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SR-203-001-03 (4) F:\atty\muni\strpts\mox\BondRefundings’02DocumentAuthorization.doc Council Meeting July 23, 2002 Santa Monica, California TO: Mayor and City Council FROM: City Staff SUBJECT: Resolution Authorizing Issuance of Library Improvements Project General Obligation Bonds and Approval of Various Documents, Actions and Other Matters Related Thereto Introduction This is to recommend City Council adopt the attached resolution authorizing the issuance and sale of $25 Million City of Santa Monica general obligation bonds, Series 2002 (Library Improvements Project) (“Library Bonds”), and approve various related documents and actions. Background At an election held in the City on November 3, 1998, a proposition was submitted to the voters for approval of general obligation bonded indebtedness in an amount of not to exceed $25 million for construction, improvement and remodeling of the Main Library and branch libraries. The voters approved this proposition and the City is now ready to issue the Library Bonds to help finance the Library Improvements Project. // // // DRAFT 10861\0004\698458.2 6/28/02 // Discussion The attached resolution: 1) authorizes issuance of up to a maximum of $25 Million aggregate principal amount of twenty year Bonds at a true interest rate not to exceed 5.5%; 2) authorizes all steps necessary to complete the financing, including approval, execution and delivery of all required documents; 3) authorizes invitation of sealed proposals for the purchase of the Bonds by the best responsible bidder, and the publishing of a Notice of Sale and Bid Invitation in the Los Angeles Times (“Los Angeles Times Notice”)and a Notice of Intention to Sell Bonds in The Bond Buyer, a financial publication generally circulated throughout California (“Bond Buyer Notice”); 4) approves the Official Notice Inviting Bids (with the Official Bid Form as an attachment) and the Preliminary Official Statement, substantially in the forms attached hereto, for the purposes of distribution to prospective bidders for the Bonds; 5) approves all of the following documents substantially in the form presented at this meeting and authorizes the execution and delivery of these documents by specified City officials and employees: (a) Fiscal Agent Agreement. (b) Preliminary Official Statement for use in connection with the offering and sale of the Bonds. DRAFT 10861\0004\698458.2 6/28/02 (c) Continuing Disclosure Agreement. (d) Official Notice Inviting Bids (with Official Bid Form as an attachment). (e) Bond Buyer Notice. (f) Los Angeles Times Notice, and 6) authorizes the preparation, execution and delivery of a final Official Statement and execution and delivery of any additional documents as may be necessary to effect the offering, sale and issuance of the Library Bonds. Attachment A to this staff report is a list of questions which various national associations and the Federal Securities and Exchange Commission recommend that public officials ask when approving the issuance of bonds. For your convenience, staff and the City’s Financial Advisor and Bond Counsel have provided answers to each question. City staff, Financial Advisor and Bond Counsel are prepared to expand on these answers if requested by the Council. Budget and Financial The Library Bonds will be general obligations of the City. To pay off the Bonds, the City Council is empowered and obligated to levy and collect ad valorem property taxes upon all property within the City that is subject to taxation by the City. This must be done until all the Bonds are paid, or until there is a sum in the City treasury set apart for that purpose or held by the Fiscal Agent, sufficient to pay all sums coming due for principal and interest on the Bonds. The estimated additional property taxes to be paid DRAFT 10861\0004\698458.2 6/28/02 by property owners is $17.66 per year per $100,000 of assessed valuation. The tax will be in addition to all other taxes levied for City purposes, will be collected at the same time and in the same manner as other ad valorem property taxes of the City are collected, and is permitted to be used only for the payment of the Bonds and interest thereon. The City will be entitled to receive repayment from the Bond proceeds for expenses incurred in connection with the issuance and sale of the Bonds. These costs include Bond Counsel legal fees, Financial Consultant and Fiscal Agent fees, printing of the bond certificates, Official Notice Inviting Bids, Preliminary Official Statement and Official Statement, and publication of required notices. All necessary budget actions were included in the adopted FY 2002/03 City Budget. Recommendations It is recommended that the City Council adopt the attached resolution authorizing the issuance of the City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project). Attachments for City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project): (a) City Council Resolution (b) Fiscal Agent Agreement DRAFT 10861\0004\698458.2 6/28/02 (c) Preliminary Official Statement (d) Continuing Disclosure Agreement (e) Official Notice Inviting Bids (f) Bond Buyer Notice (g) Los Angeles Times Notice Attachment A – Questions For Public Officials To Ask Before Approving a Bond Issue Prepared by: Marsha Jones Moutrie, City Attorney Mike Dennis, Director of Finance Linda A. Moxon, Deputy City Attorney DRAFT 10861\0004\698458.2 6/28/02 FISCAL AGENT AGREEMENT by and between the CITY OF SANTA MONICA County of Los Angeles, California and BNY WESTERN TRUST COMPANY as Fiscal Agent Dated as of August 1, 2002 Relating To City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) DRAFT 10861\0004\698458.2 6/28/02 TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS.................................................................................................2 Section 1.1 Definitions.................................................................................................2 ARTICLE II THE BONDS.................................................................................................10 Section 2.1 Authorization; Terms of Bonds...............................................................10 Section 2.2 Form of Bonds........................................................................................11 Section 2.3 Execution and Authentication of Bonds..................................................11 Section 2.4 Book-Entry System.................................................................................11 Section 2.5 Discontinuation of Book-Entry System; Transfer and Exchange of Bonds.................................................................................12 Section 2.6 Bond Register.........................................................................................13 ARTICLE III ISSUANCE OF THE BONDS.......................................................................13 Section 3.1 Delivery of Bonds...................................................................................13 Section 3.2 Application of Proceeds of Sale of Bonds................................................13 Section 3.3 Costs of Issuance Fund...........................................................................13 Section 3.4 Improvement Fund..................................................................................14 ARTICLE IV REDEMPTION OF THE BONDS.................................................................14 Section 4.1 Optional Redemption..............................................................................14 Section 4.2 Mandatory Term Bond Redemption........................................................14 Section 4.3 General Redemption Provisions.................................................................15 ARTICLE V COVENANTS OF THE CITY.......................................................................16 Section 5.1 Payment of Principal and Interest............................................................16 Section 5.2 General Obligation; Levy of Tax.............................................................16 Section 5.3 Validity of Bonds....................................................................................16 Section 5.4 Further Assurances.................................................................................16 Section 5.5 Tax Covenants........................................................................................16 Section 5.6 Investment of Funds................................................................................17 ARTICLE VI THE FISCAL AGENT...................................................................................17 Section 6.1 Fiscal Agent; Acceptance; Removal Resignation.....................................17 Section 6.2 Duties of Fiscal Agent.............................................................................18 Section 6.3 Reliance on Documents. Etc...................................................................18 Section 6.4 Recitals of City.......................................................................................18 Section 6.5 May Own Bonds.....................................................................................18 Section 6.6 Money Held by Fiscal Agent...................................................................18 Section 6.7 Other Transactions..................................................................................18 Section 6.8 Interpleader............................................................................................18 - i - DRAFT 10861\0004\698458.2 6/28/02 Section 6.9 Indemnification.......................................................................................19 Section 6.10 Compensation.........................................................................................19 ARTICLE VII DEFEASANCE OF BONDS.......................................................................19 Section 7.1 Defeasance.............................................................................................19 Section 7.2 Unclaimed Monies..................................................................................19 ARTICLE VIII AMENDMENT OF FISCAL AGENT AGREEMENT...................................20 Section 8.1 Amendment with Owner Consent; Amendment Without Owner Consent.........................................................................20 Section 8.2 Disqualified Bonds..................................................................................20 Section 8.3 Endorsement or Replacement of Bonds After Amendment......................20 Section 8.4 Amendment by Mutual Consent..............................................................21 ARTICLE IX MISCELLANEOUS.......................................................................................22 Section 9.1 Counterparts...........................................................................................22 Section 9.2 Continuing Disclosure.............................................................................22 Section 9.3 Notices...................................................................................................22 EXHIBIT A FORM OF BOND............................................................................................1 Exhibit B [FORM OF REQUEST OF THE CITY (COSTS OF ISSUANCE FUND)]..........1 Exhibit C [FORM OF REQUEST OF THE CITY (IMPROVEMENT FUND)]...................2 - ii - DRAFT 10861\0004\698458.2 6/28/02 FISCAL AGENT AGREEMENT THIS FISCAL AGENT AGREEMENT, dated as of August 1, 2002, by and between BNY WESTERN TRUST COMPANY, a state banking corporation organized and existing under and by virtue of the laws of the State of California, as fiscal agent (the “Fiscal Agent”), and the CITY OF SANTA MONICA, a charter city duly organized and existing under and by virtue of the Constitution and laws of the State of California and its Charter (the “City”), WITNESSETH: WHEREAS, pursuant to Ordinance No. 1919 (CCS), a special election was held in the City of Santa Monica on November 3, 1998, at which election the following proposition was submitted to the qualified voters of the City: To construct, improve and remodel the Main and branch libraries and related facilities, shall the City of Santa Monica incur general obligation bonded indebtedness in the principal amount of not to exceed $25 Million? WHEREAS, more than two-thirds of the electors voting on the proposition voted for it, and the bonds described in the proposition may be issued; WHEREAS, the City Council has authorized, by its Resolution No. _____ (CCS), adopted on July 23, 2002, the issuance and sale of the City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (herein called the “Bonds”); WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and entering into of this Fiscal Agent Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly authorized to execute and enter into this Fiscal Agent Agreement; NOW, THEREFORE, in order to provide for the terms and the payment of the Bonds and the performance and observance by the City of all the covenants, agreements and conditions herein and in the Bonds contained, and in consideration of the mutual covenants and agreements contained herein, and for other valuable consideration, the City and the Fiscal Agent hereby agree as follows: - 1 - DRAFT 10861\0004\698458.2 6/28/02 ARTICLE I DEFINITIONS Section 1.1 Definitions. Unless the context otherwise requires, the terms defined in this Section 1.1 shall for all purposes hereof and of any amendment hereof or supplement hereto and of the Bonds and of any certificate, opinion, request or other document mentioned herein or therein have the meanings defined herein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein: “Authorized City Representative” shall mean the City Manager of the City, the Director of Finance of the City, the Mayor of the City, or any duly appointed deputy of any of them. “Bonds” shall mean the City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project), issued pursuant to Article II hereof. “Business Day” shall mean any day other than a Saturday, Sunday, legal holiday or other day on which banking institutions in San Francisco or Los Angeles, California, or New York, New York, or any state in which the principal corporate trust office of the Fiscal Agent is located, are authorized or required by law to close, or any day on which the New York Stock Exchange is closed. “Certificate of the City” shall mean a written certificate, authorized and signed by an Authorized City Representative. “City” shall mean the City of Santa Monica, County of Los Angeles, State of California. “City Council” shall mean the City Council of the City. “City Manager” shall mean the City Manager of the City. “Clerk” shall mean the City Clerk of the City. “Code” shall mean the Internal Revenue Code of 1986. “Continuing Disclosure Agreement” shall mean that certain Continuing Disclosure Agreement by and between the City and the Fiscal Agent dated as of August 1, 2002, as originally executed and as it may be amended from time to time in accordance with the terms thereof. “Costs of Issuance” shall mean all expenses incident to the issuance of the Bonds, including, but not limited to, any fees and charges of the Fiscal Agent in connection with the issuance of the Bonds. “Costs of Issuance Fund” shall mean the fund of that name created pursuant to Section 3.3 hereof. “Dated Date” shall mean August 1, 2002. “Debt Service Fund” shall mean the “City of Santa Monica General Obligation Bonds, Series 2002 Debt Service Fund” created pursuant to Section 3.2(a) hereof. “Director of Finance” shall mean the Director of Finance of the City. “Federal Securities” shall mean United States Treasury notes, bonds, bills or certificates of indebtedness, or other evidences of indebtedness secured by the full faith and credit of the United States of America; and also any securities now or - 2 - DRAFT 10861\0004\698458.2 6/28/02 hereafter authorized both the interest on and principal of which are guaranteed directly by the full faith and credit of the United States of America, as and to the extent that such securities are eligible for the legal investment of City funds. “Fiscal Agent” shall mean BNY Western Trust Company, Los Angeles, California, acting as fiscal and paying agent, registrar, and transfer agent with respect to the Bonds, its successors and assigns and any other corporation or association which may at any time be substituted in its place as provided in Section 6.1 hereof. “Fitch” shall mean Fitch Ratings, its successors and assigns. “Improvement Fund” shall mean the “City of Santa Monica General Obligation Bonds, Series 2002 Library Improvement Fund” created pursuant to Section 3.4 hereof. “Independent Accountant” shall mean any certified public accountant or firm of certified public accountants appointed and paid by the City, and who, or each of whom (i) is in fact independent and not under domination of the City; (ii) does not have any substantial interest, direct or indirect, in the City; and (iii) is not connected with the City as an officer or employee of the City but who may be regularly retained to make annual or other audits of the books of or reports to the City. “Information Services”shall mean Financial Information, Inc.’s “Daily Called Bond Service,” 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services’ “Called Bond Service,” 65 Broadway, 16th Floor, New York, New York 10006; Moody’s “Municipal and Government,” 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Reports; and Standard and Poor’s “Called Bond Record,” 25 Broadway, 3rd Floor, New York, New York 10004; or to such other addresses and/or such other services providing information with respect to called bonds as the Agency may designate to the Trustee in writing. “Interest Payment Date” shall mean January 1 or July 1 of each year, as specified in Section 2.1 hereof. “Law” shall mean Article 1 of Chapter 4 of Division 4 of Title 4 of the California Government Code, and other applicable law. “Moody’s shall mean Moody’s Investors Service, its successors and assigns. “Notice of Sale” shall mean the Notice of Sale dated as of __________, 2002, soliciting bids for the purchase of the Bonds at public sale. “Opinion of Counsel” shall mean a written opinion of counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the City. “Owner” shall mean the person in whose name any Bond shall be registered. “Permitted Investments” shall mean any of the following to the extent then permitted by the general laws of the State of California: (1) (a) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America (“United States Treasury Obligations”), (b) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the - 3 - DRAFT 10861\0004\698458.2 6/28/02 custodian may be obligated (collectively “United States Obligations”). These include, but are not necessarily limited to: -U.S. Treasury obligations All direct or fully guaranteed obligations -Farmers Home Administration Certificates of beneficial ownership -General Services Administration Participation certificates -U.S. Maritime Administration Guaranteed Title XI financing -Small Business Administration Guaranteed participation certificates Guaranteed pool certificates -Government National Mortgage Association (GNMA) GNMA-guaranteed mortgage-backed securities GNMA-guaranteed participation certificates -U.S. Department of Housing & Urban Development Local authority bonds -Washington Metropolitan Area Transit Authority Guaranteed transit bonds (2) Federal Housing Administration debentures. (3) The listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America: -Federal Home Loan Mortgage Corporation (FHLMC) Participation certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts) Senior debt obligations -Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) Consolidated systemwide bonds and notes -Federal Home Loan Banks (FHL Banks) Consolidated debt obligations -Federal National Mortgage Association (FNMA) Senior debt obligations Mortgage-backed securities (excluded are stripped mortgages securities which are purchased at prices exceeding their principal amounts) -Student Loan Marketing Association (SLMA) Senior debt obligations (excluded are securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date) -Financing Corporation (FICO) Debt obligations -Resolution Funding Corporation (REFCORP) Debt obligations (4) Unsecured certificates of deposit, time deposits, and bankers’ acceptances (having maturities of not more than 180 days) of any bank, including the Fiscal Agent and its affiliates, the short-term obligations of which are rated “A-1+” or better by S&P and “P-1” or better by Moody’s. - 4 - DRAFT 10861\0004\698458.2 6/28/02 (5) Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation (FDIC), in banks, including the Fiscal Agent and its affiliates, which have capital and surplus of at least $5 million. (6) Commercial paper (having original maturities of not more than 270 days) rated “A-1+” by S&P and “Prime-1” by Moody’s. (7) Money market funds rated “AAm” or “AAm-G” or better by S&P and “AA” or better by Moody’s, including funds for which the Fiscal Agent, its parent holding company, if any, or any affiliates or subsidiaries of the Fiscal Agent provide investment advisory or other management services. (8) Repurchase agreements: (a) With any domestic bank the long term debt of which is rated “AA” or better by S&P and Moody’s (so long as an opinion is rendered that the repurchase agreement is a “repurchase agreement” as defined in the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and that such bank is subject to FIRREA), or any foreign bank rated at least “AA” by S&P and “Aaa” by Moody’s or “AAA” by S & P and at least “Aa” by Moody’s; provided the term of such repurchase agreement is for one year or less. (b) With (i) any broker-dealer with “retail customers” which has, or the parent company of which has, long-term debt rated at least “AA” by S&P and “Aa” by Moody’s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corp. (SIPC); provided that: A. The market value of the collateral is maintained for United States Treasury Obligations, at the levels shown below under “Collateral Levels for United States Treasury Obligations”; B. Failure to maintain the requisite collateral percentage will require the City or the Fiscal Agent to liquidate the collateral; C. The Fiscal Agent, the City or a third party acting solely as agent therefor (the “Holder of the Collateral”) has possession of the collateral or the collateral has been transferred to the Holder of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor’s books); D. The repurchase agreement states, and an opinion of counsel is rendered to the effect, that the Fiscal Agent has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession); E. The transferor represents that the collateral is free and clear of any third-party liens or claims; F. An opinion is rendered that the repurchase agreement is a “repurchase agreement” as defined in the United States Bankruptcy Code; G. There is or will be a written agreement governing every repurchase transaction; - 5 - DRAFT 10861\0004\698458.2 6/28/02 H. Each of the City and the Fiscal Agent represents that it has no knowledge of any fraud involved in the repurchase transaction; and I. The City and the Fiscal Agent receive an opinion of counsel (which opinion shall be addressed to the City and the Fiscal Agent) that such repurchase agreement is legal, valid and binding and enforceable against the provider in accordance with its terms. (9) State Obligations (a) Direct general obligations of any state of the United States or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated “A” by Moody’s and “A” by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated. (b) Direct, general short-term obligations of any state agency or subdivision described in (a) above and rated “A-1+” by S&P and “Prime-1” by Moody’s. (c) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state, state agency or subdivision described in (a) above and rated “AA” or better by S&P and “Aa” or better by Moody’s. (10) Investment agreements with a domestic or foreign bank or corporation (other than a life or property casualty insurance company) the long-term debt of which, or, in the case of a guaranteed corporation the long- term debt of the guarantor, or in the case of a monoline financial guaranty insurance company the claims paying ability of the guarantor, is rated at least “AA” by S&P and “Aa” by Moody’s; provided, that prior written notice of an investment in the investment agreement is provided to S&P and, provided, further, by the terms of the investment agreement: (a) interest payments are to be made to the Fiscal Agent at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the Improvement Fund, construction draws) on the Bonds; (b) the invested funds are available for withdrawal without penalty or premium, at any time for purposes identified in this Fiscal Agent Agreement other than acquisition of alternative investment property upon not more than seven days prior notice (which notice may be amended or withdrawn at any time prior to the specified withdrawal date); provided that this Fiscal Agent Agreement specifically requires the Fiscal Agent or the City to give notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; (c) the investment agreement shall state that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof; (d) a fixed guaranteed rate of interest is to be paid on invested funds and all future deposits, if any, required to be made to restore the amount of such funds to the level specified under this Fiscal Agent Agreement; (e) the Fiscal Agent and the City receive the opinion of domestic counsel (which opinion shall be addressed to the City) that such investment agreement is legal, valid and binding and enforceable against the provider in accordance with its terms and of foreign counsel (if applicable); (f) the investment agreement shall provide that if during its term (A) the provider’s or the guarantor’s rating by either Moody’s or S&P is withdrawn or suspended or falls below “AA” or - 6 - DRAFT 10861\0004\698458.2 6/28/02 “Aa”, respectively, or, with respect to a foreign bank, below the ratings of such provider at the delivery date of the investment agreement, the provider must, at the direction of the City or the Fiscal Agent within 10 days of receipt of such direction, either (1) collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider’s books) to the Fiscal Agent, the City or a Holder of the Collateral, United States Treasury Obligations which are free and clear of any third-party liens or claims at the Collateral Levels set forth below; or (2) repay the principal of and accrued but unpaid interest on the investment (the choice of (1) or (2) above shall be that of the City or Fiscal Agent, as appropriate), and (B) the provider’s or the guarantor’s rating by either Moody’s or S&P is withdrawn or suspended or falls below “A”, or, with respect to a foreign bank, below “AA” or “Aa” by S&P or Moody’s, as appropriate, the provider must, at the direction of the City or the Fiscal Agent, within 10 days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the City or Fiscal Agent; (g) the investment agreement shall state, and an opinion of counsel shall be rendered to the effect, that the Fiscal Agent has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Fiscal Agent is in possession); and (h) the investment agreement must provide that if during its term (A) the provider shall default in its payment obligations, the provider’s obligation under the investment agreement shall, at the direction of the City or the Fiscal Agent, be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the City or Fiscal Agent, as appropriate, and (B) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. (“event of insolvency”), the provider’s obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the City or Fiscal Agent, as appropriate. (11) Pre-refunded municipal obligations rated “AAA” by S&P and “Aaa” by Moody’s meeting the following requirements: (a) the municipal obligations are (i) not subject to redemption prior to maturity or (ii) the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions; (b) the municipal obligations are secured by cash or United States Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations; (c) the principal of and interest on the United States Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations (“Verification”); (d) the cash or United States Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; and (e) no substitution of a United States Treasury Obligation shall be permitted except with another United States Treasury Obligation and upon delivery of a new Verification; and - 7 - DRAFT 10861\0004\698458.2 6/28/02 (f) the cash or the United States Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent. - 8 - DRAFT 10861\0004\698458.2 6/28/02 Collateral Levels For United States Treasury Obligations Remaining Maturity Frequency of 1 year 5 years 10 years 15 years 30 years Valuation or less or less or less or less or less Daily 102 105 106 108 114 Weekly 103 111 112 114 120 Monthly 105 117 120 125 133 Quarterly 107 120 130 133 140 Further Requirements: (a) On each valuation date the City, the Fiscal Agent, or the custodian who shall confirm to the City and the Fiscal Agent, shall value the market value (exclusive of accrued interest) of the collateral, which market value will be an amount equal to the requisite collateral percentage times the principal amount of the investment (including unpaid accrued interest thereon) that is being secured, (b) in the event the collateral level is below its collateral percentage on a valuation date, such percentage shall be restored within the following restoration periods: one Business Day for daily valuations, two Business Days for weekly and monthly valuations, and one month for quarterly valuations (the use of different restoration periods affect the requisite collateral percentage), (c) the City or the Fiscal Agent shall terminate the repurchase agreement or the investment agreement, as the case may be, upon a failure to maintain the requisite collateral percentage after the restoration period and, if not paid by the counterparty in federal funds against transfer of the collateral, liquidate the collateral. “Principal Payment Date” shall mean July 1 of each year specified in Section 2.1 hereof. “Purchaser” shall mean ____________________. “Record Date” shall mean the fifteenth day of the month immediately preceding an Interest Payment Date, whether or not such day is a Business Day. “Request of the City” shall mean a written request, authorized and signed by an Authorized City Representative. “S&P” shall mean Standard & Poor’s, its successors and assigns. “Securities Depositories” shall mean The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax-(516) 277-4039 or 4190; or such other securities depositories as the City may designate to the Fiscal Agent in writing. “State” shall mean the State of California. “Tax Certificate” shall mean the Tax Certificate concerning certain matters pertaining to the use of proceeds of the Bonds, executed and delivered by the City on the date of issuance of the Bonds, including all exhibits attached thereto, as such certificate may from time to time be modified or supplemented in accordance with the terms thereof. “Term Bonds” shall mean the Bonds maturing on July 1, _____. “Treasurer” shall mean the Revenue Manager/City Treasurer of the City. ARTICLE II - 9 - DRAFT 10861\0004\698458.2 6/28/02 THE BONDS Section 2.1 Authorization; Terms of Bonds. The Bonds shall be issued for the purpose of providing funds for the acquisition and construction of improvements to the Santa Monica Public Library, and to pay costs incurred in connection with the issuance, sale and delivery of the Bonds. The Bonds shall be issued by the City under and subject to the terms of this Fiscal Agent Agreement and the Law, and shall be designated as the “City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project),” and shall be in the aggregate principal amount of $25,000,000. The Bonds shall be dated August 1, 2002. The Bonds shall bear interest from the Dated Date to their respective maturity dates, payable semiannually on January 1 and July 1 in each year commencing on January 1, 2003, at the respective interest rates shown in the table below in this Section 2.1. Each Bond shall bear interest from the Interest Payment Date next preceding the date of authentication and registration thereof unless such Bond is authenticated as of a day during the period from and after any Record Date to the immediately following Interest Payment Date, inclusive, in which event it shall bear interest from such Interest Payment Date, or unless it is authenticated on or before the first Record Date, in which event it shall bear interest from the Dated provided, however, Date; that if, at the time of authentication of any Bond, interest is then in default on outstanding Bonds, such Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment on the outstanding Bonds. Interest on the Bonds shall be calculated on the basis of a 360-day year consisting of twelve 30-day months. The Bonds shall be issued in fully registered form, without coupons, in the denomination of $5,000 or any provided integral multiple thereof; that no Bond shall have principal maturing on more than one principal maturity date. The Bonds when issued shall be registered in the name of “Cede & Co.,” as nominee of The Depository Trust Company, New York, New York, and shall be initially issued as one bond for each of the maturities of the Bonds, in the principal amounts set forth in the table below in this Section 2.1. The Depository Trust Company is hereby appointed depository for the Bonds and registered ownership of the Bonds may not thereafter be transferred except as provided in Section 2.4 hereof. The Bonds shall mature on July 1 of each of the years, in the principal amounts, and bearing interest at the respective interest rates, shown below: Maturity Date Principal Interest Maturity Date Principal Interest (July 1) Amount Rate (July 1) Amount Rate 2003 $1,250,000 2013 $1,250,000 2004 1,250,000 2014 1,250,000 2005 1,250,000 2015 1,250,000 2006 1,250,000 2016 1,250,000 2007 1,250,000 2017 1,250,000 - 10 - DRAFT 10861\0004\698458.2 6/28/02 2008 1,250,000 2018 1,250,000 2009 1,250,000 2019 1,250,000 2010 1,250,000 2020 1,250,000 2011 1,250,000 2021 1,250,000 2012 1,250,000 2022 1,250,000 The principal of the Bonds shall be payable in lawful money of the United States of America to the Owner thereof, upon the surrender thereof at the office of the Fiscal Agent in Los Angeles, California, or at such other location as the Fiscal Agent shall designate. The interest on the Bonds shall be payable in like lawful money to the person whose name appears on the bond registration books of the Fiscal Agent as the Owner thereof as of the close of business on the Record Date immediately preceding such Interest Payment Date. Payment of the interest on any Bond in accordance with Section 6.2 shall be made to the person appearing on the bond registration books of the Fiscal Agent as the Owner thereof, such interest to be paid by check or draft mailed by first class mail to such Owner at such Owner’s address as it appears on such registration books or at such address as the Owner may have filed with the Fiscal Agent for that purpose; or upon written request of the Owner of Bonds aggregating not less than $1,000,000 in principal amount, given no later than the close of business on the Record Date immediately preceding the applicable Interest Payment Date, by wire transfer in immediately available funds to an account maintained in the United States at such wire address as such Owner shall specify in its written notice. So long as Cede & Co. or its registered assigns shall be the registered owner of any of the Bonds, payment shall be made thereto by wire transfer as provided in Section 2.4(d) hereof. Section 2.2Form of Bonds. The Bonds, the Fiscal Agent’s certificate of authentication and registration, and the form of assignment to appear thereon shall be in substantially the forms, respectively, attached hereto as Exhibit A, with necessary or appropriate variations, omissions and insertions as permitted or required by this Fiscal Agent Agreement. Section 2.3 Execution and Authentication of Bonds. The Bonds shall be signed by the manual or facsimile signatures of the City Manager of the City and the Treasurer and shall be countersigned by the manual or facsimile signature of the Clerk. The Bonds shall be authenticated by a manual signature of a duly authorized officer of the Fiscal Agent. Only such of the Bonds as shall bear thereon a certificate of authentication and registration in the form hereinafter recited, executed by the Fiscal Agent, shall be valid or obligatory for any purpose or entitled to the benefits of this Fiscal Agent Agreement, and such certificate of the Fiscal Agent shall be conclusive evidence that the Bonds so authenticated have been duly authenticated and delivered hereunder and are entitled to the benefits of this Fiscal Agent Agreement. Section 2.4 Book-Entry System. (a)The Bonds shall be initially issued and registered as provided in Section 2.1 hereof. Registered ownership of the Bonds, or any portion thereof, may not thereafter be transferred except: (i) To any successor of Cede & Co., as nominee of The Depository Trust Company, or its nominee, or to any substitute depository designated pursuant to clause (ii) of this section (a provided, “substitute depository”); that any successor of Cede & Co., as nominee of The Depository Trust Company or substitute depository, shall be qualified under any applicable laws to provide the services proposed to be provided by it; - 11 - DRAFT 10861\0004\698458.2 6/28/02 (ii) To any substitute depository not objected to by the City, upon (1) the resignation of The Depository Trust Company or its successor (or any substitute depository or its successor) from its functions as depository, or (2) a determination by the City to substitute another depository for The Depository Trust Company (or its successor) because The Depository Trust Company or its successor (or any substitute depository or its successor) is no longer able to carry out its functions as depository; provided, that any such substitute depository shall be qualified under any applicable 1aws to provide the services proposed to be provided by it; or (iii) To any person as provided below, upon (1) the resignation of The Depository Trust Company or its successor (or substitute depository or its successor) from its functions as depository, or (2) a determination by the City to remove The Depository Trust Company or its successor (or any substitute depository or its successor) from its functions as depository. (b) In the case of any transfer pursuant to clause (i) or clause (ii) of subsection (a) hereof, upon receipt of the outstanding Bonds by the Fiscal Agent, together with a Request of the City, a new Bond for each maturity shall be executed and delivered in the aggregate principal amount of the Bonds then outstanding, registered in the name of such successor or such substitute depository, or their nominees, as the case may be, all as specified in such Request of the City. In the case of any transfer pursuant to clause (iii) of subsection (a) hereof, upon receipt of the outstanding Bonds by the Fiscal Agent together with a Request of the City, new Bonds shall be executed and delivered in such denominations, numbered in the manner determined by the Fiscal Agent and registered in the names of such persons as are requested in such Request of the City, subject to the limitations of Section 2.1 and the receipt of such a Request of the City, and thereafter the Bonds shall be transferred pursuant to the provisions set forth in Section 2.5 of this Fiscal provided, Agent Agreement; that the Fiscal Agent shall not be required to deliver such new Bonds within a period of fewer than sixty (60) days. (c) The City and the Fiscal Agent shall be entitled to treat the person in whose name any Bond is registered as the Owner thereof, notwithstanding any notice to the contrary received by the Fiscal Agent or the City, and the City and the Fiscal Agent shall have no responsibility for transmitting payments to, communicating with, notifying, or otherwise dealing with any beneficial owners of the Bonds. Neither the City nor the Fiscal Agent shall have any responsibility or obligation, legal or otherwise, to the beneficial owners or to any other party including The Depository Trust Company or its successor (or substitute depository or its successor), except as the owner of any Bonds. (d) So long as the outstanding Bonds are registered in the name of Cede & Co. or its registered assigns, the City and the Fiscal Agent shall cooperate with Cede & Co., as sole holder, or its registered assigns, in effecting payment of the principal of and interest on the Bonds by arranging for payment in such manner that funds for such payments are properly identified and are made immediately available on the date they are due. Section 2.5 Discontinuation of Book-Entry System; Transfer and Exchange of Bonds. In the event that at any time the Bonds shall no longer be registered in the name of Cede & Co. as a result of the operation of Section 2.4 hereof, then the procedures contained in this Section 2.5 shall apply. (a) Transfer of Bonds. Any Bond may, in accordance with its terms, be transferred upon the books required to be kept pursuant to the provisions of Section 2.6 hereof by the person in whose name it is registered, in person or by the duly authorized attorney of such person, upon surrender of such Bond to the Fiscal Agent for cancellation, accompanied by delivery of a duly executed written instrument of transfer in a form approved by the Fiscal Agent. Whenever any Bond or Bonds shall be surrendered for transfer, the designated City officials shall execute (as provided in Section 2.3 hereof) and the Fiscal Agent shall authenticate and deliver a new Bond or Bonds of the same series and maturity, for a like aggregate principal amount. The Fiscal Agent shall require the payment by the Owner requesting any such transfer of any tax or other governmental charge required to be paid with respect to such transfer. - 12 - DRAFT 10861\0004\698458.2 6/28/02 No transfer of Bonds shall be required to be made by the Fiscal Agent during the period from and after any Record Date to and including the applicable Interest Payment Date. (b) Exchange of Bonds. Bonds may be exchanged at the office of the Fiscal Agent in Los Angeles, California, or such other place as the Fiscal Agent shall designate, for a like aggregate principal amount of Bonds of other authorized denominations of the same maturity. The Fiscal Agent shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. No exchange of Bonds shall be required to be made by the Fiscal Agent during the period from and after any Record Date to and including the applicable Interest Payment Date. Section 2.6 Bond Register. (a) The Fiscal Agent will keep or cause to be kept, at its principal corporate trust office, sufficient books for the registration and transfer of the Bonds, which shall at all times be open to inspection by the City, and, upon presentation for such purpose, the Fiscal Agent shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on said books, Bonds as hereinbefore provided. (b) The Fiscal Agent shall assign each Bond authenticated and registered by it a distinctive letter, or number, or letter and number. ARTICLE III ISSUANCE OF THE BONDS Section 3.1 Delivery of Bonds. The Fiscal Agent is hereby authorized to authenticate and deliver the Bonds to or upon the written order of the City. Section 3.2 Application of Proceeds of Sale of Bonds. The City shall direct the Purchaser, pursuant to the Notice of Sale, to pay the net purchase price of the Bonds by wire transfer to the Fiscal Agent upon the delivery of and in exchange for the receipt of the Bonds, and the Fiscal Agent shall deposit or transfer said sum as follows: (a) The amount of $________, representing the [premium and] accrued interest on the Bonds from August 1, 2002, through ________, 2002, for deposit in the City of Santa Monica General Obligation Bonds, Series 2002 Debt Service Fund, which is hereby created and which shall be held by the Fiscal Agent hereunder on behalf of the City; (b) The amount of $__________, for deposit in the Costs of Issuance Fund; and (c) The remaining balance of $________, for deposit in the Improvement Fund. Section 3.3 Costs of Issuance Fund. There is hereby established a fund to be held by the Fiscal Agent known as the “Costs of Issuance Fund,” into which shall be deposited a portion of the proceeds of the sale of the Bonds pursuant to Section 3.02(b) hereof. The moneys in the Costs of Issuance Fund shall be used to pay Costs of Issuance from time to time and shall be disbursed by the Fiscal Agent upon delivery to the Fiscal Agent of a Request of the City, substantially in the form attached hereto as Exhibit B. Any monies remaining in the Costs of Issuance Fund on February 1, 2003, shall be transferred to the Debt Service Fund, to be applied to the payment of interest and principal, to the extent of such monies, on the next succeeding Interest Payment Date. - 13 - DRAFT 10861\0004\698458.2 6/28/02 Section 3.4 Improvement Fund. There is hereby established a fund to be held by the Fiscal Agent known as the “City of Santa Monica General Obligation Bonds, Series 2002 Library Improvement Fund” (the “Improvement Fund”), into which shall be deposited a portion of the proceeds of sale of the Bonds pursuant to Section 3.2(c) hereof. The Fiscal Agent shall disburse or transfer all amounts in the Improvement Fund as stated in a Request of the City, substantially in the form attached hereto as Exhibit C, for the payment of the cost of library improvements (including reimbursement to the City for any such costs paid by it). Each such Request of the City shall be sufficient evidence to the Paying Agent -- (a) that an obligation in the stated amount has been properly incurred under and pursuant to the Fiscal Agent Agreement and that such obligation is a proper charge against the Improvement Fund; and (b) that there has not been filed with or served upon the City a stop notice or any other notice of any lien, right to lien or attachment upon, or claim affecting the right to receive payment of, any of the money payable to the person named in such Request of the City which has not been released or will not be released simultaneously with the payment of such obligation, other than liens accruing by mere operation of law. Upon receipt of each such Request of the City, the Fiscal Agent shall pay the amount set forth in such Request of the City as directed by the terms thereof. Monies deposited in the Improvement Fund shall be applied exclusively to the purpose and object for which the Bonds were authorized; provided, however, that when said purpose and object has been accomplished any moneys remaining in the Improvement Fund shall be transferred to the Debt Service Fund. Further, when such purpose and object have been accomplished and all principal and interest on the Bonds have been paid, any balance of money then remaining shall be transferred to the Treasurer for deposit in the General Fund of the City. ARTICLE IV REDEMPTION OF THE BONDS Section 4.1 Optional Redemption. The Bonds maturing on or after July 1, 2013, shall be subject to redemption as a whole or in part, by such maturities as the City shall designate (which designation shall be in writing and shall be delivered to the Fiscal Agent no later that 45 days prior to the redemption date), prior to their respective maturities at the option of the City on any date on or after July 1, 2012, from funds derived by the City from any source, at a redemption price equal to the principal amount thereof, without premium, together with interest accrued thereon to the date fixed for redemption. Section 4.2 Mandatory Term Bond Redemption. The Bonds maturing on July 1, ____ are also subject to redemption prior to their stated maturity, in part by lot, from amounts deposited in the Debt Service Fund for that purpose, at the principal amount thereof and interest accrued thereon to the date fixed for redemption, without premium, according to the following schedule: - 14 - DRAFT 10861\0004\698458.2 6/28/02 Bonds Maturing July 1, ____ Redemption Date Principal Amount Redemption Date Principal Amount (July 1) Redeemed (July 1) Redeemed Section 4.3 General Redemption Provisions. (a) Selection of Bonds. Whenever less than all the outstanding Bonds maturing on any one date are called for redemption at any one time, the Fiscal Agent shall select the Bonds to be redeemed, from the outstanding Bonds maturing on such date not previously selected for redemption, by lot; provided, however, that if less than all the outstanding Term Bonds of any maturity are called for redemption at any one time, the City shall specify in writing to the Fiscal Agent the reduction in any scheduled deposits required to be made with respect to such Term Bonds (in an amount equal to the amount of outstanding Term Bonds to be redeemed) which, to the extent practicable, results in approximately equal annual debt service on the Bonds outstanding following such redemption. (b) Purchase in Lieu of Redemption. In lieu of redemption of any Term Bond, amounts on deposit in the Debt Service Fund may also be used and withdrawn by the Fiscal Agent at any time, upon the Request of the City, for the purchase of such Term Bonds at public or private sale as and when and at such prices (including brokerage and other charges) as the City may in its discretion determine, but not in excess of the principal amount thereof plus accrued interest to the purchase date; provided, however, that no Bonds shall be purchased by the Fiscal Agent under this subsection (b) with a settlement date more than 60 days prior to the redemption date. The principal amount of any Term Bonds so purchased by the Fiscal Agent in any twelve-month period ending 30 days prior to any Principal Payment Date in any year shall be credited towards and shall reduce the principal amount of such Term Bonds required to be redeemed on such Principal Payment Date in such year. (c) Notice. Notice of redemption shall be mailed by first class mail by the Fiscal Agent, on behalf and at the expense of the City, not less than 30 days prior to the redemption date to (i) the respective Owners of Bonds designated for redemption at their addresses appearing on the bond registration books of the Fiscal Agent, (ii) one or more Information Services designated in writing to the Fiscal Agent by the City and (iii) the Securities Depositories. Each notice of redemption shall state the date of such notice, the Bonds to be redeemed, the date of issue of such Bonds, the redemption date, the redemption price, the place or places of redemption (including the name and appropriate address or addresses), the CUSIP number (if any) of the maturity or maturities, and, if less than all of any such maturity are to be redeemed, the distinctive certificate numbers of the Bonds of such maturity to be redeemed and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice shall also state that on said date there will become due and payable on each of such Bonds the redemption price thereof or of said specified portion of the principal amount thereof in the case of a Bond to be redeemed in part only, together with interest accrued thereon to the redemption date, and that from and after such redemption date interest thereon shall cease to accrue, and shall require that such Bonds be then surrendered at the address or addresses of the Fiscal Agent specified in the redemption notice. Failure by the Fiscal Agent to give notice pursuant to this Section to any one or more of the Information Services or Securities Depositories, or the insufficiency of any such notice shall not affect the sufficiency of the proceedings for redemption. The failure of any Owner to receive any redemption notice mailed to such Owner and any defect in the notice so mailed shall not affect the sufficiency of the proceedings for redemption. - 15 - DRAFT 10861\0004\698458.2 6/28/02 (d) Partial Redemption. Upon surrender of any Bond redeemed in part only, the City shall execute (manually or by facsimile) and the Fiscal Agent shall authenticate and deliver to the Owner thereof, at the expense of the City, a new Bond or Bonds of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Bond surrendered and of the same series, interest rate and the same maturity. (e) Effect of Redemption. From and after the date fixed for redemption, if notice of such redemption shall have been duly given and funds available for the payment of such redemption price of the Bonds so called for redemption shall have been duly provided, no interest shall accrue on such Bonds from and after the redemption date specified in such notice. All Bonds redeemed pursuant to the provisions of this section shall be canceled by the Fiscal Agent and the Fiscal Agent shall upon Request of the City deliver a certificate of destruction to the City. ARTICLE V COVENANTS OF THE CITY Section 5.1 Payment of Principal and Interest. On or before the Business Day immediately prior to the date any payment is due in respect of the Bonds, the City will cause monies to be deposited with the Fiscal Agent sufficient to pay the principal and the interest to become due in respect of all Bonds outstanding on such payment date. When and as paid in full, and following surrender thereof to the Fiscal Agent, all Bonds shall be cancelled by the Fiscal Agent, and thereafter they shall be destroyed. Section 5.2 General Obligation; Levy of Tax. The Bonds represent a general obligation of the City. ad valorem The money for the payment of principal and interest on the Bonds shall be raised by taxation without limitation as to rate or amount (except with respect to certain personal property which is taxable at limited rates) upon all taxable property in the City, and provision shall be made for the levy and collection of such taxes in the manner provided by law, and such money shall be deposited by the Director of Finance in the fund created in the treasury of the City for the payment of the Bonds. Section 5.3 Validity of Bonds. The recital contained in the Bonds that the same are regularly issued pursuant to the Law shall be conclusive evidence of their validity and of compliance with the provisions of the Law in their issuance. Section 5.4 Further Assurances. The City will promptly execute and deliver or cause to be executed and delivered all such other and further instruments, documents or assurances, and promptly do or cause to be done all such other and further things, as may be necessary or reasonably required in order to further and more fully vest in the Owners all rights, interest, powers, benefits, privileges and advantages conferred or intended to be conferred upon them by this Fiscal Agent Agreement. Section 5.5 Tax Covenants. (a) The City covenants that it shall not 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 the interest payable on the Bonds under Section 103 of the Code. Without limiting the generality of the foregoing, the City covenants that it will comply with the requirements of the Tax Certificate, which is incorporated herein as if fully set forth herein. This covenant shall survive payment in full or defeasance of the Bonds. (b) Notwithstanding any provision of this Section, if the City shall obtain an Opinion of Counsel that any specified action required under this Section is no longer required or that some further or different action is required to maintain the exclusion from federal income tax of interest on the Bonds, the City and the Fiscal Agent may - 16 - DRAFT 10861\0004\698458.2 6/28/02 conclusively rely on such Opinion of Counsel in complying with the requirements of this Section and of the Tax Certificate, and the covenants hereunder shall be deemed to be modified to that extent. Section 5.6 Investment of Funds. All moneys in any of the funds established with the Fiscal Agent pursuant to this Fiscal Agent Agreement shall be invested by the Fiscal Agent solely in Permitted Investments pursuant to the written direction of the City given to the Fiscal Agent two Business Days in advance of the making of such investments (and promptly confirmed in writing, as to any such direction given orally). In the absence of any such direction from the City, the Fiscal Agent shall invest any such moneys in Permitted Investments described in Paragraph (7) of the definition thereof. Obligations purchased as an investment of moneys in any fund shall be deemed to be part of such fund. All interest or gain derived from the investment of amounts in any of the funds established hereunder shall be deposited in the fund from which such investment was made. For purposes of acquiring any investments hereunder, the Fiscal Agent may commingle funds held by it hereunder upon the Request of the City. The Fiscal Agent may (but shall not be obligated to) act as principal or agent in the acquisition of any investment. The Fiscal Agent shall incur no liability for losses arising from any investments made at the direction of the City, or otherwise made pursuant to this Section. The Fiscal Agent shall be entitled to rely conclusively upon the written instructions of the City directing investments in Permitted Investments as to the fact that each such investment is permitted by the laws of the State, and shall not be required to make further investigation with respect thereto. With respect to any restrictions set forth in the definition of Permitted Investments set forth in Section 1.1 which embody legal conclusions (e.g., the existence, validity and perfection of security interests in collateral), the Fiscal Agent shall be entitled to rely conclusively on an opinion of counsel or upon a representation of the provider of such Authorized Investment obtained at the City’s expense. Except as specifically provided in this Fiscal Agent Agreement, the Fiscal Agent shall not be liable to pay interest on any moneys received by it, but shall be liable only to account to the City for earnings derived from funds that have been invested. For the purpose of determining the amount in any fund established hereunder, any investments credited to such fund shall be valued at least annually, on or before June 30, at the market value thereof. ARTICLE VI THE FISCAL AGENT Section 6.1 Fiscal Agent; Acceptance; Removal Resignation. BNY Western Trust Company, Los Angeles, California, is hereby appointed Fiscal Agent, and hereby accepts and agrees to perform the duties and obligations of the Fiscal Agent, registrar and transfer agent specifically imposed upon it by this Fiscal Agent Agreement, and no implied duties shall be read into this Fiscal Agent Agreement against the Fiscal Agent. provided The City may at any time remove the Fiscal Agent and appoint a new Fiscal Agent; that the removal shall not be effective until a new Fiscal Agent is appointed. The Fiscal Agent may at any time resign by giving written notice to the City of such resignation, whereupon the City shall promptly appoint a successor Fiscal Agent by the resignation date. Resignation of the Fiscal Agent will be effective forty-five (45) days after notice of the resignation is given as stated above or upon appointment of a successor Fiscal Agent, whichever first occurs. After receiving a notice of resignation of the Fiscal Agent, the City may appoint a temporary Fiscal Agent to replace the resigning Fiscal Agent until the City appoints a successor Fiscal Agent. Any such - 17 - DRAFT 10861\0004\698458.2 6/28/02 temporary Fiscal Agent appointed by the City shall immediately and without further act be superseded by the successor Fiscal Agent upon the appointment of and acceptance thereof by such successor. The Fiscal Agent is hereby authorized to pay and redeem the Bonds when duly presented for payment at maturity or upon call for redemption prior to maturity, and to cancel all Bonds upon payment thereof. The Fiscal Agent shall keep accurate records of all funds administered by it and of all Bonds paid and discharged. Section 6.2 Duties of Fiscal Agent. provided The Fiscal Agent hereby agrees, sufficient immediately available funds have been provided to it for such purpose by or on behalf of the City, to use the funds deposited with it solely for payment of the principal of and interest on the Bonds as the same shall become due, and for payment from the Costs of Issuance Fund of any amounts duly authorized to be paid therefrom pursuant to a Request of the City. Section 6.3 Reliance on Documents. Etc. (a) The Fiscal Agent may conclusivelyrely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Fiscal Agent by the City. (b) The Fiscal Agent shall not be liable for any error of judgment made in good faith. The Fiscal Agent shall not be liable for other than its negligence or willful misconduct in connection with any act or omission hereunder. (c) No provision of this Fiscal Agent Agreement shall require the Fiscal Agent to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers. (d) The Fiscal Agent may rely, or be protected in acting or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Fiscal Agent need not examine the ownership of any Bond, but is protected in acting upon receipt of Bonds containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Owner or agent of the Owner. (e) The Fiscal Agent may consult with counsel, and the written advice of such counsel or any Opinion of Counsel shall be full authorization and protection with respect to any action taken, suffered or omitted by it hereunder in good faith and reliance thereon. (f) The Fiscal Agent may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys. Section 6.4 Recitals of City. The recitals contained herein and in the Bonds shall be taken as the statements of the City, and the Fiscal Agent assumes no responsibility for their correctness. Section 6.5 May Own Bonds. The Fiscal Agent, in its individual or any other capacity, may become the owner or pledgee of Bonds with the same rights it would have if it were not the Fiscal Agent for the Bonds. Section 6.6 Money Held by Fiscal Agent. Money held by the Fiscal Agent hereunder shall be segregated from all other funds held by the Fiscal Agent. Section 6.7 Other Transactions. The Fiscal Agent may engage in or be interested in any financial or other transaction with the City. Section 6.8 Interpleader. The Fiscal Agent may seek adjudication of any adverse clam, demand, or controversy over its person as well as funds on deposit, in a court of competent jurisdiction. The Fiscal Agent has the - 18 - DRAFT 10861\0004\698458.2 6/28/02 right to file an action in interpleader in any court of competent jurisdiction to determine the rights of any person claiming any interest herein. Section 6.9 Indemnification. The City shall indemnify the Fiscal Agent, its officers, directors, employees, and agents (“Indemnified Parties”) for, and hold them harmless against, any loss, cost, claim, liability or expense arising out of or in connection with the Fiscal Agent’s acceptance or administration of the Fiscal Agent’s duties hereunder or under the Bonds (except any loss, liability or expense as may be found by a court of competent jurisdiction to be attributable to the Fiscal Agent’s negligence or willful misconduct), including without limitation the cost and expense (including its counsel fees and disbursements, including the allocated costs and disbursements of internal counsel) of defending itself against any claim or liability (except such action as may be brought against the Fiscal Agent by the City) in connection with the exercise or performance of any of its powers or duties under this Fiscal Agent Agreement. The provisions of this Section 6.09 shall survive termination of this Fiscal Agent Agreement and shall continue for the benefit of any Fiscal Agent after its resignation as Fiscal Agent hereunder. Section 6.10 Compensation. As compensation for the Fiscal Agent’s services, the City hereby agrees to pay or cause to be paid to the Fiscal Agent the fees set forth in a separate agreement between the Fiscal Agent and the City providing therefor. ARTICLE VII DEFEASANCE OF BONDS Section 7.1 Defeasance. (a) If at any time the City shall pay or cause to be paid or there shall otherwise be paid to the Owners of all outstanding Bonds all of the principal, interest and premium, if any, represented thereby, at the times and in the manner provided herein and in the Bonds or as otherwise provided by law, then such Owners shall cease to be entitled to the obligation of the City as provided in Section 5.2 hereof; and such obligation and all agreements and covenants of the City to such Owners hereunder and under the Bonds shall thereupon be satisfied and provided, however, discharged and shall terminate except only as provided in subsection 7.1(b); that the provisions of Section 7.2 hereof shall apply in all events. (b) Any outstanding Bonds shall be deemed to have been paid within the meaning of and with the effect expressed in this Section 7.1 if (1) there shall be on deposit with the Director of Finance or set aside for the purpose with a trustee or escrow agent, including the Fiscal Agent, money or Federal Securities in an amount sufficient (together with interest thereon) to pay the principal amount thereof plus accrued interest thereon, payable on or prior to their respective principal maturity dates (the sufficiency of such amounts to be appropriately verified by an Independent Accountant) and (2) the City shall have given the Fiscal Agent in form satisfactory to it irrevocable instructions to mail, as soon as practicable, a notice to the Owners of such Bonds that the deposit required by (1) above has been made and that such Bonds are deemed to have been paid in accordance with this Section and stating the maturity date or earlier redemption date upon which money is to be available for the payment of such Bonds. For the purposes of this Section, Federal Securities shall mean and include only such securities as are not subject to redemption prior to their maturity. The Owners of such Bonds shall be entitled to the principal and interest represented by such Bonds, and the City shall remain liable for such payments, but only out of such money on deposit for such payment and money transferred to the Fiscal Agent for such purpose. Section 7.2 Unclaimed Monies. Any money deposited with or otherwise held by the Fiscal Agent for the payment of the principal or interest or redemption premium on any Bond and remaining unclaimed for two years after the stated maturity or redemption date of such Bond will be paid by the Fiscal Agent to the City and the City and the Fiscal Agent hereby agree that the registered Owner of such Bond shall thereafter look only to the City for payment thereof; and that all liability of the Fiscal Agent with respect to such monies shall thereupon cease. - 19 - DRAFT 10861\0004\698458.2 6/28/02 ARTICLE VIII AMENDMENT OF FISCAL AGENT AGREEMENT Section 8.1 Amendment with Owner Consent; Amendment Without Owner Consent. (a) This Fiscal Agent Agreement and the rights and obligations of the City and of the Owners may be amended at any time upon the written consents of the Owners of a majority in aggregate principal amount of the Bonds then outstanding, exclusive provided of Bonds disqualified as provided in Section 8.2, filed with the Fiscal Agent; that if such amendment will, by its terms, not take effect so long as any Bonds remain outstanding, the consent of the Owners of such Bonds shall not be required and such Bonds shall not be deemed to be outstanding for the purpose of any calculation of Bonds outstanding under this Section. No such amendment shall (1) extend the maturity of or reduce the interest rate on or amount of interest on or principal of or redemption premium, if any, on any Bond without the express written consent of the Owner of such Bond, or (2) reduce the percentage of Bonds required for the written consent to any such amendment, or (3) modify any rights or obligations of the Fiscal Agent or the City without their prior written assent thereto, respectively. It shall not be necessary for the consent of the Owners to approve the particular form of any amendment to this Fiscal Agent Agreement, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the City and the Fiscal Agent of any amendment to this Fiscal Agent Agreement pursuant to this subsection (a) the Fiscal Agent shall mail a notice on behalf of the City, setting forth in general terms the substance of such amendment to the Owners at the addresses shown on the registration books maintained by the Fiscal Agent. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment. (b) This Fiscal Agent Agreement and the rights and obligations of the City and of the Owners may also be amended at any time without the consent of any Owners for any purpose that will not materially adversely affect the interests of the Owners, including (without limitation) for any one or more of the following purposes: (i) to add to the agreements and covenants required herein to be performed by the City other agreements and covenants thereafter to be performed by the City, or to surrender any right or power reserved herein to or conferred herein on the City; (ii) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained herein or in regard to questions arising hereunder which the City may deem desirable or necessary. Any amendment pursuant to this paragraph shall not, for purposes of this paragraph, materially adversely affect the interest of the Owners so long as (1) all Bonds are insured by a poli :y of municipal bond insurance, (2) each issuer of such an insurance policy shall have given its written consent to such amendment, and (3) each such insurer shall at the time of such consent be rated in the highest rating category by S&P’s and Moody’s. Section 8.2 Disqualified Bonds. Bonds owned or held by or for the account of the City shall not be deemed outstanding for the purpose of any consent or other action or any calculation of outstanding Bonds provided in this Article, and shall not be entitled to consent to or take any other action provided in this Article. Section 8.3 Endorsement or Replacement of Bonds After Amendment. After the effective date of any action taken as hereinabove provided, the City may determine that the Bonds may bear a notation by endorsement in form approved by the City as to such action, and in that case upon demand of the Owner of any outstanding Bonds and presentation of his Bond for such purpose at the office of the Fiscal Agent a suitable notation as to such action shall be made on such Bond. If the City shall so determine, new Bonds so modified as, in the opinion of the City, shall be necessary to conform to such action shall be prepared and executed, and in that case upon demand of - 20 - DRAFT 10861\0004\698458.2 6/28/02 the Owner of any outstanding Bond a new Bond or Bonds shall be exchanged at the office of the Fiscal Agent without cost to each Owner for its Bond or Bonds then outstanding upon surrender of such outstanding Bonds. Section 8.4 Amendment by Mutual Consent. The provisions of this Article shall not prevent any provided Owner from accepting any amendment as to the particular Bonds held by such Owner, that due notation thereof is made on such Bonds. - 21 - DRAFT 10861\0004\698458.2 6/28/02 ARTICLE IX MISCELLANEOUS Section 9.1 Counterparts. This Fiscal Agent Agreement may be signed in several counterparts, each of which will constitute an original, but all of which shall constitute one and the same instrument. Section 9.2 Continuing Disclosure. The City hereby covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of this Fiscal Agent Agreement, failure of the City to comply with the Continuing Disclosure Agreement shall not be considered provided, however, an event of default hereunder; that the Fiscal Agent may (and, at the written direction of any 25% Purchaser or the Owners of at least aggregate principal amount of Bonds, shall) or any Owner or beneficial owner of the Bonds may, take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order. Section 9.3 Notices. All notices and communications hereunder shall be in writing and shall be deemed to be duly given if received or sent by first class mail, as follows: If to the City: City of Santa Monica 1717 Fourth Street, Suite 250 Santa Monica, California 90401 Attn: Director of Finance If to the Fiscal Agent: BNY Western Trust Company 700 South Flower Street, Fifth Floor Los Angeles, California 90017-4014 Attn: Corporate Trust Department - 22 - DRAFT 10861\0004\698458.2 6/28/02 IN WITNESS WHEREOF, the parties hereto have caused this Fiscal Agent Agreement to be duly executed by their officers duly authorized as of the date first written above. CITY OF SANTA MONICA By: Authorized Officer ATTEST: By: City Clerk APPROVED AS TO FORM: By: Marsha Jones Moutrie, City Attorney BNY WESTERN TRUST COMPANY, as Fiscal Agent By: Authorized Officer - 23 - DRAFT 10861\0004\698458.2 6/28/02 EXHIBIT A FORM OF BOND R-___ $________ UNITED STATES OF AMERICA STATE OF CALIFORNIA COUNTY OF LOS ANGELES CITY OF SANTA MONICA GENERAL OBLIGATION BONDS, SERIES 2002 (LIBRARY IMPROVEMENTS PROJECT) Interest Rate Maturity Date Dated as of CUSIP NO. % July 1, August 1, 2002 Registered Owner: CEDE & CO. Principal Amount: DOLLARS The City of Santa Monica, County of Los Angeles, State of California (herein called the “City”), acknowledges itself indebted to and promises to pay to the registered owner identified above or registered assigns, on the maturity date set forth above the principal sum specified above in lawful money of the United States of America, and to pay interest thereon in like lawful money from the interest payment date next preceding the date of authentication of this bond (unless this bond is authenticated as of the day during the period from the sixteenth (16th) day of the month next preceding any interest payment date to such interest payment date, inclusive, in which event it shall bear interest from such interest payment date, or unless this bond is authenticated on or before December 15, 2002, in which event it shall bear interest from August 1, 2002) until payment of such principal sum, at the interest rate per annum stated above, payable semiannually on January 1 and July 1 in each year, commencing on January 1, 2003. The principal hereof is payable to the registered owner hereof upon the surrender hereof at the office of BNY Western Trust Company (herein called the “Fiscal Agent”), the fiscal and paying agent/registrar and transfer agent of the City, in Los Angeles, California. The interest hereon is payable to the person whose name appears on the bond registration books of the Fiscal Agent as the registered owner hereof as of the close of business on the fifteenth (15th) day of the month immediately preceding an interest payment date (the “Record Date”), whether or not such day is a business day, such interest to be paid by check mailed by first class mail, postage prepaid, to such registered owner at the owner’s address as it appears on such registration books, or upon written request of the owner of Bonds (hereinafter defined) aggregating not less than $1,000,000 in principal amount, given no later than Record Date immediately preceding the applicable interest payment date, by wire transfer in immediately available funds to an account maintained in the United States at such wire address as such Owner shall specify in its written notice. This bond is one of a duly authorized issue of bonds of like tenor (except for such variations, if any, as may be required to designate varying numbers, denominations, interest rates, maturities and redemption provisions), amounting in the aggregate to $25,000,000, designated as “City of Santa Monica General Obligation Bonds, Series 2002 (Library A-1 DRAFT 10861\0004\698458.2 6/28/02 Improvements Project)” (the “Bonds”), issued for the purpose of financing the acquisition and construction of improvements to the Santa Monica Public Library. The Bonds were authorized by the voters of the City at a special election held for that purpose on November 3, 1998, and are issued pursuant to a resolution approved by the City Council of the City (the “City Council”) on July 23, 2002 and a Fiscal Agent Agreement (the “Fiscal Agent Agreement”), dated as of August 1, 2002, between the City and the Fiscal Agent. The Bonds are issued and sold by the City pursuant to and in strict conformity with the provisions of the Fiscal Agent Agreement and of the Constitution and laws of California, specifically under the authority of Article 1 of Chapter 4 of Division 4 of Title 4 of the Government Code of the State of California. The Bonds maturing on or after July 1, 2013 shall be subject to redemption as a whole or in part, by such maturities as the City shall designate (which designation shall be in writing and shall be delivered to the Fiscal Agent no later than 45 days prior to the redemption date) prior to their maturity at the option of the City on any date on or after July 1, 2012, from funds derived by the City from any source, at a redemption price equal to the principal amount thereof, without premium, together with interest accrued thereon to the date fixed for redemption. [The Bonds maturing on July 1, _____ shall be subject to mandatory term bond redemption by lot, at a redemption price equal to the principal amount thereof to be redeemed, without premium, on July 1 of each year commencing July 1, _____, in the aggregate respective principal amounts set forth in the Fiscal Agent Agreement.] As provided in the Fiscal Agent Agreement, notice of redemption of this Bond shall be mailed by first class mail not less than thirty (30) days before the redemption date to the registered owner hereof, but failure to receive such notice shall not affect the sufficiency of such proceedings for redemption. If notice of redemption has been duly given as aforesaid and money for payment of the above-described redemption price is held by the Fiscal Agent, then such Bonds shall, on the redemption date designated in such notice, become due and payable at the above-described redemption price; and from and after the date so designated interest on the Bonds so called for redemption shall cease to accrue and registered owners of such Bonds shall have no rights in respect thereof except to receive payment of such redemption price thereof. The Bonds are issuable as fully registered bonds without coupons in the denomination of $5,000 or any integral provided multiple thereof, that no bond shall have principal maturing on more than one principal maturity date. Subject to the limitations and conditions and upon payment of the charges, if any, as provided in the Fiscal Agent Agreement, Bonds may be exchanged for a like aggregate principal amount of Bonds of the same maturity of other authorized denominations. This Bond is transferable by the registered owner hereof, in person or by attorney duly authorized in writing, at said office of the Fiscal Agent, but only in the manner, subject to the limitations and upon payment of the charges provided in the Fiscal Agent Agreement, and upon surrender and cancellation of this Bond. Upon such transfer, a new Bond or Bonds of authorized denomination or denominations for the same maturity and same aggregate principal amount will be issued to the transferee in exchange herefor. The City and the Fiscal Agent may treat the registered owner hereof as the absolute owner hereof for all purposes, and the City and the Fiscal Agent shall not be affected by any notice to the contrary. The City Council hereby certifies and declares that the total amount of indebtedness of the City, including the amount of this Bond, is within the limit provided by law, that all acts, conditions and things required by law to be done or performed precedent to and in the issuance of this Bond have been done and performed in strict conformity with the laws authorizing the issuance of this Bond, that this Bond is in the form prescribed by order of the City Council duly made and entered on its minutes, and the money for the payment of the principal of this Bond, premium, if any, and the payment of interest hereon, shall be raised by taxation upon the taxable property of said City. A-2 DRAFT 10861\0004\698458.2 6/28/02 This Bond shall not be entitled to any benefit under the Fiscal Agent Agreement, or become valid or obligatory for any purpose, until the certificate of authentication and registration hereon endorsed shall have been signed by the Fiscal Agent. A-3 DRAFT 10861\0004\698458.2 6/28/02 IN WITNESS WHEREOF the City Council of the City of Santa Monica has caused this Bond to be signed by facsimile signatures of the City Manager of the City and the City Treasurer and to be countersigned by the facsimile signature of the City Clerk. CITY OF SANTA MONICA ___________________________________ City Manager ___________________________________ Revenue Manager / City Treasurer ______________________________ City Clerk This is one of the Bonds described in the within-mentioned Fiscal Agent Agreement and authenticated and registered on ___________, 2002. BNY WESTERN TRUST COMPANY, as Fiscal Agent By Authorized Officer A-4 DRAFT 10861\0004\698458.2 6/28/02 [FORM OF DTC LEGEND] Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation (“DTC”), to the City or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. [FORM OF ASSIGNMENT] For value received the undersigned do(es) hereby sell, assign and transfer unto ___________________ the within- mentioned registered bond and hereby irrevocably constitute(s) and appoint(s) _____________ attorney, to transfer the same on the books of the Fiscal Agent with full power of substitution in the premises. Dated: _________________________ Signature Guarantee: ___________________________________________ Notice: Signature must be guaranteed by an eligible guarantor institution A-5 DRAFT 10861\0004\698458.2 6/28/02 Exhibit B [FORM OF REQUEST OF THE CITY (COSTS OF ISSUANCE FUND)] $___________ City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) WRITTEN REQUEST NO. __ FOR DISBURSEMENTS FROM THE COSTS OF ISSUANCE FUND The undersigned, the City of Santa Monica, a municipal corporation and charter city duly organized and existing under and by virtue of the Constitution and laws of the State of California and its Charter (the “City”), hereby states and certifies: (a) that ________________ is the _______________ of the City, and, as such, is a duly designated “Authorized City Representative” of the City, as such term is defined in the Fiscal Agent Agreement, dated as of August 1, 2002 (the “Fiscal Agent Agreement”), by and between the City and BNY Western Trust Company, as fiscal agent (the “Fiscal Agent”); (b) that the Fiscal Agent is hereby requested to disburse from the Costs of Issuance Fund, established pursuant to Section 3.3 of the Fiscal Agent Agreement, to the payees set forth in Schedule I attached hereto and by this reference incorporated herein, the amount set forth on Schedule I opposite each such payee, for payment of such costs identified on said Schedule I; (c) that such payment is a proper charge against the Costs of Issuance Fund; (d) that such amounts have not been the subject of a prior disbursement from the Costs of Issuance Fund; (e) that supporting detail for each amount set forth in Schedule I is on file with the City. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Fiscal Agent Agreement. DATED: ___________________ CITY OF SANTA MONICA By: Authorized City Representative B-1 DRAFT 10861\0004\698458.2 6/28/02 Exhibit C [FORM OF REQUEST OF THE CITY (IMPROVEMENT FUND)] $___________ City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) WRITTEN REQUEST NO. __ FOR DISBURSEMENTS FROM THE IMPROVEMENT FUND The undersigned, the City of Santa Monica, a municipal corporation and charter city duly organized and existing under and by virtue of the Constitution and laws of the State of California and its Charter (the “City”), hereby states and certifies: (a) that ________________ is the _______________ of the City, and, as such, is a duly designated “Authorized City Representative” of the City, as such term is defined in the Fiscal Agent Agreement, dated as of August 1, 2002 (the “Fiscal Agent Agreement”), by and between the City and BNY Western Trust Company, as fiscal agent (the “Fiscal Agent”); (b) that the Fiscal Agent is hereby requested to disburse from the Improvement Fund, established pursuant to Section 3.4 of the Fiscal Agent Agreement, to the payees set forth in Schedule I attached hereto and by this reference incorporated herein, the amount set forth on Schedule I opposite each such payee, for payment of such costs identified on said Schedule I; (c) that such payment is a proper charge against the Improvement Fund; (d) that such amounts have not been the subject of a prior disbursement from the Improvement Fund; (e) that supporting detail for each amount set forth in Schedule I is on file with the City. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Fiscal Agent Agreement. DATED: ___________________ CITY OF SANTA MONICA By: Authorized City Representative B-2 DRAFT 10861\0004\698458.2 6/28/02 cial Statement and the information contained herein are subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Official Statement is ll this Preliminary Official Statement constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, delivered in final form. Under no circumstances sha solicitation or sale would be unlawful. This Preliminary Offi B-3 DRAFT 10861\0004\698458.2 6/28/02 RWG Draft: 7/3/02 PRELIMINARY OFFICIAL STATEMENT DATED ________, 2002 NEW ISSUE – FULL BOOK -ENTRY ONLYRATINGS: Fitch:_____ Moody’s:_____ Standard & Poor’s:_____ (See “RATINGS” herein) In the opinion of Richards, Watson & Gershon, A Professional Corporation, Los Angeles, California, Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein. * $25,000,000 CITY OF SANTA MONICA GENERAL OBLIGATION BONDS, SERIES 2002 (Library Improvements Project) Dated: August 1, 2002 Due: July 1, as shown below The City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (the “Bonds”) are being issued to finance the acquisition and construction of improvements for the Santa Monica Public Library. See “THE BONDS — Purpose of Issue” herein. The Bonds will be issued in fully registered form in denominations of $5,000 or any integral multiple thereof. The Bonds shall bear interest at the respective rates per annum set forth below. Interest on the Bonds is payable on January 1 and July 1 of each year, commencing on January 1, 2003. See “THE BONDS — Description” herein. The Bonds will be issued in book-entry form only and, when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. Purchasers of the Bonds will not receive certificates representing their interests in the Bonds. Payment of principal of the Bonds at maturity or prior redemption and interest will be payable by BNY Western Trust Company, as Fiscal Agent and Bond Registrar, to DTC, and such payments will be remitted by DTC to the participants in DTC for subsequent disbursement to the beneficial owners of the Bonds. See “THE BONDS — Book-Entry Only System” herein. The Bonds are subject to redemption prior to maturity, as described herein. ad valorem The Bonds are general obligations of the City and the City Council of the City of Santa Monica is empowered and is obligated to levy taxes, without limitations of rate or amount (except certain personal property taxable at limited rates), upon all property subject to taxation by the City for the payment of the principal of and interest on the Bonds. The Bonds were authorized by the registered voters of the City at a special election held on November 3, 1998. MATURITY SCHEDULE $_______ Serial Bonds MaturityPrincipal Interest Price or Maturity Principal Interest Price or (July 1) Amount Rate Yield (July 1) Amount Rate Yield $____________ __% Term Bonds due July 1, _____ – Price ___% THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION. The Bonds will be offered, when, as and if issued to and received by the Underwriter, subject to approval as to their validity by Richards, Watson & Gershon, A Professional Corporation, Los Angeles, California, Bond Counsel. Certain legal matters will be passed on for the City by the City Attorney of the City and by Richards, Watson & Gershon, A Professional Corporation, Los Angeles, California, as Disclosure Counsel. Public Resources Advisory Group has served as financial advisor to the City in connection with the issuance of the Bonds. It is anticipated that the Bonds, in definitive form, will be available for delivery to DTC in New York, New York on or about August ___, 2002. Dated: _______, 2002 B-4 * Preliminary; subject to change. DRAFT 10861\0004\698458.2 6/28/02 No dealer, broker, salesperson or other person has been authorized by the City to provide any information or to make any representations other than as contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly described herein, are intended solely as such and are not to be construed as a representation of facts. The information set forth herein has been obtained from official sources which are believed by the City to be reliable but it is not guaranteed as to accuracy or completeness. The information and expression of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City since the date hereof. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 10861/0004/6998647.1 CITY OF SANTA MONICA (County of Los Angeles, California) City Council Mayor Michael Feinstein, Mayor Pro Tempore Kevin McKeown, Richard Bloom Ken Genser Robert T. Holbrook Herb Katz Pam O’Connor City Manager Susan E. McCarthy Director of Finance Charles M. Dennis City Attorney Marsha Jones Moutrie Deputy City Attorney Linda A. Moxon Revenue Manager/City Treasurer Ralph E. Bursey City Clerk Maria M. Stewart City Librarian Winona Allard SPECIAL SERVICES Bond Counsel Financial Advisor Richards, Watson & Gershon, Public Resources Advisory Group A Professional Corporation Los Angeles, California Los Angeles, California Disclosure Counsel Fiscal Agent Richards, Watson & Gershon, BNY Western Trust Company A Professional Corporation Los Angeles, California Los Angeles, California 10861/0004/6998647.1 [This page intentionally left blank] 10861/0004/698647.1 OFFICIAL STATEMENT $25,000,000 * CITY OF SANTA MONICA GENERAL OBLIGATION BONDS, SERIES 2002 (Library Improvements Project) INTRODUCTION This Official Statement, which includes the cover page and appendices hereto, is provided to furnish information in connection with the sale of $25,000,000* aggregate principal amount of City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (the “Bonds”). The Bonds are being issued to finance the acquisition and construction of improvements for the Santa Monica Public Library, as authorized in the bond proposition submitted at a special election held on November 3, 1998 (the “Election”). See “THE BONDS – Purpose of Issue” herein. Authority for Issuance The Bonds were authorized in the City of Santa Monica (the “City”) at the Election at which more than two-thirds of the persons voting on the proposition voted to authorize the issuance and sale of not more than $25,000,000 of general obligation bonds of the City to construct, improve and remodel the main and branch library facilities, as more fully described below. The Bonds are general obligation bonds of the City and are being issued under provisions of Article 1 of Chapter 4 of Division 4 of Title 4 of the California Government Code (the “Law”), and pursuant to a Resolution adopted by the City Council on July [23], 2002 (the “Resolution”). In connection with the Bonds, the City has entered into a Fiscal Agent Agreement (the “Fiscal Agent Agreement”), dated * Preliminary; subject to change. 1 10861/0004/697498.3 as of August 1, 2002, with BNY Western Trust Company, as Fiscal Agent (the “Fiscal Agent”). Capitalized terms used herein and not defined herein shall have the meanings set forth in the Fiscal Agent Agreement. Security and Sources of Payment The Bonds are general obligations of the City and the City Council of the City of Santa Monica is empowered and is obligated to levy ad valorem taxes, without limitations of rate or amount (except certain personal property which is taxable at limited rates), upon all property subject to taxation by the City for the payment of the principal of and interest on the Bonds. See “THE BONDS,” “SECURITY AND SOURCES OF PAYMENT,” “CITY OF SANTA MONICA,” and “CITY OF SANTA MONICA FINANCES.” Prior Issues The City previously issued two series of general obligation bonds, the City of Santa Monica General Obligations Bonds, Series 1990 (Main Library Improvements Project), of which $490,000 principal amount remain outstanding, and the City of Santa Monica General Obligation Refunding Bonds, Series 1998 (Main Library Improvements Project), of which $2,950,000 principal amount remain outstanding. These two previous series of bonds are referred to herein collectively as the “Prior Bonds.” The City The City is situated on the western side of Los Angeles County, bordered by the City of Los Angeles on three sides and by the Pacific Ocean to the west. The City encompasses an area slightly greater than eight square miles and has an estimated population of 87,954 persons. The total assessed valuation of real property in the City for the fiscal year ended June 30, 2002 is $13,491,852,764. See “SECURITY AND 2 10861/0004/697498.3 SOURCES OF PAYMENT – Assessed Valuations.” Terms of the Bonds The Bonds will be issued in book-entry form only and, when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”), and will be available to purchasers of the Bonds under the book-entry system maintained by DTC, only through brokers and dealers who are or act through DTC participants as described herein. The Bonds are issuable in denominations of $5,000 or any integral multiple thereof. Purchasers of the Bonds will not receive certificates representing their interests in the Bonds being purchased. Payment of principal of the Bonds at maturity or prior redemption and interest will be payable by the Fiscal Agent, and such payments will be remitted by DTC to the participants in DTC for subsequent disbursement to the Beneficial Owners. Interest on the Bonds is payable on January 1 and July 1 of each year, commencing on January 1, 2003. See “THE BONDS – Book-Entry Only System” herein. The Bonds are subject to redemption prior to maturity. See “THE BONDS – Redemption.” Tax Matters See Appendix B for the form of opinion that Bond Counsel proposes to deliver in connection with the issuance and sale of the Bonds. For a discussion of such opinion and certain other tax consequences incident to the ownership of Bonds, see “TAX MATTERS” herein. Continuing Disclosure The City has agreed to provide, or cause to be provided, to each nationally recognized 3 10861/0004/697498.3 municipal securities information repository and any public or private repository or entity designated by the State as a state repository for purposes of Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission certain annual financial information and operating data and, in a timely manner, notice of certain material events. These covenants have been made in order to assist the Underwriter in complying with SEC Rule l5c2-12(b)(5). See “CONTINUING DISCLOSURE” herein. 4 10861/0004/697498.3 Other Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. Copies of the Resolution, the Fiscal Agent Agreement and other documents and information are available, upon request, and upon payment to the City of a charge for copying, mailing and handling, from the City Clerk at the City of Santa Monica, 1685 Main Street, Santa Monica, California 90401. The introduction above is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and appendices hereto, and the documents described herein. All statements contained in this introduction are qualified in their entirety by reference to the entire Official Statement. Further, summaries or references to the Resolution, the Fiscal Agent Agreement and other documents, state constitutional provisions and other laws herein, and the description of the Bonds included in this Official Statement, do not purport to be comprehensive or definitive, and such summaries, references and descriptions are qualified in their entireties by reference to each such document or law provision. All capitalized terms used in this Official Statement (unless otherwise defined herein) which are in the Resolution or the Fiscal Agent Agreement shall have the meanings set forth therein. THE BONDS Description The Bonds will be dated as of August 1, 2002 (the “Dated Date”) and will be issued only as fully registered bonds in denominations of $5,000 and any integral multiple 5 10861/0004/697498.3 thereof. The Bonds shall bear interest from their Dated Date to their respective maturity dates, payable on January 1 and July 1 of each year, commencing on January 1, 2003. The Bonds will mature on July 1 in each of the years, and in the principal amounts, set forth on the cover page of this Official Statement. The Bonds, when issued, will be registered in the name of Cede & Co., as nominee of DTC. DTC will act as securities depository of the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only. Payment of principal of, or interest on, the Bonds at maturity or prior redemption is payable in lawful money of the United States of America by the Fiscal Agent to DTC. See “THE BONDS – Book-Entry Only System.” Redemption Optional Redemption. The Bonds maturing on or after July 1, 2013, will be subject to redemption as a whole or in part, by such maturities as the City shall designate (which designation shall be in writing and shall be delivered to the Fiscal Agent no later that 45 days prior to the redemption date), prior to their respective maturities at the option of the City on any date on or after July 1, 2012, from funds derived by the City from any source, at a redemption price equal to the principal amount thereof, without premium, together with interest accrued thereon to the date fixed for redemption. Term Bond Redemption. Bonds maturing on July 1, _____ are also subject to mandatory redemption in part by lot, at a redemption price equal to the principal amount of the Bonds so called for redemption, plus accrued interest to the redemption date, without premium, as set forth in the following tables: Bonds Maturing on July 1, ______ 6 10861/0004/697498.3 Redemption Date Principal Amount (July 1) to Be Redeemed Purchase in Lieu of Redemption. In lieu of redemption of any Term Bond, the Fiscal Agent, at the City’s direction, may use available funds to purchase such Term Bond at public or private sale as and when and at such prices (including brokerage and other charges) as the City may in its discretion determine, but not in excess of the principal amount thereof plus accrued interest to the purchase date; provided, however, that no Bonds will be so purchased by the Fiscal Agent with a settlement date more than 60 days prior to the redemption date. The principal amount of any Term Bonds so purchased by the Fiscal Agent in any twelve-month period ending 30 days prior to any Principal Payment Date in any year shall be credited towards and shall reduce the principal amount of such Term Bonds required to be redeemed on such Principal Payment Date in such year. Selection of Bonds for Redemption. Whenever less than all the outstanding Bonds maturing on any one date are called for redemption at any one time, the Fiscal Agent will select the Bonds to be redeemed, from the outstanding Bonds maturing on such date not previously selected for redemption, by lot; provided, however, that if less than all the outstanding Term Bonds of any maturity are called for redemption at any one time, the City will specify in writing to the Fiscal Agent the reduction in any scheduled deposits required to be made with respect to such Term Bonds (in an amount equal to the amount of outstanding Term Bonds to be redeemed) which, to the extent practicable, results in approximately equal annual debt service on the Bonds 7 10861/0004/697498.3 outstanding following such redemption. Notice of Redemption. As provided in the Fiscal Agent Agreement, notice of redemption shall be mailed by the Fiscal Agent at least 30 days prior to the redemption date to the respective registered owners of the Bonds designated for redemption at their addresses appearing on the bond registration books, but neither failure to mail such notice nor any defect in the notice so mailed shall affect the sufficiency of the proceedings for redemption. The Fiscal Agent shall also mail a copy of such notice, at least 30 days prior to the redemption date, to certain securities depositories and securities information services designated in the Fiscal Agent Agreement. Partial Redemption. Upon surrender of any Bond to be redeemed in part only, the City will execute and the Fiscal Agent will authenticate and deliver to the Owner, at the expense of the City, a new Bond or Bonds of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Bond surrendered, with the same interest rate and the same maturity. Authority for Issuance The Bonds are issued under the provisions of the Law and pursuant to the Resolution and the Fiscal Agent Agreement. The Election was held in the City on November 3, 1998, at which more than two-thirds of the persons voting on the proposition voted to authorize the issuance and sale of not more than $25,000,000 of general obligation bonds of the City to construct, improve and remodel the main and branch libraries and related facilities. Purpose of Issue 8 10861/0004/697498.3 Net proceeds of the Bonds will be used, together with other available funds, to finance the construction, improvement and remodeling of the main and other branches and related facilities of the Santa Monica Public Library, including the demolition and reconstruction of the Main Library. Book-Entry Only System DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 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 9 10861/0004/697498.3 corporations, and certain other organizations. DTC is a wholly-owned subsidiary of the Depository Trust and Clearing Corporation (“DTCC”). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“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, but Beneficial Owners are 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 Bonds are to be accomplished by entries made on the books 10 10861/0004/697498.3 of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds 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 Bonds; DTC’s records reflect only the identity of Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity 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. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC procedures. Under its usual procedures, DTC mails an Omnibus Proxy to an issuer as 11 10861/0004/697498.3 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 Bonds are credited on the record date (identified in a listing attached o the Omnibus Proxy). Principal, premium, if any, and interest payment on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City or the Fiscal Agent 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 Fiscal Agent, or the City, subject to any statutory regulatory requirements as may be in effect from time to time. Payment of principal, premium, if any, and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Fiscal Agent, 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. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the City or the Fiscal Agent. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered as described in the Fiscal Agent Agreement. 12 10861/0004/697498.3 The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered as described in the Fiscal Agent Agreement. The foregoing description concerning DTC and DTC’s book-entry system is based solely on information provided by DTC, which the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. BENEFICIAL OWNERS WILL NOT RECEIVE PHYSICAL DELIVERY OF BONDS AND WILL NOT BE RECOGNIZED BY THE FISCAL AGENT AS OWNERS THEREOF UNDER THE TERMS OF THE FISCAL AGENT AGREEMENT, AND BENEFICIAL OWNERS WILL BE PERMITTED TO EXERCISE THE RIGHTS OF OWNERS ONLY INDIRECTLY THROUGH DTC AND THE PARTICIPANTS. THE CITY WILL HAVE NO RESPONSIBILITY OR OBLIGATION TO SUCH DTC PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE PAYMENTS TO DTC PARTICIPANTS OR THE INDIRECT PARTICIPANTS OR THE BENEFICIAL OWNERS. Discontinuance of Book-Entry System In the event that the DTC book-entry system described above is no longer used with respect to the Bonds (and if there is no successor securities depository), payment, registration, transfer and exchange with respect to the Bonds will be provided as follows: Any Bond may, in accordance with its terms, be transferred upon the books by the person in whose name it is registered, in person or by the duly authorized attorney of such person, upon surrender of such Bond to the Fiscal Agent for cancellation, 13 10861/0004/697498.3 accompanied by delivery of a duly executed written instrument of transfer in a form approved by the Fiscal Agent. Whenever any Bond or Bonds shall be surrendered for transfer, the designated City officials shall execute and the Fiscal Agent shall authenticate and deliver a new Bond or Bonds of the same series and maturity, for a like aggregate principal amount. The Fiscal Agent shall require the payment by the Owner requesting any such transfer of any tax or other governmental charge required to be paid with respect to such transfer. No transfer of Bonds shall be required to be made by the Fiscal Agent during the period from and after any Record Date to and including the applicable Interest Payment Date. Bonds may be exchanged at the office of the Fiscal Agent in Los Angeles, California, or such other place as the Fiscal Agent shall designate, for a like aggregate principal amount of Bonds of other authorized denominations of the same maturity. The Fiscal Agent shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. No exchange of Bonds shall be required to be made by the Fiscal Agent during the period from and after any Record Date to and including the applicable Interest Payment Date. Defeasance If at any time the City shall pay or cause to be paid or there shall otherwise be paid to the Owners of all outstanding Bonds all of the principal, interest and premium, if any, represented thereby, at the times and in the manner provided in the Bonds and the Fiscal Agent Agreement or as otherwise provided by law, then such Owners will cease to be entitled to the obligation of the City as provided in the Fiscal Agent Agreement, 14 10861/0004/697498.3 and such obligation and all agreements and covenants of the City to such Owners the Bonds and the Fiscal Agent Agreement will thereupon be satisfied and discharged and will terminate except only as provided in the paragraph immediately below. Any outstanding Bonds will be deemed to have been paid within the meaning of the Fiscal Agent Agreement if (1) there shall be on deposit with the Director of Finance or set aside for the purpose with a trustee or escrow agent, including the Fiscal Agent, money or Federal Securities in an amount sufficient (together with interest thereon) to pay the principal amount thereof plus accrued interest thereon, payable on or prior to their respective principal maturity dates (the sufficiency of such amounts to be appropriately verified by an Independent Accountant) and (2) the City shall have given the Fiscal Agent in form satisfactory to it irrevocable instructions to mail, as soon as practicable, a notice to the Owners of such Bonds that the deposit described by (1) above has been made and that such Bonds are deemed to have been paid in accordance with the Fiscal Agent Agreement and stating the maturity date or earlier redemption date upon which money is to be available for the payment of such Bonds. For the purposes of this paragraph, “Federal Securities” shall mean and include only such securities as are not subject to redemption prior to their maturity. The Owners of such Bonds shall be entitled to the principal and interest represented by such Bonds, and the City shall remain liable for such payments, but only out of such money on deposit for such payment and money transferred to the Fiscal Agent for such purpose. Any outstanding Bonds will be deemed to have been paid within the meaning of and with the effect expressed in the Fiscal Agent Agreement if there shall be on deposit with the Director of Finance or set aside for the purpose with a trustee or escrow agent, 15 10861/0004/697498.3 including the Fiscal Agent, monies in an amount sufficient (together with interest thereon) to pay the principal amount thereof plus any accrued interest thereon, payable on their respective principal maturity dates. The Owners of such Bonds will be entitled to the principal and interest represented by such Bonds, and the City will remain liable for such payments, but only out of such monies on deposit for such payment and monies transferred to the Fiscal Agent for such purpose. Any money deposited with or otherwise held by the Fiscal Agent for the payment of the principal or interest on any Bond and remaining unclaimed for two years after the stated maturity of such Bond will be paid by the Fiscal Agent to the City, upon receipt of a written Request of the City, and the registered Owner of such Bond shall thereafter look only to the City for payment thereof. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds (exclusive of [premium and] accrued interest) are as follows: Sources: Par Amount of Bonds $25,000,000.00* Uses: Deposit to Library Improvement Fund ____________.__ (1) Costs of Issuance ____________.__ Total Uses: $25,000,000.00* ____________________________ 16 10861/0004/697498.3 * Preliminary; subject to change. (1) Includes legal fees, initial fees of the Fiscal Agent, financial advisory fees and other costs of issuance. 17 10861/0004/697498.3 DEBT SERVICE SCHEDULE* 18 10861/0004/697498.3 Fiscal Year Principal*InterestTotal (1)(2) 2003 $ 1,250,000 2004 1,250,000 2005 1,250,000 2006 1,250,000 2007 1,250,000 2008 1,250,000 2009 1,250,000 2010 1,250,000 2011 1,250,000 2012 1,250,000 2013 1,250,000 2014 1,250,000 2015 1,250,000 ____ 2016 1,250,000 ____ 2017 1,250,000 ____ 2018 1,250,000 ____ 2019 1,250,000 ____ ____ 2020 1,250,000 * 2021 1,250,000 Preli 2022 1,250,000 2023 1,250,000 19 10861/0004/697498.3 minary; subject to change. (1) Principal and interest payments due on July 1 are paid in the previous fiscal year. (2) Totals may not add due to independent rounding. 20 10861/0004/697498.3 SECURITY AND SOURCES OF PAYMENT General The Bonds are general obligations of the City. The Bonds are not obligations of the County of Los Angeles (the “County”), the State of California (the “State”) or any of the County’s or the State’s other political subdivisions. The Bonds are payable from ad valorem taxes in accordance with the Election and pursuant to the provisions of the Law, the Resolution and the Fiscal Agent Agreement. The City Council of the City of Santa Monica is empowered and obligated to levy ad valorem taxes, without limitations of rate or amount (except certain personal property which is taxable at limited rates), upon all property subject to taxation by the City for the payment of the principal of and interest on the Bonds. See “Ad Valorem Property Taxation and Collection” below and “CONSTITUTIONAL AND STATUTORY LIMITATION ON TAXES AND APPROPRIATIONS” herein. Such taxes, when collected, will be placed in a fund created in the treasury of the City for the payment of the Bonds. For further information regarding the City’s tax base, tax rates, overlapping debt and other matters concerning taxation, see “Ad Valorem Property Taxation and Collection” and “City Debt Obligations” below and “CITY OF SANTA MONICA FINANCES” herein. Covenants of the City Payment of Principal and Interest. On or before the Business Day immediately prior to the date any payment is due in respect of the Bonds, the City will cause monies on deposit in the fund created in the treasury of the City for the payment of the Bonds or, to the extent necessary, such other monies as shall be lawfully available for the payment of the Bonds, to be deposited with the Fiscal Agent sufficient to pay the 21 10861/0004/697498.3 principal and the interest (and premium, if any) to become due in respect of all Bonds outstanding on such payment date. When and as paid in full, and following surrender thereof to the Fiscal Agent, all Bonds shall be cancelled by the Fiscal Agent, and thereafter they shall be destroyed. General Obligation; Levy of Tax. The Bonds represent a general obligation of the City. The money for the payment of principal and interest on the Bonds shall be raised by ad valorem taxation without limitation as to rate or amount (except with respect to certain personal property which is taxable at limited rates) upon all taxable property in the City, and provision shall be made for the levy and collection of such taxes in the manner provided by law, and such money shall be deposited by the Director of Finance in the fund created in the treasury of the City for the payment of the Bonds. Further Assurances. The City will promptly execute and deliver or cause to be executed and delivered all such other and further instruments, documents or assurances, and promptly do or cause to be done all such other and further things, as may be necessary or reasonably required in order to further and more fully vest in the Owners all rights, interest, powers, benefits, privileges and advantages conferred or intended to be conferred upon them by the Fiscal Agent Agreement. Tax Covenants. The City covenants that it shall not 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 the interest payable on the Bonds under Section 103 of the Code. Without limiting the generality of the foregoing, the City covenants that it will comply with the requirements of the Tax Certificate. This covenant will survive payment in full or defeasance of the Bonds. 22 10861/0004/697498.3 Amendments The Fiscal Agent Agreement and the rights and obligations of the City and of the Owners may be amended at any time upon the written consents of the Owners of a majority in aggregate principal amount of the Bonds then outstanding, exclusive of Bonds disqualified pursuant to the Fiscal Agent Agreement; provided that if such amendment will, by its terms, not take effect so long as any Bonds remain outstanding, the consent of the Owners of such Bonds shall not be required and such Bonds shall not be deemed to be outstanding for the purpose of any calculation of Bonds outstanding under the Fiscal Agent Agreement. No such amendment shall (1) extend the maturity of or reduce the interest rate on or amount of interest on or principal of or redemption premium, if any, on any Bond without the express written consent of the Owner of such Bond, or (2) reduce the percentage of Bonds required for the written consent to any such amendment, or (3) modify any rights or obligations of the Fiscal Agent or the City without their prior written assent thereto, respectively. It shall not be necessary for the consent of the Owners to approve the particular form of any amendment to the Fiscal Agent Agreement, but it shall be sufficient if such consent shall approve the substance thereof. The Fiscal Agent Agreement and the rights and obligations of the City and of the Owners may also be amended at any time without the consent of any Owners for any purpose that will not materially adversely affect the interests of the Owners, including (without limitation) for any one or more of the following purposes: (1) to add to the agreements and covenants required in the Fiscal Agent Agreement to be performed by the City other agreements and covenants thereafter to be performed by the City, or to 23 10861/0004/697498.3 surrender any right or power reserved under the Fiscal Agent Agreement to or conferred under the Fiscal Agent Agreement on the City; or (2) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained under the Fiscal Agent Agreement or in regard to questions arising thereunder which the City may deem desirable or necessary. Any amendment pursuant to this paragraph shall not, for purposes of this paragraph, materially adversely affect the interest of the Owners so long as all Bonds are insured by a policy of municipal bond insurance, each issuer of such an insurance policy shall have given its written consent to such amendment, and each such insurer shall at the time of such consent be rated in the highest rating category by Standard & Poor’s Ratings Services and Moody’s Investors Service. Assessed Valuations The City is obligated to levy ad valorem taxes, without limitations of rate or amount (except certain personal property which is taxable at limited rates), upon all property subject to taxation by the City for the payment of the principal of and interest on the Bonds. The City uses the facilities and services of the County for the assessment and collection of taxes. City taxes are collected at the same time and on the same tax rolls as are the County, City and special district taxes. Assessed valuations are the same for both City and County taxing purposes. The valuation of property in the City is established by the Los Angeles County Assessor (the “County Assessor”), except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the full value of the property, as defined in Article XIIIA of the California Constitution. Prior 24 10861/0004/697498.3 to Fiscal Year 1981-82, assessed valuations were reported at 25% of the full value of the property. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS” herein. The California State Legislature adopted two types of State-reimbursed exemptions beginning in the tax year 1969-70. The first currently exempts 100% of the full value of business inventories from taxation. The second exemption currently provides a credit of $7,000 of the full value of an owner-occupied dwelling for which application has been made to the County Assessor. Revenue estimated to be lost to local taxing agencies due to the above exemptions has in the past been reimbursed from State sources. Reimbursement is based upon total taxes due upon such exemption values and therefore is not reduced by any estimated amount of actual delinquencies. The following table sets forth a five-year summary of the City’s assessed valuation after deduction of the homeowners’ exemptions: 25 10861/0004/697498.3 CITY OF SANTA MONICA Five-Year Summary of Assessed Valuation For the Five Years Ended June 30, 2002 Real Year Ended Property Personal Total Assessed (1)(2)(3) June 30 Valuations Property Secured Gross Exemptions Secured Net Valuations 1998 $ 9,241,282,631 $54,672,870 $ 9,295,955,501 $343,228,944 $ 8,952,726,557 $ 9,534,082,837 1999 9,718,922,313 48,065,652 9,766,987,965 327,617,031 9,439,370,934 10,202,640,765 2000 10,778,717,545 48,350,204 10,827,067,749 264,038,252 10,563,029,497 11,335,026,057 2001 11,771,044,825 26,836,372 11,797,881,197 335,631,820 11,462,249,377 12,282,953,459 2002 12,788,048,197 67,180,358 12,855,228,555 304,310,896 12,550,917,659 13,491,852,764 ____________________________ (1) Consists of land, improvements and public utilities. Excludes net unsecured property. (2) Includes homeowner exemption. The City is reimbursed by the State for taxes lost because of these exemptions. (3) Includes net secured and net unsecured property. Source: City of Santa Monica Finance Department (from data from Los Angeles County Auditor-Controller) 26 10861/0004/697498.3 The ten principal property taxpayers in the City and their gross assessed values are listed below: CITY OF SANTA MONICA Principal Property Taxpayers For Fiscal Year 2001-02 (Based on Taxes Paid) Assessed Valuation (Incl. Secured % of Taxpayer Type of Business & Unsecured) Total Douglas Emmet Realty Fund Property Management $ 299,325,768 2.22% TST Colorado Avenue LLC Commercial Real Estate 268,098,688 1.99 Water Garden Company Real Estate Investment 234,957,947 1.74 Sisters of Charity Leavenworth Health Property Management 178,001,169 1.32 SHCI Santa Monica Beach Hotel Hotel Management 120,951,705 0.90 Macerich Company Shopping Center 93,369,290 0.69 Commonwealth Atlantic-Arboretum Commercial Real Estate 83,288,263 0.62 Kilroy Realty Limited Partnership Commercial Real Estate 71,168,001 0.53 1299 Ocean LLC Commercial Real Estate 56,752,381 0.42 Santa Monica HSR LP Commercial Real Estate 52,582,967 0.39 Total principal property taxpayers gross assessed value $ 1,458,496,188 10.81% Total city assessed value $13,491,852,764 100.00% ____________________________ Source: City of Santa Monica Finance Department (from data from Los Angeles County Assessor) Ad Valorem Property Taxation and Collection Taxes are levied for each fiscal year on taxable real and personal property which is situated in the County as of the preceding January 1. However, upon a change in ownership of real property or completion of new construction, State law permits an accelerated recognition and taxation of increases in real property assessed valuation (known as a “floating lien date”). 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 and County assessed property secured by a lien which is sufficient, in the opinion 27 10861/0004/697498.3 of the assessor, to secure payment of the taxes. Other property is assessed on the “unsecured roll.” See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS” herein. The County levies a one percent property tax on behalf of all taxing agencies in the County. The taxes collected are allocated on the basis of a formula established by State law enacted in 1979. Under this formula, the County and all other taxing entities receive a base year allocation plus an allocation on the basis of “situs” growth in assessed value (new construction, change of ownership, inflation) prorated among the jurisdictions which serve the tax rate areas within which the growth occurs. Tax rate areas are specifically defined geographic areas which were developed to permit the levying of taxes for less than county-wide or less than city-wide special and school districts. In addition, the County levies and collects additional approved property taxes and assessments on behalf of any taxing agency within the County. Property taxes on the secured roll are due in two installments, on November 1 and February 1. If unpaid, such taxes become delinquent after December 10 and April 10, respectively, and a ten percent penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared tax-defaulted on or about June 30. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus costs and redemption penalty of one and one-half percent per month to the time of redemption. If taxes are unpaid for a period of five years or more, the tax-defaulted property is subject to sale by the Treasurer and Tax Collector of the County of Los Angeles. 28 10861/0004/697498.3 Property taxes on the unsecured roll are assessed as of the January 1 lien date and become delinquent, if unpaid, on August 31. A ten percent penalty attaches to delinquent taxes on property on the unsecured roll and an additional penalty of one and one-half percent per month begins to accrue on November 1. The taxing authority has four ways of collecting delinquent unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recordation in the County Recorder’s office in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the taxpayer. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS — Article XIIIA of the California Constitution” herein for information on the effect, if any, of current litigation on assessed values in the City or the availability of revenue sources which may be provided by the State to replace lost property tax revenues. The following tabulation shows the secured taxes levied by the City during the past five fiscal years, together with the total amounts and percentages of taxes uncollected as of June 30 of each fiscal year. 29 10861/0004/697498.3 City of Santa Monica Assessed Valuations, Property Tax Rates, Secured Levies and Collections and Delinquencies For the Five Years Ended June 30, 2002 Outstanding Delinquent Property Tax Taxes as Rates Per Outstanding Percent of Total Year Ended Total Assessed $100 Assessed Total Secured Delinquent Secured Tax (1)(2)(2) June 30 Valuation Valuation Tax Levy Taxes Levy 1998 $ 9,534,082,837 $ 1.07 $ 12,388,966 $ 650,574 5.3% 1999 10,202,640,765 1.07 12,858,253 470,071 3.7 2000 11,335,026,057 1.05 13,287,593 442,199 3.3 2001 12,282,953,459 1.05 14,040,882 452,974 3.2 (3) 2002 13,491,852,764 1.05 l4,942,057 (Not Available) (Not Available) _______________________ (1) Consists of real property, secured and net unsecured property, public utilities, less total exemptions. (2) The data presented represents the City’s proportionate allocation of County-wide totals and is not based on the actual amount of taxes uncollected within the City. (3) Based on preliminary information from the County of Los Angeles Assessor. Source: City of Santa Monica Finance Department (from data from County of Los Angeles Auditor-Controller) Tax Rates As previously noted and discussed below under “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS,” the California Constitution limits any ad valorem tax on real property to one percent of the full cash value of such property, beginning in 1978-1979; however, this limitation is not applicable to ad valorem taxes or special assessments to pay the interest and redemption charges on any indebtedness incurred to finance the acquisition or improvement of real property approved by two-thirds of the voters, including the ad valorem taxes approved in the Election for payment of the Bonds. A summary of the tax rates levied in the City during the period 1996-97 through 2000- 01 appears in the following tabulation. City of Santa Monica 30 10861/0004/697498.3 Property Tax Rates - All Direct and Overlapping Governments For the Five Years Ended June 30, 2001 Year City of County of Miscellaneous Ended Santa Los School Special June 30 Monica Angeles Districts Districts Total 1997 $0.01 $1.00 $0.05 $0.01 $1.07 1998 0.01 1.00 0.05 0.01 1.07 (1) 1999 0.00 1.00 0.06 0.01 1.07 2000 0.01 1.00 0.03 0.01 1.05 (1) 2001 0.00 1.00 0.04 0.01 1.05 _______________________ (1) For Fiscal Year 1998-99 and Fiscal Year 2000-01, City of Santa Monica property tax override for prior Library General Obligation Bonds was less than $0.01, but was levied. Source: City of Santa Monica Finance Department (from data from Los Angeles County Asessor). City taxes are collected on the same bill as County taxes. Secured taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively Unsecured taxes are assessed as of January 1. City Debt Obligations Upon delivery of the Bonds, the City’s general obligation indebtedness represented by the Bonds and the outstanding Prior Bonds will be $28,440,000 or approximately 0.21% of its total 2001-02 assessed valuation of $13,491,852,764. The City may issue additional general obligation bonds for the acquisition and improvement of real property, subject to the approval of two-thirds of the voters voting on the bond proposition. For further discussion on the City’s long-term debt and lease obligations, see “CITY OF SANTA MONICA FINANCES – Long Term Debt.” The following table is a statement of the City’s direct and estimated overlapping bonded debt as of May 31, 2002: 31 10861/0004/697498.3 City of Santa Monica Estimated Direct and Overlapping Bonded Debt (As of May 31, 2002) Debt DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: Gross Debt % Applicable as of 5/31/02 Los Angeles County $ 42,375,000 1.992 % $ 844,110 Los Angeles County Flood Control District 16,975,000 2.029 344,423 Metropolitan Water District 503,075,000 1.048 5,272,226 Los Angeles Community College District 525,000,000 0.010 52,500 Santa Monica Community College District 20,125,000 65.286 13,138,808 Los Angeles Unified School District 1,806,545,000 0.0003 5,420 Santa Monica-Malibu Unified School District 102,495,034 65.348 66,978,455 (1) City of Santa Monica 3,440,000 100. 3,440,000 Los Angeles County Regional Park and Open Space Assessment District 412,295,000 1.992 8,212,916 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $98,288,858 DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT: Los Angeles County General Fund Obligations $1,681,084,033 1.992 % $ 33,487,194 Los Angeles County Pension Obligations 1,920,582,395 1.992 38,258,001 Los Angeles County Superintendent of Schools Certificates of Participation 29,770,721 1.992 593,033 Los Angeles County Flood Control District Certificates of Participation 158,135,000 2.029 3,208,559 Los Angeles Community College District Certificates of Participation 89,915,000 0.010 8,992 Santa Monica Community College District Certificates of Participation 69,645,000 65.286 45,468,435 Los Angeles Unified School District Certificates of Participation 495,150,000 0.0003 1,485 Santa Monica-Malibu Unified School District Certificates of Participation 21,921,501 65.348 14,325,262 City of Santa Monica Redevelopment Agency Refunding 5,640,000 100. 5,640,000 City of Santa Monica Parking Authority Refunding Lease Revenue 10,480,000 100. 10,480,000 City of Santa Monica Airport Refunding Certificates of Participation 2,255,000 100. 2,255,000 City of Santa Monica Public Safety Lease Revenue Bonds 30,510,000 100. 30,510,000 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT $184,235,961 Less: Los Angeles County Certificates of Participation (100% self-supporting from leasehold revenues on properties in Marina Del Rey) 1,912,420 TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT $182,323,541 (2) GROSS COMBINED TOTAL DEBT $282,524,819 NET COMBINED TOTAL DEBT $280,612,399 (1) Excludes Series 2002 General Obligation Bonds. (2) Excludes tax and revenue anticipation notes, revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Ratios to 2001-02 Assessed Valuation: Direct Debt ($3,440,000)..............................................................0.03% Total Direct and Overlapping Tax and Assessment Debt................0.72% Ratios to Adjusted Assessed Valuation: Combined Direct Debt ($52,325,000)...........................................0.47% Gross Combined Total Debt...........................................................2.55% Net Combined Total Debt.......................................................2.53% Source: City of Santa Monica Finance Department (from data from California Municipal Statistics, Inc.) 32 10861/0004/697498.3 33 10861/0004/697498.3 A table setting forth the pro-forma statement of net debt of the City outstanding as of May 31, 2002 is provided below: City of Santa Monica Net Debt (As of May 31, 2002) Outstanding Principal Final Type of Issue Amount Maturity General Obligation Bonds $3,440,000 2010 Lease Obligations: Certificates of Participation (Airport Facilities) 2,255,000 2007 Lease Revenue Bonds (Parking Facilities) 5,640,000 2008 Lease Revenue Bonds (Public Safety Facility) 30,510,000 2021 Parking Authority Lease Refunding Revenue Bonds 10,480,000 2016 Subtotal $52,325,000 Revenue Bonds Wastewater Enterprise Revenue Bonds $34,230,000 2022 Gross Direct Debt $87,155,000 Less: Revenue Bonds ($34,230,000) Net Direct Debt $52,325,000 (1) Plus: Tax Allocation Debt 82,800,000 (2) Plus: Net Overlapping Debt 228,287,399 Total Net Debt $363,412,399 _____________________________ (1)Consists of $63,485,000 outstanding principal amount of Redevelopment Agency of the City of Santa Monica Earthquake Recovery Redevelopment Project Area Tax Allocation Bonds, Series 1999, and $19,315,000 outstanding principal amount of Redevelopment Agency of the City of Santa Monica Ocean Park Redevelopment Projects Tax Allocation Bonds, Series 2002. (2) Data from City of Santa Monica (from data from California Municipal Statistics, Inc.). Source: City of Santa Monica Finance Department 34 10861/0004/697498.3 The following table sets forth assessed value within the City, the applicable debt limit, the ratio of bonded debt to assessed value and the bonded debt per capita: City of Santa Monica Assessed Value, Debt Limit and Ratio of Bonded Debt to Assessed Value and Per Capita For Fiscal Years 1997-98 through 2001-02 Ratio of Fiscal Total Total Bonded Bonded Year Assessed Legal Debt Legal Debt Bonded Debt to Debt Ended Estimated Value Limit Margin Debt Assessed Per (1)(2)(3)(4)(5) June 30 Population (000)s (000)s (000)s (000)s Value Capita 1998 92,578 $ 10,139,995 $ 1,014,000 $ 971,962 $ 36,095 0.36 $ 389.89 (6) 1999 94,220 10,622,328 1,062,233 1,033,631 34,740 0.33 368.71 2000 84,084 11,605,257 1,160,526 1,058,808 111,760 0.96 1,329.15 2001 86,188 12,714,868 1,271,487 1,172,059 109,315 0.86 1,268.33 (7) 2002 87,954 13,893,606 1,389,361 1,266,534 132,870 0.96 1,510.68 ______________________________________ (1) Data from City of Santa Monica Finance Department (from data from the California State Department of Finance). (2) Assessed values include exempt property. (3) Pursuant to the City’s Charter. (4) After adjustment for assets in funds available for payment of debt service. (5) Includes all bonds of the Redevelopment Agency of the City of Santa Monica and the City’s general obligation library bonds. (6) Between the 1990 and 2000 censuses, the State Department of Finance estimated the annual population of the City. The estimate was re-benchmarked in 2000 with official census count. (7) Estimated. Source: Data for Fiscal Years 1997-98 through 2000-01 from City of Santa Monica Comprehensive Annual Financial Reports; data for Fiscal Year 2001-02 from City of Santa Monica Finance Department 35 10861/0004/697498.3 CITY OF SANTA MONICA General The City is situated on the western side of the County, bordered by the City of Los Angeles on three sides and by the Pacific Ocean to the west. The City encompasses an area slightly greater than eight square miles and has an estimated population of 87,954 persons, making it the 21st largest city in the County. The Santa Monica Freeway passes through the approximate center of the City on an east-west course and provides direct connection with downtown Los Angeles, approximately 16 miles to the east. About six miles southeast of the City is Los Angeles International Airport. Government and Administration The City was incorporated in 1886 and adopted its City Charter in 1945. In 1947 a council-manager form of government was established following a vote of the City’s residents and approval by the California Legislature. The City Council consists of seven members with overlapping terms of four years. Elections are held every two years, at which time three Council members or four Council members are elected. After each election, Council members select one of their group to act as Mayor, who then presides over Council meetings. The City Council appoints a City Manager, City Attorney and City Clerk. The City Manager is responsible for supervising day-to-day operations of the City and for carrying out policies set by the Council. Population The following table sets forth population data for the City of Santa Monica. 36 10861/0004/697498.3 Population Year (as of January 1)Population 1970 88,289 1980 88,314 1990 86,905 2000 84,084 2001 86,188 2002 87,954 ____________________ Source: 1970-2000 data from US Census Bureau; 2001 and 2002 data from City of Santa Monica Finance Department (from data from the State of California Department of Finance) Self-Supporting Operations The City operates an airport, bus line, cemetery, auditorium, cable communications, parking authority and pier, and provides water, refuse collection, street sweeping, recycling, wastewater and stormwater services. A portion of the net income from these enterprises is annually paid to the City’s General Fund for various administrative support services provided to the enterprises. The Santa Monica Airport is a 227-acre general aviation airport, located at the southeastern edge of the City. It is the base of approximately 550 aircraft. The City rents an average of 200 of its own aircraft tie-down spaces, and also receives commercial lease revenues and commissions on fuel sold at the airport. 37 10861/0004/697498.3 In Fiscal Year 2000-01, the City’s buses carried almost 23 million revenue passengers, while traveling approximately 4.97 million miles. The system provides excellent coverage at low cost. A bus route operates within a quarter-mile of almost every resident. Effective July 7, 2002, regular fares are $0.75 with discount fares available for the elderly, handicapped and students through the purchase of tokens or the Little Blue card. The City’s Big Blue Bus also manages shuttle services (using 5 electric buses) and paratransit services which together carried 147,300 revenue passengers in Fiscal Year 2000-01. In addition, charter and excursion programs are also provided. Woodlawn Cemetery was purchased by the City in 1897 and the mausoleum was purchased in 1972. They are operated as a self-supporting enterprise, competitive with comparable private facilities. It is located in the south-central portion of the City. The Santa Monica Pier is a County and national historical landmark built at the turn of the century. It currently contains an amusement park, carousel, games, restaurants, entertainment venues, and retail. In the mid-1990’s, a $12 million restoration of the Pier was completed, following which Santa Monica Amusements, a privately-owned enterprise, constructed and opened Pacific Park, with its ferris wheel, roller coaster, action ride theater, games and a food court. The Pier’s famous 1900-vintage carousel has been completely restored. The UCLA Ocean Discovery Center, opened in 1996, brings hands-on education about marine life to children of all ages. The Water Division of Santa Monica is operated as a self-supporting enterprise. About 19% of the City’s water is supplied by its own wells, stored in over 16 acres of well fields and reservoir grounds on City-owned property inside and outside the city limits. The remaining 81% of the water is purchased from the Metropolitan Water District of 38 10861/0004/697498.3 Southern California. The City’s modern, automated System delivers over 13 million gallons per day to approximately 16,000 water accounts. The City’s own water chemists supervise over 9,500 separate water quality and safety tests per year in State-licensed laboratories, to ensure that the highest standards are met before delivering the water to the customer’s tap. During the State’s drought years, the City implemented several conservation programs. One of the City’s water/wastewater conservation programs is a program of retrofitting bathrooms in the City with ultra low flow toilets and low flow showerheads. This program, which currently results in a wastewater reduction of approximately 1.4 million gallons per day, significantly reduces the City’s wastewater treatment and disposal costs by eliminating the need for the City to acquire additional capacity in the local Hyperion Sewage Treatment Plant. Santa Monica’s Urban Runoff Recycling Facility, otherwise known as the “SMURRF,” treats dry weather runoff water (from excessive irrigation, spills, construction sites, pool draining, car washing, the washing down of paved areas, and some wet weather runoff) to produce 500,000 gallons a day of recycled water that is safe for all landscape irrigation and dual-plumbed systems (buildings plumbed to accept recycled water for the flushing of toilets). 39 10861/0004/697498.3 Retirement System The City contributes to the State of California Public Employees’ Retirement System (PERS), an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for cities in the State. The City’s payroll for employees covered by PERS for the year ended June 30, 2001 was $95,944,563. Total payroll for the City for the year ended June 30, 2001 was $109,935,700. All full-time City employees and part-time City employees who have worked over 1,000 hours during a fiscal year are eligible to participate in PERS, with benefits vesting after 5 years of service. Employees are designated as safety (police officers, firefighters and others designated as safety by law) or miscellaneous (all others). Safety employees who retire at or after age 50 with 5 years of credited service are entitled to an annual retirement benefit, payable monthly for life, in an amount equal to a benefit factor multiplied by their final compensation which is the average monthly pay rate for the last consecutive 12 months of employment (or any 12-month period in which pay was higher). The benefit factor is an amount equal to between 2.4% and 3.0% multiplied by the number of years of credited employment. The percentage amount is based upon the age of the employee at retirement, increasing from age 50 to age 55. Miscellaneous members who retire at age 50 with 5 years of credited service are entitled to an annual retirement benefit, payable monthly for life, in an amount equal to a benefit factor multiplied by their final compensation. Final compensation for miscellaneous members is the average monthly pay rate for the last consecutive 12 months (or any 12-month period in which pay was higher) of employment. The benefit factor is an amount equal to between 1.426% and 2.418% multiplied by the number of 40 10861/0004/697498.3 years of credited employment. The percentage amount is based upon the age of the employee at retirement, increasing from age 50 to age 63. PERS also provides death and disability benefits. These benefit provisions and all other requirements are established by state statute and City ordinance. PERS requires that miscellaneous employees contribute 7% and safety employees contribute 9% of their annual salary to PERS. However, this benefit, like all others, is subject to collective bargaining. Currently all of the City’s bargaining units have negotiated for the City to contribute this portion on behalf of the employee. The City is required to contribute the remaining amounts necessary to fund the benefits for its members using the actuarial basis recommended by the PERS actuaries and actuarial consultants and adopted by the PERS Board of Administration. 41 10861/0004/697498.3 For Fiscal Year 2000-01, employer contribution rates were as follows: Annual Rate Miscellaneous Safety Category Components Category Fire Police A. Normal cost rate 4.161% 12.473% 13.230% B. Unfunded liability rate (4.161) (4.018) (5.948) C. Total required 0.000% 8.455% 7.282% Source: City of Santa Monica The contribution to PERS for Fiscal Year 2000-01 of $9,739,577 was made in accordance with actuarially determined requirements computed through an actuarial valuation performed as of June 30, 1998. The contribution consisted of (a) $6,321,970 normal cost (6.6% of current covered payroll) and (b) 3,417,607 amortization of the unfunded actuarial accrued liability (3.6% of current covered payroll). The City contributed $2,383,850 (2.5% of current covered payroll); employees contributed $7,355,727 (7.7% of current covered payroll), $7,291,415 of which was paid by the City and $64,312 was paid by employees. Labor Relations In accordance with the Meyers-Milias-Brown Act, the City has adopted an Ordinance, which establishes the procedures for the administration of employer-employee relations. This includes the procedure by which the City meets and confers with representatives of recognized employee organizations (i.e. unions and associations) regarding matters within the scope of representation, including wages, hours and other terms and conditions of employment within the appropriate unit. Of the approximately 1,824 budgeted permanent City employees, most are represented by ten unions and/or associations, including 810 by the Municipal Employees Association, 213 by the Santa Monica Police Officers Association, 103 by Local 1109 of 42 10861/0004/697498.3 the Firefighters Association, 253 by the United Transportation Union, 48 by the Management Team Associates, 167 by the Supervisory Team Associates, 168 by the Administrative Team Associates, 22 by the Public Attorneys Union, 20 by the Public Attorneys Legal Support Staff, and 20 by the Executive Pay Plan. All City employees are covered by existing multiple- or single-year contracts. Industry and Employment The City’s business community is comprised of a diverse collection of businesses ranging from traditional retailers to hi-tech post-production and internet firms. Tourism, health industries, and retail augment the large business service sector. Mainstay firms like Saint John’s and UCLA-Santa Monica Hospitals, Sanford Papermate, hotels, and new car dealerships occupy a more traditional niche as large institutional property owners, sales tax producers, and employers. Major entertainment and multimedia- software industry firms like Sony Music, Apple, Symantec-Peter Norton, and MTV are among over 200 hi-tech, multimedia, and related entertainment firms of all sizes. These companies relocate to Santa Monica and West Los Angeles because they appreciate the quality of life here and because the hi-tech and entertainment clusters provide a critical mass of support firms and other similar firms in the area. The City invests significant governmental resources in its pedestrian-oriented commercial districts, including such nationally-recognized venues as the Third Street Mall, Santa Monica Place Mall, the Santa Monica Pier, Main Street, and Montana Avenue. The City provides support for the Santa Monica Convention & Visitor’s Bureau, and a variety of other services, including parking in the downtown. The City recently completed the Downtown Transit Mall and a $7.5 million streetscape 43 10861/0004/697498.3 improvement project along Pico Boulevard. Additional projects underway include the Breakwater, and various beach and circulation improvements to the waterfront area. This investment has paid off in a healthy retail and restaurant sector and an active tourism industry which provides significant sales tax revenues to the City, and will continue to do so even through the recent economic turndown. The three largest business types producing taxable goods in the City are: New Motor Vehicle Dealers, 17.7% of the City’s sales tax revenue; Restaurants with Liquor, 7.0% of the City’s sales tax revenue, and Specialty Stores, 6.1% of the City’s sales tax revenue. When grouped into major business groups, General Consumer Goods provide 33.4% of the City’s sales tax revenue, Autos and Transportation provide 26.0% of the City’s sales tax revenue, and Restaurants and Hotels provide 17.5% of City’s sales tax revenue. Tourism spending totaled $788 million in 2000, and will remain a significant factor throughout the economic downturn as the hospitality industry expands its outreach into the locally based market. In 2000, 3.8 million visitors came to the City. The City’s tourism industry and occupancy rates benefit from its proximity to Southern California points of interest, including the beach, Pacific Park on the Santa Monica Pier, the Third Street Mall and the Getty Center in nearby Brentwood. The City has 3,574 rooms available daily. In recent months, occupancy rates have rebounded to 76%, almost achieving their former levels in 2000 before the economic downturn and September 11th; however, the average daily room rate is still lower, but is expected to return to prior levels by fiscal year 2003-2004. Heading into the economic slowdown, the City was in very good financial condition with sufficient financial flexibility to minimize the impact of uncertain financial times. 44 10861/0004/697498.3 As of September 30, 2001, over _______ people were employed by approximately ______ firms at an average salary of $_________, for a total of almost $___ billion in payroll contributed to the local economy. This figure does not include a substantial number of self-employed persons or contract workers, estimated to add 15% to that total. As of May 2002, unemployment rate in the City is estimated to be 4.2%, which is lower than the overall County unemployment rate. The City’s focus on “quality of life” issues has created a wonderful environment on the Westside in which to live, work, and visit. The resulting environment has attracted a stable, dynamic business base and a strong local economy. The following two tables summarize employment and wage information within the City as of December 31, 2000 and as of September 30, 2001. The data presented in these tables are from the State Employment Development Department (the “EDD”). The EDD changed its method of classification for industries in 2001 (i.e., a company classified in one category in 2000 may not be classified in the same category in 2001). Thus, the data on these tables should not be used for historical comparison. 45 10861/0004/697498.3 Employment and Payroll By Major Industry Division City of Santa Monica As of December 31, 2000 % Average % Average Major Industry of Total Annual % of Total Annual of Total Annual Division Firms Firms Employment Employment Payroll Payroll Salary Agriculture, Forestry, Fishing and Mining 45 0.75% 578 0.78% $ 6,005,908 0.67% $41,564 Construction 204 3.38 1,880 2.54 82,943,529 2.31 44,119 Manufacturing Durable and Non- Durable Goods 172 2.85 4,030 5.44 213,360,104 5.95 52,943 Utilities and Transportation 103 1.71 1,740 2.35 83,486,786 2.33 47,981 Wholesale Trade 270 4.48 2,127 2.87 114,492,054 3.19 53,828 Retail Trade 1,017 16.87 17,327 23.39 424,230,125 11.83 24,484 Finance, Insurance, Real Estate 586 9.72 5,560 7.51 379,497,371 10.58 68,255 Services 3,610 59.89 34,856 47.05 2,026,055,057 56.51 58,126 Non-classified 13 0.22 16 0.02 934,966 0.03 58,435 Local Government 18 0.30 5,963 8.05 236,449,893 6.59 9,653 Total Employment 6,028 100.00% 74,076 100.00% $3,585,473,696 100.00 $48,403 Source: City of Santa Monica (from data from State of California, Employment Development Department, Labor Market Information Division) [2001 TABLE TO COME] 46 10861/0004/697498.3 The major employers within the City boundaries and the number of persons employed by each organization are shown below: City of Santa Monica Major Employers As of June 30, 2001 (Unaudited) CompanyNumber of Employees City of Santa Monica 1,892 Saint John’s Hospital Medical Center 1,755 Santa Monica-UCLA Medical Center 1,165 Santa Monica College 1,050 The Rand Corporation 1,038 Santa Monica-Malibu Unified School District 1,008 Metro-Goldwyn Mayer, Inc. 980 Specialty Laboratories, Inc. 862 BAE Systems 800 E.I. Whitehall 620 Total jobs provided by principal employers 11,170 Total jobs in Santa Monica 72,540 Principal employers as percent of total jobs 15.4% 47 10861/0004/697498.3 Source: Most recent voluntary reporting of employment levels to the City of Santa Monica by individual organizations. Total jobs is provided by the State of California Employment Development Department. City of Santa Monica Comprehensive Annual Financial Report for Fiscal Year 2000-01. 48 10861/0004/697498.3 The following chart provides a comparison, for the years indicated, of the average annual unemployment rates in the City of Santa Monica, the City of Los Angeles, the County of Los Angeles, the State of California and the United States. As of May 2002, the City’s estimated unemployment rate is below the City of Los Angeles rate of 7.3%, the County rate of 6.5%, the State rate of 5.9% and the national rate of 5.8%. Annual Average Unemployment Rates For Calendar Years 1998 through 2002 City of City of County of State of Year Santa Monica Los Angeles Los Angeles California United States 1998 4.3 7.4 6.5 5.9 4.5 1999 3.8 6.7 5.9 5.2 4.2 2000 3.5 6.1 5.4 4.9 4.0 2001 3.7 6.5 5.7 5.3 4.8 (1) 20024.2 7.3 6.5 5.9 5.8 _______________________ (1) Preliminary estimates as of May 2002. Source: State of California, Employment Development Department Effective Buying Income Between 1996 and 2000, the City of Santa Monica’s median household effective buying power rose 24.2% compared to 25.1% for the Los Angeles-Long Beach Statistical Area, 26.26% for the State and 16.7% for the United States. For 2000, the City’s median 49 10861/0004/697498.3 household effective buying power was greater than the median household effective buying power for the Los Angeles-Long Beach Statistical Area and the United States. The following tables summarize the total and median effective buying power for the City, the Los Angeles-Long Beach Statistical Area, the State and the United States for calendar years 1996 through 2000. City of Santa Monica Total Effective Buying Power For Calendar Years 1996 Through 2000 (in 000s) Los Angeles-Long City of Santa Beach Year Monica MSA State of California United States 1996 $2,178,326 $133,522,302 $492,516,991 $4,161,512,384 1997 2,432,086 142,050,140 524,439,600 4,399,998,035 1998 2,526,153 147,629,445 551,999,317 4,621,491,738 1999 2,569,554 157,009,411 590,376,663 4,877,786,658 2000 2,532,368 169,417,226 652,190,282 5,230,824,904 Source: Sales and Marketing Management, Survey of Buying Power City of Santa Monica Median Household Effective Buying Power For Calendar Years 1996 Through 2000 (in 000s) City of Santa Los Angeles-Long Year Monica Beach MSA State of California United States 1996 $ 34,047 $ 33,272 $ 35,216 $ 33,482 1997 35,295 34,356 36,483 34,618 1998 35,935 34,554 37,091 35,377 1999 36,366 36,729 39,492 37,233 2000 42,301 41,627 44,464 39,129 Source: Sales and Marketing Management, Survey of Buying Power Education Public instruction in the City is provided by the Santa Monica-Malibu Unified School District with 10 elementary schools (three of which are in the City of Malibu), two middle schools, three high schools (one of which is in the City of Malibu), one adult education 50 10861/0004/697498.3 school and one alternative school. Total enrollment for the last five school years was as follows: City of Santa Monica Public School Enrollment For 1997-98 through 2000-01 Year Enrollment 1997-98 11,524 1998-99 12,041 1999-00 12,124 2000-01 12,415 (1) 2001-02 12,683 _________________ (1) As of November 2001. Source: City of Santa Monica Finance Department (from data from Santa Monica-Malibu Unified School District) The Santa Monica-Malibu Unified School District also provides additional programs, such as bilingual education, computer literacy, the Gifted and Talented program, the Regional Occupation Program (vocational skills), and pre-school and school age child care programs. There are 9 private nursery/kindergarten schools and 16 private/parochial schools in Santa Monica. The City also has one community college, Santa Monica College, which includes technical and vocational schools, including the Academy of Entertainment and Technology. 51 10861/0004/697498.3 Culture and Recreation Each year, Southern California’s natural and commercial attractions bring millions of visitors to the region. Good weather, miles of Pacific coastline, and picturesque mountain ranges combine with world class destinations such as the Getty Center, Disneyland, the Los Angeles Music Center, the Rose Bowl, Knott’s Berry Farm, Universal Studios Hollywood, and the Long Beach Aquarium to make the Los Angeles basin one of the most traveled to places in the world. The City’s strong recreational identity is historically tied to the beachside community’s extraordinary natural setting and mild climate. Residents walk, bike, skate, participate in cultural events, experience nature, and engage in a wide range of active sports throughout the year. In the most fundamental sense, recreation within a town like the City has to do with establishing ties between people and building a sense of community by creating opportunities for physical, social and cultural interaction. The City’s residents and visitors see the entire City as their park system — where users enjoy the community’s renowned public gathering places, green streets, 209 acres of beach and 24 parks to pursue their recreational activities of choice. Within the City limits are three major recreational venues including Pacific Park on the Santa Monica Pier, the Third Street Mall, and the Santa Monica Civic Auditorium. The City continues to have a profound effect on the development of art and culture in this country. More visual and performing artists, arts presenters, designers, architects, and film and music producers per capita can be found in the City than in any other city in the State. The City has over 70 galleries, three major museums (including the Santa Monica Museum of Art, the California Heritage Museum, and the Museum of Flying), 52 10861/0004/697498.3 over a dozen theaters and performance spaces presenting a wide range of music, dance and performance art, bookstores, photography, video, film, and award-winning architecture — all thriving in its many walkable and attractive neighborhoods. The exceptional physical, recreational, and cultural environment in the City provides residents with a wide range of arts and leisure opportunities. Taxable Transactions Taxable transactions for the City in 2000 increased by approximately 11.7% over the 1999 level. Total taxable transactions have been showing a gradual increase in each year since 1996. The future rate of growth of taxable transactions may be adversely affected by the growth of electronic commerce to the extent that federal and/or State laws, policies and sales tax collection procedures are not altered to include taxable transactions via electronic commerce. The following table indicates the growth of taxable transactions in the City by type of business from calendar years 1996 through 2000. 53 10861/0004/697498.3 City of Santa Monica Taxable Transactions by Type of Business for Calendar Years 1996 through 2000 (in Thousands of Dollars) Business 1996 1997 1998 1999 2000 Apparel Stores $ 125,821 $ 126,215 $ 143,180 $ 162,581 $ 199,035 General Merchandise 113,767 149,370 145,191 148,564 150,898 Drug Stores 28,124 * * * * Food Stores 58,794 64,491 66,010 72,496 70,966 Packaged Liquor Stores 10,345 * * * * Eating/Drinking Places 236,466 252,286 272,295 308,300 343,847 Home Furn. & Appliances 57,718 63,468 71,785 77,507 82,692 Bldg. Mat. & Farm Impl. 49,687 49,021 57,559 62,690 73,224 Auto Dirs. & Auto Suppl. 275,349 301,345 328,838 356,869 429,191 Service Stations 47,544 48,712 45,207 51,585 59,893 Other Retail Stores 283,637 313,145 310,937 358,685 389,043 Retail Stores Total 1,287,252 1,368,053 1,441,002 1,599,277 1,798,789 All Other Outlets 389,712 447,505 454,802 477,330 520,362 Total All Outlets $1,676,964 $1,815,558 $1,895,804 $2,076,607 $ 2,319,151 _______________________ * State Board of Equalization converted some of their categories in calendar year 1997. “Packaged Liquor Stores” was merged with “Other Retail Stores” and “Drug Stores” was merged with the “General Merchandise” category. Source: State Board of Equalization, Agency Planning and Research Division 54 10861/0004/697498.3 Building Permit Activity The following table shows the number and value of building permits issued in the City: City of Santa Monica Building Construction For Fiscal Years 1997-98 through 2001-02 Fiscal Year Commercial Residential Ended Number of Construction Number of Construction (1)(2) June 30 Units Value Units Value (3) l998 27 $115,975,087 437 $74,013,351 1999 15 142,841,619 610 68,016,702 2000 15 28,539,000 396 56,845,763 2001 28 71,462,623 370 55,271,202 (4) 2002 123 25,448,767 275 49,167,400 __________________________ (1) Represents the number of new commercial buildings. (2) Represents the number of new dwelling units. (3) Does not include $35,164,309 in earthquake-related building permits. (4) For period from July 1, 2001 through June 21, 2002. Source: Santa Monica Planning and Community Development Department 55 10861/0004/697498.3 Utilities Southern California Gas Company and Southern California Edison Company (“SCE”) provide gas and electricity service within the City, respectively. The City purchases for its own use, a large portion of renewable energy from Commonwealth Energy Corporation. Commonwealth provides this energy in conjunction with SCE services. Verizon California supplies telephone service. The City provides water and wastewater service. See also “RISK FACTORS — Developments Regarding Energy” herein for a discussion of recent development regarding energy. CITY OF SANTA MONICA FINANCES The following selected financial information provides a brief overview of the City’s finances. This financial information has been extracted from the City’s audited financial statements and, in some cases, from unaudited information provided by the City’s Finance Department. The most recent audited financial statements of the City with an unqualified auditor’s opinion is included as Appendix A hereto. See APPENDIX A — “AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE YEAR ENDED JUNE 30, 2001.” Accounting Policies and Financial Reporting The City’s accounting records are organized and operated on a “fund” basis, which is the basic fiscal and accounting entity in governmental accounting. The three broad fund categories include governmental, proprietary and fiduciary funds. The operations 56 10861/0004/697498.3 of the different funds are accounted for with separate sets of self-balancing accounts with assets, liabilities, fund balance or equity, and revenues and expenses. The basis of accounting for all funds is more fully explained in the Notes to the City of Santa Monica Combined Financial Statements contained in Appendix A. The Government Finance Officers Association has awarded its Certificate of Achievement for Excellence in Financial Reporting to the City for the past 18 years. The California Society of Municipal Finance Officers has awarded its Outstanding Financial Reporting Award to the City for 17 of the past 18 years. Budgetary Process During May of each year, the City Manager submits to the City Council a proposed operating and capital improvements budget for the fiscal year commencing the following July 1. The operating and capital improvements budget includes proposed expenditures and expenses and the means of financing them. Public hearings are conducted by the City Council to obtain citizen comments, and prior to June 30, the budget is adopted through passage of appropriate resolutions. See “General Fund Financial Summary” below for a summary of the City’s general fund budget for Fiscal Year 2001-02. The adopted budget for Fiscal Year 2001-02 assumed that the City would experience slower economic growth in Fiscal Year 2001-02 than in prior years. However, a further slowing of economic growth occurred due to the recent economic recession and the events of September 11, 2001. As a result, City general fund revenues are projected to decline by about 4.0%. This revenue shortfall is expected to be offset by expenditure savings and deferral of various capital expenditures. The recently adopted budget for 57 10861/0004/697498.3 Fiscal Year 2002-03 assumes a gradual economic recovery and increased revenues. However, on-going operating and capital expenditures were reduced to re-establish a balance with on-going revenues. Assessed Valuations and Ad Valorem Property Taxes The City uses the facilities and services of the County for the assessment and collection of taxes. The valuation of property in the City is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. For assessment and collection purposes, property is classified either as “secured” or “unsecured” and is listed accordingly on separate parts of the assessment roll. Taxes are levied for each fiscal year on taxable real and personal property in the County as of the preceding January 1. Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each year. Under the Fiscal Agent Agreement, the City has covenanted to levy ad valorem taxes upon all property subject to taxation by the City for the payment of principal of and interest on the Bonds. For a fuller discussion on property assessed valuation and the levy and collection of property taxes, see “SECURITY AND SOURCES OF PAYMENT — Assessed Valuations,” and “— Ad Valorem Property Taxation and Collection.” Tax Receipts Taxes received by the City include Utility User’s Taxes, Sales Taxes, Property Taxes, Business License Taxes, Transient Occupancy Taxes, Franchise Taxes, Parking Facility Taxes and other miscellaneous taxes. The following table sets forth tax revenues received by the City, by source: 58 10861/0004/697498.3 City of Santa Monica Tax Revenues by Source For Fiscal Years 1996-97 through 2000-01 ($’s in thousands) Fiscal Year Ended June 30 (1) Source 1998 1999 2000 2001 2002 Utility User’s Tax $23,824 $ 23,969 $23,920 $25,157 $27,817 Sales Taxes 21,198 21,424 24,360 26,186 24,750 (2) Property Taxes 14,389 14,775 15,317 16,792 17,682 Transient Occupancy Tax14,201 15,418 17,880 19,218 16,133 Business License Taxes 13,453 14,230 15,472 16,957 17,350 Parking Facility Tax 3,899 4,402 4,736 5,372 5,600 (3) State In-Lieu Taxes 3,786 4,074 4,603 5,028 4,787 Real Property Transfer Tax3,575 3,683 3,714 3,911 2,950 (4) Franchise Taxes 632 624 619 705 857 Condominium Taxes 37 57 48 30 27 Total $98,994 $102,656 $110,669 $119,356 $117,953 __________________________ (1) Estimated. (2) Includes property taxes for purposes of paying debt service on general obligation bonds. Does not include tax ad valorem increment received by redevelopment area. (3) Motor Vehicle In-Lieu taxes. 59 10861/0004/697498.3 (4) Does not include franchise fees paid by the City’s cable television franchisee. These are recorded in the Cable Communications Fund. Source: Data for Fiscal Year 1997-98 through 2000-01 from City of Santa Monica Comprehensive Annual Financial Report; data for Fiscal Year 2001-02 from City of Santa Monica Finance Department. In addition to Property Taxes, Utility User’s Taxes, Sales Taxes and Transient Occupancy Taxes constitute the major sources of revenues. A brief discussion of Utility User’s Taxes, Sales Taxes and Transient Occupancy Taxes follows: Utility User’s Tax. The Utility User’s Tax is imposed on all users of natural gas, electricity, water, wastewater, cable television and telephone services within the City’s limits. The tax rate is 10.0% of all utility charges. This tax rate has been in effect since July 1993, and the Utility User’s Tax has been in effect since July 1969. An exemption from the Utility User’s Tax is available to senior citizens over the age of 65 and to permanently disabled individuals, provided that the combined adjusted gross income of all household members is below $23,963, or $20,912 for persons living alone (as of July 1, 2002). As provided by the California Constitution, insurance companies are exempt from the Utility User’s Tax. In addition, county, state, federal and foreign governments within the City are not subject to this tax, as the City has no authority to impose a tax on these entities. Exemptions account for a minor amount of the total Utility User’s Tax base. All utility companies, including the City’s water and wastewater operations, collect and transmit the Utility User’s Tax monthly to the City’s Finance Department which then deposits the tax revenues into the General Fund. Sales Tax. A sales tax is imposed on retail sales or consumption of personal property. The tax rate is established by the State Legislature. Effective January 1, 2002, the statewide tax rate is 7.25%. An additional 1% is collected in the County for transportation purposes. The State collects and administers the tax, and makes distributions on taxes collected within the City as follows: 60 10861/0004/697498.3 State General Fund........................................................................7.25% Los Angeles County Transportation Commission..........................1.00% Total...................................................................................8.25% Sales Tax revenue collected by the State is directly deposited monthly to the City’s General Fund. While the City’s sales tax revenues for Fiscal Year 2000-01 exceeded budgeted revenues, sales tax revenues for Fiscal Year 2001-02 are expected to decrease below budget as the result of the recent recession and the events of September 11, 2001. Sales tax revenue is projected to gradually increase during Fiscal Year 2002-03 and to return to prior levels by Fiscal Year 2003-04. Transient Occupancy Tax. A transient occupancy tax (“TOT”) is imposed on persons staying 30 days or less in a hotel, motel, inn, hostelry, tourist home, rooming house or other lodging place within the City. The current tax rate is 12% and has been in effect since July 1989. The TOT has been in effect since November 1963. Exemptions are granted to federal, State and City officials or employees on official business. Exemptions account for a very minor amount of the total TOT base. Payments are made to the City on a monthly or quarterly basis and are then deposited to the City’s General Fund. TOT revenues of the City for the Fiscal Year ended June 30, 2001 were less than the Fiscal Year 2000-01 budgeted amount due to the recent recession. During Fiscal Year 2001-02, this revenue shortfall was further increased as the result of the events of September 11, 2001. TOT revenue is projected to increase during Fiscal Year 2002- 03 and to return to prior levels by Fiscal Year 2003-04. Vehicle License Fee Reduction The State’s vehicle license fee (“VLF”) is an annual fee on the ownership of a registered vehicle in California. Automobiles, motorcycles, pick-up trucks, commercial 61 10861/0004/697498.3 trucks and trailers, rental cars, and taxicabs are all subject to the VLF. The VLF revenues are distributed by the State to cities and counties. Approximately three- fourths of the VLF revenues (one-half to cities and one-half to counties) can be used for any lawful purpose, with the remaining funds allocated to counties to pay for “realignment” health and social services programs. Vehicle license fees, over and above the costs of collection and refunds authorized by law, are constitutionally defined local revenues. Chapter 322, Statutes of 1998 (“Chapter 322”), established a VLF offset program, scheduled to be implemented in successive stages if State General Fund revenues meet certain targets. Pursuant to Chapter 322, vehicle license fees were reduced (offset) by 25% beginning January 1, 1999. Later legislation increased the offset to 35% for 2000 and the first half of calendar year 2001. Beginning July 1, 2001, the offset was increased to 67.5 percent. These offset levels are expected to reduce VLF revenues by $1,763 billion in fiscal year 2000-01, $3554 billion in 2001-02, and $3,855 billion in 2002-03. The amount will be adjusted thereafter as vehicle sales activity changes. In response to revenue growth, the State Legislature provided an additional 32.5 percent VLF reduction for the period January 1, 2001, through June 30, 2001. This additional reduction is returned to taxpayers in the form of a rebate. The State Legislature appropriated $2.052 billion in 2000-01 to fund taxpayer rebates in 2000-01 and a portion of the 67.5 percent offset in 2001-02. For the Fiscal Year ended June 30, 2001, the City received $5,028,000 in total vehicle License fees, and $4,725,000 is projected for the Fiscal Year ended June 30, 2002. VLF fees represented approximately 2.7 % of the total General Fund budget and are 62 10861/0004/697498.3 the seventh largest source of General Fund revenues. Under Chapter 322, a continuous appropriation from the State’s General Fund backfills the VLF revenue that local governments, like the City, would otherwise lose due to the fee reductions. A statutory continuous appropriation, however, is not a firm guarantee of a continuing replacement. See “RISK FACTORS — State Budget” below for a discussion of recent developments regarding the State budget and proposed general fund expenditure reductions in response to lower State revenues during fiscal year 2001-02. Accordingly, no assurance can be given that the State’s General Fund will backfill the VLF revenue for fiscal year 2001-02 or thereafter. Long-Term Debt Such as in the case of the Bonds, the City may issue general obligation bonds for the acquisition and improvement of real property, subject to the approval of two-thirds of the voters voting on the bond proposition. A tax on all real property within the City to pay principal of and interest on general obligation bonds is levied by the City and collected by the County on the secured and unsecured property tax bills. The City Charter of the City limits general obligation bonded indebtedness to 10.0% of the total assessed valuation of property within the City, exclusive of any indebtedness that has been or may be incurred for the purpose of acquiring and establishing a system of waterworks for the supplying of water, or for the purpose of constructing sewers or drains in the City, for which purposes a further indebtedness may be incurred by the issuance of bonds, subject only to the provisions of the State Constitution and of the City Charter. On June 5, 1998, Fitch IBCA, Inc. rated the City’s outstanding general obligation 63 10861/0004/697498.3 bonds “AAA”. In issuing the rating, Fitch IBCA, Inc. referenced the City’s strong economy, characterized by a tourism base with stable underpinnings, growing entertainment, high technology, and multimedia employment, and very sound financial operations and debt management. On June 10, 1998, Moody’s Investors Service, Inc. assigned and affirmed an “Aaa” rating on the City’s outstanding general obligation bonds. In issuing the rating, Moody’s Investors Service, Inc. referenced the City’s healthy and diverse economy, modest debt levels, and strong financial operations. On April 5, 1999, Standard & Poor’s Ratings Services upgraded the City’s outstanding general obligation bonds from “AA” to “AAA”. In issuing the upgraded rating, Standard & Poor’s Ratings Services referenced the City’s diversified economy and enhanced financial policies and reserves. The City may enter into certain long-term lease obligations without first obtaining voter approval. The City has entered into various lease arrangements under which the City is obligated to make annual payments. Securities have been issued which certificate or are payable from these lease arrangements. As of May 31, 2002, there were $48,885,000 in non-voter approved bonded or certificated City lease obligations outstanding. For tables showing the City’s (i) direct and overlapping debt as of May 31, 2002, (ii) net debt as of May 31, 2002 and (iii) assessed value within the City, the applicable debt limit, the ratio of bonded debt to assessed value and the bonded debt per capita from Fiscal Year 1997-98 through 2001-02, see “SECURITY AND SOURCES OF PAYMENT – City Debt Obligations” 64 10861/0004/697498.3 Future Borrowing For Fiscal Year 2002-03, the City expects to issue lease revenue bonds in connection with the Santa Monica Redevelopment Agency’s Earthquake Recovery Redevelopment Project for a civic center parking garage. General Fund Financial Summary The information contained in the following tables of revenues, expenditures and changes in fund balances, and assets, liabilities and fund equity has been derived from the City’s audited financial statements for the five Fiscal Years 1996-97 through 2000- 01. A copy of the City’s audited financial statements for the fiscal year ended June 30, 2001 is attached as Appendix A hereto. Audited financial statements for prior years are available upon request from the Finance Department of the City. 65 10861/0004/697498.3 City of Santa Monica General Fund Balance Sheet For Fiscal Years 1996-97 through 2000-01 Assets 1997 1998 1999 2000 2001 Cash and investments $46,908,907 $ 69,865,778 $ 82,514,545 $ 23,459,326 $ 28,585,994 Receivables (net, where applicable, of allowance for uncollectibles): Accounts 2,979,296 2,499,340 3,893,684 2,836,434 3,351,944 Notes 1,992,934 1,989,974 1,987,114 2,132,402 1,955,296 Property taxes 840,358 785,319 173,248 1,022,558 361,521 Grants 42,111 45,594 102,049 48,278 84,825 Other Governments - - 25,351 25,351 25,351 Due from other funds 3,111,488 838,878 1,424,837 4,078,305 - Inventory 710,801 727,450 553,403 599,645 905,249 Deposits - - - - 16,750 Prepaids 294,075 88,712 608,277 583,291 105,843 Restricted assets 56,917,055 59,263,762 72,519,764 154,405,601 122,914,194 Advances to other funds 45,693,261 47,294,722 50,105,975 49,215,188 62,966,112 Land held for resale 18,41,255 17,270,791 17,270,791 - - TOTAL ASSETS $178,031,841 $200,670,320 $231,179,038 $238,406,379 $221,273,079 Liabilities and Fund Balance Liabilities: Accounts payable and accrued liabilities$ 8,180,312 $ 10,509,648 $10,484,625 $14,033,009 $ 14,466,586 Contracts payable (retained percentage) 342,289 285,275 304,957 737,243 1,091,133 Deferred revenue 34,580,462 37,338,624 44,114,919 44,145,815 14,794,011 Deposits - payable from restricted assets 435,186 447,867 465,737 465,056 488,666 Advances from other funds 14,194,320 14,194,320 14,194,320 - 10,242,188 66 10861/0004/697498.3 TOTAL LIABILITIES $57,732,869 $ 62,775,734 $69,564,558 $ 59,381,123 $ 41,062,584 Fund Balance: Total Reserved Fund Balance $ 68,721,782 $ 81,465,769 $94,655,083 $136,030,173 $144,233,412 Total Unreserved Fund Balance - Designated 36,677,190 41,857,328 50,959,397 26,295,083 19,577,083 Total Unreserved Fund Balance - Undesignated 14,900,000 14,571,489 16,000,000 16,700,000 16,400,000 TOTAL FUND BALANCE $120,298,972 $137,894,586 $161,614,480 $179,025,256 $180,210,495 TOTAL LIABILITIES AND FUND BALANCE $178,031,541 $200,670,320 $231,179,038 $238,406,379 $221,273,079 ________________________ Source: City of Santa Monica Comprehensive Annual Financial Report for Fiscal Years 1996-97 through 2000-01 67 10861/0004/697498.3 City of Santa Monica General Fund Summary of Revenues and Expenditures For Fiscal Years 1996-97 through 2000-01 Fiscal Year Ended June 30: 1997 1998 1999 2000 2001 Revenues and Transfers: Property taxes $ 13,892,252 $ 14,388.969 $ 14,774,952 $ 15,316,818 $ 16,791,606 Sales taxes 19,638,900 21,198,133 21,423,677 22,360,293 26,186,186 Other taxes 46,600,004 49,953,694 52,227,283 55,519,657 59,421,314 Licenses and permits 22,280,895 25,738,242 27,978,697 29,272,006 31,297,222 Intergovernmental 291,152 159,681 277,684 517,766 842,903 Charges for services 7,576,711 8,302,034 8,301,650 8,418,556 7,890,334 Fines and forfeits 7,670,742 8,228.026 8,739,641 9,000,597 8,539,835 Use of money and property 8,515,541 9,830,377 11,764,051 13,495,309 14,766,601 Other 4,620,508 4,264,496 6,350,500 12,918,754 8,296,585 Total revenues $131,086,705 $142,063,652 $151,838,135 $168,819,756 $174,032,586 Expenditures: General government $ 12,021,013 $ 14,229,498 $ 16,802,395 $ 18,270,834 $ 7,152,530 Public safety 43,232,544 43,576.007 45,605,413 49,564,555 59,003,870 General services 14,399,419 14,964,283 15,173,578 27,929,423 27,282,364 Cultural and recreation services 15,812,335 16,770,971 17,445,492 22,824,272 22,708,323 Library 4,823,677 5,663,797 5,228,164 5,940,473 5,948,042 Retirement – salaries 6,503,114 5,197,587 9,204,945 8,619,950 7,621,026 Housing and community development 8,040,195 9,725,752 11,121,761 10,370,751 8,787,453 Other 10,714,375 15,292,685 14,023,627 15,996,699 21,257,628 Debt service 886,932 - - - - Total expenditures $116,433,604 $125,420,580 $134,605,375 $159,516,957 $169,781,236 Excess of revenues over expenditures$ 14,653,101 $ 16,643,072 $ 17,232,760 $ 9,302,799 $ 4,251,350 68 10861/0004/697498.3 Other financing sources (uses): Proceeds from issuance of long-term debt $ - $ - $ - $ 11,771,800 $ - Issuance of capital lease - - 589,143 - 2,231,362 Operating transfers in 5,937,804 6,151,224 5,642,815 7,051,230 7,181,544 Operating transfers out (3,069,318) (2,595,307) (3,831.679) (4,992,393) (5,456,788) Total other financing sources $ 2,868,486 $ 3,555,917 $ 2,400,279 $ 13,830,637 $ 3,956,118 Excess of revenues and other sources over expenditures and other uses $ 17,521,587 $ 20,198,989 $ 19,633,039 $ 23,133,436 $ 8,207,468 Fund balance at beginning of year 104,648,731 120,298,972 137,894,586 161,614,480 179,025,256 Residual equity transfer in - - 7,386,798 - - Residual equity transfer out (1,871,346) (2,603,375) (3,299,943) (5,722,660) (7,022,229) Fund balance at end of year $120,298,972 $137,894,586 $161,614,480 $179,025,256 $180,210,495 ______________________________ Source: City of Santa Monica Comprehensive Annual Financial Report for Fiscal Years 1996-97 through 2000-01 69 10861/0004/697498.3 The following table sets forth the budgetary information for Fiscal Years 2001-02 and 2002-03. City of Santa Monica General Fund Revenues and Expenditures –Appropriations For Fiscal Years 2001-02 and 2002-03 Fiscal Year Ended June 30: 2002 2003 Revenues and Transfers: Property Taxes $ 17,487,534 18,603,213 Sales and Other Taxes 91,472,544 86,649,709 Licenses and Permits 34,062,822 32,426,110 Fines and Forfeitures 9,170,000 9,415,000 Use of Money & Property 11,028,260 11,285,367 Intergovernmental 354,000 443,433 Charges for Services 9,605,253 8,109,626 Other 1,007,740 1,053,800 Net Interfund Transfers 16,040,363 16,493,592 Subtotal $190,228,516 184,479,850 Expenditures: Operating Budget Expenditures: Public Safety $ 49,690,400 51,177,302 Retirement — Salaries 9,142,300 8,523,587 Cultural and Recreation Services 21,702,233 21,966,597 General Services 15,077,000 15,077,168 General Government 15,905,200 16,196,377 Housing & Community Development 10,005,600 10,318,300 Library 5,682,200 5,551,300 70 10861/0004/697498.3 Other 35,998,401 39,428,858 Subtotal 163,203,334 168,239,489 Excess of Revenues over Expenditures – Operating Budget $ 27,025,182 16,240,361 Capital Budget Expenditures: Public Safety $ 945,229 355,829 Cultural and Recreation Services 1,328,132 1,054,147 General Services 12,956,970 6,396,145 General Government 3,977,552 3,932,876 Housing & Community Development 22,800,000 250,000 Library 4,050,000 38,582,250 Subtotal $ 46,057,883 50,571,247 Excess (Deficiency) of Revenues over Expenditures (19,032,701) (34,330,886) Operating and Capital Budget Proceeds from Long-Term Debt (Civic Center Parking Structure Lease Revenue Bonds for FY 2001-02; Library Expansion G.O. Bonds for FY 2002-03) $ 22,800,000 25,000,000 Reduction in Prior Years CIP Applications 0 8,909,130 All Other Changes to Reservations and Designations, Net (3,177,199) 138,334 Amount Added to Unobligated/Unreserved Fund Balance $ 590,100 (283,422) _____________________________ Source: City of Santa Monica Finance Department 71 10861/0004/697498.3 See “Budgetary Process” below for a discussion of the potential impact of the recent slowdown in tourism in the City and the slowing economies of the State and the United States. Investment of City Funds The City may invest moneys not immediately required for operations in a manner consistent with the City’s Investment Policy (the “Investment Policy”). The Investment Policy. The Investment Policy, originally adopted in 1985 and last revised in February 2002, applies to all cash and financial investments of those City funds specified in the Investment Policy. The Investment Policy is reviewed annually by the City’s Investment Committee and submitted annually to the City Council. Amendments may only be made with the approval of a majority of the City’s Investment Committee, which is composed of the City’s Director of Finance, the Revenue Manager/City Treasurer (the “City Treasurer”) and a representative from the City Manager’s Office. The Investment Committee meets at least once each calendar quarter to review and evaluate previous investment activity and yield, to review the current status of all funds held by the City, to discuss anticipated cash requirements and investment activity for the next quarter, and to recommend investment strategy to the City Treasurer. The Investment Committee also meets at least annually with the City’s outside auditors to review accounting controls and to design audit procedures to identify non-compliance with the Investment Policy. The Investment Policy establishes three objectives for City investment: (1) Safety of principal: The overall value of City funds shall not be diminished in the process of securing and investing those funds or over the duration 72 10861/0004/697498.3 of the investments; (2) Liquidity of Funds: Funds shall be made available to meet all anticipated City obligations and a prudent reserve shall be kept to meet unanticipated cash requirements; and (3) Return on investment: Earn the optimum interest income from City funds commensurate with the objectives of safety and availability of the principal invested. Specific Investment Restrictions. The Investment Policy mandates “prudent” investment in those instruments specifically authorized by State law and establishes additional diversification guidelines with respect to instruments, maturity, and deposit institutions. It is the City Treasurer’s policy to hold investments to maturity and he does not anticipate any event in the future that would require selling investments prior to maturity. The Investment Policy restricts the average weighted maturity of all pooled City investments to a maximum of 547 days. The City’s practice is not to permit investment of the City’s non-pool securities either in derivatives or reverse repurchase agreements, nor does it permit leveraging of the City’s investment portfolio. Although the Investment Policy can only be amended with approval of the Investment Committee, there is no assurance that State law and/or the Investment Policy will not be amended in the future to allow for investments that are currently prohibited, or that the stated objectives of the City with respect to investments will not change. The Monthly Report. Section 711 of the City Charter delegates investment authority to the City Treasurer. The Investment Policy requires the City Treasurer to (i) keep a record of all investment transactions, (ii) submit a report at the end of the City’s Fiscal 73 10861/0004/697498.3 Year to the Director of Finance detailing the status of the City’s investments, and (iii) make monthly reports to the Investment Committee and the City Manager detailing and summarizing all transactions and stating the present status of City investments (the “Monthly Report”). The Monthly Report dated as of May 31, 2002 indicates that 65% of the City’s investment portfolio ($249,105,514.13) was invested in Federal Agency securities, 28% ($105,681,393.68) was invested in coupon-bearing United States Treasury securities, 7% ($27,951,528.06) was invested in the Local Agency Investment Fund (LAIF) and less than 1% ($250,005.53) was invested in money market funds. The book value of the City’s investment portfolio was 99.3% of its market value (excluding accrued interest). For the 2001-02 Fiscal Year, through May 31, 2002, the City Treasurer reports that the average annual yield of the City’s investment portfolio was 4.37% and the average weighted maturity was 336 days. CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Article XIIIA of the California Constitution Section 1(a) of Article XIIIA of the California Constitution limits the maximum ad valorem tax on real property to 1% of full cash value (as defined in Section 2 of Article XIIIA), to be collected by each county and apportioned among the county and other public agencies and funds according to law. Section 1(b) of Article XIIIA provides that the 1% limitation does not apply to ad valorem taxes to pay interest or redemption charges on (a) indebtedness approved by the voters prior to July 1, 1978, (b) any 74 10861/0004/697498.3 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, or (c) bonded indebtedness incurred by a school district or a community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Section 2 of Article XIIIA defines “full cash value” to mean “the County Assessor’s valuation of real property as shown on the 1975/76 tax bill under full cash value or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.” The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year or to reflect a reduction in the consumer price index or comparable data for the area under the taxing jurisdiction, or reduced in the event of declining property values caused by substantial damage, destruction, or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that notwithstanding any other law, local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. 75 10861/0004/697498.3 In addition, legislation enacted by the California Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. Prior to Fiscal Year 1981-82, assessed valuations were reported at 25% of the full value of the property. 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. On June 3, 1986, California voters approved an amendment to Article XIIIA, which added an additional exemption to the 1% tax limitation imposed by Article XIIIA. Under this amendment to Article XIIIA, local governments and school districts may increase the property tax rate above 1% for the period necessary to retire new general obligation bonds, if two-thirds of those voting in a local election approve the issuance of such bonds and the money raised through the sale of the bonds is used exclusively to purchase or improve real property. In the June 1990 election, the voters of the State approved amendments to Article XIIIA permitting the State Legislature to extend the replacement dwelling provisions applicable to persons over 55 to severely disabled homeowners for a replacement dwelling purchased or newly constructed on or after June 5, 1990, and to exclude from the definition of “new construction” triggering reassessment improvements to certain dwellings for the purpose of making the dwelling more accessible to severely disabled persons. In the November 1990 election, the voters of the State approved an amendment of Article XIIIA to permit the State Legislature to exclude from the definition 76 10861/0004/697498.3 of “new construction” seismic retrofitting improvements or improvements utilizing earthquake hazard mitigation technologies constructed or installed in existing buildings after November 6, 1990. Since 1990, the voters have approved several other minor exemptions from the reassessment provisions of Article XIIIA. Future assessed valuation growth allowed under Article XIIIA (new construction, change of ownership, 2% annual value growth) 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 school districts will share the growth of “base” revenue from the tax rate area. Each year’s growth allocation becomes part of each agency’s allocation the following year. Article XIIIA effectively prohibits the levying of any other ad valorem property tax above the 1% limit except for taxes to support indebtedness approved by the voters as described above. In a Minute Order issued on November 2, 2001 in County of Orange v. Orange County Assessment Appeals Board No. 3, case no. 00CC03385, the Orange County Superior Court held that where a home’s taxable value did not increase for two years, due to a flat real estate market, the Orange County assessor violated the 2% inflation adjustment provision of Article XIIIA, when the assessor tried to “recapture” the tax value of the property by increasing its assessed value by 4% in a single year. The assessors in most California counties, including Los Angeles County, use a similar methodology in raising the taxable values of property beyond 2% in a single year. The State Board of Equalization has approved this methodology for increasing assessed values. The City is unable to predict at this time the outcome of this litigation and what effect, if 77 10861/0004/697498.3 any, it might have on assessed values in the City or the availability of revenue sources which may be provided by the State to replace lost property tax revenues. Article XIIIB of the California Constitution On November 6, 1979, California voters approved Proposition 4, the so-called 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 of 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 cost of 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 (i) if financial responsibility for providing services is transferred to the governmental entity, or (ii) 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 of an entity of local government 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, and 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 78 10861/0004/697498.3 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 capital 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 (i) regulatory licenses, user charges, and user fees to the extent such proceeds exceed the cost of providing the service or regulation, (ii) the investment of tax revenues and (iii) certain State subventions received by local governments. Article XIIIB includes a requirement that if an entity’s revenues in any year exceed the amount permitted to be spent, the excess must be returned by revising tax rates or fee schedules over the subsequent two fiscal years. In June 1990, the voters of the State approved Proposition 111, which amended the method of calculating State and local appropriations limits. 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,” with respect to an entity of local government other than a school district or a community college district is, at the City’s option, either (A) the change in the California per capita personal income (“CPCPI”) from the preceding year, or (B) the change in the local assessment roll from the preceding year for the jurisdiction due to the addition of local 79 10861/0004/697498.3 nonresidential new construction, as selected annually by such entity of local government by a recorded vote of such entity’s governing body. Previously the lower of the CPCPI or the United States Consumer Price Index was used. The “change in population” for a local agency for a calendar year for each city and county, means the change in population between January 1 of the next calendar year and January 1 of the calendar year in question, as estimated by the State Department of Finance pursuant to Section 2227 of the California Revenue and Taxation Code, for either (A) within its own jurisdiction, or (B) for a city only, within the county in which the city is located. Previously, a city only could use the change of population within its own jurisdiction. Each city shall select its change in population pursuant to this paragraph annually by a recorded vote of the governing body of the city. A charter city and county may choose to use the change in population provided in Section 7901(b) of the California Government Code or may choose to use the change in population provided in Section 2 of Chapter 1221 of the Statutes of 1980. 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. Proposition 111 also recomputed the appropriations limit for the fiscal year by adjusting the fiscal year 1986-87 limit by the CPCPI for the three subsequent years. Proposition 111 also excluded appropriation for “all qualified capital outlay Expansion Projects, as defined by the Legislature” from the definition of “appropriations subject to limitation.” 80 10861/0004/697498.3 Article XIIIB allows voters to approve a temporary waiver of a government’s Article XIIIB limit. Such a waiver is often referred to as a “Gann limit waiver.” The length of any such waiver is limited to four years. The Gann limit waiver does not provide any additional revenues to the City or allow the City to finance additional services. When preparing the Fiscal Year 2002-03 Budget, the City calculated its appropriations limit at $363,163,733, with appropriations subject to the limit estimated at $105,741,681. The City’s appropriations have never exceeded the limitation on appropriations under Article XIIIB of the California Constitution. The impact of the appropriations limit on the City’s financial needs in the future is unknown. Articles XIIIC and XIIID of the California Constitution On November 5, 1996, the voters of the State approved Proposition 218, known as the “Right to Vote on Taxes Act.” Proposition 218 added Articles XIIIC and XIIID to the California Constitution, which contain a number of provisions affecting the ability of the City to levy and collect both existing and future taxes, assessments, fees and charges. The interpretation and application of certain provisions of Proposition 218 will ultimately be determined by the courts with respect to some of the matters discussed below. It is not possible at this time to predict with certainty the future impact of such interpretations. The provisions of Proposition 218, as so interpreted and applied, may affect the City’s ability to meet certain obligations. Proposition 218 (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 which 81 10861/0004/697498.3 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 which must be held within two years of November 5, 1996. The City has not so imposed, extended or increased any such taxes which are currently in effect. Article XIIIC also expressly extends the initiative power to give voters the power to reduce or repeal local taxes, assessments, fees and charges, regardless of the date such taxes, assessments, fees and charges were imposed. Article XIIIC expands the initiative power to include reducing or repealing assessments, fees, and charges, which had previously been considered administrative rather than legislative matters and therefore beyond the initiative power. This extension of the initiative power is not limited by the terms of Article XIIIC to fees imposed after November 6, 1996 and absent other legal authority could result in the retroactive reduction in any existing taxes, assessments, or fees and charges. No assurance can be given that the voters of the City will not, in the future, approve initiatives which reduce or repeal, or prohibit the future imposition or increase of, local taxes, assessments, fees or charges. The voter approval requirements of Proposition 218 reduce the flexibility of the City to raise revenues for the General Fund, 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 needs. Proposition 218 (Article XIIID) also added several new provisions relating to how local agencies may levy and maintain “assessments” for municipal services and programs. These provisions include, among other things, (i) a prohibition against assessments which exceed the reasonable cost of the proportional special benefit conferred on a 82 10861/0004/697498.3 parcel, (ii) a requirement that the assessment must confer a “special benefit,” as defined in Article XIIID, over and above any general benefits conferred, and (iii) a majority protest procedure which involves the mailing of notice and a ballot to the record owner of each affected parcel, a public hearing and the tabulation of ballots weighted according to the proportional financial obligation of the affected party. “Assessment” in Article XIIID is defined to mean any levy or charge upon real property for a special benefit conferred upon the real property. While this definition applies to landscape and maintenance assessments for open space areas, street medians, street lights and parks, the City currently has no landscape and maintenance assessments for open space areas, Street medians, street lights and parks. In addition, Proposition 218 (Article XIIID) added several provisions affecting “fees” and “charges,” defined for purposes of Article XIIID to mean “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.” All new and existing property related fees and charges must conform to requirements prohibiting, among other things, fees and charges which (i) generate revenues exceeding the funds required to provide the property related service, (ii) are used for any purpose other than those for which the fees and charges are imposed, (iii) are for a service not actually used by, or immediately available to, the owner of the property in question, or (iv) are used for general governmental services, including police, fire or library services, where the service is available to the public at large in substantially the same manner as it is to property owners. Depending on the interpretation of what constitutes a “property 83 10861/0004/697498.3 related fee” under Article XIIID, there could be future restrictions on the ability of the City’s General Fund to charge its enterprise funds for various services provided. Further, before any property related fee or charge may be imposed or increased, written notice must be given to the record owner of each parcel of land affected by such fee or charge. The City must then hold a hearing upon the proposed imposition or increase, and if written protests against the proposal are presented by a majority of the owners of the identified parcels, the City may not impose or increase the fee or charge. Moreover, except for fees or charges for wastewater, water and refuse collection services, or fees for electrical and gas service, which are not treated as “property related” for purposes of Article XIIID, no property related fee or charge may be imposed or increased without majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds voter approval by the electorate residing in the affected area. Proposition 218 (Article XIIIC) also removes many of the limitations on the initiative power in matters of reducing or repealing any local tax, assessment, fee or charge. No assurance can be given that the voters of the City will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges currently comprising a substantial part of the City’s General Fund. “Assessments,” “fees” and “charges” are not defined in Article XIIIC, and it is unclear whether these terms are intended to have the same meanings for purposes of Article XIIIC as for Article XIIID described above. If not, the scope of the initiative power under Article XIIIC potentially could include any General Fund local tax, assessment, or fee not received from or imposed by the federal or State government or derived from 84 10861/0004/697498.3 investment income. The City does not levy any property related “fees” or “charges” which it considers subject to challenge under Proposition 218 (Article XIIIC). Statutory Spending Limitations A statutory initiative (“Proposition 62”) was adopted by the voters of the State at the November 4, 1986 General Election which (a) requires that any tax for general governmental purposes imposed by local governmental entities be approved by resolution or ordinance adopted by two-thirds vote of the governmental agency’s legislative body and by a majority of the electorate of the governmental entity, (b) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity be approved by a two- thirds vote of the voters within the jurisdiction, (c) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax is imposed, (d) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA, (e) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities and (I) requires that any tax imposed by a local governmental entity on or after August 1, 1985 be ratified by a majority vote of the electorate within two years of the adoption of the initiative or be terminated by November 15, 1988. The requirements imposed by Proposition 62 were upheld by the California Supreme Court in Santa Clara County Local Transportation Authority v. Guardino, 11 Cal. 4th 220; 45 Cal. Rptr. 2d 207 (1995). Proposition 62 applies to the imposition of any taxes or the effecting of any tax 85 10861/0004/697498.3 increases after its enactment in 1986, but the requirements of Proposition 62 are subsumed by the requirements of Proposition 218 for the imposition of any taxes or the effecting of any tax increases after November 5, 1996. See “Articles XIIIC and XIIID of the California Constitution” above. The City has effected certain tax increases after the enactment of Proposition 62 in 1986 hut prior to the effective date of Proposition 218 on November 5, 1996, and pursuant to such increases has collected approximately $258 million through June 30, 2001. The City has not imposed any taxes or effected any tax increases since November 5, 1996. The City believes that, notwithstanding the Guardino decision, the provisions of Proposition 62 do not apply to charter cities. The extent of the application of the decision to taxes which were authorized prior to the date of the decision is also undecided. In the opinion of the City Attorney, the provisions of Proposition 62 do not apply to charter cities, although this position is being challenged by various groups, and may be the subject of future litigation. If ultimately found valid and applicable to charter cities, however, Proposition 62 could affect the ability of the City to continue the imposition of certain taxes, such as utility user’s taxes, sales taxes and transient occupancy taxes, and may further restrict the City’s ability to raise revenue. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC and Article XIIID and Proposition 62 were each adopted as measures that qualified for the ballot pursuant to California’s constitutional initiative process. From time to time other initiative measures could be adopted, 86 10861/0004/697498.3 affecting the ability of the City to increase revenues and to increase appropriations. RISK FACTORS The following factors, along with other information in this Official Statement, should be considered by potential investors in evaluating purchase of the Bonds. However, they do not purport to be an exhaustive listing of risks and other considerations which may be relevant to an investment in the Bonds. In addition, the order in which the following factors are presented is not intended to reflect the relative importance of any such risks. Seismic Activity and Natural Disasters The City, like all southern California communities, may be subject to unpredictable seismic activity, fires or floods. The City, like most regions that border the Pacific Ocean, is an area of significant seismic activity and, therefore, is subject to potentially destructive earthquakes. Several active or potentially active faults, including the San Andreas fault, the Santa Monica fault, the Malibu Coast fault and the Newport- Inglewood fault, run through or are located near the City. According to the City of Santa Monica Final Master Environmental Assessment (dated April 1996), the City is subject to sometimes violent shaking from periodic earthquakes. On January 17, 1994, a 6.8 magnitude earthquake occurred in Northridge, California which resulted in 450 injuries and 3 fatalities in the City. The City sustained damage to 530 buildings, including 2300 housing units and the temporary shutdown of St. John’s Hospital. A total of 53 of the 530 damaged buildings were demolished. Similarly, the City is susceptible to tsunami and seiche hazards. A tsunami is a sea 87 10861/0004/697498.3 wave generated by a submarine earthquake, landslide or volcanic eruption. A seiche is another form of earthquake- or landslide- induced wave or oscillation that can be generated in an enclosed body of water such as a lagoon or harbor. Tsunamis and seiches have both caused damage in the Santa Monica area. In the event of a severe earthquake, fire, flood or other natural disaster, there may be significant damage to both property and infrastructure in the City, which could impact the operations and finances of the City, the assessed value of taxable property in the City and/or the ability and the willingness of the City’s taxpayers to pay their taxes when due. Accordingly, the occurrence of such a natural disaster could have an adverse effect on the City’s ability to make timely payments of principal and interest with respect to the Bonds. See “SECURITY AND SOURCES OF PAYMENT” herein. Threats of Terrorism Military conflicts and terrorist activities have adversely impacted the finances of the City. On September 11, 2001, terrorist attacks occurred in New York City and Washington, D.C. (the “Attacks”) and resulted in significant damage and casualties. As a result, the City experienced a decrease with respect to certain tourism-related revenues because of changes in economic circumstances indirectly related to these events. See “Other Financial Matters” below and “CITY OF SANTA MONICA FINANCES — Tax Receipts” herein. Other Financial Matters Due to recent economic changes in the State and the United States and the consequences of the Attacks and responses thereto, the general revenues of the City have declined, particularly those based on tourism. The reduction in revenues included 88 10861/0004/697498.3 a decline in TOT and sales tax revenues, and may include the loss of vehicle license fee revenue as the State takes action to mitigate its own projected general fund revenue shortfall. Such financial matters, however, are not expected to have a lasting detrimental impact on the City’s general fund, or reduce the City’s ability to make timely payments of principal and interest with respect to the Bonds because the adopted Fiscal Year 2002-03 City budget has reduced on-going expenditures to re-establish a balance with projected revenues. However, the City cannot guarantee that circumstances will not change. See “CITY OF SANTA MONICA FINANCES — Tax Receipts — Transient Occupancy Tax” and “— Sales Tax” herein for information on TOT and sales tax revenues of the City; see “CITY OF SANTA MONICA FINANCES — Vehicle License Fee Reduction” herein for information on the possible loss of vehicle license fee revenue by the City; see “CITY OF SANTA MONICA FINANCES — Long Term Debt” herein for information on the possible incurrence by the City of additional financial obligations payable from the general fund on a parity with the Bonds. State Budget As a result of the slowing State and United States economies, the State’s General Fund Budget is experiencing serious budgetary shortfalls for the current fiscal year. Power purchases by the State from General Fund appropriations have significantly reduced the State’s cash reserves. In addition, the Attacks have resulted in increased uncertainty regarding the economic and revenue outlook for the State. On May 14, 2002, Governor Davis released his revised budget for Fiscal Year 2002-03. This revised budget contains significant changes from the Governor’s January 2002 proposed budget to reflect, in large part, a deterioration in the State’s revenue between 89 10861/0004/697498.3 January and May 2002. The Governor’s revised budget estimates that the State’s deficit for Fiscal Year 2002-03 will be $23.6 billion, approximately $11.1 billion higher than the figure estimated in the January 2002 proposed budget. The Governor’s revised budget proposes various measures to close the funding shortfall, including spending reductions, loans and transfer from special funds, securitization of future tobacco settlement receipts, and tax increases and accelerations. The revised budget did not make material changes to the amount of revenues the City would receive from the State. The State Legislature has not yet approved the Governor’s revised budget and further revisions to the Governor’s budget may take place. The City cannot predict what actions will be taken in the future by the State Legislature and the Governor to deal with changing State revenues and expenditures, including State efforts relating to California energy markets, and the repercussions they may have on the current State budget and future State budgets. See “Developments Regarding Energy” below. These developments at the State level may, in turn, affect local governments, including the City. The State’s revenue transfers to local governments, including VLF revenue backfill to the City, could be reduced or the State could decide to shift certain of its financial obligations to local governments to compensate for large expenditures for power. See “CITY OF SANTA MONICA FINANCES — Vehicle License Fee Reduction” herein. Developments Regarding Energy The following information concerning developments regarding energy has been obtained from publicly available sources which are believed by the City to be reliable but it is not guaranteed as to accuracy or completeness; the City has not independently 90 10861/0004/697498.3 verified such information. In mid-2000, wholesale electricity prices in the State began to rise, swiftly and dramatically. Retail electricity rates permitted to be charged by the State’s investor- owned utilities at the time were frozen by State law. The resulting shortfall between revenues and costs adversely affected the creditworthiness of the investor-owned utilities and their ability to purchase electricity. Residents of the City currently are within SCE’s service area. The City, however, purchases for its own use, a large portion of renewable energy from Commonwealth Energy Corporation. Commonwealth provides this energy in conjunction with SCE services. The assessed value of taxable property in the City may also be affected by the energy situation and by actions taken in response to the situation. If the State or a local municipality buys or otherwise acquires property owned by a private, taxpaying utility, such property will be removed from the tax rolls. If locally taxed property were acquired by a utility and taxed as unitary property, the City could gain or lose assessed value, depending on how assessed value is redistributed among taxing agencies in the County. Utilities could be delinquent in making property tax payments to the County, reducing the tax revenue available for distribution to the City or other public agencies in the County. In the short term, State expenditures for purchases of energy and or energy production and transmission facilities will reduce State funds available for other programs, including transfers to local governments. See “State Budget” above. Higher energy costs for businesses and households could also reduce income and 91 10861/0004/697498.3 therefore tax payments to the State and the City. Over the longer term, increased energy costs on individuals and businesses statewide, and the effect of such increased costs on the prices of other goods, services, transportation and housing, may reduce the attractiveness of the State for future investment and even induce business and individuals to relocate elsewhere. There can be no assurance that there will not be future disruptions in energy supplies or related developments that could affect the City. Loss of Tax Exemption As discussed under the heading “TAX MATTERS,” the interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date of delivery of the Bonds, as a result of acts or omissions of the City in violation of its covenants in the Indenture. Should such an event of taxability occur, the Bonds would not be subject to a special redemption and would remain Outstanding until maturity or until redeemed under the redemption provisions contained in the Indenture. TAX MATTERS In the opinion of Richards, Watson & Gershon, A Professional Corporation, Los Angeles, California, Bond Counsel, based upon an analysis of existing laws, regulations, rulings, and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”), and is 92 10861/0004/697498.3 exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix B hereto. To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight- line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the 93 10861/0004/697498.3 treatment of purchasers who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount greater than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, a purchaser’s basis in a Premium Bond, and under Treasury Regulations the amount of tax exempt interest received, will be reduced by the amount of amortizable bond premium properly allocable to such purchaser. Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various requirements that must be met in order for interest on the Bonds to be excluded from gross income for federal income tax purposes. The City made representations related to certain of these requirements and has covenanted to comply with certain of these requirements. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring) after the date of issuance of the Bonds 94 10861/0004/697498.3 may adversely affect the value of, or the tax status of interest on, the Bonds. Certain requirements and procedures contained or referred to in the Resolution, the Fiscal Agent Agreement, the Tax Certificate, and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to any Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of bond counsel other than Richards, Watson & Gershon, A Professional Corporation. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect an Owner’s federal or state tax liability. The nature and extent of these other tax consequences will depend upon the particular tax status of the Owner or such Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. In addition, no assurance can be given that any future legislation, including amendments to the Code, if enacted into law, or changes in interpretation of the Code, will not cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent owners of the Bonds from realizing the full current benefit of the tax status of such interest. Prospective purchasers of the Bonds should consult their own tax advisers regarding my pending or proposed federal tax legislation. Further, no assurance can be given that the introduction or enactment of 95 10861/0004/697498.3 any such future legislation, or any action of the Internal Revenue Service (“IRS”), including but not limited to regulation, ruling, or selection of the Bonds for audit examination, or the course or result of any IRS examination of the Bonds, or obligations which present similar tax issues, will not affect the market price for the Bonds. FINANCIAL STATEMENTS The City’s financial statements for the fiscal year ended June 30, 2001, included in Appendix A hereto, have been audited by KMPG LLP, independent auditors, as stated in their report appearing in Appendix A hereto. KMPG LLP has not consented to the inclusion of its report as Appendix A and has not undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by KMPG LLP with respect to any event subsequent to its report dated November 21, 2001. In some instances, the City’s unaudited (estimated/actual) financial information for the year ending June 30, 2002 is presented within this Official Statement in advance of the release of the City’s audited financial statements for such year. The City expects its audited financial statements for the year ending June 30, 2002 to be available in December 2002. ABSENCE OF LITIGATION There is no action, suit or proceeding known to be pending or threatened either restraining or enjoining the execution of delivery of the Bonds, or in any way contesting or affecting the validity of the foregoing or any proceedings of the City taken with 96 10861/0004/697498.3 respect to any of the foregoing. RATINGS Fitch Ratings, Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., have given the Bonds the ratings set forth on the cover of this Official Statement. Certain information was supplied by the City for consideration in evaluating the Bonds. Such ratings reflect only the views of such rating agencies, and an explanation of the significance of the ratings may be obtained by contacting them at: Fitch Ratings, One State Street Plaza, New York, NY 10004, Moody’s Investors Service, 99 Church Street, New York, NY 10007, and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., 55 Water Street, New York, New York 10041. Such ratings are not a recommendation to buy, sell or hold the Bonds. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agencies if, in their judgment, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price the Bonds. CERTAIN LEGAL MATTERS The validity of the Bonds and certain other legal matters are subject to the approving opinion of Richards, Watson & Gershon, A Professional Corporation, Los Angeles, California, Bond Counsel. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix B hereto. Richards, Watson & Gershon, A 97 10861/0004/697498.3 Professional Corporation, will receive compensation from the City for its services rendered in connection with the Bonds contingent upon the sale and delivery of the Bonds. Certain legal matters will be passed on for the City by the City Attorney of the City and Richards, Watson & Gershon, A Professional Corporation, as Disclosure Counsel. UNDERWRITING ______________ (the “Underwriter”) has purchased the Bonds from the City at competitive sale at an aggregate purchase price of $____________ (representing the principal amount of the Bonds, [plus net original issue premium,] plus accrued interest). The public offering prices may be changed from time to time by the Underwriter. The Underwriter may offer and sell Bonds to certain dealers and others at prices lower than the offering prices indicated on the inside cover hereof. FINANCIAL ADVISOR Public Resources Advisory Group, Los Angeles, California, served as financial advisor to the City with respect to the sale of the Bonds. Public Resources Advisory Group will receive compensation contingent upon the sale and delivery of Bonds. CONTINUING DISCLOSURE The City has covenanted for the benefit of the Owners of the Bonds to provide annually certain financial information and operating data relating to the Bonds and the City (the “City Annual Report”), and to provide notices of the occurrence of certain enumerated 98 10861/0004/697498.3 events, if material. For a complete listing of items of information which will be provided in each Annual Report, see APPENDIX C – “FORM OF CONTINUING DISCLOSURE AGREEMENT.” Such information is to be provided by the City not later than eight (8) months after the end of the City’s fiscal year (which currently would be March 1), commencing with the report for the 2001-2002 Fiscal Year. The Annual Report will be filed by the City with each Nationally Recognized Municipal Securities Information Repository and with each State Repository, if any. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-l2(b)(5). The City has never failed to comply in all material respects with any previous undertakings with regard to said Rule to provide annual reports or notices of material events. The City’s obligations under the Continuing Disclosure Agreement shall terminate upon legal defeasance, prior redemption or payment in full of all of the Bonds. The provisions of the Disclosure Agreement are intended to be for the benefit of the owners of the Bonds and Beneficial Owners of the Bonds and in order to assist the participating Underwriters in Complying with S.E.C. Rule 15c2-l2(b)(5) and shall be enforceable by the owners of Bonds, provided that any enforcement action by any such person shall be limited to a right to obtain specific enforcement of the City’s obligations under the Continuing Disclosure Agreement and by failure by the City to comply with the provisions thereof shall not be an event of default under the Resolution. [Remainder of page intentionally left blank] 99 10861/0004/697498.3 100 10861/0004/697498.3 ADDITIONAL INFORMATION 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. Copies of the Resolution, the Fiscal Agent Agreement and other documents are available, upon request, and upon payment to the City of a charge for copying, mailing and handling, from the City Clerk at the City of Santa Monica, 1685 Main Street, Santa Monica, California 90401. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the City and the purchasers or owners of any of the Bonds. The execution and delivery of this Official Statement have been duly authorized by the City. CITY OF SANTA MONICA By ___________________________ Charles M. Dennis Director of Finance 101 10861/0004/697498.3 APPENDIX A CITY AUDITED FINANCIAL STATEMENTS A-1 10861/0004/697498.3 APPENDIX B FORM OF OPINION OF BOND COUNSEL [Date of Delivery] City of Santa Monica 1685 Main Street Santa Monica, California OPINION OF BOND COUNSEL with reference to City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) Ladies and Gentlemen: We have examined the law and original documents or copies certified or otherwise identified to our satisfaction of proceedings taken in connection with the issuance of the above-referenced bonds (the “Bonds”) of the City of Santa Monica (the “City”). We have also examined supplemental documents furnished to us and have obtained such certificates and documents from public officials and others as we have deemed necessary for the purposes of this opinion. As to questions of fact material to our opinion we have relied upon such certificates and documents without undertaking to verify the same by independent investigation. The Bonds are issued under and pursuant to Article 1 Chapter 4 of Division 4 of Title 4 of the California Government Code, a Resolution adopted by the City Council of the City on July 23, 2002, and a Fiscal Agent Agreement, dated as of August 1, 2002, by and between the City and BNY Western Trust Company, as Fiscal Agent (the “Fiscal Agent Agreement”). From such examination, we are of the opinion that under existing law: 1. The Bonds have been duly and validly authorized, executed and delivered in accordance with the Constitution and laws of the State of California, and the Bonds are the legal, valid and binding obligations of the City enforceable in accordance with their terms and the terms of the Fiscal Agent Agreement and are entitled to the benefits of the Fiscal Agent Agreement. The Bonds are general obligations of the City and are payable, as to both principal and interest, from ad valorem taxes which may be levied without limitation as to rate or amount upon all taxable real property in the City and which, under the laws now in force, may be levied without limitation as to rate or amount upon all taxable personal property, except certain classes thereof, in the City. B-1 10861/0004/697498.3 2. Interest on the Bonds is exempt from State of California personal income taxes. 3. Assuming compliance with the covenants described below, interest on the Bonds is excluded from gross income for Federal income tax purposes. The Bonds are not “specified private activity bonds” within the meaning of Section 57(a)(5) of the Internal Revenue Code of 1986, as amended (the “Code”) and, therefore, the interest on the Bonds will not be treated as a preference item for purposes of computing the alternative minimum tax imposed by Section 55 of the Code. However, we note a portion of the interest on Bonds owned by corporations may be subject to the Federal alternative minimum tax, which is based in part on adjusted current earnings. The Code sets forth certain requirements which must be met subsequent to the issuance of the Bonds for interest thereon to be and remain excluded from gross income for Federal income tax purposes. Noncompliance with such requirements could cause the interest on the Bonds to be included in gross income retroactive to the date of issue of the Bonds. The City has covenanted to satisfy each provision of the Code necessary to maintain the exclusion of the interest on the Bonds from gross income for Federal income tax purposes pursuant to Section 103(a) of the Code. Certain requirements and procedures contained or referred to in the Fiscal Agent Agreement may be changed and certain actions may be taken or omitted under the circumstances and subject to the terms and conditions set forth therein, upon the advice or with the approving opinion of nationally recognized bond counsel, and no opinion is expressed herein as to any Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of any counsel other than ourselves. Except as stated in the four immediately preceding paragraphs, we express no opinion as to any Federal or state tax consequences of the ownership or disposition of the Bonds. The opinions expressed herein are based on an analysis of existing law and cover certain matters not directly addressed thereby. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof, and we have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. We have assumed the genuineness of all documents and signatures presented to us. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in such documents. Furthermore, we have assumed compliance with all agreements and covenants contained in the Fiscal Agent Agreement and all agreements and covenants compliance with which is necessary to assure that interest on the Bonds will not be included in gross income for Federal income tax purposes. In addition, we call attention to the fact that the rights of the registered owners of the Bonds and the enforceability of such rights may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted and enforcement may also be subject to the exercise of judicial discretion in appropriate cases. Respectfully Submitted, B-2 10861/0004/697498.3 APPENDIX C FORM OF CONTINUING DISCLOSURE AGREEMENT C-1 10861/0004/697498.3 CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT (this “Disclosure Agreement”) dated as of August 1, 2002, is by and between the CITY OF SANTA MONICA, a charter city duly organized and existing under and by virtue of the Constitution and laws of the State of California and its Charter (the “City”), and BNY WESTERN TRUST COMPANY, a state banking corporation organized and existing under and by virtue of the laws of the State of California, in its capacity as Fiscal Agent (the “Fiscal Agent”); W I T N E S S E T H : WHEREAS , pursuant to a resolution adopted by the City Council on July 23, 2002 (the “Resolution”) and in accordance with the Fiscal Agent Agreement, dated as of August 1, 2002, by and between the City and the Fiscal Agent (the “Fiscal Agent Agreement”), the City has issued its City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (the “Series 2002 Bonds”), in the aggregate principal amount of $__________ and WHEREAS , this Disclosure Agreement is being executed and delivered by the City and the Fiscal Agent for the benefit of the Owners and beneficial owners of the Series 2002 Bonds and in order to assist the underwriter of the Series 2002 Bonds in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). NOW, THEREFORE , for and in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Fiscal Agent Agreement. In addition, the following capitalized terms shall have the following meanings: C-2 10861/0004/697498.3 “Annual Report” means any Annual Report provided by the City pursuant to, and as described in, Sections 2 and 3 hereof. “Disclosure Representative” means the Director of Finance of the City or his or her designee, or such other person as the City shall designate in writing to the Fiscal Agent from time to time. “Dissemination Agent” means, initially the City, or any successor Dissemination Agent designated in writing by the City and which has filed with the Fiscal Agent a written acceptance of such designation. “Federal Securities Laws” means all Federal Securities Laws, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, all rules and regulations promulgated thereunder and all administrative and case law interpretations thereof. “Listed Events” means any of the events listed in Section 4(a) hereof. “National Repository” means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. “Official Statement” means the Official Statement, dated _____________, 2002, relating to the Series 2002 Bonds. “Participating Underwriter” means any of the Original Purchasers of the Series 2002 Bonds required to comply with the Rule in connection with offering of the Series 2002 Bonds. “Repository” means each National Repository and each State Repository. “Rule” means Rule 15c-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to C-3 10861/0004/697498.3 time. “State Repository” means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Agreement, there is no State Repository. Section 2. Provision of Annual Reports. (a) The City shall, or shall cause the Dissemination Agent, if any, to provide to each Repository an Annual Report which is consistent with the requirements of Section 3 hereof, not later than eight months after the end of the City’s fiscal year (which currently would be March 1) (the “Annual Report Date”), commencing with the report for the 2001-2002 fiscal year. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 hereof; provided, however, 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 not available by that date. 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 4(f) hereof. (b) Not later than 15 business days prior to the date specified in subsection (a) for providing the Annual Report to Repositories, the City shall provide the Annual Report to the Dissemination Agent, if any, and the Fiscal Agent (if the Fiscal Agent is not the Dissemination Agent). Section 3. Content of Annual Reports. The City’s Annual Report shall contain or incorporate by reference the following: C-4 10861/0004/697498.3 (a) Audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the City’s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 2(a) hereof, the Annual Report shall contain unaudited financial statements in a format similar to that used for the City’s audited financial statements, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) The following information, to the extent not included in the audited financial statement of the City, providing financial and operating data substantially similar to that provided in the corresponding tables and charts in the Official Statement: (A) the adopted budget of the City for the then current fiscal year, (B) a statement of outstanding debt of the City, (C) information regarding total assessed valuation of taxable properties within the City, if and to the extent provided to the City by the County, (D) information regarding secured tax charges and delinquencies on taxable properties within the City, if and to the extent provided to the City by the County, (E) a summary of the City’s current fiscal year investments, including types and amounts of investments, returns on investments, average yield of investments and market value of investments. (c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, 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 C-5 10861/0004/697498.3 misleading. 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 have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The City shall clearly identify each such other document so included by reference. Section 4. Reporting of Significant Events. (a) Pursuant to the provisions of this Section, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series 2002 Bonds, if material: (i) Principal and interested payment delinquencies. (ii) Nonpayment related defaults. (iii) Unscheduled draws on debt service reserves reflecting financial difficulties. (iv) Unscheduled draws on credit enhancements reflecting financial difficulties. (v) Substitution of credit or liquidity providers, or their failure to perform. (vi) Adverse tax opinions or events affecting the tax-exempt status of the security. (vii) Modifications to rights of security holders. (viii) Contingent or unscheduled bond calls. (ix) Defeasances. (x) Release, substitution, or sale of property securing repayment of the C-6 10861/0004/697498.3 securities. (xi) Rating changes. (b) The Fiscal Agent shall, promptly after obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the City promptly notify the Dissemination Agent, if any, in writing whether or not to report the event pursuant to subsection (f). (c) Whenever the City obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Fiscal Agent pursuant to subsection (b) or otherwise, the City shall as soon as possible determine if such event would be material under applicable Federal Securities Law. (d) If the City determines that knowledge of the occurrence of a Listed Event would be material under the applicable Federal Securities Laws, the City shall so notify the Dissemination Agent, if any, in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f). (e) If in response to a request under subsection (b), the City determines that the Listed Event would not be material under applicable Federal Securities Laws, the City shall notify the Dissemination Agent in writing and shall instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f). (f) If the Dissemination Agent has been instructed by the City to report the occurrence of a Listed Event, the Dissemination agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(viii) and (ix) need not be given under this subsection any earlier than the notice (if C-7 10861/0004/697498.3 any) of the underlying event is given to holders of affected Bonds pursuant to the Fiscal Agent Agreement. (g) Neither the Fiscal Agent nor the Dissemination Agent shall have any responsibility hereunder to determine the materiality of any Listed Event. Section 5. Termination of Reporting Obligation. The City’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series 2002 Bonds. If such termination occurs prior to the final maturity of the Series 2002 Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under Section 4(f) hereof. Section 6. 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 Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent may resign by providing 30 days written notice to the City. The Dissemination Agent shall not be responsible for the content of any report or notice prepared by the City. The Dissemination Agent shall have no duty to prepare any information or report, nor shall the Dissemination Agent be responsible for filing any report not provided to it by the City in a timely manner and in a form suitable for filing. Section 7. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the City and the Fiscal Agent may amend this Disclosure Agreement (and the Fiscal Agent shall agree to any amendment so requested by the City so long as such amendment does not adversely affect the rights or obligations of the Fiscal Agent), and any provision of this Disclosure Agreement may be waived, C-8 10861/0004/697498.3 provided that the following conditions are satisfied: (a) if the amendment or waiver relates to Sections 2(a), 3 or 4(a) hereof it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Series 2002 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The proposed amendment or waiver (i) is approved by holders of the Bonds in the manner provided in the Fiscal Agent Agreement for amendments to the Fiscal Agent Agreement with the consent of holders, or (ii) does not, in the opinion of the Fiscal Agent or nationally recognized bond counsel, materially impair the interests of holders. (d) If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial C-9 10861/0004/697498.3 statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial statements or information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories in the same manner as for a Listed Event under Section 4(f) hereof. Section 8. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the City chooses to include any information in the Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 9. Default. In the event of a failure of the City or the Fiscal Agent to comply with any provision of this Disclosure Agreement, the Fiscal Agent may (and, at the written direction of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Series 2002 Bonds, shall), or any holder or C-10 10861/0004/697498.3 beneficial owner of the Series 2002 Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City or Fiscal Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Fiscal Agent Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the City or the Fiscal Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 10. Duties, Immunities and Liabilities of Fiscal Agent and Dissemination Agent. Article VI of the Fiscal Agent Agreement is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Fiscal Agent Agreement, and the Fiscal Agent and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded the Fiscal Agent thereunder. The Fiscal Agent and the Dissemination Agent shall have only such duties hereunder as are specifically set forth in this Disclosure Agreement. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees, as agreed to by the City from time to time, and shall be reimbursed for all reasonable expenses, legal fees and advances made or incurred by it in the performance of its duties hereunder. Neither the Dissemination Agent nor the Fiscal Agent shall have any duty or obligation to review any information provided to it hereunder. Section 11. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the City, the Fiscal Agent, the Dissemination Agent, the Participating Underwriters C-11 10861/0004/697498.3 and holders and beneficial owners from time to time of the Series 2002 Bonds, and shall create no rights in any other person or entity. Section 12. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Disclosure agreement as of the date first above written. CITY OF SANTA MONICA By:_____________________________________ Authorized Officer ATTEST: By:____________________________ City Clerk APPROVED AS TO FORM: By:____________________________ Marsha Jones Moutrie City Attorney BNY WESTERN TRUST COMPANY By:_____________________________________ C-12 10861/0004/697498.3 Authorized Officer C-13 10861/0004/697498.3 - INTRODUCTION......................................................................................................................1 Authority for Issuance......................................................................................................1 Security and Sources of Payment.....................................................................................2 Prior Issues 2 The City 2 Terms of the Bonds..........................................................................................................3 Tax Matters 3 Continuing Disclosure......................................................................................................3 Other Information............................................................................................................5 THE BONDS 5 Description 5 Redemption 6 Authority for Issuance......................................................................................................8 Purpose of Issue..............................................................................................................8 Book-Entry Only System.................................................................................................9 Discontinuance of Book-Entry System...........................................................................13 Defeasance 14 ESTIMATED SOURCES AND USES OF FUNDS ...............................................................16 SECURITY AND SOURCES OF PAYMENT .......................................................................21 General 21 Covenants of the City.....................................................................................................21 Amendments 23 Assessed Valuations.......................................................................................................24 Ad Valorem Property Taxation and Collection...............................................................27 Tax Rates 30 City Debt Obligations.....................................................................................................31 CITY OF SANTA MONICA ..................................................................................................36 General 36 Government and Administration.....................................................................................36 Population 36 Self-Supporting Operations............................................................................................37 Retirement System.........................................................................................................40 Labor Relations..............................................................................................................42 Industry and Employment..............................................................................................43 Effective Buying Income................................................................................................49 Education 50 Culture and Recreation..................................................................................................52 Taxable Transactions.....................................................................................................53 Building Permit Activity.................................................................................................55 Utilities 56 CITY OF SANTA MONICA FINANCES ..............................................................................56 Accounting Policies and Financial Reporting..................................................................56 Budgetary Process.........................................................................................................57 Assessed Valuations and Ad Valorem Property Taxes....................................................58 Tax Receipts 58 Vehicle License Fee Reduction.......................................................................................61 1 Long-Term Debt............................................................................................................63 Future Borrowing..........................................................................................................65 General Fund Financial Summary...................................................................................65 Investment of City Funds...............................................................................................72 CONSTITUTIONAL AND STATUTORY LIMITATIONS .................................................74 Article XII1A of the California Constitution...................................................................74 Article XIIIB of the California Constitution....................................................................78 Articles XIIIC and XIIID of the California Constitution.................................................81 Statutory Spending Limitations......................................................................................85 Future Initiatives............................................................................................................86 RISK FACTORS .....................................................................................................................87 Seismic Activity and Natural Disasters...........................................................................87 Threats of Terrorism......................................................................................................88 Other Financial Matters..................................................................................................88 State Budget 89 Developments Regarding Energy...................................................................................90 Loss of Tax Exemption..................................................................................................92 TAX MATTERS .....................................................................................................................92 FINANCIAL STATEMENTS .................................................................................................96 ABSENCE OF LITIGATION ................................................................................................96 RATINGS 97 CERTAIN LEGAL MATTERS .............................................................................................97 UNDERWRITING ..................................................................................................................98 FINANCIAL ADVISOR .........................................................................................................98 CONTINUING DISCLOSURE ..............................................................................................98 APPENDIX A A-1 APPENDIX B B-1 APPENDIX C C-1 CONTINUING DISCLOSURE AGREEMENT THIS CONTINUING DISCLOSURE AGREEMENT (this “Disclosure Agreement”) dated as of August 1, 2002, is by and between the CITY OF SANTA MONICA, a charter city duly organized and existing under and by virtue of the Constitution and laws of the 2 State of California and its Charter (the “City”), and BNY WESTERN TRUST COMPANY, a state banking corporation organized and existing under and by virtue of the laws of the State of California, in its capacity as Fiscal Agent (the “Fiscal Agent”); W I T N E S S E T H : WHEREAS , pursuant to a resolution adopted by the City Council on July 23, 2002 (the “Resolution”) and in accordance with the Fiscal Agent Agreement, dated as of August 1, 2002, by and between the City and the Fiscal Agent (the “Fiscal Agent Agreement”), the City has issued its City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (the “Series 2002 Bonds”), in the aggregate principal amount of $__________ and WHEREAS , this Disclosure Agreement is being executed and delivered by the City and the Fiscal Agent for the benefit of the Owners and beneficial owners of the Series 2002 Bonds and in order to assist the underwriter of the Series 2002 Bonds in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). NOW, THEREFORE , for and in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: Section 1. Definitions. Capitalized undefined terms used herein shall have the meanings ascribed thereto in the Fiscal Agent Agreement. In addition, the following capitalized terms shall have the following meanings: “Annual Report” means any Annual Report provided by the City pursuant to, and as described in, Sections 2 and 3 hereof. “Disclosure Representative” means the Director of Finance of the City or his or her designee, or such other person as the City shall designate in writing to the Fiscal Agent 3 from time to time. “Dissemination Agent” means, initially the City, or any successor Dissemination Agent designated in writing by the City and which has filed with the Fiscal Agent a written acceptance of such designation. “Federal Securities Laws” means all Federal Securities Laws, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, all rules and regulations promulgated thereunder and all administrative and case law interpretations thereof. “Listed Events” means any of the events listed in Section 4(a) hereof. “National Repository” means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. “Official Statement” means the Official Statement, dated _____________, 2002, relating to the Series 2002 Bonds. “Participating Underwriter” means any of the Original Purchasers of the Series 2002 Bonds required to comply with the Rule in connection with offering of the Series 2002 Bonds. “Repository” means each National Repository and each State Repository. “Rule” means Rule 15c-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. “State Repository” means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure 4 Agreement, there is no State Repository. Section 2. Provision of Annual Reports. (a) The City shall, or shall cause the Dissemination Agent, if any, to provide to each Repository an Annual Report which is consistent with the requirements of Section 3 hereof, not later than eight months after the end of the City’s fiscal year (which currently would be March 1) (the “Annual Report Date”), commencing with the report for the 2001-2002 fiscal year. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3 hereof; provided, however, 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 not available by that date. 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 4(f) hereof. (b) Not later than 15 business days prior to the date specified in subsection (a) for providing the Annual Report to Repositories, the City shall provide the Annual Report to the Dissemination Agent, if any, and the Fiscal Agent (if the Fiscal Agent is not the Dissemination Agent). Section 3. Content of Annual Reports. The City’s Annual Report shall contain or incorporate by reference the following: (a) Audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the City’s audited financial statements are not available by the time the Annual Report is 5 required to be filed pursuant to Section 2(a) hereof, the Annual Report shall contain unaudited financial statements in a format similar to that used for the City’s audited financial statements, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) The following information, to the extent not included in the audited financial statement of the City, providing financial and operating data substantially similar to that provided in the corresponding tables and charts in the Official Statement: (A) the adopted budget of the City for the then current fiscal year, (B) a statement of outstanding debt of the City, (C) information regarding total assessed valuation of taxable properties within the City, if and to the extent provided to the City by the County, (D) information regarding secured tax charges and delinquencies on taxable properties within the City, if and to the extent provided to the City by the County, (E) a summary of the City’s current fiscal year investments, including types and amounts of investments, returns on investments, average yield of investments and market value of investments. (c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, 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. 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 have been submitted to each of the Repositories or the Securities and 6 Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The City shall clearly identify each such other document so included by reference. Section 4. Reporting of Significant Events. (a) Pursuant to the provisions of this Section, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series 2002 Bonds, if material: (i) Principal and interested payment delinquencies. (ii) Nonpayment related defaults. (iii) Unscheduled draws on debt service reserves reflecting financial difficulties. (iv) Unscheduled draws on credit enhancements reflecting financial difficulties. (v) Substitution of credit or liquidity providers, or their failure to perform. (vi) Adverse tax opinions or events affecting the tax-exempt status of the security. (vii) Modifications to rights of security holders. (viii) Contingent or unscheduled bond calls. (ix) Defeasances. (x) Release, substitution, or sale of property securing repayment of the securities. (xi) Rating changes. (b) The Fiscal Agent shall, promptly after obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform 7 such person of the event, and request that the City promptly notify the Dissemination Agent, if any, in writing whether or not to report the event pursuant to subsection (f). (c) Whenever the City obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Fiscal Agent pursuant to subsection (b) or otherwise, the City shall as soon as possible determine if such event would be material under applicable Federal Securities Law. (d) If the City determines that knowledge of the occurrence of a Listed Event would be material under the applicable Federal Securities Laws, the City shall so notify the Dissemination Agent, if any, in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f). (e) If in response to a request under subsection (b), the City determines that the Listed Event would not be material under applicable Federal Securities Laws, the City shall notify the Dissemination Agent in writing and shall instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f). (f) If the Dissemination Agent has been instructed by the City to report the occurrence of a Listed Event, the Dissemination agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(viii) and (ix) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Bonds pursuant to the Fiscal Agent Agreement. (g) Neither the Fiscal Agent nor the Dissemination Agent shall have any responsibility hereunder to determine the materiality of any Listed Event. 8 Section 5. Termination of Reporting Obligation. The City’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series 2002 Bonds. If such termination occurs prior to the final maturity of the Series 2002 Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under Section 4(f) hereof. Section 6. 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 Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent may resign by providing 30 days written notice to the City. The Dissemination Agent shall not be responsible for the content of any report or notice prepared by the City. The Dissemination Agent shall have no duty to prepare any information or report, nor shall the Dissemination Agent be responsible for filing any report not provided to it by the City in a timely manner and in a form suitable for filing. Section 7. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the City and the Fiscal Agent may amend this Disclosure Agreement (and the Fiscal Agent shall agree to any amendment so requested by the City so long as such amendment does not adversely affect the rights or obligations of the Fiscal Agent), and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to Sections 2(a), 3 or 4(a) hereof it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an 9 obligated person with respect to the Bonds, or type of business conducted; (b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Series 2002 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The proposed amendment or waiver (i) is approved by holders of the Bonds in the manner provided in the Fiscal Agent Agreement for amendments to the Fiscal Agent Agreement with the consent of holders, or (ii) does not, in the opinion of the Fiscal Agent or nationally recognized bond counsel, materially impair the interests of holders. (d) If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial 10 statements or information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories in the same manner as for a Listed Event under Section 4(f) hereof. Section 8. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the City chooses to include any information in the Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 9. Default. In the event of a failure of the City or the Fiscal Agent to comply with any provision of this Disclosure Agreement, the Fiscal Agent may (and, at the written direction of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Series 2002 Bonds, shall), or any holder or beneficial owner of the Series 2002 Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City or Fiscal Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure 11 Agreement shall not be deemed an Event of Default under the Fiscal Agent Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the City or the Fiscal Agent to comply with this Disclosure Agreement shall be an action to compel performance. Section 10. Duties, Immunities and Liabilities of Fiscal Agent and Dissemination Agent. Article VI of the Fiscal Agent Agreement is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Fiscal Agent Agreement, and the Fiscal Agent and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded the Fiscal Agent thereunder. The Fiscal Agent and the Dissemination Agent shall have only such duties hereunder as are specifically set forth in this Disclosure Agreement. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees, as agreed to by the City from time to time, and shall be reimbursed for all reasonable expenses, legal fees and advances made or incurred by it in the performance of its duties hereunder. Neither the Dissemination Agent nor the Fiscal Agent shall have any duty or obligation to review any information provided to it hereunder. Section 11. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the City, the Fiscal Agent, the Dissemination Agent, the Participating Underwriters and holders and beneficial owners from time to time of the Series 2002 Bonds, and shall create no rights in any other person or entity. Section 12. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one 12 and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Disclosure agreement as of the date first above written. CITY OF SANTA MONICA By:_____________________________________ Authorized Officer ATTEST: By:____________________________ City Clerk APPROVED AS TO FORM: By:____________________________ Marsha Jones Moutrie City Attorney BNY WESTERN TRUST COMPANY By:_____________________________________ Authorized Officer 13 OFFICIAL NOTICE INVITING BIDS $25,000,000 City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (Book-Entry-Only) NOTICE IS HEREBY GIVEN that sealed bids and electronic bids will be received by the City of Santa Monica (the “City”) for the purchase of all of its $25,000,000 original principal amount of the City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (the “Bonds”). Bids for less than all of the Bonds will not be accepted. The bids will be received at the place and up to the time specified below (unless postponed as described herein): Date: _________, 2002 9:00 a.m., PDT Place: Department of Finance City of Santa Monica 1717 4th Street, Suite 250 Santa Monica, California 90401 Sealed Bids: All Sealed Bids must be in an envelope clearly marked “Proposal For the City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project)”. Sealed Bids may be mailed or hand delivered to the address shown above on the date and before the time shown above. See instructions under “Terms of Sale; Form of Bid” below. Electronic Bids: Electronic proposals may be submitted only through Dalcomp/Parity. Dalcomp/Parity will act as agent of the bidder and not of the City in connection with the submission of bids and the City assumes no responsibility or liability for bids submitted through Dalcomp/Parity. See “Information Regarding Electronic Proposals” herein. Facsimile Bids: No bids will be accepted by facsimile. Terms of the Bonds The terms of issuance, principal and interest payment, redemption, security, tax exemption and all other information regarding the Bonds and the City are given in the Preliminary Official Statement for the Bonds, dated ________, 2002 (the “Preliminary Official Statement”), which each bidder must have obtained and reviewed prior to bidding for the Bonds. This 14 Official Notice Inviting Bids contains certain information for quick reference only, is not a summary of the issue and governs only the terms of the sale of, bidding for and closing procedures with respect to the Bonds. Bidders must read the entire Preliminary Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used herein and not defined herein shall have the meanings set forth in the Preliminary Official Statement. In connection with the Bonds, the City will enter into a Fiscal Agent Agreement (the “Fiscal Agent Agreement”) dated as of August 1, 2002, with BNY Western Trust Company, as Fiscal Agent (the “Fiscal Agent”). Purpose of Issue Net proceeds of the Bonds will be used, together with other available funds, to finance the construction, improvement and remodeling of the main and other branches and related facilities of the Santa Monica Public Library, including the demolition and reconstruction of the Main Library. Authorization The Bonds were authorized in the City in a bond proposition submitted at a special election held on November 3, 1998 (the “Election”) at which more than two-thirds of the persons voting on the proposition voted to authorize the issuance and sale of not more than $25,000,000 of general obligation bonds of the City to construct, improve and remodel the main and branch library facilities. The Bonds are general obligation bonds of the City and are being issued under provisions of Article 1 of Chapter 4 of Division 4 of Title 4 of the California Government Code (the “Law”), and pursuant to a Resolution adopted by the City Council on July 23, 2002 (the “Resolution”). Security and Sources of Payments The Bonds are general obligations of the City and the City Council of the City of Santa Monica is empowered and is ad valorem obligated to levy taxes, without limitations of rate or amount (except certain personal property which is taxable at limited rates), upon all property subject to taxation by the City for the payment of principal and interest on the Bonds. Book-Entry-Only 15 The Bonds will be issued in fully registered book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). Purchasers will not receive certificates representing their interest in the Bonds. Individual purchases will be in principal amounts of $5,000 or integral multiples thereof. Principal of, interest and premium, if any, on the Bonds will be paid by the Fiscal Agent to DTC for subsequent disbursement to DTC Participants who are obligated to remit such payments to the beneficial owners of the Bonds. Principal and Interest Payments The Bonds will be dated as of August 1, 2002 and will bear interest from that date (computed on the basis of a 360-day year of twelve 30-day months). Delivery of the Bonds is expected to occur on or about [August 27], 2002. Interest on the Bonds will be paid semi-annually on January 1 and July 1 of each year, commencing January 1, 2003 (each an “Interest Payment Date”). Principal of and premium (if any) on the Bonds will be paid in lawful money of the United States of America upon presentation and surrender thereof upon maturity or earlier redemption at the principal corporate trust office of the Fiscal Agent. Payment of principal and interest to DTC is the responsibility of the City or the Fiscal Agent; disbursement of such payments to Direct Participants of DTC will be the responsibility of DTC; and disbursement of such payments to the Beneficial Owners will be the responsibility of DTC’s Direct Participants and Indirect Participants. The City cannot and does not give any assurances that DTC, the Participants or others will distribute payments of principal, interest or premium with respect to the Bonds paid to DTC or its nominee as the registered owner, or will distribute any redemption notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in the Preliminary Official Statement. The City is not responsible or liable for the failure of DTC or any Participant to make any payment or give any notice to a Beneficial Owner with respect to the Bonds or an error or delay relating thereto. 16 - Principal Amortization The aggregate principal amount of $25,000,000 of the Bonds will mature either through serial maturities or mandatory term bond redemptions on the following dates: July 1, Principal Amount July 1, Principal Amount 2003 $ 1,250,000 2013 $ 1,250,000 2004 1,250,000 2014 1,250,000 2005 1,250,000 2015 1,250,000 2006 1,250,000 2016 1,250,000 2007 1,250,000 2017 1,250,000 2008 1,250,000 2018 1,250,000 2009 1,250,000 2019 1,250,000 2010 1,250,000 2020 1,250,000 2011 1,250,000 2021 1,250,000 2012 1,250,000 2022 1,250,000 Serial Bonds and/or Term Bonds Bidders may provide that all the Bonds be issued as serial bonds or may provide that any two or more consecutive annual principal amounts of be combined into one or more term bonds. Optional Redemption The Bonds maturing on or after July 1, 2013, will be subject to redemption as a whole or in part, by such maturities as the City shall designate (which designation shall be in writing and shall be delivered to the Fiscal Agent no later than 45 days prior to the redemption date), prior to their respective maturities at the option of the City on any day on or after July 1, 2012, from any funds derived by the City from any source, at a redemption price equal to the principal amount thereof, without premium, together with interest accrued thereon to the date fixed for redemption. Mandatory Term Bond Redemption; Purchase in Lieu of Redemption If the successful bidder designates principal amounts to be combined into one or more term bonds, each such term bond shall be subject to mandatory redemption commencing on July 1 of the first year which has been combined to form such term bonds and continuing on July 1 in each year thereafter until the stated maturity date of that term bond. The amount redeemed in any year shall be equal to the principal amount for such year set forth in the table above under the caption “Principal Amortization”. Bonds to be redeemed in any year by mandatory term bond redemption shall be redeemed at par and shall be selected by lot from among the Bonds then subject to redemption. In lieu of redemption of any Term Bond, amounts on deposit in the Debt Service Fund may be used and withdrawn by the Fiscal Agent, at the request of the City, for the purchase of such Term Bonds at a public or private sale as and when and at such prices as the City may in its discretion determine, but not in excess of the principal thereof plus accrued interest to the purchase date; provided, however, that no Bonds will be so purchased in lieu of redemption by the Fiscal Agent with a settlement date more than 60 days prior to the redemption date. Selection of Bonds for Redemption 3 Whenever less than all of the outstanding Bonds maturing on any one date are called for redemption, the Fiscal Agent shall select the Bonds to be redeemed from the outstanding Bonds maturing on such date not previously selected for redemption, by lot. Notice of Redemption Notice of redemption shall be mailed by the Fiscal Agent at least 30 days prior to the redemption date. So long as the Bonds are in book-entry form only, such notices will be given only to DTC or its nominee. Neither failure to mail such notice nor any defect in the notice so mailed shall effect the sufficiency of the proceeding for redemption. The Fiscal Agent shall also mail a copy of the notice, at least 30 days prior to the redemption date, to certain securities depositories and securities information services designated in the Fiscal Agent Agreement. TERMS OF SALE Form of Bid All bids must be for not less than all of the Bonds hereby offered for sale at not less than 100.0% of the par value thereof, plus accrued interest to the date of delivery. Bids for less than all of the Bonds will not be accepted. Each bid must be on the Official Bid Form. Every sealed bid must be unconditional and irrevocable, addressed to the City in a sealed envelope and endorsed “Proposal for City of Santa Monica, General Obligation Bonds, Series 2002 (Library Improvements Project)”. All electronic proposals shall be deemed to incorporate the provisions of the Official Bid Form and must be unconditional and irrevocable. Except for proposals submitted in accordance with the following paragraph, each bid must be accompanied by the applicable bid check or Surety Bond described under the caption “Bid Check” below. In addition, bidders are requested to supply an estimate of the true interest cost resulting from their bid, computed as prescribed below under the caption “Award, Delivery and Payment,” which shall be considered as informative only and not binding on either the bidder or the City. Each bid must be in accordance with the terms and conditions set forth in this Official Notice Inviting Bids. The City will make its best efforts to accommodate both electronic and sealed bids; however, the City, Public Resources Advisory Group (the “Financial Advisor”) and Richards, Watson & Gershon, A Professional Corporation (“Bond Counsel”) assume no responsibility for any error contained in any electronic or sealed bid, or for failure of any electronic or sealed bid to be transmitted, received or opened at the official time for receipt of such bids. The official time for receipt of bids will be determined by the City at the place of the bid opening, and the City shall not be required to accept the time kept by Dalcomp/Parity as the official time. The City assumes no responsibility for informing any bidder prior to the deadline that its bid is incomplete, or not received. In the event that multiple timely bids are received from a single bidder the City shall accept the best of such bids and each bidder agrees by submitting any bid to be bound by its best bid. Information Regarding Electronic Proposals Electronic proposals must be submitted through Dalcomp/Parity. If any provision of this Official Notice Inviting Bids conflicts with information provided by Dalcomp/Parity, this Official Notice Inviting Bids shall control. The City is not responsible for the proper operation of, and shall have no liability for any delays or interruptions of or any damages caused by Dalcomp/Parity. The City is using Dalcomp/Parity as a communication mechanism and not as the City’s agent to conduct electronic bidding for the Bonds. The City is not bound by any advice of or determination by Dalcomp/Parity to the effect that any particular bid complies with the terms of this Official Notice Inviting Bids. All costs and expenses incurred by prospective bidders in connection with their submission of bids through Dalcomp/Parity are the sole responsibility of such bidders and the City is not responsible for any such costs or expenses. Further information about Dalcomp/Parity, including rd any fee charged, may be obtained from Dalcomp/Parity, 395 Hudson Street, 3 Floor, New York, N.Y. 10014 (212-806- 8304). The City assumes no responsibility or liability for bids submitted through Dalcomp/Parity. The City shall be entitled to assume that any bid submitted through Dalcomp/Parity has been made by a duly authorized agent of the bidder. 4 Interest Rates Bidders must bid to purchase all of the Bonds and bids for less than all of the Bonds will not be accepted. Bidders must specify a rate of interest for each maturity of the Bonds. The rates of interest must be expressed in multiples of one-eighth (1/8) or one-twentieth (1/20) of one percent (1%), and no interest rate may exceed 8% per annum. Each Bond must bear interest at the rate specified by the bidder in the Official Bid Form from its date to its maturity date. All Bonds of the same maturity must bear the same rate of interest. 5 Award, Delivery and Payment If satisfactory bids are received, the Bonds will be awarded to the highest responsible bidder not later than 27 hours after the time established for the receipt of bids. The highest bidder shall be the bidder submitting the best price for the Bonds, which best price shall be that resulting in the lowest true interest cost. The true interest cost shall be computed by doubling the semiannual interest rate (compounded semiannually) necessary to discount the debt service payments from their respective payment dates to the date of the Bonds and to the price bid, not including accrued interest. For the purpose of calculating the true interest cost, the principal amount of bonds scheduled for mandatory sinking fund redemption as part of a term bond shall be treated as a serial maturity in each year. If two or more bidders have bid the same true interest cost, the award shall be made by lot. The purchaser shall pay accrued interest (computed on the basis of a 360-day year of twelve 30-day months) on the Bonds from and including the dated date of the Bonds to, but not including, the date of delivery. Delivery of the Bonds is expected to occur on or about [August 27], 2002. The Bonds will be delivered in New York, New York for deposit with DTC. The successful bidder shall pay for the Bonds on the date of delivery in immediately available federal funds. Any expenses of providing federal funds shall be borne by the purchaser. Payment on the delivery date shall be made in amount equal to the price bid for the Bonds plus accrued interest from the dated date less the Bid Check Amount. Bid Check Each bidder must provide with its bid a certified or cashier’s check payable in same day or next day funds drawn on a responsible bank having an office in Los Angeles, California equal to $250,000 (“Bid Check Amount”) payable to the order of “City of Santa Monica”, or a financial surety bond (“Surety Bond”) in the amount of the Bid Check Amount issued by an insurance company rated AAA by Standard & Poor’s and licensed to issue such a bond in the State of California, naming the City as the beneficiary and identifying the bidder whose deposit is guaranteed by the Surety Bond. If the successful bidder has provided a Surety Bond, such bidder shall wire transfer to the City the amount of the Bid Check Amount in immediately available federal funds not later than 12:00 p.m. PDT on the business day next succeeding the day of acceptance of the proposal, which amount shall be deposited in an escrow fund or account or a similar fund and applied to the purchase price of the Bonds. In the event the City has not received such federal funds wire transfer by the time stated, the City may draw upon the Surety Bond to satisfy the successful bidder’s deposit requirements. The check accompanying any accepted proposal shall be cashed and deposited in a fund held by the City and applied to the purchase price of the Bonds at the time of delivery of the Bonds. If after the award of the Bonds, the successful bidder fails to complete the purchase on the terms stated in its proposal, unless such failure of performance shall be caused by any act or omission of the City, any amount received from such bidder by the City, whether by paid check or pursuant to a Surety Bond, shall be retained by the City as stipulated liquidated damages. Any check accompanying an unaccepted proposal will be returned promptly. No interest will be paid upon the deposit made by any bidder. List of Members of Account Bidders are requested to list on the Official Bid Form the names of the members of the account on whose behalf the bid is made. The apparent winning bidder will be required to verify such list or to provide an updated list by facsimile prior to award of the Bonds. Reoffering Price The successful bidder will, within one hour after being notified of the award of the Bonds, advise the City of the initial public offering prices of the Bonds. The successful bidder will also be required, prior to delivery of the Bonds, to furnish a certificate acceptable to Bond Counsel stating the amount of the initial offering price to the public (excluding bond houses and brokers) at which a substantial portion (at least 10%) of the Bonds of each maturity were sold and that there was a bonafide public offering made of each maturity. 6 Official Statement The City has approved a Preliminary Official Statement for the Bonds, dated ______, 2002, which the City has “deemed final” within the meaning of SEC Rule 15c2-12 promulgated under the Securities and Exchange Act of 1934 (the “Rule”) although subject to revision, amendment and completion in conformity with such Rule. The City will provide the successful bidder such reasonable number of printed copies of the final Official Statement as such bidder may request no later than seven business days after the day the Bonds are awarded. Up to [200] copies of the final Official Statement will be furnished without cost to the successful bidder and further copies, if desired, will be made available at the successful bidder’s expense. The bidder shall file the final Official Statement with a nationally recognized municipal securities information repository on a timely basis. The bidder shall at all times comply with the provisions of the Rule and with all applicable rules of the Municipal Securities Rulemaking Board. Right to Reject Bids; Waive Irregularities The City reserves the right to reject any and all bids and to the extent permitted by law to waive any irregularity or informality in any bid. CUSIP Numbers It is anticipated that CUSIP numbers will be printed on the Bonds, but the City will assume no obligation for the assignment or printing of such numbers on the Bonds or for the correctness of such numbers, and neither the failure to print such numbers on any Bond nor any error with respect thereto shall constitute cause for a failure or refusal by the purchasers thereof to accept delivery of and make payment for the Bonds. The cost for the assignment of CUSIP numbers to the Bonds will be the responsibility of the successful bidder. California Debt and Investment Advisory Commission The successful bidder will be required to pay any fees due to the California Debt and Investment Advisory Commission (“CDIAC”) under California law. CDIAC will invoice the successful bidder after the delivery of the Bonds. Legal Opinions The City will furnish to the successful bidder at the closing of the Bonds, the legal opinion of 7 Richards, Watson & Gershon Bond Counsel, , A Professional Corporation, approving the legality of the Bonds and concluding that based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes; and interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although such counsel may observe that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel will express no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. Change in Tax Exempt Status At any time before the Bonds are tendered for delivery, the successful bidder may disaffirm and withdraw its proposal if the interest received by private holders of obligations of the same type and character of the Bonds (as determined by Bond Counsel) shall be declared to be includable in gross income under present federal income tax laws, either by a ruling of the Internal Revenue Service or by a decision of any federal court, or shall be declared taxable by the terms of any federal income tax law enacted subsequent to the date of this Official Notice Inviting Bids. Closing Documents The City will furnish to the successful bidder at the closing of the Bonds: (1) a certificate or certificates certifying (i) that as of and at the time of delivery of the Bonds, there is no action, suit, proceeding or investigation, pending or, to the best knowledge of the City, threatened against or affecting the City, (A) which affects or seeks to prohibit, restrain or enjoin the issuance of the Bonds or any of the Bonds, (B) in any way contesting the validity of the Bonds, the Fiscal Agent Agreement, 8 the Resolution or the powers of the City to enter into or perform its obligations under such documents or the existence of the City, or (C) wherein an unfavorable decision, ruling or finding would materially and adversely affect the City, or the validity or enforceability of the Bonds, the Fiscal Agent Agreement, the Resolution or the ability of the City to perform its obligations under such documents, and (ii) that to the best knowledge of the City, the Preliminary Official Statement did not on the date of sale of the Bonds and the Official Statement does not on the date of delivery contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading; and (2) a receipt of the City showing that the purchase price of the Bonds has been received by the City. Continuing Disclosure In order to assist bidders in complying with SEC Rule 15c2-12(b)(5), the City will undertake, pursuant to the Fiscal Agent Agreement and a Continuing Disclosure Agreement, to provide certain annual financial information, and notices of the occurrence of certain events, if material. A description of this undertaking is set forth in the Preliminary Official Statement and will be set forth in the final Official Statement. Additional Information Copies of the Fiscal Agent Agreement, the Resolution and when available, this Official Notice Inviting Bids, the Official Bid Form, and the Preliminary Official Statement will be furnished to any potential bidder upon request made to the City’s Financial Advisor at: Public Resources Advisory Group, 11845 W. Olympic Blvd. Suite 640, Los Angeles, CA 90064 (310) 477-8487, scooperstein@pragla.com. Right to Modify or Amend The City reserves the right to modify or amend this Official Notice Inviting Bids and the Official Bid Form including, but not limited to the right to adjust and change the principal amount of the Bonds being offered; however, such notifications or amendments shall be made not later than _______, 2002, by 12:00 p.m., PDT (3:00 p.m., EDT) and communicated through The Bond Buyer Wire (available on TM3, the Thomson Municipal Market Monitor at http://www.tm3.com) and by facsimile transmission to any qualified bidder timely requesting such notice. Bid Extension or Postponement The City reserves the right to extend or postpone, from time to time, the date or time established for the receipt of bids. Any such extension or postponement will be announced via The Bond Buyer Wire. On any such alternative date or time for receipt of bids, any bidder may submit a sealed and/or electronic bid for the purchase of the Bonds in conformity in all respects with the provisions of this Official Notice Inviting Bids except for the date of sale and except for the changes announced by The Bond Buyer Wire at the time the sale date and time are announced. Dated: _________ , 2002 City of Santa Monica By: /s/ Charles M. Dennis Director of Finance 9 OFFICIAL BID FORM $25,000,000 City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) _________, 2002 City of Santa Monica c/o Charles M. Dennis Department of Finance City of Santa Monica th 1717 4 Street, Suite 250 Santa Monica, CA 90401 Ladies and Gentlemen: We hereby offer to purchase all of the $25,000,000 aggregate principal amount of the City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) (the “Bonds”), more particularly described in your Official Notice Inviting Bids dated ______, 2002, which is incorporated herein by reference, and made a part thereof, at a purchase price of $ (which purchase price is not less than 100.0% of the aggregate principal amount of the Bonds) plus accrued interest on the Bonds from August 1, 2002 to the date of delivery. This offer is for Bonds bearing interest at the rates and in the form of serial bonds or term bonds with mandatory sinking fund redemptions as set forth in the table on the following page. Of the principal maturities set forth in the table on the following page, for those years, if any, which have been combined into a term bond or term bonds, the principal amounts shown in the table shall be the mandatory sinking fund redemption amounts in such years except that the amount shown in the year of the term bond maturity date shall mature in such year. The bid is subject to acceptance not later than 27 hours after the expiration of the time established for the final receipt of bids. Our calculation of the true interest cost, which is considered to be informative only and not a part of the bid, is __________________%. (PLEASE CHECK ONE OF THE FOLLOWING TWO PARAGRAPHS) [ ] There is enclosed herewith a certified check or cashier’s check for $ drawn on a responsible bank having an office in the City of Los Angeles payable in same day or next day funds to the order of the City of Santa Monica (the “City”). [ ] A surety bond has been provided to the City in the amount of $ issued by an insurance company rated AAA by Standard & Poor’s and licensed to issue such a bond in the State of California, naming the City as beneficiary and identifying the bidder whose deposit is guaranteed by the surety bond. 10 We have noted that payment of the purchase price is to be made in immediately available Federal Reserve Bank Funds at the time of delivery of the Bonds. If we are the successful bidder, we will (1) within one hour after being notified of the award of the Bonds, advise the City of the initial public offering prices of the Bonds and (2) prior to delivery of the Bonds furnish a certificate, acceptable to Bond Counsel, as to the “issue price” of the Bonds within the meaning of Section 1273 of the Internal Revenue Code of 1986, as amended. 11 Serial Maturity Maturity Term Bonds Principal Interest July 1 (Check One Column) Amount Rate 2003 $ 1,250,000 % 2004 1,250,000 % 2005 1,250,000 % 2006 1,250,000 % 2007 1,250,000 % 2008 1,250,000 % 2009 1,250,000 % 2010 1,250,000 % 2011 1,250,000 % 2012 1,250,000 % 2013 1,250,000 % 2014 1,250,000 % 2015 1,250,000 % 2016 1,250,000 % 2017 1,250,000 % 2018 1,250,000 % 2019 1,250,000 % 2020 1,250,000 % 2021 1,250,000 % 2022 1,250,000 % We represent that we have full and complete authority to submit this bid on behalf of our bidding syndicate and the undersigned will serve as the lead manager for the group if the Bonds are awarded pursuant to this bid. We certify (or declare) under penalty of perjury under the laws of the State of California that this proposal is genuine, and not a sham or collusive, nor made in the interest of or on behalf of any person not herein named, and that the bidder has not directly or indirectly induced or solicited any other bidder to put in a sham bid or any other person, firm or corporation to refrain from bidding, and that the bidder has not in any manner sought by collusion to secure for himself an advantage over any other bidder. Respectfully Submitted, Account Manager: By: Address (for Return of Unsuccessful Bid Check): 12 City: State: Telephone: Following (or attached) is a list of the members of our account on whose behalf this bid is made: 13 NOTICE OF INTENTION TO SELL BONDS $25,000,000 City of Santa Monica General Obligation Bonds, Series 2002 (Library Improvements Project) NOTICE IS HEREBY GIVEN that the City of Santa Monica (the “City”) has determined to sell the above-captioned bonds (the “Bonds”) at public sale and the City hereby invites sealed and electronic bids until 9:00 a.m. PDT, on _______, _____________, 2002 through the use of an electronic bidding service offered by Dalcomp/Parity or by mail or hand delivery of sealed bids to the City’s principal office, c/o Charles M. Dennis, City of Santa Monica, Department of Finance, 1717 4th Street, Suite 250, Santa Monica, California 90401, for the purchase of all of the Bonds upon the terms and subject to the conditions specified in the Official Notice Inviting Bids (the “Notice Inviting Bids”) for the Bonds. No bids will be accepted by facsimile. Bids for less than all of the Bonds will not be accepted. The City reserves the right to postpone the date established for the receipt of bids as more fully described under the paragraph “Bid Extension or Postponement” in the Notice Inviting Bids. NOTICE IS HEREBY FURTHER GIVEN that copies of the Notice Inviting Bids and the Preliminary Official Statement issued in connection with the offering and sale of the Bonds may be obtained from the City’s financial advisor, Public Resources Advisory Group, 11845 W. Olympic Blvd., Suite 640, Los Angeles, California 90064, 310-477-8487. Date: ___________, 2002 By: /s/ Charles M. Dennis Director of Finance 14 ATTACHMENT A QUESTIONS FOR PUBLIC OFFICIALS TO ASK BEFORE APPROVING A BOND ISSUE The following question list has been prepared by the National League of Cities; the National Association of State Auditors, Comptrollers and Treasurers; and the Government Finance Officers Association with input from the Securities and Exchange Commission. They are designed to assist public officials who are responsible for approving the issuance of tax exempt bonds. Questions to Ask Staff 1) How has staff allocated responsibilities for the preparation of the official statement? Have they clearly defined the responsibilities of all participants in the transaction? Answer: Preparation of the Preliminary and Final Official Statements are a collaborative effort of the Finance and Library Departments, and the Offices of the City Manager and City Attorney; the City’s Financial Advisor (Public Resources Advisory Group) and Bond Counsel (Richards, Watson & Gershon). Each participant is responsible for ensuring the information presented in their area of expertise is correct. Richards, Watson & Gershon is serving as Disclosure Counsel for the preparation of the Preliminary Official Statements. All participants review the entire document for consistency. 2) What process or procedures have been established to select qualified outside professionals? How are we relying on them, and is our reliance appropriate? How are they being compensated? Answer: The City’s Financial Advisor and Bond Counsel have been selected by a competitive selection process wherein qualifications and price were considered. As a result of these selection processes, staff believes it is appropriate to rely on their expert advice. They will be compensated from the bond proceeds. 3) What has been done to establish the accuracy of financial and operating information and its disclosure in the official statement? Has anything happened since the date of the financial statements that needs to be disclosed? Answer: All financial and operating information about the City has been subjected to multiple internal reviews by appropriate City staff. 15 Audited financial information has been presented for fiscal years 1996/97 through 2000/01. Council adopted budget information is also provided for fiscal years 2001/02 and 2002/03. 4) What policies and procedures have been developed to determine whether material conflicts of interest exist that need to be disclosed? Answer: The Financial Advisor and Bond Counsel have been questioned to determine if any material conflicts of interest exist that need to be disclosed. No conflicts of interest have been determined. A similar procedure has been followed for City staff. 5) What procedures have been established to accurately describe the project, the bond terms, the sources of repayment, and the risks associated with the project? What procedures have been established for the investment and disbursement of the bond proceeds? Answer: The project, bond terms, sources of repayment, and risks are described in the applicable Preliminary Official Statement. Bond proceeds will be controlled by the Fiscal Agent. Use of the proceeds will be accounted for by the City’s Finance Department in accordance with generally accepted accounting standards. 6) Do procedures permit the underwriters to carry out their “due diligence” and other responsibilities? Answer: Potential underwriters (including their attorneys) who will bid on, purchase, and resell the bonds, will be provided access to all bond documents. City staff, the City’s Finance Advisor, and Bond Counsel will respond to all questions in a timely manner. 7) Have staff fully considered any questions asked by the rating agencies? Answer: Staff will brief and update the rating agencies concerning this Bond issue and the financial status of the City shortly following Council authorization to proceed. Staff has tried to anticipate and include in the bond documents appropriate data and disclosures applicable to material rating agency questions. Any additional data and/or disclosures will be promptly provided to the rating agencies upon request. 8) What continuing disclosure responsibilities have staff assumed and what procedures have been established to meet them? Who will determine and file the annual financial and material event disclosure information? Have staff designated an individual to speak to the market on behalf of the City? 16 Answer: All Federal continuing disclosure requirements will be the responsibility of the Finance Department. An appropriate annual disclosure statement will be released and filed with the necessary st agencies every year by March 1 and/or as material events occur. the City’s Director of Finance and Financial Advisor will represent the City to the market. 9) Have staff produced an official statement that accurately presents the City’s financial condition and discloses the information a reasonable investor needs to know? Have all the right people reviewed it? Answer: Staff and the City’s Financial Advisor and Bond Counsel believe the official statement accurately presents the financial condition of the City and discloses information a reasonable investor needs to know. Concerning review of the official statement, please see response to question #1 above. Questions to Ask Outside Professionals 1) What is the nature and scope of the written opinion or certification, if any, that you are giving in this transaction and relating to the disclosure document? Have staff given you access to the information you need? Answer: With respect to the disclosure documents for this transaction, Bond Counsel, acting in its capacity as Disclosure Counsel, will provide an opinion which confirms the following: its attorneys have reviewed certain portions of the Preliminary Official Statement, Official Statement, certificates of the City, the Final Opinion of Bond Counsel, and opinion of the City Attorney, and such other records, opinions and documents and investigations of law as deemed appropriate as a basis for concluding that, during the course of its engagement on these matters, no information came to the attention of its attorneys rendering legal services which caused them to believe that the Official Statement, as of its respective date (except for any financial or statistical data, forecasts, numbers, charts, estimates or projections as to which no opinion is expressed) contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Yes, staff has given Bond Counsel access to the information they need. 2) Have you explained to staff all aspects of the structure or nature of this transaction so that you are confident they fully understand all critical aspects? Does the City‘s official statement adequately address any concerns you have about this transaction that a reasonable investor would consider important? Answer: The Financial Advisor and Bond Counsel have explained all aspects of this bond financing to City staff and believe City staff fully 17 understands all critical aspects. They also believe that the official statement adequately addresses matters that a reasonable investor would consider important. 3) Are there any matters regarding your participation in this transaction about which you should make staff or the City Council aware, including potential conflicts of interest? Answer: There are no matters regarding their participation in this bond transaction or potential conflicts of interest that the Financial Advisor and Bond Counsel believe should be disclosed to the City Council and/or City staff. 4) Has your review of the relevant financial documents and other materials, including the official statement, raised any concerns regarding these borrowings? Do these concerns need to be disclosed? Answer: The Financial Advisor and Bond Counsel have reviewed all bond documents and do not have any concerns which need to be disclosed. 5) Are you aware of any circumstances in which City Council, City staff, or others have not complied with City procedures to ensure the City’s official statements adequately and accurately describes this transaction? Answer: The Financial Advisor and Bond Counsel are not aware of any such Circumstances. 18 19