciated 954,971 102,850 - 1,057,821 Less accumulated depreciation for: Buildings (8,813) (27,753) - (36,566) Improvements other than buildings (2,089) (55,346) - (57,435) Machinery and equipment (155,856) (30,443) - (186,299) Total accumulated depreciation (166,758) (113,542) - (280,300) Total capital assets, being depreciated, net 788,213 (10,692) - 777,521 Business -type activities, capital assets, net $ 788,213 $ (10,692) $ - $ 777,521 47 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 6 - CAPITAL ASSETS (Continued) Depreciation expense was charged to functions and programs based on their usage of the related assets. Depreciation expense was charged to governmental activities as follows: Administration $ 2821072 Public and environmental affairs 101829 Administration services 261551 Recreation service 861604 Public works 61919,506 Amount reported in the internal service funds 4211663 Total depreciation expense - gove mmental activities $ 71747,225 Depreciation expense was charged to the business -type activities as follows: Resources Recovery Blackberry Farm Cupertino Sports Center Recreation Programs Total depreciation expense - business -type activities 48 $ 3,351 938 27,007 82,246 $ 113,542 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 7 -LONG -TERM DEBT (a) Cupertino Public Facilities Corporation Certificates of Participation Amount Original Balance Balance Due Issue July 1, June 30, Within Amount 2010 Retirements 2011 One Year Governmental activities debt: 2002 Refinancing and Capital Improvement Project, 2.00 - 5.00 %, due 07/01/2030 $ 56,640,000 $ 45,510,000_ $ (1,500,000) $ 44, 010, 000 $ 1,545,000 The Cupertino Public Facilities Corporation issued Certificates of Participation to provide financing for the construction of the Community Center, improvements of the City Hall and the Library in July 1986; purchase of Wilson Park in 1989; finance the Memorial Park Expansion in 1990; and purchase the Blackberry Farm and Fremont Older site in 1991. The Cupertino Public Facilities Corporation, as lessor, leased real property to the City (under the Lease Agreement with the lessee) and assigned the base rental payments to the trustee for the benefit of the owners of the certificates of participation. The rental payments are scheduled to be sufficient in both time and amount, when the principal and interest of the certificates are due. On October 1, 2002, $56,640,000 principal amount of 2002 Refinancing and Capital Improvement Project Certificates of Participation (2002 COPs), were issued to finance the costs of acquiring and constructing a new public library and to refund the 1992A COPs, the 1992B COPS and the 1993A COPs ( "Prior COPS "). Payment of the principal and interest are insured by a financial guaranty insurance policy issued by Ambac Assurance Corporation ( Ambac). The reserve fund required for the 2002 COPs is funded with a reserve fund surety bond issued by Ambac. The 2002 COPs are payable by a pledge of revenues from the lease payments payable by the City pursuant to the Lease Agreement between the Cupertino Public Facilities Corporation and the City for the use and possession of the Site and Facility as described in the Lease Agreement. The City also covenanted in the Lease Agreement to include all lease payments in its annual budget. In the event that insufficient funds are available to make the lease payments, payments will be made from an apportionment of moneys to which the City is entitled from the Motor Vehicle Licenses Fee Account in the Transportation Fund of the State of California. Total debt service payments remaining on the 2002 COPs is $67,121,456 payable through July 1, 2030. For the year -ended June 30, 2011, principal and interest paid totaled $1,500,000 and $2,030,144, respectively, while total Motor Vehicle Licenses Fee revenues received by the City totaled $4,664,084. Annual debt service requirements for the 2002 COPs are shown below: For the Year Govemmental Activities Ending June 30, Principal Interest 2012 $ 1,545,000 $ 1,985,144 2013 1,600,000 1,934031 2014 1,660,000 1,870031 2015 1,730,000 104,531 2016 1,795,000 1,735,331 2017 -2021 10250,000 7,415,456 2022 -2026 12,83000 4,834,444 2027 -2030 12,600,000 1,53008 $ 44,010,000 $ 23,111,456 49 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 7 -LONG -TERM DEBT (Continued) (b) 1915 Act Bonds Without City Commitment The City acts as agent for the property owners of parcels upon which assessments were made for local improvements. The City collects the assessments and forwards the collections to bond holders. The City is not directly liable for the repayment of special assessment district bonds as such bonds and interest payable are secured by fixed lien assessments on real property; however, the City has determined that it is not probable that the government would assume responsibility for all or part of the debt in the event of default. During the fiscal year ended June 30, 2011, the City paid off the remaining balance of the bonds in the amount of $35,000. (c) Conduit Debt On October 1, 2001, the City authorized the issuance of the Multi - Family Housing Revenue Bonds in an amount up to $1.6 million to assist a developer in financing the cost of site acquisition and construction of a 24 unit multi - family rental housing project. The bonds are payable solely out of loan repayments received from the developer. The principal balance outstanding of the bonds and any accrued and unpaid interest is due and payable on October 1, 2031. The City has no legal or moral liability with respect to the payment of this debt. The amount of outstanding conduit debt principal at June 30, 2011 was $798,153. NOTE 8 - NET ASSETS AND FUND BALANCES Net Assets are measured on the full accrual basis while Fund Balance is measured on the modified accrual basis. Net Assets — The government -wide and proprietary fund financial statements utilize a net assets presentation. Net assets are categorized as follows: Invested in Capital Assets, net of related debt — This category groups all capital assets including, infrastructure, into one component of net assets. Accumulated depreciation and outstanding balances of debt that are attributable to the acquisition, construction or improvement of these assets reduce the balance in this category. Restricted — This category represents net assets that have external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. At June 30, 2011, the government -wide statement of net assets reported restricted assets of $7,778,613 in governmental activities, of which, $258,390 are restricted by enabling legislation. Unrestricted — This category represents net assets of the City that do not meet the definition of "invested in capital assets, net of related debt" or "restricted." 50 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 8 -NET ASSETS AND FUND BALANCES (Continued) Fund Balances — As prescribed by GASB Statement No. 54, governmental funds report fund balance in classifications based primarily on the extent to which the City is bound to honor constraints on the specific purposes for which amounts in the funds can be spent. Fund balances for governmental funds are made up of the followings: Nonspendable Fund Balance — includes amounts that are (a) not in spendable form, or (b) legally or contractually required to be maintained intact. The "not in spendable form" criterion includes items that are not expected to be converted to cash, for example: prepaid items, land held for redevelopment and long -term notes receivable. Restricted Fund Balance — includes amounts that can be spent only for the specific purposes stipulated by external resource providers, constitutionally or through enabling legislation. Restrictions may effectively be changed or lifted only with the consent of resource providers. Committed Fund Balance — includes amounts that can only be used for the specific purposes determined by a formal action of the City's highest level of decision - making authority, the City Council. Commitments may be changed or lifted only by the City taking the same formal action that imposed the constraint originally (for example: resolution and ordinance). At June 30, 2011, the City did not have fund balance classified as committed. Assigned Fund Balance — comprises amounts intended to be used by the City for specific purposes that are neither restricted nor committed. Intent is expressed by the City Council or official to which the City Council has delegated the authority to assign amounts to be used for specific purposes. Unassigned Fund Balance — is the residual classification for the General Fund and includes all amounts not contained in the other classifications. Unassigned amounts are technically available for any purpose. In circumstances when an expenditure may be made for which amounts are available in multiple fund balance classifications, the fund balance in General Fund will generally be used in the order of restricted, unassigned, and then assigned reserves. In other governmental funds, the order will generally be restricted and then assigned. The City Council has established reserve policy levels for various capital and contingency purposes. These balances are reported as part of the governmental funds' assigned fund balance as follows: Fund Amount Purpose General Fund: Economic Uncertainty I $ 12,500,000 For economic downturns and major unforeseen outlays. Economic Uncertainty II 1,4001000 For state borrowing of local funds under Proposition lA and other shifts of funds to address state budget deficitis. Utilities Users Tax Revenue 5341000 Contingency for potential revenue lost prior to the 2009 adoption of a modern utility users tax ordinance. Capital Improvement Projects Fund: Capital Improvement 113541346 Reserves set aside for future capital projects. Infrastructure 1100000 Funds set aside for citywide infrastructure improvements. Total Fund Balances Assigned to Reserves $ 161788,346 51 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 8 - NET ASSETS AND FUND BALANCES (Continued) Fund balances for all major and nonmaj or governmental funds as of June 30, 2011, were classified as follows: Stevens Public Capital Creek Other Facilities Tmnrnvement Corridor Govemmental Nons pendable: Loans receivable Prepaid items Land held for development Subtotal Restricted for: Public access television Debt service Storm drain system Parks and open space Environmental management Streets and road projects Housing programs Redevelopment Low and moderate income housing Subtotal As s igned to: General government Capital projects Subtotal Unas s igned Total $ 9531)070 $ - $ - $ - $ - $ 953,070 701) 880 - - - - 70,880 - - - - 615!1000 615!)000 1,023,950 - - - 615,000 17,638,950 6635254 - - - - 663,254 - 58,213 - - - 58,213 - - - - 869,447 869,447 - - - - 561,889 56109 - - - - 258,390 258,390 - - - - 11)2831)527 11)2831527 - - - - 2,102,131 2,102,131 - - - - 1,016,594 1,0161)594 - - - - 163,915 163M5 663,254 58,213 - - 6,255,893 6,977,360 14,739,394 - - - - 14,739,394 - - 3,546,686 690,934 66,202 4,303,822 141)7391)394 - 31)546,686 690,934 661)202 19,043,216 3,380,279 - 52 3,380,279 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 9 - COMMITMENTS AND CONTINGENCIES (a) Federal and State Grant The City participates in a number of federal and state grant programs subject to financial and compliance audits by the grantors or their representatives. Audits of certain grant programs, including those for the year ended June 30, 2011, have yet to be conducted. The amount, if any, of expenditures that may be disallowed by the granting agencies cannot be determined at this time. Management believes that such disallowances, if any, would not have a material effect on the financial statements. (b) Encumbrances The City uses encumbrances to control expenditure commitments for the year. Encumbrances represent commitments related to executed contracts not yet performed and purchase orders not yet filled. Commitments for such expenditure of monies are encumbered to allocate a portion of applicable appropriations. Encumbrances still open at year end are not accounted for as expenditures and liabilities, but as restricted or assigned fund balance. As of June 30, 2011, the City had the following encumbrances outstanding: Governmental Funds: General Fund $ 305,394 Capital Improvement Projects Fund 4941816 Stevens Creek Corridor Park Fund 2291514 Other Governmental Funds 1,1521305 Total encumbrances $ 251821029 (c) Lease Agreement with County of Santa Clara The City has an agreement, expiring in 2019, to lease a building to the County of Santa Clara for the purpose of providing library service to the City's residents. The lease requires a minimum annual payment of $120,000 adjusted for Cupertino's portion of book circulation and increase of assessed valuation. This is an operating lease with a renewable option. At June 3 0, 2011, the cost and carrying value of the building which opened in October 2004, is $21,935,325 and $16,668,443 respectively, with $5,266,882 in accumulated depreciation. (d) Consulting Agreement for Sales Taxes The City entered into agreements with two companies to provide services consisting of the assessment and creation of new sales and use tax revenue sources for the City. The City agreed to pay the two companies based on a sliding scale payment schedule dependent on the level of new sales tax revenue realized by the City as defined in the consulting agreements. The agreement with one of the companies expired on June 30, 2011 while the agreement with the other company will expire by June 30, 2012. 53 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued) (e) Continuation of the Redevelopment Agency In June 2011, the California legislature adopted Assembly Bill lx 26 ("AB I x 26" or the "Dissolution Bill ") and Assembly Bill Ix 27 ("ABIx 27" or the "Continuation Bill "). The Dissolution Bill immediately suspends all new redevelopment activities and incurrence of indebtedness, and dissolves redevelopment agencies effective October 1, 2011. However, the Continuation Bill allows redevelopment agencies to avoid dissolution by "opting" into an alternative voluntary redevelopment program ( "Voluntary Program "), requiring substantial annual contributions to local school and special districts. On September 20, 2011, City Council adopted an ordinance to "opt into the Voluntary Program" and will be required to make a contribution of $528,802 by January 15, 2012 for fiscal year 2011 -12. Ongoing contributions of a lesser magnitude will be required going forward. On July 18, 2011, the California Redevelopment Association and the League of California Cities, along with certain other petitioners, filed a lawsuit asking the California Supreme Court to overturn AB 1 x 26 and AB 1 x 27 as they violate the Constitution of California. The California Supreme Court announced it would hear the lawsuit and issued a partial stay suspending the effectiveness of AB 1 x 26 and AB 1 x 27 until it can rule on the constitutionality of these two bills. The Court allowed the Dissolution Bill to remain in effect insofar as it precludes existing redevelopment agencies from incurring new indebtedness, transferring assets, acquiring real property, entering into new contracts or modifying existing contracts, entering into new partnerships, adopting or amending redevelopment plans, etc., but it stayed enforcement of both statutes in all other respects. The Court also states in its order that "the briefing schedule is designed to facilitate oral argument as early as possible in 2011, and a decision before January 15, 2012," which is the date that the Voluntary Program contributions are due. At this time, due to the Court's involvement, redevelopment operations are effectively placed on hold pending the outcome of the litigation, including whether or not the City will make the contribution required under the Voluntary Program. (fl Housing Trust Under Health & Safety Code Section 33334.3, the Agency is obligated to expend monies in the Agency's Low and Moderate Income Housing Fund for the purposes of increasing, improving, and preserving the community supply of housing available at affordable housing cost to low and moderate income households, lower income households, very low income households, and extremely low income household. Under Health & Safety Code Section 33220, The Agency is authorized to enter into agreements to assist the Agency in performing powers and obligations under the California Redevelopment Law. On February 15, 2011, the City and Agency entered into an Affordable Housing Agreement with the Housing Trust of Santa Clara County, a California nonprofit public benefit corporation (Trust). The City and the Agency agreed to contribute $1,000,000 to the Trust from the Agency's Low and Moderate Income Housing Fund for the fiscal year ended June 30, 2011 and an amount not to exceed $250,000 annually for the next fifteen subsequent years. The Trust shall use the funds received exclusively for eligible costs pursuant to the California Redevelopment Law while the City and the Agency will provide on -going monitoring and complete all required reporting requirements to the State of California. For the fiscal year ended June 30, 2011, the Agency transferred $1,000,000 into the Trust and the expenditure is recorded as part of community development expenditures in the basic financial statements. 54 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 10 - LIABILITIES UNDER SELF - INSURANCE AND RISK MANAGEMENT (a) General and Property Liability The City is self - insured for the first $250,000 of general and property liability for each occurrence, and the excess (up to $10,000,000 for each occurrence and annual aggregate) is covered through the City's participation in the Association of Bay Area Governments Pooled Liability Assurance Network (ABAG PLAN). The risk pool consists of 31 agencies within the San Francisco Bay Area. The stated purpose of the ABAG PLAN is to provide certain levels of liability insurance coverage, claims management, risk management services, and legal defense to its participating members. ABAG PLAN is governed by a Board of Directors, which comprises officials appointed by each participating member. Premiums paid to ABAG are subject to possible refund based on the results of actuarial studies and approval by the Board of Directors. Complete financial statements for ABAG PLAN may be obtained from their offices at the following address: ABAG PLAN, Finance Department, P.O. Box 2050, Oakland, CA 94604. Premiums are revised each year based on the City's claims experience and risk exposure. For the year ended June 3 0, 2011, the City paid ABAG PLAN premiums of $182,5 83. (b) Workers' Compensation Liability The City belongs to the CSAC Excess Insurance Authority (EIA), a joint power authority which provides excess workers' compensation liability claims coverage above the City's self - insured retention of $500,000 per occurrence. Losses above the self - insured retention are pooled with excess reinsurance purchased to a $50,000,000 statutory limit. EIA was established in 1979 for the purpose of creating a risk management pool for all California public entities. EIA is governed by a Board of Directors consisting of representatives of its member public entities. Complete financial statements for EIA may be obtained from their offices at the following address: CSAC Excess Insurance Authority, Finance Department, 75 Iron Point Circle, Suite 200, Folsom, CA 95630. For the year ended June 30, 2011, the City paid premiums of $50,033 to EIA. It is the City's practice to obtain biennial actuarial studies for the self - insured workers' compensation liability. The claims liabilities included in the workers' compensation internal service fund is based on the results of actuarial studies and include amounts for claims incurred but not reported and loss adjustment expenses. Claim liabilities are calculated considering the effects of inflation, recent claim settlement trends, including frequency and amount of payouts, and other economic and social factors. Inflation of 2.5 %, annual rate of return of 3 %, claim severity increase at 2.5% were assumed. In the current year, management used actuarial estimates based on an 80% confidence level. Settlements have not exceeded insurance coverage in the past three years. Changes in the balances of workers' compensation claims liabilities during the years ended June 30, 2011 and 2010 are as follows: Unpaid claims, beginning of year Incurred claims and changes in estimate Claim payments and credits Unpaid claims, end of year Less current portion Non - current portion W 2011 2010 11633,943 $ 1,56800 244,857 2321696 (226,847) (166,753) 1,651,953 1,633,943 (388,594) (376,037) $ 1,263,359 $ 1,257,906 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 11 - DEFINED BENEFIT PENSION PLAN (h) (c) Plan Description Substantially all City employees are eligible to participate in pension plans offered by California Public Employees Retirement System (CalPERS), an agent multiple employer defined benefit pension plan which acts as a common investment and administrative agent for its participating member employers. Ca1PERS provides retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. The City's employees participate in the Miscellaneous Employee Plan (Plan). Benefit provisions under the Plan are established by State statute and City resolution. Benefits are based on years of credited service and compensation. Audited annual financial statements are available from Ca1PERS at www.calpers.ca.gov. Funding Policy The contribution requirements of plan members and the City are established and may be amended by Ca1PERS. The City is required to contribute at an actuarially determined rate. Based on the June 3 0, 2008 actuarial report, the Plan's provisions and benefits in effect at June 3 0, 2011, are summarized as follows: Benefit vesting schedule Benefit payments Eligible retirement age Benefits, as a % of annual salary multiplied by years of service and annual salary Required employee contribution rates Required employer contribution rates 5 years service Monthly for life 50 with at least 5 years of credited service 2%-2.7% 8% 16.751% The City covered 75% of the employees' required payroll contributions for fiscal year 2011. The City uses the actuarially determined percentages of payroll to calculate and pay 100% of the required contributions to Ca1PERS. This results in no net pension obligations or unpaid contributions. Annual Pension Cost The required contribution was determined as part of June 30, 2008 actuarial valuations using the entry age normal method. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses), (b) projected annual salary increases ranging from 3.25% to 14.45% and (c) 3.25% per year cost -of- living adjustments. Both (a) and (b) included an inflation component of 3.0 %. The actuarial value of Ca1PERS assets was determined using techniques that smooth the effects of short - term volatility in the market value of investments over a fifteen -year period. The excess of the total actuarial accrued liability over the actuarial value of plan assets is called the unfunded actuarial accrued liability. Funding requirements are determined by adding the normal cost and an amortization of the unfunded liability as a level percentage of assumed future payrolls. Initial unfunded liabilities are amortized over a closed period that depends on the plan's date of entry into Ca1PERS. Subsequent plan amendments are amortized as a level percentage of pay over a closed 20 -year period. Gains and losses that occur in the operation of the plan are amortized over a 30-year rolling period, which results in an amortization of about 6% of unamortized gains or losses each year. 56 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 11 - DEFINED BENEFIT PENSION PLAN (Continued) Recent Annual Pension Costs, which equal the Annual Required Contribution to CALPERS, were as follows: Fiscal Year 06/30/2009 06/30/2010 06/30/2011 (d) Funded Status and Funding Progress Annual Pension Cost (APC) $ 1,835,521 1,841,350 2,088,898 Percent of APC Contributed 100% 100% 100% The CalPERS' Board of Administration adopted updated actuarial assumptions to be used beginning with the June 30, 2009 valuation. Nearly all of the demographic assumptions have changed, including salary increase assumptions (3.55% to 14.45% depending on Age, Service, and type of employment) and rates for mortality, disability, termination and retirement. As of the June 30, 2009 actuarial valuation, the change in assumptions resulted in a $3.5 million increase in the unfunded actuarial accrued liability for the City to be amortized over a closed 20 -year period. In June 2009, the CalPERS' Board adopted changes to the asset smoothing method as well as changes to the Board policy on the amortization of gains and losses in order to phase in over a three year period the impact of the 24% investment loss experienced by CalPERS in fiscal year 2008 -2009. The following changes were adopted: • Increase the corridor limits for the actuarial value of assets from 80% -120% of market value to 60% -140% of market value on June 30, 2009. • Reduce the corridor limits for the actuarial value of assets to 70%-130% of market value on June 3 0, 2010. • Return to the 80% -120% of market value corridor limits for the actuarial value of assets on June 30, 2011 and thereafter. • Isolate and amortize all gains and losses during fiscal year 2008 -2009, 2009 -2010, and 2010 -2011 over fixed and declining 30-year periods (as opposed to the current rolling 30-year amortization). As of the June 30, 2009 actuarial valuation, the change in "special" investment assumptions resulted in a $2.7 million increase in the unfunded actuarial accrued liabilities for the City that will be amortized over fixed and declining 30 year periods. 57 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 11 - DEFINED BENEFIT PENSION PLAN (Continued) (e) Funded Status and Funding Progress (Continued) The other significant actuarial assumptions used to prepare the City's June 30, 2009 actuarial valuation include the following: Valuation date: ARC: Actuarial Cost Method: Amortization Method: Average Remaining Period Asset Valuation Method: Actuarial Assumptions: Investment Rate of Return: Projected Salary Increases: Inflation: Payroll Growth: Individual Salary Growth: June 30, 2009 Determined for fiscal year 2011/2012 Entry Age Normal Cost Method Level percent of payroll 22 Years as of the Valuation Date 15 Year Smoothed Market 7.75% (net of administrative expenses) 3.55% to 14.45% depending on Age, Service, and type of employment 3.00% 3.25% A merit scale varying by duration of employment coupled with an assumed annual inflation growth of 3.00% and an annual production growth of 0.25 %. CalPERS' latest available actuarial data and funding progress are set forth below at their actuarial valuation date as of June 30, 2009. Actuarial accrued liability (AAL) $ 74,955,504 Actuarial value of plan assets 57,934,851 Unfunded actuarial accrued liability (UAAL) $17,020,653 Funded ratio (actuarial value of plan assests /AAL) 77.3% Covered payroll (active plan members) $11,668,964 UAAL as a percentage of covered payroll 145.9% Actuarial valuations of an on -going plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Amounts determined regarding the funded status of the plan and the annual required contribution of the City are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi -year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. 58 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 12 -OTHER POST EMPLOYMENT BENEFITS (OPEB) (a) Plan Description Permanent employees who retire under the City's CalPERS retirement plan are, pursuant to their respective collective bargaining agreements, eligible to have their medical insurance premiums paid by the City. Retirees receive the amount necessary to pay the cost of his /her enrollment, including the enrollment of his /her family members, in a health benefit plan provided by CalPERS up to the maximum received by active employees in their respective bargaining unit. The City contracts with CalPERS for this insured - benefit plan established under the state Public Employees' Medical and Hospital Care Act (PEMHCA). The plan offers employees and retirees three CalPERS' self - funded options, setup as insurance risk pools, or offers various third -party insured health plans. The plan's medical benefits and premium rates are established by CalPERS and the insurance providers. The City contribution is established by City resolution. Retirees and active employees pay the difference between the premium rate and the City's contribution. Premiums and City contributions are based on the plan and coverage selected by actives and retirees, with the City's potential contribution ranging from zero to $1,326 per month per employee or retiree. The responsibility for benefit payments has transferred to the insurers and the City does not guarantee the benefits in the event of default by the insurers. A comprehensive annual financial report of CalPERS, inclusive of their benefit plans, is available at www.calvers.ca.gov. The City participates in the Public Agency Retirement System (PARS) Public Agencies Post Retirement Health Care Plan Trust Program (PARS Trust), an agent- multiple employer irrevocable trust established to fund other postemployment benefits. The PARS Trust is approved by the Internal Revenue Code Section 115 and invests funds in equity, bond, and money market mutual funds. Copies of PARS Trust annual financial report may be obtained from PARS at 4350 Von Karman Avenue, Suite 100, Newport Beach, CA 92660. A separate report for the City's portion of the PARS Trust is available at the City's Finance Department. An employee is eligible for lifetime medical benefits under the OPEB Plan, along with his /her spouse or declared domestic partner at the time of retirement, if all criteria listed below are met: • The employee was hired or the City Council member was elected prior to August 1, 2004, and the employee has five or more full -time years of service and the City Council member has five or more years of elected service with the City of Cupertino; or • The employee was hired or the City Council member was elected on or after August 1, 2004, and the employee has ten or more full -time and /or elected years of CalPERS service, five years of which must be from the City of Cupertino; and • The employee is eligible for retirement as defined under the CalPERS retirement system; and • The employee retires from the City of Cupertino. In addition, the eligible employee's dependent children at the time of retirement who are under 23 years old are eligible for medical benefits. In addition to extending the eligibility of dependents from age 23 to age 26 in accordance with the recent healthcare reform act, effective July 1, 2010, employees that retire or resign from service with the City of Cupertino and who are not eligible for retiree medical benefits can continue on the City's medical and dental plans provided that they pay the premiums in full. 59 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 12 -OTHER POST EMPLOYMENT BENEFITS (OPEB) (Continued) (b) Funding Policy The contribution requirements to the OPEB Plan are established through budget adoption and may be amended by the City Council. The cost of the benefits provided by the OPEB Plan is currently being paid by the City on a fully pre- funded basis. The City has expressed intent to fully fund the annual required contribution (ARC) each year. Based on the actuarial valuation date of January 1, 2011, the annual required contribution rate is 14.20% of annual covered payroll. For the year ended June 30, 2011, the City contributed $2,000,000 to the PARS Trust and paid $688,723 in healthcare premium payments to fully pre -fund OPEB Plan. (c) Annual OPEB Cost Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of certain events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The other significant actuarial assumptions used to prepare the City's January 1, 2011 actuarial valuation include the following: Valuation date: January 1, 2011 Actuarial Cost Method: Entry Age Normal Cost Method Amortization Method: Level percent of payroll (assuming 3.25% per year growth in total payroll) Closed initial 20 years period. At January 1, 2011, remaining amortization Amortization Period: period is 18 years. Asset Valuation Method: Market value Actuarial Assumptions: Investment Rate of Return: 6.00% (net of investment expenses) Projected Salary Increases: 3.25% Inflation: 3.00% Assumed annual rates of future pay increases are based on the current Increases in Pay: CalPERS age and service based assumptions. Medical Inflation: Year Gross Medical City Maximum 2011 10.0% 3.5% 2012 8.0% 3.5% 2013 7.0% 3.5% 2014 6.0% 3.5% 2015 5.0% 3.5% 2016+ 5.0% 3.5% 60 CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 12 -OTHER POST EMPLOYMENT BENEFITS (OPEB) (Continued) (c) Annual OPEB Cost (Continued) In addition, PEMHCA is a community -rated plan, where the same premiums apply for all plan participants regardless of the presence or number of active employees. There is no implicit rate subsidy in the premiums for pre- Medicare retirees. The City's annual OPEB cost and actual contributions to the OPEB Plan for the past three years are as follows: Annual Percentage Net OPEB Fiscal Year OPEB Actual of AOC Obligation Year Ended Cost (AOC) Contribution Contributed (Asset) 6/30/2009 $ 214751000 $ 6471923 26% $ 118271077 6/30/2010 210431000 716161760 373% (3,746,683) 6/30/2011 118701000 216881723 144% (4,565,406) The City's Net OPEB asset is recorded in the Retiree Medical Internal Service Fund and is calculated as of June 30, 2011 as follows: Annual required contribution $ 1,83700 Interest on prior year net OPEB asset (225,000) Adjustment to annual required contribution 25800 Annual OPEB Cost 118701000 Contribution made (2,688,723) Increase in net OPEB asset (818,723) Net OPEB obligation (asset) - beginning of year (3,7461683) Net OPEB obligation (asset) - end of year $ (4,565,406) (d) Funded Status and Funding Progress The latest available actuarial data and funding progress are set forth below at their actuarial valuation date of January 1, 2011. Actuarial accrued liability (AAL) Actuarial value of plan assets Unfunded actuarial accrued liability (UAAL) Funded ratio (actuarial value of plan assests /AAL) Covered payroll (active plan members) UAAL as a percentage of covered payroll 61 $ 201869,058 7 A 1 Q QA 1 $ 131430,717 35.6% $ 1217241000 105.6% CITY OF CUPERTINO Notes to Basic Financial Statements For the Year Ended June 30, 2011 NOTE 12 -OTHER POST EMPLOYMENT BENEFITS (OPEB) (Continued) (d) Funded Status and Funding Progress (Continued) Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with long -term perspective of the calculations. The schedule of funding progress, presented as required supplemental information following the notes to basic financial statements, presents multi -year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. NOTE 13 — CONCENTRATION RISK The City has an economic dependency on revenues generated directly or indirectly from one major taxpayer. For the year ended June 30, 2011, more than 10% of the City General Fund's total revenues are derived from one taxpayer. The City's operations would be adversely impacted if there are any significant declines in revenues received from the taxpayer. NOTE 14 — SUBSEQUENT EVENTS (a) Land Held for Redevelopment On July 1, 2010, the City entered into a Disposition and Development Agreement (DDA) with a developer. In accordance with the DDA, the City will transfer the land held for redevelopment in the amount of $615,000 to the developer at no cost for the purpose of developing four single- family detached homes at an affordable price to very low income homebuyers. At September 13, 2011, the City transferred the property to the developer. (b) Credit Ratings Downgrade On August 5, 2011, Standard & Poor's lowered its long -term credit rating on debt of the United States government from AAA to AA +. That action affected Standard & Poor's view of United States public finance debt instruments that are directly or indirectly backed by the United States government. These credit downgrades impact the credit risk associated with the City's investments in U.S. Treasury securities. 62 Schedule of Funding Progress — Defined Benefit Other Post Employment Benefits Plan: CITY OF CUPERTINO Unfunded as Required Supplementary Information (Unaudited) Actuarial Actuarial Actuarial Accrued Schedules of Funding Progress Valuation Asset Liability- Liability — For the Year Ended June 30, 2011 Value Fntry Age Schedule of Funding Progress — CalPERS Defined Benefit Retirement Miscellaneous Plan: $ - Actuarial Actuarial Accrued Accrued - Percentage Valuation Asset Liability- Liability — Funded Covered of Covered Date Value Entry Age UAAL Ratio Payroll Payroll 6/30/2007 $ 50,157,077 $ 59,241,300 $ 9,084,223 84.7% $ 10,751,350 84.5% 6/30/2008 54,571,233 65,337,134 10,765,901 83.5% 11A%984 97.8% 6/30/2009 57,934,851 74,955,504 17,020,653 77.3% 11,668,964 145.9% Schedule of Funding Progress — Defined Benefit Other Post Employment Benefits Plan: 63 UAAL Unfunded as Actuarial Actuarial Actuarial Actuarial Accrued Accrued Valuation Asset Liability- Liability — Date Value Fntry Age UAAL 1 / 1/20 07 $ - $ 21,98 1, 544 $ 21,98 1, 544 1/1/2009 - 18 ^%366 18 ^%366 1/1/2011 7,438,341 20,869,058 13,430,717 63 UAAL as Percentage Funded Covered of Covered Ratio Payroll Payroll 0.0% $ 11,118,000 197.7% 0.0% 11, 892,000 151.9% 35.6% 12,724,000 105.6% This page left intentionally blank. 64 MAJOR GOVERNMENTAL FUNDS OTHER THAN THE GENERAL FUND AND SPECIAL REVENUE FUNDS This section is provided for the presentation of Budget -to- Actual Statements for the Public Facilities Corporation Debt Service Fund. Although the fund is considered to be a major government fund, GASB Statement 34 states that budget -to- actual information in the basic financial statements should be limited to the General Fund and major Special Revenue Funds. All other major governmental fund schedules with such information should be included as Supplementary Information. Public Facilities Corporation Debt Service Fund - Accounts for the accumulation of resources for and the payments of principal and interest on certificates of participation issued in 2002 to advance refund debt that was previously issued to finance the City Hall, Library, Wilson Park and Memorial Park projects. 65 CITY OF CUPERTINO Public Facilities Corporation Debt Service Fund Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual For the Year Ended June 3 01 2011 Revenues: Use of money and property Total revenues Expenditures: Debt service: Principal Interest and fiscal charges Total expenditures Excess (deficiency) of revenues over (under) expenditures Other financing sources: Transfers in Change in fund balance Fund balance, beginning of year Fund balance, end of year Variance Positive Budget Actual (Negative) $ 21000 $ - $ (21000) 21000 - (21000) 115001000 115001000 - 2,034,964 210321464 21500 315341964 315321464 21500 (31532,964) (31532,464) 500 315331000 315331000 - $ 36 536 $ 500 57,677 $ 58,213 66 NONMAJOR GOVERNMENTAL FUNDS All funds not considered as major funds on the Fund Financial Statements are consolidated in one column entitled "Other Governmental Funds." These nonmajor funds are identified and included in this supplementary section and includes all of the City's Special Revenue Funds and one Capital Project Fund. The Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specified purposes. Storm Drain Improvement - Accounts for the construction and maintenance of storm drain facilities including drainage and sanitary sewer facilities. Revenues were collected from developers as a result of connections to the storm drainage sewer system. Park Dedication - Accounts for the activity granted by the business and professions code of the State of California in accordance with the open space and conservation element of the City's General Plan. Revenues of this fund are restricted for the acquisition, improvement, expansion and implementation of the City's parks and recreation facilities. Environmental Management /Clean Creeks - Accounts for all activities related to operating the non -point source pollution program. Transportation - Accounts for the City's gas tax, sales tax and grant revenues and expenditures related to the maintenance and construction of City streets. All revenue in this fund is restricted exclusively for street and road purposes including related engineering and administrative expenditures. Housing Development - Accounts for the Federal Housing and Community Development Grant Program activities administered through the County. Monies collected from developers that mitigate the impact of housing needs are also included. Monies in this fund are governed by the program's rules. Redevelopment Agency — Accounts for the Vallco project area and low and moderate income housing funds. Capital Projects Funds account for the financial resources committed to the acquisition or construction of major capital facilities. Don Burnett Bicycle - Pedestrian Bridge — Formerly known as the Mary Avenue Bicycle Footbridge. Accounts for the design and construction of a bicycle footbridge extension of Mary Avenue over Interstate 280. It includes gateways, paths, residential buffering elements, and landscaping. 67 CITY OF CUPERTINO Nonmaj or Governmental Funds Combining Balance Sheet June 30, 2011 68 Special Revenue Funds Storm Environment Drain Park Management/ Housing Improvement Dedication Clean Creeks Transportation Development Assets: Cash and investments $ 869,286 $ 560,894 $ 265,639 $ 1,330,713 $ 1,483,407 Accounts receivable - - - 14401 204,100 Intergovernmental receivable 1,541 995 472 2,359 2,631 Loans receivable - - - - 775,834 Land held for housing development - - - - 61500 Total assets $ 870,827 $ 56109 $ 266,111 $ 1,477,733 $ 300,972 Liabilities and fund balances: Liabilities: Accounts payable and accruals $ - $ - $ 205 $ 126,192 $ 229,120 Accrued payroll and benefits 1,380 - 4,916 11,363 5,119 Deferred revenue - - - 56,651 12902 Total liabilities 1,380 - 7,721 194,206 363,841 Fund balances: Nonspendable - - - - 61500 Restricted 869,447 56109 258,390 1,283,527 2,102,131 Assigned - - - - - Total fund balances 869,447 56109 258,390 1,283,527 2,717,131 Total liabilities and fund balances $ 870,827 $ 56109 $ 266,111 $ 1,477,733 $ 300,972 68 Special Capital Revenue Funds Projects Fund Don Burnett Redevelopment Bicycle - Agency Pedestrian Bridge Total $ 1,191,827 $ 67,894 $ 5,76900 - - 348,761 285 - 8,283 - - 775,834 - - 61500 $ 1,192,112 $ 67,894 $ 7,517,538 $ 507 $ 1,692 $ 365,416 5,996 - 28,774 - - 186,253 11,603 1,692 580,443 - - 61500 1,180,509 - 6,255,893 - 66,202 66,202 1,180,509 66,202 6,937,095 $ 1,192,112 $ 67,894 $ 7,517,538 69 CITY OF CUPERTINO Nonmaj or Governmental Funds Combining Statement of Revenues, Expenditures and Changes in Fund Balances For the Year Ended June 30, 2011 Revenues: Taxes Use of money and property Intergovernmental Charges for services Other Total revenues Expenditures: Current: Community development Public works Capital outlay Total expenditures Excess (deficiency) of revenues over (under) expenditures Other financing sources: Transfers in Change in fund balances Fund balances, beginning of year Fund balances, end of year Special Revenue Funds Storm Environment Drain Park Management/ Housing Improvement Dedication Clean Creeks Transportation Development $ 201101 $ 1101250 $ - $ - $ 231939 61350 41030 738 111017 281892 - - - 114271463 6381134 - 21860 3631747 - - - - - - 151000 26,451 1171140 3641485 114381480 7051965 - - - - 9051918 821142 - 3941680 6051858 - 35,087 - - 212581515 - 117,229 - 3941680 218641373 9051918 (90,778) 1171140 (30,195) (11425,893) (199,953) - - 1351000 7501000 - (90,778) 1171140 1041805 (675,893) (199,953) 9601225 4441749 1531585 119591420 219171084 $ 8691447 $ 5611889 $ 2581390 $ 112831527 $ 217171131 70 Special Capital Revenue Funds Projects Fund Don Burnett Redevelopment Bicycle - Agency Pedestrian Bridge Total $ 112511777 $ - $ 114061067 131025 - 641052 - - 210651597 - - 3661607 - - 15,000 112641802 - 319171323 115491980 - 214551898 - 17 110821697 - 531625 213471227 115491980 531642 518851822 (285,178) (53,642) (11968,499) - - 8851000 (285,178) (53,642) (11083,499) 114651687 1191844 810201594 $ 111801509 $ 661202 $ 619371095 71 CITY OF CUPERTINO Nonmaj or Governmental Funds - Special Revenue Funds Statements of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual For the Year Ended June 30, 2011 72 Storm Drain Improvement Park Dedication Variance Variance Positive Positive Budget Actual (Negative) Budget Actual (Negative) Revenues: Taxes $ 5000 $ 20,101 $ (29,899) $1,500,000 $ 110,250 $ (1,3 89,750) Use of money and property 3400 6,350 (27,650) 2000 4,030 (15,970) Intergovernmental - - - - - - Charges for services - - - - 2,860 2,860 Other - - - - - - Total revenues 8400 26,451 (57,549) 1,52000 117,140 (1,402,860) Expenditures: Current: Community development - - - - - - Public works 82,424 82,142 282 - - - Capital outlay 982,701 3507 947,614 - - - Total expenditures 1,065,125 117,229 947,896 - - - Excess (deficiency) of revenues over (under) expenditures (981,125) (90,778) 890,347 1,52000 117,140 (1,402,860) Other financing sources (uses): Transfers in - - - - - - Transfers out - - - - - - Total other financing sources (uses) - - - - - - Change in fund balances $ (981,125) (90,778) $ 890,347 $1,520,000 117,140 $ (1,402,860) Fund balances, beginning of year 960,225 444,749 Fund balances, end of year $ 869,447 $ 56109 72 Environmental Management / Clean Creeks Transportation Housing Development Variance Variance Variance Positive Positive Positive Budget Actual (Negative) Budget Actual (Negative) Budget Actual (Negative) $ - $ 70,000 $ 23,939 $ (46,061) 200 738 (1,262) 30,000 11,017 (18,983) 120,000 28,892 (91,108) - - - 2,28000 1,427,463 (852,537) 724,640 638,134 (86,506) 365,000 363,747 (1,253) - - - - - - - - - - - - - 15,000 15,000 367,000 364,485 (2,515) 2,31000 1,438,480 (871,520) 914,640 705,965 (208,675) - - - - - - 1,463,281 905,918 557,363 529,115 39400 134,435 72608 605,858 120,950 - - - - - - 3,69604 2,258,515 1,437,489 - - - 529,115 39400 134,435 4,422,812 2,864,373 1,558,439 1,463,281 905,918 557,363 (162,115) (30,195) 131,920 (2,112,812) (1,425,893) 686,919 (548,641) (199,953) 34808 135,000 135,000 - 750,000 750,000 - - - - 135,000 135,000 - 750,000 750,000 - - - - $ (27,115) 10405 $ 131,920 $ (1,362,812) (675,893) $ 686,919 $ (548,641) (199,953) $ 348,688 153,585 1,959,420 2,91704 $ 258,390 $1,283,527 $ 2,717,131 (Continued) 73 CITY OF CUPERTINO Nonmaj or Governmental Funds - Special Revenue Funds Statements of Revenues, Expenditrues and Changes in Fund Balances - Budget and Actual For the Year Ended June 30, 2011 Revenues: Taxes Use of money and property Intergovernmental Charges for services Other Total revenues Expenditures: Current: Community development Public works Capital outlay Total expenditures Excess (deficiency) of revenues over (under) expenditures Other financing sources (uses): Transfers in Transfers out Total other financing sources (uses) Change in fund balances Fund balances, beginning of year Fund balances, end of year 74 Redevelopment Agency Variance Positive Budget Actual (Negative) $ 1,25600 $ 1,251,777 $ (4,223) 3000 13,025 (16,975) 1,28600 1,26402 (21,198) 2,249,849 1,549,980 699,869 2,249,849 1,549,980 699,869 (963,849) (285,178) 678,671 $ (963,849) (285,178) $ 678,671 1,465,687 $ 1,180,509 INTERNAL SERVICE FUNDS The Internal Service Funds are used to account for the financing of goods or services provided by one department to other departments of the City on a cost reimbursement basis. The concept of major funds does not extend to internal service funds because they do not do business with outside parties. For the Statement of Activities, the net revenues and expenses of each internal service fund are eliminated by netting them against the operations of the City departments that generated them. The remaining balance sheet items are consolidated with these same funds in the Statement of Net Assets. However, internal service funds are still presented separately in the Fund Financial Statements. Information Technology - Accounts for the activities related to the maintenance and replacement of the City's technology infrastructure. Workers' Compensation - Accounts for the activities in support of the self - insured workers' compensation program. Equipment - Accounts for the activities related to the maintenance and replacement of the City's vehicle fleet. Compensated Absences and Long -Term Disability - Accounts for the activities related to the City's program for compensated absences payouts and long -term disability. Retiree Medical - Contains funds set aside for other post employment retirement benefits. W CITY OF CUPERTINO Internal Service Funds Combining Statement of Net Assets June 30, 2011 76 Compensated Absences and Information Workers' Long -Term Retiree Technology Compensation Equipment Disability Medical Total Assets: Current assets: Cash and investments $ 2,675,622 $ 1,941,121 $ 116941075 $ 1981748 $ 8401308 $ 713491874 Accounts receivable - 91000 - - - 91000 Interest receivable 41744 31418 31004 352 11489 131007 Prepaid items 171948 - - - - 171948 Total current assets 216981314 119531539 116971079 1991100 8411797 713891829 Noncurrent assets: Advances to other funds - - 5041497 - - 5041497 Net OPEB assets - - - - 415651406 415651406 Capital assets: Depreciable, net of accumulated depreciation 2971357 - 6351330 - - 9321687 Total noncurrent assets 2971357 - 111391827 - 415651406 610021590 Total assets 219951671 119531539 218361906 1991100 514071203 1313921419 Liabilities: Current liabilities: Accounts payable and accruals 171893 - 51505 - - 231398 Accrued payroll and benefits 161888 769 91729 - - 271386 Compensated absences - - - 341927 - 341927 Claims payable - 3881594 - - - 3881594 Total current liabilities 341781 3891363 151234 341927 - 4741305 Noncurrent liabilities: Compensated absences, net of current portion 371966 - 121007 - - 491973 Claims payable, net of currrent portion - 112631359 - - - 112631359 Total liabilities 721747 116521722 271241 341927 - 117871637 Net assets: Invested in capital assets 2971357 - 6351330 - - 9321687 Unrestricted 216251567 3001817 211741335 1641173 514071203 1016721095 Total net assets $ 2,922,924 $ 3001817 $ 2,809,665 $ 1641173 $ 5,407,203 $ 1116041782 76 CITY OF CUPERTINO Internal Service Funds Combining Statement of Revenues, Expenses and Changes in Fund Net Assets For the Year Ended June 30, 2011 Operating reveneus: Charges for services Operating expenses: Salaries and related expenses Materials and supplies Contractual services Insurance claims and premium Depreciation Total operating expenses Operating income (loss) Nonoperating revenues: Investment income Income (loss) before transfers Transfers in Change in net assets Net assets, beginning of year Net assets, end of year $ 2,922,924 $ 300,817 $ 20905 $ 164,173 $ 5,407,203 $11,604,782 77 Compensated Absences and Information Workers' Long -Term Retiree Technology Compensation Equipment Disability Medical Total $ 1,26800 $ 412,547 $ 1,09100 $ 67,854 $ - $ 2,840,201 504,206 23,554 368,328 12206 1,870,000 208,894 126,958 - 260,365 - - 387,323 295,848 2,250 144,514 - 1000 452,612 - 294,890 - 72,139 - 367,029 235,267 - 186,396 - - 42103 1,162,279 320,694 95903 194,945 10000 4,517,521 106,521 91,853 131,397 (127,091) (1,88000) (1,677,320) 1706 13,444 12,331 1,246 11,697 56,384 124,187 105,297 143,728 (125,845) (1,868,303) (1,620,936) 474,283 - - 22500 1,500,000 2,199,283 598,470 105,297 143,728 99,155 (368,303) 578,347 2,324,454 195,520 205,937 65,018 5,775,506 11,026,435 $ 2,922,924 $ 300,817 $ 20905 $ 164,173 $ 5,407,203 $11,604,782 77 CITY OF CUPERTINO Internal Service Funds Combining Statement of Cash Flows For the Year Ended June 30, 2011 operating activities $ 344,389 $ 98,966 $ 296,262 $ (108,848) $ (2,698,723) $ (2,067,954) 78 Compensated Absences and Information Workers' Long -Term Retiree Technology Compensation Equipment Disability Medical Total Cash flows from operating activities: Cash received from customers $1,268,800 $ 403,547 $1,091,000 $ 67,854 $ - $ 2,831,201 Cash payments to suppliers for goods and services (428,778) (2,250) (428,047) - (10,000) (869,075) Cash payments for employees (495,633) (23,436) (366,691) (104,563) (2,688,723) (3,679,046) Cash payments for judgment and claims - (278,895) - (72,139) - (351,034) Cash flows provided by (used in) operating activities 344,389 98,966 296,262 (108,848) (2,698,723) (2,067,954) Cash flows from noncapital financing activities: Transfers in 474,283 - - 22500 1,50000 2,199,283 Cash flows provided by noncapital financing activities 474,283 - - 22500 1,50000 2,199,283 Cash flows from capital and related financing activities: Acquisition of capital assets (161,969) - (187,450) - - (349,419) Cash flows from investing activities: Interest received 12,922 10,026 9,327 894 10,208 43,377 Net change in cash and cash equivalents 669,625 108,992 118,139 117,046 (1,188,515) (174,713) Cash and cash equivalents, beginning of year 205,997 1,832,129 1,575,936 81,702 2,028,823 7,524,587 Cash and cash equivalents, end of year $ 2,675,622 $ 1,941,121 $ 1,694,075 $ 198,748 $ 840,308 $ 7,349,874 Reconciliation of operating income (loss) to net cash flows provided by (used in) operating activities: Operating income (loss) $ 106,521 $ 91,853 $ 131,397 $ (127,091) $ (1,880,000) $ (1,677,320) Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities: Depreciation 235,267 - 186,396 - - 42103 Change in assets and liabilities: Accounts receivable - (9,000) - - - (9,000) Prepaid items 1,149 - - - - 1,149 Net OPEB assets - - - - (818,723) (818,723) Accounts payable and accruals (7,121) (2,015) (23,168) - - (32,304) Accrued payroll and benefits 2,644 118 482 - - 3,244 Compensated absences 5,929 - 1,155 18,243 - 25,327 Claims payable - 18,010 - - - 18,010 Cash flows provided by (used in) operating activities $ 344,389 $ 98,966 $ 296,262 $ (108,848) $ (2,698,723) $ (2,067,954) 78 AGENCY FUNDS All Agency Funds, representing all fiduciary funds of the City, are custodial in nature and do not involve measurement of results of operations. Such funds have no equity since any assets are due to individuals or other entities at some future time. These funds are presented separately from the Governmental and Proprietary Fund Financial Statements. Special district assessments held by the City, acting as an agent for bond debt service payments, comprise City Agency funds. The City is not liable for the debt payments. 79 CITY OF CUPERTINO Special Assessment District Agency Fund Statement of Changes in Assets and Liabilities For the Year Ended June 30, 2011 Balance Balance July 1, 2010 Additions Deletions June 30, 2011 Assets: Cash and investments $ 1181241 $ - $ (36,838) $ 811403 Liabilities: Deposits $ 1181241 $ - $ (36,838) $ 811403 80 STATISTICAL SECTION NOTES STATISTICAL SECTION This part of the City's Comprehensive Annual Financial Report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about the City's overall financial health. In contrast to the financial section, the statistical section information is not subject to independent audit. Financial Trends These schedules contain trend information to help the reader understand how the City's financial performance and well being have changed over time: 1. Net Assets by Component 2. Changes in Net Assets 3. Fund Balances of Governmental Funds 4. Changes in Fund Balance of Governmental Funds Revenue Capacity These schedules contain information to help the reader assess the City's most significant own - source revenues, property tax: 1. Assessed and Estimated Actual Value of Taxable Property 2. Property Tax Rates — All Overlapping Governments 3. Principal Property Taxpayers 4. Property Tax Levies and Collections Debt Capacity These schedules present information to help the reader assess the affordability of the City's current levels of outstanding debt and the City's ability to issue additional debt in the future: 1. Ratio of Outstanding Debt by Type 2. Direct and Overlapping Bonded Debt 3. Legal Debt Margin Information 4. Ratio of General Bonded Debt Outstanding Demographic and Economic Information These schedules offer demographic and economic indicators to help the reader understand the environment within which the City's financial activities take place: 1. Demographic and Economic Statistics 2. Principal Employers Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the City's financial report relates to the services the City provides and the activities it performs: 1. Full -Time Equivalent City Employees by Function/Programs 2. Operating Indicators by Function/Program 3. Capital Asset Statistics by Function/Program Sources Unless otherwise noted, the information in these schedules is derived from the Comprehensive Annual Financial Reports for the relevant year. The City implemented GASB Statement 34 in 2002 -03; schedules presenting government -wide information include information beginning in that year. 81 This page intentionally left blank. 82 CITY OF CUPERTINO Net Assets by Component Last Nine Years (Accrual basis of accounting) (Unaudited) Fiscal Year Ended June 30 2003 2004 2005 2006 2007 2008 2009 2010 2011 Governmental Activities Invested in capital assets, net of related debt $ 79,705,041 $ 85,425,753 $ 86,530,017 $ 83,064,879 $ 80,343,053 $ 85,173,998 $ 103,341,905 $ 120,405,290 $ 120,724,205 Restricted 9,081,791 7,416,930 7,291,925 8,329,671 9,265,565 9,926,770 6,661,074 8,692,175 7,778,613 Unrestricted 24,472,451 18,541,954 21,202,795 26,916,679 39,243,717 43,242,639 33,290,050 31,087,861 33,129,252 Total governmental activities net assets 113,259,283 111,384,637 115,024,737 118,311,229 128,852,335 138,343,407 143,293,029 160,185,326 161,632,070 Business -Type Activities Invested in capital assets, net of related debt 688,331 645,290 578,962 497,681 467,416 84,126 136,127 788,213 777,521 Unrestricted 6,573,514 7,314,068 6,028,989 6,291,439 6,977,436 7,849,147 8,949,142 9,063,616 9,779,087 Total business -type activities net assets 7,261,845 7,959,358 6,607,951 6,789,120 7,444,852 7,933,273 9,085,269 9,851,829 10,556,608 Primary Government Invested in capital assets, net of related debt 80,393,372 86,071,043 87,108,979 83,562,560 80,810,469 85,258,124 103,478,032 121,193,503 121,501,726 Restricted 9,081,791 7,416,930 7,291,925 8,329,671 9,265,565 9,926,770 6,661,074 8,692,175 7,778,613 Unrestricted 31,045,965 25,856,022 27,231,784 33,208,118 46,221,153 51,091,786 42,239,192 40,151,477 42,908,339 Total primary government net assets $ 120,521,128 $ 119,343,995 $ 121,632,688 $ 125,100,349 $ 136,297,187 $ 146,276,680 $ 152,378,298 $ 170,037,155 $ 172,188,678 83 CITY OF CUPERTINO Changes in Net Assets Last Nine Fiscal Years (Accrual basis of accounting) (Unaudited) Fiscal Year Ended June 30 84 2003 2004 2005 2006 2007 2008 2009 2010 2011 Expenses Governmental activities: Administration $ 1,635,846 $ 1,430,523 $ 1,280,339 $ 1,354,543 $ 1,675,443 $ 1,636,284 $ 1,769,500 $ 1,911,665 $ 1,860,451 Law enforcement 6,041,831 6,090,038 6,179,326 6,577,199 7,148,187 7,679,467 8,804,195 8,385,476 8,434,885 Public and environmental affairs 763,254 710,754 824,317 914,024 1,186,929 1,216,164 1,624,210 1,653,034 1,625,876 Administrative services 3,556,129 3,923,377 3,750,174 4,208,389 3,874,003 3,923,217 4,001,738 4,080,134 3,993,654 Recreation services 2,156,972 2,234,509 2,173,936 2,359,966 2,517,725 3,845,873 4,206,343 4,444,536 4,528,968 Community development 3,234,456 2,678,109 3,269,475 4,541,965 4,090,959 4,059,740 6,177,879 4,351,975 5,961,774 Public works 17,534,128 15,546,461 14,585,232 16,384,026 16,230,274 16,569,310 18,104,649 19,320,151 19,666,598 Interest on long -term debt 3,796,472 2,317,837 2,289,526 2,262,913 2,239,657 2,183,403 2,118,714 2,076,264 2,032,464 Total governmental activities expenses 38,719,088 34,931,608 34,352,325 38,603,025 38,963,177 41,113,458 46,807,228 46,223,235 48,104,670 Business -type activities: Resource recovery 1,897,425 1,793,083 2,927,060 2,101,198 2,122,805 2,056,061 1,998,184 2,018,147 1,801,599 Blackberry farm 1,497,420 1,353,362 1,341,712 1,302,855 975,064 450,206 495,845 457,169 457,065 Cupertino sports center 1,130,077 1,352,509 1,452,957 1,448,048 1,623,839 1,547,402 1,594,325 1,478,143 1,716,741 Recreation programs 1,554,834 1,590,302 1,689,436 1,729,194 1,830,401 1,853,217 1,739,892 1,854,648 1,753,156 Senior center 570,412 493,244 438,440 588,818 771,570 - - - - Total business -type activities expense 6,650,168 6,582,500 7,849,605 7,170,113 7,323,679 5,906,886 5,828,246 5,808,107 5,728,561 Total primary government expenses 45,369,256 41,514,108 42,201,930 45,773,138 46,286,856 47,020,344 52,635,474 52,031,342 53,833,231 Program Revenues Governmental activities: Charges for services: Administration - - - 23,201 3,618 10,711 2,240 21,873 15,801 Law enforcement 468,110 838,457 694,952 722,164 1,031,736 799,350 869,295 811,676 797,757 Administrative services 294,577 16,650 - - - - - - - Recreation services 161,969 148,337 163,462 240,074 193,752 847,424 801,280 930,773 1,020,159 Community development 1,624,181 1,903,277 4,164,792 5,286,336 4,768,026 3,551,478 3,586,993 3,310,355 4,149,620 Public works 348,905 325,959 286,280 201,250 200,969 135,942 157,311 556,636 549,065 Operating grants and contributions 2,388,199 2,496,689 593,657 3,403,762 3,048,512 2,392,987 4,014,036 2,042,557 2,351,287 Capital grants and contributions 965,211 3,612,102 2,164,907 522,950 3,496,095 5,696,124 4,759,485 5,511,359 1,972,951 Total government activities program revenues 6,251,152 9,341,471 8,068,050 10,399,737 12,742,708 13,434,016 14,190,640 13,185,229 10,856,640 Business -type activities: Charges for services: Resource recovery 2,397,439 2,398,819 2,395,282 2,203,127 2,254,416 2,254,790 2,100,704 2,104,299 1,931,076 Blackberry farm 1,479,312 1,301,092 1,218,958 1,155,986 1,101,564 640,771 596,944 568,770 447,797 Cupertino sports center 1,109,799 1,184,860 1,385,837 1,419,672 1,655,169 1,605,545 1,732,282 1,578,330 1,722,700 Recreation programs 1,872,004 1,910,599 2,167,705 2,331,409 2,396,720 2,493,214 2,364,037 2,249,191 2,260,296 Senior center 484,530 456,211 473,787 704,390 690,603 - - - - Operating grants and contributions 61,441 84,660 28,860 135,539 14,343 14,309 14,471 6,895 - Total business -type activities program revenue 7,404,525 7,336,241 7,670,429 7,950,123 8,112,815 7,008,629 6,808,438 6,507,485 6,361,869 Total primary government program revenues 13,594,236 16,677,712 15,738,479 18,349,860 20,855,523 20,442,645 20,999,078 19,692,714 17,218,509 (Continued) 84 CITY OF CUPERTINO Changes in Net Assets Last Nine Fiscal Years (Accrual basis of accounting) (Unaudited) Fiscal Year Ended June 30 85 2003 2004 2005 2006 2007 2008 2009 2010 2011 Net (Expense) Revenue: Governmental activities (32,467,936) (25,590,137) (26,284,275) (28,203,288) (26,220,469) (27,679,442) (32,616,588) (33,038,006) (37,248,030) Business -type activities 754,357 753,741 (179,176) 780,010 789,136 1,101,743 980,192 699,378 633,308 Total primary government net expense (31,713,579) (24,836,396) (26,463,451) (27,423,278) (25,431,333) (26,577,699) (31,636,396) (32,338,628) (36,614,722) General Revenues and Transfers Governmental activities: Taxes: Property taxes 4,100,856 3,944,459 4,296,940 4,728,811 6,529,772 6,941,910 7,491,965 7,488,701 7,296,970 Property tax in lieu of motor vehicle fee (1) - - 2,930,000 3,569,300 3,652,509 3,894,502 4,299,902 4,420,912 4,404,795 Incremental property tax 25,831 76,570 15,974 185,676 187,276 220,267 1,211,128 1,322,925 1,251,777 Sales taxes 8,843,792 8,654,185 9,224,661 10,671,642 11,252,341 13,154,749 14,139,190 9,930,530 14,539,243 Transient occupancy tax 1,679,225 1,632,514 1,790,917 2,054,904 2,511,184 2,711,590 2,140,274 2,142,137 2,536,501 Utility user tax 2,566,265 2,636,264 2,705,888 2,809,587 3,011,755 3,175,724 3,205,073 3,271,452 3,227,942 Franchise tax 2,175,913 2,194,651 2,217,313 2,353,575 2,537,018 2,547,439 2,618,125 2,597,930 2,841,344 Othertaxes 1,110,545 1,248,437 3,146,516 2,534,393 2,661,449 1,709,892 1,317,767 1,211,899 1,491,316 Intergovernmental (2) 3,215,866 2,460,137 978,059 (300,039) 364,261 266,789 171,621 166,440 259,289 Investment earnings 1,207,017 526,560 684,952 669,820 1,752,177 1,451,973 889,823 295,059 259,217 Gain on sale of capital assets - - - 1,222,849 1,510,410 - - - 497,385 Miscellaneous 79,280 166,714 545,155 189,262 291,423 103,529 81,342 119,393 88,980 Transfers 225,000 175,000 1,388,000 800,000 500,000 992,150 - - 15 Total Government Activities 25,229,590 23,715,491 29,924,375 31,489,780 36,761,575 37,170,514 37,566,210 32,967,378 38,694,774 Business -type activities: Investment earnings 211,093 95,127 215,769 201,159 366,596 378,828 171,804 67,182 71,486 Transfers (225,000) (175,000) (1,388,000) (800,000) (500,000) (992,150) - - (15) Total business -type activities 106,496 (56,228) (1,172,231) (598,841) (133,404) (613,322) 171,804 67,182 71,471 Total primary government 25,336,086 23,659,263 28,752,144 30,890,939 36,628,171 36,557,192 37,738,014 33,034,560 38,766,245 Change in Net Assets Government activities (7,238,346) (1,874,646) 3,640,100 3,286,492 10,541,106 9,491,072 4,949,622 (70,628) 1,446,744 Business -type activities 860,853 697,513 (1,351,407) 181,169 655,732 488,421 1,151,996 766,560 704,779 Total primary government $ (6,377,493) $ (1,177,133) $ 2,288,693 $ 3,467,661 $ 11,196,838 $ 9,979,493 $ 6,101,618 $ 695,932 $ 2,151,523 (1) Replaced the reduced motor vehicle license fee (an intergovernmental revenue) in 2005. (2) The 2006 state take -away of sales taxes, property taxes, and vehicle license fees is reported in this category. 85 CITY OF CUPERTINO Fund Balances of Governmental Funds Last Nine Fiscal Years (Accrual basis of accounting) (Unaudited) Fiscal Year Ended June 30 General Fund 2003 (i) 2004 2005 2006 2007 2008 2009 2010 General Fund Total General Fund 19,806,877 All Other Governmental Funds Nonspendable 615,000 Restricted 6,314,106 Reserved $ 3,782,689 $ 3,897,270 $ 3,864,969 $ 2,931,046 $ 2,711,586 $ 2,668,914 $ 2,325,283 $ 2,308,290 Unreserved 13,099,033 12,632,286 18,313,846 23,866,568 23,634,874 16,997,569 19,871,574 13,622,828 Total General Fund 16,881,722 16,529,556 22,178,815 26,797,614 26,346,460 19,666,483 22,196,857 15,931,118 All Other Governmental Funds Reserved 20,891,656 9,784,645 2,701,067 4,925,900 8,555,042 11,240,851 4,180,483 5,465,423 Unreserved, reported in: Special Revenue Funds 3,976,517 3,736,446 3,618,814 6,249,004 6,844,632 7,270,331 3,692,187 5,113,020 Capital Project Funds 6,576,208 2,236,730 1,663,033 (1,208,341) (472,405) 7,631,866 968,077 3,788,810 Total All Other Governmental Funds 31,444,381 15,757,821 7,982,914 9,966,563 14,927,269 26,143,048 8,840,747 14,367,253 Total Governmental Funds $ 48,326,103 $ 32,287,377 $ 30,161,729 $ 36,764,177 $ 41,273,729 $ 45,809,531 $ 31,037,604 $ 30,298,371 General Fund Nonspendable $ 1,023,950 Restricted 663,254 Assigned 14,739,394 Unassigned 3,380,279 Total General Fund 19,806,877 All Other Governmental Funds Nonspendable 615,000 Restricted 6,314,106 Assigned 4,303,822 Total All Other Governmental Funds 11,232,928 Total Governmental Funds $ 31,039,805 (i) The City implemented GASB Statement No. 34 in fiscal year 2003 and has elected to show the above information from that date. (2) The City implemented GASB Statement No. 54 under which governmental fund balances are reported as nonspendable, restricted, committed, assigned and unassigned compared to reserved and unreserved. 86 CITY OF CUPERTINO Changes in Fund Balances of Governmental Funds Last Nine Fiscal Years (Modified accrual basis of accounting) (Unaudited) Fiscal Year Ended June 30 The City implemented GASB Statement 34 in fiscal year 2003. This calculation is included only for fiscal years from that date 1) Noncapital expenditures is total expenditures less capital assets added each year to statement of net assets 87 2003 2004 2005 2006 2007 2008 2009 2010 2011 Revenues Taxes $ 20,200,250 $ 21,004,405 $ 23,614,623 $ 25,616,553 $ 28,903,993 $ 34,589,139 $ 36,395,950 $ 30,994,583 $ 37,582,299 Use of money and property 1,910,503 940,963 1,119,399 1,607,837 2,169,977 2,490,444 1,300,508 774,219 792,035 Intergovernmental 6,318,523 7,236,955 5,567,266 5,896,167 8,200,519 8,285,280 6,896,394 7,539,835 3,543,641 Licenses and permits 1,410,572 1,540,760 2,896,000 3,614,953 3,325,844 2,656,017 2,740,463 2,583,131 2,901,944 Charges for services 855,844 930,050 1,568,935 2,143,729 2,062,067 1,728,099 1,707,533 1,701,157 2,311,216 Fines and forfeitures 550,377 723,748 559,791 629,586 926,310 722,087 761,320 736,239 695,666 Other 59,219 1,009,260 1,792,795 245,176 154,235 95,388 80,835 689,941 73,881 Total revenues 31,305,288 33,386,141 37,118,809 39,754,001 45,742,945 50,566,454 49,883,003 45,019,105 47,900,682 Expenditures Current: Administration 1,474,924 1,222,581 1,162,096 1,236,390 1,287,101 1,351,273 1,336,921 1,469,004 1,528,070 Law enforcement 6,015,036 5,950,849 6,144,695 6,499,911 6,975,517 7,456,661 8,133,168 8,384,310 8,434,885 Public and environmental affairs 703,431 686,798 758,314 853,484 1,121,437 1,169,247 1,486,443 1,487,265 1,497,263 Administrative services 3,475,991 3,758,806 3,671,303 4,103,497 3,715,994 3,797,156 3,634,043 3,733,414 3,695,076 Recreation services 2,104,167 2,141,431 2,121,366 2,302,995 2,403,296 3,745,244 3,789,260 4,003,764 4,117,477 Community development 3,177,406 2,563,242 3,156,908 4,467,655 3,969,837 3,931,055 5,841,428 4,125,739 5,693,541 Public works 10,440,335 9,322,086 9,637,314 10,386,055 10,477,727 11,137,935 11,914,584 11,961,218 12,234,726 Capital outlay 6,812,856 20,246,237 10,025,935 2,771,502 4,292,169 8,334,093 22,262,369 4,710,360 5,281,927 Debt service: Principal repayment 6,925,948 1,220,000 1,245,000 1,270,000 1,295,000 1,355,000 1,415,000 1,460,000 1,500,000 Interest and fiscal charges 2,939,757 2,317,837 2,289,526 2,262,913 2,239,657 2,183,403 2,118,714 2,076,264 2,032,464 Total expenditures 44,069,851 49,429,867 40,212,457 36,154,402 37,777,735 44,461,067 61,931,930 43,411,338 46,015,429 Excess (deficiency) of revenues over (under) expenditures (12,764,563) (16,043,726) (3,093,648) 3,599,599 7,965,210 6,105,387 (12,048,927) 1,607,767 1,885,253 Other Financing Sources (Uses) Bond proceeds 57,677,519 - - - - - - - - Proceeds from sale of capital assets - - - 2,422,849 1,663,842 - - - 1,055,449 Payment to refunded debt escrow agent (39,208,286) - - - - - - - - Transfers in 25,775,538 4,765,307 7,904,763 8,364,084 9,658,000 19,136,165 5,035,925 7,788,417 5,684,482 Transfers out (25,840,538) (4,760,307) (6,936,763) (7,784,084) (14,777,500) (20,705,750) (7,758,925) (10,135,417) (7,883,750) Total other financing sources 18,404,233 5,000 968,000 3,002,849 (3,455,658) (1,569,585) (2,723,000) (2,347,000) (1,143,819) Change in fund balances $ 5,639,670 $ (16,038,726) $ (2,125,648) $ 6,602,448 $ 4,509,552 $ 4,535,802 $ (14,771,927) $ (739,233) $ 741,434 Debt service as a percentage of noncapital expenditures (1) 25.3% 11.6% 11.4% 10.6% 10.6% 9.8% 8.9% 9.1% 8.7% The City implemented GASB Statement 34 in fiscal year 2003. This calculation is included only for fiscal years from that date 1) Noncapital expenditures is total expenditures less capital assets added each year to statement of net assets 87 CITY OF CUPERTINO Assessed and Estimated Actual Value of Taxable Property Last Ten Fiscal Years (Unaudited) (1) Net of exemptions Sources:HdL, Coren & Cone 88 Total Assessed & Direct Total SBE Secured Est. Full Market Tax Fiscal Year Secured (1) Unsecured (1) NonUnitary Exemptions Valuation (1) Rate 2002 $ 7,836,349,904 $ 634,624,124 $ 203,348 $ 82,089,594 $ 8,562,981,335 2.29% 2003 8,119,969,820 565,212,987 332,959 75,795,294 8,685,515,766 1.69% 2004 8,689,558,802 530,097,614 223,580 80,704,482 9,219,879,996 1.73% 2005 9,159,184,070 367,378,773 278,536 80,678,889 9,526,841,379 1.66% 2006 9,942,314,157 350,391,447 259,809 88,612,732 10,292,965,413 4.37% 2007 10,794,991,704 381,307,801 213,610 94,957,979 11,176,513,115 5.74% 2008 11,512,949,952 417,564,226 - 96,690,910 11,930,514,178 5.87% 2009 12,637,622,059 533,413,208 1,390,000 99,950,894 13,172,425,287 6.26% 2010 12,979,346,158 564,277,611 1,390,000 99,947,559 13,545,013,769 6.51% 2011 13,017,910,372 476,332,025 1,390,000 96,704,811 13,495,632,397 6.51% (1) Net of exemptions Sources:HdL, Coren & Cone 88 1 (II 'al I i (1) Net of exemptions Sources:HdL, Coren & Cone 88 Basic Levy County Bond 2008 Hospital Facility County Library Retirement Levy County Retirement Levy Cupertino Elementary El Camino Hopital 2003 Foothill /DeAnza College 1999 Fremont High Los Gatos /Saratoga High 1998 Santa Clara Unified Santa Clara Valley Water District Saratoga Elementary West Valley College 2004 Total Direct & Overlapping Rates City's Share of 1% Levy Redevelopment Rate Total Direct Rate Source: HdL, Coren & Cone CITY OF CUPERTINO Property Tax Rates All Overlapping Governments Last Ten Fiscal Years (Per $100 Assessed Valuation) (Unaudited) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 - - - - - - - - 0.0122 0.0095 0.0024 0.0024 0.0024 0.0024 0.0024 0.0024 0.0024 0.0024 0.0024 0.0024 0.0364 0.0388 0.0388 0.0388 0.0388 0.0388 0.0388 0.0388 0.0388 0.0388 0.0457 0.0329 0.0357 0.0360 0.0350 0.0289 0.0337 0.0306 0.0312 0.0308 - - - - - 0.0129 0.0129 0.0129 0.0129 0.0129 0.0115 0.0108 0.0110 0.0129 0.0119 0.0346 0.0113 0.0123 0.0322 0.0326 0.0204 0.0246 0.0249 0.0268 0.0260 0.0243 0.0241 0.0339 0.0306 0.0365 0.0224 0.0530 0.0417 0.0409 0.0371 0.0351 0.0345 0.0330 0.0352 0.0377 0.0366 0.0252 0.0263 0.0344 0.0861 0.0797 0.0271 0.0743 0.0701 0.0519 0.0062 0.0072 0.0087 0.0092 0.0078 0.0072 0.0071 0.0061 0.0074 0.0072 0.0285 0.0387 0.0385 0.0361 0.0356 0.0351 0.0363 0.0363 0.0388 0.0437 - - - - 0.0140 0.0126 0.0118 0.0032 0.0140 0.0139 1.2101 1.2336 1.2280 1.2375 1.2947 1.3116 1.2400 1.2838 1.3258 1.3179 0.02236 0.02236 0.02234 0.02234 0.04343 0.05725 0.05706 0.05661 0.05641 0.05644 89 CITY OF CUPERTINO Principal Property Taxpayers Current Year and Nine Years Ago (Unaudited) Source: HdL, Coren & Cone 90 2011 Percentage of 2002 Percentage of Assessed Total Assessed Assessed Total Assessed Taxpayer Valuation Valuation Valuation Valuation Apple Inc. $ 807,920,115 5.99% $ 82,161,923 0.97% Campus Holdings Inc. 396,651,458 2.94% - - Hewlett Packard - - 386,145,926 4.56% Tandem Computers Inc. - - 285,218,476 3.37% Cupertino Gateway Partners - - 135,359,062 1.60% Cupertino Property LP - - 85,54000 1.01% Cupertino City Center Buildings - - 73,12205 0.86% Teachers Insurance & Annuity - - 64,503,727 0.76% DNS Trust 94,453,581 0.70% - - Vallco Shopping Mall LLC 85,475,396 0.63% - - WW DASC Owner LLC 84,034,907 0.62% - - 500 Forbes LLC 72,294,452 0.54% - - Irvine Company LLC 70,715,658 0.52% 61,658,232 0.73% Seagate Technology LLC 67,238,438 0.50% - - ECI Two Results LLC 64,351,920 0.48% - - RWC LLC - - 61,628,310 0.73% Ridgeview Court Associates - - 54,573,444 0.64% Villa Serra Apartments 62,26301 0.46% - - Total $ 1,805,399,726 13.38% $ 1,289,911,185 15.23% Source: HdL, Coren & Cone 90 CITY OF CUPERTINO Property Tax Levies and Collections Last Ten Fiscal Years (Unaudited) (1) Per the Teeter Plan, the City receives 100% of the tax levy, while the County receives delinquencies and penalties. Source: County of Santa Clara, Department of Finance 91 Percent of Percent Delinquent Total Total Tax Fiscal Total Current Tax of Levy Tax Tax Collections Year Tax Levy Collections Collected (1) Collections (1) Collections to Tax Levy 2002 $ 4,024,705 $ 4,024,705 100.00% $ - $ 4,024,705 100.00% 2003 4,12607 4,12607 100.00% - 4,12607 100.00% 2004 4,021,029 4,021,029 100.00% - 4,021,029 100.00% 2005 4,312,914 4,312,914 100.00% - 4,312,914 100.00% 2006 4,914,487 4,914,487 100.00% - 4,914,487 100.00% 2007 6,717,048 6,717,048 100.00% - 6,717,048 100.00% 2008 7,162,177 7,162,177 100.00% - 7,162,177 100.00% 2009 8,703,093 8,703,093 100.00% - 8,703,093 100.00% 2010 8,76001 8,76001 100.00% - 8,76001 100.00% 2011 8,497,119 8,497,119 100.00% - 8,497,119 100.00% (1) Per the Teeter Plan, the City receives 100% of the tax levy, while the County receives delinquencies and penalties. Source: County of Santa Clara, Department of Finance 91 CITY OF CUPERTINO Ratios of Outstanding Debt by Type Last Ten Fiscal Years (Unaudited) 92 Percentage of Estimated % of Fiscal Certificates Actual Market Value Personal Year of Participation of Taxable Property Per Capita Income 2002 $ 42,37000 0.49% 832 1.91% 2003 54,77000 0.63% 1,055 2.40% 2004 53,55000 0.58% 1,033 2.26% 2005 52,30500 0.55% 995 2.01% 2006 51M3500 0.50% 963 1.82% 2007 49,74000 0.45% 929 1.60% 2008 48,38500 0.41% 886 1.44% 2009 46,97000 0.36% 853 1.36% 2010 45,51000 0.34% 815 1.36% 2011 44,010,000 0.33% 755 1.70% 92 CITY OF CUPERTINO Direct and Overlapping Bonded Debt June 30, 2011 (Unaudited) 2010 -11 Assessed Valuation Less: Redevelopment Incremental Valuation Adjusted Assessed Valuation Overlapping Tax and Assessment Debt: Santa Clara County Santa Clara Valley Water District, Zone W -1 Foothill- DeAnza Community College District West Valley Community College District Santa Clara Unified School District Fremont Union High School District Cupertino Union School District El Camino Hospital District Santa Clara Valley Water District Benefit Assessment Total Overlapping Tax and Assessment Debt Ratios to 2010 -11 Assessed Valuation: Total Overlapping Tax and Assessment Debt Direct and Overlapping General Fund Debt Overlapping Debt: Santa Clara County General Fund Obligations Santa Clara County Pension Obligations Santa Clara County Board of Education COP Foothill -De Anza Community College District COP West Valley- Mission Community College District General Fund Obligations Santa Clara Unified School District COP Santa Clara County Vector Control District COP Midpeninsula Regional Open Space Park District COP Subtotal Overlapping General Fund Debt Direct Debt: City of Cupertino Certificates of Participation Total Direct and Overlapping General Fund Debt Combined Total Debt Ratios to Adjusted Assessed Valuation: Total Direct Debt ($44,010,000) Combined Total Debt State School Building Aid Repayable as of 6/30/11: $ 13,495,632,397 Total Debt % City's Share of 6/30/2011 Applicable (1) Debt 6/3 0/11 $ 334,90000 5.042% $ 1605,658 40500 5.272% 21,352 650,224,288 13.812% 89,808,979 213,049,346 0.644% 1,372,038 252,26000 2.060% 5,196,556 265,975,108 29.730% 79,074,400 122,899,991 48.968% 60,18108 1430500 1.392% 2,001,766 143,16000 5.042% 7,218,127 1.94% 786,98000 5.042% 39,679,532 386,024,822 5.042% 19,463,372 12,58000 5.042% 634,284 21,21500 13.812% 2,930,216 56,12000 0.644% 361,413 12,98000 2.060% 267,388 30000 5.042% 191,596 13103,031 7.743% 10,143,565 1,410,702,853 73,671,366 4490109000 100.000% 4490109000 1,454,712,853 11701,366 $ 3,581,391,586 $ 379,441,910 (2) 0.33% 2.84% (1) Percentage of overlapping agency's assessed valuation located within boundaries of the city. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non - bonded capital lease obligations. Source: California Municipal Services 93 CITY OF CUPERTINO Legal Debt Margin Information Last Ten Fiscal Years (Unaudited) Debt Limit: Secured property assessed value, net of exempt real property Adjusted valuation - 25% of assessed valuation Debt limit - 15% of adjusted valuation Amount of Debt Subject to Limit: Total bonded debt Less: Certificates of Participation not subject to debt limit Amount of debt subject to limit Legal Debt Margin $ 13,017,910,372 488,171,639 44,010,000 $ 488,171,639 The Government Code of the State of California provides for a legal debt limit of 15% of gross assessed valuation. However, this provision was enacted when assessed valuation was based upon 25% of market value. Effective with the 1981 -82 fiscal year, each parcel is now assessed at 100% of market value (as of the most recent change in ownership for that parcel). The computations shown above reflect a conversion of assessed valuation data for each fiscal year from the current full valuation perspective to the 25% level that was in effect at the time that the legal debt margin was enacted by the State of California for local governments located within the state. Source: City of Cupertino 94 Total net debt Total Net Legal applicable to the Fiscal Debt Debt Applicable Debt limit as a % of Year Limit to Limit Margin debt limit 2002 $ 321,111,800 $ - $ 321,111,800 $ - 2003 325,706,841 - 325,706,841 - 2004 345,745,500 - 345,745,500 - 2005 357,745,500 - 357,256,552 - 2006 376,159,758 - 376,159,752 - 2007 408,373,114 - 408,373,114 - 2008 431,735,623 - 431,735,623 - 2009 473,910,827 - 473,910,827 - 2010 486,725,480 - 486,725,480 - 2011 488,171,639 - 488,171,639 - Debt Limit: Secured property assessed value, net of exempt real property Adjusted valuation - 25% of assessed valuation Debt limit - 15% of adjusted valuation Amount of Debt Subject to Limit: Total bonded debt Less: Certificates of Participation not subject to debt limit Amount of debt subject to limit Legal Debt Margin $ 13,017,910,372 488,171,639 44,010,000 $ 488,171,639 The Government Code of the State of California provides for a legal debt limit of 15% of gross assessed valuation. However, this provision was enacted when assessed valuation was based upon 25% of market value. Effective with the 1981 -82 fiscal year, each parcel is now assessed at 100% of market value (as of the most recent change in ownership for that parcel). The computations shown above reflect a conversion of assessed valuation data for each fiscal year from the current full valuation perspective to the 25% level that was in effect at the time that the legal debt margin was enacted by the State of California for local governments located within the state. Source: City of Cupertino 94 CITY OF CUPERTINO Ratio of General Bonded Debt Last Ten Fiscal Years (Unaudited) Sources: HdL, Coren & Cone City of Cupertino 95 Ratio of General Fiscal Assessed General Bonded Debt Bonded Debt to Year Population Value Bonded Debt Per Capita Assessed Value 2002 50,913 $ 8,562,981,335 $ - $ - $ - 2003 51,910 085,515,766 - - - 2004 51,858 9,219,879,996 - - - 2005 52,590 9,526,841,379 - - - 2006 53,012 10,292,965,413 - - - 2007 53,549 11,176,513,115 - - - 2008 54,584 11,930,514,178 - - - 2009 55,045 13,172,425,287 - - - 2010 55,838 13,545,013,769 - - - 2011 58,302 13,495,632,397 - - - Sources: HdL, Coren & Cone City of Cupertino 95 (1) New statistic available starting in fiscal year 2010. Sources: HdL, Coren & Cone Fremont Union High School District U.S. Census Bureau CITY OF CUPERTINO Demographic and Economic Statistics Last Ten Fiscal Years (Unaudited) City Fiscal City County Population Year Population Population % of County 2002 50,913 1,668,309 3.05% 2003 51,910 1,675,915 3.10% 2004 51,858 1,656,128 3.13% 2005 52,590 1,759,585 2.99% 2006 53,012 1,773,258 2.99% 2007 53,549 1,794,522 2.98% 2008 54,584 1,748,976 3.12% 2009 55,045 1,857,621 2.96% 2010 55,838 1,800,876 3.10% 2011 58,302 1,781,642 3.27% (1) New statistic available starting in fiscal year 2010. Sources: HdL, Coren & Cone Fremont Union High School District U.S. Census Bureau CITY OF CUPERTINO Demographic and Economic Statistics Last Ten Fiscal Years (Unaudited) 96 % of % of Population Population City Per Capita School Over 25 with Over 25 with Personal Personal Enrollment Unemployment Median High School Bachelor's Income Income Grades 9 -12 Rate Age (1) Degree (1) Degree (1) $ 2,221,262,000 $ 43,629 9,063 3.2% - - - 2,278,527,000 43,894 9,108 5.4% - - - 2,368,206,000 45,667 9,147 5.4% - - - 2,595,892,000 49,361 9,138 4.1% - - - 2,805,559,000 52,923 9,875 3.4% - - - 3,117,408,000 58,216 9,823 2.8% - - - 3,369,668,000 61,734 10,300 3.0% - - - 3,442,884,000 62,547 10,300 3.8% - - - 3,350,250,000 59,999 10,350 7.2% 40.5 96.5% 69.3% 2,586,120,000 44,357 10,365 7.3% 39.1 96.3% 72.6% 96 CITY OF CUPERTINO Principal Employers Current Year and Nine Years Ago (Unaudited) Fiscal Year 2011 Fiscal Year 2002 Sources: InfoUSA.com Cupertino Union School District Fremont Union High School District Foothill /DeAnza Community College District CA Employment Development Department Labor Market Information US Census Bureau 97 Percentage Percentage Number of of Total City Number of of Total City Employer Employees Employment Employees Employment Apple, Inc. 1200 12.0% 600 9.7% Hewlett - Packard 300 3.0% 402 7.6% Compaq - - 2,500 4.1% Cupertino Union School District 1,490 1.5% 1,500 2.4% Foothill /DeAnza Community College District 1,290 1.3% 1,341 2.2% Fremont Union High School District 837 0.8% 735 1.2% Arc Sight Inc. 512 0.5% - - Oracle 500 0.5% - - Chordiant Software 285 0.3% - - Trend Micro Inc. 250 0.3% - - Target Stores 220 0.2% 270 0.4% Sears 150 0.2% 294 0.5% Symantec - - 400 0.6% Honeywell - Measurex - - 220 0.4% Sources: InfoUSA.com Cupertino Union School District Fremont Union High School District Foothill /DeAnza Community College District CA Employment Development Department Labor Market Information US Census Bureau 97 CITY OF CUPERTINO Full -Time Equivalent City Employees by Function/Program Last Ten Fiscal Years (Unaudited) Function/Program 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Council /Commissions 0.50 0.80 0.80 0.80 0.80 1.40 1.40 1.40 1.47 1.46 Administration 4.85 4.90 4.65 4.70 4.70 4.30 4.30 4.85 4.90 4.85 Public & Environmental Affairs 4.15 4.40 4.40 4.40 4.40 5.55 6.50 7.45 6.95 6.95 Administrative Services 19.90 20.30 20.30 20.35 20.35 21.63 21.88 22.33 22.33 22.34 Parks & Recreation 35.15 32.63 33.13 32.13 32.13 31.96 31.76 30.77 30.78 30.78 Community Development / RDA 19.95 20.75 20.75 21.15 21.15 22.78 23.78 23.78 23.73 23.78 Public Works 70.00 70.22 70.22 71.22 71.22 71.13 71.13 72.17 72.59 72.59 Total 154.50 154.00 154.25 154.75 154.75 158.75 160.75 162.75 162.75 162.75 Source: City of Cupertino Budget 98 CITY OF CUPERTINO Operating Indicators by Function/Program Last Seven Fiscal Years (Unaudited) Function/Program 2005 (a) 2006 2007 2008 2009 2010 2011 Public Information Access Cupertino Response 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days Public Safety Sheriff Response Priority One 5.37 Min. 4.94 Min. 4.94 Min. 5.83 Min. 3.88 Min. 3.95 Min. 4.49 Min. Priority Two 8.61 Min. 8.09 Min. 7.15 Min. 7.95 Min. 5.94 Min. 5.90 Min. 5.76 Min. Priority Three 18.92 Min. 16.74 Min. 15.82 Min. 15.73 Min. 9.40 Min. 9.77 Min. 9.79 Min. Public Works Street Sweeping 696 Curb Miles 696 Curb Miles 696 Curb Miles 696 Curb Miles 696 Curb Miles 696 Curb Miles 696 Curb Miles Street Maintenance 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 -48 Hrs of Call Culture & Recreation (b) Senior Center Memberships 2,000 3,100 1,935 2,110 2,243 2,287 2,387 Local Resident Rentals at Blackberry Farm - - - - 28 91 120 Quinlan Community Center Rental Revenue - - - - $80,000 $71,000 $95,090 Community Development Approved Building Plan Sets Within 5 Days Within 5 Days Within 5 Days Within 5 Days Within 5 Days Within 5 Days Within 5 Days Discretionary Land Use Applications Within 21 Days Within 21 Days Within 21 Days Within 21 Days Within 21 Days Within 21 Days Within 21 Days Public Notice of Upcoming Projects Within 10 Days Within 10 Days Within 10 Days Within 10 Days Within 10 Days Within 10 Days Within 10 Days Administrative Services Accounts Payable Processing 5 Days 5 Days 5 Days 5 Days 5 Days 5 Days 5 Days Business License Renewal Certificates 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days Duplication Requests 1 Day 1 Day 1 Day 1 Day 1 Day 1 Day By Request Date (a) First year of available information (b) With change of operating indicators 99 CITY OF CUPERTINO Capital Asset Statistics by Function /Program Last Ten Fiscal Years (Unaudited) Function /Program 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Public Works Miles of Streets 450 450 450 450 450 450 450 450 450 450 Streetlights 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 3,250 Traffic Signals 39 39 39 39 39 39 39 39 39 39 Culture & Recreation City Parks 15 15 15 15 15 15 15 15 16 16 City Park Acreage 150.8 150.8 150.8 150.8 150.8 150.8 150.8 150.8 151.4 151.4 City Trails 1 1 1 1 1 1 1 1 1 1 Golf Courses 1 1 1 1 1 1 1 1 1 1 Boathouse 1 1 1 1 1 1 1 1 1 1 Community Center 1 1 1 1 1 1 1 1 1 1 Community Hall 0 0 0 1 1 1 1 1 1 1 Senior Center 1 1 1 1 1 1 1 1 1 1 Sports Center 1 1 1 1 1 1 1 1 1 1 Swimming Pools 1 1 1 1 1 1 1 1 1 1 Tennis Courts 17 17 17 17 17 17 17 17 17 17 Sports Fields 1 1 1 1 1 1 1 1 1 1 City Library 1 1 1 1 1 1 1 1 1 1 Source: City of Cupertino 100 COMMUNITY PROFILE NOTES JVz'slAory Cupertino owes its name and earliest mention in recorded history to the 1776 expedition led by the Spaniard, Don Juan Bautista de Anza, from Sonora, Mexico to the Port of San Francisco to found the presidio of St. Francis. Leaving the majority of the party of men, women, and children in Monterey to rest from their travels, deAnza, his diarist and cartographer, Petrus Font, and 18 other men pressed on through the Santa Clara Valley in late March to their San Francisco destination. With the expedition encamped in what is now Cupertino, Font christened the creek next to the encampment the Arroyo San Joseph Cupertino in honor of his patron, San Guiseppe (San Joseph) of Cupertino, Italy. The arroyo is now known as Stevens Creek. The village of Cupertino sprang up at the crossroads of Saratoga- Sunnyvale Road (now DeAnza Boulevard) and Stevens Creek Boulevard. It was first known as West Side; but by 1898 the post office at the Crossroads needed a new name to distinguish it from other similarly named towns. John T. Doyle, a San Francisco lawyer and historian, had given the name Cupertino to his winery in recognition of the name bestowed on the nearby creek by Petrus Font. In 1904 the name was applied to the Crossroads and to the post office when the Home Union Store incorporated under the name, The Cupertino Stores, Inc. Many of Cupertino's pioneer European settlers planted their land in grapes. Vineyards and wineries proliferated on Montebello Ridge, on the lower foothills, and on the flat lands below. After 1906 a lot more than grape growing was going on in Cupertino. Orchards were thriving and new businesses were being started. In the late 1940's Cupertino was swept up in Santa Clara Valley's postwar population explosion. Concerned by unplanned development, higher taxes, and piecemeal annexation to adjacent cities, Cupertino's community leaders began a drive in 1954 for incorporation. Cupertino rancher Norman Nathanson, the Cupertino — Monta Vista Improvement Association, and the Fact Finding Committee played important roles in this movement. Incorporation was approved in the September 27, 1955 election. Cupertino officially became Santa Clara County's 13th City on October 10, 1955. A major milestone in Cupertino's development was the creation by some of the city's largest landowners of Vallco Business and Industrial Park in the early 1960's. Of the 25 property owners, 17 decided to pool their land to form Vallco Park, six sold to Varian Associates, a thriving young electronics firm, founded by Russell Varian, and two opted for transplanting to farms elsewhere. The name Vallco was derived from the names of the principal developers: Varian Associates and the Leonard, Lester, Craft, and Orlando families. 101 2 Cupertino, with a population of 58,302 and city limits stretching across 13 square miles, is considered to be one of the San Francisco Bay Area's most prestigious cities in which to live and work. Economic health is an essential component to maintaining a balanced city, which provides high -level opportunities, and services that create and help sustain a sense of community and quality of life. Public and private interests must be mutual so that our success as a partnership is a direct reflection of our success as a community. The cornerstone of this partnership is a cooperative and responsive government that fosters business and residential prosperity and strengthens working relationships among all sectors of the community. Our economic development strategies are tailored to address the specific needs of Cupertino. Because this is a mature, and 90% built -out city, the focus is on business retention and revitalization. Business recruitment is site specific and targeted to industries that enhance, rather than draw from, our existing business base. Cupertino is home to many well -known high -tech companies, and offers a dynamic and exciting business climate. Apple Inc., Verigy, Durect Corporation, and Seagate are headquartered in the city. DeAnza College, one of the largest single - campus community colleges in the country, is another major employer. The City's proactive economic development efforts have resulted in a number of innovative, mutually beneficial partnerships with local companies. The City strives to retain and attract local companies through active outreach and an entitlement process that is responsive and customer oriented. The Vallco shopping center includes Macy's, JCPenney, and Sears as anchors and features many exciting entertainment and eating venues. Shoppers can enjoy the latest shows at the AMC 16- screen theater, skating at the mall's full -size ice rink, and bowling at the chic and upscale Bowl Mor Lanes. They can begin or top off the evening with fine dining at the critically- acclaimed Alexander's Steakhouse or enjoy more casual cuisine at TGI Friday's, Benihana's, Dynasty Seafood Restaurant, Fresh Choice, and the international food court. The city features many other stores and over 160 restaurants to serve the local workforce and residents. Four hotels occupy the city: Hilton Garden Inn, Marriott Courtyard, Cupertino Inn and the Cypress Hotel, operated by the Kimpton Group. A fifth hotel with 123 rooms is ready to break ground on DeAnza Boulevard. The City of Cupertino has a history of providing high -level municipal services to complement the sense of community and quality of life enjoyed by our constituents. The City will continue to enhance and promote a strong local economy to provide municipal services that make Cupertino a place that people are proud to call home. 102 2011 CXy Profa& The City of Cupertino operates as a general law city with a City Council -City Manager form of government. Five council members serve four year, overlapping terms, with elections held every two years. The council meets twice a month on the first and third Tuesday at 6:45 p.m. in the Community Hall. The City has 163 authorized full -time benefited employee positions. City departments include Administration (City Council, commissions, city manager, city attorney); Administrative Services (finance, human resources, information technology, city clerk, neighborhood watch, emergency preparedness, code enforcement); Community Development (planning, building, and economic development); Parks and Recreation; Public Works (engineering, maintenance, transportation, solid waste, and storm drain management); and Public and Environmental Affairs. Police service is provided by the Santa Clara County Sheriffs Department, and fire service is provided through the Santa Clara County Fire District. Assisting the City Council are several citizen advisory commissions /committees which include housing, telecommunications, fine arts, library, planning, audit, parks and recreation, bicycle and pedestrian, teen, economic development, strategic planning, and public safety. Members of the volunteer boards are appointed by the City Council and vacancies are announced so that interested residents may apply for the positions. Residents are kept informed about city services and programs through the Cupertino Scene, a monthly newsletter; The City Channel, Cupertino's government access cable TV channel; and the city's website. Housing The average sales price of an existing single- family home is $1,000,324 as of 2011. Community Health Care Facilities Cupertino is served by the Cupertino Medical Clinic, NovaCare Occupational Health Services. Nearby hospitals include Kaiser Permanente Medical Center in Santa Clara, El Camino Hospital in Mountain View, O'Connor Hospital in San Jose, Community Hospital of Los Gatos, Stanford Hospital in Palo Alto, and the Saratoga Walk -in Clinic in Saratoga. Utilities Gas & Electric — Pacific Gas and Electric, 800 - 743 -5000. Phone — AT &T, residential service, 800 - 894 -2355; business service, 800 - 750 -2355. Cable — Comcast, 800- 945 -2288. Solid Waste & Recycling — Recology, 408 - 725 -0420. Water — San Jose Water Company, 408 - 279 -7900 and California Water, 650- 917 -0152. Sewer Service — Cupertino Sanitary District, 408 - 253 -7071 Tax Rates and Government Services Residential, commercial, and industrial property is appraised at full market value, as it existed on March 1, 1975, with increases limited to a maximum of 2% annually. Property created or sold since March 1, 1975 will bear full cash value as of the time created or sold, plus the 2% annual increase. The basic tax rate is $1.00 per $100 full cash value plus any tax levied to cover bonded indebtedness for county, city, school, or other taxing agencies. Assessed valuations and tax rates are published annually after July 1. Retail Sales Tax: Santa Clara County: 1.25 %; City: 1%; State General Fund: 5 %; State Local Public Safety Fund: 0.50 %; State Local Revenue Fund: 0.25 %; County Transportation Fund: 0.25 %. Total: 8.25 %. Assessed Valuation: (Secured and Unsecured) Cupertino: $13,747,541,573 (7/1/11) County: $299,096,733,565 (7/1/11) Transportation Rail — CalTrain service to Gilroy and San Francisco, with local station four miles north of city; Amtrak station is 10 miles south. Air — Mineta San Jose International Airport 11 miles south; San Francisco International Airport 30 miles north. Bus — Santa Clara Valley Transportation Authority. Highways — Interstate Route 280, State Route 85. 103 C&mAui*iity StaruWLck Facts and Figures Population in City Limits 58,302 Median Household Income $131,517 Median Age 39 Sales Tax Rate 8.25% Registered Voters 26,658 Democrats M023 Republicans 5, 829 American Independent 366 Other 320 Decline to State 10,120 ArcSight Alexander's Steakhouse Aeroflex High Speed Apple Inc. Argonaut Window & Door Benihana of Tokyo BJ's Bar & Grill California Dental Arts Chevron Service Stations CVS Pharmacy DeAnza College Campus Center Dynasty Restaurant Elephant Bar Top 40 Sales Tax Producers First Quarter 2011 (In Alphabetical Order) Hewlett - Packard Insight Direct JC Penney Joy Luck Place Macy' s Marina Foods Michael's Arts & Crafts Mirapath Outback Steakhouse Ricoh Rohde & Schwarz Rotten Robbie Service Station Ranch 99 Market Scandinavian Designs Sears Shane Diamond Jewelers Shell Service Station Staples Symantec Target TJ Maxx TGI Friday's Union 76 Service Station Valero Service Station Verigy Verizon Wireless Whole Foods Demographic Information Asian White, non - Hispanic Hispanic or Latino Black or African American American Indian/Alaska Native Native Hawaiian/Other Pacific Islander Other 104 63.3% 31.3% 3.6% 0.6% 0.2% 0.1% .6% Cow and1Rec4**,*eaoorz*&wSef v4ceue Blackberry Farm Blackberry Farm has been upgraded and restored to improve the natural habitat for native trees, animals, and fish. Improvements to the park include construction of a new ticket kiosk, re- plastered pools, a new water slide, bocce ball, horseshoe courts, and numerous upgrades to the west bank picnic area. The park is located at 21979 San Fernando Avenue. Telephone: 408 - 777 -3140. The Blackberry Farm golf course is located at 22100 Stevens Creek Boulevard. Telephone: 408 - 253 -9200. The Quinlan Community Center Civic Center and Library The City of Cupertino's Quinlan Community Center is a 27,000 square foot facility that provides a variety of recreational opportunities. Most prominent is the Cupertino Room - a multi- purpose room that can accommodate 300 people in a banquet format. Telephone: 408 - 777 -3120. Cupertino Sports Center The Sports Center is a great place to meet friends. The facility features 17 tennis courts, complete locker room facilities, and a fully equipped fitness center featuring free weights, Cybex, and cardio equipment. A teen center is also included as well as a child watch center. The center is located at the corner of Stevens Creek Boulevard and Stelling Road. Telephone: 408 -777- 3160. Cupertino Senior Center The Senior Center provides a welcome and friendly environment for adults over age 50. There is a full calendar of opportunities for learning, volunteering, and enjoying life. There are exercise classes, a computer lab and classes, language instruction including English as a second language, and cultural and special interest classes. The center also coordinates trips and socials. The Senior Center is located at 21251 Stevens Creek Boulevard and is open Monday through Friday 8 a.m. to 5 p.m. Telephone: 408 - 777 -3150. The complex has a 6,000 square foot Community Hall, plaza with fountain, trees and seating areas. City Council meetings are held in the Community Hall as well as Planning Commission and Parks and Recreation Commission sessions. The 54,000 square foot library continues to be one of the busiest in the Santa Clara County Library system. For more information call 408 - 446 -1677. McClellan Ranch Park A horse ranch during the 193 0' and 40's, this 18 -acre park has the appearance of a working ranch. Preserved on the property are the original ranch house, milk barn, livestock barn, and two historic buildings: Baer's Blacksmith Shop, originally located at DeAnza and Stevens Creek, and the old water tower from the Parish Ranch, now the site of Memorial Park. Rolling Hills 4 -H Club members raise rabbits, chickens, sheep, swine, and cattle and a Junior Nature Museum, which features small live animal exhibits and dispenses information about bird, animal, and plant species of the area. McClellan Ranch is located at 22221 McClellan Road. Telephone: 408 - 777 -3120. 105 Winner of numerous state and national awards for excellence, our city's schools are widely acknowledged to be models of quality instruction. Cupertino Union School District serves 18,000 students in a 26 square mile area that includes Cupertino and portions of five other cities. The district has 20 elementary schools and five middle schools, including several choice programs. Eighteen schools have received state and /or national awards for educational excellence. Student achievement is exceptionally high. Historically, district test scores place Cupertino among the premier public school districts in California. The district is a leader in the development of a standards -based system of education and is nationally recognized for leadership in the use of technology as an effective tool for learning. Quality teaching and parent involvement are the keys to the district's success. The Fremont Union High School District serves 10,000 students in a 42 square mile area covering all of Cupertino, most of Sunnyvale and portions of San Jose, Los Altos, Saratoga, and Santa Clara. The five high schools of the district have garnered many awards and recognition based on both the achievement of students and the programs designed to support student achievement. Four of five high schools in the district exceeded their state established achievement targets for the 2009 Academic Performance Index. District students are encouraged to volunteer and /or provide service to organizations within the community. During their senior year, if students complete 80 hours of service to a non - profit community organization, they are recognized with a "Community Service Award" medal that may be worn during their graduation ceremonies. Cupertino is served by two local institutions of higher education: DeAnza College and the University of San Francisco. In addition to these schools, Cupertino's location offers easy access to Stanford University, Santa Clara University and San Jose State University. assistance, and /or recruitment and retention services. Building on its tradition of excellence and innovation, DeAnza College challenges students of every background to develop their intellect, character and abilities; to achieve their educational goals; and to serve their community in a diverse and changing world. DeAnza College offers a wide range of quality programs and services to meet the work force development needs of our region. The college prepares current and future employees of Silicon Valley in traditional classroom settings and through customized training arranged by employers. Several DeAnza programs encourage economic development through college credit courses, short -term programs, services for manufacturers, technical 106 Euphrat Museum of Art The highly regarded Euphrat Museum of Art, at its new location next to the new Visual Arts and Performance Center at DeAnza College, traditionally presents one -of -a -kind exhibitions, publications and events reflecting the rich diverse heritage of our area. The Museum prides itself on its changing exhibitions of national and international stature, emphasizing Bay Area artists. Museum hours are 10 a.m. — 4 p.m. Monday through Thursday. Telephone: 408 -864- 8836. Fujitsu Planetarium Stargazers will have a Cupertino facility catering to their interests, the Fujitsu Planetarium on the DeAnza College campus. It will host a variety of planetarium shows and events, including educational programs for school groups and family astronomy evenings when it reopens for Saturday evening shows on September 25, 2010. For more information, visit the website at www.deanza.edu /planetarium or call 408 - 864 -8814. Flint Center The cultural life of the Peninsula and South Bay is enhanced by programs presented at the Flint Center for Performing Arts located at 21250 Stevens Creek Boulevard at DeAnza College campus. The center opened in 1971 and was named in honor of Calvin C. Flint, the first chancellor of the Foothill - DeAnza Community College District. The box office is open 10 a.m. — 4 p.m. Tuesday through Friday and one and one half hours prior to any performance. Box office: 408 -864- 8816; administrative office: 408 - 864 -8820. Cupertino Historical Society On May 2, 1966, the Cupertino Historical Society was founded as a non - profit organization by a group of 177 longtime residents concerned about the rapid growth in the area and its impact on the quickly vanishing Cupertino heritage. On March 30, 1990, the Society opened the Cupertino Historical Museum dedicated to the preservation and exhibition of the city's history. Through its exhibits the museum attempts to develop and expand the learning opportunities that it offers to the ethnically diverse community of the City of Cupertino. The Society continues to build partnerships with the local school districts to ensure that the history of Cupertino is offered as part of the educational curriculum. The Society is located at the Quinlan Community Center, 10185 N. Stelling Road. Telephone: 408 - 973 -1495. Farmers' Market Residents and visitors can visit the farmers' market every Friday from 9:00 a.m. to 1:00 p.m. at the Vallco Shopping Center parking lot next to Sears. California History Center The California History Center and Foundation is located on the DeAnza College campus. The center has published 37 volumes on California history and has a changing exhibit program. The center's Stocklmeir Library Archives boasts a large collection of books, a pamphlet file, oral history tapes, videotapes and a couple thousand student research papers. The library's collection is for reference only. Heritage events focusing on California's cultural or natural history are offered by the center each quarter. For more information, call 408 - 864 -8987. The center is open September through June 9:30 a.m. to noon and 1:00 p.m. to 4:00 p.m. Tuesday through Thursday. 107 NOTES 108 APPENDIX C INVESTMENT POLICY OF THE CITY Appendix C THIS PAGE INTENTIONALLY LEFT BLANK City of Cupertino Investment Policy February 7, 2012 PnT .TCV Under authority granted by the City Council, the City Treasurer and Deputy Treasurer are responsible for investing the surplus funds of the City. The investment of the funds of the City of Cupertino is directed to the goals of safety, liquidity and yield. The authority governing investments for municipal governments is set forth in the California Government Code, Sections 53601 through 53659. The primary objective of the investment policy of the City of Cupertino is SAFETY OF PRINCIPAL. Investments shall be placed in those securities as outlined by type and maturity sector in this document. Effective cash flow management and resulting cash investment practices are recognized as essential to good fiscal management and control. The City's portfolio shall be designed and managed in a manner responsive to the public trust and consistent with state and local law. Portfolio management requires continual analysis and as a result the balance between the various investments and maturities may change in order to give the City of Cupertino the optimum combination of necessary liquidity and optimal yield based on cash flow proj ections. CrnPF. The investment policy applies to all financial assets of the City of Cupertino as accounted for in the Comprehensive Annual Financial Report (CAFR). Policy statements outlined in this document focus on the City of Cupertino's pooled, surplus funds, but will also apply to all other funds under the City Treasurer's span of control unless specifically exempted by statute or ordinance. This policy is applicable, but not limited to all funds listed below: • General Fund • Special Revenue Funds • Capital Project Funds • Enterprise Funds • Internal Service Funds • Trust and Agency Funds • Any new fund unless specifically exempted Investments of bond proceeds shall be governed by the provisions of the related bond indentures and /or cash flow requirements and therefore may extend beyond the maturity limitations as outlined in this document. Other post employment benefit (OPEB) trust investments are governed by California Government Code Sections 53620 through 53622 and trust documents. The trust has discretionary investment authority. Mutual funds, exchange- traded funds, closed - end funds, and securities comprising equities, fixed income, cash equivalents, and cash, with maturities possibly extending beyond five years, are allowed investments for an OPEB trust. City of Cupertino Investment Policy February 7, 2012 RR TTIF.NCF. The standard to be used by investment officials shall be that of a "prudent person" and shall be applied in the context of managing all aspects of the overall portfolio. Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, direction and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. It is the City's full intent, at the time of purchase, to hold all investments until maturity to ensure the return of all invested principal dollars. However, it is realized that market prices of securities will vary depending on economic and interest rate conditions at any point in time. It is further recognized that in a well - diversified investment portfolio, occasional measured losses are inevitable due to economic, bond market or individual security credit analysis. These occasional losses must be considered within the context of the overall investment program objectives and the resultant long -term rate of return. The City Treasurer and Deputy Treasurer, acting within the intent and scope of the investment policy and other written procedures and exercising due diligence, shall be relieved of personal responsibility and liability for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely manner and appropriate action is taken to control adverse developments. (1R TF.CTTVF.q The primary objectives, in order of priority, of the City of Cupertino's investment activities shall be: A. Safety of Principal Safety of principal is the foremost objective of the City of Cupertino. Each investment transaction shall seek to ensure that capital losses are avoided, whether from securities default, broker - dealer default or erosion of market value. The City shall seek to preserve principal by mitigating the two types of risk, credit risk and market risk. Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing in investment grade securities and by diversifying the investment portfolio so that the failure of any one issuer does not unduly harm the City's capital base and cash flow. 2 City of Cupertino Investment Policy February 7, 2012 Market risk, defined as market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by limiting the average maturity of the City's investment portfolio (see maximum maturities) and structuring the portfolio based on historic and current cash flow analysis eliminating the need to sell securities prior to maturity and avoiding the purchase of long term securities for the sole purpose of short term speculation. B. Liquidity The City's investment portfolio will remain sufficiently liquid to meet all operating requirements which might be reasonably anticipated and provide the City with adequate cash flows to pay its obligations over the next six months. Additionally, the portfolio should consist largely of securities with active secondary resale markets. C. Yield The City's investment portfolio shall be designed with the objective of attaining a rate of return throughout budgetary and economic cycles, commensurate with Cupertino's investment risk constraints and cash flow characteristics of the portfolio. MAXIMUM MATURITIES Maturities of investments will be selected based on liquidity requirements to minimize interest rate and maximize earnings. Investment of surplus funds shall comply with the maturity limits as set forth in the California Government Code 53600, et seq. Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security that at the time of the investment has a term remaining to maturity in excess of five years, unless the Council has granted express authority to make that investment either specifically or as a part of an investment program approved by the Council no less than three months prior to the investment. Reserve funds may be invested in securities exceeding five years if the maturity of such investments is made to coincide as nearly as practicable with the expected use of the funds. PERFORMANCE EVALUATION Investment performance is continually monitored and evaluated by the City Treasurer. Investment performance statistics and activity reports are generated on a quarterly basis for presentation to the oversight (audit) committee, City Manager and City Council. 3 City of Cupertino Investment Policy February 7, 2012 Yield on the City's investment portfolio is of secondary importance compared to the safety and liquidity objectives described above. The City's investment portfolio shall be designed to attain a market average rate of return through economic cycles. The market average rate of return is defined as the average return on the Local Agency Investment Fund (assuming the State does not adversely affect LAIF's returns due to budget constraints). Whenever possible, and consistent with risk limitations as defined herein and prudent investment principles, the Treasurer shall seek to augment return above the market average rate of return. DELEGATION OF AUTHORITY The Treasurer is responsible for investment management decisions and activities per City Council Resolution. The Treasurer shall designate a staff person as a liaison /deputy in the event circumstances require timely action and the Treasurer is not present. No officer or designee may engage in an investment transaction except as provided under terms of this policy and the procedures by the Treasurer and approved by the City Manager /Council. The Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. OVERSIGHT COMMITTEE An audit committee consisting of appropriate internal and external members, appointed by the City Council, shall be established to provide general oversight and direction concerning the policy related to management of the City's investment pool and OPEB trust. The City Treasurer shall serve in a staff and advisory capacity. The committee shall meet at least quarterly to review policy changes, new legislation and portfolio status. ETHICS AND CONFLICTS OF INTEREST Officers and employees involved in the investment process shall refrain from personal business activity that conflicts with proper execution of the investment program, or impairs their ability to make impartial investment decisions. Additionally the City Treasurer and the Deputy Treasurer are required to annually file applicable financial disclosures as required by the Fair Political Practices Commission (FPPC). SAFEKEEPING OF SECURITIES To protect against fraud or embezzlement or losses caused by collapse of an individual securities dealer, all securities owned by the City shall be held in safekeeping by a third party custodian acting as agent for the City under the terms of a custody agreement. All trades executed by a dealer will settle delivery versus payment (DVP) through the City's safekeeping agent. 11 City of Cupertino Investment Policy February 7, 2012 In order to verify investment holdings, an external auditor, on an annual basis, shall independently verify securities held in custody for the City. All exceptions to this safekeeping policy must be approved by the City Treasurer in written form and included in the quarterly report to City Council. INTERNAL CONTROL Separation of duties between the Treasurer's function and Finance is designed to provide an ongoing internal review to prevent the potential for converting assets or concealing transactions. Wire transfers shall be approved prior to being submitted to the financial institution. Wire transfers initiated by the Treasury Section must be reconfirmed by the appropriate financial institution to non - treasury staff. Proper documentation obtained from confirmation and cash disbursement wire transfers is required for each investment transaction. Timely bank reconciliation is conducted to ensure proper handling of all transactions. Separation of duties, transaction approvals, security, and reconciliations shall be included in the wire, receipting, and account receivable processes. Transaction controls, notifications, and reports provided by financial institutions shall be used to help implement these controls. The investment portfolio and all related transactions are reviewed and balanced to appropriate general ledger accounts by Finance on a monthly basis. An independent analysis by an external auditor shall be conducted annually to review internal control, account activity, and compliance with policies and procedures. The analysis shall be reported to the audit committee. R F.P(1R TTNC -r The City Treasurer shall prepare a quarterly investment report, including a succinct management summary that provides a clear picture of the status of the current investment portfolio. The report will be prepared in a manner that will report all information required under this policy and the California Government Code. The Treasurer will submit the report to Council no later than the second regular council meeting, or approximately 45 days following the end of the quarter covered by the report. Following its annual or interim adoption by the City Council, this investment policy shall be remitted to the California Debt and Investment Advisory Commission. QUALIFIED BROKER/DEALERS Minimum eligibility criteria for dealers /brokers include a minimum of $1 billion in assets and a minimum of five years in business. The registration status of all dealers is checked with the National Association of Securities Dealers. 5 City of Cupertino Investment Policy February 7, 2012 Dealers are required to acknowledge the receipt and review of the Statement of Investment Policy, to be familiar with the government code restrictions, and have experience with dealing with other municipal investors. Dealers are then selected on the basis of yields, services offered, and references obtained. They may be primary or secondary dealers. The financial institutions must submit a current annual audited financial statement to ascertain capital adequacy. COLLATERAL REQUIREMENTS Collateral is required for investments in certificates of deposit and repurchase agreements. In order to reduce market risk, the collateral level will be at least 102% of market value of principal and accrued interest. In order to conform with the provisions of the Federal Bankruptcy Code which provides for liquidation of securities held as collateral, the only securities acceptable as collateral shall be certificates of deposit, commercial paper, eligible banker's acceptances, medium term notes or securities that are the direct obligations of, or are fully guaranteed as to principal and interest by, the United States or any agency of the United States. AUTHORIZED INVESTMENTS Investment of City funds is governed by the California Government Code Sections 53600 et seq. Within the context of the limitations, the following investments are authorized, as further limited herein: 1. United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit of the United States are pledged for payment of principal and interest. There is no percentage limitation of the portfolio that can be invested in this category, although a five -year maturity limitation is applicable. 2. Obligations issued by the Government National Mortgage Association (GNMA), the Federal Farm Credit System (FFCB), the Federal Home Loan Bank Board (FHLB), the Federal National Mortgage Association (FNMA), the Student Loan Marketing Association (SLMA), and the Federal Home Loan Mortgage Association (FHLMC). There is no percentage limitation of the portfolio that can be invested in this category. A five -year maturity limitation is applicable. 3. Banker's Acceptances (bills of exchange or time drafts drawn on and accepted by commercial banks) may not exceed 180 days to maturity or 40% of the cost value of the portfolio. 4. Local Agency Investment Fund (LAIF), which is a State of California managed investment pool, may be used up to the maximum permitted by California state law. Investment officers will review LAIF's investment policy, investment mix, rate of return, etc. on a monthly basis. 0 City of Cupertino Investment Policy February 7, 2012 Investments detailed in items 5 through 10 are further restricted to percentage of the cost value of the portfolio in any one - issuer name to a maximum of 10 %. The total value invested in any one issuer shall not exceed 5% of the issuers' net worth. Again, a five -year maximum maturity limitation is applicable unless further restricted by this policy. 5. Commercial paper ranked P1 by Moody's Investor Services or A1+ by Standard & Poors, and issued by domestic corporations having assets in excess of $500,000,000 and having an AA or better rating on its long -term debentures as provided by Moody's or Standard & Poors. Purchases of eligible commercial paper may not exceed 270 days to maturity nor represent more than 10% of the outstanding paper of the issuing corporation. Purchases of commercial paper may not exceed 25% of the cost value of the portfolio. 6. Negotiable Certificates of Deposits issued by nationally or state chartered banks, state or federal savings institutions, or state or federal credit unions. These institutions may use a private sector entity to assist in the placement of the certificates of deposit under the conditions specified by the Government Code. Purchases of Negotiable Certificates of Deposit may not exceed 30% of the cost value of the portfolio. A maturity limitation of five years is applicable. 7. Repurchase agreements that specify terms and conditions may be transacted with banks and broker dealers. The maturity of the repurchase agreements shall not exceed one year. The market value of the securities used as collateral for the repurchase agreements shall be monitored by the investment staff and shall not be allowed to fall below 102% of the value of the repurchase agreement. A PSA Master Repurchase Agreement is required between the City of Cupertino and the broker /dealer or financial institution for all repurchase agreements transacted. 8. Reverse repurchase agreements are not authorized. 9. Certificates of Deposit (time deposits), non - negotiable and collateralized in accordance with the California Government Code, may be purchased through banks, savings and loan associations, or credit unions. Within a limit of 30% of the cost value of the portfolio, these institutions may use a private sector entity to assist in the placement of the time deposits under the conditions specified by the Government Code. 10. Medium Term Corporate Notes issued by corporations organized and operating in the United States with a maximum maturity of five years may be purchased. Securities eligible for investment shall be rated A or better by Moody's or Standard & Poor's rating services. Purchase of medium term notes may not exceed 30% of the cost value of the portfolio. 11. Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenue producing property owned, controlled or operated by the local agency or by a department, board, agency, or authority of the local agency. 7 City of Cupertino Investment Policy February 7, 2012 12. Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue producing property owned, controlled or operated by the state or by a department, board, agency or authority of the state. 13. Bonds, notes, warrants or other evidences of indebtedness of any local agency within this state. 14. Various daily money market funds administered for or by trustees, paying agents and custodian banks contracted by the City of Cupertino may be purchased as allowed under State of California Government Code. Only funds holding U.S. Treasury obligations, Government agency obligations, or repurchase agreements collateralized by U.S. Treasury or Government agency obligations can be utilized and may not exceed 20% of the cost value of the portfolio. 15. Ineligible investments are those that are not described herein, including but not limited to, common stocks and long term (over five years in maturity) notes and bonds are prohibited from use in this portfolio. It is noted that special circumstances arise that necessitate the purchase of securities beyond the five -year limitation. On such occasions, requests must be approved by City Council prior to purchase. T)F.P(IcsTTcs To be eligible to receive local agency money, a bank, savings association, federal association, or federally insured industrial loan company shall have received an overall rating of not less than "satisfactory" in its most recent evaluation by the appropriate federal financial supervisorial agency of its record of meeting the credit needs of California's communities. INTEREST EARNINGS All moneys earned and collected from investments authorized in this policy shall be allocated monthly to various fund accounts based on the cash balance in each fund as a percentage of the entire pooled portfolio. POLICY REVIEW The City of Cupertino's investment policy shall be adopted by resolution of the City Council on an annual basis. This investment policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law and financial and economic trends. 0 APPENDIX D FORM OF SPECIAL COUNSEL OPINION [Letterhead of Quint & Thimmig LLP] [Closing Date] City Council of the City of Cupertino 10300 Torre Avenue Cupertino, California 95014 OPINION: $43,940,000 Certificates of Participation (2012 Refinancing Project) Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the City of Cupertino, California, as the Rental for Certain Property Pursuant to a Lease Agreement with the Cupertino Public Facilities Corporation Members of the City Council: We have acted as special counsel in connection with the delivery by the City of Cupertino, California (the "City "), of its $43,940,000 Lease Agreement, dated as of May 1, 2012, by and between the Cupertino Public Facilities Corporation (the "Corporation ") and the City (the "Lease Agreement "), pursuant to the California Government Code. The Corporation has, pursuant to the Assignment Agreement, dated as of May 1, 2012 (the "Assignment Agreement "), by and between the Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee "), assigned certain of its rights under the Lease Agreement, including its right to receive a portion of the lease payments made by the City thereunder (the "Lease Payments "), to the Trustee. Pursuant to the Trust Agreement, dated as of May 1, 2012, by and among the Trustee, the Corporation and the City (the "Trust Agreement "), the Trustee has executed and delivered certificates of participation (the "Certificates ") evidencing direct, undivided fractional interests of the owners thereof in the Lease Payments. We have examined the law and such certified proceedings and other papers as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon representations of the City contained in the Lease Agreement and in the certified proceedings and certifications of public officials and others furnished to us without undertaking to verify the same by independent investigation. Based upon our examination, we are of the opinion, under existing law, as follows: 1. The City is duly created and validly existing as a municipal corporation and general law city organized and existing under the laws of the State of California with the power to enter into the Lease Agreement and the Trust Agreement and to perform the agreements on its part contained therein. 2. The Lease Agreement has been duly authorized, executed and delivered by the City and is an obligation of the City valid, binding and enforceable against the City in accordance with its terms. 3. The Trust Agreement and the Assignment Agreement are valid, binding and enforceable in accordance with their terms. 4. Subject to the terms and provisions of the Lease Agreement, the Lease Payments to be made by the City are payable from general funds of the City lawfully available therefor. By virtue of the Assignment Agreement, the owners of the Certificates are entitled to receive their fractional share of the Lease Payments in accordance with the terms and provisions of the Trust Agreement. Appendix D Page 1 5. Subject to the City's compliance with certain covenants, interest with respect to the Certificates is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the alternative minimum tax for individuals and corporations under the Internal Revenue Code of 1986, as amended, but is taken into account in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. Failure to comply with certain of such covenants could cause interest with respect to the Certificates to be includable in gross income for federal income tax purposes retroactively to the date of delivery of the Certificates. 6. The portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is exempt from personal income taxation imposed by the State of California. Ownership of the Certificates may result in other tax consequences to certain taxpayers, and we express no opinion regarding any such collateral consequences arising with respect to the Certificates. The rights of the owners of the Certificates and the enforceability of the Lease Agreement, the Assignment Agreement and the Trust Agreement may be subject to the Bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and also may be subject to the exercise of judicial discretion in accordance with general principles of equity. In rendering this opinion, we have relied upon certifications of the City and others with respect to certain material facts. Our opinion represents our legal judgment based upon such review of the law and the facts that we deem relevant to render our opinion and is not a guarantee of a result. This opinion is given as of the date hereof and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur. Respectfully submitted, Appendix D Page 2 APPENDIX E SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a brief summary of certain provisions of the Site and Facility Lease, the Lease Agreement, the Assignment Agreement and the Trust Agreement prepared for Certificates. The following also includes definitions of certain terms used therein and in this Official Statement. Such summary is not intended to be definitive. Reference is directed to said documents for the complete text thereof. Except as otherwise defined in this summary, the terms previously defined in this Official Statement have the respective meanings previously given. Copies of said documents are available from the City and from the Trustee. DEFINITIONS "Additional Payments" means the payments so designated and required to be paid by the City pursuant to the Lease Agreement. "Assignment Agreement" means the Assignment Agreement, dated as of May 1, 2012, by and between the Corporation and the Trustee, together with any duly authorized and executed amendments thereto. "Bond Counsel" means (a) Quint & Thimmig LLP, or (b) any other attorney or firm of attorneys appointed by or acceptable to the City of nationally- recognized experience in the issuance of obligations the interest on which is excludable from gross income for federal income tax purposes under the Code. "Business Day" means a day which is not a Saturday, Sunday or legal holiday on which banking institutions in the state in which the Principal Corporate Trust Office is located or in the State are closed or are required to close or a day on which the New York Stock Exchange is closed. "Certificates" means the certificates of participation to be executed and delivered pursuant to the Trust Agreement which evidence direct, undivided fractional Interests of the Owners thereof in Lease Payments. "City" means City of Cupertino, a municipal corporation and general law city, duly organized and existing under and by virtue of the laws of the State. "City Representative" means the Mayor, the City Manager, the Director of Administrative Services, the Director of Finance, or the designee of any such official, or any other person authorized by resolution delivered to the Trustee to act on behalf of the City under or with respect to the Site and Facility Lease, the Lease Agreement and the Trust Agreement. "Closing Date" means May 23, 2012, the date upon which there is a physical delivery of the Certificates in exchange for the amount representing the purchase price of the Certificates by the Original Purchaser. "Code" means the Internal Revenue Code of 1986 as in effect on the Closing Date or (except as otherwise referenced in the Lease Agreement or the Trust Agreement) as it may be amended to apply to obligations issued on the Closing Date, together with applicable temporary and final regulations promulgated under the Code. "Continuing Disclosure Certificate" shall mean that certain Continuing Disclosure Certificate executed by the City and dated the date of execution and delivery of the Certificates, as it may be amended from time to time in accordance with the terms thereof. "Corporation" means the Cupertino Public Facilities Corporation, a nonprofit, public benefit corporation organized and existing under and by virtue of the laws of the State. "Corporation Representative" means the President, the Executive Director, the Treasurer and the Secretary of the Corporation, or the designee of any such official, or any other person authorized by Appendix E Page 1 resolution delivered to the Trustee to act on behalf of the Corporation under or with respect to the Site and Facility Lease, the Lease Agreement, the Assignment Agreement and the Trust Agreement. "Council" means the City Council of the City. " Defeasance Obligations" means (a) cash, (b) direct non - callable obligations of the United States of America, (c) securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of America, to which direct obligation or guarantee the full faith and credit of the United States of America has been pledged, (d) Refcorp interest strips, (e) CATS, TIGRS, STRPS, and (f) defeased municipal bonds rated AAA by S &P or Aaa by Moody's (or any combination of the foregoing). "Delivery Costs" means all items of expense directly or indirectly payable by or reimbursable to the City or the Corporation relating to the execution and delivery of the Site and Facility Lease, the Lease Agreement, the Trust Agreement and the Assignment Agreement or the execution, sale and delivery of the Certificates, including but not limited to filing and recording costs, settlement costs, printing costs, reproduction and binding costs, costs for statistical data, initial fees and charges of the Trustee (including the fees and expenses of its counsel), financing discounts, legal fees and charges, insurance fees and charges (including title insurance), financial and other professional consultant fees, costs of rating agencies for credit ratings, fees for execution, transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing. "Delivery Costs Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. "Escrow Agreement" means that certain Escrow Deposit and Trust Agreement, dated the Closing Date, by and between the City and the Escrow Bank, as originally entered into or as it may be amended or supplemented pursuant to the provisions thereof, created to provide for the defeasance of the 2002 Certificates. "Escrow Bank" means The Bank of New York Mellon Trust Company, N.A., as escrow bank under the Escrow Agreement, or any successor thereto appointed as escrow bank thereunder in accordance with the provisions thereof. "Escrow Fund" means the fund by that name created and maintained by the Escrow Bank pursuant to the Escrow Agreement. "Event of Default" means an event of default under the Lease Agreement. "Facility" means those certain existing facilities more particularly described in the Site and Facility Lease and in the Lease Agreement. "Federal Securities " means (a) Cash (insured at all times by the Federal Deposit Insurance Corporation), and (b) obligations of, or obligations guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States including: (i) United States treasury obligations, (ii) all direct or fully guaranteed obligations, (iii) Farmers Home Administration, (iv) General Services Administration, (v) Guaranteed Title XI financing, (vi) Government National Mortgage Association (GNMA), and (vi) State and Local Government Series. "'Fiscal Year" means the twelve -month period beginning on July I of any year and ending on June 30 of the next succeeding year, or any other twelve -month period selected by the City as its fiscal year. "Independent Counsel" means an attorney duly admitted to the practice of law before the highest court of the state in which such attorney maintains an office and who is not an employee of the Corporation, the City or the Trustee. "Information Services" means the Electronic Municipal Market Access System (referred to as "EMMA "), a facility of the Municipal Securities Rulemaking Board (at http: / /emma.msrb.org) or, in Appendix E Page 2 accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other national information services providing information or disseminating notices of redemption of obligations similar to the Certificates. "Insurance and Condemnation Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. "Interest Payment Date" means the first (1st) day of January and July in each year, commencing January 1, 2013, so long as any Certificates are Outstanding. "Lease Agreement" means that certain agreement for the lease of the Property by the Corporation to the City, dated as of May 1, 2012, together with any duly authorized and executed amendments thereto. "Lease Payment Date" means the fifteenth (15th) day of June and December in each year during the Term of the Lease Agreement, commencing December 15, 2012. "Lease Payment Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. "Lease Payments" means the total payments required to be paid by the City pursuant to the Lease Agreement, including any prepayment thereof pursuant to the Lease Agreement, which payments consist of an interest component and a principal component, as set forth in the Lease Agreement. "Moody's" means Moody's Investors Service, New York, New York, or its successors. "Net Proceeds," when used with respect to insurance or condemnation proceeds, means any insurance proceeds or condemnation award paid with respect to the Property, to the extent remaining after payment therefrom of all expenses incurred in the collection thereof. "Original Purchaser" means the first purchaser of the Certificates upon their delivery by the Trustee on the Closing Date. "Outstanding," when used as of any particular time with respect to Certificates, means (subject to the provisions of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except: (a) Certificates theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (b) Certificates for the payment or redemption of which funds or Defeasance Obligations in the necessary amount shall have theretofore been deposited with the Trustee or an escrow holder (whether upon or prior to the maturity or redemption date of such Certificates), provided that, if such Certificates are to be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Trust Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice; and (c) Certificates in lieu of or in exchange for which other Certificates shall have been executed and delivered by the Trustee pursuant to the Trust Agreement. "Owner" or "Certificate Owner" or "Owner of a Certificate," or any similar term, when used with respect to a Certificate means the person in whose name such Certificate shall be registered on the Registration Books. "Participating Underwriter" shall have the meaning ascribed thereto in the Continuing Disclosure Certificate. "Permitted Encumbrances" means, as of any particular time: (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the City may, pursuant to provisions of the Lease Agreement, permit to remain unpaid; (b) the Site and Facility Lease; (c) the Lease Agreement; (d) the Appendix E Page 3 Assignment Agreement; (e) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; (f) easements, rights -of -way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which the City certifies in writing will not materially impair the use of the Property; and (g) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease Agreement and to which the Corporation and the City agree in writing do not reduce the value of the Property. "Permitted Investments" means any of the following: (a) Federal Securities; (b) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including: (i) Export- Import Bank, (ii) Rural Economic Community Development Administration, (iii) U.S. Maritime Administration, (iv) Small Business Administration, (v) U.S. Department of Housing & Urban Development (PHAs), (vi) Federal Housing Administration, and (vii) Federal Financing Bank; (c) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: (i) senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC), (ii) obligations of the Resolution Funding Corporation (REFCORP), and (iii) senior debt obligations of the Federal Home Loan Bank System; (d) U.S. dollar denominated deposit accounts, federal funds and bankers' acceptances with domestic commercial banks, which may include the Trustee and its affiliates, which have a rating on their short term certificates of deposit on the date of purchase of "P -I" by Moody's and "A -I" or "A -I +" by S &P and maturing not more than 360 calendar days after the date of purchase. (Ratings on holding companies are not considered as the rating of the bank); (e) Commercial paper which is rated at the time of purchase in the single highest classification, "P -I" by Moody's and "A -I +" by S &P and which matures not more than 270 calendar days after the date of purchase; (f) Investments in a money market fund rated "AAAm" or "AAAm -G" or better by S &P, including funds for which the Trustee, its parent holding company, if any, or any affiliate or subsidiary of the Trustee, provide investment advisory or other management services; (g) Pre - refunded municipal obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and (A) which are rated, based on an irrevocable escrow account or fund (the "escrow "), in the highest rating category of Moody's or S &P or any successors thereto; or (B) (i) which are fully secured as to principal, interest and redemption premium, if any, by an escrow consisting only of cash or obligations described in paragraph (a) above, which escrow may be applied only to the payment of such principal, interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal, interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate; (h) Municipal obligations rated "Aaa /AAA" or general obligations of states with a rating of "A2 /A" or higher by both Moody's and S &P; (i) the Local Agency Investment Fund maintained by the State; and Appendix E Page 4 (j) Shares in a California common law trust established pursuant to Title 1, Division 7, Chapter 5 of the California Government Code which invests exclusively in investments permitted by section 53635 of Title 5, Division 2, Chapter 4 of the California Government Code, as it may be amended, including but not limited to the California Asset Management Program (CAMP). "Principal Corporate Trust Office" means the corporate trust office of the Trustee located at 700 South Flower Street, Suite 500, Los Angeles, CA 90017, Attention: Corporate Trust Department, or, solely for the purposes of the presentation of Certificates for payment, transfer or exchange, the designated corporate trust operations office of the Trustee or such other office designated by the Trustee from time to time. "Proceeds," when used with reference to the Certificates, means the face amount of the Certificates, less original issue discount. "Property" means, collectively, the Site and the Facility. "Rating Category" means, with respect to any Permitted Investment, one of the generic categories of rating by Moody's or S &P applicable to such Permitted Investment, without regard to any refinement or graduation of such rating category by a plus or minus sign or a numeral. "Registration Books" means the records maintained by the Trustee pursuant to the Trust Agreement for registration of the ownership and transfer of ownership of the Certificates. "Regular Record Date" means the close of business on the fifteenth (15th) day of the month preceding each Interest Payment Date, whether or not such fifteenth (15th) day is a Business Day. "Rental Period" means each twelve -month period during the Term of the Lease Agreement commencing on July 2 in any year and ending on July 1 in the next succeeding year; provided, however, that the first Rental Period shall commence on the Closing Date and shall end on July 1, 2012. "Reserve Fund" means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. "Reserve Requirement" means an amount equal to 50% of the maximum annual Lease Payments. The amount of the Reserve Requirement shall not be reduced unless the Certificates are partially refunded, in which such amount shall be reduced to an amount equal to 50% of the maximum annual Lease Payments relating to the Certificates not so refunded, as specified in a certificate of a City Representative delivered to the Trustee. "S &P" means Standard & Poor's Ratings Services, a division of The McGraw -Hill Companies, Inc., New York, New York, or its successors. "Securities Depositories" means The Depository Trust Company, 55 Water Street, 50th Floor, New York, NY 10041 Attention: Call Notification Department; or to such other addresses and/or such other registered securities depositories holding substantial amounts of obligations of types similar to the Certificates. "Site" means that certain real property more particularly described in the Site and Facility Lease and in the Lease Agreement. "Site and Facility Lease" means the Site and Facility Lease, dated as of May 1, 2012, by and between the City, as lessor, and the Corporation, as lessee, together with any duly authorized and executed amendments thereto. "State" means the State of California. "Term of the Lease Agreement" means the time during which the Lease Agreement is in effect, as provided in the Lease Agreement. Appendix E Page 5 "Trust Agreement" means the Trust Agreement, dated as of May 1, 2012, by and among the City, the Corporation and the Trustee, together with any duly authorized amendments thereto. "Trustee" means The Bank of New York Mellon Trust Company, N.A., or any successor thereto, acting as Trustee pursuant to the Trust Agreement. "2002 Certificates" means the Certificates of Participation (2002 Refinancing and Capital Improvement Project), evidencing direct, undivided fractional interests of the owners thereof in lease payments to be made by the City as the rental for certain property pursuant to a lease agreement with the Corporation, currently outstanding in the principal amount of $44,010,000. SITE AND FACILITY LEASE The Site and Facility Lease is entered into between the City and the Corporation. The City agrees to lease the Site and the Facility to the Corporation for a term continuous with the term of the Lease Agreement. The City and the Corporation agree that the lease to the Corporation of the City's right, title and interest in the Site and the Facility pursuant to the Site and Facility Lease serves the public purposes of the City by enabling the Corporation to lease the Site and Facility back to the City. LEASE AGREEMENT Deposit of Money On the Closing Date, the Corporation shall cause to be deposited with the Trustee the net proceeds of sale of the Certificates. Amounts required to pay Delivery Costs shall be deposited in the Delivery Costs Fund, an amount equal to the Reserve Requirement will be deposited in the Reserve Fund and amounts required to refund the 2002 Certificates will be transferred to the Escrow Bank for deposit in the Escrow Fund. Payment of Delivery Costs Payment of Delivery Costs shall be made from the moneys deposited in the Delivery Costs Fund, which moneys shall be disbursed for such purpose in accordance and upon compliance with the Trust Agreement. Lease The Corporation leases the Property to the City, and the City leases the Property from the Corporation, upon the terms and conditions set forth in the Lease Agreement. The leasing of the Property by the City to the Corporation pursuant to the Site and Facility Lease shall not affect or result in a merger of the City's leasehold estate pursuant to the Lease Agreement and its fee estate as lessor under the Site and Facility Lease. Term of Agreement; Possession The Term of the Lease Agreement shall commence on the Closing Date, and shall end on August July 1, 2030, unless such term is extended. If, on July 1, 2030, the Trust Agreement shall not be discharged by its terms or if the Lease Payments payable under the Lease Agreement shall have been abated at any time and for any reason, then the Term of the Lease Agreement shall be extended without the need to execute any amendment to the Lease Agreement until there has been deposited with the Trustee an amount sufficient to pay all obligations due under the Lease Agreement, but in no event shall the Term of the Lease Agreement extend beyond July 1, 2040. If, prior to July 1, 2030, the Trust Agreement shall be discharged by its terms, the Term of the Lease Agreement shall thereupon end. The Trustee shall notify the Corporation of the termination of the Lease Agreement pursuant to the Trust Agreement. The City agrees to accept and take possession of the Property on or prior to the date of recordation of the Lease Agreement. The first Lease Payment shall be due on December 15, 2012. Appendix E Page 6 Lease Payments Obligation to Pay. The City agrees to pay to the Corporation, its successors and assigns, as rental for the use and occupancy of the Property during each Rental Period, the Lease Payments (denominated into components of principal and interest) in the respective amounts specified in the Lease Agreement, to be due and payable on the respective Lease Payment Dates specified in the Lease Agreement. Any amount held in the Lease Payment Fund on any Lease Payment Date (other than amounts resulting from the prepayment of the Lease Payments in part but not in whole and other than amounts required for payment of Certificates not yet surrendered) shall be credited towards the Lease Payment then due and payable; and no Lease Payment need be made on any Lease Payment Date if the amounts then held in the Lease Payment Fund are at least equal to the Lease Payment then required to be paid. The Lease Payments for the Property payable in any Rental Period shall be for the use of the Property for such Rental Period. Effect of Prepayment. In the event that the City prepays all remaining Lease Payments and all additional payments due under the Lease Agreement in full, the City's obligations under the Lease Agreement shall thereupon cease and terminate including, but not limited to, the City's obligation to pay Lease Payments under the Lease Agreement; subject however, to the provisions of the Lease Agreement in the case of prepayment by application of a security deposit. In the event that the City optionally prepays the Lease Payments in part but not in whole, such prepayment shall be credited entirely towards the prepayment of the Lease Payments as follows: (i) the principal components of each remaining such Lease Payments shall be reduced in such order as shall be selected by the City in integral multiples of $5,000; and (ii) the interest component of each remaining Lease Payment shall be reduced by the aggregate corresponding amount of interest which would otherwise be payable with respect to the Certificates redeemed pursuant to the Trust Agreement. Rate on Overdue Payments. In the event the City should fail to make any of the payments required in the Lease Agreement, the payment in default shall continue as an obligation of the City until the amount in default shall have been fully paid and the City agrees to pay the same with interest thereon, to the extent permitted by law, from the date of default to the date of payment at the rate per annum payable with respect to the Certificates. Such interest, if received, shall be deposited in the Lease Payment Fund or in the Reserve Fund to replenish the Reserve Fund if withdrawals were made therefrom as a result of the default. Fair Rental Value. The Lease Payments for each Rental Period shall constitute the total rental for the Property for each such Rental Period and shall be paid by the City in each Rental Period for and in consideration of the right of the use and occupancy and the continued quiet use and enjoyment of the Property during each Rental Period. The parties to the Lease Agreement have agreed and determined that the total Lease Payments represent the fair rental value of the Property. In making such determination, consideration has been given to the obligations of the parties under the Lease Agreement, the uses and purposes which may be served by the Property and the benefits therefrom which will accrue to the City and the general public. Source of Payments; Budget and Appropriation. Lease Payments shall be payable from any source of available funds of the City. The City covenants to take such action as may be necessary to include all Lease Payments due under the Lease Agreement in each of its budgets during the Term of the Lease Agreement and to make the necessary annual appropriations for all such Lease Payments and for additional payments due under the Lease Agreement. To that end, the Board of Supervisors shall direct budgetary staff to include in each annual budget proposal to the Board of Supervisors an appropriation sufficient to pay Lease Payments and Additional Payments. The City expresses its present intent to appropriate Lease Payments and additional payments due under the Lease Agreement during the Term of the Lease Agreement. The covenants on the part of the City contained in the Lease Agreement shall be deemed to be and shall be construed to be duties imposed by law and it shall be the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease Agreement agreed to be carried out and performed by the City. Appendix E Page 7 Assignment. The City understands and agrees that all Lease Payments have been assigned by the Corporation to the Trustee in trust, pursuant to the Assignment Agreement, for the benefit of the Owners of the Certificates, and the City assents to such assignment. The Corporation directs the City, and the City agrees to pay to the Trustee at the Principal Corporate Trust Office, all payments payable by the City pursuant to the Lease Agreement. Additional Payments In addition to the Lease Payments, the City shall pay when due the following additional payments: (a) Any fees and expenses incurred by the City in connection with or by reason of its leasehold estate in the Property as and when the same become due and payable; (b) Any amounts due to the Trustee pursuant to the Trust Agreement for all services rendered under the Trust Agreement and for all reasonable expenses, charges, costs, liabilities, legal fees and other disbursements incurred in and about the performance of its powers and duties under the Trust Agreement; (c) Any reasonable fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the City, the Corporation or the Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Lease Agreement or the Trust Agreement; (d) Any reasonable out -of- pocket expenses of the City in connection with the execution and delivery of the Lease Agreement or the Trust Agreement, or in connection with the execution and delivery of the Certificates, including any and all expenses incurred in connection with the authorization, execution, sale and delivery of the Certificates, or incurred by the Corporation in connection with any litigation which may at any time be instituted involving the Lease Agreement, the Trust Agreement, the Certificates or any of the other documents contemplated or thereby, or incurred by the Corporation in connection with the Continuing Disclosure Certificate, or otherwise incurred in connection with the administration thereof. Title During the Term of the Lease Agreement, the Corporation shall hold leasehold title to the Property and shall hold fee title to those portions of the Property which are newly acquired or constructed and any and all additions which comprise fixtures, repairs, replacements or modifications to the Property, except for those fixtures, repairs, replacements or modifications which are added to the Property by the City at its own expense and which may be removed without damaging the Property and except for any items added to the Property by the City pursuant to the Lease Agreement. If the City prepays the Lease Payments in full or makes the security deposit permitted by the Lease Agreement, or pays all Lease Payments during the Term of the Lease Agreement as the same become due and payable, all right, title and interest of the Corporation in and to the Property shall be terminated. The Corporation agrees to take any and all steps and execute and record any and all documents reasonably required by the City to consummate any such transfer of title. Maintenance, Utilities, Taxes and Assessments Throughout the Term of the Lease Agreement, as part of the consideration for the rental of the Property, all improvement, repair and maintenance of the Property shall be the responsibility of the City and the City shall pay, or otherwise arrange, for the payment of all utility services supplied to the Property which may include, without limitation, janitor service, security, power, gas, telephone, light, heating, water and all other utility services, and shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Property resulting from ordinary wear and tear or want of care on the part of the City or any assignee or sublessee thereof. In exchange for the Lease Payments, the Corporation agrees to provide only the Property. The City waives the benefits of subsections I and 2 of Appendix E Page 8 section 1932 of the California Civil Code, but such waiver shall not limit any of the rights of the City under the terms of the Lease Agreement. The City shall also pay or cause to be paid all taxes and assessments of any type or nature, if any, charged to the Corporation or the City affecting the Property or the respective interests or estates therein; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the City shall be obligated to pay only such installments as are required to be paid during the Term of the Lease Agreement as and when the same become due. The City may, at the City's expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Corporation shall notify the City that, in the opinion of Independent Counsel, by nonpayment of any such items, the interest of the Corporation in the Property will be materially endangered or the Property or any part thereof will be subject to loss or forfeiture, in which event the City shall promptly pay such taxes, assessments or charges or provide the Corporation with full security against any loss which may result from nonpayment, in form satisfactory to the Corporation. The City shall provide the Corporation with written notice of any such contest and shall provide such updates on the contest as the Corporation may reasonably request. Modification of Property The City shall, at its own expense, have the right to remodel the Property or to make additions, modifications and improvements to the Property. All additions, modifications and improvements to the Property shall thereafter comprise part of the Property and be subject to the provisions of the Lease Agreement. Such additions, modifications and improvements shall not in any way damage the Property, substantially alter its nature, cause the interest component of Lease Payments to be subject to federal income taxes or cause the Property to be used for purposes other than those authorized under the provisions of State and federal law; and the Property, upon completion of any additions, modifications and improvements made thereto pursuant to the Lease Agreement, shall be of a value which is not substantially less than the value of the Property immediately prior to the making of such additions, modifications and improvements. The City will not permit any mechanic's or other lien to be established or remain against the Property for labor or materials furnished in connection with any remodeling, additions, modifications, improvements, repairs, renewals or replacements made by the City pursuant to the Lease Agreement; provided that if any such lien is established and the City shall first notify the Corporation of the City's intention to do so, the City may in good faith contest any lien filed or established against the Property, and in such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and shall provide the Corporation with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Corporation. The Corporation will cooperate fully in any such contest, upon the request and at the expense of the City. Insurance Public Liability and Property Damage Insurance. The City shall maintain or cause to be maintained, throughout the Term of the Lease Agreement, insurance policies, including a standard comprehensive general insurance policy or policies in protection of the Corporation, the City and the Trustee and their respective members, officers, agents and employees. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the City, and may be maintained through a joint exercise of powers authority created for such purpose or in the form of self - insurance by the City. Said policy or policies shall provide for indemnification of said parties against direct or consequential loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the operation of the Property. Said policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $100,000 (subject to a deductible clause of not to exceed $5,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance Appendix E Page 9 coverage carried by the City and may be maintained in the form of insurance maintained through a joint exercise of powers authority created for such purpose or in the form of self - insurance by the City. The Net Proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to which the insurance proceeds shall have been paid. Fire and Extended Coverage Insurance; No Earthquake Insurance. The City shall maintain, or cause to be maintained throughout the Term of the Lease Agreement, insurance against loss or damage to any part of the Property constituting structures, if any, by fire and lightning, with extended coverage and vandalism and malicious mischief insurance; provided, however, that the City shall not be required to maintain earthquake insurance with respect to the Property. Said extended coverage insurance shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. Such insurance shall be in an amount equal to one hundred percent (100 %) of the replacement cost of such portion of the Property, if any. Such insurance may be subject to deductible clauses of not to exceed $100,000 for any one loss. Such insurance may be maintained as part of or in conjunction with any other fire and extended coverage insurance carried by the City and may be maintained in whole or in part in the form of insurance maintained through a joint exercise of powers authority created for such purpose. The Net Proceeds of such insurance shall be applied as provided in the Lease Agreement. The City may not satisfy the requirements of the Lease Agreement for fire and extended coverage insurance with self - insurance. Rental Interruption Insurance. The City shall maintain, or cause to be maintained, throughout the Term of the Lease Agreement rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of any part of the Property during the Term of the Lease Agreement as a result of any of the hazards covered in the insurance required by the Lease Agreement, if any, in an amount at least equal to two times maximum annual Lease Payments. The Net Proceeds of such insurance shall be paid to the Trustee and deposited in the Lease Payment Fund and shall be credited towards the payment of the Lease Payments in the order in which such Lease Payments come due and payable. Such insurance may be maintained as part of or in conjunction with any other insurance carried by the City and may be maintained in whole or in part in the form of insurance maintained through a joint exercise of powers authority created for such purpose. The City may not satisfy the requirements of the Lease Agreement for rental interruption insurance with self - insurance. Title Insurance. The City shall provide, from moneys in the Delivery Costs Fund or at its own expense, on the Closing Date, an CLTA title insurance policy in the amount of not less than the principal amount of the Certificates, insuring the City's leasehold estate in the Property, subject only to Permitted Encumbrances. Insurance Net Proceeds; Form of Policies. Each policy or other evidence of insurance required by the Lease Agreement shall provide that all proceeds thereunder shall be payable to the Trustee as and to the extent required under the Lease Agreement, shall name the Trustee as an additional insured and shall be applied as provided in the Lease Agreement. Insurance must be provided by an insurer rated "A" or better by S &P or A.M. Best Company. The City shall pay or cause to be paid when due the premiums for all insurance policies required by the Lease Agreement. The Trustee shall not be responsible for the sufficiency of any insurance required in the Lease Agreement, including any forms of self - insurance and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss. The City shall cause to be delivered annually on or before each September 1 to the Trustee a certification, signed by a City Representative, stating compliance with the provisions of the Lease Agreement. The Trustee shall be entitled to rely on such certification without independent investigation. The City shall have the adequacy of any insurance reserves maintained by the City or by a joint exercise of powers authority, if applicable, for purposes of the insurance required by the Lease Agreement reviewed at least annually, on or before each September 1, by an independent insurance consultant and shall maintain reserves in accordance with the recommendations of such consultant to the extent moneys are available for such purpose and not otherwise appropriated. Tax Covenants Private Activity Bond Limitation. The City shall assure that proceeds of the Certificates are not so used as to cause the Certificates or the Lease Agreement to satisfy the private business tests of section 141(b) of the Code or the private loan financing test of section 141(c) of the Code. Appendix E Page 10 Federal Guarantee Prohibition. The City shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause any of the Certificates or the Lease Agreement to be "federally guaranteed" within the meaning of section 149(b) of the Code. Rebate Requirement. The City shall take any and all actions necessary to assure compliance with section 148(f) of the Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the Certificates and the Lease Agreement. No Arbitrage. The City shall not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the Certificates which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date would have caused the Certificates or the Lease Agreement to be "arbitrage bonds" within the meaning of section 148 of the Code. Maintenance of Tax - Exemption. The City shall take all actions necessary to assure the exclusion of interest with respect to the Certificates from the gross income of the Owners of the Certificates to the same extent as such interest is permitted to be excluded from gross income under the Code as in effect on the Closing Date. No Condemnation The City covenants and agrees, to the extent it may lawfully do so, that so long as any of the Certificates remain outstanding and unpaid, the City will not exercise the power of condemnation with respect to the Property. The City further covenants and agrees, to the extent it may lawfully do so, that if for any reason the foregoing covenant is determined to be unenforceable or if the City should fall or refuse to abide by such covenant and condemns the Property, the appraised value of the Property shall not be less than the greater of (i) if the Certificates are then subject to redemption, the principal and interest components of the Certificates Outstanding through the date of their redemption, or (ii) if the Certificates are not then subject to redemption, the amount necessary to defease the Certificates to the first available redemption date in accordance with the Trust Agreement. Eminent Domain If all of the Property shall be taken permanently under the power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the Term of the Lease Agreement shall cease as of the day possession shall be so taken. If less than all of the Property shall be taken permanently, or if all of the Property or any part thereof shall be taken temporarily under the power of eminent domain, (1) the Lease Agreement shall continue in full force and effect and shall not be terminated by virtue of such taking and the parties waive the benefit of any law to the contrary, and (2) there shall be a partial abatement of Lease Payments as a result of the application of the Net Proceeds of any eminent domain award to the prepayment of the Lease Payments, in an amount to be agreed upon by the City and the Corporation and communicated to the Trustee such that the resulting Lease Payments represent fair consideration for the use and occupancy of the remaining usable portion of the Property, except to the extent of special funds, such as amounts in the Reserve Fund available for the payment of Lease Payments. Application of Net Proceeds From Insurance Award. The Net Proceeds of any insurance award resulting from any damage to or destruction of any portion of the Property constituting structures, if any, by fire or other casualty shall be paid by the City to the Trustee, as assignee of the Corporation under the Assignment Agreement, deposited in the Insurance and Condemnation Fund held by the Trustee and applied as set forth in the Trust Agreement. From Eminent Domain Award. The Net Proceeds of any eminent domain award shall be paid by the City to the Trustee, as assignee of the Corporation under the Assignment Agreement, deposited in the Insurance and Condemnation Fund and applied as set forth in the Trust Agreement. Appendix E Page 11 From Title Insurance. The Net Proceeds of any title insurance award shall be paid to the Trustee, as assignee of the Corporation under the Assignment Agreement, deposited in the Insurance and Condemnation Fund and applied as set forth in the Trust Agreement. Abatement of Lease Payments in the Event of Damage or Destruction Lease Payments shall be abated during any period in which, by reason of damage or destruction, there is substantial interference with the use and occupancy by the City of the Property or any portion thereof to the extent to be agreed upon by the City and the Corporation and communicated by a City Representative to the Trustee. The parties agree that the amounts of the Lease Payments under such circumstances shall not be less than the amounts of the unpaid Lease Payments as are then set forth in the Lease Agreement, unless such unpaid amounts are determined to be greater than the fair rental value of the portions of the Property not damaged or destroyed, based upon the opinion of an MAI appraiser with expertise in valuing such properties, or other appropriate method of valuation, in which event the Lease Payments shall be abated such that they represent said fair rental value. Such abatement shall continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction as communicated by a City Representative to the Trustee. In the event of any such damage or destruction, the Lease Agreement shall continue in full force and effect and the City waives any right to terminate the Lease Agreement by virtue of any such damage and destruction. Notwithstanding the foregoing, there shall be no abatement of Lease Payments to the extent that (a) the proceeds of rental interruption insurance or (b) amounts in the Reserve Fund, if cash funded, and/or the Insurance and Condemnation Fund and/or the Lease Payment Fund are available to pay Lease Payments which would otherwise be abated, it being declared that such proceeds and amounts constitute special funds for the payment of the Lease Payments. Access to the Property The City agrees that the Corporation and any Corporation Representative, and the Corporation's successors or assigns, shall have the right at all reasonable times to enter upon and to examine and inspect the Property. The City further agrees that the Corporation, any Corporation Representative, and the Corporation's successors or assigns, shall have such rights of access to the Property as may be reasonably necessary to cause the proper maintenance of the Property in the event of failure by the City to perform its obligations under the Lease Agreement. Release and Indemnification Covenants The City shall and agrees to indemnify and save the Corporation and the Trustee and their officers, agents, directors, employees, successors and assigns harmless from and against all claims, losses and damages, including legal fees and expenses, arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on the Property by the City, (ii) any breach or default on the part of the City in the performance of any of its obligations under the Lease Agreement or the Trust Agreement, (iii) any act or omission of the City or of any of its agents, contractors, servants, employees or licensees with respect to the Property, (iv) any act or omission of any sublessee of the City with respect to the Property, or (v) the authorization of payment of the Delivery Costs. Such indemnification shall include the costs and expenses of defending any claim or liability arising under the Lease Agreement or the Trust Agreement and the transactions contemplated thereby. No indemnification is made in the Lease Agreement for willful misconduct, negligence or breach of duty under the Lease Agreement by the Corporation, its officers, agents, directors, employees, successors or assigns. Assignment by the Corporation The Corporation's rights under the Lease Agreement, including the right to receive and enforce payment of the Lease Payments to be made by the City under the Lease Agreement, have been assigned to the Trustee pursuant to the Assignment Agreement. Appendix E Page 12 Assignment and Subleasing by the City The Lease Agreement may not be assigned by the City. The City may sublease the Property or any portion thereof, but only with the written consent of the Corporation and subject to, and delivery to the Corporation of a certificate as to, all of the following conditions: (a) The Lease Agreement and the obligation of the City to make Lease Payments shall remain obligations of the City; (b) The City shall, within thirty (30) days after the delivery thereof, furnish or cause to be furnished to the Corporation and the Trustee a true and complete copy of such sublease; (c) No such sublease by the City shall cause the Property to be used for a purpose other than as may be authorized under the provisions of the Constitution and laws of the State; and (d) The City shall furnish the Corporation and the Trustee with a written opinion of Bond Counsel, which shall be an Independent Counsel, stating that such sublease does not cause the interest components of the Lease Payments to become subject to federal income taxes or State personal income taxes. Amendment of Lease Agreement (a) Substitution of Site or Facility. The City shall have, and is granted, the option at any time and from time to time during the Term of the Lease Agreement to substitute other land (a "Substitute Site ") and /or a substitute facility (a "Substitute Facility ") for the Site (the "Former Site "), or a portion thereof, and/or the Facility (the "Former Facility "), or a portion thereof, provided that the City shall satisfy all of the following requirements (to the extent applicable) which are declared to be conditions precedent to such substitution: (i) If a substitution of the Site, the City shall file with the Corporation and the Trustee an amendment to the Site and Facility Lease which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site; (ii) If a substitution of the Site, the City shall file with the Corporation and the Trustee an amendment to the Lease Agreement which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site; (iii) If a substitution of the Facility, the City shall file with the Corporation and the Trustee an amendment to the Site and Facility Lease which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility; (iv) If a substitution of the Facility, the City shall file with the Corporation and the Trustee an amendment to the Lease Agreement which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility; (v) The City shall certify in writing to the Corporation and the Trustee that such Substitute Site and /or Substitute Facility serve the purposes of the City, constitutes property that is unencumbered, subject to Permitted Encumbrances, and constitutes property which the City is permitted to lease under the laws of the State; (vi) The City delivers to the Corporation and the Trustee evidence (which may be insurance values or any other reasonable basis of valuation and need not require an appraisal) that the value of the Property following such substitution is equal to or greater than the Outstanding principal amount of the Certificates and confirms in writing to the Trustee that the indemnification provided pursuant to the Trust Agreement applies with respect to the Substitute Site and/or Substitute Facility; Appendix E Page 13 (vii) The Substitute Site and /or Substitute Facility shall not cause the City to violate any of its covenants, representations and warranties made in the Lease Agreement and in the Trust Agreement; (viii) The City shall obtain an amendment to the title insurance policy required pursuant to the Lease Agreement which adds thereto a description of the Substitute Site and deletes therefrom the description of the Former Site; (ix) The City shall certify that the Substitute Site and /or the Substitute Facility is of the same or greater essentiality to the City as was the Former Site and/or the Former Facility; (x) The City shall provide notice of the substitution to any rating agency then rating the Certificates which rating was provided at the request of the City or the Corporation; and (xi) The City shall furnish the Corporation and the Trustee with a written opinion of Bond Counsel, which shall be an Independent Counsel, stating that such substitution does not cause the interest components of the Lease Payments to become subject to federal income taxes or State personal income taxes. (b) Release of Site. The City shall have, and is granted, the option at any time and from time to time during the Term of the Lease Agreement to release any portion of the Site, provided that the City shall satisfy all of the following requirements which are declared to be conditions precedent to such release: (i) The City shall file with the Corporation and the Trustee an amendment to the Site and Facility Lease which describes the Site, as revised by such release; (ii) The City delivers to the Corporation and the Trustee evidence (which may be insurance values or any other reasonable basis of valuation and need not require an appraisal) that the value of the Site, as revised by such release, is equal to or greater than the Outstanding principal amount of the Certificates and confirms in writing to the Trustee and the Corporation that the indemnification provided pursuant to the Trust Agreement applies with respect to the Site, as revised by such release; (iii) Such release shall not cause the City to violate any of its covenants, representations and warranties made in the Lease Agreement and in the Trust Agreement; (iv) The City shall obtain an amendment to the title insurance policy required pursuant to the Lease Agreement which describes the Site, as revised by such release; and (v) The City shall provide notice of the release to any rating agency then rating the Certificates which rating was provided at the request of the City or the Corporation. (c) Generally. The Corporation and the City may at any time amend or modify any of the provisions of the Lease Agreement, but only (a) with the prior written consent of the Owners of a majority in aggregate principal amount of the Outstanding Certificates, or (b) without the consent of any of the Owners, but only if such amendment or modification is for any one or more of the following purposes: (i) to add to the covenants and agreements of the City contained in the Lease Agreement, other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power reserved to or conferred upon the City; (ii) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in the Lease Agreement, or in any other respect whatsoever as the Corporation and the City may deem necessary or desirable, provided that, in the opinion of Bond Counsel, such modifications or amendments will not materially adversely affect the interests of the Owners; or Appendix E Page 14 (iii) to amend any provision thereof relating to the Code, to any extent whatsoever but only if and to the extent such amendment will not adversely affect the exclusion from gross income of interest with respect to the Certificates under the Code, in the opinion of Bond Counsel. Events of Default and Remedies Events of Default. The following shall be "events of default" under the Lease Agreement and the terms "Events of Default" and "Default" shall mean, whenever they are used in the Lease Agreement, any one or more of the following events: (a) Failure by the City to pay any Lease Payment or other payment required to be paid at the time specified. (b) Failure by the City to observe and perform any covenant, condition or agreement on its part to be observed or performed under the Lease Agreement or under the Trust Agreement, for a period of thirty (30) days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Corporation, the Trustee or the Owners of not less than five percent (5 %) in aggregate principal amount of Certificates then outstanding; provided, however, if the failure stated in the notice can be corrected, but not within the applicable period, the Corporation, the Trustee and such Owners shall not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the City within the applicable period and diligently pursued until the default is corrected. (c) The filing by the City of a voluntary petition in bankruptcy, or failure by the City promptly to lift any execution, garnishment or attachment, or adjudication of the City as a bankrupt, or assignment by the City for the benefit of creditors, or the entry by the City into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the City in any proceedings instituted under the provisions of the Federal Bankruptcy Act, as amended, or under any similar acts which may hereafter be enacted. Remedies on Default. The Trustee shall have the right to re -enter and re -let the Property and to terminate the Lease Agreement. Whenever any Event of Default shall have happened and be continuing, it shall be lawful for the Corporation to exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that notwithstanding anything in the Lease Agreement or in the Trust Agreement to the contrary, there shall be no right under any circumstances to accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable. Each and every covenant in the Lease Agreement to be kept and performed by the City is expressly made a condition and upon the breach thereof, the Corporation may exercise any and all rights of entry and re -entry upon the Property, and also, at its option, with or without such entry, may terminate the Lease Agreement; provided, that no such termination shall be effected either by operation of law or acts of the parties to the Lease Agreement, except only in the manner expressly provided in the Lease Agreement. In the event of such default and notwithstanding any re -entry by the Corporation, the City shall, as expressly provided in the Lease Agreement, continue to remain liable for the payment of the Lease Payments and/or damages for breach of the Lease Agreement and the performance of all conditions therein contained and, in any event such rent and/or damages shall be payable to the Corporation at the time and in the manner as provided in the Lease Agreement, to wit: (a) In the event the Corporation does not elect to terminate the Lease Agreement in the manner provided for below, the City agrees to and shall remain liable for the payment of all Lease Payments and the performance of all conditions contained in the Lease Agreement and shall reimburse the Corporation for any deficiency arising out of the re- leasing of the Property, or, in the event the Corporation is unable to re -lease the Property, then for the full amount of all Lease Payments to the end of the Term of the Lease Agreement, but said Lease Payments and/or deficiency shall be payable only at the same time and in the same manner as hereinabove provided for the payment of Lease Payments, notwithstanding such entry or re -entry by the Corporation or any suit in unlawful detainer, or otherwise, brought by the Corporation for the purpose of effecting such re -entry or obtaining possession of the Property or the exercise of any other remedy by the Corporation. The City irrevocably appoints the Corporation as the agent and Appendix E Page 15 attorney -in -fact of the City to enter upon and re -lease the Property in the event of default by the City in the performance of any covenants contained in the Lease Agreement to be performed by the City and to remove all personal property whatsoever situated upon the Property, to place such property in storage or other suitable place within Riverside City, for the account of and at the expense of the City, and the City exempts and agrees to save harmless the Corporation from any costs, loss or damage whatsoever arising or occasioned by any such entry upon and re- leasing of the Property and the removal and storage of such property by the Corporation or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. The City waives any and all claims for damages caused or which may be caused by the Corporation in re- entering and taking possession of the Property as provided in the Lease Agreement and all claims for damages that may result from the destruction of or injury to the Property and all claims for damages to or loss of any property belonging to the City that may be in or upon the Property. The City agrees that the terms of the Lease Agreement constitute full and sufficient notice of the right of the Corporation to re -lease the Property in the event of such re -entry without effecting a surrender of the Lease Agreement, and further agrees that no acts of the Corporation in effecting such re- leasing shall constitute a surrender or termination of the Lease Agreement irrespective of the term for which such re- leasing is made or the terms and conditions of such re- leasing, or otherwise, but that, on the contrary, in the event of such default by the City the right to terminate the Lease Agreement shall vest in the Corporation to be effected in the sole and exclusive manner provided for in paragraph (b) below. (b) In an Event of Default, the Corporation at its option may terminate the Lease Agreement and re -lease all or any portion of the Property. In the event of the termination of the Lease Agreement by the Corporation at its option and in the manner provided in the Lease Agreement on account of default by the City (and notwithstanding any re -entry upon the Property by the Corporation in any manner whatsoever or the re- leasing of the Property), the City nevertheless agrees to pay to the Corporation all costs, loss or damages howsoever arising or occurring payable at the same time and in the same manner as is provided in the Lease Agreement in the case of payment of Lease Payments. Any surplus received by the Corporation from such re- leasing shall be credited towards the Lease Payments next coming due and payable. Neither notice to pay rent or to deliver up possession of the premises given pursuant to law nor any proceeding in unlawful detainer taken by the Corporation shall of itself operate to terminate the Lease Agreement, and no termination of the Lease Agreement on account of default by the City shall be or become effective by operation of law, or otherwise, unless and until the Corporation shall have given written notice to the City of the election on the part of the Corporation to terminate the Lease Agreement. The City covenants and agrees that no surrender of the Property and/or of the remainder of the Term of the Lease Agreement or any termination of the Lease Agreement shall be valid in any manner or for any purpose whatsoever unless stated or accepted by the Corporation by such written notice. No Remedy Exclusive. No remedy is intended to be exclusive and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Lease Agreement now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Corporation to exercise any remedy reserved to it in the Lease Agreement, it shall not be necessary to give any notice, other than such notice as may be required in the Lease Agreement or by law. Security Deposit Notwithstanding any other provision of the Lease Agreement, the City may, on any date, secure the payment of all or a portion of the Lease Payments remaining due by an irrevocable deposit with the Trustee or an escrow holder under an escrow deposit and trust agreement, of: (a) in the case of a security deposit relating to all Lease Payments, either (i) cash in an amount which, together with amounts on deposit in the Lease Payment Fund, the Insurance and Condemnation Fund and the Reserve Fund, is sufficient to pay all unpaid Lease Payments, including the principal and interest components thereof, in accordance with the Lease Payment schedule set forth in the Lease Agreement, or (ii) Defeasance Obligations in such amount as will, in the written opinion of an independent certified public accountant or other firm of recognized experts in such matters, together with interest to accrue thereon and, if required, all or a portion of moneys or Defeasance Obligations or cash then on deposit and interest earnings thereon in the Lease Payment Fund, the Insurance and Condemnation Fund and the Reserve Fund, be fully sufficient to pay all unpaid Lease Payments on their respective Lease Payment Dates; or (b) Appendix E Page 16 in the case of a security deposit relating to a portion of the Lease Payments, a certificate executed by a City Representative designating the portion of the Lease Payments to which the deposit pertains, and either (i) cash in an amount which is sufficient to pay the portion of the Lease Payments designated in such City Representative's certificate, including the principal and interest components thereof, or (ii) Defeasance Obligations in such amount as will, together with interest to be received thereon, if any, in the written opinion of an independent certified public accountant or other firm of recognized experts in such matters, be fully sufficient to pay the portion of the Lease Payments designated in the aforesaid City Representative's certificate. In the event of a deposit pursuant as to all Lease Payments and the payment of all fees, expenses and indemnifications owed to the Trustee, all obligations of the City under the Lease Agreement shall cease and terminate, excepting only the obligation of the City to make, or cause to be made, all payments from the deposit made by the City and the obligations of the City pursuant to the Lease Agreement and title to the Property shall vest in the City on the date of said deposit automatically and without further action by the City or the Corporation. Said deposit and interest earnings thereon shall be deemed to be and shall constitute a special fund for the payments and said obligation shall thereafter be deemed to be and shall constitute the installment purchase obligation of the City for the Property. Upon said deposit, the Corporation will execute or cause to be executed any and all documents as may be necessary to confirm title to the Property in accordance with the provisions of the Lease Agreement. In addition, the Corporation appoints the City as its agent to prepare, execute and file or record, in appropriate offices, such documents as may be necessary to place record title to the Property in the City. Prepayment Optional Prepayment. The Corporation grants an option to the City to prepay the principal component of the Lease Payments in full, by paying the aggregate unpaid principal components of the Lease Payments, or in part, in a prepayment amount equal to the principal amount of Lease Payments to be prepaid, together with accrued interest to the date fixed for prepayment, without premium. Said option may be exercised with respect to Lease Payments due on and after June 15, 2021, in whole or in part on any date, commencing June 15, 2020. Said option shall be exercised by the City by giving written notice to the Corporation and the Trustee of the exercise of such option at least forty -five (45) days prior to said prepayment date. In the event of prepayment in part, the partial prepayment shall be applied against Lease Payments in such order of payment date as shall be selected by the City. Lease Payments due after any such partial prepayment shall be in the amounts set forth in a revised Lease Payment schedule which shall be provided by, or caused to be provided by, the City to the Trustee and which shall represent an adjustment to the schedule set forth in the Lease Agreement taking into account said partial prepayment. The Trustee agrees to notify the Corporation in the event of any prepayment of Lease Payments, as provided in the Trust Agreement. Mandatory Prepayment From Net Proceeds of Insurance, Title Insurance or Eminent Domain. The City shall be obligated to prepay the Lease Payments, in whole on any date or in part on any Lease Payment Date, from and to the extent of any Net Proceeds of an insurance, title insurance or condemnation award with respect to the Property theretofore deposited in the Lease Payment Fund for such purpose. The City and the Corporation agree that such Net Proceeds shall be applied first to the payment of any delinquent Lease Payments, and thereafter shall be credited towards the City's obligations under the Lease Agreement. Lease Payments due after any such partial prepayment shall be in the amounts set forth in a revised Lease Payment schedule which shall be provided by, or caused to be provided by, the City to the Trustee and which shall represent an adjustment to the schedule set forth in the Lease Agreement taking into account said partial prepayment. ASSIGNMENT AGREEMENT The Assignment Agreement is entered into between the Corporation and the Trustee, pursuant to which the Corporation assigns and transfers to the Trustee, for the benefit of the Owners, certain of the rights of the Corporation under the Lease Agreement, including the right to receive Lease Payments under the Lease Agreement and the rights and remedies of the Corporation under the Lease Agreement to enforce payment of Lease Payments or otherwise to protect and enforce the Lease Agreement in the Appendix E Page 17 event of default by the City. Certain rights of the Corporation to payment of advances, indemnification and attorneys' fees and expenses are not assigned. TRUST AGREEMENT Delivery Costs Fund; Payment of Delivery Costs There shall be deposited in the Delivery Costs Fund the proceeds of sale of the Certificates required to be deposited therein pursuant to the Trust Agreement and any other funds from time to time deposited with the Trustee for such purpose and identified in writing to the Trustee. The moneys in the Delivery Costs Fund shall be disbursed by the Trustee to pay the Delivery Costs. Disbursements from the Delivery Costs Fund shall be made by the Trustee on receipt of a sequentially numbered requisition, signed by a City Representative. The Trustee shall be responsible for the safekeeping and investment (in accordance with the Trust Agreement) of the moneys held in the Delivery Costs Fund and the payment thereof in accordance with the Trust Agreement, but the Trustee shall not be responsible for the truth or accuracy of such requisitions, may rely conclusively thereon and shall be under no duty to investigate or verify any statements made therein. Upon written notice from a City Representative that all Delivery Costs have been paid, the Trustee shall transfer any moneys then remaining in the Delivery Costs Fund to the Lease Payment Fund and applied for the purposes of such fund, the Delivery Costs Fund shall be closed, the Trustee shall no longer be obligated to make payments for Delivery Costs and all further Delivery Costs shall be paid by the City. Assignment of Rights in Lease Agreement The Corporation has, in the Assignment Agreement, transferred, assigned and set over to the Trustee certain of its rights but none of its obligations set forth in the Lease Agreement, including but not limited to all of the Corporation's rights to receive and collect Lease Payments and all other amounts required to be deposited in the Lease Payment Fund pursuant to the Lease Agreement or pursuant to the Trust Agreement. All Lease Payments and such other amounts to which the Corporation may at any time be entitled shall be paid directly to the Trustee and all of the Lease Payments collected or received by the Corporation shall be deemed to be held and to have been collected or received by the Corporation as the agent of the Trustee, and if received by the Corporation at any time shall be deposited by the Corporation with the Trustee within one Business Day after the receipt thereof, and all such Lease Payments and such other amounts shall be forthwith deposited by the Trustee upon the receipt thereof in the Lease Payment Fund. Lease Payment Fund All moneys at any time deposited by the Trustee in the Lease Payment Fund shall be held by the Trustee in trust for the benefit of the Owners of the Certificates. So long as any Certificates are Outstanding, neither the City nor the Corporation shall have any beneficial right or interest in the Lease Payment Fund or the moneys deposited therein, except only as provided in the Trust Agreement. There shall be deposited in the Lease Payment Fund all Lease Payments received by the Trustee, including any moneys received by the Trustee for deposit therein pursuant to the Trust Agreement or the Lease Agreement, and any other moneys required to be deposited therein pursuant to the Lease Agreement or the Trust Agreement. All amounts in the Lease Payment Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the principal and interest with respect to the Certificates as the same shall become due and payable in accordance with the provisions of the Trust Agreement. Appendix E Page 18 Any surplus remaining in the Lease Payment Fund after redemption and/or payment of all Certificates, including accrued interest (if any) and payment of any applicable fees and expenses to the Trustee, or provision for such redemption or payment having been made to the satisfaction of the Trustee, shall be withdrawn by the Trustee and remitted to the City. Reserve Fund Transfers of Excess. The Trustee shall, on or before each June 1 and December 1, value investments in the Reserve Fund at market value and transfer any moneys in the Reserve Fund then in excess of the Reserve Requirement; provided, however, that the Trustee shall not liquidate an investment to make such transfer of excess unless so directed in writing by a City Representative. The Trustee shall transfer any amount in excess of such sum to the Lease Payment Fund to be applied as a credit against amounts owed by the City for the payment of Lease Payments on each Lease Payment Date thereafter, until depleted. Application in Event of Deficiency in the Lease Payment Fund. If, on any Interest Payment Date, the moneys available in the Lease Payment Fund do not equal the amount of the principal and interest with respect to the Certificates then coming due and payable, the Trustee shall apply the moneys available in the Reserve Fund to make delinquent Lease Payments by transferring the amount necessary for this purpose to the Lease Payment Fund. Upon receipt of any delinquent Lease Payment with respect to which moneys have been advanced from the Reserve Fund, such Lease Payment shall be deposited in the Reserve Fund to the extent of such advance. Transfer To Make All Lease Payments. If, on any Interest Payment Date, the moneys on deposit in the Reserve Fund and the Lease Payment Fund (excluding amounts required for payment of principal and interest with respect to Certificates not presented for payment) are sufficient to pay all Outstanding Certificates, including all principal and interest, the Trustee shall transfer all amounts then on deposit in the Reserve Fund to the Lease Payment Fund to be applied to the payment of the Lease Payments, and such moneys shall be distributed to the Owners of Certificates in accordance with the Trust Agreement. Any amounts remaining in the Reserve Fund upon payment in full of all Outstanding Certificates and all amounts due the Trustee under the Trust Agreement, or upon provision for such payment, shall be withdrawn by the Trustee and paid to the City. Insurance and Condemnation Fund; Application of Net Proceeds of Insurance Award (a) Any Net Proceeds of insurance against damage to or destruction of any part of the Property collected by the City in the event of any such damage or destruction shall be paid to the Trustee by the City pursuant to the Lease Agreement and deposited by the Trustee promptly upon receipt thereof in a special fund designated as the "Insurance and Condemnation Fund" to be established by the Trustee when deposits are required to be made therein. (b) Within ninety (90) days following the date of such deposit, the City shall determine and notify the Trustee in writing of its determination either (i) that the replacement, repair, restoration, modification or improvement of the Property is not economically feasible or in the best interest of the City, or (ii) that all or a portion of such Net Proceeds are to be applied to the prompt replacement, repair, restoration, modification or improvement of the damaged or destroyed portions of the Property. (c) In the event the City's determination is as set forth in clause (i) of paragraph (b) above, such Net Proceeds shall be promptly transferred by the Trustee to the Lease Payment Fund, applied to the prepayment of Lease Payments pursuant to the Lease Agreement and applied to the redemption of Certificates as provided in the Trust Agreement; provided, however, that in the event of damage or destruction of the Property in full, such Net Proceeds may be transferred to the Lease Payment Fund only if sufficient, together with other moneys available therefor, to cause the prepayment of the principal components of all unpaid Lease Payments pursuant to the Lease Agreement, otherwise such Net Proceeds shall be applied to the replacement, repair, restoration, modification or improvement of the Property; provided further, however, that in the event of damage or destruction of the Property in part, such Net Proceeds may be transferred to the Lease Payment Fund and applied to the prepayment of Lease Payments only if the resulting Lease Payments represent fair consideration for the remaining portions of the Property, evidenced by a certificate signed by a City Representative and an Corporation Representative. Appendix E Page 19 (d) In the event the City's determination is as set forth in clause (ii) of paragraph (b) above, Net Proceeds deposited in the Insurance and Condemnation Fund shall be applied to the prompt replacement, repair, restoration, modification or improvement of the damaged or destroyed portions of the Property by the City, and disbursed by the Trustee upon receipt of requisitions signed by a City Representative stating with respect to each payment to be made (i) the requisition number, (ii) the name and address of the person, firm or corporation to whom payment is due, (iii) the amount to be paid and (iv) that each obligation mentioned therein has been properly incurred, is a proper charge against the Insurance and Condemnation Fund, has not been the basis of any previous withdrawal, and specifying in reasonable detail the nature of the obligation, accompanied by a bill or a statement of account for such obligation. The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein. Any balance of the Net Proceeds remaining after such work has been completed shall be paid to the City. Application of Net Proceeds of Eminent Domain Award If all or any part of the Property shall be taken by eminent domain proceedings (or sold to a government threatening to exercise the power of eminent domain), the Net Proceeds therefrom shall be deposited with the Trustee in the Insurance and Condemnation Fund pursuant to the Lease Agreement and shall be applied and disbursed by the Trustee as follows: (a) If the City has given written notice to the Trustee of its determination that (i) such eminent domain proceedings have not materially affected the operation of the Property or the ability of the City to meet any of its obligations with respect to the Property under the Lease Agreement, and (ii) such proceeds are not needed for repair or rehabilitation of the Property, the City shall so certify to the Trustee and the Trustee, at the City's written request, shall transfer such proceeds to the Lease Payment Fund to be credited towards the prepayment of the Lease Payments pursuant to the Lease Agreement and applied to the redemption of Certificates in the manner provided in the Trust Agreement. (b) If the City has given written notice to the Trustee of its determination that (i) such eminent domain proceedings have not materially affected the operation of the Property or the ability of the City to meet any of its obligations with respect to the Property under the Lease Agreement, and (ii) such proceeds are needed for repair, rehabilitation or replacement of the Property, the City shall so certify to the Trustee and the Trustee, at the City's written request, shall pay to the City, or to its order, from said proceeds such amounts as the City may expend for such repair or rehabilitation, upon the filing with the Trustee of requisitions of the City Representative in the form and containing the provisions set forth in the Trust Agreement. The Trustee shall not be responsible for the representations made in such requisitions and may conclusively rely thereon and shall be under no duty to investigate or verify any statements made therein. (c) If (i) less than all of the Property shall have been taken in such eminent domain proceedings or sold to a government threatening the use of eminent domain powers, and if the City has given written notice to the Trustee of its determination that such eminent domain proceedings have materially affected the operation of the Property or the ability of the City to meet any of its obligations with respect to the Property under the Lease Agreement or (ii) all of the Property shall have been taken in such eminent domain proceedings, then the Trustee shall transfer such proceeds to the Lease Payment Fund to be credited toward the prepayment of the Lease Payments pursuant to the Lease Agreement and applied to the redemption of Certificates in the manner provided in the Trust Agreement. Application of Net Proceeds of Title Insurance Award The Net Proceeds from a title insurance award shall be deposited with the Trustee in the Insurance and Condemnation Fund pursuant to the Lease Agreement and shall be transferred to the Lease Payment Fund to be credited towards the prepayment of Lease Payments required to be paid pursuant to the Lease Agreement and applied to the redemption of Certificates in the manner provided in the Trust Agreement. Appendix E Page 20 Moneys in Funds; Investment Held in Trust. The moneys and investments held by the Trustee under the Trust Agreement are irrevocably held in trust for the benefit of the Owners of the Certificates and for the purposes specified in the Trust Agreement and such moneys, and any income or interest earned thereon, shall be expended only as provided in the Trust Agreement and shall not be subject to levy, attachment or lien by or for the benefit of any creditor of the Corporation, the Trustee, the City or any Owner of Certificates. Investments Authorized. Moneys held by the Trustee under the Trust Agreement shall, upon written order of a City Representative, be invested and reinvested by the Trustee in Permitted Investments. The Trustee may deem all investments directed by a City Representative as Permitted Investments without independent investigation thereof. If a City Representative shall fail to so direct investments, the Trustee shall invest the affected moneys in Permitted Investments described in paragraph (g) of the definition thereof. Such investments, if registrable, shall be registered in the name of and held by the Trustee or its nominee. The Trustee may purchase or sell to itself or any affiliate, as principal or agent, investments authorized by this the Trust Agreement. Such investments and reinvestments shall be made giving full consideration to the time at which funds are required to be available. The Trustee may act as principal or agent in the making or disposing of any investment and make or dispose of any investment through its investment department or that of an affiliate and shall be entitled to its customary fees therefor. The Trustee is authorized, in making or disposing of any investment permitted by the Trust Agreement, to deal with itself (in its individual capacity) or with one or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any third person or dealing as principal for its own account. Allocation of Earnings. Unless and until otherwise directed by the City to the Trustee in writing, all interest or income received by the Trustee on investment of the Lease Payment Fund shall be retained in the Lease Payment Fund. Amounts retained or deposited in the Lease Payment Fund pursuant to the Trust Agreement shall be applied as a credit against the Lease Payment due by the City pursuant to the Lease Agreement on the Lease Payment Date following the date of deposit. All interest received by the Trustee on investment of the Reserve Fund shall be retained in the Reserve Fund in the event that amounts on deposit in the Reserve Fund are less than the Reserve Requirement. Reserve Fund investments may not have maturities extending beyond five years. In the event that amounts then on deposit in the Reserve Fund on the valuation date described in the Trust Agreement equal or exceed the Reserve Requirement, such excess shall be transferred to the Lease Payment Fund. Transfers to the Lease Payment Fund from the Reserve Fund shall be made by the Trustee on or prior to each June 1 and December 1. All interest or income in the Delivery Costs Fund shall be retained in the Delivery Costs Fund until the Delivery Costs Fund is closed pursuant to the Trust Agreement. Such investments shall be valued by the Trustee not less often than quarterly, at the market value thereof, exclusive of accrued interest. Deficiencies in the amount on deposit in any fund or account resulting from a decline in market value shall be restored no later than the succeeding valuation date. Investments purchased with funds on deposit in the Reserve Fund shall have a term to maturity of not greater than five years. Amendments The Trust Agreement and the rights and obligations of the Owners of the Certificates, the Lease Agreement and the rights and obligations of the parties thereto, the Site and Facility Lease and the rights and obligations of the parties thereto and the Assignment Agreement and the rights and obligations of the parties thereto, may be modified or amended at any time by a supplemental agreement which shall become effective when the written consent of the Owners of at least sixty percent (60 %) in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided in the Trust Agreement, shall have been filed with the Trustee. No such modification or amendment shall (1) extend or have the effect of extending the fixed maturity of any Certificate or reducing the interest rate with respect thereto or extending the time of payment of interest, or reducing the amount of principal thereof, without the express consent of the Owner of such Certificate, or (2) reduce or have the effect of reducing the percentage of Certificates required for the affirmative vote or written consent to an amendment or modification of a Lease Agreement, or (3) modify any of the rights or obligations of the Appendix E Page 21 Trustee without its written assent thereto. Any such supplemental agreement shall become effective as provided in the Trust Agreement. The Trust Agreement and the rights and obligations of the Owners of the Certificates and the Lease Agreement and the rights and obligations of the respective parties thereto, may be modified or amended at any time by a supplemental agreement, without the consent of any such Owners, but only to the extent permitted by law and only (1) to add to the covenants and agreements of the Corporation or the City, (2) to cure, correct or supplement any ambiguous or defective provision contained therein and which shall not, in the opinion of nationally recognized bond counsel, adversely affect the interests of the Owners of the Certificates, (3) in regard to questions arising thereunder, as the parties thereto may deem necessary or desirable and which shall not, in the opinion of nationally recognized bond counsel, materially adversely affect the interests of the Owners of the Certificates; (4) to make such additions, deletions or modifications as may be necessary or appropriate in the opinion of bond counsel to assure the exclusion from gross income for federal income tax purposes of the interest component of Lease Payments and the interest payable with respect to the Certificates, (5) to add to the rights of the Trustee, or (6) to maintain the rating or ratings assigned to the Certificates. Any such supplemental agreement shall become effective upon execution and delivery by the parties thereto, as the case may be. The Trust Agreement and the Lease Agreement may not be modified or amended at any time by a supplemental agreement which would modify any of the rights and obligations of the Trustee without its written assent thereto. Certain Covenants Compliance With and Enforcement of Lease Agreement. The City covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The Corporation covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The City will not do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for cancellation or termination of their respective Lease Agreement by the Corporation thereunder. The Corporation and the City, immediately upon receiving or giving any notice, communication or other document in any way relating to or affecting their respective estates, or either of them, in the Property, which may or can in any manner affect such estate of the City or the Corporation, will deliver the same, or a copy thereof, to the Trustee. Observance of Laws and Regulations. The City and the Corporation will well and truly keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on them by contract, or prescribed by any law of the United States, or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of any and every right, privilege or franchise now owned or hereafter acquired by the City or the Corporation, respectively, including its right to exist and carry on business as a public entity, to the end that such rights, privileges and franchises shall be maintained and preserved, and shall not become abandoned, forfeited or in any manner impaired. Budgets. The City shall supply to the Trustee as soon as practicable, but not later than September 15 in each year, a written determination by a City Representative that the City has made adequate provision in its annual budget for the payment of Lease Payments due under the Lease Agreement in the Fiscal Year covered by such budget. The determination given by the City to the Trustee shall be that the amounts so budgeted are fully adequate for the payment of all Lease Payments and Additional Payments due under the Lease Agreement in the annual period covered by such budget. Continuing Disclosure. The City covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Trust Agreement, failure of the City to comply with the Continuing Disclosure Certificate shall not be considered an Event of Default; however, the Trustee may, upon payment of its fees and expenses, including counsel fees, and receipt of indemnity satisfactory to it, at the request of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Certificates, shall Appendix E Page 22 or any holder or beneficial owner of the Certificates may, take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. Limitation of Liability Limited Liability of City. Except for the payment of Lease Payments when due in accordance with the Lease Agreement and the performance of the other covenants and agreements of the City contained in the Lease Agreement and the Trust Agreement, the City shall have no pecuniary obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee, except as expressly set forth in the Trust Agreement. No Liability of City or Corporation for Trustee Performance. Neither the City nor the Corporation shall have any obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement. Indemnification of Trustee. The City shall to the extent permitted by law indemnify and save the Trustee, its officers, employees, directors, affiliates and agents harmless from and against all claims, losses, costs, expenses, liability and damages, including legal fees and expenses (including allocated costs of internal counsel), arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on, the Property by the Corporation or the City; (ii) any breach or default on the part of the Corporation or the City the performance of any of their respective obligations under the Lease Agreement, the Assignment Agreement, the Trust Agreement and any other agreement made and entered into for purposes of the Property; (iii) any act of the Corporation or the City or of any of their respective agents, contractors, servants, employees, licensees with respect to the Property; (iv) any act of any assignee of, or purchaser from the Corporation or the City or of any of its or their respective agents, contractors, servants, employees or licensees with respect to the Property; (v) the authorization of payment of Delivery Costs; (vi) the actions of any other party, including but not limited to the ownership, operation or use of the Property by the Corporation or the City including, without limitation, the use, storage, presence, disposal or release of any Hazardous Substances on or about the Property; (vii) the Trustee's exercise and performance of its powers and duties under the Trust Agreement or as assigned to it under the Assignment Agreement; (viii) the offering and sale of the Certificates; (ix) the presence under or about or release from the Property, or any portion thereof, of any substance, material or waste which is or becomes regulated or classified as hazardous or toxic under State, local or federal law, or the violation of any such law by the City; or (x) any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, in any official statement or other offering document utilized in connection with the sale of the Certificates. Such indemnification shall include the costs and expenses of defending against any claim or liability arising under the Trust Agreement. No indemnification will be made under the Trust Agreement for willful misconduct or negligence under the Trust Agreement by the Trustee, its officers, affiliates or employees. The City's obligations under the Trust Agreement shall remain valid and binding notwithstanding maturity and payment of the Certificates or resignation or removal of the Trustee. Assignment of Rights; Remedies. Pursuant to the Assignment Agreement, the Corporation has transferred, assigned and set over to the Trustee certain of the Corporation's rights in and to the Lease Agreement, including without limitation all of the Corporation's rights to exercise such rights and remedies conferred on the Corporation pursuant to the Lease Agreement as may be necessary or convenient (i) to enforce payment of the Lease Payments and any other amounts required to be deposited in the Lease Payment Fund or the Insurance and Condemnation Fund, and (ii) otherwise to exercise the Corporation's rights and take any action to protect the interests of the Trustee or the Certificate Owners in an Event of Default. If an Event of Default shall happen, then and in each and every such case during the continuance of such Event of Default, the Trustee shall, upon request of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, and upon payment of its fees and expenses, including counsel fees, and being indemnified to its satisfaction therefor shall, exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that notwithstanding anything in the Trust Agreement or in the Lease Agreement to the contrary, there shall Appendix E Page 23 be no right under any circumstances to accelerate the maturities of the Certificates or otherwise to declare any Lease Payment not then in default to be immediately due and payable. Appendix E Page 24 APPENDIX F DTC'S BOOK -ENTRY ONLY SYSTEM The information in this Appendix F, concerning The Depository Trust Company, New York, New York ( "DTC "), and DTC's book -entry system, has been furnished by DTC for use in official statements and the City takes no responsibility for the completeness or accuracy thereof. The City cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest or principal with respect to the Certificates, (b) certificates representing ownership interest in or other confirmation of ownership interest in the Certificates, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Certificates, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix F. The current "Rules" applicable to DTC are on file with the Securities and Exchange Commission and the current "Procedures" of DTC to be followed in dealing with DTC Participants are on file with DTC. Information Furnished by DTC Regarding its Book -Entry Only System 1. The Depository Trust Company ( "DTC "), New York, NY, will act as securities depository for the Certificates (as used in this Appendix E, the "Securities "). The Securities 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 Security certificate will be issued for each maturity of the Securities, in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue. 2. DTC, the world's largest securities depository, is a limited - purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non -U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC's participants ( "Direct Participants ") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book -entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly -owned subsidiary of The Depository Trust & Clearing Corporation ( "DTCC "). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( "Indirect Participants "). DTC is rated AA+ by Standard & Poor's. 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. 3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC's records. The ownership interest of each actual purchaser of each Security ( "Beneficial Owner ") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities 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 Securities, except in the event that use of the book -entry system for the Securities is discontinued. Appendix F Page 1 4. To facilitate subsequent transfers, all Securities 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 Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Securities 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. 5. 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 Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit the notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. 6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. 7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Securities unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Redemption proceeds, distributions, and dividend payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or the paying agent or bond 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 paying agent or bond trustee, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption 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 City or the paying agent or bond 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. 9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to the City or the paying agent or bond trustee. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered. 10. The City may decide to discontinue use of the system of book - entry -only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC. 11. The information in this section concerning DTC and DTC's book -entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. Appendix F Page 2 APPENDIX G FORM OF CONTINUING DISCLOSURE CERTIFICATE This CONTINUING DISCLOSURE CERTIFICATE (the "Disclosure Certificate ") is executed and delivered by the CITY OF CUPERTINO, CALIFORNIA (the "City ") in connection with the execution and delivery of $43,940,000 City of Cupertino Certificates of Participation (2012 Refinancing Project) (the "Certificates "). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of May 1, 2012, by and among The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee "), the City and the Cupertino Public Facilities Corporation (the "Trust Agreement "). Pursuant to Section 11.08 of the Trust Agreement, the City covenants and agree as follows: Section 1. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate, unless otherwise defined in this Section 2, the following capitalized terms shall have the following meanings when used in this Disclosure Certificate: "Annual Report" shall mean any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. "Beneficial Owner" shall mean any person who (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Certificates (including persons holding Certificates through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Certificates for federal income tax purposes. "Dissemination Agent" shall mean The Bank of New York Mellon Trust Company, N.A. or any successor Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation. In the absence of such a designation, the City shall act as the Dissemination Agent. "EMMA" or "Electronic Municipal Market Access" means the centralized on -line repository for documents to be filed with the MSRB, such as official statements and disclosure information relating to municipal bonds, notes and other securities as issued by state and local governments. "Listed Events" shall mean any of the events listed in Section 5(a) or 5(b) of this Disclosure Certificate. "MSRB" means the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information which may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future. "Participating Underwriter" shall mean any original underwriter of the Certificates required to comply with the Rule in connection with offering of the Certificates. "Rule" shall mean Rule 15c2 -12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. Section 2. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the owners and Beneficial Owners of the Certificates and in order to assist the Participating Underwriter in complying with Securities and Exchange Commission Rule 15c2- 12(b)(5). Section 3. Provision of Annual Reports. (a) Delivery of Annual Report. The City shall, or shall cause the Dissemination Agent to, not later than nine months after the end of the City's fiscal year (which currently ends on June 30), commencing with the report for the 2011 -12 Fiscal Year, which is due not later than March 31, 2013, file with EMMA, in a readable PDF or other electronic format as prescribed by the MSRB, an Annual Report that is consistent Appendix G Page 1 with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package and may cross - reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. (b) Change of Fiscal Year. If the City's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c), and subsequent Annual Report filings shall be made no later than nine months after the end of such new fiscal year end. (c) Delivery of Annual Report to Dissemination Agent. Not later than fifteen (15) Business Days prior to the date specified in subsection (a) (or, if applicable, subsection (b)) of this Section 3 for providing the Annual Report to EMMA, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall notify the City. (d) Report of Non - Compliance. If the City is the Dissemination Agent and is unable to file an Annual Report by the date required in subsection (a) (or, if applicable, subsection (b)) of this Section 3, the City shall send a notice to EMMA substantially in the form attached hereto as Exhibit A. If the City is not the Dissemination Agent and is unable to provide an Annual Report to the Dissemination Agent by the date required in subsection (c) of this Section 3, the Dissemination Agent shall send a notice to EMMA in substantially the form attached hereto as Exhibit A. (e) Annual Compliance Certification. The Dissemination Agent shall, if the Dissemination Agent is other than the City, file a report with the City certifying that the Annual Report has been filed with EMMA pursuant to Section 3 of this Disclosure Certificate, stating the date it was so provided and filed. Section 4. Content of Annual Reports. The Annual Report shall contain or incorporate by reference the following: (a) Financial Statements. Audited financial statements of the City for the preceding fiscal year, prepared in accordance generally accepted accounting principles. If the City's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) Other Annual Information. To the extent not included in the audited final statements of the City, the Annual Report shall also include financial and operating data with respect to the City for preceding fiscal year, as follows, substantially similar to that provided in the corresponding tables and charts in the official statement for the Certificates: (i) Table 5-Investment Portfolio; (ii) Table 6-Tax Revenues by Source (iii) Table 7-Other Revenue Sources (iv) Table 8-Assessed Valuations; (v) Table 9-Largest Local Secured Property Tax Payers; (vi) Table 10 Sales Tax Rates; (vii) Table 11 Property Tax In -Lieu of VLF; (vi) Required Contributions, Funded Status and Valuation History of Employee Retirement Plans; and (vi) Valuation History of OPEB Plan. (c) Cross References. Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which are available to the public on EMMA. The City shall clearly identify each such other document so included by reference. EMMA. If the document included by reference is a final official statement, it must be available from Appendix G Page 2 (d) Further Information. In addition to any of the information expressly required to be provided under paragraph (b) of this Section 4, the City shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading. Section 5. Reporting of Listed Events. (a) Reportable Events. The City shall, or shall cause the Dissemination Agent (if not the City) to, give notice of the occurrence of any of the following events with respect to the Certificates: (1) Principal and interest payment delinquencies. (2) Unscheduled draws on debt service reserves reflecting financial difficulties. (3) Unscheduled draws on credit enhancements reflecting financial difficulties. (4) Substitution of credit or liquidity providers, or their failure to perform. (5) Defeasances. (6) Rating changes. (7) Tender offers. (8) Bankruptcy, insolvency, receivership or similar event of the obligated person. (9) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701 - TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security. Note: For the purposes of the event identified in subparagraph (8), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person. (b) Material Reportable Events. The City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material: (1) Non - payment related defaults. (2) Modifications to rights of security holders. (3) Bond calls. (4) The release, substitution, or sale of property securing repayment of the securities. (5) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms. (6) Appointment of a successor or additional trustee, or the change of name of a trustee. (c) Time to Disclose. The City shall, or shall cause the Dissemination Agent (if not the City) to, file a notice of such occurrence with EMMA, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of any Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(5) and (b)(3) above need not be given Appendix G Page 3 under this subsection any earlier than the notice (if any) of the underlying event is given to owners of affected Certificates under the Trust Agreement. Section 6. Identifying Information for Filings with EMMA. All documents provided to EMMA under this Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB. Section 7. Termination of Reporting Obligation. The City's obligations under this Disclosure Certificate shall terminate upon the defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the City shall give notice of such termination in the same manner as for a Listed Event under Section 5(c). Section 8. Dissemination Agent. (a) Appointment of Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate and may discharge any such agent, with or without appointing a successor Dissemination Agent. If the Dissemination Agent is not the City, the Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the City pursuant to this Disclosure Certificate. It is understood and agreed that any information that the Dissemination Agent may be instructed to file with EMMA shall be prepared and provided to it by the City. The Dissemination Agent has undertaken no responsibility with respect to the content of any reports, notices or disclosures provided to it under this Disclosure Certificate and has no liability to any person, including any Certificate owner, with respect to any such reports, notices or disclosures. The fact that the Dissemination Agent or any affiliate thereof may have any fiduciary or banking relationship with the City shall not be construed to mean that the Dissemination Agent has actual knowledge of any event or condition, except as may be provided by written notice from the City. (b) Compensation of Dissemination Agent. The Dissemination Agent shall be paid reasonable compensation by the City for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the City from time to time and all reasonable expenses, legal fees and expenses and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the City, owners or Beneficial Owners, or any other party. The Dissemination Agent may rely, and shall be protected in acting or refraining from acting, upon any direction from the City or an opinion of nationally recognized bond counsel. The Dissemination Agent may at any time resign by giving written notice of such resignation to the City. The Dissemination Agent shall not be liable hereunder except for its negligence or willful misconduct. Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City may amend this Disclosure Certificate (and the Dissemination Agent shall agree to any amendment so requested by the City that does not impose any greater duties or risk of liability on the Dissemination Agent), and any provision of this Disclosure Certificate may be waived, provided that all of the following conditions are satisfied: (a) Change in Circumstances. If the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a) or (b), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Certificates, or the type of business conducted. (b) Compliance as of Issue Date. The undertaking, as amended or taking into account such waiver, would, in the opinion of a nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Certificates, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances. (c) Consent of Holders; Non - impairment Opinion. The amendment or waiver either (i) is approved by the Certificate owners in the same manner as provided in the Trust Agreement for amendments to the Trust Agreement with the consent of Certificate owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Certificate owners or Beneficial Owners. Appendix G Page 4 If this Disclosure Certificate is amended or any provision of this Disclosure Certificate is waived, the City shall describe such amendment or waiver in the next following Annual Report and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the City. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(c), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 11. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate, any Certificate owner or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. The sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance. Section 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and no implied covenants or obligations shall be read into this Disclosure Certificate against the Dissemination Agent, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the reasonable costs and expenses (including attorneys fees and expenses) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The Dissemination Agent shall have the same rights, privileges and immunities hereunder as are afforded to the Trustee under the Trust Agreement. The obligations of the City under this Section 12 shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. Appendix G Page 5 Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriter and the owners and Beneficial Owners from time to time of the Certificates, and shall create no rights in any other person or entity. Date: [Closing Date] ACKNOWLEDGED: THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Dissemination Agent LDOZ Authorized Officer CITY OF CUPERTINO, CALIFORNIA M9 Appendix G Page 6 Authorized Officer EXHIBIT A NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: City of Cupertino, California Name of Issue: Certificates of Participation (2012 Refinancing Project) Evidencing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be made by the City of Cupertino, California, as the Rental for Certain Property Pursuant to a Lease Agreement with the Cupertino Public Facilities Corporation Date of Issuance: [Closing Date] NOTICE IS HEREBY GIVEN that the City has not provided an Annual Report with respect to the above - named Issue as required by the Continuing Disclosure Certificate, dated [Closing date], furnished by the City in connection with the Issue. The City anticipates that the Annual Report will be filed by Date: THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., Dissemination Agent Appendix G Page 7 Authorized Officer THIS PAGE INTENTIONALLY LEFT BLANK AGREEMENT BETWEEN THE CITY OF CUPERTINO AND MAGIS ADVISORS FOR FINANCIAL ADVISORY SERVICES ON POTENTIAL REFINANCING OF THE CITY'S 2002 CIERTIFICATES OF PARTICIPATION THIS AGREEMENT, for reference dated rssape- 7, 2012, is by and between CITY OF CUPERTINO, a municipal corporation (hereinafter referred to as "City "), and MAGIS ADVISORS, INC., a California corporation whose address is 1301 Dove Street, Suite 380, Newport Beach, CA 92660 (hereinafter referred to as "Consultant "), and is made with reference to the following: RECITALS: A. City is a municipal corporation duly organized and validly existing under the laws of the State of California with the power to carry on its business as it is now being conducted under the Constitution and the statutes of the State of California and the Cupertino Municipal Code. B. Consultant is specially trained, experienced and competent to perform the special services which will be required by this Agreement; and C. Consultant possesses the skill, experience, ability, background, certification and knowledge to provide the services described in this Agreement on the terms and conditions described herein. D. City and Consultant desire to enter into an agreement for upon the terms and conditions herein. NOW, THEREFORE, it is mutually agreed by and between the undersigned parties as follows: 1. TERM: The term of this Agreement shall commence on February 9, 2012, and shall terminate on July 31, 2012, unless terminated earlier as set forth herein. 2. SERVICES TO BE PERFORMED: Consultant shall perform each and every applicable service set forth in Magis Advisors' Financial Advisory Service Proposal to the City dated January 30, 2012 (Exhibit "A ") which is attached hereto and incorporated herein by this reference. 3. COMPENSATION TO CONSULTANT: Consultant shall be compensated for services performed pursuant to this Agreement in the amount and in the manner set forth in Exhibit "A ". Payment shall be made by checks drawn on the treasury of the City. 4. TIME IS OF THE ESSENCE: Consultant and City agree that time is of the essence regarding the performance of this Agreement. 5. STANDARD OF CARE: Consultant agrees to perform all services hereunder in a manner commensurate with the prevailing standards of like professionals in the San Francisco Bay Area and agrees that all services shall be performed by qualified and experienced personnel who are not employed by the City nor have any contractual relationship with City. 6. INDEPENDENT PARTIES: City and Consultant intend that the relationship between them created by this Agreement is that of employer- independent contractor. The manner and means of conducting the work are under the control of Consultant, except to the extent they are limited by statute, rule or regulation and the express terms of this Agreement. No civil service status or other right of employment will be acquired by virtue of Consultant's services. None of the benefits provided by City to its employees, including but not limited to, unemployment insurance, workers' compensation plans, vacation and sick leave are available from City to Consultant, its employees or agents. Deductions shall not be made for any state or federal taxes, FICA payments, PERS payments, or other purposes normally associated with an employer - employee relationship from any fees due Consultant. Payments of the above items, if required, are the responsibility of Consultant. 6. IMMIGRATION REFORM AND CONTROL ACT (IRCA): Consultant assumes any and all responsibility for verifying the identity and employment authorization of all of his/her employees performing work hereunder, pursuant to all applicable IRCA or other federal, or state rules and regulations. Consultant shall indemnify and hold City harmless from and against any loss, damage, liability, costs or expenses arising from any noncompliance of this provision by Consultant. 7. NON - DISCRIMINATION: Consistent with City's policy that harassment and discrimination are unacceptable employer /employee conduct, Consultant agrees that harassment or discrimination directed toward a job applicant, a City employee, or a citizen by Consultant or Consultant's employee or subcontractor on the basis of race, religious creed, color, national origin, ancestry, handicap, disability, marital status, pregnancy, sex, age, or sexual orientation will not be tolerated. Consultant agrees that any and all violations of this provision shall constitute a material breach of this Agreement. 8. HOLD HARMLESS: Indemnification: Consultant shall indemnify, defend, and hold harmless City, its City Council, boards, commissions, officials, employees, and volunteers ( "Indemnitees ") from and against any and all loss, damages, liability, claims, suits, costs and expenses whatsoever, including reasonable attorneys' fees ( "Claims "), arising from or in any manner connected to Consultant's negligent act or omission, whether alleged or actual, regarding performance of services or work conducted or performed pursuant to this Agreement. If Claims are filed against Indemnitees which allege negligence on behalf of the Consultant, Consultant shall have no right of reimbursement against Indemnitees for the costs of defense even if negligence is not found on the part of Consultant. However, Consultant shall not be obligated to indemnify Indemnitees from Claims arising from the sole or active negligence or willful misconduct of Indemnitees. Indemnification For Claims for Professional Liability: As to Claims for professional liability only, Consultant's obligation to defend Indemnitees (as set forth above) is limited to the extent to which its professional liability insurance policy will provide such defense costs. 9. INSURANCE: On or before the commencement of the term of this Agreement, Consultant shall furnish City with certificates showing the type, amount, class of operations covered, effective dates and dates of expiration of insurance coverage in compliance with paragraphs 9A, B, C, D and E. Such certificates, which do not limit Consultant's indemnification, shall also contain substantially the following statement: "Should any of the above insurance covered by this certificate be canceled or coverage reduced before the expiration date thereof, the insurer affording coverage shall provide thirty (30) days' advance written notice to the City of Cupertino by certified mail, Attention: Finance Director." It is agreed that Consultant shall maintain in force at all times during the performance of this Agreement all appropriate coverage of insurance required by this Agreement with an insurance company that is acceptable to City and licensed to do insurance business in the State of California. Endorsements naming the City as additional insured shall be submitted with the insurance certificates. A. COVERAGE: Consultant shall maintain the following; insurance coverage: (1) Workers' Compensation: Statutory coverage as required by the State of California. (2) Liability: Commercial general liability coverage in the following minimum limits: Bodily Injury: $500,000 each occurrence $1,000,000 aggregate - all other Property Damage: $100,000 each occurrence $250,000 aggregate If submitted, combined single limit policy with aggregate limits in the amounts of $1,000,000 will be considered equivalent to the required minimum limits shown above. (3) Automotive: Comprehensive automotive liability coverage in the following minimum limits: Bodily Injury: $500,000 each occurrence Property Damage: $100,000 each occurrence or Combined Single Limit: $500,000 each occurrence (4) Professional Liability: Professional liability insurance which includes coverage for the professional acts, errors and omissions of Consultant in the amount of at least $1,000,000. B. SUBROGATION WAIVER: Consultant agrees that in the event of loss due to any of the perils for which he /she has agreed to provide comprehensive general and automotive liability insurance, Consultant shall look solely to his/her insurance for recovery. Consultant hereby grants to City, on behalf of any insurer providing comprehensive general and automotive liability insurance to either Consultant or City with respect to the services of Consultant herein, a waiver of any right to subrogation which any such insurer of said Consultant may acquire against City by virtue of the payment of any loss under such insurance. C. FAILURE TO SECURE: If Consultant at any time during the term hereof should fail to secure or maintain the foregoing insurance, City shall be permitted to obtain such insurance in the Consultant's name or as an agent of the Consultant and shall be compensated by the Consultant for the costs of the insurance premiums at the maximum rate permitted by law and computed from the date written notice is received that the premiums have not been paid. D. ADDITIONAL INSURED: City, its City Council, boards and commissions, officers, employees and volunteers shall be named as an additional insured under all insurance coverages, except any professional liability insurance, required by this Agreement. The naming of an additional insured shall not affect any recovery to which such additional insured would be entitled under this policy if not named as such additional insured. An additional insured named herein shall not be held liable for any premium, deductible portion of any loss, or expense of any nature on this policy or any extension thereof. Any other insurance held by an additional insured shall not be required to contribute anything toward any loss or expense covered by the insurance provided by this policy. E. SUFFICIENCY OF INSURANCE: The insurance limits required by City are not represented as being sufficient to protect Consultant. Consultant is advised to confer with Consultant's insurance broker to determine adequate coverage for Consultant. 10. CONFLICT OF INTEREST: Consultant warrants that it is not a conflict of interest for Consultant to perform the services required by this Agreement. Consultant may be required to fill out a conflict of interest form if the services provided under this Agreement require Consultant to make certain governmental decisions or serve in a staff capacity as defined in Title 2, Division 6, Section 18700 of the California Code of Regulations. 11. PROHIBITION AGAINST TRANSFERS: Consultant shall not assign, sublease, hypothecate, or transfer this Agreement, or any interest therein, directly or indirectly, by operation of law or otherwise, without prior written consent of City. Any attempt to do so without said consent shall be null and void, and any assignee, sublessee, hypothecate or transferee shall acquire no right or interest by reason of such attempted assignment, hypothecation or transfer. However, claims for money by Consultant from City under this Agreement may be assigned to a bank, trust company or other financial institution without prior written consent. Written notice of such assignment shall be promptly furnished to City by Consultant. The sale, assignment, transfer or other disposition of any of the issued and outstanding capital stock of Consultant, or of the interest of any general partner or joint venturer or syndicate member or cotenant, if Consultant is a partnership or joint venture or syndicate or co- tenancy, which shall result in changing the control of Consultant, shall be construed as an assignment of this Agreement. Control means fifty percent (50 %) or more of the voting power of the corporation. 12. SUBCONTRACTOR APPROVAL: Unless prior written consent from City is obtained, only those people and subcontractors whose names and resumes are attached to this Agreement shall be used in the performance of this Agreement. In the event that Consultant employs subcontractors, such subcontractors shall be required to furnish proof of workers' compensation insurance and shall also be required to carry general, automobile and professional liability insurance in reasonable conformity to the - insurance carried by Consultant. In addition, any work or services subcontracted hereunder shall be subject to each provision of this Agreement. 13. PERMITS AND LICENSES: Consultant, at his/her sole expense, shall obtain and maintain during the term of this Agreement, all appropriate permits, certificates and licenses including, but not limited to, a City Business License, that may be required in connection with the performance of services hereunder. 14. REPORTS: A. Each and every report, draft, work product, map, record and other document, hereinafter collectively referred to as "Report", reproduced, prepared or caused to be prepared by Consultant pursuant to or in connection with this Agreement, shall be the exclusive property of City. Consultant shall not copyright any Report required by this Agreement and shall execute appropriate documents to assign to City the copyright to Reports created pursuant to this Agreement. Any Report, information and data acquired or required by this Agreement shall become the property of City, and all publication rights are reserved to City. Consultant may retain a copy of any report furnished to the City pursuant to this Agreement. B. All Reports prepared by Consultant may be used by City in execution or implementation of: (1) The original Project for which Consultant was hired; (2) Completion of the original Project by others; (3) Subsequent additions to the original project; and/or (4) Other City projects as appropriate. C. Consultant shall, at such time and in such form as City may require, furnish reports concerning the status of services required under this Agreement. D. No Report, information or other data given to or prepared or assembled by Consultant pursuant to this Agreement shall be made available to any individual or organization by Consultant without prior approval by City. 15. RECORDS: Consultant shall maintain complete and accurate records with respect to sales, costs, expenses, receipts and other such information required by City that relate to the performance of services under this Agreement. Consultant shall maintain adequate records of services provided in sufficient detail to permit an evaluation of services. All such records shall be maintained in accordance with generally accepted accounting principles and shall be clearly identified and readily accessible. Consultant shall provide free access to such books and records to the representatives of City or its designees at all proper times, and gives City the right to examine and audit same, and to make transcripts therefrom as necessary, and to allow inspection of all work, data, documents, proceedings and activities related to this Agreement. Such records, together with supporting documents, shall be kept separate from other documents and records and shall be maintained for a period of three (3) years after receipt of final payment. If supplemental examination or audit of the records is necessary due to concerns raised by City's preliminary examination or audit of records, and the City's supplemental examination or audit of the records discloses a failure to adhere to appropriate internal financial controls, or other breach of contract or failure to act in good faith, then Consultant shall reimburse City for all reasonable costs and expenses associated with the supplemental examination or audit. 16. NOTICES: All notices, demands, requests or approvals to be given under this Agreement shall be given in writing and conclusively shall be deemed served when delivered personally or on the second business day after the deposit thereof in the United States Mail, postage prepaid, registered or certified, addressed as hereinafter provided. All notices, demands, requests, or approvals from Consultant to City shall be addressed to City at: City of Cupertino 10300 Torre Ave. Cupertino CA 95014 Attention: Finance Director All notices, demands, requests, or approvals from City to Consultant shall be addressed to Consultant at: Tim Schaefer, Principal Owner Magis Advisors, Inc. 1301 Dove Street, Suite 380 Newport Beach, CA 92660 17. TERMINATION: In the event Consultant fails or refuses to perform any of the provisions hereof at the time and in the manner required hereunder, Consultant shall be deemed in default in the performance of this Agreement. If such default is not cured within the time specified after receipt by Consultant from City of written notice of default, specifying the nature of such default and the steps necessary to cure such default, City may terminate the Agreement forthwith by giving to the Consultant written notice thereof. City shall have the option, at its sole discretion and without cause, of terminating this Agreement by giving seven (7) days' prior written notice to Consultant as provided herein. Upon termination of this Agreement, each party shall pay to the other party that portion of compensation specified in this Agreement that is earned and unpaid prior to the effective date of termination. 18. COMPLIANCES: Consultant shall comply with all state or federal laws and all ordinances, rules and regulations enacted or issued by City. 19. CONFLICT OF LAW: This Agreement shall be interpreted under, and enforced by the laws of the State of California excepting any choice of law rules which may direct the application of laws of another jurisdiction. The Agreement and obligations of the parties are subject to all valid laws, orders, rules, and regulations of the authorities having jurisdiction over this Agreement (or the successors of those authorities.) Any suits brought pursuant to this Agreement shall be filed with the courts of the County of Santa Clara, State of California. 20. ADVERTISEMENT: Consultant shall not post, exhibit, display or allow to be posted, exhibited, displayed any signs, advertising, show bills, lithographs, posters or cards of any kind pertaining to the services performed under this Agreement unless prior written approval has been secured from City to do otherwise. 21. WAIVER: A waiver by City of any breach of any germ, covenant, or condition contained herein shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant, or condition contained herein, whether of the same or a different character. 22. INTEGRATED CONTRACT: This Agreement represents the full and complete understanding of every kind or nature whatsoever between the parties hereto, and all preliminary negotiations and agreements of whatsoever kind or nature are merged herein. No verbal agreement or implied covenant shall be held to vary the provisions hereof. Any modification of this Agreement will be effective only by written execution signed by both City and Consultant. 22. INSERTED PROVISIONS: Each provision and clause required by law to be inserted into the Agreement shall be deemed to be enacted herein, and the Agreement shall be read and enforced as though each were included herein. If through mistake or otherwise, any such provision is not inserted or is not correctly inserted, the Agreement shall be amended to make such insertion on application by either party. 23. CAPTIONS: The captions in this Agreement are for convenience only, are not a part of the Agreement and in no way affect, limit or amplify the terms or provisions of this Agreement. IN WITNESS WHEREOF, the parties have caused the Agreement to be executed. MAGIS ADVISORS, INC. By Tim chaefer Title:Incipal wner Date `Z CITY OF CUPERTINO A Municipal Corporation Byi% Carol A. Atwood Title: Director of Administrative Services Date Z - iq —/ Z— APPROVED AS TO FORM: By City Attorney ALAW MAGIS ADVISORS public finance consulting //I MAGIS ADVISORS MAGIS (m6 jis) — adverb (Latin): public finance consulting (1) more; (2) to a greater extent "Magis" means more. TABLE OF CONTENTS TRANSMITTAL LETTER CUPERTINO'S STATED NEEDS .............................................................................................................. ..............................1 GENERAL INFORMATION & FIRM EXPERIENCE .................................................................................... ..............................2 SERVICESOFFERED ....................................................................................................................................... ..............................2 CURRENTCLIENTS ........................................................................................................................................ ..............................2 EXPERTISE................................................................................................................................................... ..............................3 REFERENCES....................................................................................................................................... ............................... 4 CLIENTTESTIMONIALS ................................................................................................................................... ..............................7 PROPOSED STAFFING (WITH EXPERIENCE) .......................................................................................... ..............................8 TIM SCHAEFER — ASSIGNED PROJECT MANAGER ............................................................................................... ..............................8 EVAWOLF — TECHNICAL CONSULTANT ............................................................................................................ ..............................9 INFORMATION RESOURCES & PRICING CAPABILITIES ........................................................................ .............................10 REGULATORYACTIONS ...................................................................................................................... .............................11 CONFLICTSOF INTEREST .................................................................................................................... .............................12 KNOWNCONFLICTS ..................................................................................................................................... .............................12 HOW WE MANAGE POTENTIAL CONFLICTS OF INTEREST ................................................................... .............................12 COSTPROPOSAL ................................................................................................................................ .............................13 MONTHLY RETAINER FEE WITH "CAPPED" TOTAL .............................................................................................. .............................13 ADDITIONALWORK ..................................................................................................................................... .............................13 REIMBURSEMENTOF COSTS & EXPENSES ......................................................................................................... .............................14 BILLING& PAYMENT TERMS ......................................................................................................................... .............................14 AVOIDING CONFLICTS ARISING FROM FEE ARRANGEMENTS ................................................................................. .............................14 THE MAGIS VALUE PROPOSITION ...................................................................................................... .............................14 EXHIBIT 1: .............................................................................................. Illustration of Refunding Transaction EXHIBIT2: ......................................................................................................................... Detailed Work Plan EXHIBIT 3: ....................................................................................................... Resumes of Assigned Personnel EXHIBIT 4: ................................................................................. Transaction Experience of Assigned Personnel EXHIBIT 5: .................................................................. Description of MMA Reports & Recent Delphis Scale Set EXHIBIT 6: .......................................................................................................... Disclosure Statement on Fees Copyright © 2012 Magis Advisors, Inc. All rights reserved. All copyrights and all other intellectual property rights of whatsoever nature contained herein are and shall remain the sole and exclusive property of Magis Advisors. The Magis Advisors name and Magis Advisors logo are trademarks or registered trademarks of Magis Advisors. /I MAGIS ADVISORS public finance consulting January 30, 2012 Mr. David Woo Finance Director City of Cupertino 10300 Torre Avenue Cupertino, CA 95014 Subject: Proposal to Provide Financial Advisory Services for Potential Refunding of City of Cupertino's 2002 Certificates of Participation Dear Mr. Woo: This is a financial advisory service proposal submitted by Magis Advisors in response to your request for proposals dated January 13, 2012. We understand that the City is considering a refinancing of its outstanding 2002 Certificates of Participation to achieve interest rate savings. We have performed a preliminary analysis and agree that a refinancing transaction could produce savings— perhaps very significant savings —in the current interest rate environment. We are independent, registered "municipal advisors," as that term is defined in the recently enacted Dodd -Frank Wall Street Reform and Consumer Protection Act. We offer strategic capital planning and tactical debt management services (including issuance advice and transaction management), as well as advice related to the investment of capital funds. We specialize in translating complex financial market data into meaningful, actionable information for our clients and their elected policy- makers. I will be the designated project manager on this engagement. I have more than forty years of experience in the municipal finance sector. I have been the engagement manager or project manager on more than 200 financial advisory engagements. These assignments have produced more than $30 billion in capital funds, almost $6.0 billion of which was long term funding. It is not enough for your consultant just to be experienced. Your advisor must have your agency's best interest at heart; they must be trustworthy —the type of people you can can on regularly, but especially when things get difficult. Magis is such an advisor. We have the "know - how" and the disposition to offer creative, practical solutions that will help Cupertino do three things: (1) develop useful strategy at the lowest possible cost and in the least amount of time; (2) design the strategy to avoid future problems with it; and (3) uncover profitable opportunities to improve it. We have presented several testimonials from current clients that attest to our capabilities in this regard. 1301 Dove Street, Suite 380 Newport Beach, CA 92660 Telephone (949) 428 -8363 www.magisadvisors.com Mr. David Woo Finance Director City of Cupertino January 30, 2012 Page 2 So, why should Cupertino hire Magis instead of another advisor? We think there are four compelling reasons. First, Magis offers a business philosophy bat is quite different from others. Our business approach is expressed in our name, derived from the Latin word for "more" or "to a greater extent." We look for those situations that others might not see or be too timid to to or lack the energy to pursue. That may sound subtle, but the manifestation of it isn't. Raising large sums of money, whether in the bond market or through other means, is a complex process and there are few chances for "do- over's." We energetically apply the principle of "magi" to help our clients uncover hidden opportunities, and then apply best practices and our deep experience to help them design and build sustainable financial strategies. Second, Magis is a company with a large imagination and we are capable of big things. We designed our business to focus on fewer clients f ivoring those clients who are disposed to longer - term relationships or who face projects that are more challenging. We are handling major assignments for nationally visible clients such as 7_he California State Controller's Office and the Denver (CO) Public School system. We are assisting several communities with transactions virtually identical to that being considered by Cupertino. Fach requires political discernment, an awareness of the critical need to establish excellent relationships with the project's stakeholders and sensitivity to the organizational dynamics driving the decision - making. Third, because of Cupertino's stature, we expect that its name recognition will hold substantial appeal to retail investors. With that �.ssumption in mind, we strongly believe that a competitive sale of the refunding issue will produce superior results to any other approach. In the first half of calendar 2011, more than 80% of the trade volume in the U.S. municipal securities market was retail buying and selling, with an average ticket size of $100,000 or less. This is the market segment that will offer Cupertino the absolute lowest borrowing rates. Accessing this market segment effectively through a competitive sale requires an advisor with a deep understanding of the intricacies of Wall Street's retail distribution apparatus. Magis has such an understanding. Prior to entering the financial advisory field more than two decades ago, I worked as part of that retail apparatus — managing a municipal bond trading desk at a major New York City dealer bank. I am the rarest form of municipal advisor —one who has sold municipal bonds to retail and traded them in the primary and secondary market for a living. This expertise and experience can provide substantial benefit to the City that is a significant multiple of the cost of our services. Finally, we call your attention to the element of our proposal that is unique among all advisors, the Magis "value proposition." We understand that for Magis to succeed, your needs must be fully satisfied. We must be invested in your outcome—it is an essential ingredient of quality control. Mr. David Woo Finance Director City of Cupertino January 30, 2012 Page 3 Here's how we do that. We offer a guarantee. Others will claim to be committed to your success —but our confidence that we will bring bottom -line value to your financing project is embedded in the Magis value proposition, which promises: "If we do not provide clear value to your financing project (in terms of time, money, and qualitative results) in excess of our fee, we will waive all or part of our fee at your sole, reasonable discretion." Energy. Imagination. Expertise. Commitment. Those are our four distinguishing features. They are real and measurable. We want to make die City of Cupertino our next, great client. We appreciate your consideration of us and wish you every success in your future endeavors. Very truly yours, MAGIS ADVISORS M Timothy J. Schaefer Principal Owner CITY OF CUPERTINO CUPERTINO'S STATED NEEDS You have solicited assistance with the development and execution of a financing transaction that would refinance an existing certificate of participation originally issued by the City in 2002. The 2002 Certificates were issued in the aggregate amount of $57.64 million, of which $44.1 million remains outstanding. The 2002 Certificates were used to fund the costs of the City's new library building and refund three earlier issues. The 2002 Certificates did not establish a debt service reserve fund in cash, relying instead on a surety provided by one of the major municipal bond insurors. This latter point is especially relevant. Presently, the availability of debt service reserve sureties is virtually non - existent. The proposed refinancing must provide for a debt service reserve fund to meet current market criteria. This will require an issuance of new (refunding) certificates in a larger amount (than the principal amount remaining of the 2002 Certificates) to provide funding for the debt service reserve fund. Magis has performed an initial analysis of the feasibility of refinancing the City's 2002 Certificates at a lower rate of interest. The analysis presumes a public, competitive sale of the refunding certificates and used interest rates available on January 17, 2012, assuming that the refunding issue attained a rating of at least "AA." The analysis is presented as Exhibit 1. The net present value savings from the refinancing amount to more than $4.8 million, after applying the new reserve fund to the final year's debt service payment. Using conventional measurements, the analysis indicates that the City would save about 11% of the refunded principal amount of the 2002 Certificates —well in excess of the widely used industry indicator of 3 %. Our recent experience with the City of Poway indicates that another alternative may be worth exploring before making a commitment to a public sale of debt. In the Poway transaction, also a city hall complex, we are soliciting bank credit through a private placement. The private placement market with commercial banks is especially appealing at the moment because of the aggressive interest rates being offered by a number of banks. However, accessing the bank market for as much as $48 million may be infeasible, since the greatest bank appetite is among smaller banks. Nevertheless, we strongly encourage a canvass of the bank market before committing to a sale of the refunding certificates. Finally, we strongly recommend a competitive sale for the refunding certificates. There is absolutely no tangible evidence that a negotiated sale will produce better results for an issue such as the City's. The City is well- known, well respected in the credit markets, and with the presence of major Silicon Valley corporate names as stakeholders (such as Apple), invE!stors will clamor to take an investment position in this transaction. Cupertino has the market cachet needed to attract significant retail attention on its own, without requiring the type of liquidity that would be furnished by a negotiated sale. Our work plan and full scope of services are shown in Exhibit 2 attached to this proposal. The work plan shows the specific tasks, steps and deliverable work products required to accomplish the goals the City has set forth in its RFP. CITY OFCUPERTIIVO GENERAL INFORMATION & FIRM EXPERIENCE Magis Advisors, Inc. is an independent public finance consulting firm. We are financial advisors to state and local government. Magis is a California corporation ( #3217955, formed August 20, 2008). Magis is a federally registered municipal advisor (SEC #866 - 00026 -00 and MSRB #K0125); and, is a state - registered investment advisor (CRD #148720). Magis is a certified small business with the State of California Department of General Services ( #62132 expires 1/21/13). The firm is admitted to the California State Treasurer's panel of firms qualified to do business with the State (and we are currently under contract with the State Controller's Office). Our offices are located at 1301 Dove Street, Suite 380, Newport Beach, California 92660. The primary telephone number is (949) 428 -8363. Services Offered We provide strategic and tactical consulting services to our clients to enable them to design and build sustainable strategies for the planning, evaluation, sale and administration of their municipal debt — bonds, notes (including commercial paper), financing leases, bank loans and private placements. Our specialty is translating credit market data into useful, actionable information for financial managers and policy- makers. We provide services in the following areas and fields of expertise: 4A General obligation debt (planning & sale) //A Other tax supported debt //A Revenue debt (planning & sale) for: (planning & sale) supported by: Q Water Q Sales tax Q Wastewater Q Occupancy tax 0 Solid waste //A Debt portfolio management: 0 Transportation Q Restructuring & refunding Q Electric distribution Z Tenders & exchanges //A Financing leases (planning & sale): -0 Financial feasibility reviews: Q Revenue based Q Development agreements Q Certificates of participation Q Public /private funding //0 Bank /private placements (planning) Q Transfers of obligation //A Development & redevelopment: //A Capital asset planning 0 Tax increment financing //A Staff training & development Q Special assessment financing //A Investor relations programs 0 Mello -Roos formation and financing -0 Investment of capital funds //A Pension - related obligations and funding -A Public /private partnership analysis Current Clients Our active client list presently includes the State of California (State Controller's Office), the Denver Public Schools, and the California cities of Belmont, Burlingame, Menifee, Murrieta, Poway, Rancho Palos Verdes, Rolling Hills Estates, San Luis Obispo, :Santa Paula, and Vista. We have an engagement CITY OFCUPERTIIVO pending with the City of Lomita. We are presently processing refinancing transactions for Murrieta, Poway, and Rolling Hills Estates. Of these, the Poway transaction is particularly relevant, as it is for a city building complex similar in character to the Cupertino project. Similarly, we are presently working on a city hall financing for the City of Rancho Palos Verdes. Several years ago, we completed a financing of $116 million for the City of Vista that included $46 million of funding for its new city hall. Among the reasons our past and present clients cite for engaging us in lieu of larger firms are: (1) the opportunity to work with mature, experienced advisors at reasonable rates; (2) reduced emphasis on transaction fee income (a common condition with many advisors); (3) avoidance of the "consultant of the month" phenomenon that sometimes occurs in larger firms; and (4) the lack of unrealistic quotas or financial expectations required by the overhead of a larger organization. Expertise The founder and principal owner of Magis, Tim Schaefer, has forty years of experience in delivering services equivalent to those needed by Cupertino. Specifically, Schaefer has transacted close to 200 financial advisory engagements, including 47 lease financings (certificates of participation) and 81 refunding transactions. Taken together, this experience has helped public agencies (predominantly in California) raise more than $5.9 billion of capital. Before founding Magis, Schaefer was the President and Chief Operating Officer of Fieldman, Rolapp & Associates in Irvine, California. Prior to his tenure with Fieldman, he was the Western Regional Manager for Evensen Dodge, Inc. (since merged with Public Financial Management). Before entering the financial advisory field, Schaefer managed the national municipal trading desk at Chemical Bank in New York City. REFERENCES CITY OFCUPERTINO The references listed below can attest to the quality of our work and the energy that we put into it. We encourage you to contact any of them for further information. STATE of CALIFORNIA Population: 37,000,000; General Fund Revenues: $94 billion. CONTROLLER'S OFFICE Client of Mr. Schaefer since 1982; of Magis since 2008. Presently, Magis is under contract through 2013 to assist with cash flow planning for the State's General Fund. Notable past experience includes five offerings of short and intermediate term cash flow notes in sizes ranging from $450 million through $7.5 billion, all but one sold MR. COLLIN WONG competitively. The 1994 offering was for medium term notes and is CHIEF OF STAFF believed to be the largest competitive sale ever attempted in the U.S. TEL: (916) 327 -1361 municipal market for such securities. The 2002 offering also required a Sacramento, CA 95814 Capitol Mall complex solicitation of credit support from commercial banks. This Sac cwong- martinusen @sco.ca.gov solicitation totaled $8.5 billion in "stand- alone" credit agreements. CITY OF VISTA Population: 96,455; Incorporated: 1963; Charter adopted 2007; Debt Portfolio: approximately $199 million outstanding. Mk Client of Mr. Schaefer since 1994; of Magis since 2008. Advisory services for debt issuance, debt management, and capital planning. Presently engaged for two sewer projects and a multi -year MR. PATRICK JOHNSON program for redevelopment. Notable past experience includes 2007 CITY MANAGER issuance of $117 million COP issue to fund new civic center (supported by TEL: (760) 639 -6131 local option sales tax) and $24 million issue of taxable BANS in 2010 to 200 Civic Center Dr. finance redevelopment activities. Vista, CA 92084 patrickj@cityofvista.com CITY OF BELMONT Population: 26,243; Incorporated: 1926 (General Law); Debt Portfolio: approximately $18.0 million outstanding. Client of Mr. Schaefer since 1995; of Magis since 2008. CR OF BEIMO Presently engaged for planning and sale of two sewer issues. These issues MR. THOMAS FIL would be the fourth and fifth in a series spanning almost fourteen years. FINANCE DIRECTOR Notable experience includes planning and sale of citywide Mello -Roos TEL: (650) 595 -7435 issue, in which Schaefer also acted as special tax consultant. The Mello- One Twin Pines Lane Roos issue funded the City's library located on city -owned property Belmont, CA 94002 adjacent to City Hall. tfil @belmont.gov CITY OFCUPERTIIVO CITY OF RANCHO PALOS Population: 42,642; Incorporated: 1973 (General Law); VERDES Debt Portfolio: approximately $7.0 million outstanding. Iq Client of Mr. Schaefer since 2005; of Magis since 2008. Planning underway on offering to fund a new civic center complex. Additional proceeds will be used for the development of sports fields. The MR. DENNIS MCLEAN city is studying a "public:- private partnership" arrangement — likely to be a DIRECTOR OF FINANCE "design- build" approach. We are engaged to assist in the financial aspects TEL: (310) 544 -5212 of the proposal. Also assisting the City with the development of a long - 308400 Hawthorne BI. term capital improvement plan. Magis provides ongoing investment Rancho Palos Verdes, CA advisory services to this client as well. dennism @rpv.com CITY OF BURLINGAME Population: 26,158; Incorporated: 1908 (General Law); Debt portfolio: approximately $117.0 million (All funds). BURLINGAME Client of Ms. Wolf and Magis since 2011. Recently assisted the City with evaluation of pricing terms offered on a MR. JESUS NAVA negotiated sale of debt that refunded prior debt issued for the City's FINANCE water and wastewater utilities. Magis oversaw the pricing process, DIRECTOR/TREASURER evaluated the terms and conditions of the underwriter's initial and final TEL: (951) 558 -7222 proposals, then offered a fairness opinion about the pricing to the City's 501 Primrose Road management. Burlingame, CA 94010 jnava @burlingame.org CITY OF MURRIETA Population: 100,835; Incorporated: 1991 (General Law); Debt portfolio: approximately $68.0 million (General Fund); and, xAx�i^i^seta "No- Commitment Debt" of $145.6 million in 13 Mello -Roos CFDS. MR. RICK DUDLEY Client of Mr. Schaefer and Magis since 2009. CITY MANAGER Presently assisting with the planning, formation and sale of Mello -Roos TEL: (951) 461 -6002 24601 Jefferson Ave. debt for a multi -owner commercial development project. Recently Murrieta, CA 92562 assisted the City with its response to an IRS "letter audit" inquiring about rdudley @murrieta.org the City's compliance with tax law in the administration of one of its Mello -Roos district issues. Presently Engaged in a refinancing transaction for 7 Mello -Roos issues, totaling $60.0 million, expected to reach the market in summer 2012. CUPERTIIVO CITY OF POWAY Population: 51,322; Incorporated: 1980 (General Law); Debt Portfolio: approximately $51.6 million (General Fund). 40 Client of Mr. Schaefer and Magis since 2010. Magis was engaged in 2010 as the city's general financial advisor after a MR. PETER MOOTE competitive selection process. Initial work is focused on development of a DIRECTOR OF debt policy and integration of the debt policy with the city's established ADMINISTRATIVE SERVICES reserve policies. Presently engaged on a refinancing of a 2003 certificate TEL: (858) 668 -4414 of participation issue for the City's civic center complex, expected to total 13325 Civic Center Dr. $15.0 million, and reach the market in Spring 2012. The refinancing issue Poway, CA 92064 will likely take the form of a private placement with a bank as the rates pmoote @ci.poway.ca.us available from a bank placement are often as much as % percent lower than the rates offered in the public bond markets. CITY OF ROLLING HILLS Population: 8,067; Incorporated: 1957 (General Law); ESTATES Debt portfolio: no indebtedness. Client of Mr. Schaefer and Magis since 2011. Magis was engaged in 2011 to assist this city with an evaluation of funding options for an unfunded accrued actuarial liability in a CalPERS side fund MR. DOUG PRICHARD for its miscellaneous ernployees. Several funding options were evaluated, CITY MANAGER including separate sinking funds, use of accumulated reserves and TEL: (310) 377 -1577 issuance of debt. The City has elected to issue a pension debt obligation 4045 Palos Verdes Dr. N. through a private placement with a commercial bank. The transaction is Rolling Hills Estates, CA expected to amount to approximately $2.0 million, and is currently in the DougP @ci.Rolling- Hills- judicial validation process. The financing is expected to close in late Spring Estates.ca.us 2012. CITY OF SANTA PAULA Population: 29,321; Founded 1872, Incorporated: 1902 (General Law); Ai m\ portfolio: $148.4 million. 'a� � s IW- Client of Mr. Schaefer and Magis since 2012. Magis was recently engaged to assist Santa Paula with the evaluation of a MR. JAIME FONTES proposed termination Of a "public- private partnership" for a wastewater CITY MANAGER treatment plant. The City wishes to exercise its buyout option because TEL: (805) 955 -4200 the treatment standards for the effluent from this facility have changed 970 Ventura St. and the capital needs may be financed less expensively through the use of Santa Paula, CA 93060 tax - exempt indebtedness. The transaction is expected to close in early jfontes @spcity.org Spring 2012. CITY OFCUPERTIINO CITY OF SAN LUIS OBIPSO MR. MICHAEL CODRON ASSISTANT CITY MANAGER TEL: (805) 781 -7112 990 Palm St. San Luis Obispo, CA 93401 mcodron @slocity.org DENVER PUBLIC SCHOOLS eeuBLIC'�y O r Off, p�0 MS. JEANNIE KAPLAN BOARD SECRETARY TEL: (720) 423 -3210 jskinden @aol.com Client Testimonials Population: 44,697; Incorporated: 1856 (Charter adopted 1876); Debt portfolio: $88.6 million. Client of Mr. Schaefer since 1989 and Magis since 2011. Magis was recently engaged to assist San Luis Obispo with the evaluation of a proposed development project sponsored by the Chevron Corporation. The development will revitalize an area of more than 368 acres contained within the City's airport area specific plan. Until recently, the site was used by Chevron as an oil storage and distribution facility. The proposed Chevron development business park, manufacturing and commercial uses. Magis is assisting the City with the evaluation of financing options for the required infrastructure to support the development. Population: 600,000; Student Enrollment: 80,000; Debt Portfolio: approximately $1.03 billion outstanding. Client of Mr. Schaefer and Magis since 2011. Co- financial advisor to the District for a two- series refunding of $750 million of taxable, pension - related debt. The refunded issue consisted of (a) $396.2 million, fixed rate, taxable certificates; and (b) $396.0 million, variable rate, certificates. The variable rate offering included a four -party interest rate swap, creating a synthetic fixed rate obligation. Testimonials from past and present clients support our claim that we provide real, bottom -line value to their financing projects. "I owe you a debt of gratitude for providing us with help that is above and beyond the call of duty." — Mr. Collin Wong Martinusen, Chief of Staff to California State Controller John Chiang "Your professionalism and great sense of humor helped us to keep this project in focus and on track and we truly appreciate it." — John Violet, Elected City Treasurer, City of Belmont "Throughout his activities for the City, Mr. Schaefer consistently demonstrated a strong service orientation towards our needs and sensitivities. His integrity and loyalty to our City agenda were both obvious and genuine." — Morris Vance, Past Mayor and Former City Manager, City of Vista CITY OFCUPERTIIVO PROPOSED STAFFING (WITH EXPERIENCE) We propose to assign two superbly qualified consultants to Cupertino: Tim Schaefer and Eva Wolf. Mr. Schaefer, will be Cupertino' designated project manager and day -to -day contact person. He will furnish approximately 75% of Magis' work effort. Under Mr. Schaefer's direct supervision and control, Ms. Wolf will perform numerical and economic analysis, as required; she will furnish approximately 20% of Magis' work effort. Mr. Schaefer and Ms. Wolf are supported by Kathryn Schaefer, who will perform certain administrative and support tasks; she will supply approximately 5% of Magis' work effort. The chart below shows the reporting relationships of the team members to the City. Detailed resumes of the assigned personnel are attached in Exhibit 3. Highlights of the expertise and capabilities of the assigned consultants follow. Tim Schaefer— Assigned Project Manager Schaefer has more than forty years of experience in municipal finance, more than twenty years advising California's public agencies, twenty years experience trading and underwriting municipal debt securities, and direct, relevant experience in the development and implementation of competitive sales for lease financings. His experience includes: 40 189 advisory engagements on long -term 4A 47 lease financings (certificates of financings, raising $5.9 billion of capital. participation), totaling $2.9 billion. -0 81 refunding transactions, totaling $3.6 billion. -41 21 refundinl?s of certificates of participation, totaling $1.9 billion A complete list of Mr. Schaefer's transaction experience is included as Exhibit 4. Schaefer's qualifications include: PROFESSIONAL DESIGNATIONS AND LICENSES ✓ Certified Independent Public Finance Advisor designation by NAIPFA awarded 1997. ✓ California registered investment advisor representative, (Uniform Investment Adviser Law, Series 65). CITY OFCUPERTIINO ✓ Qualified as a General Securities Principal (Series 24), General Municipal Securities Principal (Series 53), General Securities Representative (Series 7), and Municipal Securities Representative (Series 53). MEMBERSHIPS ✓ Regular member — National Association of Independent Public Finance Advisors. ✓ Affiliate member — International City Management Association, which provides technical assistance, training, and information resources in the areas of performance measurement, community and economic development, and other topics. ✓ Associate member (non- voting) — Government Finance Officers Association. ✓ Professional member —Risk Management Association, a member - driven professional association, whose purpose is to advance the use of sound lending principles through ongoing training. ✓ Regular member — California Society of Municipal Analysts, (a constituent society of the National Federation of Municipal Analysts, an organization of nearly 1,000 municipal professionals), whose focus is on providing educational programs for municipal finance professionals. ✓ Commercial associate member — California Society of Municipal Finance Officers. ✓ Affiliate member —the Appraisal Institute, the acknowledged worldwide leader in residential and commercial real estate appraisal education with an extensive curriculum of courses and specialty seminars providing a well- rounded education in valuation methodology to its members. BOARD & COMMITTEE SERVICE; PUBLICATIONS ✓ Former member of the Technical Assistance Committee to the California Debt and Investment Advisory Commission. (1985 through 2005; 3 terms as chair.) ✓ Former private sector advisor to the GFOA's Standing Committee on Governmental Debt. (2000 through 2003.) ✓ Co- author of the California Public Fund Investment Primer, published by the California Debt and Investment Advisory Commission. (2005) ✓ Miscellaneous publications in Public Management magazine, American City & County magazine, and various newsletters and bulletins. Eva Wolf — Technical Consultant Wolf has been the advisor, project manager, or closing coordinator on more than 100 long -term bond issues. She has sixteen years of experience in the municipal bond consulting field, including public finance, municipal bond continuing disclosure, redevelopment plan amendments, and affordable housing programs. Eva has worked with the City's bond counsel (Quint & Thimmig) in the past. She excels at managing procurements of additional service providers. Her experience includes: ➢ 79 advisory engagements, which raised $922 million. MEMBERSHIPS ✓ California Redevelopment Association CITY OFCUPERTIIVO ✓ California Association of School Business Officials ✓ International Hispanic Network ✓ California Society of Municipal Finance Officers ✓ Municipal Management Association of Southern California COMMITTEES & PRESENTATIONS ✓ Membership Committee, International Hispanic Network ✓ Presenting Trainer, California Tax Credit Allocation Committee (2001) ✓ Presenter of numerous workshops and study sessions to the real estate industry on affordable housing programs and requirements. A partial list of Ms. Wolfs transactional experience is also included in Exhibit 4, attached. INFORMATION RESOURCES & PRICING CAPABILITIES Fixed income markets are complex. We believe that our ability to understand and comment on the key drivers affecting bond structures and interest rates is of utmost importance to our clients. We maintain access to both primary and secondary market pricing through Thomson Reuters Municipal Market Monitor (TM3), a data collection and analysis program that provides statistical data and analysis tools for all debt issued by public agencies in the United States. TM3 is the most comprehensive news source dedicated exclusively to the municipal marketplace, and offers query tools and drill down capabilities in both the primary and secondary markets. For keeping up -to -date on credit matters, we subscribe to the complete suite of Standard & Poor's Public Finance resources through their Global Credit Portal. This enables us to bring together credit intelligence with market intelligence and to perform effective, peer grouping and ratio analyses. We actively use the services of Municipal Market Advisors, a subscription based service, to analyze interest rates in the primary and secondary market. MMA is the leading independent strategy, research, and advisory firm in the municipal bond industry. MMA provides analysis throughout the trading day, as well as daily and weekly summaries, along with a comprehensive monthly report. Detailed descriptions of the MMA reports and analysis are attached as Exhibit S. We subscribe to the daily analysis of primary market municipal bond pricing furnished by Delphis Hanover Corporation. Delphis displays the actual average prices at which primary offerings of bond issues were sold to initial investors, and groups those prices along credit quality lines. A recent Delphis scale set is included in Exhibit S. Together, these four resources (TM3, S &P, MMA and Delphis) offer powerful, objective tools to evaluate bond structures and pricing confidently on the strength of verifiable data rather than on unreliable "verbal reports" or anecdotal claims made by bond underwriters. CITY OF CUPERTIIVO Magis uses Munex® (developed by Ferrand Consulting Group) to calculate bond issue sizing, refunding analyses, escrow investments, etc. and model debt sE!rvice requirements. Munex® allows us to perform sensitivity analyses "on- the -fly" to understand the effect of interest rate changes on the financing transaction. Moreover, Munex° also allows for more efficient refinancing analysis because it enables us to compute economic efficiencies, by maturity, based on the value to the issuer of the embedded call option. We have a modern, networked computer system, with numerous applications, that enables us to compete effectively with larger competitors. In addition to the standard software applications expected in a modern office, we also have an extensive library of more than 22,000 documents, articles, and records in the field of public finance that is text searchable from any terminal in the firm. We have dedicated teleconferencing facilities and the capability to conduct video conferencing. For analysis of real estate projects, the firm uses ARGUS Developer'". ARGUS Developer is an established real estate pro forma software program in use by thousands of owners, commercial developers, home builders, land developers, brokers and financial institutions throughout the world. It is designed to work for all forms of real estate, including commercial, single or multifamily residential, retail, office, industrial, land development, and any combination for mixed -use developments. ARGUS Developer is designed to develop accurate pro formas, including rent roll /tenancy schedules, unit sales, and cost distribution capabilities. This enables us to quickly and accurately analyze real estate transactions; forecast cash flows and calculate investment values and returns; and, effectively summarize complex deal structures to our clients. We subscribe to all major periodicals in the field of municipal finance, including The Bond Buyer, The Wall Street Journal, The Journal of Municipal Finance, The Journal of Finance, and numerous periodicals. We maintain online access to databases furnished by Highbeam Research (financial news, periodicals, out of town newspapers, etc.), The New York Times (archives), the National Federation of Municipal Analysts, and Rand California Construction Data, to name but a few. In their entirety, these resources require significant financial commitment f -om Magis, a prerequisite to establishing credible, long -term relationships with major clients such as Cupertino. REGULATORY ACTIONS There are no past, pending, or threatened regulatory, legal or enforcement actions or investigations affecting Magis, its officers or employees. Magis is rEquired under the recently enacted Dodd -Frank Act to register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board as a "municipal advisor," as that term is defined in Dodd- Frank. Our registration number with the SEC is 866 - 00026 -00; our registration with the MSRB is #K01.25. Magis is a state - registered investment advisor and we are required to maintain and regularly update certain information as a condition of that registration. Additional background information about Magis and its employees is also available on the CITY OFCUPERTINO internet at www.adviserinfo.sec.gov. Once at that site, you can search for more information about Magis by using a unique identifying number (called a "CRD number"). Magis' CRD number is 148720. CONFLICTS OF INTEREST As a matter of business philosophy, Magis is independent. Preservation of that independence demands that we avoid any entanglements (personal or corporate) with parties that may have economic connections or influence over our clients' financings. Upon our founding, we adopted a corporate Code of Conduct that specifically prohibits such relationships. The Code establishes guiding principles for the prevention of conflicts of interest and requires high transparency of our economic interests to our clients. As a result, the firm's owners file California Fair Political Practices Act Form 700, "Statement of Economic Interest," in all of the jurisdictions we serve. Upon your engagement of us, we will promptly file Form 700 with your City Clerk. Known Conflicts Neither Magis nor any of its employees, owners, officers or affiliated persons have any known conflicts of interest with Cupertino or any of its constituent agencies. We do not believe that any of our current relationships with other clients present situations where our efforts for such clients are in conflict with Cupertino's interests, nor would Cupertino's interests conflict with theirs. It is our present policy, and will remain so, to refuse client engagements that would place us in a position of having to offer advice to clients who may be in economically adversarial relationships. HOW WE MANAGE POTENTIAL CONFLICTS OF INTEREST The following are excerpts from our adopted Code of Conduct, which all employees and owners of Magis acknowledge and certify at least annually. "Our clients and others support us because they trust us to be good stewards of their resources, and to uphold rigorous standards of conduct. This requires that we avoid not only actual misconduct but also the appearance of impropriety. When in doubt, we stop and reflect. We ask questions. If we are unclear about the application of the law to our responsibilities, or if we are unsure about the legality or integrity of a particular course of action, we seek the advice of outside counsel or others knowledgeable on the issues." Each associated person with Magis is responsible for identifying and managing conflicts in accordance with applicable regulatory requirements and our policies. If any conflicts or potential conflicts are evident, they will be explained to the client at the first opportunity. There may be occasions when a conflict is ambiguous or is not addressed by existing policies. In those situations, the conflict is referred to outside counsel. Please let us know if you would like a copy of the complete Code of Conduct. CITY OFCUPERTIIVO COST PROPOSAL We are presenting a cost approach for Cupertino's consideration that represents the best value for dollars spent in the industry—a monthly retainer fee, subject to a "cap" on the City's total expenditure. The cost proposal is based on our reasonable estimate of the time required to execute the work plan presented herein (attached as Exhibit 2), and the total elapsed time shown in the schedule appearing on page 6 of Exhibit 2. Monthly Retainer Fee with "Capped" Total We will furnish any requested services for a monthly retainer fee of $3,450, assuming that the proposed transaction is concluded within six months of the City's notice to proceed. Reimbursable expenses are not included in that sum. Any time required beyond the end of the sixth month will be charged at our normal hourly rates shown below in Table 1. Accordingly, so long as the City is prepared to move forward and conclude the matter by the end of June, our fees are effectively "capped" $20,700, plus our expenses. This is the most economical way to handle this assignment as there are no "transactional" charges beyond the monthly retainer fee. It represents a 55% discount to our normal hourly rates, assuming the work effort presented in the Work Plan in Exhibit 2. If the project is abandoned, we expect to be paid for the time expended to the date of the abandonment at our normal hourly rates, up to the capped amount. Additional Work Other services specifically requested by the City, or unanticipated services outside of the scope of work presented in the work plan, are "additional work." and will be charged at the hourly rates shown below in Table 1. These services are billed monthly. It is our practice to specifically identify these additional or out of scope activities upon their identification as being outside of the agreed -upon scope. Alternatively, such services (if required) can be completed on an as- quoted basis, using a task order process as the City may wish. Table 1: Hourly Rates Personnel Hourly Rate Principal Owner $300 Vice Presidents 225 Senior Associates 160 Associates 130 Analysts 90 Administrative /clerical 70 CITY OF CUPERTIIVO Reimbursement of Costs & Expenses We also charge separately for costs incurred by us at your request and on your behalf. Examples of this include, but are not limited to, the following: materials or services you request that are provided by third -party vendors, telephone conference services, out -of -town travel (beyond 30 miles from our office) and meals, publication of legal notices, filing or official fees, printing of official documents, and similar disbursements. In the case of particularly large disbursements, we request specific approval of the expenditure or an advance for these items. Since there is no practical way to estimate these expenses, and we have no control over them, we do not offer a "cap" on them. However, our experience indicates that it is unlikely that such expenses would exceed $10,000. In addition to the above, we add a general expense charge of 6% of the net fee amount billed (when applicable) to cover expenses which are not practical to track on an individual basis. These items include, but are not limited to, subscription -based credit statistics services, volume -based data services, internal printing and photocopying costs, long distance telephone calls, records retention and retrieval, and minor office supplies and equipment. Billing & Payment Terms Regardless of the billing arrangement agreed upon, it is our policy to deliver an itemized invoice showing all of our chargeable time against the matters we have been engaged to perform. The invoice shows a detailed description of the services provided, the date on which they were delivered, and the names and hourly rates of the individuals who performed such services. Billing for the monthly retainer fee arrangement would occur on last day of the month. Billing for hourly charges on a time- and - materials arrangement, if any, also occurs monthly. Unless otherwise agreed upon, we expect payment within thirty days of the invoice date. Avoiding Conflicts Arising from Fee Arrangements Fee arrangements may present conflicts of interest that are not immediately apparent. Please see Exhibit 6 for important information on this matter. The above proposal should be reviewed in the context of the disclosures in Exhibit 6. We believe that non - contingent, predictable fees are the essence of a conflict free fiduciary standard. THE MAGIS VALUE PROPOSITION We believe that by engaging Magis, Cupertino will save money and time and achieve better results. We seek to build a long -term, trust -based relationship with the City that promotes a candid exchange of information between client and consultant. Building; that trust requires making commitments to each other. CITY OFCUPERTIIVO To initiate a trust relationship between Magis and Cupertino, we offer a guarantee that is unmatched by any other advisor. We claim no originality in this guarantee — in fact, it was first used by Roger Staubach, the former Heisman Trophy winner, Annapolis graduate and NFL quarterback who founded The Staubach Company — a commercial real estate brokerage company since merged with Jones, Lang & LaSalle. Staubach sought a way to demonstrate his new company's commitment to his clients. What he did was then considered revolutionary for a service business. He offered a value guarantee that promised fee reductions if the client was not completely satisfied with his company's representation of their interests. We offer a virtually identical commitment. Others w'II claim to be committed to your success — but our conviction that we will bring bottom -line value is embedded in the Magis value proposition and guarantee, which promises: "If we do not provide clear value to your financing project (in terms of time, money, and qualitative results) in excess of our fee, we will waive all or part of our fee at your sole, reasonable discretion." That is a commitment that is both real and measurable. It serves as the ultimate test of our ability and willingness to assure Cupertino that industry - standard, best practices will be applied to produce the best results for the City, not its consultant. Our success wi l be dependent on Cupertino's success. We appreciate your consideration of us to serve your financial advisory needs! //A CUPERTIIVO EXHIBIT 1: ILLUSTRATION OF RESULTS OF PROPOSED REFUNDING TRANSACTION © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 1, Page 1 CUPERTIINO $48,105,000 CITY OF CUPERTINO Certificates of Participation, Series 2012 Refunding (Proposed) ILLUSTRATION (Using 1/17/12 rates; Delphis "96 ") Pricing Summary Part , oft Total - - - $48,105,000.00 - $48,807,753.50 File 1 00115961.SF 1 2012 Refunding COPs 1 1/2512012 1 4:50 PM © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 1, Page 2 Type of Maturity Bond Coupon Yield Maturity Value Price Dollar Price 07/01/2012 Serial Coupon 2375% 0.200% 2,070,000.00 100.440% 2,079,108.00 07/01/2013 Serial Coupon 2.375% 0.400% 2,060,000.00 102.367% 2,108,760.20 07/01 /2014 Serial Coupon 2.375% 0.650% 2,105,000.00 103.766% 2,184,274.30 07/01/2015 Serial Coupon 2.375% 0.900% 2,160,000.00 104.645% 2,260,332.00 07/01/2016 Serial Coupon 2.375% 1.150% 2,205,000.00 105.011% 2,315,492.55 07/01/2017 Serial Coupon 2.375% 1.250% 2,260,000.00 105.648% 2,387,644.80 07/01/2018 Serial Coupon 2.375% 1.520% 2,315,000.00 105.041% 2,431,699.15 07/01/2019 Serial Coupon 2.375% 1.800% 2,365,000.00 101866% 2,456,430.90 07/01/2020 Serial Coupon 2375% 2.050% 2,425,000.00 102.440% 2,484,170.00 07/01/2021 Serial Coupon 2375% 2.300% 2,480,000.00 100.617% 2,495,301.60 07/01/2022 Serial Coupon 2.500% 2.500% 2,540,000.00 99.998% 2,539,949.20 07/01/2023 Serial Coupon 2.625% 2.650% 2,605,000.00 99.756% 2,598,643.80 07/01/2024 Serial Coupon 2.800% 2.850% 2,675,000.00 99485% 2,661,223.75 07/01/2025 Serial Coupon 3.000% 1000% 2,750,000.00 100.000% 2,750,000.00 07/01/2026 Serial Coupon 3.100% 3.150% 2,830,000.00 99.428% 2,813,812.40 07/01/2027 Serial Coupon 3.200% 3.200% 2,920,000.00 99.996% 2,919,883.20 07/01/2028 Serial Coupon 3.300% 3.350% 3,015,000.00 99375% 2,996,15625 07/01/2029 Serial Coupon 3.500% 1500% 3,110,000.00 100.000% 3,110,000.00 07/01/2030 Serial Coupon 3.600% 3.600% 3,215,000.00 99.996% 3,214,871.40 Total - - - $48,105,000.00 - $48,807,753.50 File 1 00115961.SF 1 2012 Refunding COPs 1 1/2512012 1 4:50 PM © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 1, Page 2 CUPERTIIVO © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 1, Page 3 CUPERTIIVO $48,105,000 CITY OF CUPERTINO Certificates of Participation, Series 2012 Refunding (Proposed) ILLUSTRATION (Using 1/17/12 rates; Delphis "96 ") Debt Service Schedule Date Principal Coupon Interest Total P +I 07/01/2012 2,070,000.00 2.375% 269,208.79 2,339,208.79 07/01/2013 2,060,000.00 2375% 1,278,442.50 3,338,44150 07/01/2014 2,105,000.00 2.375% 1,229,517.50 3,334,517.50 07/01/2015 2,160,000.00 2375% 1,179,52376 3,339,523.76 07/01/2016 2,205,000.00 2.375% 1,128,223.76 3,333,223.76 07/01/2017 2,260,000.00 2.375% 1,075,855.00 3,335,855.00 07/01/2018 2,315,000.00 2.375% 1,022,180.00 3,337,180.00 07/01/2019 2,365,000.00 2.375% 967,198.76 3,332,198.76 07/01/2020 2,425,000.00 2.375% 911,030.00 3,336,030.00 07/01/2021 2,480,000.00 2.375% 853,436.26 3,333,436.26 07/01/2022 2,540,000.00 2.500% 794,536.26 3,334,536.26 07/01/2023 2,605,000.00 1625% 731,036.26 3,336,036.26 07/01/2024 2,675,000.00 2.800% 662,655.00 3,337,655.00 07/01/2025 2,750,000.00 3.000% 587,755.00 3,337,755.00 07/01/2026 2,830,000.00 3.100% 505,255.00 3,335,255.00 07/01/2027 2,920,000.00 3.200% 417,525.00 3,337,525.00 07/01/2028 3,015,000.00 3.300% 324,085.00 3,339,085.00 07/01/2029 3,110,000.00 3.500% 224,590.00 3,334,590.00 07/01/2030 3,215,000.00 3.600% 115,740.00 3,330,740.00 Total $48,105,000.00 - $14,277,793.85 $62,382,793.85 Yield Statistics Bond Year Dollars $479,094.63 Average Life 9.959 Years Average Coupon 2.9801616% Net Interest Cost (NIC) 2.9489473% True Interest Cost (TIC) 2.91785129/6 Bond Yield for Arbitrage Purposes 2.7812175% All Inclusive Cost (AIC) 2.9552950% IRS Form 8038 Net Interest Cost 2.8163460% Weighted Average Maturity 9.876 Years File 1 00115961.SF 1 2012 Refunding COPS 1 1/25/2012 1 4:50 PM © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 1, Page 4 CUPERTI © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 1, Page 5 CUPERTIINO $48,105,000 CITY OF CUPERTINO Certificates of Participation, Series 2012 Refunding (Proposed) ILLUSTRATION (Using 1/17/12 rates; Delphis "95 ") Refunding Summary of Assumptions Dated 04/18/2012 1 Delivered 04/18/2012 Date And Term Structure Dated 4/18/2012 Delivery Date 4/18/2012 First Coupon Date Frequency of Interest Payments Frequency of Principal Amortization Payments First Serial Maturity Date Final Serial Maturity Date Fund Assumptions 7/01/2012 2 Per Year 1 Per Year 7/01/2012 7/01/2030 Primary Purpose Fund First Deposit Date 4/18/2012 Final Draw Date 5/18/2012 Frequency of Draws Irregular _ _ Investment Parameters Investment Model [PV, GIC, or Securities] Securities Default investment yield target Unrestricted Transfer amounts in excess of fund requirements to Debt Service Fund Yield to Receipt 0.0197266 Issues Refunded 2002 COPS 56,640,000.00 Debt Service Reserve Fund First Deposit Date 4/18/2012 Final Draw Date 7/01/2030 Frequency of Draws 2 Per Year Investment Parameters Investment Model [PV, GIC, or Securities] GIC Default investment yield target Unrestricted Transfer amounts in excess of fund requirements to Debt Service Fund Yield to Receipt 1.34E -09 File 1 00115961.SF 1 2012 Refunding COPs 1 1/2512012 1 4:50 PM Magis Advisors PLiblic Finance ConSLJ1t1l1g Page © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 1, Page 6 CITY OFCUPERTIINO EXHIBIT 2: DETAILED WORK PLAN The following work plan shows the specific tasks, typical deliverable work products, allocation of resources, and estimated work effort for each phase of the debt issuance process. Each financing project is unique. Not all debt issues require each specific task, nor are the resources or hours devoted to each task uniform across all types of issues. However, this is an excellent representation of a typical financing project. Please note that there are parallel tracks for Phase 3, showing activities for either a competitive sale or a negotiated sale, depending on the selected market access (negotiated or competitive sale). PHASE 1: PLANNING & STRUCTURING Specific Deliverables . Task 1. Evaluate possible financing options and Primarily Mr. Schaefer; Up to 20 produce cash flow or debt service illustrations showing associates may furnish hours. burdens imposed by preferred option(s). analytical work in Deliverable(s): debt service illustrations and models. background under his direction. Task 2. Review, evaluate, and comment on Primarily Mr. Schaefer; Up to 5 sufficiency of projected revenues needed to meet associates may furnish hours. economic targets. analytical work in Deliverable(s): memoranda and commentary to City staff. background under his direction. Task 3. Recommend structuring alternatives, Mr. Schaefer. Up to 5 based on identified alternatives. hours. Deliverable(s): term sheet outlining the desired business arrangement for the borrowing. Task a. Assist the City's bond counsel in the Primarily Mr. Schaefer; Up to 10 development of appropriate financial and non - financial associates may furnish hours, covenants for the financing. analytical work in including Deliverable(s): revisions to term sheet; written plan of background under his updates. finance with supporting cash flow schedules; specific direction. comments on documents; memoranda or commentary to City staff. Task S. Prepare and maintain a financing calendar Associates, under direction Up to 5 showing time of performance and assigned responsibilities of Mr. Schaefer, who plans hours. for all major activities required to complete the financing. and reviews. Deliverable(s): initial project financing schedule and regular updates; written or oral reports to City of performance measures. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 2, Page 1 CUPERTI140 Specific Tasks & Deliverables Resource Allocation Work Task 6. Attend meetings with City staff and Mr. Schaefer, accompanied Limited to financing team to discuss the plan for financing of the by associates, when 10 hours project. desirable. Mr. Schaefer maximum. Deliverable(s): attendance at all requested meetings. exclusively at City Council Deliverable(s): credit development plan and rating level. Time to complete: four to six weeks from notice to Schaefer: 80% Total Effort: proceed. Others: 20% Up to 55 hrs PHASE 2: CREDIT EVALUATION AND PRESENTATION Specific .. les Resource Allocation Work Task 7. Evaluate credit quality and advise the City Primarily Mr. Schaefer; Up to 10 on seeking credit ratings and /or financial guarantee (bond associates may furnish hours. insurance) based on established industry standards and work in background. published rating criteria. Deliverable(s): credit development plan and rating package. Task 8. Prepare written report and /or oral Primarily Mr. Schaefer; Up to 10 presentation to the City to support decision to issue the associates may furnish hours. debt and confirm the feasibility of the proposed approach. work in background. Deliverable(s): written report or oral presentation, as applicable. Task 9. Review and evaluate overall credit, present Primarily Mr. Schaefer; Up to 6 to rating agency and /or insurer, as required. associates may furnish hours. Deliverable(s): revisions to the rating package and work in background. present to rating agency or insurer, in person. Task 10. Attend meetings with City staff and Mr. Schaefer exclusively at Limited to financing team to implement the plan for financing of the City Council level. 14 hours project. maximum. Deliverable(s): attendance at all requested meetings. Time to complete: six weeks from notice to proceed; Schaefer: 85% Total Effort: typically overlaps planning and structuring by one to two Others: 15% Up to 40 hrs weeks. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 2, Page 2 CUPERTIf4O PHASE 3A: MARKETING & SALE — COMPETITIVE SALE ALTERNATIVE (Choose either this Phase 3A; or, Phase 313, which follows this section) Specific Deliverables . Task 11. Develop a marketing plan for the offering, Primarily Mr. Schaefer; Up to 20 taking into account the features and characteristics associates may furnish hours. appropriate to a retail, institutional, or combined offering; support in background identify possible bidders based on primary and secondary under his direction. market performance with similar issues and issuers. Deliverable(s): written marketing plan. Task 12. Assist the City with selection of a time and Mr. Schaefer. Up to 5 date for the bond sale, taking into consideration such hours. factors as changing economic conditions, current and projected market trends, and convenience to the City. Deliverable(s): oral or written recommendation. Task 13. Coordinate with bond counsel the Primarily Mr. Schaefer; Up to 5 preparation and distribution of the notice of sale, bidding associates may furnish hours. instructions, authorizing resolutions and other documents support in background required to implement the advertised sale. under his direction. Deliverable(s): notice of sale, bid forms, electronic bid platform data, procedure for good faith deposits, electronic bidding instructions, and related data. Task 14. Assist in publicizing the issue in advance Mr. Schaefer will identify Up to 10 using mail, electronic delivery, telephonic contact, and and make direct contact hours. distribution of notice of sale, official statement and bidding with "most probable" instructions. bidders. Deliverable(s): "probable bidders" list; memoranda; oral report to City. Task 15. Advertise the bond sale in nationally Associates, under direction Up to 2 prominent financial publications in addition to coordinating of Mr. Schaefer. hours. local publication requirements. Deliverable(s): printed legal notices; display ads, etc. Task 16. Attend the bid opening, receive bids, and Mr. Schaefer, accompanied Up to 8 evaluate for conformance with established bid parameters. by associates, for support. hours. Deliverable(s): award or reject recommendation. Time to complete: six to eight weeks from completion of Schaefer: 75% Total Effort: planning and structuring. I Others: 25% Up to 50 hrs © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 2, Page 3 X11 ' PHASE 38: MARKETING & SALE — NEGOTIATED SALE ALTERNATIVE Specific Tasks & Deliverables Resource Allocation Work Effort Task 11. Prepare and distribute a request for Primarily Mr. Schaefer; Limited to proposal for underwriting services on behalf of the City; associates may furnish 25 hours. evaluate proposals and recommend selection of an support in background underwriting firm (or firms) to the City; assist in the under his direction. selection of co- managers and syndicate members, as appropriate. Deliverable(s): written report and /or recommendation based on objective criteria. Task 12. Advise City on the appropriate terms and Primarily Mr. Schaefer; Up to 10 conditions proposed by underwriter, such as maturity associates will furnish hours. scheduling, call provisions, and other matters (discount or analytical work in premium pricing; effect on true interest costs, etc.). background under his Collaborate with bond counsel and the selected direction. underwriter concerning necessary covenants and structural features including parity debt provisions, reserve requirements, sinking fund payments, optional or mandatory redemption provisions, tax credits, etc. Deliverable(s): written or oral communication as necessary. Task 13. Advise the City on the timing of the bond Primarily Mr. Schaefer; Up to 6 sale, taking into consideration such factors as changing associates may furnish hours. economic conditions, current and projected market trends, support in background and convenience to the City. under his direction. Deliverable(s): written or oral communication as necessary. Task 14. Coordinate with bond counsel preparation Primarily Mr. Schaefer; Up to 4 of authorizing resolutions and other documents involved in associates will furnish hours. the sale of bonds. Review such documents for support in background conformance with selected financing plan. under his direction. Deliverable(s): written or oral communication as necessary to bond counsel and City. Task 15. Advise the City as to the appropriateness Primarily Mr. Schaefer; Up to 8 of the pricing being proposed by the negotiating associates may furnish hours. underwriter, including interest rate(s), underwriting support in background spread, level of discount, distribution of orders, allocation under his direction. of spread, and the like. Deliverable(s): written or oral communication to City with supporting numerical analyses, as required. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 2, Page 4 CITY OFCUPERTIIVO Deliverables Specific Tasks & Allocation Task 16. Confirm establishment of order priorities Mr. Schaefer. Up to 2 according to MSRB Rule G -11 and verify fair allocation of associates will furnish hours. the bonds following the order period. support in background Deliverable(s): written or oral communication with the under his direction. City, as required. Exclusively Mr. Schaefer Up to 5 Time to complete: four to six weeks from completion of Schaefer: 85% Total Effort: planning and structuring. Others: 15% Up to 55 hrs PHASE 4: CLOSING AND SETTLEMENT Specific .. les Resource Allocation Task 17. Direct and coordinate bond closing details Primarily Mr. Schaefer; Up to 10 including final delivery. associates will furnish hours. Deliverable(s): closing memorandum showing settlement support in background funds and movement of money at settlement. under his direction. Task 18. Recommend appropriate investment Exclusively Mr. Schaefer Up to 5 strategy to maximize earnings on the bond proceeds and (requires licensed person). hours. solicit bids on investment of proceeds, if required. Deliverable(s): written investment plan, as requested or required (except in case of U.S. Treasury "State and Local Government Series "). Task 19. Coordinate the organization of the closing Associates, under direction Up to 10 conference call, final numerical proof of borrowing terms, of Mr. Schaefer, who hours. confirm settlement funds, and prepare post -sale analysis. reviews. Deliverable(s): attendance at closing, when required; written post -sale analysis; written or oral commun cation with the City, when appropriate. Time to complete: ten to fourteen days from sale date. Schaefer: 60% Total Effort: Others: 40% Up to 25 hrs REPRESENTATIVE PROJECT SCHEDULE The graphic below shows a representation of the timeline required to complete a public offering of bonds similar to that being proposed to the City. The milestone dates are estimated, and are subject to your further approval and scheduling requirements, especially as those requirements relate to public meetings and City Council deliberations. The schedule contemplates a 12 week process, with a closing occurring in late June 2012. This would enable a refunding of the 2002 Certificates immediately before the next scheduled maturity date, July 1, 2012. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 2, Page 5 CUPERTINO Task Resource Start Erd Duration Typical Rated Lease -based financing tasks 3/5/12 6/2E/12 83 Mar Apt May Jrrn Project initiation and kick -off; organizational meeting; review term All 3/5/12 3/12/12 6 sheet and /or conceptual financing plan Sign -off on term sheet, begin drafting of legal documents (resolutions, installment Bond counsel 3/12/12 3/2S/12 14 sale agreements, indentures, etc.) and circulate for comments Initial draft of offering documents (Preliminary Official Statement) and Disclosure counsel 4/9,f12 7 circulate to working group for comments All hands meeting to review documents and All 4/10/12 mark -up Revise legal documents and circulate to Bond counsel 4/18/12 7 working group for comments Revise offering documents and circulate to Disclosure counsel 4/26/12 5/4112 7 working group for comments Update bond sizing illustration and circulate Financial advisor 5/9112 3 to working group for comments All hands meeting to review second draft of legal and offering documents and updated All 5/10/12 sizing illustrations Initial drafting of rating agency package, with updated numerical analysis and bond Financial 5/18/12 7 sizing; circulate to working group for advisor /underwriter /City comments and completion, where required. All hands meeting to review rating agency All ' 5/13/12 package and updated numerical analysis a Establish deadline forfiling staff reports, completing legal documents, confirming Issuer / financial advisor 5/19/12 rating agency meetings Submit "near final' legal and offering Bond counsel /disclosure documents to clerk for agenda preparation counsel /financial 5/29/12 6 and filing advisor /City City, underwriter, bond Rating agency meeting(s) counsel, financial 5/31/12 2 advisor City Council meets to consider: adoption of legal documents; City, underwriter, bond distribution of preliminary official counsel, financial 6/5/12 6/5/12 statement; advisor other actions, as required. Ratings received Financial advisor /City 6/6/12 6/6/12 Official Statement distributed Underwriter /financial ir' j 6/11/12 5 advisor Preliminary pricing meeting/call All 6/12/12 6/12/12 Pricing /market entry; order period Underwriter 6/13/12 2 opened Order period closed; bid proposal to issuer Underwriter 6/14/12 Execute bond purchase agreement; Underwriter, City, finalize bond sizing; press release (if financial advisor, bond 6/14/12 requested) counsel Update legal documents and prepare Bond counsel i 6/27/12 30 closing documents Update Official Statement, sign -off and Disclosure counsel, City 6/19/12 4 distribute to underwriter Pre - closing All 6/28/12 Money closing; bonds delivered, All k 6/28/12 receipt of funds and settlement © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 2, Page 6 CITY OFCUPERTIf4O EXHIBIT I RESUMES OF ASSIGNED PERSONNEL Tim Schaefer is the founder and principal owner of Magis Advisors. He has practiced in the financial advisory business in California for twenty years and has more than forty years of experience in the municipal securities industry. His experience includes the development and sale of both tax - supported and revenue bonds for public facilities, redevelopment, transportation projects, and essential service enterprises. A 40 -year veteran, Schaefer offers experience with a special emphasis in delivering practical, common sense based solutions to California cities. Over the past twenty years, he has been responsible for overseeing in excess of $25 billion in financing for more than four dozen agencies. Tim has assisted numerous state and local government issuers with the structuring, sale or administration of their debt capital. Present clients include the State of California, the Denver (CO) Public School System, and the California cities of Belmont, Menifee, Murrieta, Poway, Rancho Palos Verdes, Rolling Hills Estates, San Luis Obispo, Santa Paula, and Vista. Notable past clients include the states of California, Minnesota, Montana, New Hampshire, New York, Tennessee and Texas; the cities of Los Angeles, San Diego, and San Jose; and, the counties of Los Angeles, Orange and Riverside, among others. Before founding Magis, he was the President and Chief Operating Officer of another Southern California - based financial advisory firm. Prior to entering the f=inancial advisory field, Tim managed the national municipal trading desk at Chemical Bank in New York City and subsequently was the Managing Director of the Public Finance Division of Bank of America. He served more than twenty years on the Technical Assistance Committee to the California Debt and Investment Advisory Commission (including three terms as its chairman) and three years as a private sector advisor to the Standing Committee on Governmental Debt of the Government Finance Officers Association. Recently, he served on a National League of Cities' task force investigating substitute mechanisms for municipal bond credit substitutions as a consequence of the collapse of the major municipal bond insurers in 2008. He is a co- author of the California Public Funds Investment Primer, published by the California Debt and Investment Advisory Commission in 2005, and has authored a number of articles on the field of municipal finance. He is a frequent speaker before €;roups such as the California Debt and Investment Advisory Commission, the League of California Cities, the Government Finance Officers Association, and the California Association of Counties. Tim holds the designation of Certified Independent Public Finance Advisor awarded by the National Association of Independent Public Finance Advisors. He is a state - registered investment advisor representative. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 3, Page 1 CITY OFCUPERTIIVO Eva Wolf, Senior Associate, has over sixteen years of public finance experience in California. She has been the advisor, project manager, or closing coordinator on more than 100 bond issues. Currently, Ms. Wolf is working with the City of Vista Community Development Commission, Vista Sanitation & Buena Sanitation District, and the City of Belmont. During her prior employment (with another financial advisory firm), she was involved in the formation and subsequent bond financing of 25 special district /1915 Act assessment district bonds, totaling over $1.0 billion dollars in tax exempt: securities. She has worked as a financial advisor, project manager and /or closing coordinator on financings for cities, redevelopment agencies, and school districts. Ms. Wolf has also been extensively involved in redevelopment consulting services as well, especially the preparation of AB1290 updates and plan adoptions. She has participated in the preparation and implementation of numerous redevelopment plans. She is an expert in the compilation and composition of the redevelopment fiscal consultant report, a key component of the preliminary and final official statement for redevelopment financings as well as credit packages for rating agencies. Ms. Wolf earned a Bachelor of Science Degree from the University of Redlands in Business Management and has taken the following specialized coursework: ABC's of School Debt Financing — California Debt and Investment Advisory Commission, Fundamentals of Land - Secured Financing — CDIAC, School Finance Courses for Chief Business Officials — University of California Riverside Extension, Redevelopment Accounting — California Redevelopment Association, Financial Reporting Workshop - CRA MEMBERSHIPS ✓ California Redevelopment Association ✓ California Association of School Business Officials ✓ International Hispanic Network ✓ California Society of Municipal Finance Officers ✓ Municipal Management Association of Southern California Kathryn Schaefer, Corporate Secretary, has more than eight years of experience in the securities industry. In addition to her corporate duties, she handles the majority of the administrative functions of the firm. Prior to co- founding Magis, she worked for the Investment Securities Division of the Bank of America as the administrative aide to the Division's Operations Officer and for a major brokerage firm. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 3, Page 2 CITY OFCUPERTIIVO EXHIBIT 4: TRANSACTION HISTORY (SCHAEFER AND WOLF) The following table lists the transaction history for financial advisory engagements of Mr. Schaefer: Arcadia Arcadia Redevelopment Agency Arcadia Redevelopment Agency Banning Banning CFD No 86 -1 Banning Redevelopment Agency Belmont CFD No 2000 -1 Belmont Joint Powers Financing Authority Belmont Joint Powers Financing Authority Belmont Joint Powers Financing Authority Belmont Redevelopment Agency Belmont Redevelopment Agency Buena Park Community Redevelopment Agency Buena Park Community Redevelopment Agency Buena Park Community Redevelopment Agency Buena Park Community Redevelopment Agency Burbank Burbank Burbank Burbank Burbank Redevelopment Agency Burbank Redevelopment Agency Burbank Redevelopment Agency Burbank - Glendale- Pasadena Airport Authority Burlingame California Fairs Financing Authority California Infrastructure & Economic Development Bank California Infrastructure & Economic Development Bank 5/16/01 General obligation bond Competitive $ 8,000,000 5/16/01 Tax allocation bond Competitive 11,655,000 5/16/01 Tax allocation bond Competitive 9,240,000 2/21/97 Financing lease Negotiated 6,810,000 (COP or lease revenue) 5/15/96 Limited tax obligation bond Negotiated 3,810,000 2/27/92 Tax allocation bond Competitive 4,130,000 2/4/04 Limited tax obligation bond Negotiated 8,650,000 12/15/09 Public enterprise revenue bond Competitive 8,500,000 2/15/06 Public enterprise revenue bond Competitive 7,500,000 12/5/01 Public enterprise revenue bond Competitive 7,500,000 11/17/99 Tax allocation bond Competitive 8,725,000 11/17/99 Tax allocation bond Competitive 15,490,000 6/17/03 Tax allocation bond Competitive 24,055,000 1/19/00 Tax allocation bond Competitive 8,265,000 11/13/92 Tax allocation bond Competitive 21,515,000 11/13/92 Tax allocation bond Negotiated 8,325,000 10/17/95 Public enterprise revenue bond Negotiated 16,800,000 10/27/92 Public enterprise revenue bond Competitive 27,165,000 6/3/92 Public enterprise revenue bond Negotiated 2,280,000 6/3/92 Public enterprise revenue bond Negotiated 7,685,000 12/16/94 Tax allocation bond Negotiated 13,295,000 5/19/93 Tax allocation bond Negotiated 23,945,000 5/12/93 Tax allocation bond Negotiated 69,000,000 11/6/92 Public enterprise revenue bond Negotiated 23,780,000 11/21/11 Public enterprise revenue bond Negotiated 5,935,000 8/21/91 Public enterprise revenue bond Negotiated 30,865,000 9/23/04 Conduit revenue bond Negotiated 48,000,000 9/23/04 Conduit revenue bond Negotiated 48,000,000 © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 4, Page 1 CITY OF CUPERTIIVO California Infrastructure & Economic Development Bank California Infrastructure & Economic Development Bank California Pollution Control Financing Authority California Pollution Control Financing Authority California Special District Association Finance Corporation California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Controller's Office California State Public Works Board California State Public Works Board California Statewide Communities Development Authority California Statewide Communities Development Authority California Trade And Commerce Agency Capitola Capitola Capitola Financing Authority Carson Carson Redevelopment Agency Cathedral City Cathedral City Redevelopment Agency Cathedral City Redevelopment Agency 5/9/03 Conduit revenue bond Negotiated 275,000,000 5/9/02 Commercial paper Negotiated 225,000,000 12/7/95 Conduit revenue bond Negotiated 11,225,000 10/27/89 Conduit revenue bond Negotiated 3,100,000 8/6/98 Financing lease Negotiated 2,675,000 (COP or lease revenue) 7/20/94 Medium term note (> 12 mos) Competitive 100,000,000 7/20/94 Medium term note (> 12 mos) Competitive 3,900,000,000 2/15/94 Short -term borrowing (< 13 mos) Competitive 3,200,000,000 6/16/93 Short -term borrowing (< 13 mos) Competitive 100,000,000 6/16/93 Short -term borrowing (< 13 mos) Competitive 1,400,000,000 6/16/93 Short -term borrowing (< 13 mos) Competitive 100,000,000 6/16/93 Short -term borrowing (< 13 mos) Competitive 100,000,000 6/16/93 Short -term borrowing (< 13 mos) Competitive 200,000,000 6/16/93 Short -term borrowing (< 13 mos) Competitive 100,000,000 6/23/92 Short -term borrowing (< 13 mos) Competitive 400,000,000 6/23/92 Short -term borrowing (< 13 mos) Competitive 75,000,000 10/15/98 Financing lease Negotiated 32,630,000 (COP or lease revenue) 3/25/98 Financing lease Negotiated 102,700,000 (COP or lease revenue) 5/28/98 Conduit revenue bond Negotiated 179,320,000 5/28/98 Conduit revenue bond Negotiated 3,000,000 10/18/94 Public enterprise revenue bond Negotiated 7,000,000 12/16/98 Special assessment bond Negotiated 1,539,000 12/16/98 Special assessment bond Negotiated 2,389,000 9/11/96 Financing lease Negotiated 5,935,000 (COP or lease revenue) 8/22/01 Special assessment bond Negotiated 32,195,000 6/21/01 Tax allocation bond Negotiated 28,625,000 8/14/91 Special assessment bond Negotiated 10,725,064 11/1/89 Tax allocation bond Competitive 3,145,000 4/12/89 Tax allocation bond Competitive 5,820,000 © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 4, Page 2 CITY OF CUPERTI140 ISSUER SALE DATE DEBT TYPE SALE TYPE PRINCIPAL AMOUNT Cathedral City Redevelopment 4/12/89 Tax allocation bond Competitive 4,910,000 Agency Charleston County (SC) 5/5/93 Public enterprise revenue bond Negotiated 28,400,000 Chino Basin Desalter Authority 2/26/02 Public enterprise revenue bond Negotiated 100,000,000 Compton Community 6/21/06 Tax allocation bond Negotiated 51,215,000 Redevelopment Agency Costa Mesa City Hall And Public 10/5/88 Financing lease Competitive 17,000,000 Safety Facilities Inc (COP or lease revenue) Del Mar Race Track Authority 8/29/05 Public enterprise revenue bond Negotiated 49,380,000 Denver Public Schools 4/5/11 Financing lease (fixed) Negotiated 396,235,000 (COP or lease revenue) Denver Public Schools 4/12/11 Financing lease (variable) Negotiated 396,045,000 (COP or lease revenue) Kent County (MI) 4/20/95 Public enterprise revenue bond Negotiated 40,000,000 Lake Forest 3/9/04 Financing lease Competitive 9,505,000 (COP or lease revenue) Lee Lake Water District 6/24/03 Limited tax obligation bond Negotiated 21,940,000 CFD No 1 Lee Lake Water District 7/30/02 Limited tax obligation bond Negotiated 6,835,000 CFD No 2 Lee Lake Water District 2/24/04 Limited tax obligation bond Negotiated 27,310,000 CFD No 3 Long Beach 6/4/91 Special assessment bond Negotiated 17,440,000 Los Angeles 3/23/04 Public enterprise revenue bond Competitive 56,230,000 Los Angeles 12/2/03 Public enterprise revenue bond Competitive 61,120,000 Los Angeles 4/24/03 Public enterprise revenue bond Competitive 47,825,000 Los Angeles CFD No 4 3/12/03 Limited tax obligation bond Negotiated 135,000,000 Los Angeles County Public Works 11/29/06 Financing lease Negotiated 320,995,000 Financing Authority (COP or lease revenue) Los Angeles County Public Works 2/15/05 Financing lease Negotiated 393,315,000 Financing Authority (COP or lease revenue) McFarland Unified School District 7/25/94 General obligation bond Competitive 9,800,000 Modesto 8/4/93 Short -term borrowing (< 13 mos) Competitive 5,000,000 Moreno Valley 5/9/95 Financing lease Competitive 10,420,000 (COP or lease revenue) Moreno Valley CFD No 3 3/24/00 Limited tax obligation bond Negotiated 8,075,000 Moreno Valley CFD No 5 5/31/07 Limited tax obligation bond Negotiated 5,870,000 Moreno Valley Public Financing 6/23/05 Financing lease Negotiated 48,205,000 Authority (COP or lease revenue) Newport Beach ID No 95 -1 7/26/01 Limited tax obligation bond Negotiated 15,495,000 Ontario 12/14/95 Special assessment bond Negotiated 15,280,000 Orange County CFD No 88 -1 7/15/92 Limited tax obligation bond Negotiated 119,250,000 © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 4, Page 3 a CUPERTINO CITY OFCUPERTI14O Orange County CFD No 88 -2 Otay Water District Oxnard Oxnard Oxnard Oxnard Oxnard CFD No 1 Oxnard Financing Authority Oxnard Financing Authority Oxnard Financing Authority Oxnard Financing Authority Oxnard Financing Authority Oxnard Financing Authority Oxnard Redevelopment Agency Riverside Riverside Riverside Riverside Riverside Riverside Riverside Riverside Riverside Riverside Riverside Riverside CFD No 90 -1 Riverside CFD No 90 -2 Riverside County Asset Leasing Corp Riverside County Redevelopment Agency Riverside County Redevelopment Agency Riverside Unified School District Riverside Unified School District Rosedale Union School District 6/18/98 Limited tax obligation bond 6/24/98 General obligation bond 7/14/99 Special assessment bond 6/5/97 Special assessment bond 11/26/96 Special assessment bond 1/3/96 Special assessment bond 12/3/02 Limited tax obligation bond 9/7/95 Public enterprise revenue bond 12/3/93 Financing lease (COP or lease revenue) 11/8/93 Financing lease (COP or lease revenue) 7/31/93 Public enterprise revenue bond 1/13/93 Public enterprise revenue bond 1/13/93 Public enterprise revenue bond 4/22/94 Tax allocation bond 8/26/93 Conduit revenue bond 12/8/92 Conduit revenue bond 12/8/92 Conduit revenue bond 12/8/92 Conduit revenue bond 12/8/92 Conduit revenue bond 11/5/92 Special assessment bond 7/30/91 Special assessment bond 5/9/91 Conduit revenue bond 7/3/90 Conduit revenue bond 4/10/90 Financing lease (COP or lease revenue) 7/7/89 Special assessment bond 3/20/91 Limited tax obligation bond 9/5/91 Limited tax obligation bond 12/9/08 Financing lease (COP or lease revenue) 8/28/91 Tax allocation bond Sacramento Area Flood Agency © Magis Advisors 2012. All rights reserved 00116032.DOCX 5/9/90 Tax allocation bond 5/6/08 General obligation bond 4/19/06 General obligation bond 7/9/91 General obligation bond 2/1/90 Medium term note (> 12 mos) Negotiated Competitive Competitive Negotiated Negotiated Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Competitive Negotiated 1,775,000 11,835,000 3,545,000 31,120,000 8,560,000 7,460,000 9,740,000 25,000,000 31,565,000 7,700,000 59,530,000 4,105,000 5,983,256 18,580,000 3,060,000 540,000 435,000 7,745,000 9,420,000 4,416,947 4,268,565 7,515,000 6,700,000 7,500,000 30,795,000 20,400,000 8,945,980 78,895,000 11,415,000 18,020,000 50,000,000 65,000,000 2,480,000 11,000,000 January 30, 2012 Exhibit 4, Page 4 CITY OF CUPERTI140 San Diego 12/17/03 Special assessment bond Negotiated 5,430,000 San Diego 8/13/03 Special assessment bond Negotiated 8,850,000 San Diego 10/13/93 Conduit rE!venue bond Negotiated 16,000,000 San Diego 8/20/93 Conduit rE!venue bond Negotiated 15,700,000 San Diego 7/30/93 Conduit rE!venue bond Negotiated 3,490,000 San Diego 5/28/92 Special assessment bond Negotiated 2,235,000 San Diego 7/30/91 Financing lease Competitive 11,810,000 (COP or lease revenue) San Diego CFD No 1 12/27/95 Limited tax obligation bond Negotiated 20,865,000 San Diego CFD No 1 7/18/91 Limited tax obligation bond Negotiated 35,340,000 San Diego CFD No 3 6/29/06 Limited tax obligation bond Negotiated 16,000,000 San Diego County 7/17/91 Special assessment bond Negotiated 28,804,151 San Diego Housing Authority 11/10/93 Conduit rE,venue bond Negotiated 13,608,000 San Diego Santaluz CFD No 2 2/11/04 Limited tax obligation bond Negotiated 9,965,000 San Diego Santaluz CFD No 2 2/11/04 Limited tax obligation bond Negotiated 5,000,000 San Diego Santaluz CFD No 2 10/18/00 Limited tax obligation bond Negotiated 56,020,000 San Diego Santaluz CFD No 2 10/18/00 Limited tax obligation bond Negotiated 4,350,000 San Francisco Bay Area Rapid 5/17/95 Sales tax revenue bond Negotiated 135,000,000 Transit District San Francisco City & County 12/8/94 Public enterprise revenue bond Competitive 25,000,000 Parking Authority San Jose 7/29/93 Special assessment bond Negotiated 1,494,426 San Jose Financing Authority 11/16/93 Financing lease Negotiated 24,875,000 (COP or lease revenue) San Jose Financing Authority 10/28/93 Financing lease Negotiated 9,000,000 (COP or lease revenue) San Luis Obispo 8/8/06 Public enterprise revenue bond Competitive 16,905,000 San Luis Obispo 12/11/02 Public enterprise revenue bond Competitive 9,485,000 San Luis Obispo 10/5/94 Financing lease Negotiated 11,780,000 (COP or lease revenue) San Luis Obispo 3/17/93 Public enterprise revenue bond Competitive 10,890,000 San Luis Obispo 12/13/90 Financing lease Competitive 4,500,000 (COP or lease revenue) San Luis Obispo 12/13/88 Financing lease Competitive 5,000,000 (COP or lease revenue) San Luis Obispo Capital 4/12/06 Financing lease Competitive 16,160,000 Improvement Board (COP or lease revenue) San Luis Obispo Capital 4/1/04 Financing lease Competitive 6,700,000 Improvement Board (COP or lease revenue) San Luis Obispo Capital 11/14/01 Financing lease Competitive 12,415,000 Improvement Board (COP or lease revenue) © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 4, Page 5 CITY OFCUPERTINO San Luis Obispo Capital Improvement Board San Luis Obispo Capital Improvement Board San Luis Obispo Capital Improvement Board San Luis Obispo Capital Improvement Board San Luis Obispo County San Marcos CFD No 2002 -1 San Marcos CFD No 88 -1 San Marcos CFD No 88 -1 San Marcos CFD No 88 -1 San Marcos Public Facilities Authority San Marcos Public Facilities Authority San Marcos Public Facilities Authority San Marcos Public Facilities Authority San Marcos Public Facilities Authority San Marcos Public Facilities Authority Santa Margarita Water District Santa Margarita Water District Santa Margarita Water District Santa Margarita Water District Santa Margarita Water District CFD No 99 -1 Santee Redevelopment Agency South Gate Public Financing Authority South Gate Public Financing Authority Southwest Communities Financing Authority Sparks (NV) Sparks (NV) State of California State of California 10/27/99 Financing lease 3/11/04 (COP or lease revenue) 10/27/99 Financing lease 3/11/04 (COP or lease revenue) 10/27/99 Financing lease Sales tax revenue bond (COP or lease revenue) 6/6/96 Financing lease Negotiated (COP or lease revenue) 4/29/99 Special assessment bond 7/21/04 Limited tax obligation bond 8/19/98 Limited tax obligation bond 8/19/98 Limited tax obligation bond 8/19/98 Limited tax obligation bond 9/15/04 Revenue bond (Pool) 9/15/04 Revenue bond (Pool) 5/8/03 Tax allocation bond 5/8/03 Tax allocation bond 12/2/99 Financing lease (COP or lease revenue) 8/19/98 Revenue bond (Pool) 3/11/04 General obligation bond 3/11/04 General obligation bond 3/11/04 General obligation bond 3/11/04 General obligation bond 4/23/03 Limited tax obligation bond 8/24/88 Tax allocation bond 11/30/89 Tax allocation bond 11/17/89 Public enterprise revenue bond Competitive Competitive Negotiated Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Negotiated Negotiated Negotiated Negotiated Negotiated Negotiated Competitive Negotiated Negotiated 11/19/08 Financing lease Negotiated (COP or lease revenue) 7/2/08 Special assessment bond Negotiated 6/18/08 Sales tax revenue bond Negotiated 10/25/07 Short -term borrowing (< 13 mos) Negotiated 6/18/02 Short -term borrowing (< 13 mos) Competitive © Magis Advisors 2012. All rights reserved 00116032.DOCX 3,245,000 6,745,000 3,105, 000 7,100,000 2,796,932 22,500,000 16,535,000 2,705,000 14,320,000 3,690,000 33,805,000 21,360,000 69,740,000 8,350,000 33,560,000 1,920,000 36,740,000 7,755,000 16,355,000 33,145,000 6,775,000 26,665,000 14,700,000 15,105,000 26,120,000 83,290,000 7,000,000,000 7,500,000,000 January 30, 2012 Exhibit 4, Page 6 Financial • • Proposal •j ..... ,� .... �.J, £A ..................... FIE] CITY OFCUPERTINO 4� %ANAL Y E F�C T CUPERTINO - ISSUER SALE DATE DEBT TYPE SALE TYPE PRINCIPAL AmOUNT Three Rivers Levee Improvement 4/18/07 Limited tax obligation bond Negotiated 14,930,382 Authority CFD No 2006 -1 Three Rivers Levee Improvement 4/18/07 Limited tax obligation bond Negotiated 8,663,901 Authority CFD No 2006 -2 Three Valleys Municipal Water 10/1/03 Financing lease Negotiated 16,125,000 District (COP or lease revenue) Vista 12/13/07 Financing lease Negotiated 116,480,000 (COP or lease revenue) Vista 3/31/99 Conduit revenue bond Negotiated 6,365,000 Vista Community Development 6/17/11 Tax allocation bond Negotiated 15,520,000 Commission Vista Community Development 3/2/10 Tax allocation bond Negotiated 11,410,000 Commission Vista Community Development 3/2/10 Tax allocation bond Negotiated 24,215,000 Commission Vista Community Development 6/7/05 Tax allocation bond Competitive 2,490,000 Commission Vista Community Development 6/7/05 Tax allocation bond Competitive 26,910,000 Commission Vista Community Development 6/13/01 Tax allocation bond Competitive 12,150,000 Commission Vista Community Development 6/26/98 Tax allocation bond Negotiated 14,580,000 Commission Vista Community Development 9/20/95 Tax allocation bond Negotiated 32,550,000 Commission Vista Community Development 7/12/95 Tax allocation bond Negotiated 2,980,000 Commission Vista Joint Powers Financing 12/17/97 Financing lease Negotiated 3,900,000 Authority (COP or lease revenue) Vista Joint Powers Financing 12/17/97 Financing lease Negotiated 1,745,000 Authority (COP or lease revenue) Vista Joint Powers Financing 5/22/97 Financing lease Negotiated 21,130,000 Authority (COP or lease revenue) Washoe County Airport Authority 4/25/96 Public enterprise revenue bond Negotiated 36,095,000 (NV) Washoe County Airport Authority 3/22/93 Public enterprise revenue bond Negotiated 112,020,000 (NV) Washoe County Airport Authority 1/7/93 Public enterprise revenue bond Negotiated 10,000,000 (NV) Washoe County Airport Authority 8/20/92 Public enterprise revenue bond Negotiated 35,195,000 (NV) Yuba County CFD No 2004 -1 10/6/05 Limited tax obligation bond Negotiated 13,895,000 Yucaipa Public Financing Authority 4/12/95 Public enterprise revenue bond Negotiated 12,335,000 Total: $30,170,115,604 © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 4, Page 7 CITY OFCUPERTIP40 The following table lists the transaction history for financial advisory engagements of Ms. Wolf: Adelanto Public Utility Authority 9/7/05 Public enterprise revenue bond Negotiated $15,020,000 Adelanto Public Utility Authority 9/7/05 Public enterprise revenue bond Negotiated $55,615,000 Azusa Redevelopment Agency 11/13/08 Tax allocation bond Negotiated $11,580,000 Banning Community Redevelopment Agency 5/24/07 Tax allocation bond Negotiated $29,965,000 Calexico Community Redevelopment Agency 12/11/06 Tax allocation bond Negotiated $9,995,000 Calexico Community Redevelopment Agency 9/27/07 Tax allocation note Negotiated $3,160,000 Desert Hot Springs Redevelopment Agency 4/16/08 Tax allocation bond Negotiated $19,965,000 Lancaster Financing Authority 9/9/04 Tax allocation bond Negotiated $7,830,000 Lancaster Financing Authority 11/9/04 Tax allocation bond Negotiated $11,005,000 Lancaster Financing Authority 11/8/06 Tax allocation bond Negotiated $13,655,000 Lancaster Redevelopment Agency 8/18/04 Conduit revenue bond Negotiated $7,760,000 Lancaster Redevelopment Agency 11/9/04 Tax allocation bond Negotiated $13,575,000 Lancaster Redevelopment Agency 12/15/04 Tax allocation bond Negotiated $21,540,000 Lancaster Redevelopment Agency 12/15/04 Tax allocation bond Negotiated $5,135,000 Lancaster Redevelopment Agency 12/15/04 Tax allocation bond Negotiated $10,200,000 Murrieta CFD No 2003 -1 12/15/04 Limited tax obligation bond Negotiated $26,570,000 Murrieta CFD No 2003 -3 6/21/05 Limited tax obligation bond Negotiated $18,070,000 Murrieta CFD No 2003 -4 4/7/04 Limited tax obligation bond Negotiated $4,000,000 Murrieta CFD No 2004 -2 5/11/05 Limited tax obligation bond Negotiated $2,605,000 Murrieta CFD No 2005 -1 6/22/05 Limited tax obligation bond Negotiated $4,455,000 Norco Redevelopment Agency 12/8/04 Tax allocation bond Negotiated $11,250,000 Norco Redevelopment Agency 11/17/05 Tax allocation bond Negotiated $17,245,000 Redlands Redevelopment Agency 8/21/07 Tax allocation bond Negotiated $4,640,000 Soledad Redevelopment Agency 7/26/07 Tax allocation bond Negotiated $6,180,000 Soledad Redevelopment Agency 7/26/07 Tax allocation bond Negotiated $7,260,000 Winters Public Finance Authority 9/10/07 Public enterprise revenue bond Negotiated $4,495,000 Winters Public Finance Authority 9/10/07 Public enterprise revenue bond Negotiated $3,810,000 $346,580,000 © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 4, Page 8 CITY OFCUPERTINO EXHIBIT 5: MMA REPORTS, FREQUENCY OF PUBLICATION AND DESCRIPTION Municipal ADVISOR (Monthly) The monthly Advisor is the most comprehensive and complete month -end review of the past and near to long -term outlook for the municipal market. It is used by numerous Wall Street dealers to develop macro strategies/ identify trading and sales ideas for clients; portfolio managers to augment their own client reports; and, public finance professionals for RFP's and post- deal briefing book. MMA AAA Median Yields (Daily, close of business;, The MMA AAA Median is the only municipal benchmark created directly by the leading institutions of the municipal market and is the most consistent benchmark for daily municipal yield change. Municipal INSIGHT (Three Times Daily) INSIGHT includes timely coverage of the bond market and includes the latest economic news, new issue sales, secondary market trading, and arbitrage derivative market activity. MMA's years of market experience and strong industry relationships allow them to augment this reporting with market observations from leading economists, fixed - income strategists, traders, underwriters, insurers, and financial advisors. Municipal OUTLOOK (Weekly) The Outlook is a comprehensive summary of the past week's municipal market activity and a detailed look ahead at key factors impacting the upcoming week's market. The municipal market is undergoing the most tumultuous changes in its history. Old perceptions and beliefs are falling by the wayside. The Outlook provides unbiased, independent and timely insights into how to best navigate through this new market terrain. The Outlook is used by market participants to develop macro strategies, and then, translate that strategy into immediate implementation. Public Finance bankers and financial advisors use the information as another resource to best serve their clients' needs. Municipal STRATEGIST (Daily) The Strategist is the leading daily report on municipal market activity. It provides analysis of current dynamics in the municipal market to help enhance customer's daily trading and long- term strategies. Thought - provoking analysis spurs discussion and dialogue regarding activities and decisions for the upcoming trading sessions. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 5, Page 1 CUPERTINO EXHIBIT 5: RECENT DELPHIS HANOVER SCALE SET Wednesday, January 25, 2012 Municipal bond yield curve for the full range of credit quality, from Triple -A -rated through non -rated tax - exempt issues. Yields on a 360 -day basis. Data as of 4 p.m. t 1. 00 96 92 88 '0 Baa 86 2013 0.28 0.34 0.45 0.60 0.97 1.30 1.71 1.99 2014 �I 0.45 0.52 0.66 0.85 1.22 1.58 1.98 2.26 2015 0.67 0.74 0.93 1.14 1.51 1.87 2.30 2.58 2016 0.91 0.99 1.15 1.33 1.70 2.06 2.49 2.77 2017 1.03 1.11 1.27 1.49 1.84 2.23 2.65 2.93 2018 1.28 1.36 1.59 1.84 2.28 2.68 3.09 3.37 2019 1.57 1.65 1.89 2.15 2.65 3.04 3.46 3.73 2020 1.79 1.87 2.12 2.38 2.87 3.27 3.69 3.96 2021 2.02 2.10 2.37 2.62 3.08 3.48 3.90 4.17 2022 2.22 2.30 2.58 2.83 3.28 3.68 4.14 4.41 2023 2.36 2.43 2.74 3.08 3.51 3.92 4.45 4.73 2024 2.57 2.65 2.94 3.27 3.71 4.11 4.61 4.89 2025 2.71 2.79 3.08 3.40 3.83 4.25 4.73 4.99 2026 2.87 2.95 3.22 3.51 3.93 4.35 4.83 5.09 2027 2.99 3.07 3.30 3.63 4.04 4.44 4.92 5.18 2028 3.12 3.17 3.43 3.73 4.14 4.51 4.99 5.25 2029 3.25 3.31 3.57 3.87 4.26 4.64 5.11 5.37 2030 3.34 3.40 3.67 3.95 4.32 4.70 5.18 5.44 2031 3.49 3.56 3.84 4.09 4.49 4.86 5.35 5.61 2032 3.55 3.61 3.89 4.15 4.56 4.94 5.42 5.68 2033 3.65 3.70 3.99 4.3C 4.68 5.05 5.55 5.80 2034 3.73 3.78 4.06 4.34 4.73 5.08 5.59 5.85 2035 3.80 3.85 4.12 4.4C 4.77 5.12 5.62 5.88 2036 3.91 3.96 4.25 4.54 4.92 5.28 5.76 6.02 2037 3.93 3.99 4.28 4.5E 4.94 5.30 5.78 6.04 2042 4.08 4.15 4.38 4.6E 5.09 5.43 5.92 6.17 2047 4.13 4.20 4.43 4.72 5.13 5.49 5.97 6.23 2052 4.15 4.22 4.44 4.74 5.14 5.50 5.97 6.24 High - grades improved by .02. Secondary market activity was light to moderate. Source: Delphis Hanover Corporation (by subscription) © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 5, Page 2 CITY OF CUPERTINO CUPERTINO EXHIBIT 6: DISCLOSURE STATEMENT ON FEES The recent enactment of the Dodd -Frank Wall Street Reform and Consumer Protection Act establishes, for the first time, a "fiduciary duty" on financial advisors. The Municipal Securities Rulemaking Board has been delegated the responsibility to establish certain rules applicable to municipal advisors. In addition to other matters, these rules are designed to identify business practices that might result in conflicts of interest in the municipal advisor /client relationship. Recently, the MSRB proposed rules that would requires us, as your municipal advisor, to provide written disclosure to you about actual or potential conflicts of interest presented by various forms of compensation. Though the proposed rules are not yet effective, we have elected to provide this disclosure even if you have already chosen a particular form of compensation. You are encouraged to select a form of compensation that best meets your needs and the agreed upon scope of services after a careful review of the following information. FORMS OF COMPENSATION & POTENTIAL CONFLICTS The forms of compensation for municipal advisors vary according to the nature of the engagement and requirements of the client, among other factors. Various forms of compensation may present actual or potential conflicts of interest because they may create an incentive for the advisor to recommend one course of action over another if it is more beneficial to the advisor to do so. This document discusses various forms of compensation, the potential conflic' :s that may be embedded in such compensation, and the timing of payments to the advisor. FIXED FEE, NON - CONTINGENT Under a fixed fee form of compensation, the municipal advisor is paid a fixed amount established at the outset of the transaction. The amount is usually based upon an analysis by the client and the advisor of, among other things, the expected duration and complexity of the transaction and the agreed -upon scope of work that the advisor will perform. This form of compensation presents a potential conflict of interest because, if the transaction requires more work than originally contemplated, the advisor may suffer a loss. Thus, the advisor may recommend less time- consuming alternatives, or fail to do a thorough analysis of alternatives. There may be additional conflicts of interest if the municipal advisor's fee is contingent upon the successful completion of a financing, as described below. HOURLY FEE Under an hourly fee form of compensation, the municipal advisor is paid an amount equal to the number of hours worked by the advisor at an ;agreed -upon hourly billing rate. This form of compensation presents a potential conflict of interest if the client and the advisor do not agree on a reasonable maximum amount at the outset of the engagement, because the advisor does not have a financial incentive to recommend alternatives that would result in fewer hours worked. In some cases, an hourly fee may be applied against a retainer (e.g., a retainer payable monthly), in which case it is payable whether or not a financing closes. Alternatively, it may be contingent upon the successful completion of a financing, in which case there may be additional conflicts of interest, as described below. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 6, Page 1 CITY OFCUPERTINO CONTINGENT FIXED FEE Under a contingent fee form of compensation, payment of an advisor's fee is dependent upon the successful completion of a financing or other transaction. Although this form of compensation may be customary for the client, it presents a conflict because the advisor may have an incentive to recommend unnecessary financings or financings that are disadvantageous to the client. For example, when facts or circumstances arise that could cause the financing or other transaction to be delayed or fail to close, an advisor may have an incentive to discourage a full consideration of such facts and circumstances, or to discourage consideration of alternatives that may result in the cancellation of the financing or other transaction. RETAINER FEE Under a retainer agreement, fees are paid to a municipal advisor periodically (e.g., monthly) and are not contingent upon the completion of a financing or other transaction. Fees paid under a retainer agreement may be calculated on a fixed fee basis (e.g., a fixed fee per month regardless of the number of hours worked) or an hourly basis (e.g., a minimum monthly payment, with additional amounts payable if a certain number of hours worked is exceeded). A retainer agreement does not present the conflicts associated with a contingent fee arrangement (described above), and is often the most "conflict free" form of compensation. VOLUME -BASED FEE Under this form of compensation, the municipal advisor's fee is based upon a percentage of the principal amount of an issue of securities (e.g., bonds) or, in the case of a derivative, the present value of, or notional amount and term of the derivative. This form of compensation may present a conflict of interest because the advisor may have an incentive to advise the client to increase the size of the securities issue or modify the derivative for the purpose of increasing the advisor's compensation. © Magis Advisors 2012. All rights reserved January 30, 2012 00116032.DOCX Exhibit 6, Page 2