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Agenda Report - November 7, 2007 K-01
AGENDA ITEM V% I CITY OF LODI LODI PUBLIC IMPROVEMENT CORPORATION im AGENDA TITLE: Proposed issuance not to exceed $35 million of Wastewater Revenue Certificates of Participation secured by net revenues of the City's wastewater enterprise to finance improvements to the wastewater collection, treatment and disposal system and to refund the outstanding 1991 Certificates of Participation. MEETING DATE: November7,2007 PREPARED BY: Kirk Evans, Budget Manager RECOMMENDED ACTION: Council and the Lodi Public Improvement Corporation each adopt a resolution to (a) approve the issuance of Wastewater System Revenue Certificates of Participation, Series 2007A (COPs) in an amount not to exceed $35 million, (b) approve in substantially final form the drafl Preliminary Official Statement, the Trust Agreement, Installment Purchase Agreement, Continuing Disclosure Certificate, Bond Purchase Contract, and Escrow Agreement, with staff authorized to make adjustments as necessary. In addition, direction is requested regarding whether a surety reserve or cash funded debt service reserve should be used. BACKGROUND INFORMATION: Purpose: The 2007 COPs are being sold to finance new construction and capital maintenance improvements to the City of Lodi wastewater treatment system, and for economic savings, to refinance outstanding 1991 COPs. Proceeds will also be used for the following proposed purposes: 1) to either establish a debt service reserve fund or pay a surety reserve premium, 2) to pay a bond insurance premium (if purchased), 3) to pay for other costs of issuance such as bond counsel, underwriter costs (including underwriters bond counsel) and for the financial advisor to the City of Lodi. In January 2001, the City adopted a three-phase Wastewater System Master Plan. The first two phases are now complete and work on the third is underway. Phase 3 improvements to the White Slough Water Pollution Control Facility include: • headworks improvements • acquisition and installation of an additional digester (from the current 3 to 4) • an additional secondary clarifier (from the current 2 to 3) • two additional aeration basins (from the current 4 to 6) • improvements to the control room These improvements are intended to improve de -nitrification and restore the facility's permitted treatment capacity to 8.5 million gallons per day. Phase 3 improvements are expected to cost approximately $20.6 million, and will be funded with proceeds of the 2007 COPs along with remaining proceeds of the 2004 _Z2�� APPROVED:-/ MINg , City Manager COPs. The City commenced work on Phase 3 in April 2007 and expects to complete these improve- ments by March 2009. The City will undertake additional capital projects for the system, including rehabilitation of 22,600 feet of existing 48 inch diameter main trunk line from the City proper to White Slough. This is not expected to cost more than $7.75 million and should be completed by summer 2008. Security: The 2007 COPs will be secured by installment payments made by the City from the "net revenues" of the City's wastewater enterprise remaining after payment of operations and maintenance costs. Payment of debt service on the COPs is further secured by a debt service reserve initially funded from bond proceeds as a cash reserve or a surety reserve policy. The 2007 COPs are payable on parity with the outstanding wastewater debt issued in 2003 and 2004. Wastewater Enterprise Revenues and Rate Covenant: A key element of security for the COPs is the City's "rate covenant" - the promise to charge wastewater rates and charges to generate net revenues sufficient to pay annual debt service on the COPs and parity debt plus a measure of coverage above that amount. In April 2004, the Council adopted a resolution allowing for a periodic service charge adjustment by resolution, following a public hearing, in an amount not to exceed the percentage change in the Consumer Price Index (CPI) for the San Francisco -Oakland -San Jose Area since the previous adjustment. In 2006 and again in 2007, the Council approved annual rate increases based on CPI. Assuming on-going annual rate increases (based on CPI), projected system net revenues are sufficient to meet the debt service and coverage requirementson the proposed 2007 COPs and parity debt. Ratings and Insurance: The City's financing has been rated by Standard & Poor's and Fitch. Standard & Poor's Rating Service has indicated that the 2007 COPs would carry a A- rating and Fitch has indicated a A- rating. The City has received bond insurance bids from seven AAA -rated bond insurers active in the California municipal market. If bond insurance is purchased, the COPs will be sold with the rating of the AAA bond insurance company. Stone & Youngberg (Managing Underwriter) has analyzed whether the potential savings on interest payments exceed the cost of insurance and the bids received from insurers. Based on the attached Stone & Youngberg analysis , the recommendation is to accept the bid of FSA insurance at 19.4 basis points, the cost of which is estimated at $121,055 and (if a surety reserve is utilized) their bid of 1.5% of the reserve requirementfor the surety reserve, the cost of which is estimated at $39,232. The benefit of insurance is calculated to be $670,346. Without the bond insurance, the COPs would be sold on the basis of the "stand-alone" rating of A-. Cash funded reserve and Surety reserve: Discussion took place at the shirtsleeve meeting on October 30, 2007 regarding the relative merits of a surety reserve and a cash funded reserve. Staff has asked that Stone & Youngberg complete an analysis to determine the cost and benefits with either a cash reserve or a surety reserve. The analysis indicates that there is a modest benefit (approximately $30,000) associated with using a surety reserve. In addition, there are some administrative costs that would be saved through use of a surety reserve. There would be some administrative costs associated with maintaining a cash reserve including hiring a firm to do arbitrage calculations (interest earnings in excess of the interest cost on the COPs) and internal costs associated with keeping track of the interest earnings and the balance of the cash reserves in the City's accounting system. Staff recommends the use of surety reserve based on the modest benefits and administrative cost savings. Refunding Economics: The 1991 COPs are outstanding in the amount of $8,575,000, with an interest rate of 6.70% on the final 2026 maturity. The 1991 COPs may be prepaid on February 1, 2008 with a redemption penalty of 1.5% of refunded principal. Refunding savings on the COPs are estimated to be approximately $800,000 or 9% of the refunded bonds. Actual savings will depend upon market conditions at the time the COPs are sold. Market Conditions: Although municipal interest rates have risen from the historical lows seen earlier this year, they remain relatively attractive. Long-term, tax-exempt interest rates have averaged 5.32% over the last 10 years and roughly 4.60% over the last year. 6.50 6.00 Bond Buyer 21 -Bond Revenue Index Tax-Hxempt Bands Maturing in 30 Yon nh Average Rating of Al/A+ Weekly Period Ev nt January 2, 1997 to October l8, 2007 n+All : &AINI 4.50.:. .. 9.W Legal documents: In order to complete this financing, the City and the Corporation are required to approve and execute several key legal documents. Copies of these documents are on file with the City Clerk and available for your review. While the documents are in near-to-final form, the Resolutions authorize certain officers of the City to make amendments, as necessary. A summary of the key documents is provided below. Official Statement: This document describes the security and discloses potential risks to prospective investors. It generally describes: the sources of payment for the COPs, the wastewater system infrastructure, the proposed improvement projects, historic and projected trends for wastewater enterprise revenues securing the COPs, the economic and demographic characteristics of the City, and inherent risk factors associated with the security. The Official Statement (often referred to as the `OS" or "POS" in its preliminary form) is distributed by the underwriterto prospective investors prior to the COP sale so that investors can make informed purchase decisions. Ifs most important that this document contains no material misstatements or omissions. Continuing Disclosure Certificate: This certificate, attached as an appendix of the Official Statement, outlines the updated information related to the security that the City will agree to provide to the bond market on an ongoing basis. Disclosure is required annually, and on an exceptional basis for any major "material" developments. Purchase Contract: This contract, executed at the time of the COP sale, specifies the actual principal amounts, interest rates and prices at which the COPs will be sold. In this contract, the underwriters commit to purchase the COPs at closing and the City and Corporation commit to sell the COPs at the agreed upon prices and amounts subject to certain closing conditions. Closing conditions generally relate to the execution and validity of all the required documents and the absence of material changes in the nature of the security, etc. Trust Indenture: This agreement, between the Corporation and the trustee, lays out the legal structure and terms of the COPs. Itwill specify: • the payment dates and maturities of the COPs; • the flow of funds for the accounts (the mechanics of the cashflow); • the default and remedy provisions (in the event that something goes wrong); • redemption and defeasance provisions, in the event that the COPs are pre -paid; • covenants of the issuer Installment Purchase Agreement: This agreement, between the City and the Corporation, enables the COP -financed project to be purchased through installment payments that correspond to the debt service payments on the COPs. The agreement will specify: • the revenues and accounts specifically pledged to the repayment of the COPs; • the default and remedy provisions (in the event that something goes wrong); • covenants of the issuer — most importantly, the rate covenant and the conditions under which additional parity debt may be issued. Escrow Agreement: This agreement establishes a refunding escrow to refinance the outstanding 1991 COPS. Financing Team: The City has been working with the following firms in the preparation of this financing: Rate Consultant: Hilton Farnkopf & Hobson, LLC FinancialAdvisor: Lamont Financial Services Corporation Bond Counsel: Orrick Herrington& Sutcliffe Senior Managing Underwriter: Stone &Youngberg Co -Manager: Bear Stearns Trustee: The Bank of New York Trust Company, NA Escrow Agent; U.S. Bank FISCAL IMPACT: Actual debt service for all Wastewater Fund COPs in FiscalYear 2006-07 was $3,344,140. Projected debt service for all Wastewater Fund COPs in future years is approximately $4,194,000. On an annual basis, total Wastewater Fund COP debt service will increase by approximately $849,860. FUNDING AVAILABLE: The debt service included in the Fiscal Year 2007-08 budget is $3,339,773. After sale of the COPs is consummated, an adjustment to the debt service appropriation may be necessary. Respectfully submitted, es Krueger, Deputy City Manager RESOLUTION NO. LPIC2007-01 A RESOLUTION OF THE LODI PUBLIC IMPROVEMENT CORPORATION APPROVING THE FORMS AND AUTHORIZING THE EXECUTION AND DELIVERY OF AN INSTALLMENT PURCHASE AGREEMENT AND A TRUST AGREEMENT IN CONNECTION WITH CITY OF LODI WASTEWATER SYSTEM REVENUE CERTIFICATES OF PARTICIPATION, 2007 SERIES A; AND APPROVING AND AUTHORIZING CERTAIN OTHER MATTERS RELATED THERETO WHEREAS, the City of Lodi, a municipal corporation duly organized and existing under and by virtue of the Constitution and laws of the State of California (the "City"), owns and operates a municipal wastewater system (the "System") to provide for the collection, treatment, and disposal of wastewater; and WHEREAS, the Lodi Public Improvement Corporation (the "Corporation") is a nonprofit public benefit corporation formed for the purpose of assisting the City in financing capital improvements to the System; and WHEREAS the City and the Corporation have entered into that certain Installment Sale Agreement, dated as of December 1, 1991, (the "1991 Prior Agreement") for the purpose of refinancing certain improvements to the System (the "Existing Facilities"); and WHEREAS, the Corporation entered into that certain Trust Agreement, dated as of December 1, 1991, (the "1991 Trust Agreement") with Bank of America National Trust and Savings Association pursuant to which there have been delivered Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the 1991 Certificates") evidencing the right to receive the installment payments to be made by the City underthe 1991 Prior Agreement; and WHEREAS, the City proposes to refund the outstanding 1991 Certificates by making a prepayment of the remaining installment payments under the 1991 Prior Agreement, which is to be applied to the redemption of the outstanding 1991 Certificates; and WHEREAS, the Corporation has agreed to assist the City by: (i) acquiring the Existing Facilities and selling the Existing Facilities to the City, and (ii) acquiring or causing the acquisition of the Project and selling the Project to the City, in each case pursuant to the terms of an Installment Purchase Agreement (the "Installment Purchase Agreement"): and WHEREAS, pursuant to the Installment Purchase Agreement, the City will be obligated to make installment payments (the "Installment Payments") to the Corporation as the purchase price of the Project; and WHEREAS, the Corporation will assign certain of its rights under the Installment Purchase Agreement, including its rights to receive the Installment Payments, to The Bank of New York Trust Company, N.A. (the 'Trustee") pursuant to a Trust Agreement (the "Trust Agreement") between the Corporation and the Trustee; and WHEREAS, pursuant to the Trust Agreement, the Trustee is to execute and deliver Wastewater System Revenue Certificates of Participation, 2007 Series A (the "Certificates"), evidencing a proportionate ownership interest in the Installment Payments; and WHEREAS, a portion of the sale of the Certificates is to be applied, among other things, to the costs of the Project as provided in the Trust Agreement; and WHEREAS, a portion of the sale of the Certificates is to be applied to the prepayment of the City's obligations to make installment payments under the 1991 Prior Agreement; and WHEREAS, there have been executed and delivered Wastewater System Revenue Certificates of Participation, 2004 Series A, under a certain Trust Agreement (the "2004 Trust Agreement"), dated as of May 1, 2004, between Corporation and Union Bank of California, N.A (the "2004 Trust Agreement Trustee"); and WHEREAS, the City wishes the Corporation and the 2004 Trust Agreement Trustee to enter into a supplemental trust agreement amending the definition of the term "Operation and Maintenance Costs" contained in the 2004 Trust Agreement to match the definition of the same term in the Trust Agreement; and WHEREAS, all acts, conditions, and things required by the laws of the State of California to exist, to have happened and to have been performed precedent to and in connection with the consummation of the transactions authorized hereby do exist, have happened, and have been performed in regular and due time, form, and manner as required by law, and the Corporation is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such transactions, for the purpose, in the manner and upon the terms herein provided; NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE LODI PUBLIC IMPROVEMENT CORPORATION AS FOLLOWS: Section 1. The Board of Directors of the Corporation hereby specifically finds and determines it is desirable and furthers the Corporation's public purpose to assist the City in the refinancing of the Existing Facilities and the financing of the Project as provided in the Installment Purchase Agreement and the Trust Agreement and that the statements, findings, and determinations of the Corporation set forth above and in the preambles of the documents approved herein are true and correct. Section 2. The Installment Purchase Agreement, in the form presented at this meeting and on file with the Secretary of the Corporation, and the performance by the Corporation of its obligations thereunder, are hereby approved. The President and the Treasurer of the Corporation, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the Corporation, to execute and deliver to the City the Installment Purchase Agreement in substantially said form, with such changes therein as such officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. Section 3. The Trust Agreement, in the form presented at this meeting and on file with the Secretary of the Corporation, and the performance of by the Corporation of 2 its obligations thereunder, are hereby approved. The President or the Treasurer of the Corporation, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the Corporation, to execute and deliver to the Trustee the Trust Agreement in substantially said form, with such changes therein as such officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. Section 4. The President or the Treasurer of the Corporation, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the Corporation, to execute and deliver to the 2004 Trustee a supplement to the 2004 Trust Agreement to amend the definition of Operation and Maintenance Costs to match the definition of such term in the Trust Agreement. Section 5. The secretary of the Corporation is hereby authorized and directed to attest the signatures of the President and the Treasurer of the Corporation, as may be required or appropriate, in connection with the execution and delivery of the Installment Purchase Agreement, the Trust Agreement and the Certificates. Section 6. Each officer of the Corporation is hereby authorized and directed, acting singly, to do any and all things and to execute and deliver any and all documents which they may deem necessary or desirable in order to consummate the transactions authorized hereby and to consummate the sale, execution, and delivery of the Certificates and otherwise to carry out, give effect to, and comply with the terms and intent of this Resolution, the Installment Purchase Agreement the Trust Agreement and the Certificates; and all such actions heretofore taken by such officers are hereby ratified, confirmed and approved. Section 7. This Resolution shall take effect immediately upon its passage. Dated: November 7, 2007 hereby certify that Resolution No. LPIC2007-01 was passed and adopted by the Board of Directors of the Lodi Public Improvement Corporation in a regular meeting held November 7, 2007 by the following vote: AYES: DIRECTORS— Hansen, Katzakian, Mounce, and President Johnson NOES: DIRECTORS— Hitchcock ABSENT: DIRECTORS— None ABSTAIN: DIRECTORS—None 4JN IFER PERRIN Deputy City Clerk on behalf of Secretary Randi Johl LPIC2007-01 3 RESOLUTION NO. 2007-219 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LODI APPROVING THE FORMS OF AN INSTALLMENT PURCHASE AGREEMENT, A CERTIFICATE PURCHASE CONTRACT, A PRELIMINARY OFFICIAL STATEMENT, A CONTINUING DISCLOSURE CERTIFICATE, AND AN ESCROW AGREEMENT RELATING TO WASTEWATER SYSTEM REVENUE CERTIFICATES OF PARTICIPATION, 2007 SERIES A; AND APPROVING AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO WHEREAS, the City of Lodi, a municipal corporation duly organized and existing under and by virtue of the Constitution and laws of the State of California (the "City"), owns and operates a municipal wastewater system (the "System") to provide for the collection, treatment, and disposal of wastewater; and WHEREAS, the Lodi Public Improvement Corporation (the "Corporation") is a nonprofit public benefit corporation formed for the purpose of assisting the City in financing capital improvements to the System; and WHEREAS the City and the Corporation have entered into that certain Installment Sale Agreement, dated as of December 1, 1991, (the "1991 Prior Agreement") for the purpose of refinancing certain improvements to the System (the "Existing Facilities"); and WHEREAS, the Corporation entered into that certain Trust Agreement, dated as of December 1, 1991, (the 1991 Trust Agreement") with Bank of America National Trust and Savings Association pursuant to which there have been delivered Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates") evidencing the right to receive the installment payments to be made by the City under the 1991 Prior Agreement; and WHEREAS, the City proposes to refund the outstanding 1991 Certificates by making a prepayment of the remaining installment payments under the 1991 Prior Agreement, which is to be applied to the redemption of the outstanding 1991 Certificates; and WHEREAS, the City proposes to make certain additions, betterments, extensions, replacements, and improvementsto the System (the "Project"); and WHEREAS, the Corporation has agreed to assist the City by: (i) acquiring the Existing Facilities and selling the Existing Facilities to the City, and (ii) acquiring or causing the acquisition of the Project and selling the Project to the City, in each case pursuant to the terms of an Installment Purchase Agreement (the "Installment Purchase Agreement"); and WHEREAS, pursuant to the Installment Purchase Agreement, the City will be obligated to make installment payments (the "installment Payments") to the Corporation as the purchase price of the Existing Facilitiesand the Project; and WHEREAS, the Corporation will assign certain of its rights under the Installment Purchase Agreement, including its rights to receive the Installment Payments, to The Bank of New York Trust Company, N.A. (the 'Trustee") pursuant to a Trust Agreement (the'Trust Agreement") between the Corporation and the Trustee; and WHEREAS, pursuant to the Trust Agreement, the Trustee is to execute and deliver Wastewater System Revenue Certificates of Participation, 2007 Series A (the "Certificates"), evidencing a proportionate ownership interest in the Installment Payments; and WHEREAS, pursuant to the Trust Agreement, the Trustee will establish and hold a reserve fund in an amount equal to the reserve fund requirement; and WHEREAS, the City wishes to initially satisfy the reserve fund requirementwith a debt service reserve fund insurance policy (the "Reserve Policy") to be provided by Financial Assurance inc. ("FSA"): and WHEREAS, the City has determined to provide for the redemption of the 1991 Certificates by entering into an Escrow Deposit and Trust Agreement (the "Escrow Agreement") with U.S. Bank National Association (the "Escrow Bank"); and WHEREAS, a portion of the sale of the Certificates is to be applied, among other things, to the costs of the Project as provided in the Trust Agreement: and WHEREAS, a portion of the sale of the Certificates is to be applied to the prepayment of the City's obligations to make installment payments under the 1991 Prior Agreement: and WHEREAS, a portion of the sale of the Certificates is to be applied to pay the premiumsfor the Reserve Policy; and WHEREAS, the City proposes to prepare and distribute a Preliminary Official Statement and a final Official Statement in connection with the offer and sale of the Certificates; and WHEREAS, the City proposes to execute and deliver a Certificate Purchase Contract (the "Certificate Purchase Contract") with Stone & Youngberg LLC (on behalf of itself and Bear Stearns, together the "Underwriters"), pursuant to which the Underwriters will purchase the Certificates for reoffering to the public; and WHEREAS, the California Statewide Communities Development Authority (the "Authority") had assigned its rights to receive Installment Payments under the installment Purchase Agreement (the "2003 Agreement") to Union Bank of California, N.A., as Trustee (the "2003 Trustee") and executed and delivered its Water and Wastewater Revenue Bonds (Pooled Financing Program) Series 20038, under a certain indenture, dated as of October 1, 2003, between the Authority and the 2003 Trustee, which was secured in part by the Installment Payments: and 2 WHEREAS, the City wishes the Authority to amend the 2003 Agreement so that the definition of the term "Operation and Maintenance Costs" contained in the 2003 Agreement (as it relates to the City) be amended to match the definition of the same term in the Trust Agreement; and WHEREAS, there have been executed and delivered Wastewater System Revenue Certificates cf Participation, 2004 Series A, under a certain Trust Agreement (the "2004 Trust Agreement"), dated as of May 1, 2004, between the Corporation and Union Bank of California, N.A (the "2004 Trust Agreement Trustee"); and WHEREAS, the City wishes the Corporation and the 2004 Trust Agreement Trustee to enter into a supplemental trust agreement amending the definition of the term "Operation and Maintenance Costs" contained in the 2004 Trust Agreement to match the definition of such term in the Trust Agreement; and WHEREAS, all acts, conditions, and things required by the laws of the State of California to exist, to have happened and to have been performed precedent to and in connection with the consummation of the transactions authorized hereby do exist, have happened and have been performed in regular and due time, form, and manner as required by law, and the City is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such transactions for the purpose, in the manner and upon the terms herein provided. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LODI AS FOLLOWS: Section 1. The City Council hereby specifically finds and determines that the actions authorized hereby constitute and are with respect to the public affairs of the City and that the statements, findings, and determinations of the City set forth above and in the preambles of the documents approved herein are true and correct and that the consummation of the transactions contemplated therein shall result in significant public benefits to the City in that the City expects to improve the efficient operation of the City's System through the refinancing of the Existing Facilities and the financing of the Project as provided in the Installment Purchase Agreement and the Trust Agreement. Section 2. The Installment Purchase Agreement, in the form presented at this meeting and on file with the City Clerk, and the performance by the City cf its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the City, to execute and deliver to the Corporation the Installment Purchase Agreement in substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof; provided, that the principal component of the Installment Payments set forth in Exhibit B to the Installment Purchase Agreement shall not exceed Thirty -Five Million Dollars ($35,000,000); provided further that the interest components on the principal components of the Installment Payments set forth in Exhibit B to the Installment Purchase Agreement shall not exceed such rate or rates that the true interest cost with respect to the Certificates is greater than five and one half percent (5.50%); and provided further that no Installment Payment shall be scheduled for payment later than 35 years from the date of initial delivery of the Certificates. 3 Section 3. The Escrow Agreement, proposed to be executed and entered into by the City and the Escrow Bank, in the form presented at this meeting and on file with the City Clerk, and the performance by the City of its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed for and in the name and on behalf of the City to execute and deliver the Escrow Agreement in substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. Section 4. The Certificate Purchase Contract, proposed to be executed and entered into by and between the City and Stone & Youngberg LLC, on behalf of the Underwriters, in the form presented at this meeting and on file with the City Clerk, and the performance by the City of its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the City, to execute and deliver to the Underwriters the Certificate Purchase Contract in Substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof; provided that the Underwriters' discount in connection with the sale of the Certificates shall not exceed ninety-five hundredths (.95) of one percent of the principal components of the Installment Payments evidenced by the Certificates. Section 5. The Preliminary Official Statement, in the form presented at this meeting and on file with the City Clerk, is hereby approved. The City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed to cause the Preliminary Official Statement to be distributed to potential purchasers of the Certificates in substantially the form presented to this meeting with such changes therein as the officer deeming the Preliminary Official Statement final for purposes of Rule 15c2-12 of the Securities and Exchange Commission ("Rule 15c2-12") may approve, such approval to be conclusively evidenced by such officer deeming the Preliminary Official Statement final for purposes of Rule 15c2-12. The City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed to deem the Preliminary Official Statement final for purposes of Rule 15c2-12 except for such information as may be omitted from the Preliminary Official Statement under Rule 15c2-12, Section 6. The preparation and delivery of a final Official Statement, and its use by the Underwriters, in connection with the offering and sale of the Certificates are hereby approved. The Official Statement shall be substantially in the form of the Preliminary Official Statement deemed final for purposes of Rule 15c2-12 pursuant to Section 5 of this Resolution, with such changes as the officer executing the Official Statement may approve, such approval to be conclusively evidenced by such officer's execution and delivery thereof. The City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the City, to execute and deliver the Official Statement and any amendment or supplement thereto contemplated by the Certificate Purchase Contract, in the name and on behalf of the City, and thereupon to cause the final Official Statement and any such amendment or supplement to be delivered to the Underwriters. 4 Section 7. The Continuing Disclosure Certificate, proposed to be executed and entered into by the City and the Trustee, in the form presented at this meeting and on file with the City Clerk, and the performance by the City of its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed for and in the name and on behalf of the City to execute and deliver the Continuing Disclosure Certificate in substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. Section 8. The City Clerk is hereby authorized and directed to attest the signature of the City Manager, the Deputy City Manager, and the Public Works Director and to affix and attest the seal of the City, as may be required or appropriate, in connection with the execution and delivery of the Certificates and the documents approved by this Resolution. Section 9. The City hereby authorizes and directs that the definition of Operation and Maintenance Costs in the 2003 Agreement (as it relates to the City) and the 2004 Trust Agreement be amended to match the definition of the same term in the Trust Agreement. Section 10. The City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed, for and in the name of the City, to procure the Reserve Policy from FSA with the premium for the Reserve Policy to be paid from the proceeds of the sale of the Certificates; provided, however, that such premium shall not exceed one and one half percent (1.5%) of the reserve fund requirement. Section 11. Each officer of the City is hereby authorized and directed, acting singly, to do any and all things (including the negotiating and obtaining of a municipal bond insurance policy with respect to the Certificates if the City Manager, the Deputy City Manager, or the Public Works Director determines that such insurance policy is expected to result in savings to the City) and to execute and deliver any and all documents which such officer may deem necessary or desirable in order to consummate the transactions authorized hereby and to consummate the sale, execution and delivery of the Certificates and otherwise to carry out, give effect to and comply with the terms and intent of this Resolution, the Installment Purchase Agreement, the Certificate Purchase Contract, the Preliminary Official Statement, the Official Statement and the Certificates; and all such actions heretofore taken by such officers are hereby ratified, confirmed and approved. Section 12. This Resolution shall take effect immediately upon its passage. Dated: November 7,2007 5 I hereby certify that Resolution No. 2007-219 was passed and adopted by the Lodi City Council in a regular meeting held November 7, 2007, by the following vote: AYES: COUNCIL MEMBERS— Hansen, Katzakian, Mounce, and MayorJohnson NOES: COUNCIL MEMBERS — Hitchcock ABSENT: COUNCIL MEMBERS — None ABSTAIN: COUNCIL MEMBERS — None KNJIFERPERRIN Derk 2007-219 6 RESOLUTION NO. A RESOLUTION OF THE LODI PUBLIC IMPROVEMENT CORPORATION APPROVING THE FORMS AND AUTHORIZING THE EXECUTION AND DELIVERY OF AN INSTALLMENT PURCHASE AGREEMENT AND A TRUST AGREEMENT IN CONNECTION WITH CITY OF LODI WASTEWATER SYSTEM REVENUE CERTIFICATES OF PARTICIPATION, 2007 SERIES A; AND APPROVING AND AUTHORIZING CERTAIN OTHER MATTERS RELATEDTHERETO WHEREAS, the City of Lodi, a municipal corporation duly organized and existing under and by virtue of the Constitution and laws of the State of California (the "City"), owns and operates a municipal wastewater system (the "System") to provide for the collection, treatment, and disposal of wastewater; and WHEREAS, the Lodi Public Improvement Corporation (the "Corporation") is a nonprofit public benefit corporation formed for the purpose of assisting the City in financing capital improvements to the System; and WHEREAS the City and the Corporation have entered into that certain Installment Sale Agreement, dated as of December 1, 1991, (the "1991 Prior Agreement") for the purpose of refinancing certain improvements to the System (the "Existing Facilities"); and WHEREAS, the Corporation entered into that certain Trust Agreement, dated as of December 1, 1991, (the "1991 Trust Agreement") with Bank of America National Trust and Savings Association pursuant to which there have been delivered Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates") evidencing the right to receive the installment payments to be made by the City under the 1991 Prior Agreement; and WHEREAS, the City proposes to refund the outstanding 1991 Certificates by making a prepayment of the remaining installment payments under the 1991 Prior Agreement, which is to be applied to the redemption of the outstanding 1991 Certificates; and WHEREAS, the Corporation has agreed to assist the City by: (i) acquiring the Existing Facilities and selling the Existing Facilities to the City, and (ii) acquiring or causing the acquisition of the Project and selling the Project to the City, in each case pursuant to the terms of an Installment Purchase Agreement (the "Installment Purchase Agreement"); and WHEREAS, pursuant to the Installment Purchase Agreement, the City will be obligated to make installment payments (the "Installment Payments") to the Corporation as the purchase price of the Project; and WHEREAS, the Corporation will assign certain of its rights under the Installment Purchase Agreement, including its rights to receive the Installment Payments, to The Bank of New York Trust Company, N.A. (the 'Trustee") pursuant to a Trust Agreement (the `Trust Agreement') between the Corporation and the Trustee; and WHEREAS, pursuant to the Trust Agreement, the Trustee is to execute and deliver Wastewater System Revenue Certificates of Participation, 2007 Series A (the "Certificates"), evidencing a proportionate ownership interest in the Installment Payments; and WHEREAS, a portion of the sale of the Certificates is to be applied, among other things, to the costs of the Project as provided in the Trust Agreement; and WHEREAS, a portion of the sale of the Certificates is to be applied to the prepayment of the City's obligations to make installment payments under the 1991 Prior Agreement; and WHEREAS, there have been executed and delivered Wastewater System Revenue Certificates of Participation, 2004 Series A, under a certain Trust Agreement (the "2004 Trust Agreement"), dated as of May 1, 2004, between Corporation and Union Bank of California, N.A (the "2004 Trust Agreement Trustee"); and WHEREAS, the City wishes the Corporation and the 2004 Trust Agreement Trustee to enter into a supplemental trust agreement amending the definition of the term "Operation and Maintenance Costs" contained in the 2004 Trust Agreement to match the definition of the same term in the Trust Agreement; and WHEREAS, all acts, conditions, and things required by the laws of the State of California to exist, to have happened and to have been performed precedent to and in connection with the consummation of the transactions authorized hereby do exist, have happened, and have been performed in regular and due time, form, and manner as required by law, and the Corporation is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such transactions, for the purpose, in the manner and upon the terms herein provided; NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE LODI PUBLIC IMPROVEMENT CORPORATION AS FOLLOWS: Section 1. The Board of Directors of the Corporation hereby specifically finds and determines it is desirable and furthers the Corporation's public purpose to assist the City in the refinancing of the Existing Facilities and the financing of the Project as provided in the Installment Purchase Agreement and the Trust Agreement and that the statements, findings, and determinations of the Corporation set forth above and in the preambles of the documents approved herein are true and correct. Section 2. The Installment Purchase Agreement, in the form presented at this meeting and on file with the Secretary of the Corporation, and the performance by the Corporation of its obligations thereunder, are hereby approved. The President and the Treasurer of the Corporation, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the Corporation, to execute and deliver to the City the Installment Purchase Agreement in substantially said form, with such changes therein as such officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. Section 3. The Trust Agreement, in the form presented at this meeting and on file with the Secretary of the Corporation, and the performance of by the Corporation of 2 its obligations thereunder, are hereby approved. The President or the Treasurer of the Corporation, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the Corporation, to execute and deliver to the Trustee the Trust Agreement in substantially said form, with such changes therein as such officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. Section 4. The President or the Treasurer of the Corporation, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the Corporation, to execute and deliver to the 2004 Trustee a supplement to the 2004 Trust Agreement to amend the definition of Operation and Maintenance Costs to match the definition of such term in the Trust Agreement. Section 5. The Secretary of the Corporation is hereby authorized and directed to attest the signatures of the President and the Treasurer of the Corporation, as may be required or appropriate, in connection with the execution and delivery of the Installment Purchase Agreement, the Trust Agreement and the Certificates. Section 6. Each officer of the Corporation is hereby authorized and directed, acting singly, to do any and all things and to execute and deliver any and all documents which they may deem necessary or desirable in order to consummate the transactions authorized hereby and to consummate the sale, execution, and delivery of the Certificates and otherwise to carry out, give effect to, and comply with the terms and intent of this Resolution, the Installment Purchase Agreement the Trust Agreement and the Certificates: and all such actions heretofore taken by such officers are hereby ratified, confirmed and approved. Section 7. This Resolution shall take effect immediately upon its passage. Dated: November 7, 2007 -------------------------------- hereby certify that Resolution No. LPIC2007- was passed and adopted by the Board of Directors of the Lodi Public Improvement Corporation in a regular meeting held November 7, 2007 by the following vote: AYES: DIRECTORS— NOES: DIRECTORS— ABSENT: DIRECTORS— ABSTAIN: DIRECTORS— RANDI JOHL Secretary LPIC2007- 3 K- 1 RESOLUTION NO. 2007- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LODI APPROVING THE FORMS OF AN INSTALLMENT PURCHASE AGREEMENT, A CERTIFICATE PURCHASE CONTRACT, A PRELIMINARY OFFICIAL STATEMENT, A CONTINUING DISCLOSURE CERTIFICATE AGREEMENT, AND AN ESCROW AGREEMENT RELATING TO WASTEWATER SYSTEM REVENUE CERTIFICATES OF PARTICIPATION, 2007 SERIES A; AND APPROVING AND AUTHORIZING CERTAIN OTHER MATTERS RELATING THERETO WHEREAS, the City of Lodi, a municipal corporation duly organized and existing under and by virtue of the Constitution and laws of the State of California (the "City"), owns and operates a municipal wastewater system (the "System") to provide for the collection, treatment, and disposal of wastewater; and WHEREAS, the Lodi Public Improvement Corporation (the "Corporation") is a nonprofit public benefit corporation formed for the purpose of assisting the City in financing capital improvementsto the System; and WHEREAS the City and the Corporation have entered into that certain Installment Sale Agreement, dated as of December 1, 1991, (the "1991 Prior Agreement") for the purpose of refinancing certain improvements to the System (the "Existing Facilities"); and WHEREAS, the Corporation entered into that certain Trust Agreement, dated as of December 1, 1991, (the "1991 Trust Agreement") with Bank of America National Trust and Savings Association pursuant to which there have been delivered Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates") evidencing the right to receive the installment payments to be made by the City under the 1991 Prior Agreement; and WHEREAS, the City proposes to refund the outstanding 1991 Certificates by making a prepayment of the remaining installment payments under the 1991 Prior Agreement, which is to be applied to the redemption of the outstanding 1991 Certificates; and WHEREAS, the City proposes to make certain additions, betterments, extensions, replacements, and improvements to the System (the "Project"); and WHEREAS, the Corporation has agreed to assist the City by: (i) acquiring the Existing Facilities and selling the Existing Facilities to the City, and (ii) acquiring or causing the acquisition of the Project and selling the Project to the City, in each case pursuant to the terms of an Installment Purchase Agreement (the "Installment Purchase Agreement"); and WHEREAS, pursuant to the Installment Purchase Agreement, the City will be obligated to make installment payments (the "Installment Payments") to the Corporation as the purchase price of the Project; and WHEREAS, the Corporation will assign certain of its rights under the Installment Purchase Agreement, including its rights to receive the Installment Payments, to The Bank of New York Trust Company, N.A. (the `Trustee") pursuant to a Trust Agreement (the `Trust Agreement") between the Corporation and the Trustee; and WHEREAS, pursuant to the Trust Agreement, the Trustee is to execute and deliver Wastewater System Revenue Certificates of Participation, 2007 Series A (the "Certificates"), evidencing a proportionate ownership interest in the Installment Payments; and WHEREAS, the City has determined to provide for the redemption of the 1991 Certificates by entering into an Escrow Deposit and Trust Agreement (the "Escrow Agreement") with U.S. Bank National Association (the "Escrow Bank"); and WHEREAS, a portion of the sale of the Certificates is to be applied, among other things, to the costs of the Project as provided in the Trust Agreement: and WHEREAS, a portion of the sale of the Certificates is to be applied to the prepayment of the City's obligations to make installment payments under the 1991 Prior Agreement; and WHEREAS, the City proposes to prepare and distribute a Preliminary Official Statement and a final Official Statement in connection with the offer and sale of the Certificates; and WHEREAS, the City proposes to execute and deliver a Certificate Purchase Contract (the "Certificate Purchase Contract") with Stone & Youngberg LLC (on behalf of itself and Bear Stearns, together the "Underwriters"), pursuant to which the Underwriters will purchase the Certificates for reoffering to the public; and WHEREAS, the California Statewide Communities Development Authority (the "Authority") had assigned its rights to receive Installment Payments under the Installment Purchase Aareement (the "2003 Aareement") to Union Bank of California. NA. as Trustee (the "2003 Trustee") and executed and delivered its Water and Wastewater Revenue Bonds (Pooled Financing Program) Series 2003B, under a certain " , indenture, dated as of October 1, 2003, between the Authority and Union Bank of Callfernla4 NA the "2003 indefitue Trustee"), which was secured in Part by the Installment Payments; and WHEREAS, the City wishes the Authority aad to amend the 2003 indentuFe AAqreement so that the definition of the term "Operation and Maintenance Costs" contained in the 2003 'RdentuFe Aareement (as it relates to the City) be amended to match the definition of the same term in the Trust Agreement; and WHEREAS, there have been executed and delivered Wastewater System Revenue Certificates of Participation, 2004 Series A, under a certain Trust Agreement (the "2004 Trust Agreement"), dated as of May 1, 2004, between the Corporation and Union Bank of California, N.A (the "2004 Trust Agreement Trustee"); and 2 WHEREAS, the City wishes the Corporation and the 2004 Trust Agreement Trustee to enter into a supplemental trust agreement amending the definition of the term "Operation and Maintenance Costs" contained in the 2004 Trust Agreement to match the definition of such term in the Trust Agreement; and WHEREAS, all acts, conditions, and things required by the laws d^ the State of California to exist, to have happened and to have been performed precedent to and in connection with the consummation of the transactions authorized hereby do exist, have happened and have been performed in regular and due time, form, and manner as required by law, and the City is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such transactions for the purpose, in the manner and upon the terms herein provided. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LODI AS FOLLOWS: Section 1. The City Council hereby specifically finds and determines that the actions authorized hereby constitute and are with respect to the public affairs of the City and that the statements, findings, and determinations of the City set forth above and in the preambles of the documents approved herein are true and correct and that the consummation of the transactions contemplated therein shall result in significant public benefits to the City in that the City expects to improve the efficient operation of the City's System through the refinancing of the Existing Facilities and the financing of the Project as provided in the Installment Purchase Agreement and the Trust Agreement. Section 2. The Installment Purchase Agreement, in the form presented at this meeting and on file with the City Clerk, and the performance by the City of its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the City, to execute and deliver to the Corporation the Installment Purchase Agreement in substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof; provided, that the principal component of the Installment Payments set forth in ExhibitB to the Installment Purchase Agreement shall not exceed Thirty -Five Million Dollars ($35,000,000); provided further that the interest components on the principal components of the Installment Payments set forth in Exhibit B to the Installment Purchase Agreement shall not exceed such rate or rates that the true interest cost with respect to the Certificates is greater than five and one half percent (5.50%); and provided further that no Installment Payment shall be scheduled for payment later than 35 years from the date of initial delivery of the Certificates. Section 3. The Escrow Agreement, proposed to be executed and entered into by the City and the Escrow Bank, in the form presented at this meeting and on file with the City Clerk, and the performance by the City of its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed for and in the name and on behalf of the City to execute and deliver the Escrow Agreement in substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. 3 Section 4. The Certificate Purchase Contract, proposed to be executed and entered into by and between the City and Stone & Youngberg LLC, on behalf of the Underwriters, in the form presented at this meeting and on file with the City Clerk, and the performance by the City of its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the City, to execute and deliver to the Underwriters the Certificate Purchase Contract in substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof; provided that the Underwriters' discount in connection with the sale of the Certificates shall not exceed ninety-five hundredths (.95) of one percent of the principal components of the Installment Payments evidenced by the Certificates. Section 5. The Preliminary Official Statement, in the form presented at this meeting and on file with the City Clerk, is hereby approved. The City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed to cause the Preliminary Official Statement to be distributed to potential purchasers of the Certificates in substantially the form presented to this meeting with such changes therein as the officer deeming the Preliminary Official Statement final for purposes of Rule 15c2-12 of the Securities and Exchange Commission ("Rule 15c2-12") may approve, such approval to be conclusively evidenced by such officer deeming the Preliminary Official Statement final for purposes of Rule 15c2-12. The City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed to deem the Preliminary Official Statement final for purposes of Rule 15c2-12 except for such information as may be omitted from the Preliminary Official Statement under Rule 15c2-12, Section 6. The preparation and delivery of a final Official Statement, and its use by the Underwriters, in connection with the offering and sale of the Certificates are hereby approved. The Official Statement shall be substantially in the form of the Preliminary Official Statement deemed final for purposes of Rule 1502-12 pursuant to Section 5 of this Resolution, with such changes as the officer executing the Official Statement may approve, such approval to be conclusively evidenced by such officer's execution and delivery thereof. The City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed, for and in the name and on behalf of the City, to execute and deliver the Official Statement and any amendment or supplement thereto contemplated by the Certificate Purchase Contract, in the name and on behalf of the City, and thereupon to cause the final Official Statement and any such amendment or supplementto be delivered to the Underwriters. Section 7. The Continuing Disclosure Certificate we-e e+t, proposed to be executed and entered into by the City and the Trustee, in the form presented at this meeting and on file with the City Clerk, and the performance by the City of its obligations thereunder, are hereby approved, and the City Manager, the Deputy City Manager, and the Public Works Director, each acting singly, are hereby authorized and directed for and in the name and on behalf of the City to execute and deliver the Continuing Disclosure Certificate AgreemeRt in substantially said form, with such changes therein as the officer executing such document may approve, such approval to be conclusively evidenced by the execution and delivery thereof. 4 Section 8. The City Clerk is hereby authorized and directed to attest the signature of the City Manager, the Deputy City Manager, and the Public Works Director and to affix and attest the seal of the City, as may be required or appropriate, in connection with the execution and delivery of the Certificates and the documents approved by this Resolution. Section 9. The City hereby authorizes and directs that the definition of Operation and Maintenance Costs in the 20031Rdere Aareement (as it relates to the City) and the 2004 Trust Agreement Is amended to match the definition of the same term in the Trust Agreement. Section 10. Each officer of the City is hereby authorized and directed, acting singly, to do any and all things (including the negotiating and obtaining of a municipal bond insurance policy and/or reserve fund surety bond with respect to the Certificates if the City Manager, the Deputy City Manager or the Public Works Director determines that such insurance policy or surety bond is expected to result in savings to the City) and to execute and deliver any and all documents which such officer may deem necessary or desirable in order to consummate the transactions authorized hereby and to consummate the sale, execution and delivery of the Certificates and otherwise to carry out, give effect to and comply with the terms and intent of this Resolution, the Installment Purchase Agreement, the Certificate Purchase Contract, the Preliminary Official Statement, the Official Statement and the Certificates; and all such actions heretofore taken by such officers are hereby ratified, confirmed and approved. Section 11. This Resolution shall take effect immediately upon its passage. Dated: November7, 2007 hereby certify that Resolution No. 2007- was passed and adopted by the Lodi City Council in a regular meeting held November 7, 2007, by the following vote: AYES: COUNCIL MEMBERS - NOES: COUNCIL MEMBERS - ABSENT: COUNCIL MEMBERS - ABSTAIN: COUNCIL MEMBERS- RANDI JOHL City Clerk 2007- 5 STONE & YO U N G B E RG One Ferry Building, San Francisco, California 94111 (415) 445-2300 MEMORANDUM To: City of Lodi Wastewater Financing Team From: Eileen Gallagher and Stephanie Hansen, Stone & Youngberg LLC Date: October 29, 2007 Re: Summary of Ratings and Bond Insurance Bids City of Lodi Wastewater System Revenue COPS, Series 2007A This memo summarizes the results of the ratings and bond insurer responses on the proposed City of Lodi Wastewater System Revenue COPS, Series 2007A. Ratings Both Standard & Poor's Rating Service (S&P) and Fitch Ratings reviewed the City's proposed Wastewater System Revenue COPS. Each provided a rating of "A-" on the credit with a "stable" outlook. Bond Insurance and Surety Reserve Bids Seven AAA -rated bond insurers were invited to review the proposed financing and submit insurance and surety reserve bids. All seven firms provided bids. The bids are summarized in the table below. COP Insurance Bid 1 Estimated Cost XL Capital 14.0 bps $ 87,637 FSA 19.4 bps 121,055 CIFG 25.0 bps 156,494 MBIA 26.0 bps 162,238 FGIC 27.5 bps 171,598 Ambac 28.0 bps 174,718 Assured Guaranty 28.0 bps 175,273 Surety Reserve Bid 2 Estimated Cost 2.00% $ 52,476 1.50% 39,232 1.50% 39,357 1.75% 45,771 1.75% 45,771 2.00% 52,309 1.50% 39,357 (1) Insurance bids are quoted in basis points times total principal and interest on the COPS. (2) Surety reserve bids are quoted as a percentage of the total reserve requirement. Economics of Bond Insurance We compared the debt service costs of a "AAA" rated COP issue relative to an "A-" rated COP issue. We also analyzed the economic benefits of using the low bidder, XL Capital, relative to the next lowest bidder, FSA. As a relatively new insurer in the California market, XL Capital is not yet fully accepted by all investors and consequently trades at slightly higher interest rates than the other mainstream AAA insurers. Our desk estimates this spread to be approximately 5 basis points as of October 29, 2007. The results of this analysis are summarized below. To Final Maturity To 10 -Year Call NPV of Debt Benefit of NPV of Debt Benefit of Service Insurance Service Insurance A- Rating $ 31,839,664 n/a $ 31,074,718 n/a FSA Insurance 31,169,318 $ 670,346 30,409,583 $ 665,134 XL Insurance 31,269,158 570,506 30,507,053 567,665 If the 2007 COPS are left outstanding to maturity, the FSA insurance generates saving of over $$670,000. Even if it's assumed that the CON are refinanced at par in 10 years (before the cost of the insurance has been fully amortized,) the FSA insurance generates savings of over $665,000. We recommend accepting the FSA insurance bid. Detailed analyses are attached. Surety Reserve The economics of using a surety reserve in lieu of a cash -funded debt service reserve are essentially a wash. The use of a surety reserve reduces the principal amount of the 2007 COPS by approximately $2.8 million. The City pays an up -front surety premium of approximately $39,200, but also saves on issuance costs that are indexed to the lower principal amount. We recommend accepting the surety reserve bid from FSA. City of Lodi Wastewater Certificates of Participation (Refinancing and ImprovementProject) Series 2007 Comparison of FSA Insurance bid, XL Insurance bid and A- rating ** Assumes no call before final maturity ** Premium Estimated Cost NPV Cash Flom Benefit ofinsurance A - rating n/a n/a 31,839,664 n/a FSA Bid 19.4bps $ 121,055 31,169,318 $ 670,346 XL Bid 14 bps $ 87,637 31,269,158 $ 570,506 CIFG Bid 25 bps $ 156,494 4.545505% MBIA Bid 26 bps $ 162,238 of Difference FGIC 27.5 bps $ 171,598 12/5/2007 Ambac Bid 28 bps $ 174,718 Assured Guaranty Bid 28 bps $ 175,273 Present Value Analysis Based on Net Debt Service FSABond Insurance XL Capital Bond Insurance Stand Alone A- Rating FSA PV Factor at PV of XL PV of PV A- PV of A- PV Rate Debt Service 4.545505% FSA DS Debt Semcc XL DS of Difference Debt Service Debt Service of Difference 12/5/2007 4/1/2008 466,936 0.9856217 460,223 468,423 461,687 1,465 476,054 469,209 8,987 10/1/2008 724,556 0.9637188 698,268 726,863 700,491 2,223 738,705 711,904 13,635 4/1/2009 724,556 0.9423026 682,751 726,863 684,924 2,173 738,705 696,084 13,332 10/1/2009 849,556 0.9213623 782,749 851,863 784,874 2,125 903,705 832,640 49,891 4/1/2010 722,056 0.9008873 650,491 724,363 652,569 2,078 735,405 662,517 12,026 10/1/2010 852,056 0.8808674 750,549 854,363 752,580 2,032 910,405 801,946 51,397 4/1/2011 719,456 0.8612924 619,662 721,763 621,649 1,986 731,905 630,384 10,722 10/1/2011 859,456 0.8421523 723,793 861,763 725,735 1,942 916,905 772,174 48,381 4/1/2012 716,656 0.8234376 590,122 718,963 592,021 1,899 728,205 599,631 9,510 10/1/2012 856,656 0.8051388 689,727 863,963 695,610 5,883 918,205 739,282 49,555 4/1/2013 713,856 0.7872466 561,981 716,063 563,718 1,737 724,405 570,285 8,304 10/1/2013 863,856 0.7697521 664,955 866,063 666,653 1,698 924,405 711,563 46,607 4/1/2014 710,856 0.7526463 535,023 713,063 536,684 1,661 720,405 542,210 7,187 10/1/2014 860,856 0.7359206 633,522 868,063 638,825 5,303 925,405 681,025 47,503 4/1/2015 707,856 0.7195667 509,350 709,963 510,865 1,516 716,305 515,429 6,079 10/1/2015 867,856 0.7035761 610,603 869,963 612,085 1,482 931,305 655,244 44,641 4/1/2016 704,656 0.6879409 484,762 706,763 486,211 1,449 712,005 489,817 5,055 10/1/2016 874,656 0.6726532 588,340 876,763 589,757 1,417 937,005 630,279 41,939 4/1/2017 701,256 0.6577052 461,220 703,363 462,605 1,385 707,505 465,330 4,110 10/1/2017 876,256 0.6430893 563,511 878,363 564,866 1,355 942,505 606,115 42,604 4/1/2018 697,756 0.6287983 438,748 699,863 440,072 1,324 702,805 441,923 3,175 10/1/2018 877,756 0.6148249 539,666 879,863 540,961 1,295 942,805 579,660 39,994 4/1/2019 694,156 0.6011619 417,300 696,263 418,567 1,266 698,005 419,614 2,314 10/1/2019 879,156 0.5878026 516,770 881,263 518,008 1,238 948,005 557,240 40,469 4/1/2020 690,456 0.5747402 396,833 692,563 398,044 1,211 693,005 398,298 1,465 10/1/2020 885,456 0.5619681 497,598 887,563 498,782 1,184 953,005 535,558 37,960 4/1/2021 686,556 0.5494798 377,249 688,663 378,406 1,157 687,805 377,935 686 10/1/2021 891,556 0.5372690 479,006 893,663 480,137 1,132 957,805 514,599 35,593 4/1/2022 682,456 0.5253295 358,514 684,563 359,621 1,106 682,405 358,487 (27) 10/1/2022 897,456 0.5136554 460,983 899,563 462,065 1,082 967,405 496,913 35,929 4/1/2023 677,888 0.5022407 340,463 679,994 341,521 1,058 676,349 339,690 (773) 10/1/2023 897,888 0.4910797 440,934 899,994 441,969 1,034 971,349 477,010 36,075 4/1/2024 673,213 0.4801667 323,254 675,319 324,266 11011 670,080 321,750 (1,504) 10/1/2024 1,283,213 0.4694962 602,463 1,290,319 605,800 3,336 1,360,080 638,552 36,089 4/1/2025 660,250 0.4590628 303,096 662,250 304,014 918 655,417 300,878 (2,218) 10/1/2025 3,465,250 0.4488613 1,555,417 3,472,250 1,558,559 3,142 3,545,417 1,591,401 35,984 4/1/2026 590,125 0.4388865 258,998 592,000 259,821 823 583,167 255,944 (3,054) 10/1/2026 3,535,125 0.4291334 1,517,040 3,542,000 1,519,990 2,950 2,731,667 1,172,250 (344,791) 4/1/2027 516,500 0.4195970 216,722 518,250 217,456 734 528,978 221,957 5,236 10/1/2027 1,971,500 0.4102725 808,852 1,978,250 811,622 2,769 2,158,978 885,769 76,917 4/1/2028 480,125 0.4011552 192,605 481,750 193,257 652 488,228 195,855 3,250 10/1/2028 2,005,125 0.3922406 786,491 2,011,750 789,090 2,599 2,198,228 862,234 75,743 4/1/2029 442,000 0.3835240 169,518 443,500 170,093 575 445,478 170,851 1,334 10/1/2029 2,047,000 0.3750012 767,627 2,053,500 770,065 2,438 2,240,478 840,182 72,554 4/1/2030 401,875 0.3666677 147,355 403,250 147,859 504 400,603 146,888 (467) 10/1/2030 2,086,875 0.3585195 748,185 2,093,250 750,471 2,286 2,285,603 819,433 71,248 4/1/2031 359,750 0.3505523 126,111 361,000 126,549 438 353,478 123,912 (2,199) 10/1/2031 2,124,750 0.3427622 728,284 2,136,000 732,140 3,856 2,333,478 799,828 71,544 4/1/2032 315,625 0.3351451 105,780 316,625 106,115 335 303,978 101,877 (3,904) 10/1/2032 2,170,625 0.3276974 711,308 2,176,625 713,274 1,966 2,383,978 781,223 69,915 4/1/2033 269,250 0.3204151 86,272 270,125 86,552 280 251,978 80,737 (5,534) 10/1/2033 2,219,250 0.3132947 695,279 2,225,125 697,120 1,841 2,436,978 763,492 68,213 4/1/2034 220,500 0.3063325 67,546 221,250 67,776 230 197,353 60,455 (7,091) 10/1/2034 2,265,500 0.2995251 678,574 2,276,250 681,794 3,220 2,492,353 746,522 67,948 4/1/2035 169,375 0.2928689 49,605 169,875 49,751 146 139,978 40,995 (8,610) 10/1/2035 2,319,375 0.2863606 664,178 2,324,875 665,753 1,575 2,549,978 730,213 66,035 4/1/2036 115,625 0.2799970 32,375 116,000 32,480 105 79,728 22,323 (10,051) 10/1/2036 2,370,625 0.2737748 649,017 2,381,000 651,858 2,840 2,609,728 714,478 65,460 4/1/2037 59,250 0.2676908 15,861 59,375 15,894 33 16,478 4,411 01,450) 10/1/2037 2,429,250 0.2617421 635,837 2,434,375 637,178 1,341 631,383 165,260 (470,577) 62,399,368 31,169,318 62,597,560 31,269,158 99,840 62,993,433 31,839,664 670,346 City of Lodi Wastewater Certificates of Participation (Refinancing and Improvement Project) Series 2007 Comparison of FSA Insurancebid, XL Insurance bid and A- rating ** Assumes 10 year par call ** Premium NPV Cashflow A- rating n/a 31,074,718 FSA Bid 19.4bps 30,409,583 XL Bid 14bps 30,507,053 Present Value Analysis Based on Net Debt Service Benefit of Insurance n/a $ 665,134 8 567,665 XL Capital Bond Insurance XL PV of XL PV Debt Service Debt Service of Difference Stand Alone A- Rating A- PV ofA- PV Debt Service Debt Service of Difference 468,423 FSA B and Insurance 1,465 476,054 FSA PV Factor at PV of Date Debt Service 4.545505% FSA DS 13,635 726,863 684,924 12/5/2007 738,705 696,084 13,332 4/1/2008 466,936 0.9856217 460,223 10/1/2008 724,556 0.9637188 698,268 4/1/2009 724,556 0.9423026 682,751 10/1/2009 849,556 0.9213623 782,749 4/1/2010 722,056 0.9008873 650,491 10/1/2010 852,056 0.8808674 750,549 4/1/2011 719,456 0.8612924 619,662 10/1/2011 859,456 0.8421523 723,793 4/1/2012 716,656 0.8234376 590,122 10/1/2012 856,656 0.8051388 689,727 4/1/2013 713,856 0.7872466 561,981 10/1/2013 863,856 0.7697521 664,955 4/1/2014 710,856 0.7526463 535,023 10/1/2014 860,856 0.7359206 633,522 4/1/2015 707,856 0.7195667 509,350 10/1/2015 867,856 0.7035761 610,603 4/1/2016 704,656 0.6879409 484,762 10/1/2016 874,656 0.6726532 588,340 4/1/2017 701,256 0.6577052 461,220 10/1/2017 29,096,256 0.6430893 18,711,492 4/1/2018 712,005 489,817 5,055 10/1/2018 589,757 1,417 937,005 4/1/2019 41,939 703,363 462,605 10/1/2019 707,505 465,330 4,110 4/1/2020 18,767,509 56,017 29,385,910 10/1/2020 186,273 4/1/2021 10/1/2021 4/1/2022 10/1/2022 4/1/2023 10/1/2023 4/1/2024 10/1/2024 4/1/2025 10/1/2025 4/1/2026 10/1/2026 4/1/2027 10/1/2027 4/1/2028 10/1/2028 4/1/2029 10/1/2029 4/1/2030 10/1/2030 4/1/2031 10/1/2031 4/1/2032 10/1/2032 4/1/2033 10/1/2033 4/1/2034 10/1/2034 4/1/2035 10/1/2035 4/1/2036 10/1/2036 4/1/2037 10/1/2037 Benefit of Insurance n/a $ 665,134 8 567,665 XL Capital Bond Insurance XL PV of XL PV Debt Service Debt Service of Difference Stand Alone A- Rating A- PV ofA- PV Debt Service Debt Service of Difference 468,423 461,687 1,465 476,054 469,209 8,987 726,863 700,491 2,223 738,705 711,904 13,635 726,863 684,924 2,173 738,705 696,084 13,332 851,863 784,874 2,125 903,705 832,640 49,891 724,363 652,569 2,078 735,405 662,517 12,026 854,363 752,580 2,032 910,405 801,946 51,397 721,763 621,649 1,986 731,905 630,384 10,722 861,763 725,735 1,942 916,905 772,174 48,381 718,963 592,021 1,899 728,205 599,631 9,510 863,963 695,610 5,883 918,205 739,282 49,555 716,063 563,718 1,737 724,405 570,285 8,304 866,063 666,653 1,698 924,405 711,563 46,607 713,063 536,684 1,661 720,405 542,210 7,187 868,063 638,825 5,303 925,405 681,025 47,503 709,963 510,865 1,516 716,305 515,429 6,079 869,963 612,085 1,482 931,305 655,244 44,641 706,763 486,211 1,449 712,005 489,817 5,055 876,763 589,757 1,417 937,005 630,279 41,939 703,363 462,605 1,385 707,505 465,330 4,110 29,183,363 18,767,509 56,017 29,385,910 18,897,766 186,273 43,593,905 30,409,583 43,732,610 30,507,053 97,469 44,482,853 31,074,718 665,134 29079-171 J H: CKL 10-2-07 10-10-07 10-18-07 10-23-07 10-25-07 PRELIMINARY OFFICIAL STATEMENT DATED NOVEMBER 8, 2007 NEW ISSUE - FULL BOOK -ENTRY ONLY Ratings: (See "Ratings") In the opinion of Orrick, Herrington & Sutcliffe LLP, Special Counsel to the City, based on an analysis of existing laws, regulations, rulings and court decisions and assuming, among other things, the accuracy of certain representations and compliance with certain covenants, the portion of each Installment Payment designated as and constituting interest paid by the City under the Installment Purchase Agreement and received by the Owners of the 2007 Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Special Counsel, the portion of each Installment Payment designated as and constituting interest paid by the City under the Installment Purchase Agreement and received by the Owners of the 2007 Certificates is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Special Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest evidenced by, the 2007 Certificates. See "TAX MATTERS" $32,000,000' Wastewater System Revenue Certificates of Participation, 2007 Series A Evidencing the Proportionate Interests of the Owners Thereof in Certain Installment Payments to be Made by the CITY OF LODI, CALIFORNIA Dated: Date of Delivery Due: October 1, as set forth on the inside front cover This cover page contains certain information for general reference only. It is not intended to be a summary of the security or terms of this issue. Investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings set forth in this Official Statement. The Wastewater System Revenue Certificates of Participation, 2007 Series A (the "2007 Certificates") e✓idence the proportionate interests of the Owners thereof in Installment Payments (the "Installment Payments") to be made by the City of Lodi, California (the "City") under the terms of an Installment Purchase Agreement, dated as of December 1, 2007 (the 'Installment Purchase Agreement"), between the City and the Lodi Public Improvement Corporation (the "Corporation"). Pursuant to the Installment Purchase Agreement, the City is obligated to make the Installment Payments to the Corporation from System Net Revenues of the City's wastewater collection, treatment and disposal system (the "System"). See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES". The 2007 Certificates are being sold to provide funds (i) to finance the costs of certain improvements to the System, (ii) to allow the City to prepay outstanding installment payment obligations of the City and, as a result, to cause immediate defeasance of the outstanding Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates"), (iii) to [fund a deposit to a reserve fund] [pay the premium for a debt service reserve fund surety bond] for the 2007 Certificates, and (iv) to pay costs of delivery of the 2007 Certificates. See "THE FINANCING PLAN'. The 2007 Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2007 (the "Trust Agreement"), between the Corporation and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). The 2007 Certificates will be delivered in fully registered form, and, when executed and delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"). DTC will act as securities depository for the 2007 Certificates. Purchasers of interests in the 2007 Certificates will not receive securities certificates representing their interests in the 2007 Certificates purchased. Principal, premium, if any, and interest evidenced by the 2007 Certificates are payable by the Trustee to DTC, which is obligated in tum to remit such principal, premium, if any, and interest to its DTC participants for subsequent disbursement to the beneficial owners of the 2007 Certificates, as described in this Official Statement. The 2007 Certificates are deliverable in denominations of $5,000 or any integral multiple thereof. Interest evidenced by the 2007 Certificates will be payable semiannually on April 1 and October 1 of each year, commencing April 1, 2008. The 2007 Certificates are subject to prepayment prior to their stated maturity dates, as more fully described in this Official Statement. See "THE 2007 CERTIFICATES—Prepayment Provisions". The scheduled payment of principal and interest evidenced by the 2007 Certificates when due will be guaranteed under a financial guaranty insurance policy to be issued by simultaneously with the delivery of the 2007 Certificates. Preliminary; subject to change. [logo] The obligation of the City to make the Installment Payments is a special obligation of the City that is secured by a pledge of and payable solely from System Net Revenues. The general fund of the City is not liable for, and neither the faith and credit nor the taxing power of the City is pledged to, the payment of the Installment Payments. The pledge of System Net Revenues to the Installment Payments is on a parity with the pledge of System Net Revenues to certain outstanding obligations, which will be outstanding in the principal amount of $28,690,000 following defeasance of the 1991 Certificates with proceeds d the 2007 Certificates (the "Existing Parity Obligations"). See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES - Outstanding Parity Obligations'. The City is also authorized under the Installment Purchase Agreement to incur other obligations payable from System Net Revenues on a parity with the Installment Payments. The 2007 Certificates are offered when, as and if executed and delivered to the Underwriters, subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Special Counsel, and certain other conditions. Certain legal matters will be passed upon for the Underwriters by Jones Hall, A Professional Law Corporation, San Francisco, California, and for the City and the Corporation by the City Attorney of the City. It is expected that the 2007 Certificates in definitive form will be available for delivery in New York, New York through the DTC book -entry system on or about December 5, 2007. STONE & YOUNGBERG LLC BEAR, STEARNS & CO. INC. Dated: November—, 2007 MATURITY SCHEDULE Maturity Maturity Date Principal Interest Price or CUSIPt Date Principal (October 1) Amount Rate Yield (540279) (October 1) Amount 2008 2016 2009 2017 2010 2018 2011 2019 2012 2020 2013 2021 2014 2022 2015 Interest Price or CUSIPt Rate Yield (540279) $ __% Term Certificate due October 1, 2037, Price: _% CUSIPt No. _ "' Priced to par call on October 1, t Copyright 2007, American Bankers Association. CUSIP data are provided by Standard & Poor's CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc., and are provided for convenience of reference only. Neither the City nor the Underwriters assume any responsibility for the accuracy of these CUSIP data. CITY OF LODI, CALIFORNIA City Council Bob Johnson, Mayor JoAnne Mounce, Mayor Pro Tempore Larry D. Hansen, Council Member Susan Hitchcock, Council Member Phil Katzakian, Council Member City Officials Blair King, City Manager Jim Krueger, Deputy City Manager Randi Johl, City Clerk D. Stephen Schwabauer, City Attorney Richard C. Prima, Jr., Public Works Director Charles E. Swimley Jr., Water Services Manager LODI PUBLIC IMPROVEMENT CORPORATION Board of Directors Bob Johnson JoAnne Mounce Larry D. Hansen Susan Hitchcock Phil Katzakian SPECIAL SERVICES Special Counsel Trustee Orrick, Herrington & Sutcliffe LLP The Bank of New York Trust Company, N.A. Los Angeles, California San Francisco, California Financial Advisor Verification Agent Lamont Financial Services Corp. Causey Demgen & Moore Inc. Los Angeles, California Denver, Colorado Escrow Bank U.S Bank National Association San Francisco, California GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT No dealer, broker, salesperson or other person has been authorized by the City or the Underwriters to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. 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 2007 Certificates by a person in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Statements contained in this Official Statement that include forecasts, estimates or matters of opinion, whether or not expressly stated as such, are intended solely as such and are not to be construed as representations of fact. The information set forth in this Official Statement has been furnished by the City and by other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the Underwriters. The information and expressions of opinions in this Official Statement are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall create, under any circumstances, any implication that there has been no change in affairs of the City since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THE OFFERING OF THE 2007 CERTIFICATES, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH 2007 CERTIFICATES AT A LEVEL ABOVE 1HAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements." Such statements are generally identifiable by the terminology used such as "plan," "project," "expect," "anticipate," "intend," "believe," "estimate," "budget' or other similar words. The achievement of certain results or other expectations contained in such forward- looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Except as specifically set forth in this Official Statement, the City does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur. TABLE OF CONTENTS Page Page INTRODUCTION............................................1 Environmental Compliance ........................ 21 Purpose of this Official Statement.................1 Service Area and Customers .....................22 The 2007 Certificates..................................1 Wastewater Rates and Charges ................. 25 Purpose of the 2007 Certificates ..................1 Planned Capital Improvements................... 28 Security and Sources of Payment for the Financial Statements ................................. 28 2007 Certificates.....................................2 Historical Operating Results....................... 29 Rate Covenant............................................2 Projected Operating Results and Debt Reserve Fund.............................................2 Service Coverage.................................. 30 Certificate Insurance....................................3 Transfers to the General Fund of the City.... 32 Continuing Disclosure..................................3 CONTINUING DISCLOSURE ........................ 32 Other Matters..............................................3 THE CORPORATION ................................... 32 THE FINANCING PLAN..................................4 CONSTITUTIONAL LIMITATIONS ON Refinancing of the 1991 Certificates .............4 TAXES AND APPROPRIATIONS............... 32 Financing of the 2007 Project.......................4 California Constitution Articles XIIIA and Estimated Sources and Uses of Funds .........5 XIIIB..................................................... 32 Schedule of Installment Payments................6 California Constitution Articles XIIIC and THE 2007 CERTIFICATES ..............................7 XIIID..................................................... 33 General......................................................7 Future Initiatives ........................................ 35 Prepayment Provisions................................7 RISK FACTORS ........................................... 36 SECURITY AND SOURCES OF PAYMENT Limited Obligations....................................36 FOR THE 2007 CERTIFICATES ..................9 Parity Obligations ...................................... 36 Installment Payments..................................9 Increased Direct Costs .............................. 36 Defined Terms .......................................... 10 Natural Calamities ..................................... 36 Pledge of System Net Revenues ................ 11 Limited Recourse on Default...................... 37 Rate Covenant .......................................... 11 Effect of Bankruptcy .................................. 37 Reserve Fund ........................................... 12 Loss of Tax Exemption .............................. 37 Application of System Revenues ................ 13 Secondary Market ..................................... 38 Outstanding Parity Obligations ................... 14 Potential Liability Associated with the Main Additional Parity Debt ................................ 14 Trunk Line ............................................ 38 Subordinate Obligations ............................. 15 TAX MATTERS ............................................ 39 Rate Stabilization Fund .............................. 15 LITIGATION ................................................. 41 CERTIFICATE INSURANCE ......................... 17 APPROVAL OF LEGALITY ...........................44 THE SYSTEM .............................................. 18 RATINGS ..................................................... 44 General .................................................... 18 FINANCIAL ADVISOR..................................44 Governance and Management ................... 18 UNDERWRITING.........................................45 Employees ................................................ 19 VERIFICATION OF MATHEMATICAL Retirement Programs ................................ 19 COMPUTATIONS.....................................45 Insurance ................................................. 19 EXECUTION AND DELIVERY ....................... 45 System Facilities ....................................... 19 APPENDIXA -THE CITY OF LODI..................................................................................................A-1 APPENDIXB -EXCERPTS OF AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2006 ....................................................B-1 APPENDIX C -BOOK-ENTRY ONLY SYSTEM.................................................................................0-1 APPENDIX D -SUMMARY OF PRINCIPAL LEGAL DOCUMENTS....................................................D-1 APPENDIXE -PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE .........................E-1 APPENDIXF -PROPOSED FORM OF OPINION OF SPECIAL COUNSEL........................................F-1 APPENDIX -SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY ...................................... G-1 OFFICIAL STATEMENT Relating to $32,000,000' Wastewater System Revenue Certificates of Participation, 2007 Series A Evidencing the Proportionate Interests of the Owners Thereof in Certain Installment Payments to be Made by the CITY OF LODI, CALIFORNIA INTRODUCTION This Introduction is qualified in its entirety by reference to the more detailed information included and referred to elsewhere in this Official Statement. The offering of the 2007 Certificates to potential investors is made only by means of the entire Official Statement. Terms used in this Introduction and not otherwise defined shall have the respective meanings assigned to them elsewhere in this Official Statement. See "APPENDIX D — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS". Purpose of this Official Statement The purpose of this Official Statement (which includes the cover page and the appendices attached hereto) is to provide certain information concerning the sale and delivery of the above -titled Certificates of Participation (the '2007 Certificates"). The 2007 Certificates evidence the proportionate interests of the registered owners (the "Owners") thereof in installments payments (the "Installment Payments") to be made by the City of Lodi, California (the 'City') under the terms of an Installment Purchase Agreement, dated as of December 1, 2007 (the "Installment Purchase Agreement"), between the City and the Lodi Public Improvement Corporation (the "Corporation"). The 2007 Certificates The 2007 Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2007 (the Trust Agreement"), between the Corporation and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). Purpose of the 2007 Certificates The 2007 Certificates are being sold to provide funds for the following purposes: (i) to finance the costs of certain improvements to the wastewater collection, treatment and disposal system of the City (the 'System") (see "THE 2007 PROJECT AND THE SYSTEM CAPITAL PLAN"), (ii) to allow the City to prepay certain outstanding installment payment obligations of the City (the '1991 Installment Payments") and, as a result, to cause a redemption of the outstanding Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates"), Preliminary; subject to change. (iii) to [fund a deposit to a reserve fund] [pay the premium for a debt service reserve fund surety bond] for the 2007 Certificates, and (iv) to pay costs of delivery of the 2007 Certificates. See "THE FINANCING PLAN". Security and Sources of Payment for the 2007 Certificates Pledge of System Net Revenues. The obligation of the City to make the Installment Payments pursuant to the Installment Purchase Agreement is a special obligation of the City secured by a pledge of and payable solely from System Net Revenues. The obligation of the City to make the Installment Payments does not constitute a debt of the City or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. Existing Parity Obligations. The City's pledge of System Net Revenues to the Installment Payments is on a parity with the City's pledge of System Net Revenues to certain outstanding obligations (the 2003 Installment Payments and the 2004 Installments Payments, as defined below), which are outstanding in the aggregate principal amount of $28,690,000 as of October 2, 2007 (the "Existing Parity Obligations"). The 1991 Installment Payments, which will be defeased in their entirety with proceeds of the 2007 Certificates on the date of execution and delivery of the 2007 Certificates, were outstanding in the principal amount of $8,575,000 as of October 2, 2007. See "THE FINANCING PLAN" and "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES - Outstanding Parity Obligations". Additional Parity Obligations. The City may incur additional obligations payable from and secured by the System Net Revenues on a parity with the Installment Payments and the Existing Parity Obligations. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES - Additional Parity Debt". Parity Debt. The Existing Parity Obligations, the Installments Payments and any future Parity Obligations are referred to as Parity Debt in this Official Statement. Rate Covenant The City covenants in the Installment Purchase Agreement that it will, to the maximum extent permitted by law, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Net Revenues during such Fiscal Year equal to at least 110% of the Annual Debt Service in such Fiscal Year; provided, an adjustment will be made to the amount of System Net Revenues for amounts deposited into or withdrawn from the Rate Stabilization Fund, provided that, for purposes of such calculation, the amount of System Net Revenues before any credits for transfers from the Rate Stabilization Fund to the System Revenue Fund may not be less than 100% of Annual Debt Service for such Fiscal Year. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 Certificates— Rate Covenant". Reserve Fund A Reserve Fund is established with the Trustee pursuant to the Trust Agreement in an amount equal to the "Reserve Fund Requirement" (as defined in the Trust Agreement). Amounts on deposit in the Reserve Fund will be applied to pay principal and/or interest evidenced by the 2007 Certificates in the event amounts on deposit in the Debt Service Fund are insufficient for that purpose. In lieu of funding the Reserve Fund with cash or in replacement of amounts then on deposit in the Reserve Fund, there may be credited to the Reserve Fund a Reserve Policy in an amount, together with moneys to remain on deposit therein, equal to the Reserve Fund Requirement. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 Certificates - Reserve Fund". Certificate Insurance The scheduled payment of principal and interest evidenced by the 2007 Certificates when due will be guaranteed under a financial guaranty insurance policy (the 'Policy') to be issued by (the "Insurer") simultaneously with the delivery of the 2007 Certificates. See "CERTIFICATE INSURANCE". Continuing Disclosure The City has covenanted for the benefit of the Owners and beneficial owners of the 2007 Certificates to provide certain financial information and operating data relating to the City and the System annually, and to provide notices of the occurrence of certain enumerated events, if material. See "CONTINUING DISCLOSURE". Other Matters This Official Statement speaks only as of its date, and the information and expressions of opinions contained in this Official Statement are subject to change without notice. Neither delivery of this Official Statement nor any sale made hereunder, under any circumstances, shall create any implication that there has been no change in the affairs of the City or the System since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The summaries of and references to documents, statutes, reports and other instruments referred to in this Official Statement do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report or instrument. The capitalization of any word not conventionally capitalized or otherwise defined in this Official Statement indicates that such word is defined in a particular agreement or other document and, as used in this Official Statement, has the meaning given it in such agreement or document. See "APPENDIX D — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS". Copies of the Trust Agreement and the Installment Purchase Agreement are available for inspection at the City Hall of the City in Lodi, California, and will be available from the Trustee upon request and payment of duplication costs. THE FINANCING PLAN The 2007 Certificates are being executed and delivered to provide funds (i) to allow the City to prepay the outstanding 1991 Installment Payments and, as a result, to cause a redemption of the outstanding 1991 Certificates, (ii) to finance the costs of certain improvements to the System, (iii) to fund a deposit to a reserve fund for the 2007 Certificates, and (iv) to pay costs of delivery of the 2007 Certificates. Refinancing of the 1991 Certificates The City previously caused execution and delivery of the Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates") outstanding, as of October 2, 2007, in the principal amount of $8,575,000. The 1991 Certificates evidence proportionate interests in certain payments (the "1991 Installment Payments") to be made by the City pursuant to an Installment Sale Agreement, dated as of December 1, 1991 (the "1991 Installment Sale Agreement"), between the City and the Corporation. The City will cause a portion of the sale proceeds of the 2007 Certificates to be used to immediately defease the outstanding 1991 Certificates by funding the outstanding principal component of the 1991 Certificates to be redeemed on February 1, 2008, plus accrued interest to February 1, 2008, plus a premium equal to 1.5% of the total principal amount to be redeemed. The City and U.S. Bank National Association, as trustee with respect to the 1991 Certificates (the "Escrow Bank"), will enter into an Escrow Deposit Agreement (the 'Escrow Agreement") under which the Escrow Bank will establish an Escrow Fund (the "Escrow Fund"), into which a portion of the proceeds of the 2007 Certificates and other available funds held for the 1991 Certificates will be deposited concurrently with the execution and delivery of the 2007 Certificates. Cash sufficient to defease the 1991 Certificates will be deposited in the Escrow Fund, and the cashmay be invested in non -callable federal securities. Sufficiency of the cash to defease the 1991 Certificateswill be verified by Causey Demgen & Moore Inc., Denver, Colorado ("Verification Agent"). Any interest earnings on amounts in the Escrow Fund will be available for transfer to the Improvement Fund on February 1, 2008. See "VERIFICATION OF MATHEMATICAL COMPUTATIONS" below. Financing of the 2007 Project Proceeds of the 2007 Certificates will be used to finance capital improvements to the System. The City currently expects the improvements to include the following: oo Phase 3 improvements to the City's White Slough Water Pollution Control Facility (the "White Slough Facility'). Phase 3 improvements include headworks improvements, acquisition and installation of an additional digester, two additional aeration basins, an additional secondary clarifier and improvements to the control room. These improvements are intended to improve de -nitrification and restore the facility's permitted treatment capacity to 8.5 mgd. The Phase 3 improvements are expected to cost approximately $20.6 million, and will be funded with proceeds of the 2007 Certificates and with remaining proceeds of the 4 2004 Certificates (as defined in "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES — Outstanding Parity Obligations"). The City commenced work on the Phase 3 improvements in April 2007 and expects to complete the Phase 3 improvements by March 2009. oo The City expects to undertake additional capital projects for the System, including rehabilitation of the main trunk line from the White Slough Facility to the City, which the City expects will not cost more than $7.75 million. On October 17, 2007, the City Council declared a local state of emergency, dispensed with bidding requirements and authorized the City Manager to negotiate a contract change order with the contractor performing the Phase 3 work to include the pipeline rehabilitation. The City is in the process of filing a Notice of Exemption under the California Environmental Quality Act ("CEQA') and expects the pipeline rehabilitation to be completed by Summer 2008. See "RISK FACTORS — Potential Liability Related to the Main Trunk Line". Estimated Sources and Uses of Funds The estimated sources and uses of funds with respect to the 2007 Certificates are as follows: Sources: Principal Amount of 2007 Certificates Plus Net Original Issue Premium Less Underwriters' Discount Total Sources Uses: Deposit to Escrow Fund Deposit to Improvement Fund Deposit to Reserve Fund') Costs of Issuance(2) Total Uses Represents an amount equal to the Reserve Fund Requirement. (2) Includes legal, financing and consulting fees, Trustee's fees, printing costs, rating agency fees, bond insurance premium and other costs incurred in connection with the delivery of the 2007 Certificates. Schedule of Installment Payments The schedule of Installment Payments and the City's payments obligations under existing Parity Debt (assuming no optional prepayments) is set forth below: Existing Parity Debt Service (1) 2007 Certificates Period Total Parity Ending Principal Interest Debt Service Principal Interest Debt Service Debt Service (1) Reflects the 2003 Installment Payments and the 2004 Installment Payments. THE 2007 CERTIFICATES General The 2007 Certificates will be prepared as one fully registered securities certificate for each maturity, and will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ("DTC'). DTC will act as securities depository for the 2007 Certificates. Principal, prepayment premium, if any, and interest evidenced by the 2007 Certificates are payable by the Trustee to DTC, which is obligated in turn to remit such principal, prepayment premium, if any, and interest to its DTC Participants for subsequent disbursement to the beneficial owners of the 2007 Certificates. See "APPENDIX C — BOOK -ENTRY ONLY SYSTEM". The 2007 Certificates will be delivered in authorized denominations of $5,000 or any integral multiple thereof. Interest evidenced by the 2007 Certificates is payable on April 1, 2008 and semiannually thereafter, on each April 1 and October 1 (each, an "Interest Payment Date" for the 2007 Certificates), computed on the basis of a 360 -day year comprised of twelve 30 -day months. The 2007 Certificates will be dated the date of delivery thereof, will mature on the dates and in the principal amounts and will evidence interest at the rates, all as set forth on the inside front cover of this Official Statement. Prepayment Provisions Optional Prepayment. The 2007 Certificates maturing on or prior to October 1, are not subject to optional prepayment prior to their stated maturity dates. The 2007 Certificates maturing on and after October 1, are subject to prepayment prior to their stated maturity dates, on any date on or after October 1, , as a whole or in part, at the option of the City, from any source of available funds, at a prepayment price equal to 100% of the principal amount of 2007 Certificates or portions thereof to be prepaid, plus unpaid accrued interest thereon to the date fixed for prepayment, without a prepayment premium. Mandatory Sinking Fund Prepayment. The 2007 Certificates maturing on October 1, are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1, thereafter to and including October 1, , from scheduled Installment Payments made by the City on such dates at a prepayment price equal to the principal amount of the 2007 Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment according to the following schedule: Prepayment Date Principal (October 1) Amount * Maturity The amount of each such prepayment shall be reduced as provided in the Installment Purchase Agreement in the event and to the extent of any and all optional prepayments, or purchases for retirement, of 2007 Certificates maturing on October 1, The 2007 Certificates maturing on October 1, , are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1, thereafter to and including October 1, , from scheduled Installment Payments made by the City on such dates at a prepayment price equal to the principal amount of the 2007 Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment according to the following schedule: Prepayment Date Principal (October 1) Amount * Maturity The amount of each such prepayment shall be reduced as provided in the Installment Purchase Agreement in the event and to the extent of any and all optional prepayments, or purchases for retirement, of 2007 Certificates maturing on October 1. Notice of Prepayment. Notice of prepayment of 2007 Certificates shall be mailed by the Trustee not less than thirty (30) days nor more than sixty (60) days prior to the prepayment date to (i) the respective Owners of the 2007 Certificates designated for prepayment at their addresses as shown on the registration books maintained by the Trustee, (ii) the Securities Depositories, and (iii) one or more Information Services. Each notice of prepayment shall state the date of such notice, prepayment price, the place of prepayment, the CUSIP number, if any, and if less than all of the 2007 Certificates of any one maturity are to be prepaid, the distinctive certificate numbers of the 2007 Certificates to be prepaid, and in the case of 2007 Certificates to be prepaid in part only, the respective portions of the principal amount thereof to be prepaid. Each such notice shall also state that on said date there will become due and payable on each of said 2007 Certificates the prepayment price thereof or of said specified portion of the principal amount thereof to be prepaid and that from and after such prepayment date interest with respect thereto shall cease to accrue, and shall require that such 2007 Certificates be then surrendered. Failure to receive such notice shall not invalidate any of the proceedings taken in connection with such prepayment. In the event of prepayment of 2007 Certificates (other than mandatory prepayment), the Trustee will mail a notice of prepayment upon receipt of a Written Request of the City but only after the City files a Certificate of the City with the Trustee that, on or before the date set for prepayment, the City will deposit with or otherwise make available to the Trustee for deposit in the Debt Service Fund the money required for payment of the prepayment price, including accrued interest evidenced thereby, of all 2007 Certificates then to be called for prepayment (or the Trustee determines that money will be deposited with or otherwise made available to it in sufficient time for such purpose), together with the estimated expense of giving such notice. Unless the book -entry only system shall have been discontinued, the Corporation, the City and the Trustee will recognize only DTC or its nominee as an Owner. Conveyance of notices and other communications by DTC to DTC Participants and by DTC Participants to beneficial owners will be governed by arrangements between them, subject to any statutory and regulatory requirements as may be in effect from time to time. Selection of Certificates for Prepayment. If less than all Outstanding 2007 Certificates of any particular maturity are to be prepaid at any one time, the Trustee shall select the 2007 Certificates or the portions of the 2007 Certificates of such maturity to be prepaid by lot in a manner which the Trustee deems to be fair. For purposes of selecting 2007 Certificates to be prepaid, 2007 Certificates shall be deemed to be composed of $5,000 multiples and any such multiple of principal amount may be separately prepaid, subject to the requirement that the unpaid balance of any 2007 Certificate prepaid in part must be in an authorized denomination. As long as the 2007 Certificates are held in the book -entry only system, selection of 2007 Certificates for prepayment will be governed by DTC procedures. Effect of Prepayment. If notice of prepayment has been duly given as aforesaid, and money for the payment of the prepayment price of the 2007 Certificates (or portions thereof) so called for prepayment is held by the Trustee, then on the prepayment date designated in such notice, the 2007 Certificates (or portions thereof) so called for prepayment shall become due and payable, and from and after the prepayment date so designated, interest with respect to the 2007 Certificates (or portions thereof) so called for prepayment shall cease to accrue, such 2007 Certificates (or portions thereof) shall cease to be entitled to any benefit or security under the Trust Agreement and the Installment Purchase Agreement, and the Owners of such 2007 Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof from the money held by the Trustee for such purpose. SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES Installment Payments The 2007 Certificates evidence the proportionate interests of the Owners in the Installment Payments to be made by the City pursuant to the Installment Purchase Agreement. The Installment Purchase Agreement provides that the City's obligation to make the Installment Payments from System Net Revenues is absolute and unconditional, and, until such time as the Installment Payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement), the City will not discontinue or suspend any Installment Payment required to be paid by the City under the Installment Purchase Agreement, whether or not the System or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments shall be net payments to the Corporation and shall not be subject to deduction, abatement, reduction or diminution, whether by offset or otherwise, and shall not be conditional upon the performance or nonperformance by any party to any agreement or for any other cause whatsoever. Notwithstanding anything to the contrary contained in the Installment Purchase Agreement, the City shall not be required to advance any moneys derived from any source of income other than the System Net Revenues for the payment of the Installment Payments or for the performance of any agreements or covenants required to be performed by it contained in the Installment Purchase Agreement. Pursuant to the Trust Agreement, the Corporation transfers, assigns and sets over to the Trustee all of the Installment Payments and any and all rights, title, interest and privileges it has in, to and under the Installment Purchase Agreement (other than its rights to expenses and indemnification), including without limitation, the right to collect and receive directly all of the Installment Payments and the right to enforce the provisions of the Installment Purchase Agreement. The City consents to such assignment in the Installment Purchase Agreement and agrees to make payments of the Installment Payments directly to the Trustee. Under the Trust Agreement, the Trustee is to take all steps, actions and proceedings required to be taken, as provided in an opinion of counsel delivered to the Trustee, reasonably necessary to maintain in force for the benefit of the Owners of the 2007 Certificates the Trustee's rights in and priority to the security granted to it for the payment of the Installment Payments as assignee of the Installment Payments and all of the Corporation's rights, title, interest and privileges in, to and under the Installment Purchase Agreement (other than its rights to indemnification and expenses), and all other rights and property which the Trustee may receive in the future as security for the 2007 Certificates. The Trustee is entitled to indemnification and expenses before taking such action as provided in the Trust Agreement. The Trust Agreement provides that all of the Installment Payments received by the Trustee shall be deposited immediately in the Debt Service Fund. All of the Installment Payments are to be held in trust by the Trustee for the benefit of the Owners of the 2007 Certificates and shall be disbursed and applied only as provided in the Trust Agreement. Defined Terms For the purposes of the Trust Agreement and the Installment Purchase Agreement, the following terms are given the following meanings: "System Net Revenues" means, for any period, System Revenues less Operation and Maintenance Costs for such period; provided that certain adjustments in the amount of System Net Revenues for a Fiscal Year may be made in connection with amounts deposited in and transferred from the Rate Stabilization Fund. "System Revenues" is defined under the Installment Purchase Agreement as all gross income and revenue received or receivable by the City from the ownership or operation of the System, determined in accordance with Generally Accepted Accounting Principles, including all fees (including connection fees), rates, charges and all amounts paid under any contracts received by or owed to the City in connection with the operation of the System and all proceeds of insurance relating to the System and investment income allocable to the System and all other income and revenue howsoever derived by the City from the ownership or operation of the System or arising from the System. System Revenues for any Fiscal Year shall include, for the purposes permitted by the Installment Purchase Agreement, amounts transferred to the System Revenue Fund from the Rate Stabilization Fund during such Fiscal Year. "Operation and Maintenance Costs" means the reasonable and necessary costs paid or incurred by the City for maintaining and operating the System, determined in accordance with Generally Accepted Accounting Principles, including all reasonable expenses of management and repair and all other expenses necessary to maintain and preserve the System in good repair and working order, including all other reasonable and necessary costs of the City or charges required to be paid by it to comply with the terms of the Trust Agreement or of any resolution authorizing the execution of any Parity Obligations, such as compensation, reimbursement and indemnification of the Trustee and the Corporation, fees and expenses of 10 Independent Certified Public Accountants and deposits to the Rebate Fund; but excluding in all cases (i) payment of Parity Debt and Subordinate Obligations, (ii) costs of capital additions, replacements, betterments, extensions or improvements which under Generally Accepted Accounting Principles are chargeable to a capital account, (iii) depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles, (iv) City Administrative Costs (as defined in the Trust Agreement (the "City Administrative Expenses")), and (v) transfers from the System Revenue Fund to other funds or accounts of the City. The definition of Operation and Maintenance Costs is different than the definition originally included in the 2003 Installment Purchase Agreement (defined below) and the 2004 Installment Purchase Agreement (defined below). In September 2007, the City completed a study relating to the allocation of general fund administrative overhead to various City enterprise funds, including the System Revenue Fund. The definition of Operations and Maintenance Costs will be amended to exclude the payment of City Administrative Costs, which means those costs will be paid after the Installment Payments and any Parity Obligation Payments have been paid. Financial Security Assurance Inc., the insurer of the 2003 Bonds, and MBIA Insurance Corporation, the insurer of the 2004 Bonds, have consented to amending the definition of Operation and Maintenance Costs in the 2003 Installment Purchase Agreement and the 2004 Installment Purchase Agreement. For definitions of additional terms used in the Installment Purchase Agreement and the Trust Agreement, see "APPENDIX D — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS— CERTAIN DEFINITIONS". Pledge of System Net Revenues Pursuant to the Installment Purchase Agreement, all System Net Revenues and all amounts on deposit in the System Revenue Fund are irrevocably pledged to the payment of the Installment Payments, as provided in the Installment Purchase Agreement. The Installment Purchase Agreement provides that such pledge, together with the pledge of System Net Revenues and amounts in the System Revenue Fund securing all other Parity Debt shall, subject to application as permitted in the Installment Purchase Agreement, constitute a first lien on System Net Revenues and amounts on deposit in the System Revenue Fund. The obligation of the City to make the Installment Payments is a special obligation of the City payable solely from the System Net Revenues, and does not constitute a debt of the City or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. See "Outstanding Parity Obligations" and "Additional Parity Debt" below. Rate Covenant The Installment Purchase Agreement provides that the City will, at all times until all Installment Payments have been fully paid or provision has been made therefor in accordance with the Installment Purchase Agreement, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Revenues at least sufficient, after making reasonable allowances for contingencies and errors in the estimates, to pay the following amounts during such Fiscal Year: 11 All current Operation and Maintenance Costs. The Installment Payments and all other Parity Obligation Payments and all payments on Subordinate Obligations as they become due and payable. All payments required for compliance with the terms of the Trust Agreement and the Installment Purchase Agreement, including restoration of the Reserve Fund to an amount equal to the Reserve Fund Requirement. (iv) All payments to meet any other obligations of the City which are charges, liens or encumbrances upon, or payable from, the System Revenues. In addition, the City covenants that it will, to the maximum extent permitted by law, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Net Revenues during such Fiscal Year equal to at least 110% of the Annual Debt Service in such Fiscal Year; provided an adjustment may be made to the amount of System Net Revenues for amounts deposited into or withdrawn from the Rate Stabilization Fund; provided that, for purposes of such calculation, the amount of System Net Revenues before any credits for transfers from the Rate Stabilization Fund to the System Revenue Fund may not be less than 100% of Annual Debt Service for such Fiscal Year. Reserve Fund General. Pursuant to the Trust Agreement, the Reserve Fund is to be held by the Trustee so long as the Installment Purchase Agreement has not been discharged in accordance with its terms or any 2007 Certificates remain Outstanding. The Reserve Fund is required to be maintained in an amount equal to the Reserve Fund Requirement (See "Application of System Revenues" below) pursuant to the Installment Purchase Agreement and the Trust Agreement. "Reserve Fund Requirement" means, as of any date of determination, the least of (a) 10% of the initial offering price to the public of the 2007 Certificates as determined under the Code, or (b) the greatest annual debt service with respect to the Installment Payments in any Fiscal Year during the period commencing with the Fiscal Year in which the determination is being made and terminating with the last Fiscal Year in which any Installment Payment is due, or (c) 125% of the sum of the annual debt service with respect to the Installment Payments for all Fiscal Years during the period commencing with the Fiscal Year in which such calculation is made (or if appropriate, the first full Fiscal Year following the execution and delivery of the 2007 Certificates) and terminating with the last Fiscal Year in which any Installment Payment is due, divided by the number of such Fiscal Years, all as computed and determined by the City and specified in writing to the Trustee. Reserve Policy. In lieu of funding the Reserve Fund with cash or in replacement of amounts then on deposit in the Reserve Fund, there may be credited to the Reserve Fund a debt service reserve municipal bond insurance policy or surety bond issued by a municipal bond insurer or a letter of credit issued by a bank or other institution provided that, at the time of delivery of such insurance policy, surety bond or letter of credit, the obligations insured by such insurer or the obligations of such bank or other institution payable on a parity with its obligations under such letter of credit, as applicable, are rated in the highest rating category (without regard to qualifiers) by the Rating Agencies and, if rated by A.M. Best & Company, also in the highest rating category (without regard to qualifiers) by A.M. Best & Company (a "Reserve Policy") in an amount, together with moneys to remain on deposit therein, equal to the Reserve Fund 12 Requirement. Moneys on deposit in the Reserve Fund shall be transferred, and if the amount of money then on deposit in the Reserve Fund is insufficient therefor, amounts shall be drawn on any Reserve Policy and transferred, by the Trustee to the Debt Service Fund to pay principal and/or interest evidenced by the 2007 Certificates on each date such principal and/or interest is due and payable in the event amounts on deposit therein are insufficient for such purposes. The Reserve Fund is not available for the payment of any Parity Obligations of the City nor is any other reserve fund relating to any Parity Obligations available for the payment of any insufficiency with respect to the Installment Payments. Application of System Revenues The City agrees and covenants in the Installment Purchase Agreement that all System Revenues it receives (except for net proceeds of any casualty insurance or condemnation award) will be deposited when and as received in the System Revenue Fund, which the City has established and which the City agrees to maintain separate and apart from other moneys of the City until all Installment Payments have been fully paid or provision has been made therefor in accordance with the Installment Purchase Agreement. Moneys in the System Revenue Fund shall be used and applied only as provided in the Installment Purchase Agreement. The Installment Purchase Agreement provides that the City is to pay all Maintenance and Operation Costs (including amounts reasonably required to be set aside in contingency reserves for Maintenance and Operation Costs the payment of which is not then immediately required) from the System Revenue Fund as they become due and payable and all remaining money in the System Revenue Fund shall be set aside and deposited by the City at the following times in the following order of priority: Installment Payments. Not later than each Installment Payment Date (Le., March 15 and September 15 of each year), the City is required to, from the moneys in the System Revenue Fund, transfer to the Trustee the Installment Payment due and payable on that Installment Payment Date. The City will also, from the moneys in the System Revenue Fund, transfer when due to the applicable trustee for deposit in the respective payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, any Parity Obligation Payments in accordance with the provisions of the applicable Parity Obligation. Reserve Fund. On or before the first Business Day of each month, the City is required to, from the remaining moneys in the System Revenue Fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the Trustee for deposit in the Reserve Fund in accordance with the Trust Agreement and to the applicable trustee for such other debt service reserve funds, if any, as may have been established in connection with Parity Obligations that sum, if any, necessary to restore: (i) the Reserve Fund to an amount equal to the Reserve Fund Requirement and otherwise replenish the Reserve Fund for any withdrawals (including draws upon the Reserve Policy) to pay the Installment Payments due under the Installment Purchase Agreement and (ii) necessary to restore such other debt service funds to an amount equal to the amount required to be maintained therein; provided that payments to restore the Reserve Fund after a withdrawal will be in an amount equal to 1/12 of the aggregate amount needed to restore the Reserve Fund to the Reserve Fund Requirement as of the date of the withdrawal. To the extent that draws on the Reserve Fund are from the Reserve Policy as permitted under the Trust Agreement, transfers under the Installment Purchase Agreement to 13 restore the Reserve Fund shall be made to reimburse the provider of the Reserve Policy to the extent the Reserve Policy is reinstated. Surplus. Moneys on deposit in the System Revenue Fund not necessary to make any of the payments required above in a Fiscal Year, may be expended by the City at any time for any purpose permitted by law, including but not limited to payments with respect to Subordinate Obligations and deposits to the Rate Stabilization Fund. Outstanding Parity Obligations As of October 2, 2007, the City had the following outstanding obligations that are payable from System Net Revenues on a parity with the Installment Payments (referred to as the "Existing Parity Obligations" in this Official Statement): 1991 Certificates. As of October 2, 2007, the 1991 Certificates were outstanding in the principal amount of $8,575,000. The 1991 Certificates are being immediately defeased and prepaid on February 1, 2008 with proceeds of the 2007 Certificates. 2003 Installment Payments; 2003 CSCDA Bonds. The City entered into an Installment Purchase Agreement, dated as of October 1, 2003 (the `2003 Installment Purchase Agreement"), by and between the City and the California Statewide Communities Development Authority ("CSCDA"), pursuant to which the City is obligated to make certain installment payments (the `2003 Installment Payments") to CSCDA which 2003 Installment Payments secure a portion of the debt service on the CSCDA $9,855,000 initial principal amount Water and Wastewater Revenue Bonds (Pooled Financing Program) Series 2003B (the "2003 CSCDA Bonds"). The City's share of the initial principal amount of the 2003 CSCDA Bonds was $5,000,000. As of October 2, 2007, the outstanding principal obligation under the 2003 Installment Purchase Agreement was $4,245,000. 2004 Certificates. On May 12, 2004, the City caused execution and delivery of the $27,360,000 initial principal amount Wastewater System Revenue Certificates of Participation, 2004 Series A (the "2004 Certificates"). The 2004 Certificates are secured by and payable from installment payments (the '2004 Installment Payments") payable by the City under an Installment Purchase Agreement, dated as of May 1, 2004 (the "2004 Installment Purchase Agreement") between the City and the Corporation. As of October 2, 2007, the outstanding principal obligation under the 2004 Installment Purchase Agreement was $24,445,000. Additional Parity Debt In addition to the Existing Parity Obligations, the City is permitted under the Installment Purchase Agreement to incur obligations secured by a pledge of System Net Revenues on a parity with the Installment Payments and the Existing Parity Obligations, subject to satisfaction of the following conditions. The Installment Purchase Agreement refers to the Installment Payments and any Parity Obligations as "Parity Debt". (a) The City must be in compliance with its obligations under the Installment Purchase Agreement. 14 (b) Any debt service reserve fund established for the Parity Debt must satisfy certain criteria, including (among others) the required amount of the debt service reserve fund may not exceed the lesser of the maximum annual debt service of such Parity Debt (calculated on the basis of a year ending on the final day of the Fiscal Year) or the maximum amount permitted under federal tax law. The Installment Purchase Agreement allows the debt service reserve fund for a loan from a governmental agency to be the amount required by such governmental agency. (c) The System Net Revenues for the last completed Fiscal Year or any 12 consecutive months within the last 18 months preceding the date of entry into or incurrence of the Parity Debt, as shown by a Certificate of the City on file with the Trustee, plus an allowance for increased System Net Revenues arising from any increase in the rates, fees and charges of the System which was duly adopted by the City Council of the City prior to the date of the entry into or incurrence of the Parity Debt but which, during all or any part of such 12 month period, was not in effect, in an amount equal to the amount by which the System Net Revenues would have been increased if the increase in rates, fees and charges had been in effect during the whole of such 12 month period, as shown by a Certificate of the City on file with the Trustee, must have produced a sum equal to at least 110% of the Maximum Annual Debt Service as calculated after the entry into or incurrence of the Parity Debt; provided, that in the event that all or a portion of such Parity Debt is to be issued for the purpose of refunding and retiring any Parity Debt then outstanding, interest and principal payments on the Parity Debt to be so refunded and retired from the proceeds of such Parity Debt being issued shall be excluded from the foregoing computation of Maximum Annual Debt Service; provided further, that the City may at any time enter into or incur Parity Debt without compliance with the foregoing conditions if the Annual Debt Service for each Fiscal Year during which such Parity Debt is outstanding will not be increased by reason of the entry into or incurrence of such Parity Debt; and provided further, an adjustment shall be made in the amount of System Net Revenues as described in "Rate Stabilization Fund" below. Subordinate Obligations The Installment Purchase Agreement permits the City to incur obligations payable from System Net Revenues on a subordinate basis to the Installment Payments, the Existing Parity Obligations and any future Parity Debt. Rate Stabilization Fund Pursuant to the Installment Purchase Agreement, a Rate Stabilization Fund is to be held and maintained by the City until all Installment Payments have been fully paid or provision has been made therefor in accordance with the Installment Purchase Agreement. The City may, during or within 210 days after a Fiscal Year, transfer surplus System Net Revenues attributable to such Fiscal Year on the basis of Generally Accepted Accounting Principles (the `GAAP Receipt Fiscal Year") from the System Revenue Fund to the Rate Stabilization Fund. The City may at any time transfer moneys from the Rate Stabilization Fund to the System Revenue Fund. System Net Revenues deposited into the Rate Stabilization Fund will not be taken into account as System Net Revenues for the GAAP Receipt Fiscal Year for purposes of the calculations required by the covenants in the Installment Purchase Agreement relating to rate coverage and additional Parity Obligations. Amounts withdrawn from the Rate Stabilization 15 Fund and deposited into the System Revenue Fund, may be taken into account as System Revenues for purposes of the calculations required by such covenants for the Fiscal Year in which such deposit is made; provided that, for purposes of the calculation described in the last paragraph under "Rate Covenant" above, the amount of System Net Revenues before any credits for transfers from the Rate Stabilization Fund to the System Revenue Fund may not be less than 100% of Annual Debt Service for such Fiscal Year. Although it has not historically done so, the City currently expects to utilize the Rate Stabilization Fund in order to avoid year-to-year fluctuations in System rates and charges. The City does not believe that transfers from the Rate Stabilization Fund will be necessary in order for the City to make the Installment Payments when due. 16 CERTIFICATE INSURANCE The following information has been furnished by the Insurer for use in this Official Statement. Such information has not been independently confirmed or verified by the City. No representation is made in this Official Statement by the City as to the accuracy or adequacy of such information subsequent to the date hereof, or that the information contained and incorporated in this Official Statement by reference is correct. Reference is made to Appendix G for a specimen of the Insurer's Policy. [to come] 17 THE SYSTEM General The City of Lodi is located in the County of San Joaquin (the "County') between Stockton and Sacramento, and adjacent to U.S. Highway 99, approximately 90 miles east of San Francisco. The City was incorporated as a General Law City on December 6, 1906. The City operates under a City Council -Manager form of government and provides the following services: public safety (police, fire and graffiti abatement), public utilities services (electric, water and sewer), transportation services (streets, flood control and transit), leisure, cultural and social services (parks and recreation, library, and community center), and general government services (management, human resources administration, financial administration, building maintenance and equipment maintenance). As of January 1, 2007, the City had an estimated population of 63,395 within an area of approximately 13.9 square miles. See "APPENDIX A— THE CITY OF LODI". Since 1923, the City has been providing wastewater collection and treatment services to the community. Governance and Management The City is governed by a five -member City Council comprised of members elected at large. Each council member is elected for four years with staggered terms. The current City Council members and the expiration dates of their terms are set forth below. Council Member Bob Johnson JoAnne Mounce Larry D. Hansen Susan Hitchcock Phil Katzakian Title Mayor Mayor Pro Tempore Council Member Council Member Council Member Expiration of Term December 2008 December 2008 December 2010 December 2010 December 2010 Blair King, City Manager, was appointed City Manager by the City Council effective January 24, 2005. Mr. King directs the daily operations of Lodi government, prepares and administers the municipal budget and implements the policies established by the City Council. Before coming to Lodi, Mr. King was Assistant City Manager in the City of Milpitas for four years. He previously served as City Manager in Half Moon Bay, Imperial Beach and Soledad. Mr. King earned his Bachelor's and Master's degrees from Fresno State. Jim Krueger, Deputy City Manager, was promoted from Finance Director to Deputy City Manager in November 2005. Mr. Krueger manages the City's finances, including those of the System. He came to Lodi in May 2004 with nearly 20 years' experience as a Finance Director/Chief Financial Officer for city, county and special district governments. His jobs have included tenures with the City of Thousand Oaks and agencies in three Oregon communities. He earned his Bachelor's degree in accounting from Cal Poly Pomona and Master's degree in 18 Business Administration at Southern Oregon University. Krueger passed the Certified Public Accounting examination in California in 1978. Richard Prima, Public Works Director, has overseen the City's wastewater, water, drainage, street, traffic, parks and public building infrastructure since his appointment in 1998. Mr. Prima, a registered civil engineer, earned his Bachelor of Science degree from the University of California, Berkeley. He has been on the City's Public Works staff since 1975, beginning as an assistant civil engineer. He was City Engineer from 1988 to 1998. Charles Swimley, Water Services Manager, oversees wastewater collection and treatment and water production and distribution for the City. He received his Bachelor of Science degree in mechanical engineering from California State University, Sacramento, and has been a registered civil engineer since 1994. He was hired as a senior civil engineer by the City in 2001 and was promoted to his current position in 2007. He previously worked as an engineer for two private firms and as an associate civil engineer for the City of Stockton from 1995 to 1998 and from 1999 to 2001. Employees As of January 1, 2007, the City had 41 full-time equivalent employee positions budgeted for the System and the City's water system. Employees of the System and the City's water system are represented by the Maintenance and Operators Bargaining Unit, whose Memorandum of Understanding is set to expire on June 30, 2008. The City has never experienced a labor strike. Retirement Programs The System is responsible for a portion of the City's personnel costs. Retirement benefits to City employees, in the form of pension benefits provided through the City's participation in the California Public Employees Retirement System ("PERS") and limited post- retirement ostretirement health care benefits, are described in Note 10 to the City's audited financial statements included in APPENDIX B hereto. Insurance The City's boiler and machinery operations (including those parts of the System) are insured by Hartford Steam Boiler for up to $21,250,000 per occurrence. The City, including the System, is self-insured for general liability losses for up to $500,000 and has pooled excess coverage through the California Joint Powers Risk Management Authority for up to $40 million per occurrence. The City is self-insured for workers' compensation losses for up to $250,000 and has pooled excess coverage through the Local Agency Workers' Compensation Excess Authority for up to $300,000,000. System Facilities The System consists of 186.5 miles of wastewater mains, seven pump stations and one wastewater treatment plant, the White Slough Water Pollution Control Facility (the "White Slough Facility'). White Slough Facility. The White Slough Facility operates pursuant to a National Pollutant Discharge Elimination System ("NPDES") permit administered by the State of 19 California Regional Water Quality Control Board, Central Valley Region (the "RWQCB"), which was adopted by the RWQCB on September 14, 2007. The current NPDES permit will expire on September 1, 2012. See "Environmental Compliance" below. The White Slough Facility is located in a primarily agricultural area adjacent to Interstate 5, approximately 6.5 miles southwest of the City. The White Slough Facility was originally constructed in 1966 to replace an older wastewater treatment plant located in the City. The White Slough Facility assists the City in maintaining water quality standards required for the protection of the environmentally sensitive Sacramento -San Joaquin Delta. Through the years, the White Slough Facility has been expanded and improved to meet increasingly stringent environmental protection standards. The most recent project, completed in 1992, expanded the White Slough Facility to a capacity of 8.5 million gallons per day ("mgd"). However, the Waste Discharge Requirements ("WDRs") issued by the Regional Water Quality Control Board (the "RWQCB") presently limit the average dry weather flow from the White Slough Facility to 7.0 mgd to limit potential water quality impacts in Dredger Cut, a waterway connecting to White Slough. The average current daily demand on the White Slough Facility is approximately 6.5 mgd. The Phase 3 improvements to the White Slough Facility being financed with proceeds of the 2007 Certificates are expected to restore the treatment capacity to the full 8.5 mgd. The 8.5 mgd flow capacity is expected to be sufficient to accommodate the City's growth projections past 2020. The White Slough Facility consists of an activated sludge treatment system and a lagoon and storage pond system, having an approximate 100 million gallons of capacity. Preliminary treatment of the domestic wastewater is accomplished by (Dmminutors, detritors and five rectangular clarifiers. Secondary treatment facilities consist of four activated sludge aeration basins with a fine bubble aeration system, and two circular secondary clarifiers. The aeration system is driven by four centrifugal blowers. The municipal wastewater is treated to tertiary standards then disinfected using ultraviolet light pathogen deactivation (uv disinfection) prior to surface water discharge. In addition to domestic wastewater treatment, the White Slough Facility also disposes of industrial wastewater produced primarily by Pacific Coast Producers, a local cannery. See "Service Area and Customers" below. In past years, the annual industrial flow to the White Slough Facility has exceeded 400 million gallons per year ("mgy'); however, since 2002, industrial flows have decreased to between 100 to 200 mgy due to changes in processing. Most of this flow is received during the period from June through September. During summer months (i.e., generally during the period from May 1 through September 1), treated domestic wastewater, industrial wastewater, and digested sludge are blended together and used for irrigation of an adjacent 790 acres of City -owned agricultural land. During the remainder of the year, treated domestic wastewater is discharged to Dredger Cut in the Sacramento -San Joaquin Delta, and industrial wastewater is stored in four ponds located directly north of the main treatment plant site. These ponds have a total surface area of about 40 acres. Tertiary treated domestic wastewater is also used by the adjacent Northern California Power Agency power generation facilities for various purposes, including, but not limited to, cooling, and to supply nearby ponds that are used by the Mosquito Abatement District to raise mosquito fish. Sludge is thickened and then digested in three anaerobic digestors and then stored in a concrete lined facility and periodically removed for use on City -owned agricultural land. Methane gas from the anaerobic digestion process is used for building and digester heating. Excess methane is flared off at the plant site. 20 Collection System. The existing collection system, not including the outfall to the treatment plant, consists of approximately 186.5 miles of 4" to 48" sewers constructed of clay, concrete, and PVC plastic materials. Included in this system are six lift stations which serve outlying portions of the City and one industrial waste pumping station. The collection system currently serves over 23,000 customers (most of which is residential), 1,400 acres of commercial/industrial development, and 250 acres of schools. Over 50% of the sewers are 6" in diameter. The following is a tabulation of the sewers. Table 1 City of Lodi Wastewater System Tabulation of Existing Sewers As of October 1, 2007 Sewer Size Sewer Size inches Total Feet inches Total Feet 48 27,529 15 16,130 42 8,678 14 7,340 30 10,3398 12 44,203 24 16,130 10 78,272 21 14,737 8 200,069 18 30,839 6 525,072 16 7,505 4 4,758 Source: City of Lodi The domestic wastewater collection system conveys all domestic and commercial flows and limited industrial flows. The industrial wastewater system conveys fruit processing water and minor amounts of cooling and process water contributed by certain industries. The wastewater collection system serves all of the developed property within the City limits. The maintenance program for these facilities is accomplished by City crews. This program includes the systematic hydrocleaning, rodding, smoke testing and video inspection of mains throughout the City. Environmental Compliance The present discharge requirements for the City's White Slough Facility are established by the RWQCB which administers and enforces all federal and State of California discharge requirements. The RWQCB administers regulations promulgated by the United States Environmental Protection Agency through the NPDES permits. The City's NPDES discharge permit No. CA0079243 is subject to renewal every five years. The City's current NPDES permit was adopted on September 14, 2007 by the RWQCB. The permit includes an interim effluent limit of 7.0 mgd; 7.2 mgd upon acceptance of flows from the San Joaquin County Service Area 31 (Flag City), which is expected prior to April 2008; and a final effluent limit of 8.5 mgd upon completion of the White Slough Facility Phase 3 improvements scheduled to be completed in March 2009. An environmental organization has filed a petition with the State Water Resources Control Board challenging issuance by the RWQCB of the NPDES permit for the White Slough Facility. The City does not expect the petition to adversely impact its ability to operate the System or its ability to make the Installment Payments when due. The current NPDES permit establishes new discharge limits for Aluminum, Ammonia, Chlorodibromomethane, Dichlorobromomethanem, Manganese, Nitrate and Nitrite while 21 reducing the discharge limits for Mercury. In September 2007, the RWQCB issued a Time Schedule Order (No. R5-2007-0114) to the City, which recognizes that the City is not able to consistently comply with the waste discharge limitations in the NPDES permit for manganese, nitrate and nitrite, and establishes a time schedule (including a final compliance date of May 18, 2010) for completion of action necessary to bring the waste discharge into compliance. The permit also includes a salinity limit of 780 pS/cm. The City can currently comply with this limit; however some additional studies are required by the permit to evaluate reducing salinity discharges. The permit also contains more stringent discharge requirements for the treated wastewater used to irrigate the surrounding land application area. Constituents included are Chloride, Iron, Lead, Nitrite, Nitrate, and Mercury. Finally, additional study requirements relating to organic loading, background groundwater assessments and industrial influent characterization have been required along with schedules for completion. The Phase 3 improvements are intended to improve de -nitrification and bring the facility's permitted treatment capacity to 8.5 MGD. RWQCB Staff considered the proposed Phase 3 improvements when developing the latest NPDES permit conditions. A Negative Declaration pursuant to CEQA was adopted for the recent Phase 3 improvements on April 10, 2007. The City's pretreatment program complies with the pretreatment requirements contained in the Federal Water Pollution Control Act. In general, performance of the White Slough Facility has met discharge requirements, although the City has experienced a handful of non -material instances of noncompliance. See "RISK FACTORS — Potential Liability Related to the Main Trunk Line" below for a discussion of potential liability associated with the current condition of the main trunk line being rehabilitated with proceeds of the 2007 Certificates, and "LITIGATION" below for a discussion of certain pending environmental litigation and liability involving the City. Service Area and Customers The City provides wastewater collection and treatment to substantially all of the population of the City, representing an area of approximately 13.9 square miles in the City. The City ordinance does not allow wastewater service outside the City limits, except for wineries and other public wastewater service districts pursuant to contracts with the City. The System will be providing wastewater treatment service by contract to San Joaquin County Service Area 31 (Flag City) beginning in Spring 2008. Pursuant to the contract, the City will receive a $250,000 one-time administrative fee, an estimated $6.5 million capacity fee and ongoing service charges. The City expects service charges paid by County Service Area 31 to account for approximately $163,000, or 1 %, of fiscal year 2007-08 System Revenues, The System also provides service to the Van Ruiten Family Winery, which accounts for a de minimis amount of System Revenues. 22 The table below shows the number of connections of the System by user type and service charge revenues by class of user. Table 2 City of Lodi Wastewater System Number of Connections by User Type as of June 30 and Percentage of Fiscal Year 2006-07 Service Charge Revenue by User Type Source: City of Lodi. The table below shows the 10 largest users of the System based on service charge revenues for the Fiscal Year 2006-07 (unaudited). User Cottage Bakery Lodi Unified School District Pacific Coast Producers General Mills City of Lodi Miller Packing Co. Lodi Memorial Hospital Tokay Villa Apartments Sand Creek Apartments Kaitz Property Services Total Top 10 Total System Table 3 City of Lodi Wastewater System Largest Users by Service Charge Revenues Fiscal Year 2006-07 (unaudited)(') Percentage of Service Total Annual Connections Charge Service Charge Type of Business Revenue Revenue Specialty bakery, frozen dough $265,284 3.1% K-12, adult education % of FY 06- 2.9 Private label fruit canning 227,264 2.7 Cereals, bread mixes, snack foods 186,793 07 Service Government 42,459 0.5 Hot dog producer 34,281 0.4 Charge User Type 2003 2004 2005 2006 2007 Revenue Residential 21,094 21,857 22,194 22,511 22,571 72.5% Commercial/Industrial 1,595 11595 1,584 1,603 1,562 27.5 Total All Users 22,689 23,452 23,778 24,114 24,133 100.0% Source: City of Lodi. The table below shows the 10 largest users of the System based on service charge revenues for the Fiscal Year 2006-07 (unaudited). User Cottage Bakery Lodi Unified School District Pacific Coast Producers General Mills City of Lodi Miller Packing Co. Lodi Memorial Hospital Tokay Villa Apartments Sand Creek Apartments Kaitz Property Services Total Top 10 Total System Table 3 City of Lodi Wastewater System Largest Users by Service Charge Revenues Fiscal Year 2006-07 (unaudited)(') Percentage of Source: Lodi Public Works Department. $8.523.531 Set forth below are descriptions of the major users identified in the previous table except the City (see "APPENDIX A — The City of Lodi"): 23 Service Total Annual Charge Service Charge Type of Business Revenue Revenue Specialty bakery, frozen dough $265,284 3.1% K-12, adult education 246,926 2.9 Private label fruit canning 227,264 2.7 Cereals, bread mixes, snack foods 186,793 2.2 Government 42,459 0.5 Hot dog producer 34,281 0.4 Health care 25,195 0.3 Residential 23,119 0.3 Residential 21,284 0.2 Residential 21.195 0_2 $1,093,800 12.8% Source: Lodi Public Works Department. $8.523.531 Set forth below are descriptions of the major users identified in the previous table except the City (see "APPENDIX A — The City of Lodi"): 23 Cottage Bakery — A division of RalCorp (formerly Ralston Purina Company), Cottage Bakery provides frozen bread and bagel dough to the retail and food service industries, as well as baked cakes, pastries and pies. Cottage Bakery is one of Lodi's largest employers, with over 700 full-time staff. Lodi Unified School District — The school district has 16 school sites (kindergarten through 12th grade) in Lodi, in addition to the district administrative center, a 40,000 square foot warehouse and a maintenance yard. From a square mile perspective, Lodi Unified School District is the second largest in California (the school district has numerous school sites outside of Lodi's city limits as well). Pacific Coast Producers — Pacific Coast Producers is a fruit canning/labeling cooperative that supplies the retail and food service industries. The company's corporate offices are located in Lodi. The company has in excess of 1 million square feet of space under roof for its fruit preparation, refrigeration, canning, labeling, and storage in Lodi. General Mills — the Lodi plant produces and packages numerous cereal products, including Golden Grahams, Cheerios and Frosted Cheerios, as well as breakfast and lunch snack bars. These products are stored and then shipped to 12 western states. The General Mills plant has been a part of the Lodi community for over 50 years, and employs 500+ full-time employees. Miller Packing Company - In 1910, Miller Packing Company began manufacturing smoked meat products in Oakland, California. The company remained in the same facility until 2002 when a new state-of-the-art plant was constructed in the City. Today, Miller Packing continues to produce high quality products and has expanded its market area to include the Western continental United States, Hawaii, Guam and the Far East. Miller products are sold by food service distributors to fine hotels, restaurants, and sporting facilities. Miller is the official hot dog provider of the Oakland A's at the Oakland Coliseum. Lodi Memorial Hospital - Since opening its doors in 1952, Lodi Memorial Hospital has evolved to meet growing community needs. In addition to nine clinics and various community services provided across a broad geographic area, Lodi Memorial Hospital includes a Main Campus and West Campus. Current licensed beds at the Main Campus total 99 and West Campus total 71. Services provided include general acute inpatient, acute rehabilitation, subacute care, emergency care, urgent rare, inpatient and out patient surgery, a medical ambulatory care unit, cardiac rehabilitation and many other services. The hospital will break ground for over $150 million in major upgrades and construction of a new, four-story patient wing in 2008. Tokay Villa Apartments - This apartment complex, built in the late 1970s, is comprised of 90 residential units. Sand Creek Apartments - This apartment complex, built in the early 1980s, is comprised of 130 residential units. Kaitz Property Services - Kaitz Property Services owns Orange Grove Apartments (92 units), Vintage Apartments (102 units) and Turner Road Apartments (12 units) for a total of 206 units. 24 Wastewater Rates and Charges The City has the power to establish rates and charges as needed to operate the System. The rates and charges are established by the City Council and are not subject to review or approval by any other agency. The City principally relies on service charges and capacity/connection fees. Service Charges. The City Council established charges for domestic system residential, commercial and industrial wastewater service by Resolution No. 2004-77 adopted by the City on April 27, 2004. Resolution No. 2004-77 did the following: 0o Imposed a 25% system average rate increase over prior rates, effective May 1, 2004. 0o Imposed a second system average rate increase of 25%, effective July 1, 2005. 0o Allowed the City Council to adjust the service charges periodically by resolution, following a public hearing, in an amount not to exceed the percentage change in the Consumer Price Index (CPI) for the San Francisco -Oakland -San Jose Area since the previous adjustment. Most recently, pursuant to Resolution No. 2007-113 adopted on June 6, 2007, the City Council implemented the CPI increase (3.44%) effective July 1, 2007. See "CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS — California Constitution Articles XIIIC and XIIID" for a discussion of the City's compliance with requirements established by Proposition 218. 25 Set forth below is a table showing the rates effective May 1, 2004, July 1, 2005, July 1, 2006 and July 1, 2007. Table 4 City of Lodi Wastewater System Schedule of Wastewater Service Charges For Commercial/Industrial Users: Moderate Strength (annual per Sewage Service Unit (SSU)) ................................................ $194.60 Service Service Service High Strength: Service Charge Charge Charge Charge Flow (annual per MG) ...................................... (effective (effective (effective (effective BOD (annual per 1,000 lbs.) ........................... May 1. 2004) July 1. 20051 July 1. 2006) July 1. 2007) For Residential Users (per month): 374.58 468.23 215.86 223.29 1 Bedroom ............................................. $12.16 $15.20 $15.49 $16.03 2 Bedrooms ........................................... 16.21 20.26 20.65 21.37 3 Bedrooms ........................................... 20.27 25.34 25.81 26.71 4 Bedrooms ........................................... 24.33 30.41 30.98 32.06 5 Bedrooms ........................................... 28.38 35.48 36.14 37.40 6 Bedrooms ........................................... 32.43 40.54 41.30 42.74 7 Bedrooms ........................................... 36.48 45.60 46.46 48.08 For Commercial/Industrial Users: Moderate Strength (annual per Sewage Service Unit (SSU)) ................................................ $194.60 $ 243.25 $247.80 $256.33 High Strength: Flow (annual per MG) ...................................... 936.36 1,170.45 2,092.01 2,164.00 BOD (annual per 1,000 lbs.) ........................... 458.23 572.79 345.24 357.12 SS (annual per 1,000 lbs.) .............................. 374.58 468.23 215.86 223.29 Grease Interceptor/Septic Holding Tank Waste within City Limits (per 1,000 gal.)...... 143.44 179.30 182.80 189.09 Septic Holding Tank Waste outside City Limits (per 1,000 gal.) ...................................... 304.51 380.64 388.06 401.41 Disposal to Storm Drain System (per MG)... 150.66 180.33 192.00 198.61 Disposal to Industrial System ......................... Flow (per MG, annual basis) ................. 1,309.48 BOD (per 1,000 lbs., annual basis) ...... 22.82 Winery Waste (per 1,000 gallons) ................ 185.10 191.47 There are separate charges applicable to the industrial system, which primarily apply to Pacific Coast Producers, the largest individually -monitored system user. No new users have been connected to the industrial system, except the Van Ruiten Family Winery, in several years and no new users are anticipated. Capacity/Connection Fees. Capacity/connection fees are one-time only connection charges based on estimated annual usage (the City reviews large industrial users after connection to determine actual usage and, in some cases, adjusts the connection fee to reflect actual usage). Capacity/connection fees are collected at the time a building permit is granted. The capacity/connection fees were established for residential, commercial and industrial wastewater service by Resolution No. 2006-06, adopted by the City on January 4, 2006 and effective March 6, 2006. The capacity/connection fees are adjusted annually on July 1 based on the past annual change in the Engineering News Record 20 Cities Construction Cost Index. 26 The current capacity/connection fees are identified in the following table: Table 5 Capacity/Connection Fees (as of July 1, 2007) Description Fees(') Moderate Strength Users Per Sewage Service Unit (SSU) $5,356.00 High Strength Users Flow (per million gallons (MG), annual basis) $40,825.00 BOD (per 1,000 lbs., annual basis) 10,573.00 SS (per 1,000 lbs., annual basis) 5,655.00 `'' Includes 1% public art fee. Subject to annual adjustment on July 1 based on the past annual change in the Engineering News Record 20 Cities Construction Cost Index. Source: City of Lodi. New residential development in the City is subject to a growth control ordinance that limits new residential development based on an increase in population of 2% per year. Collections. The City bills for water, wastewater, solid waste and electricity on the same bill. If a bill is unpaid, the City will terminate electric service to a customer within 90 days of nonpayment after 48 hours notice. The annual delinquency rate has been less than 1% for the preceding 10 fiscal years. Comparison of Monthly Wastewater Service Charges of Selected Agencies. A comparison of wastewater service charges of selected agencies located in San Joaquin County for an average single-family home is set forth below. Table 6 Comparison of Monthly Wastewater Service Charges (as of October 1, 2007)(1) Average $32.35 Rates shown are as of October 1, 2007. (2) For all agencies other than the City, based upon flat monthly rate charged to all single family residential customers. Rate for City reflects rate for three-bedroom single family residence. Source: City of Lodi. 27 Service Agency Charge (2) City of Galt $49.89 City of Manteca 33.06 City of Tracy 31.00 City of Lodi 26.71 City of Stockton 21.10 Average $32.35 Rates shown are as of October 1, 2007. (2) For all agencies other than the City, based upon flat monthly rate charged to all single family residential customers. Rate for City reflects rate for three-bedroom single family residence. Source: City of Lodi. 27 Planned Capital Improvements In May 2000, the RWQCB adopted a plan for he implementation of new discharge requirements to be imposed under NPDES permits. In January 2001, the City adopted a three- phase Wastewater System Master Plan, which included the evaluation of the improvements required to meet the new permit requirements, as well as other future improvements. cc Phase 1 ($1.4 million) involved the installation of aeration blower equipment, electrical improvements and seismic and fire improvements. The Phase 1 improvements were completed in mid -2004 and financed with proceeds of the 2003 CSCDA Bonds. 0o Phase 2 ($8.2 million) involved addition of tertiary filters/UV disinfection and acquisition of land to increase the size of the White Slough Facility, and satisfied the requirements of the City's then -current NPDES permit. The Phase 2 improvements were completed in 2004 and primarily financed with proceeds of the 2004 Certificates. 0o Phase 3 ($20.6 million) is currently underway, and is being financed with proceeds of the 2007 Certificates and remaining proceeds of the 2004 Certificates (see "THE FINANCING PLAN — Financing of the 2007 Project"). In addition to the third and final phase of the 2001 Master Plan, the City intends to finance with proceeds of the 2007 Certificates the rehabilitation of the main trunk line connecting the City and the White Slough Facility. Beyond that, the City expects to make $11 million of capital improvements to the System in fiscal years 2007-08 through 2012-13. The City plans to finance these capital improvements through a combination of operating revenues, capacity fees and System reserves. See also "LITIGATION" below for additional information regarding certain environmental cleanup costs the City may incur. Financial Statements Excerpts of the audited General Purpose Financial Statements of the City as of June 30, 2006 are included in Appendix B to this Official Statement. A complete copy of the City's Comprehensive Annual Financial Report may be obtained from the City. The Installment Payments are special obligations of the City payable solely from the System Net Revenues. The General Purpose Financial Statements, including the excerpts contained in Appendix B, have been audited by Macias, Gini & Company LLP, Sacramento, California, independent accountants (the "Independent Accountants") as stated in their report appearing in Appendix B. No review or investigation with respect to subsequent events has been undertaken in connection with such General Purpose Financial Statements by the Independent Accountants and the Independent Accountants have not been asked to consent to the City including the General Purpose Financial Statements in this Official Statement. 28 Historical Operating Results The following table sets forth historical revenues, expenses and debt service coverage of the System, based on the City's audited financial statements for fiscal years 2002-03 through 2005- 06 (except as set forth in footnote 5 below) and unaudited results for fiscal year 2006-07. The coverage ratios have been computed in accordance with the requirements of the Installment Purchase Agreement, including the definitions of System Net Revenues and Operation and Maintenance Costs. Table 7 City of Lodi Wastewater System Historical Operating Results and Debt Service Coverage Fiscal Years 2002-03 through 2006-07 Operating Expenses (1), (4), (5) Personnel services 2,091,217 1,904,055 2002-03 2003-04 2004-05 2005-06 2006-07 1,912,989 audited audited audited audited (estimated) Operating Revenues (1) 345,969 Total Operating Expenses $4,380,114 $4,385,669 $4,781,260 Charges for Services $5,366,092 $5,510,561 $6,645,391 $8,206,016 $8,523,531 Capacity/Connection Fees 1,394,287 1,049,452 1,440,337 720,588 1,454,915 Non -Operating Revenues 806,530 2003 Installment Payments - 88,888 383,148 379,448 380,698 Interest Income 64,042 75,151 563,759 569,234 896,668 Rent (2) 237,749 37,301 182,345 103,345 176,435 Other (3) 365.654 563.811 400.377 265.788 555.148 Total System Revenues $7,427,824 $7,236,276 $9,232,209 $9,864,971 $11,606,696 Operating Expenses (1), (4), (5) Personnel services 2,091,217 1,904,055 2,336,247 2,163,754 2,233,733 Supplies, materials and services 1,825,041 1,956,715 1,809,913 1,912,989 2,019,582 Utilities 463,856 524,899 635,100 723,387 683,670 Other 345,969 Total Operating Expenses $4,380,114 $4,385,669 $4,781,260 $4,800,130 $5,282,954 System Net Revenues $3,047,710 $2,850,607 $4,450,949 $5,064,841 $6,323,742 Parity Debt Service 1991 Installment Payments 803,960 808,488 807,055 804,798 806,530 2003 Installment Payments - 88,888 383,148 379,448 380,698 2004 Installment Payments - - 1.248.212 2.157.300 2.156.913 Total Parity Debt Service $803,960 $897,375 $2,438,414 $3,341,545 $3,344,140 Debt Service Coverage (5) 3.79 3.18 1.83 1.52 1,89 Non -Operating Expenses Transfers (In)/Out 580,535 670,450 2,913,009 1,143,269 1,050,077 Total Non -Operating Expenses 580,535 670,450 2,913,009 1,143,269 1,050,077 Net Cashflow Before Capital Expenditures 1,663,215 1,282,782 (900,474) 580,027 1,929,525 (1) Source: City of Lodi Consolidated Annual Financial Reports for fiscal years 2002-03 through 2005-06; City unaudited estimated actual for fiscal year 2006-07. (2) Includes annual lease revenue for White Slough Facility agricultural land. (3) Includes Operating Grants, Sewer Tap Fees and Septic Dumping Charges. (4) Excludes depreciation. Operating costs increased in fiscal year 2005-06 and thereafter due to implementation of tertiary treatment. (5) Transfers to the City's water enterprise to cover PCE/TCE-related litigation expenses of $2,247,318 in fiscal year 2004-05 and $85,736 in fiscal year 2005-06 were included as operating expenses in the City's audited financial statements for those years, but are shown here as Transfers Out, which is consistent with the definition of Operation and Maintenance Costs in the Indenture. The aggregate Transfer Out to the water enterprise was repaid to the System in fiscal year 2006-07. See "LITIGATION" below.. 29 Management's Discussion of Operating Results. Financially, the City operates the wastewater utility as a separate enterprise activity within the City government. This structure is essentially the same as for its water and electric utility enterprises. Functionally, the wastewater utility is operated jointly with the water utility by the Water/Wastewater Division within the Department of Public Works. This arrangement is designed by the City to provide for improved efficiency in cross training and utilization of staff and in the purchase and use of equipment and facilities. Rate increases implemented in May 2004 and July 2005, were implemented to pay for the second and third phases of improvements at the White Slough Facility. The increases in 2004 and 2005 and the additional increases which match the Consumer Price Index in 2006 and 2007 were adopted in compliance with the requirements of Proposition 218 (see "CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS — California Constitution Articles XIIIC and XIIID"). These increases have generated approximately $2.7 million additional revenues per year as of fiscal year 2006-07. This additional revenue is being used to pay for a significant share of the 2003 Installment Payments and the 2004 Installment Payments and is expected to pay for a significant share of the Installment Payments. The Wastewater Fund Balance (including the Rate Stabilization Fund) has increased to a balance of approximately $5 million as of June 30, 2007 and exceeds the reserve policy goal of 15% of operating expenses. Projected Operating Results and Debt Service Coverage The City's estimated projected operating results for the System for the Fiscal Years ending June 30, 2008 through 2012 are set forth below, reflecting certain significant assumptions concerning future events and circumstances. The financial forecast represents the City's estimate of projected financial results based upon its judgment of the probable occurrence of future events. The assumptions set forth in part in the footnotes to the chart set forth below are material in the development of the City's financial projections, and variations in the assumptions may produce substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. The following table also sets forth debt service coverage ratios with respect to existing and anticipated Parity Debt. Such coverage ratios have been computed in accordance with the requirements of the Installment Purchase Agreement. Such coverage calculation differs in certain respects from the requirements of the instruments authorizing the wtstanding 2003 CSCDA Bonds. 30 Table 8 City of Lodi Wastewater System Projected Operating Results and Debt Service Coverage Fiscal Years 2007-08 through 2011-12 (1) Source: City Budget estimates for fiscal year 2007-08. HF&H Consultants provided revenue and expense projections for revised fiscal year 2008-09 through fiscal year 2011-12, with City input. (2) Reflects addition of approximately $163,280 from Flag City wholesale treatment in fiscal year 2007-08. Charges for services projected for fiscal year 2008-09 and thereafter to increase at annual CPI (estimated at 3.4%) plus annual growth in connections of 0.6%. (3) Estimate for fiscal year 2007-08 based on analysis of development activity in pipeline; reduced below prior five year average of $1.13 million annually. Fiscal year 2007-08 also includes $6.5 million one-time payment for Flag City annexation into service area. Inflated at construction cost index (estimated at 4.1%) and 0.6% annual growth in connections. (4) Annual interest earnings projected at 5% in fiscal year 2007-08 and 4.5% thru fiscal year 2011-12 and 4% thereafter times the average annual fund balance. (5) Includes annual lease revenue for White Slough treatment plant agricultural land; projected to increase annually at CPI rate (estimated at 3.4%) (6) Includes Operating Grants, Sewer Tap Fees and Septic Dumping Charges. Sewer Tap Fees projected at 0.6% annual growth rate; Septic Dumping Charges projected at 3.4% annual inflation estimate. (7) Excludes depreciation. Projected to increase annually at varying rates: personnel costs at 3%, utility costs at 5%, supplies and other at 3.4%, with variations for regulatory studies, etc. Operating costs projected to increase in fiscal year 2007-08 and thereafter due to new NPDES permit requirements. (8) Assumes refunding of the 1991 Certificates and issuance of 2007 Certificates in November 2007 (9) In fiscal year 2007-08, the City will eliminate the payment in Lieu of Taxes (PILOT) transfer and charge mly an overhead service charge from the wastewater enterprise to the City General Fund on a basis subordinate to debt. (10)Represents planned capital expenditures net of projects to be funded from approximately $8.4 million of 2004 Certificate proceeds and $21 million from proposed 2007 Certificate proceeds. (11)Represents a combined wastewater enterprise reserve available for operations and capital projects. *Preliminary; subject to change. 31 Budget Projected Projected Projected Projected Projected FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 Operating Revenues (1) Charges for Services (2) $9,001,880 $9,363,792 $9,740,253 $10,131,851 $10,539,192 $10,962,909 Capacity/Connection Fees (3) 997,825 1,044,968 1,094,339 1,146,042 1,200,188 1,256,892 Capacity Fe a for Flag City service area 6,500,000 Non -Operating Revenues Interest Income (4) 400,843 510,710 519,841 465,605 367,483 285,574 Rent (5) 250,000 258,500 267,289 276,377 285,774 295,490 Other (6) 195,000 201,204 207,617 214,245 221,096 228,178 Transfer from/(to) Rate Stabilization Fund (400,0001 175.000 - - - - Total System Revenues $16,945,548 $11,554,174 $11,829,340 $12,234,120 $12,613,733 $13,029,043 Operating Expenses (1), (7) Personnel services 3,055,902 3,147,579 3,242,006 3,339,267 3,439,445 3,542,628 Supplies, materials and services 868,663 902,683 938,039 974,786 1,012,977 1,052,669 Utilities 797,465 837,338 879,205 923,165 969,324 1,017,790 Other 753,574 821,636 750,353 774,645 759,632 780,233 Total Operating Expenses $5,475,604 $5,709,237 $5,809,603 $6,011,863 $6,181,377 $6,393,320 System Net Revenues $11,469,944 $5,844,938 $6,019,736 $6,222,257 $6,432,356 $6,635,723 Parity Debt Service (8) 1991 Installment Payments 519,800 0 0 0 0 0 2003 Installment Payments 381,848 382,648 382,733 381,393 379,170 381,123 2004 Installment Payments 2,151,450 2,145,713 2,148,800 2,147,600 2,139,350 2,138,475 2007 Certificates* 330.975 1,665,525 1.661,025 1,666,300 1,676.013 1,675,275 Total Parity Debt Service* $3,384,072 $4,193,885 $4,192,558 $4,195,293 $4,194,533 $4,194,873 Debt Service Coverage* 3.39 1.39 1.44 1.48 1.53 1.58 Non -Operating Expenses Transfers (In)/Out (9) 1,456,510 1,506,031 1.557,236 1,610,182 1,664.929 1,721,536 Total Non -Operating Expenses 1,456,510 1,506,031 1,557,236 1,610,182 1,664,929 1,721,536 Net Cashflow Before Capital Expenditures $6,629,361 $145,021 $269,943 $416,782 $572,894 $719,314 Less Net Capital Expenditures (10) 0 0 (1,575,723) (2,724,390) (2,507,268) (2,261,650) Net Deposit/Withdrawal from Reserves 6,629,361 145,021 (1,305,781) (2,307,608) (1,934,374) (1,542,336) Wastewater Enterprise Fund (11) Beginning Fund Balance 4,902,595 11,531,956 11,676,978 10,371,197 8,063,588 6,129,214 Ending Fund Balance 11,531,956 11,676,978 10,371,197 8,063,588 6,129,214 4,586,879 Rate Stabilization Fund Beginning Balance 0 410,000 249,513 260,741 272,474 284,735 Rate Stabilization Fund Ending Balance 410,000 249,513 260,741 272,474 284,735 297,548 Total Reserves at Year End 11,941,956 11,926,490 10,631,938 8,336,062 6,413,950 4,884,427 (1) Source: City Budget estimates for fiscal year 2007-08. HF&H Consultants provided revenue and expense projections for revised fiscal year 2008-09 through fiscal year 2011-12, with City input. (2) Reflects addition of approximately $163,280 from Flag City wholesale treatment in fiscal year 2007-08. Charges for services projected for fiscal year 2008-09 and thereafter to increase at annual CPI (estimated at 3.4%) plus annual growth in connections of 0.6%. (3) Estimate for fiscal year 2007-08 based on analysis of development activity in pipeline; reduced below prior five year average of $1.13 million annually. Fiscal year 2007-08 also includes $6.5 million one-time payment for Flag City annexation into service area. Inflated at construction cost index (estimated at 4.1%) and 0.6% annual growth in connections. (4) Annual interest earnings projected at 5% in fiscal year 2007-08 and 4.5% thru fiscal year 2011-12 and 4% thereafter times the average annual fund balance. (5) Includes annual lease revenue for White Slough treatment plant agricultural land; projected to increase annually at CPI rate (estimated at 3.4%) (6) Includes Operating Grants, Sewer Tap Fees and Septic Dumping Charges. Sewer Tap Fees projected at 0.6% annual growth rate; Septic Dumping Charges projected at 3.4% annual inflation estimate. (7) Excludes depreciation. Projected to increase annually at varying rates: personnel costs at 3%, utility costs at 5%, supplies and other at 3.4%, with variations for regulatory studies, etc. Operating costs projected to increase in fiscal year 2007-08 and thereafter due to new NPDES permit requirements. (8) Assumes refunding of the 1991 Certificates and issuance of 2007 Certificates in November 2007 (9) In fiscal year 2007-08, the City will eliminate the payment in Lieu of Taxes (PILOT) transfer and charge mly an overhead service charge from the wastewater enterprise to the City General Fund on a basis subordinate to debt. (10)Represents planned capital expenditures net of projects to be funded from approximately $8.4 million of 2004 Certificate proceeds and $21 million from proposed 2007 Certificate proceeds. (11)Represents a combined wastewater enterprise reserve available for operations and capital projects. *Preliminary; subject to change. 31 Transfers to the General Fund of the City Pursuant to budget policy adopted by the City Council, transfers by the System to the City's General Fund have included a payment in -lieu of taxes for fiscal years up through 2006- 07. This transfer had been 12% of revenues through fiscal year 2003-04 and was reduced to a fixed dollar amount in fiscal year 2004-05 (approximately 9% of system revenues). A cost of services study was completed in September 2007 to review the allocation of administrative overhead to the System. As a result, the City has changed its method of calculating general administrative overhead allocable to the System. Beginning in fiscal year 2007-08, the payment in -lieu of taxes will be eliminated and the administrative transfers to the General Fund will be paid on a subordinate basis to the Installment Payments. CONTINUING DISCLOSURE The City will covenant pursuant to a Continuing Disclosure Certificate to provide certain financial information and operating data relating to the City and the System by not later than six months following the end of the City's Fiscal Year, which Fiscal Year presently ends June 30 (the "Annual Report"), commencing with the Annual Report for fiscal year 2006-07, and to provide notices of the occurrence of certain enumerated events, if material, under federal securities law. The specific nature of the information to be contained in the Annual Report and the notices of material events are set forth in "APPENDIX E — PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE". These covenants have been made to assist the Underwriters in complying with Rule 15c2-12 of the Securities and Exchange Commission (the "Rule"). As of the date hereof, the City has never failed to comply in any material respect with any previous undertakings with regard to the provision of annual reports or material events notices as required by the Rule. THE CORPORATION The Corporation was incorporated under the Nonprofit Public Benefit Corporation Law of the State of California. The Corporation was organized as a nonprofit corporation for the purpose, among others, of assisting the City in the acquisition, construction and financing of public improvements which are of public benefit to the City. Members of the Lodi City Council serve on the Board of Directors of the Corporation. CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS California Constitution Articles XIIIA and XIIIB Article XIIIA of the California Constitution limits the taxing powers of California public agencies. Article XIIIA provides that the maximum ad valorem tax on real property cannot exceed 1% of the "full cash value" of the property, and effectively prohibits the levying of any other ad valorem property tax except for taxes above that level required to pay debt service on voter -approved general obligation bonds. "Full cash value" is defined as "the County Assessor's 32 valuation of real property as shown on the 1975-76 tax bill under 'full cash value' or, thereafter, the appraisal value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment." The "full cash value" is subject to annual adjustment to reflect inflation at a rate not to exceed 2% or a reduction in the consumer price index or comparable local data, or declining property value caused by damage, destruction or other factors. The foregoing limitation does not apply to ad valorem taxes or special assessments to pay the interest and redemption charges on any indebtedness approved by the voters before July 1, 1978 or any bonded indebtedness for the acquisition or improvement of real property approved by the voters as required by law. Under Article XIIIB of the California Constitution, state and local government entities have an annual "appropriations limit" which limits their ability to spend certain moneys called "appropriations subject to limitation," which consist of tax revenues, certain state subventions and certain other moneys, including user charges to the extent they exceed the costs reasonably borne by the entity in providing the service for which it is levying the charge. The City is of the opinion that the wastewater service and user charges imposed by the City do not exceed the costs the City reasonably bears in providing the wastewater service. In general terms, the "appropriations limit" is to be based on certain 1978-79 expenditures, and is to be adjusted annually to reflect changes in the consumer price index, population, and services provided by these entities. Among other provisions of Article XIIIB, if an entity's revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. California Constitution Articles XIIIC and XIIID General. On November 5, 1996, California voters approved Proposition 218, the so- called "Right to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which affect the ability of local governments to levy and collect both existing and future taxes, assessments, and property -related fees and charges. Proposition 218, which generally became effective on November 6, 1996, changed, among other things, the procedure for the imposition of any new or increased property -related "fee" or "charge," which is defined as "any levy other than an ad valorem tax, a special tax or an assessment, imposed by a [local government] upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property related service" (and referred to in this section as a "property -related fee or charge"). Specifically, under Article XIIID, before a municipality may impose or increase any property -related fee or charge, the entity must give written notice to the record owner of each parcel of land affected by that fee or charge. The municipality must then hold a hearing upon the proposed imposition or increase at least 45 days after the written notice is mailed, and, if a majority of the property owners of the identified parcels present written protests against the proposal, the municipality may not impose or increase the property -related fee or charge. Further, under Article XIIID, revenues derived from a property -related fee or charge may not exceed the funds required to provide the "property -related service" and the entity may not use such fee or charge for any purpose other than that for which it imposed the fee or charge. The amount of a property -related fee or charge may not exceed the proportional cost of the service attributable to the parcel, and no property -related fee or charge may be imposed for a 33 service unless that service is actually used by, or is immediately available to, the owner of the property in question. In addition, Article XIIIC states that "the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments and neither the Legislature nor any local government charter shall impose a signature requirement higher than that applicable to statewide statutory initiatives." Judicial Interpretation of Proposition 218. After Proposition 218 was enacted in 1996, appellate court cases (such as Apartment Association v. City of Los Angeles (2001) 24 Cal. 4'" 830) and an Attorney General opinion initially indicated that fees and charges levied for water and wastewater services would not be considered property-related fees and charges, and thus not subject to the requirements of Article XIIID regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. However, three recent cases have held that certain types of water and wastewater charges could be subject to the requirements of Proposition 218 under certain circumstances. In Richmond v. Shasta Community Services District (9 Cal. Rptr. 3rd 121), the California Supreme Court addressed the applicability of the notice, hearing and protest provisions of Article XIIID to certain charges related to water service. In Richmond, the Court held that connection charges are not subject to Proposition 218. The Court also indicated in dictum that a fee for ongoing water service through an existing connection could, under certain circumstances, constitute a property-related fee and charge, with the result that a local government imposing such a fee and charge must comply with the notice, hearing and protest requirements of Article XIIID. In Howard Jarvis Taxpayers Association v. City of Fresno (March 23, 2005), the California Court of Appeal, Fifth District, concluded that water, sewer and trash fees are property-related fees subject to Proposition 218 and a municipality must comply with Article XIIID before imposing or increasing such fees. The California Supreme Court denied the City of Fresno's petition for review of the Court of Appeal's decision on June 15, 2005. In July 2006 the California Supreme Court, in Bighorn-Desert View Water Agency v. Verjil (S127535, July 24, 2006), addressed the validity of a local voter initiative measure that would have (a) reduced a water agency's rates for water consumption (and other water charges), and (b) required the water agency to obtain voter approval before increasing any existing water rate, fee, or charge, or imposing any new water rate, fee, or charge. The court adopted the position indicated by its statement in Richmond that a public water agency's charges for ongoing water delivery are "fees and charges" within the meaning of Article XIIID, and went on to hold that charges for ongoing water delivery are also "fees" within the meaning of Article XIIIC's mandate that the initiative power of the electorate cannot be prohibited or limited in matters of reducing or repealing any local tax, assessment, fee or charge. Therefore, the court held, Article XIIIC authorizes local voters to adopt an initiative measure that would reduce or repeal a public agency's water rates and other water delivery charges. (However, the court ultimately ruled in favor of the water agency and held that the entire initiative measure was invalid on the grounds that the second part of the initiative measure, which would have subjected future water rate increases to prior voter approval, was not supported by Article XIIIC and was therefore invalid.) 34 The court in Bighorn specifically noted that it was not holding that the initiative power is free of all limitations; the court stated that it was not determining whether the electorate's initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay for operating expenses, provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due. Proposition 218 and the City's Wastewater System Rates. The City followed the procedural requirements, including the public hearing and majority protest provisions, of Proposition 218 in connection with its most recent System rate increases (which included approval for annual CPI increases). See "THE SYSTEM - Wastewater Rates and Charges". The City believes that its current wastewater charges which are collected to pay the costs of System operation and maintenance and debt service comply in all respects with the requirements of Article XIIID and the City expects that any future wastewater charges will comply with Article XIIID's procedural and substantive requirements to the extent applicable thereto. The City will continue to comply with the provisions of Proposition 218 in connection with future rate increases. Conclusion. It is not possible to predict how courts will further interpret Article XIIIC and Article XIIID in future judicial decisions, and what, if any, further implementing legislation will be enacted. Under the Bighorn case, local voters could adopt an initiative measure that reduces or repeals the City's rates and charges, although it is not clear whether (and California courts have not decided whether) any such reduction or repeal by initiative would be enforceable in a situation in which such rates and charges are pledged to the repayment of bonds or other indebtedness. In this regard, it should be noted that, after the City Council adopted increased water rates on September 21, 2005 to pay for the cleanup of perch loroethylene (PCE) and trichloroethylene (TCE) in the City's groundwater (see "LITIGATION" below), an initiative (Measure H) was placed on the November 7, 2006 ballot to repeal the increased rates. The resolution failed, with 63.9% of the voters rejecting the proposed rate reduction and 36.1% of voters supporting it. There can be no assurance that the courts will not further interpret, or the voters will not amend, Article XIIIC and Article XIIID to limit the ability of local agencies to impose, levy, charge and collect increased fees and charges for utility service, or to call into question previously adopted utility rate increases. Future Initiatives Articles XIIIA, XIIIB, XIIIC and XIIID were adopted as measures that qualified for the ballot pursuant to California's initiative process. From time to time other initiatives could be proposed and adopted affecting the City's revenues or ability to increase revenues. 35 RISK FACTORS The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating the purchase of the 2007 Certificates. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the 2007 Certificates. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks. Limited Obligations The 2007 Certificates are payable only from Installment Payments received from the City, and the Installment Payments are secured by and payable solely from System Net Revenues; the Installment Payments are not secured by a legal or equitable pledge or charge or lien upon any property of the City or the Corporation or any of their income or receipts, except the System Net Revenues. The obligation of the City to make the Installment Payments does not constitute an obligation of the City to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. Parity Obligations In addition to the Installment Payments, the City is obligated to make the 2003 Installment Payments and the 2004 Installment Payments from System Net Revenues. In addition, the City is permitted under the Installment Purchase Agreement, subject to satisfaction of certain conditions, to incur additional Parity Debt. In the event System Net Revenues were insufficient to pay all of the City's obligations with respect to the Parity Debt, when due, the City would be obligated to make payments on the Parity Debt on a pari passu basis. Increased Direct Costs There can be no assurance that the Operation and Maintenance Costs of the City with respect to the System will be consistent with the levels contemplated in this Official Statement. Changes in technology, litigation (see "LITIGATION"), costs related to environmental matters (see "THE SYSTEM — Environmental Compliance"), increases in the cost of operation or other expenses could require increases in rates or charges in order to comply with the City's rate covenant, and could increase the possibility of nonpayment of the Installment Payments. See "THE SYSTEM". Natural Calamities From time to time, the service area of the System is subject to natural calamities, including earthquake and flood. A seismic event or a flood could cause property damage, which could adversely impact the availability of System Net Revenues, whether as the result of reduced System Revenues or increased Operation and Maintenance Costs, or both. The City of Lodi General Plan dated June 12, 1991, includes the following information about flood and earthquake risk in the City. 36 Earthquakes. The greatest geologic hazard in Lodi is the structural danger posed by groundshaking from earthquakes originating outside of the area. The level of impact resulting from any seismic activity will depend on factors such as: distance from epicenter, earthquake magnitude, and characteristics of soils and subsurface geology. Damaging effects could possibly be worsened by liquefaction of underlying materials, causing larger buildings to settle or topple. Direct damage from surface rupture is considered unlikely because no faults are known to underlie the area. The maximum expected earthquake intensity to be reasonably expected in the Lodi area would correspond to a Modified Mercalli Intensity VIII, or possibly higher. During an intensity VIII event, some damage would occur to well -made structures and chimneys; some towers would fall; and poorly constructed or weak structures would be heavily damaged. An earthquake with an intensity of VIII would be most probably in areas where the water table is most shallow in proximity to the Mokelumne River. Where the water table is deeper than 30 feet, which it is throughout most of the City, a maximum intensity of only VII would be more reasonably expected. In such an earthquake, damage in well-built structures would be slight. Flood. Based on revised flood risk evaluations prepared by the Federal Emergency Management Agency (FEMA) for the City of Lodi and San Joaquin County in 1987, flood hazards are a constraint to development only in the area immediately adjacent to the Mokelumne River in the 100 -year floodplain. The levee system along the Mokelumne River is of sufficient height to protect nearly all of the City from 100 -year floodflow, but the majority of the area would be inundated during the 500 -year flood event. Flood depths during the 500 -year event have not been estimated. Significant portions of the area are high enough to be free of the 500 -year hazard. [discuss updates] Limited Recourse on Default Failure by the City to make the Installment Payments, when due, constitutes an event of default under the Installment Purchase Agreement and the Corporation is permitted to pursue remedies at law or in equity to enforce the City's obligation to make the Installment Payments. Although the Corporation has the right to accelerate the total unpaid principal component of the Installment Payments, there is no assurance that the City will have sufficient System Net Revenues to pay the principal component of the Installment Payments upon acceleration. See also "CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS — California Constitution Articles XIIIC and XIIID" above. Effect of Bankruptcy In addition to the limitations on remedies contained in the Installment Purchase Agreement and the Trust Agreement, the rights and remedies provided in the Installment Purchase Agreement and the Trust Agreement may be limited by and are subject to provisions of federal bankruptcy laws, as now or hereafter enacted, and to other laws or equitable principles that may affect creditors' rights. In the event of the bankruptcy of the City, the obligations of the City under the Installment Purchase Agreement may be set aside. Loss of Tax Exemption The City has covenanted in the Installment Purchase Agreement that it will not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of interest evidenced by the 2007 Certificates under 37 Section 103 of the Internal Revenue Code of 1986. In the event the City fails to comply with the foregoing tax covenant, interest evidenced by the 2007 Certificates may be includable in the gross income of the Owners thereof for federal tax purposes. See "TAX MATTERS". Secondary Market There can be no guarantee that there will be a secondary market for the 2007 Certificates or, if a secondary market exists, that any 2007 Certificates can be sold for any particular price. Prices of bond issues for which a market is being made will depend upon then - prevailing circumstances. Such prices could be substantially different from the original purchase price. No assurance can be given that the market price for the 2007 Certificates will not be affected by the introduction or enactment of any future legislation (including without limitation amendments to the Internal Revenue Code), or changes in interpretation of the Internal Revenue Code, or any action of the Internal Revenue Service, including but not limited to the publication of proposed or final regulations, the issuance of rulings, the selection of the 2007 Certificates for audit examination, or the course or result of any Internal Revenue Service audit or examination of the 2007 Certificates or obligations that present similar tax issues as the 2007 Certificates. On May 21, 2007, the U.S. Supreme Court agreed to review Davis v. Kentucky Dept of Revenue of the Finance and Admin. Cabinet, 197 S.W.3d 557 (2006), a decision holding that state statutes providing more favorable state income tax treatment to holders of debt issued by in-state government bodies than for debt issued by out-of-state government bodies violate the U.S. Constitution. If the decision is upheld, the marketability and market price for the 2007 Certificates may be affected. It is likely that the case will be heard by the U.S. Supreme Court before the end of the Court's session that ends June 30, 2008. Potential Liability Associated with the Main Trunk Line The City expects to finance rehabilitation of the main trunk line from the White Slough Facility to the City with proceeds of the 2007 Certificates. On October 17, 2007, the City Council declared a local state of emergency, dispensed with bidding requirements and authorized the City Manager to negotiate a contract change order with the contractor performing the Phase 3 work to include the pipeline rehabilitation. The City expects the pipeline rehabilitation to be complete by Summer 2008. The City believes that it could be exposed to liability as a result of the current condition of the main trunk line. The 40 -year-old concrete pipeline is badly deteriorated because of a chemical reaction in the sewage that produces sulfuric acid, which, over time, eats away at the top of the concrete pipe. In order to eliminate this exposure, the City has (i) marked the pipeline alignment; (ii) warned the owners of land under the alignment that the condition of the line could cause their land to be unstable and recommended that it be avoided; and (iii) fast -tracked the rehabilitation timeline to completion by June of 2008. Based upon these measures, the City believes that any liability associated with the condition of the main trunk line will not adversely impact its ability to make the Installment Payments. 38 TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, Special Counsel to the City ("Special Counsel"), based on an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, the portion of each Installment Payment designated as and constituting interest paid by the City under the Installment Purchase Agreement and received by the Owners of the 2007 Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the `'Code") and is exempt from State of California personal income taxes. Special Counsel is of the further opinion the portion of each Installment Payment designated as and constituting interest is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Special Counsel is set forth in Appendix F hereto. To the extent the issue price of any maturity of the 2007 Certificates is less than the amount to be paid at maturity of such 2007 Certificates (excluding amounts stated to be interest and payable at least annually over the term of such 2007 Certificates), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each Owner thereof, is treated as interest with respect to the 2007 Certificates which is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes. For this purpose, the issue price of a particular maturity of the 2007 Certificates is the first price at which a substantial amount of such maturity of the 2007 Certificates is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the 2007 Certificates accrues daily over the term to maturity of such 2007 Certificates on the basis of 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 2007 Certificates to determine taxable gain or loss upon disposition (including sale, prepayment, or payment at maturity) of such 2007 Certificates. Owners of the 2007 Certificates should consult their own tax advisors with respect to the tax consequences of ownership of 2007 Certificates with original issue discount, including the treatment of Owners who do not purchase such 2007 Certificates in the original offering to the public at the first price at which a substantial amount of such 2007 Certificates is sold to the public. 2007 Certificates purchased, whether at original execution and delivery or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ("Premium Certificates") will be treated as having amortizable premium. No deduction is allowable for the amortizable premium in the case of obligations, like the Premium Certificates, the interest evidenced by which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and an Owner's basis in a Premium Certificate, will be reduced by the amount of amortizable premium properly allocable to such Owner. Owners of Premium Certificates should consult their own tax advisors with respect to the proper treatment of amortizable premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on or evidenced by obligations such as the 2007 Certificates. The City has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that the interest installments of the Installment Payments paid by the City under the Installment 39 Purchase Agreement and received by the Owners of the 2007 Certificates will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in such interest evidenced by the 2007 Certificates being included in gross income for federal income tax purposes, possibly from the date of original execution and delivery of the 2007 Certificates. The opinion of Special Counsel assumes the accuracy of these representations and compliance with these covenants. Special Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Special Counsel's attention after the date of execution and delivery of the 2007 Certificates may adversely affect the value of, or the tax status of interest evidenced by, the 2007 Certificates. Accordingly, the opinion of Special Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Special Counsel is of the opinion that the interest installments of the Installment Payments paid by the City under the Installment Purchase Agreement and received by the Owners of the 2007 Certificates are excluded from gross income for federal income tax purposes and are exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of the interest with respect to, the 2007 Certificates may otherwise affect an Owner's federal, state or local tax liability. The nature and extent of these other tax consequences depend upon the particular tax status of the Owner or the Owner's other items of income or deduction. Special Counsel expresses no opinion regarding any such other tax consequences. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest evidenced by the 2007 Certificates to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Owners from realizing the full current benefit of the tax status of such interest. As one example, on May 21, 2007, the United States Supreme Court agreed to hear an appeal from a Kentucky state court which ruled that the United States Constitution prohibited the state from providing a tax exemption for interest on bonds issued by the state and its political subdivisions but taxing interest on obligations issued by other states and their political subdivisions. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the 2007 Certificates. Prospective purchasers of the 2007 Certificates should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Special Counsel expresses no opinion. The opinion of Special Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Special Counsel's judgment as to the proper treatment of the 2007 Certificates for federal income tax purposes. It is not binding on the Internal Revenue Service ("IRS") or the courts. Furthermore, Special Counsel cannot give and has not given any opinion or assurance about the future activities of the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirements of the Code. Special Counsel's engagement with respect to the 2007 Certificates ends with the execution and delivery of the 2007 Certificates, and, unless separately engaged, Special Counsel is not obligated to defend the City or the Owners regarding the tax-exempt status of the 2007 Certificates in the event of an audit examination by the IRS. Under current procedures, parties other than the City and its appointed counsel, including the Owners, would have little, if 40 any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the 2007 Certificates for audit, or the course or result of such audit, or an audit of obligations presenting similar tax issues may affect the market price for, or the marketability of, the 2007 Certificates, and may cause the City or the Owners to incur significant expense. LITIGATION No Litigation Relating to 2007 Certificates. To the knowledge of the City, there is no controversy or litigation of any nature now pending or threatened restraining or enjoining the execution and delivery of the 2007 Certificates, the Trust Agreement, the Installment Purchase Agreement or in any way contesting or affecting the validity of the 2007 Certificates or any proceedings of the City a- the Corporation taken with respect to the execution and delivery thereof. Litigation Relating to PCE, TCE. The City relies upon groundwater for providing potable water to its residents. The City first detected the chemicals Tetrachloroethylene ("PCE" or `FERC") and Trichloroethylene ("TCE") in the groundwater in 1989. It appears that this contamination was caused by releases into the environment over many decades by dozens of drycleaners and other businesses in the City. In 1996, the City negotiated a Comprehensive Joint Cooperative Agreement (the "Cooperative Agreement") with the California Environmental Protection Agency's Department of Toxic Substances Control ("DTSC"). Under the May 6, 1997 Cooperative Agreement, the City agreed to diligently prosecute environmental enforcement actions against responsible parties to compel them to investigate and remediate the contamination in order to protect the City's groundwater supply. Subsequent to the execution of the Cooperative Agreement, the City enacted the ill fated Municipal Environmental Response & Liability Ordinance (" MERLO") to support the City's lead enforcement role. Thereafter, the City filed several enforcement actions. The primary one, entitled 'The People of the State of California and the City of Lodi v. M&P Investments, et. al U.S. District Court for the Eastern District of California, Case No. Civs-00-2441 FCD JFM'., sought the abatement of a public nuisance and a nuisance per se and recovery of the City's cost of responding to that nuisance. Various counterclaims and cross- claims have been filed including claims against the City for its alleged contribution to the contamination. Although a trial date is set for October 2008, all but four of the defendant groups have agreed to settle with the City as further outlined below. During the course of the litigation, several events and judicial decisions negatively impacted the City's initial litigation strategy. First, the Courts ruled that (1) the City does not have authority to serve as lead enforcement agency under the Cooperative Agreement and (2) MERLO is preempted by State and Federal environmental legislation. In one of these matters, City of Lodi v. Unigard, Case No. C039076, the City suffered an adverse judgment and the court ordered the City to pay damages and attorney's fees. In another matter, City of Lodi v. Randtron, Case No. C037445, the City received a favorable judgment and an award of attorney's fees. These matters were appealed and on May 5, 2004, the Third District Court of Appeal issued opinions in both of the cases. In Unigard, the Court held that the information gathering provisions of the City's MERLO ordinance as enforced by the City were a violation of Unigard's civil rights and confirmed a $288,000 judgment against the City. This liability was ultimately waived by Unigard in the Busy Bee Settlement discussed below. In Randtron, the 41 Court held that MERLO is preempted by California's Hazardous Substance Account Act and that the administrative abatement order issued to Randtron under MERLO was therefore void. In addition, the federal court in the M&P action determined that the City itself is a potentially responsible party for the contamination due to the alleged release and increased migration of certain of the contamination sources into the City's groundwater through the infrastructure of the System and the City's water enterprise (the "Water System"). As such, the City was exposed to potential liability for the clean-up as more fully described below. Due to the complete failure of the City's former outside counsel's legal strategy, the City changed course and attorneys in 2004 and pursued settlements with the various potentially responsible parties. Of the five contamination plumes identified in the groundwater supply, the City has resolved four and is close to resolving the fifth. The first settlement came with respect to the Busy Bee Plume. The Busy Bee settlement fully funded a contract with a remediation company which is expected to fully remediate the site. In addition, the settlement funded a $182,500 escrow account. In the event the contract fails to remediate the site, the escrow account can be used to cover the excess costs. The City also settled with all but four groups of potentially responsible parties regarding the remaining four plumes and with its own insurance carriers, raising $34.2 million toward the estimated $49.5 million total cleanup cost. The settlements reached as of the date of this Official Statement leave the City obligated to fund the $15.3 million remaining shortfall in clean- up costs. Settlements with the remaining defendants would reduce the City's potential clean-up liability. However, the litigation program created several other liabilities for the City including the Lehman financing described below, litigation and consultant costs. To finance the litigation, the City and the Lodi Public Improvement Corporation entered into a financing arrangement with Lehman Brothers Inc. ("Lehman") in June 2000 entitled the Lodi Financing Corporation Environmental Abatement Program Variable Rate Certificates of Participation ("2000 COPs"). Lehman advanced $15,625,000, which was repayable with interest accruing at the rate of "LIBOR" plus 20% per annum, adjusted quarterly and compounded annually. In 2004, litigation arose between Lehman and the City over the City's obligations under the 2000 COPs. The matter settled in 2005 with the City paying Lehman $6 million to fully discharge its obligations under the 2000 COPs. The City also sued its former outside counsel, Envision Law Group ("Envision"), for the City of Lodi v. M&P Investments, et. al. litigation. Envision cross -claimed, alleging that the City owes it $7.0 million dollars in accrued but unpaid legal fees, $3.5 million in interest and 20% of all settlements that the City secured after Envision's termination. No trial date is scheduled but the City is confident that it will prevail, in which case the City would not be responsible for paying anything to Envision. In 2005, City staff and outside consultants estimated that the cost of the City's potential liability arising from the PCE/TCE clean-up and related litigation that was not yet funded was $45 million. Although this potential liability could be shared by the System and the Water System, the City determined to fund the unfunded costs through the Water System by raising water rates. Accordingly, Bartle Wells performed a rate analysis, and concluded that a $10.50 average monthly rate increase, phased in over 2 years, would meet the City's unfunded potential liability. This $10.50 average rate increase was adopted pursuant to Council Resolution 2005-203 on September 21, 2005, and is projected to raise $2.7 million in additional revenue each year ("Water Rate Increase Revenue"). This rate increase was unsuccessfully challenged by citizen initiative in November 2006; the effort to repeal the water rate increase was defeated by a vote of 63.9% to 36.1 %. 42 After concluding the various settlements described above, City staff and outside consultants concluded in mid -2007 that the City's potential liability arising from the PCE/TCE clean-up and related litigation that was not yet funded was actually $35.46 million including a $15 million contingency. The City expects that the Water Rate Increase Revenue described in the previous paragraph will be sufficient to cover the total unfunded potential liability. In this regard, it is important to note that (1) the clean-up costs are expected to be incurred over a 30 - year period; and (2) the existing settlements will be sufficient to fund the capital needs related to the clean-up, leaving Water Rate Increase Revenue to fund the ongoing operations and maintenance expenses, repayment of an internal water fund loan and operating reserves. The estimated future costs, immediately available sources of funds(excluding the $2.7 million of Water Rate Increase Revenues that the City expects to be generated on an annual basis) and resulting unfunded potential City liability with respect to the PCE/TCE clean-up and related litigation is summarized below. The City expects to fund the unfunded liability with Water Rate Increase Revenues and not with assets or revenues of the System. Costs: Item Amount (in millions) Cleanup Costs (1) $49.5 Water Fund Loan (2) 12.5 Legal Fees 1.66 Total Costs $63.66 Available Sources of Funds: M&P settlements $14.6 Insurance settlements (3) 13.6 Total Sources of Funds 28.2 Unfunded Potential City Exposure to be funded $35.46 from Water Rate Increase Revenue (1) Includes a $15 million contingency. (2) Represents a loan from the Infrastructure Replacement Water Fund Account to the PCE Water Fund Account, which is now being repaid from Water Rate Increase Revenue. (3) Reflects use of $6 million of the USF&G settlement to pay Lehman in connection with the 2000 COPs, as described above. Potential Litigation Relating to Nitrate Levels. The City is investigating nitrate levels in the vicinity of the White Slough Facility. There are a number of potential nitrate sources in the area including dairy and farming operations. It is too early to determine the cause of the contamination or whether it will require remediation by the City or any other party. Given the current evidence, the RWQCB issued the City's most recent NPDES Permit in September 2007, 43 concluding that further investigation is needed. The cost of the investigation is factored into the City's current revenue model. APPROVAL OF LEGALITY The execution and delivery of the 2007 Certificates is subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California, Special Counsel, substantially in the form set forth as Appendix F. Special Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the Underwriters by Jones Hall, A Professional Law Corporation, San Francisco, California, and for the City and the Corporation by the City Attorney of the City. Payment of the fees and expenses of Special Counsel and Underwriters' Counsel is contingent upon execution and delivery of the 2007 Certificates. RATINGS Insured Ratings. Standard & Poor's and Fitch are expected to assign the 2007 Certificates the long-term ratings of " " and " ," respectively, upon the delivery by the Insurer of the Policy guaranteeing the payment of the principal and interest evidenced by the 2007 Certificates when due. Underlying Ratings. In addition, the 2007 Certificates have been assigned the underlying ratings, without regard to the Policy, of "Ar" and "A: ", respectively, by Standard & Poor's and Fitch. General. The ratings reflect only the respective views of the rating agencies, and any explanation of the significance of such ratings may be obtained only from such rating agencies as follows: Standard & Poor's, 55 Water Street, 38`" Floor, New York, New York 10041; and Fitch Ratings, One State Street Plaza, New York, New York 10004. The City and the Insurer furnished to the rating agencies certain information and materials concerning the 2007 Certificates and themselves. Generally, rating agencies base their ratings on information and materials furnished to them and on investigations, studies and assumptions by the rating agencies. There is no assurance that the ratings will remain in effect for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agencies, or either of them, if, in their respective judgments, circumstances so warrant. The City undertakes no responsibility to oppose any such revisions or withdrawal. Any downward revision or withdrawal of any rating may have an adverse effect on the market price of the 2007 Certificates. FINANCIAL ADVISOR Lamont Financial Services Corp. (the 'Financial Advisor") has assisted the City with various matters relating to the planning, structuring and delivery of the 2007 Certificates. The Financial Advisor is a financial advisory firm and is not engaged in the business of underwriting or distributing municipal securities or other public securities. The Financial Advisor assumes no responsibility for the accuracy, completeness or fairness of this Official Statement. The 44 Financial Advisor will receive compensation from the City contingent upon the sale and delivery of the 2007 Certificates. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the 2007 Certificates at a price of $ , representing the aggregate principal amount of the 2007 Certificates plus $ net original issue premium and less $ Underwriters' discount). The Purchase Contract for the 2007 Certificates provides that the Underwriters will purchase all the 2007 Certificates, if any are purchased. The 2007 Certificates may be offered and sold by the Underwriters to certain dealers and others at prices lower than the public offering price stated on the inside cover page of this Official Statement, and such public offering price may be changed, from time to time, by the Underwriters. VERIFICATION OF MATHEMATICAL COMPUTATIONS Causey Demgen & Moore Inc., Denver, Colorado (the "Verification Agent"), will verify the arithmetical accuracy of certain computations included in the schedules provided bar the underwriters relating to discharge of the 1991 Installment Payments and the 1991 Certificates. See "THE FINANCING PLAN". The Verification Agent has restricted its procedures to verification of the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information upon which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. City. EXECUTION AND DELIVERY The execution and delivery of this Official Statement has been duly authorized by the 45 CITY OF LODI, CALIFORNIA By: City Manager APPENDIX A THE CITY OF LODI The 2007 Certificates are not secured by the faith and credit or the taxing power of the City. The economic and financial data regarding the City of Lodi and the County of San Joaquin set forth in this section are included for information purposes only, to give a more complete description of the service area of the City's System. General The City of Lodi, California ("Lodi" or the "City) was incorporated as a General Law City on December 6, 1906. The City is located in the San Joaquin Valley between Stockton, 2 miles to the south, and Sacramento, 35 miles to the north, and adjacent to State Route 99. The city is located on a main line of the Union Pacific Railroad and is within 5 miles of Interstate 5. The City population is 63,395 (as of Jan. 1, 2007 estimate by the California Department of Finance) and is contained in an area of approximately 13 square miles. The City has grown steadily since incorporation in 1906 and in 2006 approved development proposals that will add 3,509 dwelling units in newly annexed areas to the south and west. The City's growth is provided for in both the General Plan and the City's growth -control ordinance that allows an increase in population of 2% per year until the growth limits are reached. The City provides a wide range of municipal services, including public safety (police, fire and graffiti abatement), public utilities services (electric, water and sewer), transportation services (streets, flood control and transit), leisure, cultural and social services (parks and recreation, library, and community center), and general government services (management, human resources administration, financial administration, building maintenance and equipment maintenance). The City has a broad-based economy that, unlike many cities in the San Joaquin Valley, does not simply depend upon agriculture, one reason the City's unemployment rate averages roughly 2 percent less than San Joaquin County's as a whole. The region's growing reputation for its fine wines has boosted its image as a tourist destination, and the city's downtown, enhanced by a $25 million public and private investment, is a model for other mid-sized cities seeking to revitalize their downtowns. As it transitions to an entertainment, white -linen dining and wine -tasting destination, downtown Lodi serves as a hub for the 60 wineries located within a 10 -mile radius. Sales at dining and drinking establishments grew by 31 percent from Fiscal Year 2002-2003 to 2006-2007. In 2006, the City partnered with three local wineries outside the City limits, allowing them to use the wastewater plant's capacity in return for opening a downtown wine -tasting room. Two other boutique wineries recently moved their winemaking operations within the City limits. Additionally, the City recently agreed to begin accepting waste from Flag City, a growing collection of transportation service businesses, hotels and restaurants, at Interstate 5 and Highway 12 that is five miles west of the City limits. San Joaquin County, which is responsible for treating Flag City's waste, recently agreed to pay Lodi more than $6.5 million in connection fees and approximately $160,000 a year to send its wastewater to the City's White Slough Water Pollution Control Facility for treatment. The City has a diversified industrial base, ranging from plastics industries that are industry leaders in producing pipes for irrigation and drainage, and injection -molded products, to A-1 Cottage Bakery, which sells specialty baked goods and frozen dough to customers nationwide. Still, agriculture plays a large role in the city's economy. In addition to wines, processed foods, nuts, fruit, vegetables and milk are major commodities of the Lodi area and supply the materials for local food processors and packagers. These products support the operations of General Mills and private-label cannery Pacific Coast Producers, among other companies. A variety of Lodi businesses serve the surrounding farms and vineyards with irrigation supplies and specialty machinery. In addition, the City has a wide range of other financially sound businesses. These companies range in size from a few dozen to hundreds of employees and produce a wide variety of services and products. One of them, health insurance company Blue Shield of California, broke ground this year on a new claims processing center that will house its current 800 -employee workforce and allow it to expand to 1,500 workers. Municipal Government City Council. All powers of the City are vested in the City Council which is empowered to perform all duties of and obligations of the City as imposed by State law. The City has a five - member City Council composed of members elected at large. Each council member is elected for four years with staggering terms. Biographies of the members of the City Council are set forth below: BOB JOHNSON, MAYOR, was elected to the Lodi City Council in November 2004. Mr. Johnson attained the rank of captain in the United States Marine Corps and, following his military service, was employed for more than 20 years in the financial industry in a variety of marketing and management positions in New York, Los Angeles, and San Francisco. Most recently, he has been a self-employed real estate appraiser in the Central Valley. Mr. Johnson received a Bachelor of Arts degree from St. Bonaventure University. JOANNE MOUNCE, MAYOR PRO TEMPORE, was elected to the Lodi City Council in November 2004. Ms. Mounce received an Accounting Certificate from South Lake Tahoe Community College and her Associates Degree with Honors from San Joaquin Delta College. With 23 years of accounting experience, Ms. Mounce currently works with Dougherty CPAs, Inc., a Stockton certified public accountant firm. LARRY D. HANSEN, COUNCIL MEMBER, was elected to the Lodi City Council in November 2002 and re-elected in November 2006. Mr. Hansen is a United States Navy veteran and obtained his Master of Public Administration degree in 1993 from California State University, Stanislaus. Mr. Hansen had a 30 -year career with the City of Lodi Police Department, serving as Chief of Police from 1993 to 2000. SUSAN HITCHCOCK, COUNCIL MEMBER, was elected to the Lodi City Council in November 1998 and re-elected in 2002 and 2006. Ms. Hitchcock received a Bachelor of Science in Business Administration from California State University, Sacramento, in 1979 and a teaching credential in 1991. She also received a Master of Arts in School Administration and an Administrative Services credential from University of the Pacific in 1997. Ms. Hitchcock worked as a commercial loan officer for eight years. She has been employed by the Lodi Unified School District since 1991 and is currently the Principal of Clairmont Elementary School. A-2 PHIL KATZAKIAN, COUNCIL MEMBER, was elected to the Lodi City Council in November 2006. Mr. Katzakian is president and co-owner of Lodi Printing, an 83 -year-old business owned by the Katzakian family since 1948. Mr. Katzakian attended San Joaquin Delta College and California State University, Sacramento, before being hired by Lodi Vintners, a Lodi -area winery. He spent five years with the company, eventually becoming General Manager, before leaving to open an automotive repair business. Five years later, Mr. Katzakian joined Lodi Printing. Investment Portfolio All funds of the City, including surplus funds of the System, are invested by the City in accordance with the investment guidelines of the California Government Code (Sections 53601 and 53635) and the City's Investment Policy, which is presented annually to the City Council for approval. Investment Policy. Pursuant to the Investment Policy, the City strives to maintain a level of investment of all idle funds, less required reserves, as near 100% as possible, through daily and projected cash flow determinations. The City's cash management system is designed to monitor and forecast expenditures and revenue accurately in order to enable the City to invest funds to the fullest extent possible. Idle cash management and investment transactions are the responsibility of the Finance Director/City Treasurer. The Investment Policy, as adopted by the City Council on October 1, 2003, permits investment in the following: U.S. Treasury obligations (bills, notes and bonds); U.S. Government Agency securities and instrumentalities; bankers acceptances; certificates of deposit; negotiable certificates of deposit; commercial paper; California State Local Agency Investment Fund; passbook deposits; mutual funds; and medium term notes. The Investment Policy provides that safety is given the highest priority, followed by liquidity and yield. Investments are selected to achieve a "market average" rate of return, or the annual rate of return on the one-year U.S. Treasury Bill. The Investment Policy may be changed at any time at the discretion of the City Council (subject to the State of California law provisions relating to authorized investments) and as the California Government Code is amended. There can be no assurance, therefore, that the State of California law and/or the Investment Policy will not be amended in the future to allow for investments which are currently not permitted under such State law or the Investment Policy, or that the objectives of the City with respect to investments will not change. All investments, including the Authorized Investments and those authorized by law from time to time for investments by public agencies, contain a certain degree of risk. Such risks include, but are not limited to, a lower rate of return than expected and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Trust Agreement and the Installment Purchase Agreement, or other amounts held by the City, could have a material adverse effect on the City's finances. Investment Results as of June 30, 2007. A summary of the City's pooled investment portfolio as of June 30, 2007 is set forth below. A-3 CITY OF LODI Investment Portfolio Summary (as of June 30, 2007) Percent Type of Investment Amount of Total Local Agency Investment Fund (City) $19,648,971.23 48.2% LAIF (Lodi Public Improvement Corporation) 3,439,412.57 8.4 Certificates of Deposit 300,000.00 0.7 Passbook/Checking Accounts 17.398.013.40 42.7 Total $40,786,397.20 100.0% Source: City of Lodi. Population The following chart indicates the growth in the population of the City since 1998. CITY OF LODI POPULATION For Years 1998 through 2007 Year (as of January 1) Population 1998 54,800 1999 56,000 2000 56,512 2001 58,353 2002 59,835 2003 60,951 2004 61,848 2005 62,520 2006 62,828 2007 63,395 Source: State of California, Department of Finance. A-4 Employment in the City was 27,900 in 2002 and 29,600 in 2006, representing a 6.1% increase over the five-year period. The unemployment rate ranged from 5.5% in 2006 to 6.9% in 2003. Statewide unemployment rates were 4.9% in 2006 and 6.8% in 2003. CITY OF LODI EMPLOYMENT, UNEMPLOYMENT AND LABOR FORCE Averages for each of the Calendar Years 1999-2003 Source: State of California, Employment Development Department. Major Employers There are several manufacturing plants in the community producing a wide variety of products: cereals, food mixes, wines, rubber products, foundry items, recreational vehicle components, electronic substrates, plastic piping and injection molded products. In addition, a number of small businesses are located within the City. The main businesses in the City, however, are food processing and plastics. The largest employers in Lodi as of September 24, 2007 are as follows: Employer Lodi Unified School District Lodi Memorial Hospital Blue Shield Cottage Bakery City of Lodi General Mills Pacific Coast Producers Farmers & Merchants Bank Wal-Mart Valley Towing Target Dart Container CITY OF LODI LARGEST EMPLOYERS Business Number of Employees Education 2002 2003 2004 2005 2006 Employment 27,900 28,300 28,800 29,300 29,600 Unemployment 2,000 2,100 2,000 1,800 1,700 Civilian Labor Force 29,900 30,400 30,800 31,100 31,300 Unemployment Rate 6.6% 6.9% 6.5% 5.9% 5.5% State Unemployment Rate 6.7% 6.8% 6.2% 5.4% 4.9% Source: State of California, Employment Development Department. Major Employers There are several manufacturing plants in the community producing a wide variety of products: cereals, food mixes, wines, rubber products, foundry items, recreational vehicle components, electronic substrates, plastic piping and injection molded products. In addition, a number of small businesses are located within the City. The main businesses in the City, however, are food processing and plastics. The largest employers in Lodi as of September 24, 2007 are as follows: Employer Lodi Unified School District Lodi Memorial Hospital Blue Shield Cottage Bakery City of Lodi General Mills Pacific Coast Producers Farmers & Merchants Bank Wal-Mart Valley Towing Target Dart Container CITY OF LODI LARGEST EMPLOYERS Business Number of Employees Education 3,292 Health Care 1,320 Insurance Claims Processing 800 Baked Goods 700 Government 458 Cereals and Food Mixes 430 Fruit Canning 400-1,200 Banking 340 Retail 310 Trailer Hitch Manufacturing 234 Retail 200 Food Packaging Manufacturing 180 Source: City of Lodi, City Manager's Office. A-5 Building Permit Activity The following table shows the value of building permits issued in the City between 2002 and 2006. CITY OF LODI BUILDING PERMIT VALUATION (in thousands) for Calendar Years 2002 through 2006 Source: City of Lodi, Community Development Department Taxable Sales The following table indicates taxable transactions in the City by type of business during the fiscal years 2002-03 through 2006-07. The table does not reflect the allocation to the City of County- and State-wide sales taxes in fiscal years 2002-03 ($940,951), 2003-04 ($786,756), 2004-05 ($938,249), 2005-06 ($1,006,486) and 2006-07 ($1,037,937). CITY OF LODI TAXABLE TRANSACTIONS BY TYPE OF BUSINESS for Fiscal Years 2002-03 through 2006-07 (in Thousands of Dollars) 2002 2003 2004 2005 2006 Residential Valuation Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Single Family $61,144 $54,351 $52,189 $81,449 $19,344 Multifamily 934 495 0 1.497 0 TOTAL $62,077 $54,846 $52,189 $82,946 $19,344 New Dwelling Units 16,105 15,165 14,088 14,076 14,419 Single Family 305 274 255 371 96 Multiple Family 6 4 0 14 0 TOTAL 311 278 255 385 96 Source: City of Lodi, Community Development Department Taxable Sales The following table indicates taxable transactions in the City by type of business during the fiscal years 2002-03 through 2006-07. The table does not reflect the allocation to the City of County- and State-wide sales taxes in fiscal years 2002-03 ($940,951), 2003-04 ($786,756), 2004-05 ($938,249), 2005-06 ($1,006,486) and 2006-07 ($1,037,937). CITY OF LODI TAXABLE TRANSACTIONS BY TYPE OF BUSINESS for Fiscal Years 2002-03 through 2006-07 (in Thousands of Dollars) Source: California State Board of Equalization M. 2002-03 2003-2004 2004-2005 2005-2006 2006-2007 Category Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Apparel Stores 13,298 17,695 17,551 17,287 17,691 Auto Dealers/Supplies 203,666 197,817 201,348 214,248 198,619 Building Materials 47,942 52,791 75,408 101,804 78,313 Drug Stores 16,105 15,165 14,088 14,076 14,419 Eating/Drinking Places 65,130 66,933 72,659 80,615 85,190 Food Stores 38,095 41,647 40,467 45,291 42,282 Furniture/Appliances 26,907 27,503 27,797 29,866 28,545 General Merchandise 130,608 132,491 129,136 130,739 129,181 Other Retail Stores 44,552 45,558 48,411 51,280 55,137 Packaged Liquor 9,132 10,321 12,729 12,799 12,911 Service Stations 55.769 55.177 64.663 73.422 80.837 Total Retail Outlets 651,204 663,099 704,257 771,427 743,126 All Other Outlets 117.237 115.104 129.776 139.768 162.952 Total Sales All Outlets 768,442 778,203 834,033 911,195 906,078 Source: California State Board of Equalization M. Income The following table, based on data reported in the annual publication "Survey of Buying Power" published by Sales and Marketing Management, summarizes the median household effective buying income for the City, the County, the State and the nation for the years 2002 through 2006. The following table compares the median household effective buying income for the City, the County, the State and the nation. MEDIAN HOUSEHOLD EFFECTIVE BUYING INCOME Year City of Lodi 2002 35,315 2003 35,577 2004 36,529 2005 37,288 2006 38,540 County of San Joaquin 37,577 37,988 39,040 39,956 41,693 State of California United States 42,484 38,035 42,924 38,201 43,915 39,324 44,681 40,529 46,275 41,255 Source: Sales & Marketing Management Survey of Buying Power for 2002 through 2004; Claritas Demographics for 2005 & 2006. Agriculture Lodi is a worldwide agricultural shipping center for the San Joaquin Valley. The surrounding prime agricultural land is the nation's largest producer of premium wine grapes. Lodi businesses process and ship local produce ranging from grapes to cherries and asparagus. Community Facilities The City has a central library, one community center, 26 parks and five specific use facilities, covering 263 developed acres and 110 undeveloped acres, and 16 playgrounds. Lodi Lake Park is connected to the Mokelumne River and features boating, fishing, beach swimming, boat rentals, nature walks, group picnic sites, an RV park and the Discovery Nature Center. Micke Grove Park, a San Joaquin County park, is located between Lodi and Stockton. The park is home to a Japanese garden, the San Joaquin Historical Museum, rides, picnic areas and a five -acre zoo featuring mammals, birds, reptiles and invertebrates. Community recreation programs cover a wide range of interests and activities including youth and adult sports and special interest classes, youth -at -risk programs, aquatics, special events, camps/clinics and tournaments. Lodi Memorial Hospital offers a 181 -bed, nonprofit, independent, acute-care hospital to the residents of the City and surrounding community. Its mission is to provide quality medical care, education and support services to the community. Two hospital campuses and six satellite clinics are used to provide a variety of inpatient, outpatient, urgent, emergency and primary care A-7 services. The hospital broke ground in 2007 on a $200 million expansion and upgrade plan that will result in remodeled rooms and the addition of an 80 -bed wing. Housing The City of Lodi housing market offers a blend of older neighborhoods and newer executive developments. CITY OF LODI Median -Priced Home (For August of Year) 2003 $274,000 2004 326,000 2005 397,000 2006 480,000 2007 418,000 Source: Coldwell Banker Grupe-TrendGraphix Education The Lodi Unified School District provides K12 and special education programs. The area also is served by several private and parochial schools. The University of the Pacific, San Joaquin Delta College, California State University, Stan islaus -Stockton campus, and the University of San Francisco satellite center are all within a 20 -minute drive of the city. The University of California, Davis and California State University, Sacramento, and the University of Southern California satellite center are within an hour's drive of the City. Additionally, San Joaquin Delta College is developing plans to build a satellite learning center that would be annexed into the city. The plans include a housing development. Transportation The City is served by Interstate 5 and State Highways 12 and 99 and is located on the main line of the Union Pacific Railroad. Lodi has Amtrak passenger rail service and local, regional and national bus service. A deep -water seaport and airport with commercial passenger travel are located approximately 15 miles south in Stockton. M Estimated Direct and Overlapping Bonded Debt The estimated direct and overlapping bonded debt of the City as of _ 1, 2007 is set forth below. CITY OF LODI ESTIMATED DIRECT AND OVERLAPPING BONDED DEBT as of 1, 2007 to come Source: California Municipal Statistics, Inc. Assessed Valuation and Tax Collections Taxes are levied for each fiscal Year on taxable real and personal property that is situated in the City as of the preceding March 1. For assessment and collection purposes, property is classified either as "secured" or "unsecured" and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll containing State -assessed property and real property having a tax lien that is sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll." Property taxes on the secured roll are due as of the March 1 lien date and become delinquent, if unpaid, on August 31. A 10% penalty attaches to the delinquent taxes on property of the unsecured roll, and an additional penalty of 1.5% per month begins to accrue commencing on November 1 of the Fiscal year. Collections of delinquent unsecured taxes is the responsibility of the County of San Joaquin using the several means legally available to it. CITY OF LODI ASSESSED VALUATIONS For Fiscal Years 2002 through 2006 (In thousands) Source: City of Lodi audited financial statements. In 1993, the City made an agreement with San Joaquin County to participate the Teeter Plan pursuant to provisions of Sections 4701-4717 of the California Revenue and Taxation Code. The Teeter Plan is an alternative method of apportioning property tax money. Pursuant to those sections the accounts of all political subdivisions that levy taxes on the County tax rolls are credited with 100% of their respective tax levies regardless of actually payments and delinquencies. The cities covered under the plan receive 95% of the property taxes in advance from the County and the 5% remaining after reconciling the cities' balances at June 30. As part of the agreement, the county keeps the penalties and interest on the delinquent taxes. =0 Personal Less Net Assessed Fiscal Year Land Improvements Property Total Exemptions Value 2001-2002 889,262 2,164,121 245,611 3,298,994 190,252 3,108,742 2002-2003 960,166 2,366,887 265,339 3,592,392 200,957 3,391,435 2003-2004 1,027,462 2,549,860 248,472 3,825,794 212,102 3,613,692 2004-2005 1,107,776 2,739,061 249,812 4,096,649 217,077 3,879,572 2005-2006 1,226,293 2,989,575 258,035 4,473,903 220,590 4,253,313 Source: City of Lodi audited financial statements. In 1993, the City made an agreement with San Joaquin County to participate the Teeter Plan pursuant to provisions of Sections 4701-4717 of the California Revenue and Taxation Code. The Teeter Plan is an alternative method of apportioning property tax money. Pursuant to those sections the accounts of all political subdivisions that levy taxes on the County tax rolls are credited with 100% of their respective tax levies regardless of actually payments and delinquencies. The cities covered under the plan receive 95% of the property taxes in advance from the County and the 5% remaining after reconciling the cities' balances at June 30. As part of the agreement, the county keeps the penalties and interest on the delinquent taxes. =0 Ten Largest Locally Secured Taxpayers The following table shows the ten largest locally secured taxpayers of the City for the Fiscal year ended June 30, 2006. CITY OF LODI TEN LARGEST LOCALLY SECURED TAXPAYERS Fiscal Year Ended June 30, 2006 TOTAL Source: San Joaquin County Assessor's Office. A-10 Assessed Name Valuation 1. General Mills, Inc. 152,102,000 2. Pacific Coast Producers 43,068,000 3. Pacific Coast Producers Corp. 34,267,000 4. Cottage Bakery Inc. 25,341,000 5. Kristmont West 21,961,000 6. Parineh's Exchange 2004 LLC 19,539,000 7. Certainteed Corp. 18,842,000 8. Dart Container Corp. 17,625,000 9. Fountains At Lodi LLC 13,031,000 10. Carl D. Panattoni, et al 12,984,000 TOTAL Source: San Joaquin County Assessor's Office. A-10 APPENDIX B EXCERPTS OF AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2006 B-1 APPENDIX C BOOK -ENTRY ONLY SYSTEM The following description of the Depository Trust Company ("DTC'), the procedures and record keeping with respect to beneficial ownership interests in the Certificates, payment of principal, interest and other payments on the Certificates to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Certificates and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case maybe. Neither the issuer of the Certificates (the "Issuer') nor the trustee, fiscal agent or paying agent appointed with respect to the Certificates (the `Agent') take any responsibility for the information contained in this Appendix. No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Certificates, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Certificates, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Certificates, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to DTC are on file with the Securities and Exchange Commission and the current "Procedures" of DTC to be followed in dealing with DTC Participants are on file with DTC. 1. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the securities (the "Certificates"). The Certificates will be issued as fully -registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully -registered certificate will be issued for the Certificates, in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount and an additional certificate will be issued with respect to any remaining principal amount of such issue. 2. DTC, the world's largest depository, is a limited -purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non -U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book -entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned C-1 subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non - U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. 3. Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Certificates, except in the event that use of the book -entry system for the Certificates is discontinued. 4. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. 6. Redemption notices shall be sent to DTC. If less than all of the Certificates within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. C-2 7. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Redemption proceeds, distributions, and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from Issuer or 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, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or 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. 9. DTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor securities depository is not obtained, security certificates are required to be printed and delivered. 10. Issuer may decide to discontinue use of the system of book -entry -only transfers through DTC (or a successor securities depository). In that event, security certificates will be printed and delivered to DTC. 11. The information in this section concerning DTC and DTC's book -entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof. C-3 APPENDIX D SUMMARY OF PRINCIPAL LEGAL DOCUMENTS D-1 APPENDIX E PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE E-1 APPENDIX F PROPOSED FORM OF OPINION OF SPECIAL COUNSEL Upon delivery of the Certificates, Orrick, Herrington & Sutcliffe LLP, Special Counsel to the City, proposes to render its final approving opinion with respect to the Certificates in substantially the following form: Date of Closing City of Lodi 221 West Pine Street Lodi, California 95240 Wastewater System Revenue Certificates of Participation, 2007 Series A (Final Opinion) Ladies and Gentlemen: We have acted as special counsel to the City of Lodi, California (the "City") in connection with the execution and delivery of the $ aggregate principal amount of Wastewater System Revenue Certificates of Participation, 2007 Series A (the "Certificates"). The Certificates evidence the proportionate interests of the owners thereof in certain payments (the "Installment Payments") to be made by the City under the terms of an Installment Purchase Agreement, dated as of December 1, 2007 (the "Agreement"), between the City and the Lodi Public Improvement Corporation (the "Corporation"). The Certificates have been executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2007 (the "Trust Agreement"), by and between the Corporation and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Trust Agreement. In such connection, we have reviewed the Trust Agreement, the Agreement, the Tax Certificate and Agreement relating to the Certificates (the "Tax Certificate"), opinions of counsel to the City, the Corporation and the Trustee, certificates of the City, the Corporation, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this opinion is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Our engagement with respect to the Certificates has concluded with their execution and delivery, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. We have assumed, without F-1 undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Trust Agreement, the Agreement and the Tax Certificate, including, without limitation, covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause the interest components of the Installment Payments to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Certificates, the Trust Agreement, the Agreement and the Tax Certificate, and their enforceability, may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against cities in the State of California. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the real or personal property described in or as subject to the lien of the Agreement or the Trust Agreement or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such property. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Certificates and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Agreement has been duly executed and delivered by, and constitutes the valid and binding obligation of, the City. 2. The obligation of the City to make the Installment Payments pursuant to the terms of the Agreement constitutes a valid and binding special obligation of the City, payable solely from the System Net Revenues of the City's Wastewater System, as provided in the Agreement. The general fund of the City is not liable for, and neither the faith and credit nor the taxing power of the City is pledged to, the payment of the Installment Payments. 3. Assuming due authorization, execution and delivery of the Trust Agreement and the Certificates by the Trustee, the Certificates are entitled to the benefits of the Trust Agreement. 4. The portion of each Installment Payment designated as and constituting interest paid by the City under the Agreement and received by the registered owners of the Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of California personal income taxes. The portion of each Installment Payment designated as and constituting interest paid by the City under the Agreement and received by the registered owners of the Certificates is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest with respect to, the Certificates. F-2 APPENDIX G SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY G-1 STONE fir. YOUNGBERG ntation to ON Cound city of Lodi Wastewater System Revenue Certificates of Participation November 7, 2 0 0 7 2007 Financing ■ Proposed financing • Not -to -exceed $35 million Wastewater Revenue Certificates of Participation (COPS) • Raise $21 million for Phase 3 treatment plant improvements and pipeline rehabilitation • Refund the outstanding 1991 Certificates of Participation callable on February 1,2008 ■ Security • Net System Revenues • All wastewater system revenues (customer service charges, connection fees, interest income, etc.) less operating and maintenance costs • City administrative overhead is payable after debt service • Rate Covenant ♦ City promises to charge sufficient wastewater rates to pay debt service with a coverage cushion ♦ 110% coverage from all net revenues AND 100% coverage excluding any transfers from the Rate Stabilization Fund (used to manage casMow and debt service coverage) • Debt Service Reserve Requirement ♦ Lesser of (i) maximum annual debt service, (ii) 125% of average annual debt service or (iii)1 Q% of principal amount Page 1 ■ ■ Ratings and Bond Insurance Ratings ■ Bond Insurance • Standard & Poor's and Fitch • Seven AAA -rated firms provided bids Ratings both provided ratings of o FSA was the low, winning bid "A-" vifh "stable" outlook o CON would be sold at "AAA" interest rates Credit Considerations instead of "A-" rates + Essential service o Total debt service savings of 41.2 6 million + Diversified, residential rate base • "Netpresent value" savings of $640,000 + Steady customer growth ■ Surety Reserve + Healthy local economy o FSA provides surety in lieu of a cash -funded + Adequate coverage aided by prior debt service reserve rate increases o Total up front premium of 4 4 0, 0 0 0 equal to - Flexible rate covenant 1.5% of total reserve requirement Past reserve depletion • Reduces principal of borrowing by roughly - Historic exposure to groundwater $2.9 million (and eliminates insurance and litigation expenses issuance costs on additional par) o All -in "net present value" savings increase to $670,000 Page 2 6.x 6.4c 5.50 5.00 4.50 Interest Rate Trends Bond Buyer 25 -Bond Revenue Index Tax -Exempt Bonds Maturing h 30 Years with Average Rating of Al /A+ Weekly Period from January 2, 1997 to November 1,2007 4.04 - -- -- - , --T—,- ...-._..-- -- _, rn a a a a a a a a N N N N N N N N N N N N N N N \ \ u'] C� u1 T V)\\--. \ \\--i \ \\.r \ \ \ \ \ \ \ \\+ \ \ \ \ .--i Q� � T .r' U1 C� ^ Ul � � � V'1 O, Page 3 Financing Details ■ Estimated Borrowing Costs o Interest rates for 2007 COPS will beset on day of pricing o Borrowing cost estimated at 4.95% as of November 7,2007 ■ Refunding of 1991 COPS o $8.57 d o n outstanding at an interest rate of 6.70% 0 1991 COPs well be paid off on February 1,2008 with 1.5% redemption premium o Savings estimated at $966,000 or 11% of outstanding principal ■ Preliminary Estimated Sources and Uses Uses cf Funds Refunding Escrow Project Fund COP Insurance Cash Reserve/Surety Reserve Issuance Costs Total Principal Amount Average Annual Debt Service With Surety With Cash Reserve $ 8, 990, 000 21, 000, 000 125, 000 40, 000 400.000 $30, 555, 000 $2,144, 000 $ 8, 990, 000 21, 000, 000 135, 000 2, 930, 000 415.000 $33,470,000 $2, 342, 000 Page 4 Approvals Requested ■ Resolutions o City and Lodi Public Improvement Corporation each authorize issuance cf the COPs and approve the legal documents and POS in substantially final form ■ Preliminary Official Statement (POS) o Describes security and discloses potential risks for investors o Should be complete and accurate with no material omissions or misstatements ■ Other Documents o Continuing Disclosure Certificate: City agrees to provide annual information to market o Trust Agreement: lays out legal structure of financing, flow of funds, etc. • Installment Purchase Agreement: pledges net wastewater revenues to debt payments and provides covenant to maintain adequate rates to generate 110% coverage on debt • Escrow Agreement: provides for refinancing of outstanding 1991 COPS • Purchase Agreement: contract with underwriters to lock in interest rates and principal • Supplemental Indentures for 2003 Bonds and 2004 COPS: modifies definitions of "operating and maintenance costs" to be consistent with 2007 COPs Page 5 o November 7t' o November 81-' o November 15'-' • December 51h Next Steps Council approval Print preliminary official statement (POS) COP pricing COP closing and delivery of funds Page 6 29079-171 JH:CKL 10-2-07 10-10-07 10-18-07 10-23-07 10-25-07 11-5-07 11-0-07 11-7-07 PRELIMINARY OFFICIAL STATEMENT DATED NOVEMBER 8,2007 NEW ISSUE- FULL BOOK-ENTRYONLY Ratings: (See "Ratings") In the opinion of Orrick, Henfngton & Sutc litie LLP, Special Counsel to the City, based on an analysis of existing laws, regulations, rulings and court decisions and assuming, among other things, the accuracy of certain representations and compliance with certain covenants, the portion of each Installment Payment designated as and constituting interest paid by the Cily under the Installment Purchase Agreement and received by the Owners of the 2007 Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Special Counsel, the portion of each Installment Payment designated as and constituting interest paid by the City under the Installment Purchase Agreement and received by the Owners of the 2007 Certificates is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such interestis included in adjusted current earnings when calculating corporate alternative minimum taxable income. Special Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrualor receiptof interest evidenced by, the 2007 Certificates. See"TAXMATTERS". 532,000,000' Wastewater System Revenue Certificates of Participation, 2007 Series A Evidencing the Proportionate Interests of the Owners Thereof in Certain Installment Paymentsto be Made by the CITY OF LODI, CALIFORNIA Dated Date of Delivery Due: October 1, as set forth an the inside front cover This cover page contains certain information for general reference only. It isnot intended to be a summary of the security or terms of this issue. Investorsare advised to read the entire Official Statement to obtain information essential fo the making of an informed investment decision. Capitalized terms used on this coverp age not otherwise defined shall have the meanings set forth in this Oficial Statement. The Wastewater System Revenue Certificates of Participation, 2007 Saries A (the "2007 Certificates') evidence the proportionate interests of the Owners thereof in Installment Payments (the 'Installment Payments") to be made by the City of Lodi, California (the "City") under the terms of an Installment Purchase Agreement, dated as of December 1. 2007 (the 'Installment Purchase Agreement"), between the City and the Lodi Public Improvement Corporation (the "Corporation"). Pursuant to the Installment Purchase Agreement the City is obligated to make tha Installment Payments to the Corporation from System Net Revenues of the City's wastewater collection, treatmentand disposal system (the "System"). See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES". The 2007 Certificates are being sold to pmvide funds (i) to finance the costs of certain improvementsto the System. (ii) to allow the City to prepay outstanding installment payment obligations d: the City and. as a result. to cause immediate defeasance of the outstanding Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates'). (iii) to pay the premium for a debt service reserve fund insurance policy for the 2007 Certificates. and (iv) to pay costs of delivery of the 2007 Certificates. See'THE FINANCING PLAN". The 2007 Certificates are being executed and delivered pursuant to a Trust Agreement. dated as of December 1, 2007 (the"Trust Agreement"), between the Corporation and The Bank of New York Trust Company, NA. as trustee (the 'Trustee"). The 2007 Certificates will be delivered in fully registered form, and. when executed and delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC-). DTC will act as securities depository for the 2007 Certificates. Purchasers of interests in the 2007 Certificates will not receive securities certificates representing their interests in the 2007 Certificates purchased. Principal, premium, if any, and interest evidenced by the 2007 Certificates are payable by the Trustee to DTC, which is obligated in turn to remit such principal, premium. if any. and interest to its DTC participants for subsequent disbursement to the beneficial owners of the 2007 Certificates, as described in this Official Statement. The 2007 Certificates are deliverable in denominations of $5,000 or any integral multiple thereof. Interest evidenced by the 2007 Certificates will be payable semiannually on April 1 and October 1 of each year, commencing April 1,2008. The 2007 Certificates are subject to prepayment prior to their stated maturity dates, as more fully described in this Official Statement. See'THE2007 CERTIFICATES—PrepaymentProvis+ons". Preliminary: subject to change. The scheduled payment of principal and interest evidenced by the 2007 Certificates when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the 2007 Certificates by FINANCIAL SECURITY ASSURANCE INC. 90901 The obligation of the City to make the Installment Payments is a special obligation of the City that is secured by a pledge of and payable solely from System Net Revenues. The general fund of the City is not liablefor. and neither the faith and credit nor the taxing power of the City is pledged to, the paymentof the Installment Payments. The pledge of System Net Revenues to the Installment Payments is on a parity with the pledge of System Net Revenues to certain outstanding obligations, which will be outstanding in the principal amount of $28,690.000 following defeasance of the 1991 Certificates with proceeds of the 2007 Certificates (the "Existing Parity Obligations"). See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES- Outstanding Parity Obligations". The City is also authorized under the Installment Purchase Agreementto incurother obligations payable from System Net Revenues on a paritywith the Installment Payments. The 2007 Certificates are offered when, as and if executed and delivered to the Underwrites, subject to the approval of legality by Orrick, Herrington& Sutcliffe LLP, Los Angeles, California, Special Counsel, and certain other conditions. Certain legal matters will be passed upon for the underwriters by Jones Hall, A Professional Law Corporation, San Francisco. California, and for the City and the Corporation by the City Attorney of the City. It is expected that the 2007 Certificates in definitive form will be availablefor delivery in New York. New Yolk through the DTC book -entry system on or about December 5.2007. STONE & YOUNGBERG LLC BEAR, STEARNS & CO. INC. Dated: November, 2007 MATURITY SCHEDULE Maturity Date Principal Interest Priceor CUSIPt Octobers} Amount Rate Yield (540279) 2008 2009 2010 2011 2012 2013 2014 2015 Maturity Date Principal Interest Price or CUSIPt (October 1) Amount Rate Yield (540279) 2016 2017 2018 2019 2020 2021 2022 $ _ _% Term Certificate due October 1,2037, Price: _% CUSIPt No. _ Priced to par call on October 1, t Copyright 2007, American BankerSAssociatlon. CUSIP data are provided by Standard & Poo h CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc., and are providedfor convenience of referenceonly. NeithertheCity northe Undewiters assume any responsibility for the accuracy of these CUSP data. CITY OF LODI, CALIFORNIA City Council Bob Johnson, Mayor JoAnne Mounce, Mayor Pro Tempore Larry D. Hansen, Council Member Susan Hitchcock, Council Member Phil Katzakian, Council Member City Officials Blair King, City Manager Jim Krueger, Deputy City Manager Randi Johl, City Clerk D. Stephen Schwabauer, City Attorney Richard C. Prima, Jr., Public Works Director Charles E. Swimley Jr., Water Services Manager LODI PUBLIC IMPROVEMENT CORPORATION Board of Directors Bob Johnson JoAnne Mounce Larry D. Hansen Susan Hitchcock Phil Katzakian SPECIAL SERVICES Special Counsel Orrick, Herrington & Sutcliffe LLP Los Angeles, California Financial Advisor Lamont Financial Services Corp. Los Angeles, California Trustee The Bank of New York Trust Company, N.A. San Francisco, California Verification Agent Causey Demgen & Moore Inc. Denver, Colorado Escrow Bank U.S Bank National Association San Francisco, California GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT No dealer, broker, salesperson or other person has been authorized by the City or the Underwriters to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. 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 2007 Certificates by a person in anyjurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Statements contained in this Official Statement that include forecasts, estimates or matters of opinion, whether or not expressly stated as such, are intended solely as such and are not to be construed as representations of fact. The information set forth in this Official Statement has been furnished by the City and by other sources that are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the Underwriters. The information and expressions of opinions in this Official Statement are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall create, under any circumstances, any implication that there has been no change in affairs of the City since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwritersdo not guarantee the accuracy or completeness of such information. Other than with respect to information concerning Financial Security Assurance Inc. ("Financial Security") contained under the caption "CERTIFICATE INSURANCE and Appendix G — "SPECIMEN MUNICIPAL BOND INSURANCE POLICY herein, none of the information in this Official Statement has been supplied or verified by Financial Security and Financial Security makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information; (ii) the validity of the 2007 Certificates; or (iii) the tax exempt status of the interestwith respect to the 2007 Certificates. IN CONNECTION WITH THE OFFERING OF THE 2007 CERTIFICATES, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH 2007 CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements." Such statements are generally identifiable by the terminology used such as "plan," "project," "expect," "anticipate," "intend," "believe," "estimate," "budget" or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Except as specifically set forth in this Official Statement, the City does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur. TABLE OF CONTENTS Paye INTRODUCTION..............................................1 Purpose of this Official Statement .................1 The 2007 Certificates ..................................... 1 Purpose of the 2007 Certificates ...................1 Security and Sources of Payment for the 2007 Certificates ........................................ 2 Rate Covenant ............................................... 2 Reserve Fund ................................................ 2 Certificate Insurance ...................................... 3 Continuing Disclosure .................................... 3 Other Matters ................................................. 3 THE FINANCING PLAN .................................... 4 Refinancing of the 1991 Certificates .............. 4 Financing of the 2007 Project ........................ 4 Estimated Sources and Uses of Funds ......... 5 Scheduleof Installment Payments ................ 6 THE 2007 CERTIFICATES ............................... 7 General.......................................................... 7 Prepayment Provisions .................................. 7 SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES ................... 9 Installment Payments .................................... 9 Defined Terms.............................................10 23 Pledge of System Net Revenues.................11 Rate Covenant.............................................11 29 Reserve Fund..............................................12 29 Application of System Revenues .................13 30 Outstanding Parity Obligations .................... 14 Additional Parity Debt .................................. 14 Subordinate Obligations .............................. 15 Rate Stabilization Fund ................................ 15 CERTIFICATE INSURANCE ........................... 17 THE SYSTEM..................................................19 General........................................................19 33 Governance and Management ....................19 Employees................................................... 20 Retirement Programs ................................... 20 Insurance..................................................... 20 System Facilities .......................................... 20 Page Environmental Compliance .......................... 22 Service Area and Customers ....................... 23 Wastewater Rates and Charges .... .............26 Planned Capital Improvements...... ............. 29 Financial Statements.. ................................. 29 Historical Operating Results ......................... 30 Projected Operating Results and Debt Service Coverage ..................................... 31 Transfers to the General Fund of the City ... .33 CONTINUING DISCLOSURE .......................... 33 THE CORPORATION ...................................... 33 CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS ................ 33 California Constitution Articles XIIIA and XII IB..........................................................33 California Constitution Articles X111C and XIIID.......................................................... 34 Future Initiatives.........................................36 RISK FACTORS ..................... ..........................37 Limited Obligations ....................................... 37 Parity Obligations ......................................... 37 Increased DirectCosts................................. 37 Natural Calamities ....................................... 37 Limited Recourse on Default ........................ 38 Effect of Bankruptcy ..................................... 38 Loss of Tax Exemption ................................ 38 Secondary Market ........................................ 39 Potential Liability Associated with the Main Trunk Line ................................................ 39 TAX MATTERS ................................................ 40 LITIGATION..................................................... 42 APPROVAL OF LEGALITY .............................. 44 RATINGS.......................................................... 45 FINANCIAL ADVISOR.....................................45 UNDERWRITING ............................................. 45 VERIFICATION OF MATHEMATICAL COMPUTATIONS ......................................... 46 EXECUTIONAND DELIVERY ......................... 46 APPENDIX A -THE CITY OF LODI.......................................................................................................... A -I APPENDIX -EXCERPTS OF AUDITED FINANCIAL STATEMENTS OF THE CITY FORTHE FISCALYEAR ENDEDJUNE 30, 2006 ....................................................... B-1 APPENDIX C -BOOK-ENTRY ONLY SYSTEM....................................................................................... C-1 APPENDIX D -SUMMARY OF PRINCIPAL LEGAL DOCUMENTS.......................................................D-1 APPENDIX E -PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE .......................... E-1 APPENDIX F -PROPOSED FORM OF OPINION OF SPECIAL COUNSEL ........................................... F-1 APPENDIX G -SPECIMEN MUNICIPAL BOND INSURANCE POLICY.................................................G-1 APPENDIX H —SPECIMEN MUNICIPAL BOND DEBT SERVICE RESERVE INSURAME POLICY........................................................................................................................ H-1 OFFICIAL STATEMENT Relating to $32,000,000' Wastewater System Revenue Certificates of Participation, 2007 Series A Evidencing the Proportionate Interests of the Owners Thereof in Certain Installment Payments to be Made by the CITY OF LODI, CALIFORNIA This Introduction is qualified in its entirety by reference to the more detailed information included and referred to elsewhere in this Official Statement. The offering of the 2007 Certificates to potential investors is made only by means of the entire Official Statement. Terms used in this Introduction and not otherwise defined shall have the respective meanings assigned to them elsewhere in this Official Statement. See "APPENDIX D — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS". Purpose of this Official Statement The purpose of this Official Statement (which includes the cover page and the appendices attached hereto) is to provide certain information concerning the sale and delivery of the above -titled Certificates of Participation (the "2007 Certificates"). The 2007 Certificates evidence the proportionate interests of the registered owners (the "Owners") thereof in installments payments (the "Installment Payments") to be made by the City of Lodi, California (the "City") under the terms of an Installment Purchase Agreement, dated as of December 1, 2007 (the "Installment Purchase Agreement), between the City and the Lodi Public Improvement Corporation (the "Corporation"). The 2007 Certificates The 2007 certificates are being executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2007 (the "Trust Agreement), between the Corporation and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). Purpose of the 2007 Certificates The 2007 Certificates are being sold to provide funds for the following purposes: (i) to finance the costs of certain improvements to the wastewater collection, treatment and disposal system of the City (the "System") (see "THE 2007 PROJECTAND THE SYSTEM CAPITAL PLAN), (ii) to allow the City to prepay certain outstanding installment payment obligations of the City (the 1991 Installment Payments") and, as a result, to cause a redemption of the outstanding Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the 1991 Certificates"), (iii) to pay the premium for a debt service reserve fund insurance policy for the 2007 Certificates, and Preliminary:subject to change. (iv) to pay costs of delivery of the 2007 Certificates. See "THE FINANCING PLAN. Security and Sources of Payment for the 2007 Certificates Pledge of System Net Revenues. The obligation of the City to make the Installment Payments pursuant to the Installment Purchase Agreement is a special obligation of the City secured by a pledge of and payable solely from System Net Revenues. The obligation of the City to make the Installment Payments does not constitute a debt of the City or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. Existing Parity Obligations, The City's pledge of System Net Revenues to the Installment Payments is on a parity with the City's pledge of System Net Revenues to certain outstanding obligations (the 2003 Installment Payments and the 2004 Installments Payments, as defined below), which are outstanding in the aggregate principal amount of $28,690,000 as of October 2, 2007 (the "Existing Parity Obligations"). The 1991 Installment Payments, which will be defeased in their entirety with proceeds of the 2007 Certificates on the date of execution and delivery of the 2007 Certificates, were outstanding in the principal amount of $8,575,000 as of October 2, 2007. See "THE FINANCING PLAN" and "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES- Outstanding Parity Obligations", Additional Parity Obligations, The City may incur additional obligations payable from and secured by the System Net Revenues on a parity with the Installment Payments and the Existing Parity Obligations, See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES -Additional Parity Debt". Parity Debt. The Existing Parity Obligations, the Installments Payments and any future Parity Obligations are referred to as Parity Debt in this Official Statement. Rate Covenant The City covenants in the Installment Purchase Agreement that it will, to the maximum extent permitted by law, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Net Revenues during such Fiscal Year equal to at least 110%of the Annual Debt Service in such Fiscal Year; provided, an adjustment will be made to the amount of System Net Revenues for amounts deposited into or withdrawn from the Rate Stabilization Fund, provided that, for purposes of such calculation, the amount of System Net Revenues before any credits for transfers from the Rate Stabilization Fund to the System Revenue Fund may not be less than 100% of Annual Debt Service for such Fiscal Year. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 Certificates— Rate Covenant". Reserve Fund A Reserve Fund is established with the Trustee pursuant to the Trust Agreement in an amount equal to the "Reserve Fund Requirement" (as defined in the Trust Agreement). Amounts on deposit in the Reserve Fund will be applied to pay principal and/or interest 2 evidenced by the 2007 Certificates in the event amounts on deposit in the Debt Service Fund are insufficient for that purpose. The City will initially satisfy the Reserve Fund Requirement with a debt service reserve fund insurance policy (the "Reserve Fund Insurance Policy") to be provided by Financial Security Assurance Inc. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 Certificates- Reserve Fund". Certificate Insurance The scheduled payment of principal and interest evidenced by the 2007 Certificates when due will be guaranteed under an insurance policy (the "Policy")to be issued concurrently with the delivery of the 2007 Certificates by Financial Security Assurance Inc. ("Financial Security"). Financial Security will also issue the Reserve Fund Insurance Policy in satisfaction of the Reserve Fund Requirement. See "CERTIFICATE INSURANCE. Continuing Disclosure The City has covenanted for the benefit of the Owners and beneficial owners of the 2007 Certificates to provide certain financial information and operating data relating to the City and the System annually, and to provide notices of the occurrence of certain enumerated events, if material. See "CONTINUING DISCLOSURE". Other Matters This Official Statement speaks only as of its date, and the information and expressions of opinions contained in this Official Statement are subject to change without notice. Neither delivery of this Official Statement nor any sale made hereunder, under any circumstances, shall create any implication that there has been no change in the affairs of the City or the System since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The summaries of and references to documents, statutes, reports and other instruments referred to in this Official Statement do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each document, statute, report or instrument. The capitalization of any word not conventionally capitalized or otherwise defined in this Official Statement indicates that such word is defined in a particular agreement or other document and, as used in this Official Statement, has the meaning given it in such agreement or document. See "APPENDIX D — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS". Copies of the Trust Agreement and the Installment Purchase Agreement are available for inspection at the City Hall of the City in Lodi, California, and will be available from the Trustee upon request and payment of duplication costs. 3 THE FINANCING PLAN The 2007 Certificates are being executed and delivered to provide funds (i)o allow the City to prepay the outstanding 1991 Installment Payments and, as a result, to cause a redemption of the outstanding 1991 Certificates, (ii) to finance the costs of certain improvements to the System, (iii) to pay the premium for the Reserve Fund Insurance Policy, and (iv) to pay costs of delivery of the 2007 certificates. Refinancing of the 1991 Certificates The City previously caused execution and delivery of the Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates") outstanding, as of October 2, 2007, in the principal amount of $8,575,000. The 1991 Certificates evidence proportionate interests in certain payments (the "1991 Installment Payments")to be made by the City pursuant to an Installment Sale Agreement, dated as of December 1, 1991 (the "1991 Installment Sale Agreement"), between the City and the Corporation. The City will cause a portion of the sale proceeds of the 2007 Certificates to be used to immediately defease the outstanding 1991 Certificates by funding the outstanding principal component of the 1991 Certificates to be redeemed on February 1, 2008, plus accrued interest to February 1, 2008, plus a premium equal to 1.5% of the total principal amount to be redeemed. The City and U.S. Bank National Association, as trustee with respect to the 1991 Certificates (the "Escrow Bank"), will enter into an Escrow Deposit Agreement (the "Escrow Agreement") under which the Escrow Bank will establish an Escrow Fund (the "Escrow Fund), into which a portion of the proceeds of the 2007 Certificates and other available funds held for the 1991 Certificates will be deposited concurrently with the execution and delivery of the 2007 Certificates. Cash sufficient to defease the 1991 Certificates will be deposited in the Escrow Fund, and the cash may be invested in non -callable federal securities. Sufficiency of the cash to defease the 1991 Certificates will be verified by Causey Demgen & Moore Inc., Denver, Colorado ("Verification Agent). Any interest earnings on amounts in the Escrow Fund will be available for transfer to the Improvement Fund on February 1, 2008. See "VERIFICATION OF MATHEMATICAL COMPUTATIONS" below. Financing of the 2007 Project Proceeds of the 2007 Certificates will be used to finance capital improvements to the System. The City currently expects the improvements to include the following: Phase 3 improvementsto the City's White Slough Water Pollution Control Facility (the "White Slough Facility"). Phase 3 improvements include headworks improvements, acquisition and installation of an additional digester, two additional aeration basins, an additional secondary clarifier and improvementsto the control room. These improvements are intended to improve de -nitrification and restore the facility's permitted treatment capacity to 8.5 mgd. The Phase 3 improvements are expected to cost approximately $20.6 million, and will be funded with proceeds of the 2007 Certificates and with remaining proceeds of the 4 2004 Certificates (as defined in "SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES — Outstanding Panty Obligations"). The City commenced work on the Phase 3 improvements in April 2007 and expects to complete the Phase 3 improvements by March 2009. • The City expects to undertake additional capital projects for the System, including rehabilitation of the main trunk line from the White Slough Facilityto the City, which the City expects will not cost more than $7.75 million. On October 17, 2007, the City Council declared a local state of emergency, dispensed with bidding requirements and authorized the City Manager to negotiate a contract change order with the contractor performing the Phase 3 work to include the pipeline rehabilitation. The City is in the process of filing a Notice of Exemption under the California Environmental Quality Act ("CEQA") and expects the pipeline rehabilitation to be completed by Summer 2008. See "RISK FACTORS — Potential Liability Related to the Main Trunk Line". Estimated Sources and Uses of Funds follows: The estimated sources and uses of funds with respect to the 2007 Certificates are as Sources: PrincipalAmount of 2007 Certificates Plus Net Original Issue Premium Less Underwriters' Discount Total Sources us": Deposit to Escrow Fund Deposit to Improvement Fund Costs of Issuance(') Total Uses Pq Includes legal, financing and consulting fees, Trustee's fees, printing costs, rating agency fees, the premium for the Policy, the premium for the Reserve Fund Insurance Policy and other costs incurred in connection with the delivery of the 2007 Certificates. 5 Schedule of Installment Payments The schedule of Installment Payments and the City's payments obligations under existing Parity Debt (assuming no optional prepayments) is set forth below: Total $28,690,000 $14,303,113 $42,993,113 (1) Reflects Me2003Installment Payments and the 20041nsta11ment Payments ExistinaParity Debt service (1) 2007 Certificates Total Parity Period Ending Principal interest Debt Service Principal Interest Debt Service Debt Service 411108 5693.661 5693,661 10/1108 51,165,000 E193,661. 1,858,661. 4/1/09 669,699 669,699 1011/09 1,215,000 669,699 1,884,699 4/1/10 646,834 Oz46,334. 1011110 1,260,000 046,834 1,906,834 4/1/11 622,159 622,159 1011111 1,305,000 622,159 1,927,159 4/1/12 591,361 591.361 1011112 1,370,000 591,361 1,961,361 4/1/13 558,236 558,236 10/1113 1,435,000 558,236 1,993,236 4/1/14 523,799 523.799 1011114 1, 505, 000 523.799 2,028,799 4/1/15 489,075 489,075 1011115 1,575,000 489,075 2,064,075 4/1/16 448,669 448.669 1011/16 1,650,000 448,669 2,098,669 411117 412,064 412,064 1011117 1,725,000 412,064 2,137,064 4/1/18 366,381 366,381 1011118 1,820,000 366,381 2,166,381 4/1/19 317,044 317,044 1011119 1,920,000 317,044 2237,044 4/1/20 271,069 271.069 1011120 2,010,000 271,069 2,281,069 4/1/21 220,425 220,425 1011121 2,110,000 220.425 2,330,425 4/1/22 163,925 163.925 1011/22 2,220,000 163,925 2,383,925 4/1/23 107,994 107,994 10/1123 2,335,000 107,994 2,442,994 4/1/24 49,163 49,163 1011/24 2,070,000 49,163 2,119,163 4/1/25 10/1125 4/1/26 10/1/26 40127 10/1127 4/1/28 1011 /28 4/1/29 1011129 4/1/30 10/1/30 4/1/31 1011131 4/1/32 1011132 4/1/33 1011133 4/1/34 1011!34 4/1/35 10/1135 4/1/36 1011136 4/1/37 10/1/37 Total $28,690,000 $14,303,113 $42,993,113 (1) Reflects Me2003Installment Payments and the 20041nsta11ment Payments THE 2007 CERTIFICATES General The 2007 Certificates will be prepared as one fully registered securities certificate for each maturity, and will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ("DTC). DTC will act as securities depository for the 2007 Certificates. Principal, prepayment premium, if any, and interest evidenced by the 2007 Certificates are payable by the Trustee to DTC, which is obligated in turn to remit such principal, prepayment premium, if any, and interest to its DTC Participants for subsequent disbursement to the beneficial owners of the 2007 Certificates. See "APPENDIX C — BOOK -ENTRY ONLY SYSTEM. The 2007 Certificates will be delivered in authorized denominations of $5,000 or any integral multiple thereof. Interest evidenced by the 2007 Certificates is payable on April 1, 2008 and sem iannuallythereafter, on each April 1 and October 1 (each, an "Interest Payment Date" for the 2007 Certificates), computed on the basis of a 360 -day year comprised of twelve 30 -day months. The 2007 Certificates will be dated the date of delivery thereof, will mature on the dates and in the principal amounts and will evidence interest at the rates, all as set forth on the inside front cover of this Official Statement. Prepayment Provisions Optional Prepayment. The 2007 Certificates maturing on or prior to October 1, are not subject to optional prepayment prior to their stated maturity dates. The 2007 Certificates maturing on and after October 1, are subject to prepayment prior to their stated maturity dates, on any date on or after October 1, , as a whole or in part, at the option of the City, from any source of available funds, at a prepayment price equal to 100% of the principal amount of 2007 Certificates or portions thereof to be prepaid, plus unpaid accrued interest thereon to the date fixed for prepayment, without a prepayment premium. Mandatory Sinking Fund Prepayment The 2007 Certificates maturing on October 1, ------, are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1, thereafter to and including October 1, , from scheduled Installment Payments made by the City on such dates at a prepayment price equal to the principal amount of the 2007 Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment according to the following schedule: Maturity Prepayment Date Principal (October 1) Amount 7 The amount of each such prepayment shall be reduced as provided in the Installment Purchase Agreement in the event and to the extent of any and all optional prepayments, or purchasesfor retirement, of 2007 Certificates maturing on October 1, The 2007 Certificates maturing on October 1, are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1, thereafter to and including October 1, , from scheduled Installment Payments made by the City on such dates at a prepayment price equal to the principal amount of the 2007 Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment according to the following schedule: Prepayment Date Principal (October 1) Amount Maturity The amount of each such prepayment shall be reduced as provided in the Installment Purchase Agreement in the event and to the extent of any and all optional prepayments, or purchasesfor retirement, of 2007 Certificates maturing on October 1. Notice of Prepayment. Notice of prepayment of 2007 Certificates shall be mailed by the Trustee not less than thirty (30) days nor more than sixty (60) days prior to the prepayment date to (i) the respective Owners of the 2007 Certificates designated for prepayment at their addresses as shown on the registration books maintained by the Trustee, (ii) the Securities Depositories, and (iii) one or more Information Services. Each notice of prepayment shall state the date of such notice, prepayment price, the place of prepayment, the CUSIP number, if any, and if less than all of the 2007 Certificates of any one maturity are to be prepaid, the distinctive certificate numbers of the 2007 Certificatesto be prepaid, and in the case of 2007 Certificates to be prepaid in part only, the respective portions of the principal amount thereof to be prepaid. Each such notice shall also state that on said date there will become due and payable on each of said 2007 Certificatesthe prepayment price thereof or of said specified portion of the principal amount thereof to be prepaid and that from and after such prepayment date interest with respect thereto shall cease to accrue, and shall require that such 2007 Certificates be then surrendered. Failure to receive such notice shall not invalidate any of the proceedings taken in connectionwith such prepayment. In the event of prepayment of 2007 Certificates (other than mandatory prepayment), the Trustee will mail a notice of prepayment upon receipt of a Written Request of the City but only after the City files a Certificate of the City with the Trustee that, on or before the date set for prepayment, the City will deposit with or otherwise make available to the Trustee for deposit in the Debt Service Fund the money required for payment of the prepayment price, including accrued interest evidenced thereby, of all 2007 Certificates then to be called for prepayment (or the Trustee determines that money will be deposited with or otherwise made available to it in sufficient time for such purpose), togetherwith the estimated expense of giving such notice. 8 Unless the book -entry only system shall have been discontinued, the Corporation, the City and the Trustee will recognize only DTC or its nominee as an Owner. Conveyance of notices and other communications by DTC to DTC Participants and by DTC Participants to beneficial owners will be governed by arrangements between them, subject to any statutory and regulatory requirements as may be in effect from time to time. Selection of Certificatesfor Prepayment. If less than all Outstanding 2007 Certificates of any particular maturity are to be prepaid at any one time, the Trustee shall select the 2007 Certificates or the portions of the 2007 Certificates of such maturity to be prepaid by lot in a manner which the Trustee deems to be fair. For purposes of selecting 2007 Certificates to be prepaid, 2007 Certificates shall be deemed to be composed of $5,000 multiples and any such multiple of principal amount may be separately prepaid, subject to the requirement that the unpaid balance of any 2007 Certificate prepaid in part must be in an authorized denomination. As long as the 2007 Certificates are held in the book -entry only system, selection of 2007 Certificates for prepayment will be governed by DTC procedures. Effect of Prepayment If notice of prepayment has been duly given as aforesaid, and money for the payment of the prepayment price of the 2007 Certificates (or portions thereof) so called for prepayment is held by the Trustee, then on the prepayment date designated in such notice, the 2007 Certificates (or portions thereof) so called for prepayment shall become due and payable, and from and after the prepayment date so designated, interestwith respect to the 2007 Certificates (or portions thereof) so called for prepayment shall cease to accrue, such 2007 Certificates (or portions thereof) shall cease to be entitled to any benefit or security under the Trust Agreement and the Installment Purchase Agreement, and the Owners of such 2007 Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof from the money held by the Trustee for such purpose. SECURITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES Installment Payments The 2007 Certificates evidence the proportionate interests of the Owners in the Installment Payments to be made by the City pursuant to the Installment Purchase Agreement. The Installment Purchase Agreement provides that the City's obligation to make the Installment Payments from System Net Revenues is absolute and unconditional, and, until such time as the Installment Payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement), the City will not discontinue or suspend any Installment Payment required to be paid by the City under the Installment Purchase Agreement, whether or not the System or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments shall be net payments to the Corporation and shall not be subject to deduction, abatement, reduction or diminution, whether by offset or otherwise, and shall not be conditional upon the performance or nonperformance by any party to any agreement or for any other cause whatsoever. Notwithstanding anything to the contrary contained in the Installment Purchase Agreement, the City shall not be required to advance any moneys derived from any source of income other than the System Net Revenues for the payment of the Installment Payments or for the performance of any agreements or covenants requiredto be performed by it contained in the Installment Purchase Agreement. Pursuant to the Trust Agreement, the Corporation transfers, assigns and sets over to the Trustee all of the Installment Payments and any and all rights, title, interest and privileges it has in, to and under the Installment Purchase Agreement (other than its rights to expenses and indemnification), including without limitation, the right to collect and receive directly all of the Installment Payments and the right to enforce the provisions of the Installment Purchase Agreement. The City consents to such assignment in the Installment Purchase Agreement and agrees to make payments of the Installment Payments directly to the Trustee. Under the Trust Agreement, the Trustee is to take all steps, actions and proceedings required to be taken, as provided in an opinion of counsel delivered to the Trustee, reasonably necessary to maintain in force for the benefit of the Owners of the 2007 Certificates the Trustee's rights in and priority to the security granted to it for the payment of the Installment Payments as assignee of the Installment Payments and all of the Corporation's rights, title, interest and privileges in, to and under the Installment Purchase Agreement (other than its rights to indemnification and expenses), and all other rights and property which the Trustee may receive in the future as security for the 2007 Certificates. The Trustee is entitled to indemnification and expenses before taking such action as provided in the Trust Agreement. The Trust Agreement provides that all of the Installment Payments received by the Trustee shall be deposited immediately in the Debt Service Fund. All of the Installment Payments are to be held in trust by the Trustee for the benefit of the Owners of the 2007 Certificates and shall be disbursed and applied only as provided in the Trust Agreement. Defined Terms For the purposes of the Trust Agreement and the Installment Purchase Agreement, the following terms are given the following meanings: "System Net Revenues" means, for any period, System Revenues less Operation and Maintenance Costs for such period; provided that certain adjustments in the amount of System Net Revenues for a Fiscal Year may be made in connection with amounts deposited in and transferred from the Rate Stabilization Fund. "System Revenues" is defined under the Installment Purchase Agreement as all gross income and revenue received or receivable by the City from the ownership or operation of the System, determined in accordance with Generally Accepted Accounting Principles, including all fees (including connection fees), rates, charges and all amounts paid under any contracts received by or owed to the City in connection with the operation of the System and all proceeds of insurance relating to the System and investment income allocable to the System and all other income and revenue howsoever derived by the City from the ownership or operation of the System or arising from the System. System Revenuesfor any Fiscal Year shall include, for the purposes permitted by the Installment Purchase Agreement, amounts transferred to the System Revenue Fund from the Rate Stabilization Fund during such Fiscal Year. "Operation and Maintenance Costs" means the reasonable and necessary costs paid or incurred by the City for maintaining and operating the System, determined in accordance with Generally Accepted Accounting Principles, including all reasonable expenses of management and repair and all other expenses necessary to maintain and preserve the System in good repair and working order, including all other reasonable and necessary costs of the City or charges required to be paid by it to comply with the terms of the Trust Agreement or of any Supplemental Agreement or resolution authorizing the execution of any Parity Obligations, such as compensation, reimbursement and indemnification of the Trustee and the Corporation, fees 10 and expenses of Independent Certified Public Accountants and deposits to the Rebate Fund; but excluding in all cases (i) payment of Parity Debt and Subordinate Obligations, (ii) costs of capital additions, replacements, betterments, extensions or improvements which under Generally Accepted Accounting Principles are chargeable to a capital account, (iii) depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles, (iv) City Administrative Costs (as defined in the Trust Agreement (the "City Administrative Expenses")), and (v) transfers from the System Revenue Fund to otherfunds or accounts of the City. The definition of Operation and Maintenance Costs is different than the definition originally included in the 2003 Installment Purchase Agreement (defined below) and the 2004 Installment Purchase Agreement (defined below). In September 2007, the City completed a study relating to the allocation of general fund administrative overhead to various City enterprise funds, including the System Revenue Fund. The definition of Operations and Maintenance Costs will be amended to exclude the payment of City Administrative Costs, which means those costs will be paid after the Installment Payments and any Parity Obligation Payments have been paid. Prior to execution and delivery of the 2007 Certificates, Financial Security Assurance Inc., the insurer of the 2003 Bonds, and MBIA Insurance Corporation, the insurer of the 2004 Bonds, will consent to amending the definition of Operation and Maintenance Costs in the 2003 Installment Purchase Agreement and the 2004 Installment Purchase Agreement. For definitions of additional terms used in the Installment Purchase Agreement and the Trust Agreement, see "APPENDIX D — SUMMARY OF PRINCIPAL LEGAL DOCUMENTS— CERTAIN DEFINITIONS". Pledge of System Net Revenues Pursuant to the Installment Purchase Agreement, all System Net Revenues and all amounts on deposit in the System Revenue Fund are irrevocably pledged to the paymentof the Installment Payments, as provided in the Installment Purchase Agreement. The Installment Purchase Agreement provides that such pledge, together with the pledge of System Net Revenues and amounts in the System Revenue Fund securing all other Parity Debt shall, subject to application as permitted in the Installment Purchase Agreement, constitute a first lien on System Net Revenues and amounts on deposit in the System Revenue Fund. The obligation of the City to make the Installment Payments is a special obligation of the City payable solely from the System Net Revenues, and does not constitute a debt of the City or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. See "Outstanding Parity Obligations" and "Additional Parity Debt" below. Rate Covenant The Installment Purchase Agreement provides that the City will, at all times until all Installment Payments have been fully paid or provision has been made therefor in accordance with the Installment Purchase Agreement, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Revenues at least sufficient, after making reasonable allowances for contingencies and errors in the estimates, to pay the following amounts during such Fiscal Year: 11 (i) All current Operation and Maintenance Costs. The Installment Payments and all other Parity Obligation Payments and all payments on Subordinate Obligations as they become due and payable. (iii) All payments required for compliance with the terms of the Trust Agreement and the Installment Purchase Agreement, including restoration of the Reserve Fund to an amount equal to the Reserve Fund Requirement. (iv) All payments to meet any other obligations of the City which are charges, liens or encumbrances upon, or payable from, the System Revenues. In addition, the City covenants that it will, to the maximum extent permitted by law, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Net Revenues during such Fiscal Year equal to at least 110% of the Annual Debt Service in such Fiscal Year; provided an adjustment may be made to the amount of System Net Revenues for amounts deposited into or withdrawn from the Rate Stabilization Fund; provided that, for purposes of such calculation, the amount of System Net Revenues before any credits for transfers from the Rate Stabilization Fund to the System Revenue Fund may not be less than 100% of Annual Debt Service for such Fiscal Year. Reserve Fund General. Pursuant to the Trust Agreement, the Reserve Fund is to be held by the Trustee so long as the Installment Purchase Agreement has not been discharged in accordance with its terms or any 2007 Certificates remain Outstanding. The Reserve Fund is required to be maintained in an amount equal to the Reserve Fund Requirement (See "Application of System Revenues" below) pursuantto the Installment Purchase Agreement and the Trust Agreement. "Reserve Fund Requirement means, as of any date of determination, the least of (a) 10% of the initial offering price to the public of the 2007 Certificates as determined under the Code, or (b) the greatest annual debt service with respect to the Installment Payments in any Fiscal Year during the period commencing with the Fiscal Year in which the determination is being made and terminating with the last Fiscal Year in which any Installment Payment is due, or (c) 125% of the sum of the annual debt service with respect to the Installment Payments for all Fiscal Years during the period commencing with the Fiscal Year in which such calculation is made (or if appropriate, the first full Fiscal Year following the execution and delivery of the 2007 Certificates) and terminating with the last Fiscal Year in which any Installment Payment is due, divided by the number of such Fiscal Years, all as computed and determined by the City and specified in writing to the Trustee. Reserve Fund Insurance Policy. In lieu of funding the Reserve Fund with cash, the City will initially satisfy the Reserve Fund Requirementwith the Reserve Fund Insurance Policy issued by Financial Security. See "APPENDIX H — Specimen Municipal Bond Debt Service Reserve Insurance Policy". The Reserve Fund is not available for the payment of any Parity Obligations of the City nor is any other reserve fund relating to any Parity Obligations available for the payment of any insufficiency with respect to the Installment Payments. 12 Application of System Revenues The City agrees and covenants in the Installment Purchase Agreement that all System Revenues it receives (except for net proceeds of any casualty insurance or condemnation award) will be deposited when and as received in the System Revenue Fund, which the City has established and which the City agrees to maintain separate and apart from other moneys of the City until all Installment Payments have been fully paid or provision has been made therefor in accordance with the Installment Purchase Agreement. Moneys in the System Revenue Fund shall be used and applied only as provided in the Installment Purchase Agreement. The Installment Purchase Agreement provides that the City is to pay all Maintenance and Operation Costs (including amounts reasonably required to be set aside in contingency reserves for Maintenance and Operation Costs the payment of which is not then immediately required) from the System Revenue Fund as they become due and payable and all remaining money in the System Revenue Fund shall be set aside and deposited by the City at the following times in the following order of priority: Installment Payments. Not later than each Installment Payment Date (r. e., March 15 and September 15 of each year), the City is required to, from the moneys in the System Revenue Fund, transfer to the Trustee the Installment Payment due and payable on that Installment Payment Date. The City will also, from the moneys in the System Revenue Fund, transfer when due to the applicable trustee for deposit in the respective payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, any Parity Obligation Payments in accordance with the provisions of the applicable Parity Obligation. Reserve Fund. On or before the first Business Day of each month, the City is required to, from the remaining moneys in the System Revenue Fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the Trustee for deposit in the Reserve Fund in accordance with the Trust Agreement and to the applicable trustee for such other debt service reserve funds, if any, as may have been established in connection with Parity Obligations that sum, if any, necessary to restore: (i) the Reserve Fund to an amount equal to the Reserve Fund Requirement and otherwise replenish the Reserve Fund for any withdrawals (including draws upon the Reserve Policy) to pay the Installment Payments due under the Installment Purchase Agreement and (ii) necessary to restore such other debt service funds to an amount equal to the amount required to be maintained therein; provided that payments to restore the Reserve Fund after a withdrawal will be in an amount equal to 1/12 of the aggregate amount needed to restore the Reserve Fund to the Reserve Fund Requirement as of the date of the withdrawal. To the extent that draws on the Reserve Fund are from the Reserve Policy as permitted under the Trust Agreement, transfers under the Installment Purchase Agreement to restore the Reserve Fund shall be made to reimburse the provider of the Reserve Policy to the extent the Reserve Policy is reinstated. Surplus. Moneys on deposit in the System Revenue Fund not necessary to make any of the payments required above in a Fiscal Year, may be expended by the City at any time for any purpose permitted by law, including but not limited to payments with respect to Subordinate Obligations and deposits to the Rate Stabilization Fund. 13 Outstanding Parity Obligations As of October 2, 2007, the City had the following outstanding obligations that are payable from System Net Revenues on a panty with the Installment Payments (referred to as the "Existing Parity Obligations" in this Official Statement): 1999 Certificates. As of October 2, 2007, the 1991 Certificates were outstanding in the principal amount of $8,575,000. The 1991 Certificates are being immediately defeased and prepaid on February 1, 2008 with proceeds of the 2007 Certificates. 2003 Installment Payments; 2003 CSCDA Bonds. The City entered into an Installment Purchase Agreement, dated as of October 1, 2003 (the "2003 Installment Purchase Agreement"), by and between the City and the California Statewide Communities Development Authority ("CSCDA"), pursuant to which the City is obligated to make certain installment payments (the "2003 Installment Payments") to CSCDA which 2003 Installment Payments secure a portion of the debt service on the CSCDA $9,855,000 initial principal amount Water and Wastewater Revenue Bonds (Pooled Financing Program) Series 20038 (the "2003CSCDA Bonds"). The City's share of the initial principal amount of the 2003 CSCDA Bonds was $5,000,000. As of October 2, 2007, the outstanding principal obligation under the 2003 Installment Purchase Agreement was $4,245,000. 2004 Certificates. On May 12, 2004, the City caused execution and delivery of the $27,360,000 initial principal amount Wastewater System Revenue Certificates of Participation, 2004 Series A (the "2004 Certificates"). The 2004 Certificates are secured by and payable from installment payments (the "20041nstallment Payments") payable by the City under an Installment Purchase Agreement, dated as of May 1, 2004 (the "20041nstallment Purchase Agreement) between the City and the Corporation. As of October 2, 2007, the outstanding principal obligation under the 2004 Installment Purchase Agreement was $24,445,000. Additional Parity Debt In addition to the Existing Parity Obligations, the City is permitted under the Installment Purchase Agreement to incur obligations secured by a pledge of System Net Revenues on a panty with the Installment Payments and the Existing Parity Obligations, subject to satisfaction of the following conditions. The Installment Purchase Agreement refers to the Installment Payments and any Parity Obligations as "Parity Debt. (a) The City must be in compliance with its obligations under the Installment Purchase Agreement. (b) Any debt service reserve fund established for the Parity Debt must satisfy certain criteria, including (among others) the required amount of the debt service reserve fund may not exceed the lesser of the maximum annual debt service of such Parity Debt (calculated on the basis of a year ending on the final day of the Fiscal Year) or the maximum amount permitted under federal tax law. The Installment Purchase Agreement allows the debt service reserve fund for a loan from a governmental agency to be the amount required by such governmental agency. 14 (c) The System Net Revenues for the last completed Fiscal Year or any 12 consecutive months within the last 18 months preceding the date of entry into or incurrence of the Panty Debt, as shown by a Certificate of the City on file with the Trustee, plus an allowance for increased System Net Revenues arising from any increase in the rates, fees and charges of the System which was duly adopted by the City Council of the City prior to the date of the entry into or incurrence of the Parity Debt but which, during all or any part of such 12 month period, was not in effect, in an amount equal to the amount by which the System Net Revenues would have been increased if the increase in rates, fees and charges had been in effect during the whole of such 12 month period, as shown by a Certificate of the City on file with the Trustee, must have produced a sum equal to at least 110% of the Maximum Annual Debt Service as calculated after the entry into or incurrence of the Parity Debt; provided, that in the event that all or a portion of such Parity Debt is to be issued for the purpose of refunding and retiring any Parity Debt then outstanding, interest and principal payments on the Parity Debt to be so refunded and retired from the proceeds of such Parity Debt being issued shall be excluded from the foregoing computation of Maximum Annual Debt Service; provided further, that the City may at any time enter into or incur Parity Debt without compliance with the foregoing conditions if the Annual Debt Service for each Fiscal Year during which such Parity Debt is outstanding will not be increased by reason of the entry into or incurrence of such Parity Debt; and provided further, an adjustment shall be made in the amount of System Net Revenues as described in "Rate Stabilization Fund" below. Subordinate Obligations The Installment Purchase Agreement permits the City to incur obligations payable from System Net Revenues on a subordinate basis to the Installment Payments, the Existing Parity Obligations and any future Parity Debt. Rate Stabilization Fund Pursuant to the Installment Purchase Agreement, a Rate Stabilization Fund is to be held and maintained by the City until all Installment Payments have been fully paid or provision has been made therefor in accordance with the Installment Purchase Agreement. The City may, during or within 210 days after a Fiscal Year, transfer surplus System Net Revenues attributable to such Fiscal Year on the basis of Generally Accepted Accounting Principles (the "GAAP Receipt Fiscal Year") from the System Revenue Fund to the Rate Stabilization Fund. The City may at any time transfer moneys from the Rate Stabilization Fund to the System Revenue Fund. System Net Revenues deposited into the Rate Stabilization Fund will not be taken into account as System Net Revenues for the GAAP Receipt Fiscal Year for purposes of the calculations required by the covenants in the Installment Purchase Agreement relating to rate coverage and additional Parity Obligations. Amounts withdrawn from the Rate Stabilization Fund and deposited into the System Revenue Fund, may be taken into account as System Revenues for purposes of the calculations required by such covenants for the Fiscal Year in which such deposit is made; provided that, for purposes of the calculation described in the last paragraph under "Rate Covenant" above, the amount of System Net Revenues before any credits for transfers from the Rate Stabilization Fund to the System Revenue Fund may not be less than 100% of Annual Debt Service for such Fiscal Year. 15 Although it has not historically done so, the City currently expects to utilize the Rate Stabilization Fund in order to avoid year-to-year fluctuations in System rates and charges. The City does not believe that transfers from the Rate Stabilization Fund will be necessary in order for the Cityto makethe Installment Payments when due. 16 CERTIFICATE INSURANCE The following information has been furnished by Financial Security Assurance Inc. for use in this Official Statement. Such information has not been independently confirmed or verified by the City. No representation is made in this Official Statement by the City as to the accuracy or adequacy of such information subsequent to the date hereof, or that the information contained and incorporated in this Official Statement by reference is correct Reference is made to Appendix G for a specimen of the Policy to be issued by Financial Security Assurance Inc. Financial Security Assurance Inc. will also provide the Reserve Fund Insurance Policy that the City will use to satisfy the Reserve Fund Requirement, and reference is made to Appendix H for a specimen of the Reserve Fund Insurance Policy. Bond Insurance Policy Concurrently with the delivery of the 2007 Certificates, Financial Security Assurance Inc. ("Financial Security") will issue its Municipal Bond Insurance Policy for the 2007 Certificates (the "Policy"). The Policy guarantees the scheduled payment of principal of and interest with respect to the 2007 Certificates when due as set forth in the form of the Policy included as an exhibit to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Financial Security Assurance Inc. Financial Security is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. ("Holdings"). Holdings is an indirect subsidiary of Dexia, S.A., a publicly held Belgian corporation, and of Dexia Credit Local, a direct wholly-owned subsidiary of Dexia, S.A. Dexia, S.A., through its bank subsidiaries, is primarily engaged in the business of public finance, banking and asset management in France, Belgium and other European countries. No shareholder of Holdings or Financial Security is liable for the obligations of Financial Security. At June 30, 2007, Financial Security's combined policyholders' surplus and contingency reserves were approximately $2,642,612,000 and its total net unearned premium reserve was approximately $2,116,401,000 in accordance with statutory accounting principles. At June 30, 2007, Financial Security's consolidated shareholder's equity was approximately $3,072,828,000 and its total net unearned premium reserve was approximately $1,660,356,000 in accordance with generally accepted accounting principles. The consolidated financial statements of Financial Security included in, or as exhibits to, the annual and quarterly reports filed after December 31, 2005 by Holdings with the Securities and Exchange Commission are hereby incorporated by reference into this Official Statement. All financial statements of Financial Security included in, or as exhibits to, documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this Official Statement and before the termination of the offering cf the 2007 Certificates shall be deemed incorporated by reference into this Official Statement. Copies of materials incorporated by reference will be provided upon request to Financial Security 17 Assurance Inc.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) 826-0100). The Policy does not protect investors against changes in market value of the 2007 Certificates, which market value may be impaired as a result of changes in prevailing interest rates, changes in applicable ratings or other causes. Financial Security makes no representation regarding the 2007 Certificates or the advisability of investing in the 2007 Certificates. Financial Security makes no representation regarding the Official Statement, nor has it participated in the preparation thereof, except that Financial Security has provided to the Issuer the information presented under this caption for inclusion in the Official Statement. 18 THE SYSTEM General The City of Lodi is located in the County of San Joaquin (the "County") between Stockton and Sacramento, and adjacent to U.S. Highway 99, approximately 90 miles east of San Francisco. The City was incorporated as a General Law City on December 6, 1906. The City operates under a City Council -Manager form of government and provides the following services: public safety (police, fire and graffiti abatement), public utilities services (electric, water and sewer), transportation services (streets, flood control and transit), leisure, cultural and social services (parks and recreation, library, and community center), and general government services (management, human resources administration, financial administration, building maintenanceand equipment maintenance). As of January 1, 2007, the City had an estimated population of 63,395 within an area of approximately 13.9 square miles. See "APPENDIXA — THE CITY OF LODI". Since 1923, the City has been providing wastewater collection and treatment services to the community. Governance and Management The City is governed by a five -member City Council comprised of members elected at large. Each council member is elected for four years with staggered terms. The current City Council members and the expiration dates of their terms are set forth below. Council Member IWB Expiration of Term Bob Johnson Mayor December 2008 JoAnne Mounce Mayor Pro Tempore December 2008 Larry D. Hansen Council Member December 2010 Susan Hitchcock Council Member December 2010 Phil Katzakian Council Member December 2010 Blair King, City Manager, was appointed City Manager by the City Council effective January 24, 2005. Mr. King directs the daily operations of Lodi government, prepares and administers the municipal budget and implements the policies established by the City Council. Before coming to Lodi, Mr. King was Assistant City Manager in the City of Milpitas for four years. He previously served as City Manager in Half Moon Bay, Imperial Beach and Soledad. Mr. King earned his Bachelor's and Master's degrees from Fresno State. Jim Krueger, Deputy City Manager, was promoted from Finance Director to Deputy City Manager in November 2005. Mr. Krueger manages the City's finances, including those of the System. He came to Lodi in May 2004 with nearly 20 years' experience as a Finance Director/Chief Financial Officer for city, county and special district governments. His jobs have included tenures with the City of Thousand Oaks and agencies in three Oregon communities. He earned his Bachelor's degree in accounting from Cal Poly Pomona and Master's degree in 19 Business Administration at Southern Oregon University. Krueger passed the Certified Public Accounting examination in California in 1978. Richard Prima, Public Works Director, has overseen the City's wastewater, water, drainage, street, traffic, parks and public building infrastructure since his appointment in 1998. Mr. Prima, a registered civil engineer, earned his Bachelor of Science degree from the University of California, Berkeley. He has been on the City's Public Works staff since 1975, beginning as an assistant civil engineer. He was City Engineer from 1988 to 1998. Charles Swimley, Water Services Manager, oversees wastewater collection and treatment and water production and distribution for the City. He received his Bachelor of Science degree in mechanical engineering from California State University, Sacramento, and has been a registered civil engineer since 1994. He was hired as a senior civil engineer by the City in 2001 and was promoted to his current position in 2007. He previously worked as an engineer for two private firms and as an associate civil engineer for the City of Stockton from 1995 to 1998 and from 1999 to 2001. Employees As of January 1, 2007, the City had 41 full-time equivalent employee positions budgeted for the System and the City's water system. Employees of the System and the City's water system are represented by the Maintenance and Operators Bargaining Unit, whose Memorandum of Understanding is set to expire on June 30, 2008. The City has never experienced a labor strike. Retirement Programs The System is responsible for a portion of the City's personnel costs. Retirement benefits to City employees, in the form of pension benefits provided through the City's participation in the California Public Employees Retirement System ("PERS") and limited post- retirement health care benefits, are described in Note 10 to the City's audited financial statements included in APPENDIX B hereto. Insurance The City's boiler and machinery operations (including those parts of the System) are insured by Hartford Steam Boiler for up to $21,250,000 per occurrence. The City, including the System, is self-insured for general liability losses for up to $500,000 and has pooled excess coverage through the California Joint Powers Risk Management Authority for up to $40 million per occurrence. The City is self-insured for workers' compensation losses for up to $250,000 and has pooled excess coverage through the Local Agency Workers' Compensation Excess Authority for up to $300,000,000. System Facilities The System consists of 186.5 miles of wastewater mains, seven pump stations and one wastewater treatment plant, the White Slough Water Pollution Control Facility (the "White Slough Facility"). White Slough Facility. The White Slough Facility operates pursuant to a National Pollutant Discharge Elimination System ("NPDES") permit administered by the State of 20 California Regional Water Quality Control Board, Central Valley Region (the "RWQCB), which was adopted by the RWQCB on September 14,2007. The current NPDES permitwill expire on September 1, 2012. See "Environmental Compliance" below. The White Slough Facility is located in a primarily agricultural area adjacent to Interstate 5, approximately 6.5 miles southwest of the City. The White Slough Facility was originally constructed in 1966 to replace an olderwastewater treatment plant located in the City. The White Slough Facilityassists the City in maintaining water quality standards required for the protection of the environmentally sensitive Sacramento -San Joaquin Delta. Through the years, the White Slough Facility has been expanded and improved to meet increasingly stringent environmental protection standards. The most recent project, completed in 1992,expanded the White Slough Facility to a capacity of 8.5 million gallons per day ("mgd"). However, the Waste Discharge Requirements ("WDRs") issued by the Regional Water Quality Control Board (the "RWQCB") presently limit the average dry weather flow from the White Slough Facility to 7.0 mgd to limit potential water quality impacts in Dredger Cut, a waterway connecting to White Slough. The average current daily demand on the White Slough Facility is approximately 6.5 mgd. The Phase 3 improvements to the White Slough Facility being financed with proceeds of the 2007 Certificates are expected to restore the treatment capacity to the full 8.5 mgd. The 8.5 mgd flow capacity is expected to be sufficient to accommodate the City's growth projections past 2020. The White Slough Facility consists of an activated sludge treatment system and a lagoon and storage pond system, having an approximate 100 million gallons of capacity. Preliminary treatment of the domestic wastewater is accomplished by comminutors, detritors and five rectangular clarifiers. Secondary treatment facilities consist of four activated sludge aeration basins with a fine bubble aeration system, and two circular secondary clarifiers. The aeration system is driven by four centrifugal blowers. The municipal wastewater is treated to tertiary standards then disinfected using ultraviolet light pathogen deactivation (uv disinfection) prior to surface water discharge. In addition to domestic wastewater treatment, the White Slough Facility also disposes of industrial wastewater produced primarily by Pacific Coast Producers, a local cannery. See "Service Area and Customers" below. In past years, the annual industrial flow to the White Slough Facility has exceeded 400 million gallons per year ("rngy"); however, since 2002, industrial flows have decreased to between 100 to 200 mgy due to changes in processing. Most of this flow is received during the period from June through September. During summer months (i.e., generally during the period from May 1 through September 1), treated domestic wastewater, industrial wastewater, and digested sludge are blended together and used for irrigation of an adjacent 790 acres of City -owned agricultural land. During the remainder of the year, treated domestic wastewater is discharged to Dredger Cut in the Sacramento -San Joaquin Delta, and industrial wastewater is stored in four ponds located directly north of the main treatment plant site. These ponds have a total surface area of about 40 acres. Tertiary treated domestic wastewater is also used by the adjacent Northern California Power Agency power generation facilities for various purposes, including, but not limited to, cooling, and to supply nearby ponds that are used by the Mosquito Abatement District to raise mosquito fish. Sludge is thickened and then digested in three anaerobic digestors and then stored in a concrete lined facility and periodically removed for use on City -owned agricultural land. Methane gas from the anaerobic digestion process is used for building and digester heating. Excess methane is flared off at the plant site. 21 Collection System. The existing collection system, not including the outfall to the treatment plant, consists of approximately 186.5 miles of 4" to 48" sewers constructed of clay, concrete, and PVC plastic materials. Included in this system are six lift stations which serve outlying portions of the City and one industrial waste pumping station. The collection system currently serves over 23,000 customers (most of which is residential), 1,400 acres of commercial/industrial development, and 250 acres of schools. Over 50% of the sewers are 6" in diameter. The following is a tabulation of the sewers. Table 1 City of Lodi Wastewater System Tabulation of Existing Sewers As of October 1,2007 Sewer Size Sewer Size (inchesl Total Feet inches Total Feet 48 27,529 15 16,130 42 8,678 14 7,340 30 10,3398 12 44,203 24 16,130 10 78,272 21 14,737 8 200,069 18 30,839 6 525,072 16 7,505 4 4,758 Source: City of Lodi The domestic wastewater collection system conveys all domestic and commercial flows and limited industrial flows. The industrial wastewater system conveys fruit processing water and minor amounts of cooling and process water contributed by certain industries. The wastewater collection system serves all of the developed property within the City limits. The maintenance program for these facilities is accomplished by City crews. This program includes the systematic hydrocleaning, rodding, smoke testing and video inspection of mains throughout the City. Environmental Compliance The present discharge requirementsfor the City's White Slough Facility are established by the RWQCB which administers and enforces all federal and State of California discharge requirements. The RWQCB administers regulations promulgated by the United States Environmental Protection Agency through the NPDES permits. The City's NPDES discharge permit No. CA0079243 is subject to renewal every five years. The City's current NPDES permit was adopted on September 14, 2007 by the RWQCB. The permit includes an interim effluent limit of 7.0 mgd; 7.2 mgd upon acceptance of flows from the San Joaquin County Service Area 31 (Flag City), which is expected prior to April 2008; and a final effluent limit of 8.5 mgd upon completion of the White Slough Facility Phase 3 improvements scheduled to be completed in March 2009. An environmental organization has filed a petition with the State Water Resources Control Board challenging issuance by the RWQCB of the NPDES permit for the White Slough Facility. Although an adverse ruling could obligate the City to make additional capital improvements to the White Slough Facility and could increase the costs of operating the White 22 Slough Facility, the City does not expect the petition to adversely impact its ability to operate the System or its ability to make the Installment Payments when due. The current NPDES permit establishes new discharge limits for Aluminum, Ammonia, Chlorodibromomethane, Dichlorobromomethanem, Manganese, Nitrate and Nitrite while reducing the discharge limits for Mercury. In September 2007, the RWQCB issued a Time Schedule Order (No. R5-2007-0114) to the City, which recognizes that the City is not able to consistently comply with the waste discharge limitations in the NPDES permit for manganese, nitrate and nitrite, and establishes a time schedule (including a final compliance date of May 18, 2010) for completion of action necessary to bring the waste discharge into compliance. The permit also includes a salinity limit of 780 NS/cm. The City can currently comply with this limit; however some additional studies are required by the permit to evaluate reducing salinity discharges. The permit also contains more stringent discharge requirements for the treated wastewater used to irrigate the surrounding land application area. Constituents included are Chloride, Iron, Lead, Nitrite, Nitrate, and Mercury. Finally, additional study requirements relating to organic loading, background groundwater assessments and industrial influent characterization have been required along with schedules for completion. The Phase 3 improvements are intended to improve de -nitrification and bring the facility's permitted treatment capacity to 8.5 MGD. RWQCB Staff considered the proposed Phase 3 improvements when developing the latest NPDES permit conditions. A Negative Declaration pursuant to CEQA was adopted for the recent Phase 3 improvements on April 10, 2007. The City's pretreatment program complies with the pretreatment requirements contained in the Federal Water Pollution Control Act. In general, performance of the White Slough Facility has met discharge requirements, although the City has experienced a handful of non -material instances of noncompliance. See "RISK FACTORS — Potential Liability Related to the Main Trunk Line" below for a discussion of potential liability associated with the current condition of the main trunk line being rehabilitated with proceeds of the 2007 Certificates, and "LITIGATION" below for a discussion of certain pending environmental litigation and liability involving the City. Service Area and Customers The City provides wastewater collection and treatment to substantially all of the population of the City, representing an area of approximately 13.9 square miles in the City. The City ordinance does not allow wastewater service outside the City limits, except for wineries and other public wastewater service districts pursuantto contracts with the City. The System will be providing wastewater treatment service by contract to San Joaquin County Service Area 31 (Flag City) beginning in Spring 2008. Pursuant to the contract, the City will receive a $250,000 one-time administrative fee, an estimated $6.5 million capacity fee and ongoing service charges. The City expects service charges paid by County Service Area 31 to account for approximately $163,000, or 1 %, of fiscal year 2007-08 System Revenues, 23 The System also provides service to the Van Ruiten Family Winery, which accounts for a de minimis amount of System Revenues. The table below shows the number of connections of the System by user type and service charge revenues by class of user. Table 2 City of Lodi Wastewater System Number cf Connections by User Type as of June 30 and Percentage of FiscalYear 2006-07 Service Charge Revenue by User Type Connections % of FY 06- 07 Service Source: City of Lodi. 24 Charge User Type 2003 Zppa 2W5 2006 2007 RPvani iP Residential 21,094 21,857 22,194 22.511 22,571 72.5% Commercial/Industrial 1,595 1.595 1584 1,603 1.562 27S Total All Users 22,689 23,452 23.778 24,114 24,133 100.0% Source: City of Lodi. 24 The table below shows the 10 largest users of the System based on service charge revenues for the Fiscal Year 2006-07 (unaudited). I Isar Cottage Bakery Lodi Unified School District Pacific Coast Producers General Mills City of Lodi Miller Packing Co. Lodi Memorial Hospital Tokay Villa Apartments Sand Creek Apartments Kaitz Property Services Total Top 10 Total System Table 3 City of Lodi Wastewater System Largest Users by Service Charge Revenues Fiscal Year 2006-07 (unaudited){11 Percentage cf Source: Lodi Public Works Department. Set forth below are descriptions of the major users identified in the previous table except the City (see "APPENDIX A —The City of Lodi"): Cottage Bakery — A division of RalCorp (formerly Ralston Purina Company), Cottage Bakery provides frozen bread and bagel dough to the retail and food service industries, as well as baked cakes, pastries and pies. Cottage Bakery is one of Lodi's largest employers, with over 700 full-time staff. Lodi Unified School District — The school district has 16 school sites (kindergarten through 12th grade) in Lodi, in addition to the district administrative center, a 40,000 square foot warehouse and a maintenance yard. From a square mile perspective, Lodi Unified School District is the second largest in California (the school district has numerous school sites outside of Lodi's city limits as well). Pacific Coast Producers— Pacific Coast Producers is a fruit canning/labeling cooperative that supplies the retail and food service industries. The company's corporate offices are located in Lodi. The company has in excess of 1 million square feet of space under roof for its fruit preparation, refrigeration, canning, labeling, and storage in Lodi. General Mills — the Lodi plant produces and packages numerous cereal products, including Golden Grahams, Cheerios and Frosted Cheerios, as well as breakfast and lunch snack bars. These products are stored and then shipped to 12 western states. The General Mills plant has been a part of the Lodi community for over 50 years, and employs 500+ full-time employees. 25 Service Total Annual Charge Service Charge Tyne of Business Revenue Revenue Specialty bakery, frozen dough $265,284 3.1% K-12, adult education 246,926 2.9 Private label fruit canning 227,264 2.7 Cereals, bread mixes, snack foods 186,793 2.2 Government 42,459 0.5 Hot dog producer 34,281 0.4 Health care 25,195 0.3 Residential 23,119 0.3 Residential 21,284 0.2 Residential 21.195 D2 $1,093,800 12.8% 8.523.531 Source: Lodi Public Works Department. Set forth below are descriptions of the major users identified in the previous table except the City (see "APPENDIX A —The City of Lodi"): Cottage Bakery — A division of RalCorp (formerly Ralston Purina Company), Cottage Bakery provides frozen bread and bagel dough to the retail and food service industries, as well as baked cakes, pastries and pies. Cottage Bakery is one of Lodi's largest employers, with over 700 full-time staff. Lodi Unified School District — The school district has 16 school sites (kindergarten through 12th grade) in Lodi, in addition to the district administrative center, a 40,000 square foot warehouse and a maintenance yard. From a square mile perspective, Lodi Unified School District is the second largest in California (the school district has numerous school sites outside of Lodi's city limits as well). Pacific Coast Producers— Pacific Coast Producers is a fruit canning/labeling cooperative that supplies the retail and food service industries. The company's corporate offices are located in Lodi. The company has in excess of 1 million square feet of space under roof for its fruit preparation, refrigeration, canning, labeling, and storage in Lodi. General Mills — the Lodi plant produces and packages numerous cereal products, including Golden Grahams, Cheerios and Frosted Cheerios, as well as breakfast and lunch snack bars. These products are stored and then shipped to 12 western states. The General Mills plant has been a part of the Lodi community for over 50 years, and employs 500+ full-time employees. 25 Miller Packing Company - In 1910, Miller Packing Company began manufacturing smoked meat products in Oakland, California. The company remained in the same facility until 2002 when a new state-of-the-art plant was constructed in the City. Today, Miller Packing continues to produce high quality products and has expanded its market area to include the Western continental United States, Hawaii, Guam and the Far East. Miller products are sold by food service distributors to fine hotels, restaurants, and sporting facilities. Miller is the ofticial hot dog provider of the Oakland s at the Oakland Coliseum. Lodi Memorial Hospital - Since opening its doors in 1952, Lodi Memorial Hospital has evolved to meet growing community needs. In addition to nine clinics and various community services provided across a broad geographic area, Lodi Memorial Hospital includes a Main Campus and West Campus. Current licensed beds at the Main Campus total 99 and West Campus total 71. Services provided include general acute inpatient, acute rehabilitation, subacute care, emergency care, urgent care, inpatient and out patient surgery, a medical ambulatory care unit, cardiac rehabilitation and many other services. The hospital will break ground for over $150 million in major upgrades and construction of a new, four-story patient wing in 2008. Tokav Villa Apartments - This apartment complex, built in the late 1970s, is comprised of 90 residential units. Sand Creek Apartments - This apartment complex, built in the early 1980s, is comprised of 130 residential units. Kaitz Property Services - Kaitz Property Services owns Orange Grove Apartments (92 units), Vintage Apartments (102 units) and Turner Road Apartments (12 units) for a total of 206 units. Wastewater Rates and Charges The City has the power to establish rates and charges as needed to operate the System. The rates and charges are established by the City Council and are not subject to review or approval by any other agency. The City principally relies on service charges and capacity/connection fees. Service Charges. The City Council established charges for domestic system residential, commercial and industrial wastewater service by Resolution No. 2004-77 adopted by the City on April 27, 2004. Resolution No. 2004-77 did the following: • Imposed a 25% system average rate increase over prior rates, effective May 1, 2004. • Imposed a second system average rate increase of 25%, effective July 1,2005. • Allowed the City Council to adjust the service charges periodically by resolution, following a public hearing, in an amount not to exceed the percentage change in the Consumer Price Index (CPI) for the San Francisco -Oakland -San Jose Area since the previous adjustment. Most recently, pursuant to Resolution No. 2007-113 adopted on June 6, 2007, the City Council implemented the CPI increase (3.44%) effective July 1, 2007. See "CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS — California Constitution Articles X1110 and 26 XIIID" for a discussion of the City's compliance with requirements established by Proposition 218. Set forth below is a table showing the rates effective May 1, 2004, July 1, 2005, July 1, 2006 and July 1,2007. Table 4 City of Lodi Wastewater System Schedule of Wastewater Service Charges For Commemialgndustrial Users: Moderate Strength (annual per Sewage Service Unit (SSU)) ............................. .............. $194.60 Service Service Service High Strength: Service Charge Charge Charge Charge Flow (annual per MG) .................................. (effective (effective (effective (effective BOD (annual per 1,000 lbs.) ........................ Mav1, 2004) July 1, 20051 July 1.20081 July 1.2007) For Residential Users (per month): 374.58 468.23 215.86 223.29 1 Bedroom............ ........................... $12.16 $15.20 $15.49 $16.03 2 Bedmoms....._--- _----- 16.21 20.26 20.65 21.37 3 Bedmoms..................................... 20.27 25.34 25.81 26.71 4 Bedrooms ...................................... 24.33 30.41 30.98 32.06 5 Bedrooms ...................................... 28,38 35.48 36.14 37.40 6 Bedrooms ...................................... 32.43 40.54 41.30 42.74 7 Bedrooms ...................................... 36.48 45.60 46.46 48.08 For Commemialgndustrial Users: Moderate Strength (annual per Sewage Service Unit (SSU)) ............................. .............. $194.60 $ 243.25 $247.80 $256.33 High Strength: Flow (annual per MG) .................................. 936.36 1,170.45 2,092.01 2,164.00 BOD (annual per 1,000 lbs.) ........................ 458.23 572.79 345.24 357.12 SS (annual per 1,000 lbs.) ........................... 374.58 468.23 215.86 223.29 Grease Interceptor/Septic Holding Tank Waste within City Limits (per 1,000 gal.) ..... 143.44 179.30 182.80 189.09 Septic Holding Tank Waste outside City Limits (per 1,000 gal.) .................................. 304.51 380.64 388.06 401.41 Disposal to Storm Drain System (per MG)... 150.66 180.33 192.00 198.61 Disposalto Industrial System ...................... Flow (per MG, annual basis) ................ 1,309.48 BOD (per 1,000 lbs., annual basis) ...... 22.82 Winery Waste (per 1,000 gallons) .............. 185.10 191.47 There are separate charges applicable to the industrial system, which primarily apply to Pacific Coast Producers, the largest individually -monitored system user. No new users have been connected to the industrial system, except the Van Ruiten Family Winery, in several years and no new users are anticipated. Capacity/Connection Fees. Capacity/connection fees are one-time only connection charges based on estimated annual usage (the City reviews large industrial users afler connection to determine actual usage and, in some cases, adjusts the connection fee to reflect actual usage). Capacity/connection fees are collected at the time a building permit is granted. The capacity/connection fees were established for residential, commercial and industrial wastewater service by Resolution No. 2006-06, adopted by the City on January 4, 2006 and effective March 6, 2006. The capacity/connection fees are adjusted annually on July 1 based on the past annual change in the Engineering News Record 20 Cities Construction Cost Index. 27 The current capacity/connection fees are identified in the following table: Table 5 Capacity/Connection Fees (as of July 1, 2007) Description Fees(') Moderate Strength Users Per Sewage Service Unit (SSU) $5,356.00 High Strength Users Flow (per million gallons (MG), annual basis) $40,825.00 BOD (per 1,000lbs., annual basis) 10,573.00 SS (per 1,000bs., annual basis) 5,655.00 Includes 1 %public art fee. Subject to annual adjustment on July 1 based on the past annual change in the Engineering News Record 20 Cities Construction Cost Index. Source: City of Lodi. New residential development in the City is subject to a growth control ordinance that limits new residential development based on an increase in population of 2% per year. Collections. The City bills for water, wastewater, solid waste and electricity on the same bill. If a bill is unpaid, the City will terminate electric service to a customer within 90 days of nonpayment after 48 hours notice. The annual delinquency rate has been less than 1% for the preceding 10 fiscal years. Comparison of Monthly Wastewater Service Charges of Selected Agencies. A comparison of wastewater service charges of selected agencies located in San Joaquin County for an average single-family home is set forth below. Table 6 Comparison of Monthly Wastewater Service Charges (as of October 1, 2007)"' Average $32.35 Rates shown are as of October 1,2007. (2) For all agencies other than the City, based upon flat monthly rate charged to all single family residential customers. Rate for City reflects rate for three-bedroom single family residence. Source: City of Lodi. K3 Service Agency Charge (2l City of Galt $49.89 City of Manteca 33.06 City of Tracy 31.00 City of Lodi 26.71 City of Stockton 21.10 Average $32.35 Rates shown are as of October 1,2007. (2) For all agencies other than the City, based upon flat monthly rate charged to all single family residential customers. Rate for City reflects rate for three-bedroom single family residence. Source: City of Lodi. K3 Planned Capital Improvements In May 2000, the RWQCB adopted a plan for the implementation of new discharge requirementsto be imposed under NPDES permits. In January 2001, the City adopted a three- phase Wastewater System Master Plan, which included the evaluation of the improvements required to meet the new permit requirements, as well as other future improvements. • Phase 1 ($1.4 million) involved the installation of aeration blower equipment, electrical improvements and seismic and fire improvements. The Phase 1 improvements were completed in mid -2004 and financed with proceeds of the 2003 CSCDA Bonds. • Phase 2 ($8.2 million) involved addition of tertiary flters/UV disinfection and satisfied the requirements of the City's then -current NPDES permit. The Phase 2 improvements were completed in 2004 and primarily financed with proceeds of the 2004 Certificates. • Phase 3 ($20.6 million) is currently underway, and is being financed with proceeds of the 2007 Certificates and remaining proceeds of the 2004 Certificates (see "THE FINANCING PLAN — Financing of the 2007 Project"). In addition to the third and final phase of the 2001 Master Plan, the City intends to finance with proceeds of the 2007 Certificates the rehabilitation of the main trunk line connecting the City and the White Slough Facility. Beyond that, the City expects to make $11 million of capital improvementsto the System in fiscal years 2007-08 through 2012-13. The City plans to finance these capital improvements through a combination of operating revenues, capacity fees and System reserves. See also "LITIGATION" belowfor additional information regarding certain environmental cleanup costs the City may incur. Financial Statements Excerpts of the audited General Purpose Financial Statements of the City as of June 30, 2006 are included in Appendix B to this Official Statement. A complete copy of the City's Comprehensive Annual Financial Report may be obtained from the City. The Installment Payments are special obligations of the City payable solely from the System Net Revenues. The General Purpose Financial Statements, including the excerpts contained in Appendix B, have been audited by Macias, Gini & Company LLP, Sacramento, California, independent accountants (the "Independent Accountants") as stated in their report appearing in Appendix B. No review or investigation with respect to subsequent events has been undertaken in connection with such General Purpose Financial Statements by the IndependentAccountants and the Independent Accountants have not been asked to consent to the City including the General Purpose Financial Statements in this Official Statement. 29 Historical Operating Results The following table sets forth historical revenues, expenses and debt service coverage of the System, based on the City's audited financial statements for fiscal years 2002-03 through 2005- 06 (except as set forth in footnote 5 below) and unaudited results for fiscal year 2006-07. The coverage ratios have been computed in accordance with the requirements of the Installment Purchase Agreement, including the definitions of System Net Revenues and Operation and Maintenance Costs. Table 7 City of Lodi Wastewater System Historical Operating Results and Debt Service Coverage Fiscal Years 2002-03 through 2006-07 NetCashflaw Before Capital Expenditures 1,663,215 1,282,782 (900,474) 580,027 1,929,525 (1) Source: City of Lodi Consolidated Annual Financial Reports for fiscal years 2002-03 through 200506; City unaudited estimated actual for fiscal year 2006-07. (2) Includes annual lease revenuefor White Slough Facility agricultural land. (3) Includes Operating Grants, Sewer Tap Fees and Septic Dumping Charges. (4) Excludes depreciation. Operating costs increased in fiscal year 2005-06 and thereafter due to implementation of tertiary treatment. (5) Transfers to the City's water enterprise to wver PCEITCE-related litigation expenses of $2,247,318 i n fiscal year 2004-05 and $85.736 in fiscal year 2005-06 were included as operating expenses in the City's audited financial statements for those years, but are shown here as Transfers Out, which is consistent with the definition of Operation and Maintenance Costs in the Indenture. The aggregate Transfer Out to the water enterprise was repaid to the System in fiscal year 2006-07. See "LITIGATION" below.. 30 2002-03 2003-D4 2004-05 2005-06 200&07 audited audited (ainted) (estimated) Operating Revenues(1) Charges for Services $5,366,092 $5,510,561 $6,645,391 $8,206,016 $8,523,531 Capacity/Connection Fees 1,394,287 1,049,452 1,440,337 720,588 1,454,915 Non -Operating Revenues Interestlncome 64.042 75.151 563,759 569,224 896,668 Rent (2) 237.749 37.301 182,345 103,345 176,435 Other (3) 265.788 Total System Revenues $7,427,824 $7,236,276 $9,232,209 $9,864,971 $11,606,696 Opefating Expenses (1), (4), (5) Fersornel services 2,091,217 1,904,055 2,336,247 2,163,754 2,233,733 Supplies, materials andservices 1,825,041 1,956,715 1,809,913 1,912,989 2,019,582 Utilities 463,856 524,899 635.100 723,387 683,670 Other 345.gg9 Total OperatingExpeftses $4,380,114 $4-385,669 $4,781.26 $4,800130 $5282,954 System Net Revenues $3,047,710 $2,850,607 $4,450,949 $5,064,841 $6,323,742 Parity Debt Service 1991 Installment Payments 803,960 808,488 807.055 804,798 806,530 2003 Installment Payments 88,868 383.148 379,448 380,698 2004 Installment Payments 1,248,212 2,157,300 2.156,913 Total Parity Debt Service $803,966 $897,375 52,438,414 $3,341,545 $3,344,140 Debt 9exvim Coverage (5) 3.79 3.18 1.83 1.52 1,89 Non-Operadniq Expenses Transfers(InyOut 580.535 X70.450 2.913,009 1.143.289 1.050.077 Total Non -Operating Expenses 580,535 670,450 2,913,009 1,143,269 1,050,077 NetCashflaw Before Capital Expenditures 1,663,215 1,282,782 (900,474) 580,027 1,929,525 (1) Source: City of Lodi Consolidated Annual Financial Reports for fiscal years 2002-03 through 200506; City unaudited estimated actual for fiscal year 2006-07. (2) Includes annual lease revenuefor White Slough Facility agricultural land. (3) Includes Operating Grants, Sewer Tap Fees and Septic Dumping Charges. (4) Excludes depreciation. Operating costs increased in fiscal year 2005-06 and thereafter due to implementation of tertiary treatment. (5) Transfers to the City's water enterprise to wver PCEITCE-related litigation expenses of $2,247,318 i n fiscal year 2004-05 and $85.736 in fiscal year 2005-06 were included as operating expenses in the City's audited financial statements for those years, but are shown here as Transfers Out, which is consistent with the definition of Operation and Maintenance Costs in the Indenture. The aggregate Transfer Out to the water enterprise was repaid to the System in fiscal year 2006-07. See "LITIGATION" below.. 30 Management's Discussion of Operating Results. Financially, the City operates the wastewater utility as a separate enterprise activity within the City government. This structure is essentially the same as for its water and electric utility enterprises. Functionally, the wastewater utility is operated jointly with the water utility by the Watermastewater Division within the Department of Public Works. This arrangement is designed by the City to provide for improved efficiency in cross training and utilization of staff and in the purchase and use of equipment and facilities. Rate increases implemented in May 2004 and July 2005, were implemented to pay for the second and third phases of improvements at the White Slough Facility. The increases in 2004 and 2005 and the additional increases which match the Consumer Price Index in 2006 and 2007 were adopted in compliance with the requirements of Proposition 218 (see "CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS — California Constitution Articles XIIIC and XIIID). These increases have generated approximately $2.7 million additional revenues per year as of fiscal year 2006-07. This additional revenue is being used to pay for a significant share of the 2003 Installment Payments and the 2004 Installment Payments and is expected to pay for a significant share of the Installment Payments. The Wastewater Fund Balance has increased to a balance of approximately $5 million as of June 30,2007 and exceeds the reserve policy goal of 15% of operating expenses. Projected Operating Results and Debt Service Coverage The City's estimated projected operating results for the System for the Fiscal Years ending June 30, 2008 through 2012 are set forth below, reflecting certain significant assumptions concerning future events and circumstances. The financial forecast representsthe City's estimate of projected financial results based upon its judgment of the probable occurrence of future events. The assumptions set forth in part in the footnotes to the chart set forth below are material in the development of the City's financial projections, and variations in the assumptions may produce substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. The following table also sets forth debt service coverage ratios with respect to existing and anticipated Parity Debt. Such coverage ratios have been computed in accordance with the requirements of the Installment Purchase Agreement. 31 Table 8 City cf Lodi Wastewater System Projected CiDerating Results and Debt Service Coverage Fiscal Years 2007-08 through 2011-12 (1) Source: Revised City Budget estimates for fiscal year 2007-08. HF&H Consultants provided revenue and expense projections for fiscal year 200809 through fiscal year 2011-12, with City input. (2) Reflects addition of approximately $163.280 from Flag City wholesale treatment in fiscal year 2007-08. Charges for services projected for fiscal year 2008-09 and thereafter to increase at annual CPt (estimated at 3.4%) plus annual growth in connections of 0.6%. (3) Estimate for fiscal year 2007-08 based on analysis of development activity in pipeline; reduced below prior five year average of $1.13 million annually. Inflated at construction cost index (estimated at 4.1%) and 0.6% annual growth in connections. Fiscal year 2007-08 also tnoludes estimated $6.5 million one-time paymentfor Flag City annexation into service area. (4) Annual interest earnings projected at 5% in fiscal year 2007-08 and 4.5% thru fiscal year 2011-12 and 4% thereafter times the average annual fund balance. (5) Includes annual lease revenue for White Slough treatment plant agricultural land; projected to increase annually at CPI rate (estimated at 3.4%) (6) Includes Operating Grants. Sewer Tap Fees and Septic Dumping Charges. Sewer Tap Fees projected at 0.6% annual growth rate: Septic Dumping Charges projected at 3.4% annual inflation estimate. (7) Excludes depreciation. Projected to increase annually at varying rates: personnel wsts at 3%, utility Costs at 5%. supplies and other at 3.4%. with variationsfor regulatory studies, etc. Operating costs projected to increase in fiscal year 2007-08 and thereafter due to new NPDES permit requirements. (8) Assumes refunclingof the 1991 Certificatesand issuance of 2007 Certificates i n December2007. (9) In fiscal year 2007-08, the City will eliminate the payment in Lieu of Taxes (PILOT) transfer and charge only an overhead service charge from the wastewater enterpriseto the City General Fund on a basis subordinate to debt. (10) Represents planned capital expenditures net of projects to be funded from approximately $8.4 million of 2004 Certificate proceeds and $21 million from proposed 2007 Certificate proceeds. (11) Represents a com bined Wastewater enterprise reserve availablefor operations and capital projects. *Preliminary; subjectto change. 32 Revised Budget Projected Projected Projected Projected Projected FY2007-05 FY2008-09 FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 Operating Revenues (1) Chargesfor Services (2) $9,001,880 $9,363,792 $9,740,253 $10,131,851 $10,539,192 $10,962,909 Capacity/Connection Fees (3) 997,825 1,044,968 1,094,339 1,146,042 1,200,188 1,256,892 Capacity Fee for Flag City service area 6,500,000 Non -Operating Revenues Interestlncome (4) 400,843 510,710 519,841 465,605 367,483 285,574 Rent (5) 250,000 258.500 267.289 276,377 285,774 295,490 Other (6) 195.000 201,204 207,617 214,245 221,096 228,178 Transferfroml(to) Rate Stabilization Fund (400,000} 175.000 Total System Revenues $16,945,548 $11,554,174 $11,829,340 $12,224,120 $12,613,733 $13,029,043 Operating Expenses (1), (7) Personnel ser ces 3,055,902 3,147,579 3,242,006 3,339,267 3,439,445 3,542,628 Supplies, materialsand services 868,663 902.683 938.039 974,786 1,012,977 1,052,669 Utilities 797,465 837,338 879,205 923,165 969,324 1,017,790 Other 759,532 Total Operating Expenses $5,475,604 $5,709,237 $5,809,603 $6,011,863 $6,181,377 $6,393,320 System Net Revenues $11,469,944 $5,844,938 $6,019,736 $6,222,257 $6,432,356 $6,635,723 Parity DebtService (8) 1991 Installment Payments 519,800 0 0 0 0 0 2003 Installment Payments 381,848 382,648 382,733 381,393 379.170 381,123 2004 Installment Payments 2,151,450 2,145,713 2,148,800 2,147,600 2,139,350 2,138,475 2007 Certificates. 1.665.525 1.66630 1,676A13 1,675.275 Total ParityDebt Service* $3,384,072 $4,193,885 $4,192,558 $4,195,293 $4,194,533 $4,194,873 Debt Service Coverage' 3.39 1.39 1.44 1.48 1.53 1.58 Non -Operating Expenses Transfers (inyOut (9) 1.456,510 1.506.031 1.884.929 1,721.536 Total Non -Operating Expenses 1,456,510 1,506,031 1,557,236 1.610.182 1,664,929 1,721,536 NetCashtiow Before Capital Expenditures $6,829,361 $145,021 $269,943 $416,782 $572,894 $719,314 Less Net Capital Expenditures (10) 0 0 (1,575,723) (2,724,390) (2,507,258) (2,261,650) Net Deposit/Withdrawal from Reserves 6,629,381 145,021 (1,305,781) (2,307,608) (1,934,374) (1,542,336) Wastewater Enterprise Fund (11) Beginning Fund Balance 4,902,595 11,531,956 11,676,978 10,371,197 8,063,588 6,129,214 Ending Fund Balance 11,531,955 11,676,978 10,371,197 8,063,588 6,129,214 4,588,879 Rate Stabilization Fund Beginning Balance 0 410.000 249.513 260.741 272.474 284.735 Rate Stabilization Fund Ending Balance 410.000 297.548 Total Reserves at Year End 11,941,956 11,926,490 10,631,938 8,336,062 6,413,950 4,884,427 (1) Source: Revised City Budget estimates for fiscal year 2007-08. HF&H Consultants provided revenue and expense projections for fiscal year 200809 through fiscal year 2011-12, with City input. (2) Reflects addition of approximately $163.280 from Flag City wholesale treatment in fiscal year 2007-08. Charges for services projected for fiscal year 2008-09 and thereafter to increase at annual CPt (estimated at 3.4%) plus annual growth in connections of 0.6%. (3) Estimate for fiscal year 2007-08 based on analysis of development activity in pipeline; reduced below prior five year average of $1.13 million annually. Inflated at construction cost index (estimated at 4.1%) and 0.6% annual growth in connections. Fiscal year 2007-08 also tnoludes estimated $6.5 million one-time paymentfor Flag City annexation into service area. (4) Annual interest earnings projected at 5% in fiscal year 2007-08 and 4.5% thru fiscal year 2011-12 and 4% thereafter times the average annual fund balance. (5) Includes annual lease revenue for White Slough treatment plant agricultural land; projected to increase annually at CPI rate (estimated at 3.4%) (6) Includes Operating Grants. Sewer Tap Fees and Septic Dumping Charges. Sewer Tap Fees projected at 0.6% annual growth rate: Septic Dumping Charges projected at 3.4% annual inflation estimate. (7) Excludes depreciation. Projected to increase annually at varying rates: personnel wsts at 3%, utility Costs at 5%. supplies and other at 3.4%. with variationsfor regulatory studies, etc. Operating costs projected to increase in fiscal year 2007-08 and thereafter due to new NPDES permit requirements. (8) Assumes refunclingof the 1991 Certificatesand issuance of 2007 Certificates i n December2007. (9) In fiscal year 2007-08, the City will eliminate the payment in Lieu of Taxes (PILOT) transfer and charge only an overhead service charge from the wastewater enterpriseto the City General Fund on a basis subordinate to debt. (10) Represents planned capital expenditures net of projects to be funded from approximately $8.4 million of 2004 Certificate proceeds and $21 million from proposed 2007 Certificate proceeds. (11) Represents a com bined Wastewater enterprise reserve availablefor operations and capital projects. *Preliminary; subjectto change. 32 Transfers to the General Fund of the City Pursuant to budget policy adopted by the City Council, transfers by the System to the City's General Fund have included a payment in -lieu of taxes for fiscal years up through 2006- 07. This transfer had been 12% of revenues through fiscal year 2003-04 and was reduced to a fixed dollar amount in fiscal year 2004-05 (approximately 9% of system revenues). A cost of services study was completed in September 2007 to review the allocation of administrative overhead to the System. As a result, the City has changed its method of calculating general administrative overhead allocable to the System. Beginning in fiscal year 2007-08, the payment in -lieu of taxes will be eliminated and the administrative transfers to the General Fund will be paid on a subordinate basis to the Installment Payments. CONTINUING DISCLOSURE The City will covenant pursuant to a Continuing Disclosure Certificate to provide certain financial information and operating data relating to the City and the System by not later than six months following the end of the City's Fiscal Year, which Fiscal Year presently ends June 30 (the "Annual Report"), commencing with the Annual Report for fiscal year 2006-07, and to provide notices of the occurrence of certain enumerated events, if material, under federal securities law. The specific nature of the information to be contained in the Annual Report and the notices of material events are set forth in "APPENDIXE— PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE". These covenants have been made to assist the Underwriters in complying with Rule 15c2-12 of the Securities and Exchange Commission (the "Rule"). As of the date hereof, the City has never failed to comply in any material respect with any previous undertakings with regard to the provision of annual reports or material events notices as required by the Rule. THE CORPORATION The Corporation was incorporated under the Nonprofit Public Benefit Corporation Law of the State of California. The Corporation was organized as a nonprofit corporation for the purpose, among others, of assisting the City in the acquisition, construction and financing of public improvements which are of public benefit to the City. Members of the Lodi City Council serve on the Board of Directors of the Corporation. CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS California Constitution Articles XIIIA and XIIIB ArticleXIIIA of the California Constitution limits the taxing powers of California public agencies. Article XMA provides that the maximum ad valorem tax on real property cannot exceed 1% of the "full cash value" of the property, and effectively prohibits the levying of any other ad valorem property tax except for taxes above that level required to pay debt service on voter -approved general obligation bonds. "Full cash value" is defined as "the County Assessor's 33 valuation of real property as shown on the 1975-76 tax bill under'full cash value' or, thereafter, the appraisal value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment." The "full cash value" is subject to annual adjustment to reflect inflation at a rate not to exceed 2% or a reduction in the consumer price index or comparable local data, or declining property value caused by damage, destruction or otherfactors. The foregoing limitation does not apply to ad valorem taxes or special assessments to pay the interest and redemption charges on any indebtedness approved by the voters before July 1, 1978 or any bonded indebtedness for the acquisition or improvement of real property approved by the voters as required by law. Under Article XIIIB of the California Constitution, state and local government entities have an annual "appropriations limit" which limits their ability to spend certain moneys called "appropriations subject to limitation," which consist of tax revenues, certain state subventions and certain other moneys, including user charges to the extent they exceed the costs reasonably borne by the entity in providing the service for which it is levying the charge. The City is of the opinion that the wastewater service and user charges imposed by the City do not exceed the costs the City reasonably bears in providing the wastewater service. In general terms, the "appropriations limit" is to be based on certain 1978-79 expenditures, and is to be adjusted annually to reflect changes in the consumer price index, population, and services provided by these entities. Among other provisions of Article X111B, if an entity's revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. California Constitution Articles XlllC and Xlll© General. On November 5, 1996, California voters approved Proposition 218, the so- called "Right to Vote on Taxes Act." Proposition 218 added Articles XI IIC and XIIID to the State Constitution, which affect the ability of local governments to levy and collect both existing and future taxes, assessments, and property -related fees and charges. Proposition 218, which generally became effective on November 6, 1996, changed, among other things, the procedure for the imposition of any new or increased property -related "fee" or "charge," which is defined as "any levy other than an ad valorem tax, a special tax or an assessment, imposed by a [local government] upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property related service" (and referred to in this section as a "property -related fee or charge"). Specifically, under Article MID, before a municipality may impose or increase any property -related fee or charge, the entity must give written notice to the record owner of each parcel of land affected by that fee or charge. The municipality must then hold a hearing upon the proposed imposition or increase at least 45 days after the written notice is mailed, and, if a majority of the property owners of the identified parcels present written protests against the proposal, the municipality may not impose or increase the property -related fee or charge. Further, underArticle XIIID, revenues derived from a property -related fee or charge may not exceed the funds required to provide the "property -related service" and the entity may not use such fee or charge for any purpose other than that for which it imposed the fee or charge. The amount of a property -related fee or charge may not exceed the proportional cost of the service attributable to the parcel, and no property -related fee or charge may be imposed for a 34 service unless that service is actually used by, or is immediately available to, the owner of the property in question. In addition, Article XIIIC states that "the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments and neither the Legislature nor any local government charter shall impose a signature requirement higherthan that applicable to statewide statutory initiatives." Judicial Interpretation of Proposition 278. After Proposition 218 was enacted in 1996, appellate court cases (such as Apartment Association v. City of LosAngeles (2001) 24 Cal. 4°i 830) and an Attorney General opinion initially indicated that fees and charges levied for water and wastewater services would not be considered property -related fees and charges, and thus not subject to the requirements of Article XIIID regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. However, three recent cases have held that certain types of water and wastewater charges could be subject to the requirements of Proposition 218 under certain circumstances. In Richmond v. Shasta Community Services District (9 Cal. Rptr. 3rd 121), the California Supreme Court addressed the applicability of the notice, hearing and protest provisions of Article X111D to certain charges related to water service. In Richmond, the Court held that connection charges are not subject to Proposition 218. The Court also indicated in dictum that a fee for ongoing water service through an existing connection could, under certain circumstances, constitute a property -related fee and charge, with the result that a local government imposing such a fee and charge must comply with the notice, hearing and protest requirements of Article XIIID. In Howard Jarvis Taxpayers Association v. City of Fresno (March 23, 2005), the California Court of Appeal, Fifth District, concluded that water, sewer and trash fees are property -related fees subject to Proposition 218 and a municipality must comply with Article X1IID before imposing or increasing such fees. The California Supreme Court denied the City of Fresno's petition for review of the Court of Appeal's decision on June 15, 2005. In July 2006 the California Supreme Court, in Bighorn -Desert View Water Agency V. Verjil (S127535, July 24, 2006), addressed the validity of a local voter initiative measure that would have (a) reduced a water agency's rates for water consumption (and other water charges), and (b) required the water agency to obtain voter approval before increasing any existing water rate, fee, or charge, or imposing any new water rate, fee, or charge. The court adopted the position indicated by its statement in Richmond that a public water agency's charges for ongoing water delivery are "fees and charges" within the meaning of Article XIIID, and went on to hold that charges for ongoing water delivery are also "fees" within the meaning of Article XIIIC's mandate that the initiative power of the electorate cannot be prohibited or limited in matters of reducing or repealing any local tax, assessment, fee or charge. Therefore, the court held, Article X111C authorizes local voters to adopt an initiative measure that would reduce or repeal a public agency's water rates and other water delivery charges. (However, the court ultimately ruled in favor of the water agency and held that the entire initiative measure was invalid on the grounds that the second part of the initiative measure, which would have subjected future water rate increases to prior voter approval, was not supported by Article XIIIC and was therefore invalid.) 35 The court in Bighorn specifically noted that it was not holding that the initiative power is free of all limitations; the court stated that it was not determining whether the electorate's initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay for operating expenses, provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due. Proposition 218 and the City's Wastewater System Rates. The City followed the procedural requirements, including the public hearing and majority protest provisions, of Proposition 218 in connection with its most recent System rate increases (which included approval for annual CPI increases). See "THE SYSTEM - Wastewater Rates and Charges". The City believes that its current wastewater charges which are collected to pay the costs of System operation and maintenance and debt service comply in all respects with the requirements of Article XIIID and the City expects that any future wastewater charges will comply with Article XIIID's procedural and substantive requirements to the extent applicable thereto. The City will continue to comply with the provisions of Proposition 218 in connection with future rate increases. Conclusion. It is not possible to predict how courts will further interpret Article XII IC and Article XIIID in future judicial decisions, and what, if any, further implementing legislation will be enacted. Under the Bighom case, local voters could adopt an initiative measure that reduces or repeals the City's rates and charges, although it is not clear whether (and California courts have not decided whether) any such reduction or repeal by initiative would be enforceable in a situation in which such rates and charges are pledged to the repayment of bonds or other indebtedness. In this regard, it should be noted that, after the City Council adopted increased water rates on September 21, 2005 to pay for the cleanup of perch loroethylene (PCE) and trichloroethylene (TCE) in the City's groundwater (see "LITIGATION" below), an initiative (Measure H) was placed on the November 7, 2006 ballot to repeal the increased rates. The resolution failed, with 63.9% of the voters rejecting the proposed rate reduction and 36.1% of voters supporting it. There can be no assurance that the courts will not further interpret, or the voters will not amend, Article XI IIC and Article XIIID to limit the ability of local agencies to impose. levy, charge and collect increased fees and charges for utility service, or to call into question previously adopted utility rate increases. Future Initiatives Articles XIIIA, XIIIB, XIIIC and XIIID were adopted as measures that qualified for the ballot pursuant to California's initiative process. From time to time other initiatives could be proposed and adopted affecting the City's revenues or ability to increase revenues. 36 RISK FACTORS The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating the purchase of the 2007 Certificates. However, the following does not purport to be an exhaustive listing of risks and other considerationswhich may be relevant to investing in the 2007 Certificates. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks. Limited Obligations The 2007 Certificates are payable only from Installment Payments received from the City, and the Installment Payments are secured by and payable solely from System Net Revenues; the Installment Payments are not secured by a legal or equitable pledge or charge or lien upon any property of the City or the Corporation or any of their income or receipts, except the System Net Revenues. The obligation of the City to make the Installment Payments does not constitute an obligation of the City to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. Parity Obligations In addition to the Installment Payments, the City is obligated to make the 2003 Installment Payments and the 2004 Installment Payments from System Net Revenues. In addition, the City is permitted under the Installment Purchase Agreement, subject to satisfaction of certain conditions, to incur additional Parity Debt. In the event System Net Revenues were insufficientto pay all of the City's obligations with respect to the Parity Debt, when due, the City would be obligated to make paymentson the Parity Debt on a paripassu basis. Increased Direct Costs There can be no assurance that the Operation and Maintenance Costs of the City with respect to the System will be consistent with the levels contemplated in this Official Statement. Changes in technology, litigation (see "LITIGATION"), costs related to environmental matters (see "THE SYSTEM — Environmental Compliance"), increases in the cost of operation or other expenses could require increases in rates or charges in order to comply with the City's rate covenant, and could increase the possibility of nonpayment of the Installment Payments. See "THE SYSTEM. Natural Calamities From time to time, the service area of the System is subject to natural calamities, including earthquake and flood. A seismic event or a flood could cause propertydamage, which could adversely impact the availability of System Net Revenues, whether as the result of reduced System Revenues or increased Operation and Maintenance Costs, or both. Earthquakes. The City of Lodi General Plan dated June 12, 1991, includesthe following information about earthquake risk in the City.The greatest geologic hazard in Lodi is the structural danger posed by groundshaking from earthquakes originating outside of the area. The level of impact resulting from any seismic activity will depend on factors such as: distance from 37 epicenter, earthquake magnitude, and characteristics of soils and subsurface geology. Damaging effects could possibly be worsened by liquefaction of underlying materials, causing larger buildings to settle or topple. Direct damage from surface rupture is considered unlikely because no faults are known to underlie the area. The maximum expected earthquake intensityto be reasonably expected in the Lodi area would correspond to a Modified Mercalli Intensity VI Il, or possibly higher. During an intensity VIII event, some damage would occur to well -made structures and chimneys; some towers would fall; and poorly constructed or weak structures would be heavily damaged. An earthquake with an intensity of VIII would be most probably in areas where the water table is most shallow in proximity to the Mokelumne River. Where the water table is deeper than 30 feet, which it is throughout most of the City, a maximum intensity of only VII would be more reasonably expected. In such an earthquake, damage in well-built structures would be slight. Flood. Based on revised flood risk evaluations prepared by the Federal Emergency Management Agency (FEMA) for the City of Lodi and San Joaquin County in 1987, flood hazards are a constraint to development only in the area immediately adjacent to the Mokelumne River in the 1 00 -year flood plain. The levee system along the Mokelumne River is of sufficient height to protect nearly all of the City from 100 -year floodflow, but the majority of the area is subject to overland flooding (sheet flow, generally less than two feet in depth) during the 500 -year flood event. Significant portions of the area are high enough to be free of the 500 -year hazard. The property on which the White Slough Facility sits is within a 100 -year flood zone associated with the San Joaquin Delta. However, the White Slough Facility itself is constructed at or above the flood elevation. Limited Recourse on Default Failure by the City to make the Installment Payments, when due, constitutes an event of default under the Installment Purchase Agreement and the Corporation is permitted to pursue remedies at law or in equity to enforce the City's obligation to make the Installment Payments. Although the Corporation has the right to accelerate the total unpaid principal component of the Installment Payments, there is no assurance that the City will have sufficient System Net Revenues to pay the principal component of the Installment Payments upon acceleration. See also "CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS — California Constitution Articles XI I IC and XI I I D above. Effect of Bankruptcy In addition to the limitations on remedies contained in the Installment Purchase Agreement and the Trust Agreement, the rights and remedies provided in the Installment Purchase Agreement and the Trust Agreement may be limited by and are subject to provisions of federal bankruptcy laws, as now or hereafter enacted, and to other laws or equitable principles that may affect creditors' rights. In the event of the bankruptcy of the City, the obligations of the City underthe Installment Purchase Agreement may be set aside. Loss of Tax Exemption The City has covenanted in the Installment Purchase Agreement that it will not take any action, or fail to take any action, if any such action or failure to take action would adversely 38 affect the exclusion from gross income of interest evidenced by the 2007 Certificates under Section 103 of the Internal Revenue Code of 1986. In the event the City fails to comply with the foregoing tax covenant, interest evidenced by the 2007 Certificates may be includable in the gross income of the Owners thereof for federal tax purposes. See "TAX MATTERS. Secondary Market There can be no guarantee that there will be a secondary market for the 2007 Certificates or, if a secondary market exists, that any 2007 Certificates can be sold for any particular price. Prices of bond issues for which a market is being made will depend upon then - prevailing circumstances. Such prices could be substantially different from the original purchase price. No assurance can be given that the market price for the 2007 Certificates will not be affected by the introduction or enactment of any future legislation (including without limitation amendments to the Internal Revenue Code), or changes in interpretation of the Internal Revenue Code, or any action of the Internal Revenue Service, including but not limited to the publication of proposed or final regulations, the issuance of rulings, the selection of the 2007 Certificates for audit examination, or the course or result of any Internal Revenue Service audit or examination of the 2007 Certificates or obligations that present similar tax issues as the 2007 Certificates. On May 21, 2007, the U.S. Supreme Court agreed to review Davis v. KentuckyDep'f of Revenue of the Finance and Admin. Cabinet, 197 S,W.3d 557 (2006), a decision holding that state statutes providing more favorable state income tax treatment to holders of debt issued by in-state government bodies than for debt issued by out-of-state government bodies violate the U.S. Constitution. If the decision is upheld, the marketability and market price for the 2007 Certificates may be affected. It is likely that the case will be heard by the U.S. Supreme Court before the end of the Court's session that ends June 30,2008. Potential Liability Associated with the Main Trunk Line The City expects to finance rehabilitation of the main trunk line from the White Slough Facility to the City with proceeds of the 2007 Certificates. On October 17, 2007, the City Council declared a local state of emergency, dispensed with bidding requirements and authorized the City Manager to negotiate a contract change order with the contractor performing the Phase 3 work to include the pipeline rehabilitation. The City expects the pipeline rehabilitation to be complete by Summer 2008. The City believes that it could be exposed to liability as a result of the current condition of the main trunk line. The 40 -year-old concrete pipeline is badly deteriorated because of a chemical reaction in the sewage that produces sulfuric acid, which, over time, eats away at the top of the concrete pipe. In order to eliminate this exposure, the City has (i) marked the pipeline alignment; (ii) warned the owners of land under the alignment that the condition of the line could cause their land to be unstable and recommended that it be avoided; and (iii) fast -tracked the rehabilitation timeline to completion by June of 2008. Based upon these measures, the City believes that any liability associated with the condition of the main trunk line will not adversely impact its ability to make the Installment Payments. 39 TAX MATTERS In the opinion of Orrick, Herrington& Sutcliffe LLP, Special Counsel to the City ("Special Counsel"), based on an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, the portion of each Installment Payment designated as and constituting interest paid by the City underthe Installment Purchase Agreement and received bythe Owners of the 2007 Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. Special Counsel is of the further opinion the portion of each Installment Payment designated as and constituting interest is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Special Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Special Counsel is set forth in Appendix F hereto. To the extent the issue price of any maturity of the 2007 Certificates is less than the amount to be paid at maturity of such 2007 Certificates (excluding amounts stated to be interest and payable at least annually over the term of such 2007 Certificates), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each Owner thereof, is treated as interest with respect to the 2007 Certificates which is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes. For this purpose, the issue price of a particular maturity of the 2007 Certificates is the first price at which a substantial amount of such maturity of the 2007 Certificates is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the 2007 Certificates accrues daily over the term to maturity of such 2007 Certificates on the basis of 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 2007 Certificates to determine taxable gain or loss upon disposition (including sale, prepayment, or payment at maturity) of such 2007 Certificates. Owners of the 2007 Certificates should consult their own tax advisors with respect to the tax consequences of ownership of 2007 Certificates with original issue discount, including the treatment of Owners who do not purchase such 2007 Certificates in the original offering to the public at the first price at which a substantial amount of such 2007 Certificates is sold to the public. 2007 Certificates purchased, whether at original execution and delivery or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ("Premium Certificates") will be treated as having amortizable premium. No deduction is allowable for the amortizable premium in the case of obligations, like the Premium Certificates, the interest evidenced by which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and an Owner's basis in a Premium Certificate, will be reduced by the amount of amortizable premium properly allocable to such Owner. Owners of Premium Certificates should consult their own tax advisors with respectto the propertreatment of amortizable premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on or evidenced by obligations such as the 2007 Certificates. The City has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that the interest installments of the Installment Payments paid by the City under the Installment 40 Purchase Agreement and received by the Owners of the 2007 Certificates will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in such interest evidenced by the 2007 Certificates being included in gross income for federal income tax purposes, possibly from the date of original execution and delivery of the 2007 Certificates. The opinion of Special Counsel assumes the accuracy of these representations and compliance with these covenants. Special Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Special Counsel's attention after the date of execution and delivery of the 2007 Certificates may adversely affect the value of, or the tax status of interest evidenced by, the 2007 Certificates. Accordingly, the opinion of Special Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Special Counsel is of the opinion that the interest installments of the Installment Payments paid by the City under the Installment Purchase Agreement and received by the Owners of the 2007 Certificates are excluded from gross income for federal income tax purposes and are exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of the interestwith respect to, the 2007 Certificates may otherwise affect an Owner's federal, state or local tax liability. The nature and extent of these other tax consequences depend upon the particular tax status of the Owner or the Owner's other items of income or deduction. Special Counsel expresses no opinion regarding any such other tax consequences. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest evidenced by the 2007 Certificates to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Owners from realizing the full current benefit of the tax status of such interest. As one example, on May 21, 2007, the United States Supreme Court agreed to hear an appeal from a Kentucky state court which ruled that the United States Constitution prohibited the state from providing a tax exemption for interest on bonds issued by the state and its political subdivisions but taxing interest on obligations issued by other states and their political subdivisions. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the 2007 Certificates. Prospective purchasers of the 2007 Certificates should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Special Counsel expresses no opinion. The opinion of Special Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Special Counsel's judgment as to the proper treatment of the 2007 Certificates for federal income tax purposes. It is not binding on the Internal Revenue Service ("IRS") or the courts. Furthermore, Special Counsel cannot give and has not given any opinion or assurance about the future activities of the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirementsof the Code. Special Counsel's engagement with respect to the 2007 Certificates ends with the execution and delivery of the 2007 Certificates, and, unless separately engaged, Special Counsel is not obligated to defend the City or the Owners regarding the tax-exempt status of the 2007 Certificates in the event of an audit examination by the IRS. Under current procedures, parties other than the City and its appointed counsel, including the Owners, would have little, if 41 any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the 2007 Certificates for audit, or the course or result of such audit, or an audit of obligations presenting similar tax issues may affect the market price for, or the marketability of, the 2007 Certificates, and may cause the City or the Owners to incur significant expense. LITIGATION No Litigation Relating to 2007 Certificates. To the knowledge of the City, there is no controversy or litigation of any nature now pending or threatened restraining or enjoining the execution and delivery of the 2007 Certificates, the Trust Agreement, the Installment Purchase Agreement or in any way contesting or affecting the validity of the 2007 Certificates or any proceedings of the City or the Corporation taken with respect to the execution and delivery thereof. Litigation Relating to PCE, TCE. The City relies upon groundwater for providing potable water to its residents. The City first detected the chemicals Tetrachloroethylene ("PCE" or "PER C) and Trichloroethylene ("TCE) in the groundwater in 1989. It appears that this contamination was caused by releases into the environment over many decades by dozens of drycleaners and other businesses in the City. In 1996, the City negotiated a Comprehensive Joint Cooperative Agreement (the "Cooperative Agreement")with the California Environmental Protection Agency's Department of Toxic Substances Control ("DTSC). Under the May 6, 1997 Cooperative Agreement, the City agreed to diligently prosecute environmental enforcement actions against responsible parties to compel them to investigate and remediate the contamination in order to protect the City's groundwater supply. Subsequent to the execution of the Cooperative Agreement, the City enacted the ill fated Municipal Environmental Response& Liability Ordinance ("MERLO)to supportthe City's lead enforcement role. Thereafter, the City filed several enforcement actions. The primary one, entitled "The People of the State of California and the City of Lodi v. M&P Investments, et. al U.S. District Court for the Eastern District of California, Case No. Civs-00-2441 FCD JFM., sought the abatement of a public nuisance and a nuisance per se and recovery of the City's cost of responding to that nuisance. Various counterclaims and cross- claims have been filed including claims against the City for its alleged contribution to the contamination. Although a trial date is set for October 2008, all but four of the defendant groups have agreed to settle with the City as further outlined below. During the course of the litigation, several events and judicial decisions negatively impacted the City's initial litigation strategy. The Courts ruled that (1) the City does not have authority to serve as lead enforcement agency under the Cooperative Agreement and (2) MERLO is preempted by State and Federal environmental legislation. In one of these matters, Citv of Lodi v. Uni ard, Case No. C039076, the City suffered an adverse judgment and the court ordered the City to pay damages and attorney's fees. In another matter, City of Lodi v. Ran tr n, Case No. C037445, the City received a favorable judgment and an award of attorney's fees. These matters were appealed and on May 5, 2004, the Third District Court of Appeal issued opinions in both of the cases. In Uniaard, the Court held that the information gathering provisions of the City's MERLO ordinance as enforced by the City were a violation of Unigard's civil rights and confirmed a $288,000 judgment against the City. This liability was ultimately waived by Unigard in the Busy Bee Settlement discussed below. In Randtron, the Court held that MERLO is preempted by California's Hazardous Substance Account Act and 42 that the administrative abatement order issued to Randtron under MERLO was therefore void. In addition, the federal court in the M&P action determined that the City itself is a potentially responsible party for the contamination due to the alleged release and increased migration of certain of the contamination sources into the City's groundwater through the infrastructure of the System and the City's water enterprise (the "Water System"). As such, the City was exposed to potential liability for the clean-up as more fully described below. Due to the complete failure of the City's former outside counsel's legal strategy, the City changed course and attorneys in 2004 and pursued Settlements with the various potentially responsible parties. Of the five contamination plumes identified in the groundwater supply, the City has resolved four and is close to resolving the fifth. The first settlement came with respect to the Busy Bee Plume. The Busy Bee settlement fully funded a contract with a remediation company which is expected to fully remediate the site. In addition, the settlement funded a $182,500 escrow account. In the event the contract fails to remediate the site, the escrow account can be used to cover the excess costs. The City also settled with all but four groups of potentially responsible parties regarding the remaining four plumes and with its own insurance carriers, raising $34.2 million toward the estimated $49.5 million total cleanup cost. The settlements reached as of the date of this Official Statement leave the City obligated to fund the $15.3 million remaining shortfall in clean- up costs. Settlements with the remaining defendants would reduce the City's potential clean-up liability. However, the litigation program created several other liabilities for the City including the Lehman financing described below, litigation and consultant costs. To finance the litigation, the City and the Lodi Public Improvement Corporation entered into a financing arrangement with Lehman Brothers Inc. ("Lehman") in June 2000 entitled the Lodi Financing Corporation Environmental Abatement Program Variable Rate Certificates of Participation ("2000 COPs"). Lehman advanced $15,625,000, which was repayable with interest accruing at the rate of "LIBOR" plus 20% per annum, adjusted quarterly and compounded annually. In 2004, litigation arose between Lehman and the City over the City's obligations under the 2000 COPs. The matter settled in 2005 with the City paying Lehman $6 million to fully discharge its obligations under the 2000 COPs. The City also sued its former outside counsel, Envision Law Group ("Envision "),for the City of Lodi v. M&P Investments. et. al. litigation. Envision cross -claimed, alleging that the City owes it $7.0 million dollars in accrued but unpaid legal fees, $3.5 million in interest and 20% of all settlements that the City secured after Envision's termination. No trial date is scheduled but the City is confident that it will prevail, in which case the City would not be responsiblefor paying anything to Envision. In 2005, City staff and outside consultants estimated that the cost of the City's potential liability arising from the PCEITCE clean-up and related litigation that was not yet funded was $45 million. Although this potential liability could be shared by the System and the Water System, the City determined to fund the unfunded costs through the Water System by raising water rates. Accordingly, Bartle Wells performed a rate analysis, and concluded that a $10.50 average monthly rate increase, phased in over 2 years, would meet the City's unfunded potential liability. This $10.50 average rate increase was adopted pursuant to Council Resolution 2005-203 on September 21, 2005, and is projected to raise $2.7 million in additional revenue each year ("Water Rate Increase Revenue"). This rate increase was unsuccessfully challenged by citizen initiative in November 2006; the effort to repeal the water rate increase was defeated by a vote of 63.9% to 36.1 %. 43 After concluding the various settlements described above, City staff and outside consultants concluded in mid -2007 that the City's potential liability arising from the PCEECE clean-up and related litigation that was not yet funded was actually $35.46 million, including a $15 million contingency. The City expects that the Water Rate Increase Revenue described in the previous paragraph will be sufficient to cover the total unfunded potential liability. In this regard, it is important to note that (1) the clean-up costs are expected to be incurred over a 30 - year period; and (2) the existing settlements will be sufficient to fund the capital needs related to the clean-up, leaving Water Rate Increase Revenue to fund the ongoing operations and maintenance expenses, repayment of an internalwater fund loan and operating reserves. The estimated future costs, immediately available sources cf funds excluding the $2.7 million of Water Rate Increase Revenues that the City expects to be generated on an annual basis) and resulting unfunded potential City liabilitywith respect to the PCE/TCE clean-up and related litigation is summarized below. The City expects to fund the unfunded liability with Water Rate Increase Revenues and not with assets or revenues cf the System. Costs: Item Cleanup Costs (1) Water Fund Loan (2) Legal Fees Total Costs Available Sources of Funds: M&Psettlements insurance settlements (3) Total Sources of Funds Unfunded Potential City Exposure to be funded from Water Rate Increase Revenue Amount lin millionsl $49.5 12.5 1.66 $63.66 $14.6 13.6 28.2 (1) Includes a $15 million contingency. 121 Represents a loan from the Infrastructure Reolacernent Water Fund Account to the PCE Water Fund Account, which is now being repaid from Water Rate Increase Revenue. (3) Reflects use of $6 million of the USF&G settlement to pay Lehman in connection with the 2000 COPs, as described above. Potential Litigation Relating to Nitrate Levels. The City is investigating nitrate levels in the vicinity of the White Slough Facility. There are a numberof potential nitrate sources in the area including dairy and farming operations. It is too early to determine the cause of the contamination or whether it will require remediation by the City or any other party. Given the current evidence, the RWQCB issued the City's most recent NPDES Permit in September 2007, concluding that further investigation is needed. The cost of the investigation is factored into the City's current revenue model. APPROVAL OF LEGALITY The execution and delivery of the 2007 Certificates is subject to the approval of legality by Orrick, Herrington& Sutcliffe LLP, Los Angeles, California, Special Counsel, substantially in the form set forth as Appendix F. Special Counsel undertakes no responsibility for the 44 accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the Underwriters by Jones Hall, A Professional Law Corporation, San Francisco, California, and for the City and the Corporation by the City Attorney of the City. Payment of the fees and expenses of Special Counsel and Underwriters' Counsel is contingent upon execution and delivery of the 2007 Certificates. RATINGS Insured Ratings. Standard & Poor's and Fitch are expected to assign the 2007 Certificates the long-term ratings of "AAA" and "AAA," respectively, upon the delivery by Financial Security of the Policy guaranteeing the payment of the principal and interest evidenced by the 2007 Certificates when due. Underlying Ratings. In addition, the 2007 Certificates have been assigned the underlying ratings, without regard to the Policy, of "A-" and "A-", respectively, by Standard & Poor's and Fitch. General. The ratings reflect only the respective views of the rating agencies, and any explanation of the significance of such ratings may be obtained only from such rating agencies as follows: Standard & Poor's, 55 Water Street, 38h Floor, New York, New York 10041; and Fitch Ratings, One State Street Plaza, New York, New York 10004. The City and Financial Security furnished to the rating agencies certain information and materials concerning the 2007 Certificates and themselves. Generally, rating agencies base their ratings on information and materials furnished to them and on investigations, studies and assumptions by the rating agencies. There is no assurance that the ratings will remain in effect for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agencies, or either of them, if, in their respective judgments. circumstances so warrant. The City undertakes no responsibility to oppose any such revisions or withdrawal. Any downward revision or withdrawal of any rating may have an adverse effect on the market price of the 2007 Certificates. FINANCIAL ADVISOR Lamont Financial Services Corp. (the "Financial Advisor") has assisted the City with various matters relating to the planning, structuring and delivery of the 2007 Certificates. The Financial Advisor is a financial advisoryfirm and is not engaged in the business of underwriting or distributing municipal securities or other public securities. The Financial Advisor assumes no responsibility for the accuracy, completeness or fairness of this Official Statement. The Financial Advisor will receive compensation from the City contingent upon the sale and delivery of the 2007 Certificates. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the 2007 Certificates at a price of $ , representingthe aggregate principal amount of the 2007 Certificates plus $ net original issue premium and less $ Underwriters' discount). 45 The Purchase Contract for the 2007 Certificates provides that the Underwriters will purchase all the 2007 Certificates, if any are purchased. The 2007 Certificates may be offered and sold by the Underwriters to certain dealers and others at prices lower than the public offering price stated on the inside cover page of this Official Statement, and such public offering price may be changed, from time to time, by the Underwriters. VERIFICATION OF MATHEMATICAL COMPUTATIONS Causey Demgen 8 Moore Inc., Denver, Colorado (the "Verification Agent"), will verify the arithmetical accuracy of certain computations included in the schedules provided by the underwriters relating to discharge of the 1991 Installment Payments and the 1991 Certificates. See "THE FINANCING PLAN". The Verification Agent has restricted its procedures to verification of the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information upon which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. City. EXECUTION AND DELIVERY The execution and delivery of this Official Statement has been duly authorized by the 46 CITY OF LODI, CALIFORNIA By: City Manager APPENDIX A THE CITY OF LODI The 2007 Certificates are not secured by the faith and credit or the taxing power of the City. The economic and financial data regarding the City of Lodi and the County of San Joaquin set forth in this section are included for information purposes only, to give a more complete description of the service area of the City's System. General The City of Lodi, California ("Lodi" or the "City) was incorporated as a General Law City on December 6, 1906. The City is located in the San Joaquin Valley between Stockton, 2 miles to the south, and Sacramento, 35 miles to the north, and adjacent to State Route 99. The city is located on a main line of the Union Pacific Railroad and is within 5 miles of Interstate 5. The City population is 63,395 (as of Jan. 1, 2007 estimate by the California Department of Finance) and is contained in an area of approximately 13 square miles. The City has grown steadily since incorporation in 1906 and in 2006 approved development proposals that will add 3,509 dwelling units in newly annexed areas to the south and west. The City's growth is provided for in both the General Plan and the City's growth -control ordinance that allows an increase in population of 2% per year until the growth limits are reached. The City provides a wide range of municipal services, including public safety (police, fire and graffiti abatement), public utilities services (electric, water and sewer), transportation services (streets, flood control and transit), leisure, cultural and social services (parks and recreation, library, and community center), and general government services (management, human resources administration, financial administration, building maintenance and equipment maintenance). The City has a broad-based economy that, unlike many cities in the San Joaquin Valley, does not simply depend upon agriculture, one reason the City's unemployment rate averages roughly 2 percent less than San Joaquin County's as a whole. The region's growing reputation for its fine wines has boosted its image as a tourist destination, and the city's downtown, enhanced by a $25 million public and private investment, is a model for other mid-sized cities seeking to revitalize their downtowns. As it transitions to an entertainment, white -linen dining and wine -tasting destination, downtown Lodi serves as a hub for the 60 wineries located within a 10 -mile radius. Sales at dining and drinking establishments grew by 31 percent from Fiscal Year 2002-2003 to 2006-2007. In 2006, the City partnered with three local wineries outside the City limits, allowing them to use the wastewater plant's capacity in return for opening a downtown wine -tasting room. Two other boutique wineries recently moved their winemaking operations within the City limits. Additionally, the City recently agreed to begin accepting waste from Flag City, a growing collection of transportation service businesses, hotels and restaurants, at Interstate 5 and Highway 12 that is five miles west of the City limits. San Joaquin County, which is responsible for treating Flag City's waste, recently agreed to pay Lodi more than $6.5 million in connection fees and approximately $160,000 a year to send its wastewater to the City's White Slough Water Pollution Control Facility for treatment. The City has a diversified industrial base, ranging from plastics industries that are industry leaders in producing pipes for irrigation and drainage, and injection -molded products, to A-1 Cottage Bakery, which sells specialty baked goods and frozen dough to customers nationwide. Still, agriculture plays a large role in the city's economy. In addition to wines, processed foods, nuts, fruit, vegetables and milk are major commodities of the Lodi area and supply the materials for local food processors and packagers. These products support the operations of General Mills and private-label cannery Pacific Coast Producers, among other companies. A variety of Lodi businesses serve the surrounding farms and vineyards with irrigation supplies and specialty machinery. In addition, the City has a wide range of other financially sound businesses. These companies range in size from a few dozen to hundreds of employees and produce a wide variety of services and products. One of them, health insurance company Blue Shield of California, broke ground this year on a new claims processing center that will house its current 800 -employee workforce and allow it to expand to 1,500 workers. Municipal Government City Council. All powers of the City are vested in the City Council which is empowered to perform all duties of and obligations of the City as imposed by State law. The City has a five - member City Council composed of members elected at large. Each council member is elected for four years with staggering terms. Biographies of the members of the City Council are set forth below: BOB JOHNSON, MAYOR, was elected to the Lodi City Council in November 2004. Mr. Johnson attained the rank of captain in the United States Marine Corps and, following his military service, was employed for more than 20 years in the financial industry in a variety of marketing and management positions in New York, Los Angeles, and San Francisco. Most recently, he has been a self-employed real estate appraiser in the Central Valley. Mr. Johnson received a Bachelor of Arts degree from St. Bonaventure University. JOANNE MOUNCE, MAYOR PRO TEMPORE, was elected to the Lodi City Council in November2004. Ms. Mounce received an Accounting Certificate from South Lake Tahoe Community College and her Associates Degree with Honors from San Joaquin Delta College. With 23 years of accounting experience, Ms. Mounce currently works with Dougherty CPAs, Inc., a Stockton certified public accountant firm. LARRY D. HANSEN, COUNCIL MEMBER, was elected to the Lodi City Council in November 2002 and re-elected in November 2006. Mr. Hansen is a United States Navy veteran and obtained his Master of Public Administration degree in 1993 from California State University, Stanislaus. Mr. Hansen had a 30 -year career with the City of Lodi Police Department, serving as Chief of Police from 1993 to 2000. SUSAN HITCHCOCK, COUNCIL MEMBER, was elected to the Lodi City Council in November 1998 and re-elected in 2002 and 2006. Ms. Hitchcock received a Bachelor of Science in Business Administration from California State University, Sacramento, in 1979 and a teaching credential in 1991, She also received a Master of Arts in School Administration and an Administrative Services credential from University of the Pacific in 1997. Ms. Hitchcock worked as a commercial loan officer for eight years. She has been employed by the Lodi Unified School District since 1991 and is currently the Principal of Clairmont Elementary School. A-2 PHIL KATZAKIAN, COUNCIL MEMBER, was elected to the Lodi City Council in November 2006. Mr. Katzakian is president and co-owner of Lodi Printing, an 83 -year-old business owned by the Katzakian family since 1948. Mr. Katzakian attended San Joaquin Delta College and California State University, Sacramento, before being hired by Lodi Vintners, a Lodi -area winery. He spent five years with the company, eventually becoming General Manager, before leaving to open an automotive repair business. Five years later, Mr. Katzakian joined Lodi Printing. Investment Portfolio All funds of the City, including surplus funds of the System, are invested by the City in accordance with the investment guidelines of the California Government Code (Sections 53601 and 53635) and the City's Investment Policy, which is presented annually to the City Council for approval. Investment Policy. Pursuant to the Investment Policy, the City strives to maintain a level of investment of all idle funds, less required reserves, as near 100% as possible, through daily and projected cash flow determinations. The City's cash management system is designed to monitor and forecast expenditures and revenue accurately in order to enable the City to invest funds to the fullest extent possible. Idle cash management and investment transactions are the responsibility of the Finance Director/City Treasurer. The Investment Policy, as adopted by the City Council on October 1, 2003, permits investment in the following: U.S. Treasury obligations (bills, notes and bonds); U.S. Government Agency securities and instrumentalities; bankers acceptances; certificates of deposit; negotiable certificates of deposit; commercial paper; California State Local Agency Investment Fund; passbook deposits; mutual funds; and medium term notes. The Investment Policy provides that safety is given the highest priority, followed by liquidity and yield. Investments are selected to achieve a "market average" rate of return, or the annual rate of return on the one-year U.S. Treasury Bill. The Investment Policy may be changed at any time at the discretion of the City Council (subject to the State of California law provisions relating to authorized investments) and as the California Government Code is amended. There can be no assurance, therefore, that the State of California law and/or the Investment Policy will not be amended in the future to allow for investments which are currently not permitted under such State law or the Investment Policy, or that the objectives of the City with respect to investments will not change. All investments, including the Authorized Investments and those authorized by law from time to time for investments by public agencies, contain a certain degree of risk. Such risks include, but are not limited to, a lower rate of return than expected and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Trust Agreement and the Installment Purchase Agreement, or other amounts held by the City, could have a material adverse effect on the City's finances. A-3 Investment Results as of June 30, 2007. A summary of the City's pooled investment portfolio as of June 30, 2007 is set forth below. CITY OF LODI Investment Portfolio Summary (as of June 30,2007) Percent. Type of Investment Amount of Total Local Aaencv Investment Fund (City) $19,648,971,23 48.2% LAIF (Lodi Public Improvement Corporation) 3,439,412.57 8.4 Certificatesof Deposit 300.000.00 0.7 Passbook/Checking Accounts 17.3981013.40 42.7 Total $40,786,397.20 100.0% Source: City of Lodi. Population The following chart indicatesthe growth in the population of the City since 1998. CITY OF LODI POPULATION For Years 1998 through 2007 Year (as of January 1) Population 1998 54,800 1999 56,000 2000 56,512 2001 58,353 2002 59,835 2003 60,951 2004 61,848 2005 62,520 2006 62,828 2007 63,395 Source: State of California, Department of Finance. A-4 Employment in the City was 27,900in 2002 and 29,600in 2006, representing a 6.1% increase over the five-year period. The unemployment rate ranged from 5.5% in 2006 to 6.9% in 2003. Statewide unemployment rates were 4.9% in 2006 and 6.8% in 2003. CITY OF LODI EMPLOYMENT, UNEMPLOYMENTAND LABOR FORCE Averages for each of the CalendarYears 1999-2003 Source: State of California, Employment Development Department. Major Employers There are several manufacturing plants in the community producing a wide variety of products: cereals, food mixes, wines, rubber products, foundry items, recreational vehicle components, electronic substrates, plastic piping and injection molded products. In addition, a number of small businesses are located within the City. The main businesses in the City, however, are food processing and plastics. The largest employers in Lodi as of September 24, 2007 are as follows: Employer Lodi Unified School District Lodi Memorial Hospital Blue Shield Cottage Bakery City of Lodi General Mills Pacific Coast Producers Farmers & Merchants Bank Wal-Mart Valley Towing Target Dart Container CITY OF LODI LARGEST EMPLOYERS Business 2002 2003 2004 2005 2006 Employment 27,900 28,300 28,800 29,300 29,600 Unemployment 2,000 2,100 2,000 1,800 1,700 Civilian Labor Force 29,900 30,400 30,800 31,100 31,300 Unemployment Rate 6.6% 6.9% 6.5% 5.9% 5.5% State Unemployment Rate 6.7% 6.8% 6.2% 5.4% 4.9% Source: State of California, Employment Development Department. Major Employers There are several manufacturing plants in the community producing a wide variety of products: cereals, food mixes, wines, rubber products, foundry items, recreational vehicle components, electronic substrates, plastic piping and injection molded products. In addition, a number of small businesses are located within the City. The main businesses in the City, however, are food processing and plastics. The largest employers in Lodi as of September 24, 2007 are as follows: Employer Lodi Unified School District Lodi Memorial Hospital Blue Shield Cottage Bakery City of Lodi General Mills Pacific Coast Producers Farmers & Merchants Bank Wal-Mart Valley Towing Target Dart Container CITY OF LODI LARGEST EMPLOYERS Business Number of Emolovees Education 3,292 Health Care 1,320 Insurance Claims Processing 800 Baked Goods 700 Government 458 Cereals and Food Mixes 430 Fruit Canning 400-1,200 Banking 340 Retail 310 Trailer Hitch Manufacturing 234 Retail 200 Food Packaging Manufacturing 180 Source: City of Lodi, City Manager's Office, A-5 Building Permit Activity The following table shows the value of building permits issued in the City between 2002 and 2006. CITY OF LODI BUILDING PERMIT VALUATION (in thousands) for Calendar Years 2002 through 2006 Source: City of Lodi, Community Development Department Taxable Sales The following table indicates taxable transactions in the City by type of business during the fiscal years 2002-03 through 2006-07. The table does not reflect the allocation to the City of County- and State-wide sales taxes in fiscal years 2002-03 ($940,951), 2003-04 ($786,756), 2004-05 ($938,249), 2005-06 ($1,006,486) and 2006-07 ($1,037,937). CITY OF LODI TAXABLE TRANSACTIONS BY TYPE OF BUSINESS for Fiscal Years 2002-03 through 2006-07 (in Thousands of Dollars) Category 2002 2003 2004 2005 2006 Residential Valuation $13,298 $17,695 $17,551 $17.287 $17,691 Single Family $61,144 $54,351 $52,189 $81,449 $19,344 Multifamily 934 4q50 75,408 1497 0 TOTAL $62,077 $54,846 $52,189 $82,946 $19,344 New Dwelling Units 65,130 66,933 72,659 80,615 85,190 Single Family 305 274 255 371 96 Multiple Family -6 4 D 14 28,545 TOTAL 311 278 255 385 96 Source: City of Lodi, Community Development Department Taxable Sales The following table indicates taxable transactions in the City by type of business during the fiscal years 2002-03 through 2006-07. The table does not reflect the allocation to the City of County- and State-wide sales taxes in fiscal years 2002-03 ($940,951), 2003-04 ($786,756), 2004-05 ($938,249), 2005-06 ($1,006,486) and 2006-07 ($1,037,937). CITY OF LODI TAXABLE TRANSACTIONS BY TYPE OF BUSINESS for Fiscal Years 2002-03 through 2006-07 (in Thousands of Dollars) Category 2002-03 Fiscal Year 2003-2004 Fiscal Year 20042005 FiscalYear 2005-2006 Fiscal Year 2006-2007 FiscalYear Apparel Stores $13,298 $17,695 $17,551 $17.287 $17,691 Auto Dealers/Supplies 203,666 197,817 201,348 214,248 198,619 Building Materials 47,942 52,791 75,408 101,804 78.313 Drug Stores 16,105 15,165 14.088 14,076 14,419 Eating/Drinking Places 65,130 66,933 72,659 80,615 85,190 Food Stores 38,095 41,647 40,467 45,291 42,282 Fumiture/Appliances 26,907 27,503 27,797 29,866 28,545 General Merchandise 130,608 132.491 129,136 130,739 129,181 Other Retail Stores 44.552 45,558 48,411 51,280 55,137 Packaged Liquor 9,132 10,321 12,729 12,799 12,911 Service Stations Total Retail Outlets 651,204 663,099 704,257 771,427 743,126 All Other Outlets 1177,237 115.104 129.776 139,768 X462952 Total Sales All Outlets $768,442 $778,203 $834,033 $911,195 $906,078 Source: California State Board of Equalization A-6 Income The following table, based on data reported in the annual publication "Survey of Buying Power' published by Sales and Marketing Management, summarizes the median household effective buying income for the City, the County, the State and the nation for the years 2002 through 2006. The following table compares the median household effective buying income for the City, the County, the State and the nation. MEDIAN HOUSEHOLD EFFECTIVE BUYING INCOME Year City of Lodi County of San Joaquin State of California United States 2002 $35,315 $37,577 $42,484 $38,035 2003 35,577 37,988 42,924 38,201 2004 36,529 39,040 43,915 39,324 2005 37,288 39,956 44,681 40,529 2006 38,540 41,693 46,275 41,255 Source: Sales & Marketing Management Survey of Buying Power for 2002 through 2004; Claritas Demographics for 2005 & 2006. Agriculture Lodi is a worldwide agricultural shipping center for the San Joaquin Valley. The surrounding prime agricultural land is the nation's largest producer of premium wine grapes. Lodi businesses process and ship local produce ranging from grapes to cherries and asparagus. Community Facilities The City has a central library, one community center, 26 parks and five specific use facilities, covering 263 developed acres and 110 undeveloped acres, and 16 playgrounds. Lodi Lake Park is connected to the Mokelumne River and features boating, fishing, beach swimming, boat rentals, nature walks, group picnic sites, an RV park and the Discovery Nature Center. Micke Grove Park, a San Joaquin County park, is located between Lodi and Stockton. The park is home to a Japanese garden, the San Joaquin Historical Museum, rides, picnic areas and a five -acre zoo featuring mammals, birds, reptiles and invertebrates. Community recreation programs cover a wide range of interests and activities including youth and adult sports and special interest classes, youth -at -risk programs, aquatics, special events, camps/clinics and tournaments. Lodi Memorial Hospital offers a 181 -bed, nonprofit, independent, acute-care hospital to the residents of the City and surrounding community. Its mission is to provide quality medical care, education and support services to the community. Two hospital campuses and six satellite clinics are used to provide a variety of inpatient, outpatient, urgent, emergency and primary care A-7 services. The hospital broke ground in 2007 on a $200 million expansion and upgrade plan that will result in remodeled rooms and the addition of an 80 -bed wing. Housing The City of Lodi housing market offers a blend of older neighborhoods and newer executive developments. CITY OF LODI Median -Priced Home (For August of Year) 2003 $274,000 2004 326,000 2005 397,000 2006 480,000 2007 418,000 Source: Coldwell Banker Grupe-TrendGraphix Education The Lodi Unified School District provides K-12 and special education programs. The area also is served by several private and parochial schools. The University of the Pacific, San Joaquin Delta College, California State University, Stan islaus-Stockton campus, and the University of San Francisco satellite center are all within a 20 -minute drive of the city. The University of California, Davis and California State University, Sacramento, and the Universityof Southern California satellite center are within an hour's drive of the City. Additionally, San Joaquin Delta College is developing plans to build a satellite learning center that would be annexed into the city. The plans include a housing development. Transportation The City is served by Interstate 5 and State Highways 12 and 99 and is located on the main line of the Union Pacific Railroad. Lodi has Amtrak passenger rail service and local, regional and national bus service. A deep -water seaport and airport with commercial passenger travel are located approximately 15 miles south in Stockton. M. Estimated Direct and Overlapping Bonded Debt The estimated direct and overlapping bonded debt of the City as of November 1, 2007 is set forth below. CITY OF LODI ESTIMATED DIRECTAND OVERLAPPING BONDED DEBT as of November 1,2007 2007-08 Assessed Valuation: $5,159,270,328 OVERLAPPING TAX AND ASSESSMENT DEBT: San Joaquin Community College District Lodi Unified School District City of Lodi 1915 Act Bonds (Estimated) TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT DIRECT AND OVERLAPPING GENERAL FUND DEBT: San Joaquin County Certificatesof Participation Lodi Unified School District Certificates of Participation City of Lodi Certificates of Participation TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT COMBINED TOTAL DEBT % Awlicable (1) Debt 11/1/07 8.332% $ 5,894,566 35.678 37,290,646 100, 595,000 $43,780,212 9.178% $10,729,082 35.678 12,769,156 100. 23,420.000 (2) $46,918,238 (1) Based on 2006-07 ratios. (2) Excludes 2007 Certificates to be sold. Represents 2002 City of Financing Project Certificates of Participation. (3) Excludes tax and revenue anticipation notes, enterprise revenue, allocation bonds and non -bonded capital lease obligations. Ratios to Assessed Valuation: Combined Direct Debt ($23,420,000) ................0.45% Total Overlapping Tax and Assessment Debt....... 0.85% Combined Total Debt .............................................. 1.760/6 STATE SCHOOL BUILDINGAID REPAYABLEAS OF 6/30/07: $263 Source: California Municipal Statistics, Inc. Assessed Valuation and Tax Collections $90,698,450 (3) Lodi Public Improvement mortgage revenue and tax Taxes are levied for each fiscal Year on taxable real and personal property that is situated in the City as of the preceding March 1. For assessment and collection purposes, property is classified either as "secured" or "unsecured and is listed accordingly on separate parts of the assessment roll. The "secured roll' is that part of the assessment roll containing State -assessed property and real property having a tax lien that is sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll." Property taxes on the secured roll are due as of the March 1 lien date and become delinquent, if unpaid, on August 31. A 10%penalty attaches to the delinquenttaxes on property of the unsecured roll, and an additional penalty of 1.5% per month begins to accrue commencing on November 1 of the Fiscal year. Collections of delinquent unsecured taxes is the responsibilityof the County of San Joaquin using the several means legally available to it. CITY OF LODI ASSESSED VALUATIONS For Fiscal Years 2002 through 2006 (Inthousands) Fiscal Year Land Improvements Personal Property Total Less Exemptions NetAssessed Value 2001-2002 $889,.262 $2.164,121 $245,611 $3,298,994 $190,252 $3..'[M742 2002-2003 960,166 2,366,887 265,339 3,592,392 200,957 3,391,435 2003-2004 1,027,462 2,549,860 248.472 3,825,794 212,102 3,613,692 2004-2005 1,107,776 2,739,061 249,812 4,096,649 217,077 3,879,572 2005-2006 1,226,293 2,989,575 258,035 4,473,903 220,590 4,253,313 Source: City of Lodi audited financial statements. In 1993, the City made an agreement with San Joaquin County to participate the Teeter Plan pursuant to provisions of Sections 4701-4717 of the California Revenue and Taxation Code. The Teeter Plan is an alternative method of apportioning propertytax money. Pursuantto those sections the accounts of all political subdivisions that levy taxes on the County tax rolls are credited with 100% of their respective tax levies regardless of actually payments and delinquencies. The cities covered under the plan receive 95% of the property taxes in advance from the County and the 5% remaining after reconciling the cities' balances at June 30. As part of the agreement, the county keeps the penalties and interest on the delinquent taxes. Ten Largest Locally Secured Taxpayers The following table shows the ten largest locally secured taxpayers of the City for the Fiscal year ended June 30,2006. CITY OF LODI TEN LARGEST LOCALLY SECURED TAXPAYERS Fiscal Year Ended June 30,2006 TOTAL Source: San Joaquin County Assessor's Office. A-10 Assessed Name Valuation 1. General Mills, Inc. $152,102,000 2. Pacific Coast Producers 43,068,000 3. Pacific Coast Producers Corp. 34,267,000 4. Cottage Bakery Inc. 25,341,000 5. Kristmont West 21,961,000 6. Parineh's Exchange 2004 LLC 19,539,000 7. Certainteed Corp. 18,842,000 8. Dart Container Corp. 17,625,000 9. Fountains At Lodi LLC 13,031,000 10, Carl D. Panattoni, et al 12,984,000 TOTAL Source: San Joaquin County Assessor's Office. A-10 APPENDIX B EXCERPTS OF AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30,2006 B-1 APPENDIX C BOOK -ENTRY ONLY SYSTEM The following description of the Depository Trust Company ("DTC'), the procedures and record keeping with respect to beneficial ownership interests in the Certificates, payment of principal, interest and other payments on the Certificates to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Certificates and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be. Neither the issuer of the Certificates (the "Issuer") nor the trustee, fiscal agent or paying agent appointed with respect to the Certificates (the "Agent') take any responsibility for the information contained in this Appendix. No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Certificates, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Certificates, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Certificates, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to DTC are on file with the Securities and Exchange Commission and the current "Procedures" of DTC to be followed in dealing with DTC Participantsare on file with DTC. 1. The Depository Trust Company ("DTC), New York, NY, will act as securities depository for the securities (the "certificates"). The Certificates wi I I be issued as fully -registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully -registered certificate will be issued for the Certificates, in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount and an additional certificate will be issued with respect to any remaining principal amount of such issue. 2. DTC, the world's largest depository, is a limited -purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non -U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book -entry transfers and pledges between Direct Participants'accounts. This eliminates the need for physical movement of securities certificates, Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned C-1 subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non - U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. 3. Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Certificates, except in the event that use of the book -entry system for the Certificates is discontinued. 4. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participantsto Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. 6. Redemption notices shall be sent to DTC. If less than all of the Certificates within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. o-2 7. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & CO.'s consenting or voting rights to those Direct Participants to whose accounts the Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Redemption proceeds, distributions, and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from Issuer or 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 responsibilityof such Participant and not of DTC nor its nominee, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or 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 responsibilityof Direct and Indirect Participants. 9. DTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor securities depository is not obtained, security certificates are required to be printed and delivered. 10. Issuer may decide to discontinue use of the system of book -entry -only transfers through DTC (or a successor securities depository). In that event, security certificates will be printed and delivered to DTC. 11. The information in this section concerning DTC and DTC's book -entry system has been obtained from sources that Issuer believes to be reliable, but Issuertakes no responsibility for the accuracy thereof. c-3 APPENDIX D SUMMARY OF PRINCIPAL LEGAL DOCUMENTS D-1 APPENDIX E PROPOSED FORM OF CONTINUING DISCLOSURE CERTIFICATE E-1 APPENDIX F PROPOSED FORM OF OPINION OF SPECIAL COUNSEL Upon delivery of the Certificates, Orrick, Herrington & Sutcliffe LLP, Special Counsel to the City, proposes to render its final approving opinion with respect to the Certificates in substantially the following form: Date of Closing City of Lodi 221 West Pine Street Lodi, California 95240 Wastewater System Revenue Certificates of Participation, 2007 Series A (Final Opinion) Ladies and Gentlemen: We have acted as special counsel to the City of Lodi, California (the "City) in connection with the execution and delivery of the $ aggregate principal amount of Wastewater System Revenue Certificates of Participation, 2007 Series A (the "Certificates"). The Certificates evidence the proportionate interests of the owners thereof in certain payments (the "Installment Payments") to be made by the City under the terms of an Installment Purchase Agreement, dated as of December 1, 2007 (the "Agreement"), between the City and the Lodi Public Improvement Corporation (the "Corporation"). The Certificates have been executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2007 (the "Trust Agreement"), by and between the Corporation and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Trust Agreement. In such connection, we have reviewed the Trust Agreement, the Agreement, the Tax Certificate and Agreement relating to the Certificates (the "Tax Certificate"), opinions of counsel to the City, the Corporation and the Trustee, certificates of the City, the Corporation, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to renderthe opinions set forth herein. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this opinion is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Our engagement with respect to the Certificates has concluded with their execution and delivery, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the City. We have assumed, without F-1 undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Trust Agreement, the Agreement and the Tax Certificate, including, without limitation, covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause the interest components of the Installment Payments to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Certificates, the Trust Agreement, the Agreement and the Tax Certificate, and their enforceability, may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against cities in the State of California. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum, choice of venue, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the real or personal property described in or as subject to the lien of the Agreement or the Trust Agreement or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such property. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Certificates and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Agreement has been duly executed and delivered by, and constitutes the valid and binding obligation of, the City. 2. The obligation of the City to make the Installment Payments pursuant to the terms of the Agreement constitutes a valid and binding special obligation of the City, payable solely from the System Net Revenues of the City's Wastewater System, as provided in the Agreement. The general fund of the City is not liable for, and neither the faith and credit nor the taxing power of the City is pledged to, the payment of the Installment Payments. 3. Assuming due authorization, execution and delivery of the Trust Agreement and the Certificates by the Trustee, the Certificates are entitled to the benefits of the Trust Agreement. 4. The portion of each Installment Payment designated as and constituting interest paid by the City under the Agreement and received by the registered owners of the Certificates is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of California personal income taxes. The portion of each Installment Payment designated as and constituting interest paid by the City under the Agreement and received by the registered owners of the Certificates is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest with respect to, the Certificates. F-2 APPENDIX G SPECIMEN MUNICIPAL BOND INSURANCE POLICY G-1 APPENDIX H SPECIMEN MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICY G-1 TRUST AGREEMENT by and between LODI PUBLIC IMPROVEMENT CORPORATION and THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee Dated as of December 1,2007 Relating to Wastewater System Revenue Certificates of Participation, 2007 Series A OHS West:260306950.4 40490-8 OH&S Draft of November 2,2007 TRUST AGREEMENT THIS TRUST AGREEMENT, dated as of December 1, 2007 (the "Trust Agreement"), by and between the LODI PUBLIC IMPROVEMENT CORPORATION, a nonprofit, public benefit corporation duly organized and existing under and by virtue of the laws of the State of California (the "Corporation"), and THE BANK OF NEW YORK TRUST COMPANY, N.A., a national banking association duly organized and existing under and by virtue of the laws of the United States of America (the "Trustee"); WITNESSETH: WHEREAS, the Corporation is a nonprofit, public benefit corporation duly organized and existing under and pursuant to the laws of the State of California; and WHEREAS, the Corporation is authorized and empowered to assist the City of Lodi, a municipal corporation duly organized and existing under the laws of the State of California, in connection with the financing of additions, betterments, extensions, replacements and improvements to its System (capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms pursuant to Section 1.01 hereof); and WHEREAS, in order to provide for the acquisition by the City of the additions, betterments, extensions, replacements and improvements to the System constituting the Project, and in order to refinance the City's obligations to make installment payments under the 1991 Agreement in connection with the Existing Facilities and the 1991 Certificates, the City and the Corporation have entered into the Agreement; and WHEREAS, pursuant to the Agreement the City is to make certain Installment Payments to the Corporation; and WHEREAS, the City has determined that the consummation of the transactions contemplated by the Agreement is necessary and proper for City purposes and is for the common benefit of the City as a whole; and WHEREAS, the Installment Payments and all of the Corporation's rights and privileges under the Agreement (other than rights to indemnification and expenses) have been assigned and transferred by the Corporation to the Trustee pursuant to this Trust Agreement; and WHEREAS, in consideration of such assignment and the execution and entering into of this Trust Agreement, the Trustee has agreed to execute and deliver the Certificates, with each Certificate evidencing a proportionate ownership interest in the Installment Payments; and WHEREAS, the Corporation has determined that all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Trust Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the execution and delivery of this Trust Agreement have been in all respects duly authorized, OHS West:260306950.4 40490-8 NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants herein, and for other valuable consideration, the parties hereto do hereby covenant and agree, as follows: ARTICLE I DEFINITIONS; EQUAL SECURITY Section 1.01 Definitions. Unless the context otherwise requires, the terms defined in this section shall, for all purposes hereof and of any Supplemental Trust Agreement and of any certificate, opinion, request or other document herein or therein mentioned, have the meanings herein specified such definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein. "Agreement" means the Installment Purchase Agreement, dated as of December 1,2007, between the City and the Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance herewith. "Agreement Event of Default" means an event described in Section 8.1 of the Agreement. "Amendment" means a modification or supplement to the Agreement. "Annual Debt Service" means, for any Fiscal Year, the sum of (1) the interest accruing on all Parity Debt during such Fiscal Year, assuming that all such Parity Debt is retired as scheduled, plus (2) the principal amount (including principal due as sinking fund installment payments) allocable to all Parity Debt in such Fiscal Year, calculated as if such principal amounts were deemed to accrue daily during such Fiscal Year in equal amounts from, in each case, the immediately preceding payment date for such principal or, with respect to the initial principal payment date for such Parity Debt, the date of delivery of such Parity Debt (provided that principal shall not be deemed to accrue for greater than a 365 -day period prior to any principal payment date), as the case may be, to the next succeeding payment date for principal, provided, that the following adjustments shall be made to the foregoing amounts in the calculation of Annual Debt Service: (A) with respect to any Parity Debt bearing or comprising interest at other than a fixed interest rate, the rate of interest used to calculate Annual Debt Service shall be (i) with respect to such Parity Debt then outstanding, one hundred ten per cent (110%) of the greater of (1) the daily average interest rate on such Parity Debt during the twelve (12) calendar months next preceding the date of such calculation (or the portion of such twelve (12) calendar months that such Parity Debt has borne interest) or (2) the most recent effective interest rate on such Parity Debt prior to the date of such calculation or (ii) with respect to Parity Debt then proposed to be issued, the then current Municipal Market Data General Obligation Yield for a maturity comparable to the maturity of the applicable Parity Debt as published in The Bond Buyer (or if The Bond Buyer or such yield is no longer published, such other published similar index as shall be selected by the City); OHS West:260306950.4 40490-9 -2- (B) with respect to any issue or series of Parity Debt having twenty-five per cent (25116) or more of the aggregate principal amount thereof due in any one Fiscal Year, Annual Debt Service shall be calculated as if the interest on and principal of the Parity Debt of such issue or series were being paid in substantially equal annual amounts over the term of such Parity Debt; provided, however that the full amount of scheduled payments of interest and principal of such Parity Debt shall be included in Annual Debt Service if the date of calculation is within 24 months of the date on which such twenty-five percent (25%) or more of aggregate principal amount becomes due; (C) with respect to any Parity Debt or portions thereof bearing no interest but which are sold at a discount and which discount accretes with respect to such Parity Debt or portions thereof, such accreted discount shall be treated as due when scheduled to be paid; (D) Annual Debt Service shall not include interest on Parity Debt which is to be paid from amounts constituting capitalized interest; (E) if an interest rate swap agreement is in effect with respect to, and is payable on a parity with, any Parity Debt, no amounts payable under such interest rate swap agreement in addition to debt service payable with respect to such Parity Debt shall be included in the calculation of Annual Debt Service unless, in the applicable Fiscal Year, the sum of (i) the interest payable on such Parity Debt, plus (ii) the amounts payable by the City under such interest rate swap agreement, less (iii) the amounts receivable by the City under such interest rate swap agreement, is greater than the interest payable on such Parity Debt, in which case the net amount of payments to be made by the City under such interest rate swap agreement that exceed the interest to be paid on such Parity Debt shall be included in such calculation, and for this purpose, the variable amount under any such interest rate swap agreement shall be determined in accordance with the procedure set forth in subparagraph (A) of this definition; and (F) Repayment Obligations payable on a parity with Parity Debt shall be deemed to be payable at the scheduled amount due under such Repayment Obligation and for this purpose, the variable interest amount included in any such Repayment Obligation shall be determined in accordance with the procedure set forth in subparagraph (A) of this definition. "Authorized Denomination" means $5,000 or any integral multiple thereof. "Beneficial Owners" means those individuals, partnerships, corporations or other entities for whom the Direct Participants have caused DTC to hold Book -Entry Certificates. "Bond Counsel" means any attorney at law or firm of attorneys of nationally recognized standing in matters pertaining to the federal tax exemption of interest on obligations of states and political subdivisions, selected by the City and duly admitted to practice law before the highest court of any state of the United States of America. "Book -Entry Certificates" means the Certificates registered in the name of the nominee of DTC, or any successor securities depository for the Certificates, as the registered owner thereof pursuant to the terms and provisions of Section 2.14 hereof. OHS West:260306950.4 40490-s -3- "Business Day" means any day other than a Saturday, a Sunday or a day on which banks located in the city where the Corporate Trust Office is located, are required or authorized to remain closed. "Certificate Insurance Policy" means the financial guaranty insurance policy issued by the Certificate Insurer with respect to the Certificates. "Certificate Insurer" means Financial Security Assurance Inc., and its successors and assigns. "Certificate Insurer Expenses" means any and all charges, fees, costs and expenses which the Certificate Insurer may reasonably pay or incur in connection with (a) the administration, enforcement, defense or preservation of any rights or security hereunder, (b) the pursuit of any remedies hereunder or otherwise afforded by law or equity, (c) any amendment, waiver or other action with respect to, or related to, this Trust Agreement, whether or not executed or completed, (d) the violation by the City of any law, rule or regulation, or any judgment, order or decree applicable to it, or (e) any litigation or other dispute in connection with this Trust Agreement or the transactions contemplated hereby, other than amounts resulting from the failure of the Certificate Insurer to honor its obligations under the Certificate Insurance Policy. "Certificate of Completion" means a Certificate of the City certifying that all Costs of the Project to be paid from the Improvement Fund have been disbursed or reserved. "Certificate of the City" means an instrument in writing signed by the Mayor, the City Manager or the Director of Finance of the City, or by any other officer of the City duly authorized by the City for that purpose, such authorization to be evidenced by a certificate verifying the specimen signatures of such officers at the request of the Trustee. "Certificate of the Corporation" means an instrument in writing signed by the President of the Corporation or by any other officer of the Corporation duly authorized by the Corporation for that purpose. "Certificate Payment Date" means, with respect to each Certificate, the applicable date set forth in Section 2.02(x) hereof. "Certificate Register" means the books for the registration and transfer of the Certificates kept by the Trustee pursuant to Section 2.11 hereof. "Certificate Reserve Insurer" means Financial Security Assurance Inc., or any successor thereto or assignee thereof. "Certificates" means the City of Lodi Wastewater System Revenue Certificates of Participation, 2007 Series A, evidencing the proportionate interests of the owners thereof in the Installment Payments, executed and delivered by the Trustee pursuant to this Trust Agreement and then Outstanding under this Trust Agreement. "City" means the City of Lodi, a municipal corporation duly organized and existing under and by virtue of the laws of the State of California. OHS West:260306950.4 40490-9 -4- "City Administrative Costs" means those costs and expenses of the general administration of the City that are apportioned to the operation of the System such as: salaries and wages of employees that do not work primarily for the System, or for the System and the City's water system; the allocated overhead of the City; taxes and payments in lieu of taxes (if any) payable to the City; and insurance premiums for insurance not limited to the System or its operations, or the System and the City's water system or their operations (including payments required to be paid into any self-insurance funds not maintained from Revenues). "Code" means the Internal Revenue Code of 1986, as amended, and the regulations of the United States Department of the Treasury issued thereunder, and in this regard reference to any particular section of the Code shall include reference to all successors to such section of the Code. "Completion Date" means, with respect to each component of the Project, the date of completion of such component as evidenced by a Certificate of the City delivered pursuant to Section 3.4 of the Agreement. "Continuing Disclosure Certificate" means the Continuing Disclosure Certificate, dated December _, 2007, between the City and the Trustee with respect to the Certificates. "Corporate Trust Office" means, with respect to the Trustee: (i) the corporate trust office in Los Angeles, California; or (ii) such other office designated by the Trustee from time to time. "Corporation" means the Lodi Public Improvement Corporation, a nonprofit, public benefit corporation duly organized and existing under and by virtue of the laws of the State of California. "Cost" means, with respect to the Project, the costs, expenses and liabilities paid or incurred or to be paid or incurred by the City in connection with the planning, engineering, designing, acquiring, constructing, installing, and financing of the Project or any portion thereof, and the obtaining of all governmental approvals, certificates, permits and licenses with respect thereto, including, but not limited to, the cost of any demolitions or relocations necessary in connection therewith, any good faith or other similar payment or deposits, the cost of acquisition by or for the City of real and personal property or any interests therein, costs of physical construction and costs of the City incidental to such construction or acquisition, all costs relating to injury and damage claims, the costs of any indemnity or surety bonds and premiums on insurance, including obligations to a stock, mutual or reciprocal insurance company or exchange, preliminary investigation and development costs, engineering fees and expenses, contractors' fees and expenses, the costs of labor, materials, equipment and utility services and supplies, legal fees and expenses, administration and general overhead expenses and costs of keeping accounts and making reports required by the Agreement and this Trust Agreement prior to or in connection with the completion of construction, and all federal, state and local taxes and payments in lieu of taxes legally required to be paid in connection with the Project during the period of construction thereof and shall include reimbursements to the City for any of the above items theretofore paid by or on behalf of the City. It is intended that this definition of Cost be broadly construed to encompass all costs, expenses and liabilities of the City which are OHS West:260306950.4 40490-8 -5- chargeable to the capital accounts of the Project in accordance with generally accepted accounting principles. "Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the City or the Corporation and related to the authorization, execution and delivery of the Agreement, this Trust Agreement and the sale of the Certificates, including, but not limited to, costs of preparation and reproduction of documents, costs of rating agencies and costs to provide information required by rating agencies, filing and recording fees, initial fees and charges of the Trustee, legal fees and charges, fees and disbursements of consultants and professionals, fees and expenses of the underwriter, fees and charges for preparation, execution and safekeeping of the Certificates, fees of the Corporation and any other cost, charge or fee in connection with the original execution and delivery of the Certificates. "Costs of Issuance Fund" means the fund so designated established pursuant to Section 3.06 hereof. "Debt Service Fund" means the fund by that name established pursuant to Section 3.03 hereof. "Default Rate" means the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank or its successor, at its principal office in the City of New York, as its prime or base lending rate ("Prime Rate") plus 3 %, and (ii) the then applicable rate of interest on the Certificates and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Default Rate shall be computed on the basis of the actual number of days elapsed over a year of 3 60 days. In the event JPMorgan Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such national bank as the Certificate Insurer shall specify. "Defeasance Securities" mean the following: A. United States Treasury Certificates, Notes and Bonds (including State and Local Government Series). B. Direct obligations of the Treasury which have been stripped by the Treasury itself, CATS, TIGRS and similar securities. C. The interest component of Resolution Funding Corporation strips which have been stripped by request to the Federal Reserve Bank of New York in book entry form D. Pre -refunded municipal bonds rated "Aaa" by Moody's and "AAA" by S&P. If however, the pre -refunded municipal bond issue is only rated by S&P (i.e., there is no Moody's rating), then the pre -refunded bonds must have been pre -refunded with cash, direct United States or United States guaranteed obligations, or "A A A rated pre -refunded municipals to satisfy this condition. OHS West:260306950.4 40490-8 -6- E. Obligations issued by the following agencies which are backed by the full faith and credit of the United States: United States Exhort—Import Bank Direct obligations or fully guaranteed certificates of beneficial ownership 2. Farmers Home Administration ("FmHA") Certificates of beneficial ownership 3. Federal Financing Bank 4. General Services Administration Participation certificates 5. United States Maritime Administration Guaranteed Title XI financing 6. United States Department of Housing and Urban Development Project Notes Local Authority Bonds New Communities Debentures –United States government guaranteed debentures United States Public Housing Notes and Bonds –United States government guaranteed public housing notes and bonds. "Delivery Date" means 12007. "Direct Participants" means those broker-dealers, banks and other financial institutions from time to time for which DTC holds the Certificates as securities depository. "DTC" means The Depository Trust Company, New York, New York, a limited purpose trust company organized under the New York Banking Law, or any successor securities depositary for the Certificates. "Electronic Notice" means notice given by email or other electronic means which can be reduced to written form and the receipt of which is acknowledged by the receiving party. "Escrow Agreement" means that certain Escrow Deposit and Trust Agreement, dated as of 1, 2007, between the City and U.S. National Bank Association in connection with the prepayment of the 1991 Certificates. "Escrow Fund" means the fund so designated established pursuant to the Escrow Agreement. "Existing Facilities" means the additions, betterments, extensions, replacements and improvements to the System described in Exhibit A-2 to the Agreement. OHS West;260306950.4 40490-a -7' "Favorable Opinion of Bond Counsel" means, with respect to any action requiring such an opinion, an Opinion of Counsel from a Bond Counsel to the effect that such action, in and of itself, will not adversely affect the Tax-exempt status of interest evidenced by the Certificates. "Fiscal Year" means the period beginning on July 1 of each year and ending on the last day of June of the next succeeding year, or any other twelve month period selected and designated as the official Fiscal Year of the City. "Fitch" means Fitch Ratings, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors or assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the services of a municipal securities rating agency, then "Fitch" shall be deemed to refer to any other nationally recognized municipal securities rating agency rating Parity Obligations at the Request of the City. "Generally Accepted Accounting Principles" means the uniform accounting and reporting procedures set forth in publications of the American Institute of Certified Public Accountants or its successor, or by any other generally accepted authority on such procedures, and includes, as applicable, the standards set forth by the Governmental Accounting Standards Board or its successor. "Improvement F un d means the fund by that name established pursuant to Section 3.05 hereof. "Independent Certified Public Accountant" means any firm of certified public accountants appointed by the City, which is independent of the City and the Corporation pursuant to the Statement on Auditing Standards No. I of the American Institute of Certified Public Accountants. "Information Services" means Financial Information, Inc.'s "Daily Called Bond Service," 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302; Fitch "Called Bond Department," 5250 Center Drive, Suite 150, Charlotte, NC 28217; S&P "Called Bond Record," 55 Water Street, New York, New York 10041; or, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other services providing information with respect to called bonds as the City may designate in a Certificate of the City delivered to the Trustee. "Installment Payment Date" means the fifteenth day of the month prior to each Interest Payment Date, or if said date is not a Business Day, then the preceding Business Day. "Installment Payments" means the Installment Payments of interest and principal scheduled to be paid by the City pursuant to Section 4.2 of the Agreement. "Interest Account" means the account by that name in the Debt Service Fund established pursuant to Section 3.03 hereof. "Interest Payment Date" means April 1 and October 1 of each year commencing April 1, 11: OHS West:260306950.4 40490-8 -8- "Maximum Annual Debt Service" means, as of any date of calculation, the largest Annual Debt Service during the period from the date of such calculation through the final maturity date of all Parity Debt. "Moody's" means Moody's Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the services of a municipal securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized municipal securities rating agency selected by the City. "Net Proceeds" means, when used with respect to any casualty insurance or condemnation award, the proceeds from such insurance or condemnation award remaining after payment of all expenses (including attorneys' fees) incurred in the collection of such proceeds. "1991 Agreement" means the Installment Sale Agreement, dated as of December 1, 1991, between the Corporation and the City, as the same may be amended and supplemented. "1991 Certificates" means the Certificates of Participation (1991 Wasterwater Treatment Plant Expansion Refunding Project) evidencing interests in installment payments made by the City under the 1991 Agreement and outstanding on the date hereof. "Operation and Maintenance Costs" means the reasonable and necessary costs paid or incurred by the City for maintaining and operating the System, determined in accordance with Generally Accepted Accounting Principles, including all reasonable expenses of management and repair and all other expenses necessary to maintain and preserve the System in good repair and working order, including all other reasonable and necessary costs of the City or charges required to be paid by it to comply with the terms hereof or of any Supplemental Agreement or of any resolution authorizing the execution of any Parity Obligations, such as compensation, reimbursement and indemnification of the Trustee and the Corporation, fees and expenses of Independent Certified Public Accountants and deposits to the Rebate Fund; but excluding in all cases (i) payment of Parity Debt and Subordinate Obligations, (ii) costs of capital additions, replacements, betterments, extensions or improvements which under Generally Accepted Accounting Principles are chargeable to a capital account, (iii) depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles, (iv) City Administrative Costs, and (v) transfers from the System Revenue Fund to other funds or accounts of the City. "Opinion of Counsel" means a written opinion signed by an attorney or firm of attorneys selected by the City and duly admitted to practice law before the highest court of any state of the United States of America. "Outstanding," means when used as of any particular time with respect to the Certificates, means (subject to the provisions of Section 7.02 hereof) all Certificates theretofore executed and delivered by the Trustee under this Trust Agreement except: (1) Certificates theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; OHS Weg:260306950.4 40490-8 -9- (2) Certificates for the payment or prepayment of which funds or Defeasance Securities, together with interest earned thereon, in the necessary amount shall have theretofore been deposited with the Trustee (whether upon or prior to the maturity or prepayment date of such Certificates) pursuant to Article IX hereof, provided that, if such Certificates are to be prepaid prior to maturity, notice of such prepayment shall have been given as provided in Section 2.07 hereof or provision satisfactory to the Trustee shall have been made for the giving of such notice; and (3) Certificates in lieu of or in exchange for which other Certificates shall have been executed and delivered by the Trustee. "Owner" means any person who shall be the registered owner of any Certificate. "Parity Debt" means the Installment Payments and any Panty Obligations. "Parity Obligation Payments" means the payments scheduledto be paid by the City under and pursuant to the Parity Obligations, which payments are secured by a pledge of System Net Revenues on a parity with the Installment Payments as provided herein. "Parity Obligations" means all obligations of the City authorized and executed by the City, other than the Installment Payments, the Parity Obligation Payments under which are secured by a pledge of the System Net Revenues on a parity with the Installment Payments as provided herein, including but not limited to any Repayment Obligations secured by System Net Revenues on a parity with the Installment Payments. "Participating Underwriters" shall have the meaning ascribed thereto in the Continuing Disclosure Certificate. "Permitted Investments" mean any of the following obligations if and to the extent that they are permissible investments of funds of the City: A. Direct obligations of the United States (including obligations issued or held in book -entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States. B. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States (stripped securities are only permitted if they have been stripped by the agency itself): 1. Fanners Home Administration ("FmHA") Certificates of beneficial ownership 2. Federal Housing Administration Debentures ("FHA") 3. General Services Administration Participation certificates OHS west260306950.4 40490-8 -10- 4. Government National Mortgage Association ("GNMA") GNMA- guaranteed mortgage-backed bonds GNMA - guaranteed pass-through obligations (participation certificates) (not acceptable for certain cash -floor sensitive issues) 5. United States Maritime Administration Guaranteed Title XI financing 6. United States Department of Housing and Urban Development Project Notes Local Authority Bonds C. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non -full faith and credit United States government agencies (stripped securities are only permitted if they have been stripped by the agency itself): 1. Federal Home Loan Bank Svstem Senior debt obligations 2. Federal Home Loan Mortgage Corporation ("FHLMC") Participation Certificates Senior debt obligations 3. Federal National Mortgage Association ("FNMA") Mortgage-backed securities and senior debt obligations (excluded are stripped mortgage securities which are valued greater than par on the portion of unpaid principal) 4. Student Loan Marketing Association Senior debt obligations 5. Resolution FundingCorporation obligation (only the interest component of REFCORP strips which have been stripped by request to the Federal Reserve Bank of New York in book entry form are acceptable) 6. Farm Credit S, s� tem Consolidated system -wide bonds and notes D. Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of "AAAm-G," "AAA -m" or "AA -m" and if rated by Moody's rated "Aaa," "Aal" or "Aa2," including funds for which the Trustee or any of its affiliates (including any holding company, subsidiaries, or other affiliates) provides investment advisory or other management services, provided such funds satisfy the criteria herein contained. OHS West:260306950.4 40490-8 -11- E. Certificates of deposit secured at all times by collateral described in (A) and/or (B) above. Such certificates must be issued by commercial banks (including affiliates of the Trustee), savings and loan associations or mutual savings banks. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral. F. Certificates of deposit, savings accounts, deposit accounts or money market deposits (including those of the Trustee and its affiliates) which are fully insured by FDIC, including BIF and SAIF. G. Investment agreements, including guaranteed investment agreements, forward purchase agreements and Reserve Fund put agreements acceptable to the Certificate Insurer. H. Commercial paper rated, at the time of purchase, "Prime - I" by Moody's and "A-1" or better by S&P. I. Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies. J. Federal funds or bankers acceptances with a maximum term of one year of any bank (including those of the Trustee and its affiliates) which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" or "AY or better by Moody's and "A-1" or "A" or better by S&P. K. Repurchase Agreements for 30 days or less must follow the following criteria. Repurchase Agreements which exceed 30 days must be acceptable to the Certificate Insurer. Repurchase agreements provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to a municipal entity (buyer/lender), and the transfer of cash from a municipal entity to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the municipal entity in exchange for the securities at a specified date. 1. Repurchase agreements must be between the municipal entity and a dealer bank or securities firm a. Primary dealers on the Federal Reserve reporting dealer list which are rated "A" or better by S&P and Moody's, or b. Banks rated "A" or above by S&P and Moody's. 2. The written repurchase agreements contract must include the following: a. Securities which are acceptable for transfer are: (1) Direct United States governments, or OHS West:260306950.4 40490-8 -12- (2) Federal agencies backed by the full faith and credit of the United States government (and FNMA & FHLMC) b. The term of a repurchase ap-reement may be up to 30 days C. The collateral must be delivered to the municipal entity, trustee (if trustee is not supplying the collateral) or third party acting as agent for the trustee (if the trustee is supplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities). d. Valuation of Collateral (1) The securities must be valued weekly, marked -to - market at current market price plus accrued interest (a) The value of collateral must be equal to 104% of the amount of cash transferred by the municipal entity to the dealer bank or security firm under the repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by municipality, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. 3. A legal opinion must be delivered to the municipal entity to the effect that the repurchase agreement meets guidelines under state law for legal investment of public funds. L. Any state administered pool investment fund in which the City is statutorily permitted or required to invest will be deemed a permitted investment, including, but not limited to the Local Agency Investment Fund in the treasury of the State. "Person" means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivisionthereof. "Pledge Law" mean Section 5451 of the Government Code of the State of California and all laws amendatory thereof or supplemental thereto. OHS West:260306950.4 40490-8 -13- "Policy Costs" means repayment of draws under the Reserve Policy, plus all related reasonable expenses incurred by the Certificate Reserve Insurer, plus interest thereon at the Reserve Policy Rate. "Prepayment Account" means the account by that name in the Debt Service Fund established pursuant to Section 3.03 hereof. "Principal Account" means the account by that name in the Debt Service Fund established pursuant to Section 3.03 hereof. "Prior Agreements" mean the 2003 Prior Agreement and the 2004 Prior Agreement. "Project" means the additions, betterments, extensions, replacements and improvements to the System described or provided for in Exhibit A-1 to the Agreement. "Purchase Price" means the principal components of the Installment Payments plus interest on the unpaid portion of such principal components owed by the City to the Corporation under the terms of the Agreement as provided in Section 4.1 of the Agreement. "Rate Stabilization F u n d means the fund by that name referred to in Section 5.4 of the Agreement. "Rating Agencies" mean S&P and Fitch, and their respective successors or assigns, or any other nationally recognized securities rating agency or agencies rating the Certificates or any outstanding Parity Obligations at the request of the City. "Rebate Fund" means the fund by that name established pursuant to Section 3.07 of this Trust Agreement and provided for in Section 6.17 of the Agreement. "Record Date" means the fifteenth day of the month prior to an Interest Payment Date whether or not a Business Day. "Repayment Obligation" means the reimbursement obligation or any other payment obligation of the City under a written agreement between the City and a credit provider to reimburse the credit provider for amounts paid pursuant to a credit facility for the payment of the principal amount or purchase price of and/or interest on any Pity Debt. "Representation Letter" means the letter of representation to The Depository Trust Company, New York, New York, from the City. "Reserve Fund" means the fund by that name established pursuant to Section 3.04 hereof. "Reserve Fund Requirement" means with respect to the Certificates, as of any date of determination, the least of (a) ten percent (10%) of the initial offering price to the public of the Certificates as determined under the Code, or (b) the greatest annual debt service with respect to the Installment Payments in any Fiscal Year during the period commencing with the Fiscal Year in which the determination is being made and terminating with the last Fiscal Year in which any OHS Wmt:260306950.4 40490-8 -14- Installment Payment is due, or (c) one hundred twenty-five percent (125%) of the sum of the annual debt service with respect to the Installment Payments for all Fiscal Years during the period commencing with the Fiscal Year in which such calculation is made (or if appropriate, the first full Fiscal Year following the execution and delivery of the Certificates) and terminating with the last Fiscal Year in which any Installment Payment is due, divided by the number of such Fiscal Years, all as computed and determined by the City and specified in writing to the Trustee; provided, that such requirement (or any portion thereof) may be provided by a Reserve Policy. "Reserve Policy" means the Municipal Bond Debt Service Reserve Insurance Policy issued by the Reserve Insurer. "Reserve Policy Rate" means the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, as its prime or base lending rate ("Prime Rate") (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Certificates, and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Reserve Policy Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such national bank as the Certificate Reserve Insurer shall specify. "S&P" means Standard &. Poor's Ratings Service, a corporation duly organized and existing under and by virtue of the laws of the State of New York, and its successors or assigns, except that if such entity shall be dissolved or liquidated or shall no longer perform the services of a municipal securities rating agency, then "W" shall be deemed to refer to any other nationally recognized municipal securities rating agency rating Parity Obligations at the Request of the City. "Securities Depositaries" mean: The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax (516) 227-4039 or 4190; or, in accordance with then -current guidelines of the Securities and Exchange Commission, such other securities depositaries as the Corporation may designate in a Certificate of the Corporation to the Trustee. "State" means the State of California. "Subordinate Obligations" means the obligations of the City that are payable from System Net Revenues on a basis that is subordinate to the payment of Parity Debt. "Supplemental Trust Agreement" means any trust agreement then in full force and effect which has been duly executed and delivered by the Corporation and the Trustee amendatory hereof or supplemental hereto; but only if and to the extent that such Supplemental Trust Agreement is specifically authorized hereunder. "System" means the whole and each and every part of the system of the City for the collection, treatment and disposal of wastewater, including the portion thereof existing on the date hereof, and including all additions, betterments, extensions and improvements to such system or any part thereof hereafter acquired or constructed. OHS West:260306950.4 40490-8 - 1S- "System Net Revenues" means for any period System Revenues less Operation and Maintenance Costs for such period; provided that certain adjustments in the amount of System Net Revenue for a Fiscal Year may be made in connection with amounts deposited in and transferred from the Rate Stabilization Fund as provided in Section 5.4 of the Agreement. "System Revenue Fund" means the fund by that name referred to in Section 5.2 of the Agreement. "System Revenues" means all gross income and revenue received or receivable by the City from the ownership or operation of the System, determined in accordance with Generally Accepted Accounting Principles, including all fees (including connection fees), rates, charges and all amounts paid under any contracts received by or owed to the City in connection with the operation of the System and all proceeds of insurance relating to the System and investment income allocable to the System and all other income and revenue howsoever derived by the City from the ownership or operation of the System or arising from the System. System Revenues for any Fiscal Year shall include, for the purposes permitted by the Agreement, amounts transferred to the System Revenue Fund from the Rate Stabilization Fund during such Fiscal Year. "Tax Certificate" means the Tax Certificate and Agreement, dated the date of the original execution and delivery of the Certificates, with respect to the requirements of certain provisions of the Code, as such certificate may from time to time be modified or supplemented in accordance with the terms thereof, including all exhibits attached thereto. "Tax-exempt" means, with respect to interest on any obligations of a state or local government, including the Interest Installments evidencedby the Certificates, that such interest is excluded from gross income for federal income tax purposes (other than in the case of a holder of any such obligation who is a substantial user of the facilities financed with such obligations or a related person within the meaning of Section 147(a) of the Code) whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for purposes of calculating tax liabilities, including any alternative minimum tax or environmental tax, under the Code. "Trust Agreement" means this Trust Agreement, as originally executed and as it may from time to time be amended or supplemented in accordance with its terms. "Trustee" means The Bank of New York Trust Company, N.A., acting in its capacity as trustee under and pursuant to this Trust Agreement, and its successors and assigns. "Trust Event of Default" means, with respect to this Trust Agreement, an event described in Section 8.01 hereof. "2004 Prior Agreement" means the Installment Purchase Agreement, dated as of May 1, 2004, between the City and the Corporation, as the same may be amended and supplemented. "2003 Prior Agreement" means the Installment Purchase Agreement, dated as of October 1, 2003, between the City and the California Statewide Communities Development Authority, as the same may be amended and supplemented. OHS West:260306950.4 40490-8 -16- "Written Request of the City" means an instrument in writing signed by the Mayor, the City Manager or the Finance Director of the City or their designee, or by any other officer of the City duly authorized by the City for that purpose, such authorization to be evidenced at the request of the Trustee by a certificate verifying the specimen signatures of such officers. "Written Request of the Corporation" means an instrument in writing signed by the President of the Corporation or by any other officer of the Corporation duly authorized by the Corporation for that purpose. Section 1.02 Rules of Construction. The headings or titles of the several articles and sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof. All references herein to "articles," "sections" and other subdivisions or clauses are to the corresponding articles, sections, subdivisions or clauses hereof; and the words "hereby," "herein," "hereof," "hereto," "herewith," "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular article, section, subdivision or clause hereof. References in this Trust Agreement and the Agreement to the principal or principal amount of Certificates shall refer to the principal component of the Installment Payments as to which such Certificates evidences a proportionate ownership interest. References in this Trust Agreement and the Agreement to interest on Certificates or interest borne by Certificates shall refer to the interest component of the Installment Payments on the principal component of the Installment Payments as to which such Certificates evidence proportionate ownership interests. Section 1.03 Egual Security. In consideration of the acceptance of the Certificates by the Owners thereof, this Trust Agreement shall be deemed to be and shall constitute a contract between the Corporation and the Owners from time to time of all Certificates authorized, executed and delivered hereunder and then Outstanding to secure the full and final payment of the interest, and principal and prepayment premiums, if any, evidenced by the Certificates which may from time to time be authorized, executed and delivered hereunder, subject to the agreements, conditions, covenants and provisions contained herein; and all agreements and covenants set forth herein to be performed by or on behalf of the Trustee shall be for the equal and proportionate benefit, protection and security of all Owners without distinction, preference or priority as to security or otherwise of any Certificates over any other Certificates by reason of the number or date thereof or the time of authorization, execution or delivery thereof or for any cause whatsoever, except as expressly provided herein or therein. ARTICLE II THE CERTIFICATES Section 2.01 The Certificates. (a) The Trustee is hereby authorized and directed to execute and deliver the Certificates in the aggregate principal amount of $ evidencing proportionate ownership interests in the Installment Payments. The Certificates shall be designated "City of Lodi Wastewater System Revenue Certificates of Participation, 2007 Series A". Section 2.02 General Terms of the Certificates. (a) Each Certificate shall be dated the Delivery Date, and shall mature (subject to prior prepayment and acceleration) on its Certificate OHS West:260306950.4 40490-8 -17- Payment Date. The Certificates shall have Certificate Payment Dates on the dates and in the principal amounts (evidencing principal components of the Installment Payments coming due on the Installment Payment Date immediately preceding each such Certificate Payment Date) and shall bear interest (evidencing the interest components of the Installment Payments with respect to the related principal components of Installment Payments and based on a 360 -day year consisting of twelve 30 -day months) as set forth in the following schedule: Certificate Payment Date Principal Interest (October 1) Amount Rate (b) The Certificates shall evidence interest with respect to the related principal components of the Installment Payments from the Interest Payment Date next preceding the date of execution thereof, unless such date of execution is after a Record Date and on or before the following Interest Payment Date, in which event they shall evidence interest from such following Interest Payment Date, or unless such date of execution is on or before the Record Date for the first Interest Payment Date for the Certificates, in which event such Certificate shall evidence interest from the Delivery Date; provided, that if at the time of execution of any Outstanding Certificate, interest evidenced by such Certificate is then in default, such Certificate shall evidence interest from the Interest Payment Date to which interest has previously been paid or made available for payment with respect to the Certificate. (c) The Certificates shall be delivered only in Authorized Denominations. The Certificates shall be issued in substantially the form set forth in Exhibit A of this Trust Agreement with such variations, insertions or omissions for the Certificates as are appropriate and not inconsistent therewith and shall conform generally to the rules and regulations of any OHS West:260306950.4 40490-8 -� $- governmental authority or usage or requirement of law with respect thereto. The Certificates shall be numbered from one upward and may bear such additional letters, numbers, legends or designations as the Trustee determines are desirable. The Certificates may be printed, lithographed or typewritten. (d) The principal of and premium, if any, and interest evidenced by the Certificates shall be payable in lawful money of the United States of America. Payment of interest on each Certificate shall be made on each Interest Payment Date to the Person appearing on the Certificate Register as the Owner thereof on the applicable Record Date, such interest to be paid by the Trustee (i) to such Owner by check mailed by first class mail on the Interest Payment Date, to such Owner's address as it appears on the Certificate Register or at such other address as has been furnished to the Trustee in writing by such Owner not later than the applicable Record Date, or (ii) upon written request at least three Business Days prior to the applicable Record Date, to the Owner of Certificates aggregating not less than $1,000,000 in principal amount, by wire transfer in immediately available funds to an account maintained in the United States as such Owner shall specify in its written notice; except, in each case, that if and to the extent that there shall be a default in the payment of the interest due on such Interest Payment Date, such defaulted interest shall be paid to the Owners in whose name the Certificates are registered at the close of business on the fifth Business Day next preceding the date of payment of such defaulted interest. The principal of and premium, if any, on the Certificates shall be payable by check of the Trustee upon surrender thereof at the Corporate Trust Office of the Trustee. (e) The Certificates shall be subject to optional prepayment as provided in Section 2.04 hereof. Section 2.03 Procedure for the Delivery of Certificates. The Trustee is hereby authorized to execute and deliver the Certificates to the purchaser thereof upon the Written Request of the Corporation and upon receipt of the proceeds of the sale thereof to be wired to the Trustee and receipt of the Certificate Insurance Policy, a Certificate of the City stating that: (i) the conditions of Section 4.08(b) of the 1991 Agreement to the Installment Payments constituting Parity Debt (as defined in the 1991 Agreement) are satisfied; (ii) the conditions of Section 5.3 of the 2003 Prior Agreement to the Installment Payments constituting Parity Debt (as defined in the 2003 Prior Agreement) are satisfied; and (iii) the conditions of Section 5.3 of the 2004 Prior Agreement to the Installment Payments constituting Parity Debt (as defined in the 2004 Prior Agreement) are satisfied. Upon receipt of the proceeds of the sale of the Certificates from the purchaser thereof in the amount of $ (representing the aggregate principal amount of the Certificates of $ [plus a net original issue premium of $1, less an Underwriter's discount of $ , less $ as the premium for the Certificate Insurance Policy to be wired by such purchaser to the Certificate Insurer), the Trustee shall set aside and deposit such proceeds in the following respective accounts or funds: (a) The Trustee shall deposit the sum of $ in the Costs of Issuance Fund; (b) The Trustee shall deposit the sum of $ in the Escrow Fund; OHS West:260306950.4 40490-8 -19- (c) The Trustee shall deposit the sum of $ in the Reserve Fund, which sum is sufficient to satisfy the Reserve Fund requirement; and (d) The Trustee shall deposit the balance of such proceeds in the Improvement Fund. Section 2.04 Optional Prepayment. Oytional Prepavment. [To be con firmed] The Certificates maturing on and prior to October 1, are not subject to optional prepayment prior to their stated maturity dates. The Certificates maturing on and after October 1, are subject to optional prepayment prior to their stated maturity dates on any date on and after October 1, , as a whole or in part, at the option of the City, from any source of available funds at a prepayment price equal to the principal amount of the Certificates or portions thereof to be prepaid plus unpaid accrued interest thereon to the date fixed for prepayment, without premium. Section 2.05 Mandatory Sinking Fund Prepayment. (a) The Certificates maturing on October 1, , are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1, thereafter to and including October 1, , from scheduled Installment Payments made by the City on such dates at a prepayment price equal to the principal amount of the Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment according to the following schedule: Prepayment Date Principal (October 1) Amount Maturity The amount of each such prepayment shall be reduced as provided in the Agreement in the event and to the extent of any and all optional prepayments, or purchases for retirement, of Certificates maturing on October 1, other than prepayments made pursuant to the preceding paragraph. The Certificates maturing on October 1, are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1 thereafter to and including October 1, , from scheduled Installment Payments made by the City on such dates, at a prepayment price equal to the principal amount of the Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment, according to the following schedule: OHS West:260306950.4 40490-8 -20- Prepayment Date Principal (October 1) Amount S Maturity The amount of each such prepayment shall be reduced as provided in the Agreement in the event and to the extent of any and all optional prepayments, or purchases for retirement, of Certificates maturing on October 1, , other than prepayments made pursuant to the preceding paragraph. Section 2.06 Selection of Certificates for Prepayment. If less than all Outstanding Certificates with the same Certificate Payment Date are to be prepaid at any one time, the Trustee shall select the Certificates or the portions of the Certificates and Certificate Payment Date to be prepaid by lot in a manner which the Trustee deems to be fair. For purposes of selecting Certificates to be prepaid, Certificates with the same Certificate Payment Date shall be deemed to be composed of five thousand dollars ($5,000) multiples and any such multiple of principal amount as may be separately prepaid, subject to the requirement that the unpaid balance of any Certificate prepaid in part must be in an Authorized Denomination. Section 2.07 Notice of Prepayment. Notice of prepayment of Certificates shall be mailed by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the prepayment date to (i) the respective Dowers of the Certificates designated for prepayment at their addresses appearing in the Certificate Register, (ii) the Securities Depositories and (iii) one or more Information Services. Notice of prepayment to the Securities Depositories and the Information Services shall be given by registered mail, certified mail, overnight delivery or facsimile transmission or by such other method acceptable to such institutions. Each notice of prepayment shall state the date of such notice, the prepayment price, the place of prepayment (including the name and appropriate address of the Trustee), the CUSIP number (if any) of the Certificates to be prepaid, and, if less than all of the Certificates of any one maturity are to be prepaid, the distinctive certificate numbers of the Certificates of such maturity to be prepaid and, in the case of Certificates to be prepaid in part only, the respective portions of the principal amount thereof to be prepaid. Each such notice shall also state that on said date there will become due and payable on each of said Certificates the prepayment price thereof and in the case of a Certificate to be prepaid in part only, the specified portion of the principal amount thereof to be prepaid, with accrued and unpaid interest thereof to the prepayment date, and that from and after such prepayment date interest thereon shall cease to accrue, and shall require that such Certificates be then surrendered at the address of the Trustee specified in the prepayment notice. Failure to receive such notice shall OHS Wmt:260306950.4 40490-8 -21- not invalidate any of the proceedings taken in connection with such prepayment. The failure to receive such notice nor any defect therein shall affect the sufficiency of such prepayment. In the event of prepayment of Certificates with optional prepayments of Installment Payments pursuant to Section3.02 of the Agreement, the Trustee shall mail a notice of prepayment upon receipt of a Written Request of the City but only after the City shall file a Certificate of the City with the Trustee that on or before the date set for prepayment, the City will deposit with or otherwise make available to the Trustee for deposit in the Debt Service Fund the money required for payment of the prepayment price, including accrued interest thereon, of all Certificates then to be called for prepayment (or the Trustee determines that money will be deposited with or otherwise made available to it in sufficient time for such purpose), together with the estimated expense of giving such notice. If notice of prepayment has been duly given as aforesaid and money for the payment of the prepayment price of the Certificates called for prepayment is held by the Trustee, then on the prepayment date designated in such notice the Certificates (or portions thereof) so called for prepayment shall become due and payable, and from and after the prepayment date so designated interest on such Certificates shall cease to accrue, such Certificates (or portions thereof) shall cease to be entitled to any benefit or security under this Trust Agreement and the Owners of such Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof from the moneys held by the Trustee for such purpose, and such moneys are hereby pledged to such payment. All Certificates prepaid pursuant to the provisions of this Section shall be cancelled and destroyed by the Trustee and shall not be redelivered. Section 2.08 Execution of certificates. The Certificates shall be executed by the Trustee by the manual signature of an authorized officer or signatory of the Trustee. Section 2.09 Transfer and Payment of Certificates. Any Certificate may, in accordance with its terms, be transferred in the Certificate Register by the Person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Certificates at the Corporate Trust Office of the Trustee for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee. Whenever any Certificate or Certificates shall be surrendered for transfer, the Trustee shall execute and deliver to the transferee a new Certificate or Certificates of the same Certificate Payment Date evidencing and representing a like aggregate principal amount in authorized denominations. The Trustee shall require the payment by the Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer as a condition precedent to the exercise of such privilege. Services rendered and reasonable expenses incurred by the Trustee, including the cost of printing any new Certificate, in connection with a transfer pursuant to this Section shall be paid by the City. The Trustee may deem and treat the registered owner of any Certificates as the absolute owner of such Certificates for the purpose of receiving payment of the principal and interest and prepayment premium, if any, evidenced thereby and for all other purposes, whether such Certificates shall be overdue or not, and the Trustee shall not be affected by any notice or knowledge to the contrary; and payment of the interest and principal and prepayment premium, OHS West260306950.4 40490-8 -22- if any, evidenced by such Certificates shall be made only to such registered owner, which payments shall be valid and effectual to satisfy and discharge liability on such Certificates to the extent of the sum or sums so paid. The Trustee shall not be required to register the transfer of any Certificate during the period commencing on the date 15 days preceding the selection of certificates for prepayment and ending on the date of mailing of notice of such prepayment, or any Certificate which has been selected for prepayment in whole or in part, from and after the day of mailing of a notice of prepayment of such Certificates selected for prepayment in whole or in part. Section 2.10 Exchange of Certificates. Certificates may be exchanged at the Corporate Trust Office. of the Trustee for Certificates evidencing and representing a like aggregate principal amount of Certificates of the same Certificate Payment Date of other Authorized Denominations. The Trustee shall require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange as a condition precedent to the exercise of such privilege. Services rendered and reasonable expenses incurred by the Trustee, including the cost of printing any new Certificate, in connection with an exchange pursuant to this Section shall be paid by the City. The Trustee shall not be required to exchange any Certificate during the period commencing on the date 15 days preceding the selection of Certificates for prepayment and ending on the date of mailing of notice of such prepayment, or any Certificate which has been selected for prepayment in whole or in part, from and after the day of mailing of a notice of prepayment of such Certificatesto the date of prepayment thereof. Section 2.11 Certificate Registration Books. The Trustee will keep at its Corporate Trust Office sufficient books for the registration and transfer of the Certificates which shall at all times be open to inspection by the Corporation during regular business hours with reasonable prior notice, and upon presentation for such purpose the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer the Certificates in such books as hereinabove provided. Section 2.12 Mutilated. Destroyed. Stolen or Lost Certificates. If any Certificate shall become mutilated the Trustee, at the expense of the Owner, shall thereupon execute and deliver a new Certificate of like tenor and amount in exchange and substitution for the Certificate so mutilated, but only upon surrender to the Trustee of the Certificate so mutilated. Every mutilated Certificate so surrendered to the Trustee shall be cancelled and destroyed. If any Certificate shall be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence be satisfactory to the Trustee and indemnity satisfactory to the Trustee shall be given, the Trustee, at the expense of the Owner, shall thereupon execute and deliver a new Certificate of like tenor in lieu of and in substitution for the Certificate so lost, destroyed or stolen. The Trustee may require payment of a reasonable sum for each new Certificate delivered under this Section and of the expenses which may be incurred by the Corporation and the Trustee in the premises. Any Certificate executed and delivered under the provisions of this Section in lieu of any Certificate alleged to be lost, destroyed or stolen shall be equally and proportionately OHS West:260306950.4 40490-8 -23- entitled to the benefits of this Trust Agreement with all other Certificates secured by this Trust Agreement. The Trustee shall not be required to treat both the original Certificate and any replacement Certificate as being Outstanding for the purpose of determining the principal amount of Certificates which may be executed and delivered hereunder or for the purpose of determining any percentage of Certificates Outstanding hereunder, but both the original and replacement Certificate shall be treated as one and the same. Section 2.13 Temporary Certificates. The Certificates executed and delivered under this Trust Agreement may be initially executed and delivered in temporary form exchangeable for definitive Certificates when ready for delivery. The temporary Certificates may be printed, lithographed or typewritten, shall be of such denominations as may be determined by the Trustee, shall be in fully registered form and may contain such reference to any of the provisions of this Trust Agreement as may be appropriate. Every temporary Certificate shall be executed and delivered by the Trustee, upon the same conditions and terms and in substantially the same manner as definitive Certificates. If the Trustee executes and delivers temporary Certificates it will execute and furnish definitive Certificates and thereupon the temporary Certificates may be surrendered, for cancellation, in exchange therefor at the Corporate Trust Office of the Trustee, and the Trustee shall deliver in exchange for such temporary Certificates definitive Certificates evidencing and representing an equal aggregate principal amount of Certificates of authorized denominations. Until so exchanged, the temporary Certificates shall be entitled to the same benefits under this Trust Agreement as definitive Certificates delivered hereunder. Section 2.14 Use of Book -Entry System for Certificates. (a) The Certificates initially shall be delivered in the form of a single executed fully registered securities certificate for each stated Certificate Payment Date, in the aggregate principal amount of the Certificates of such Certificate Payment Date. Upon initial delivery, the ownership of all such Certificates shall be registered in the registration records maintained by the Trustee pursuant to Section 2.11 hereof in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"), or such other nominee as DTC shall request pursuant to the Representation Letter. The Trustee may treat DTC (or its nominee) as the sole and exclusive owner of the Certificates registered in its name for the purposes of payment of the principal amount or prepayment price and interest on such Certificates, selecting the Certificates or portions thereof to be prepaid, giving any notice permitted or required to be given to Owners hereunder, registering the transfer of Certificates, obtaining any consent or other action to be taken by Owners of the Certificates and for all other purposes whatsoever; and the Trustee shall not be affected by any notice to the contrary. Neither the Trustee nor the Corporation shall have any responsibility or obligation to any Participant (which shall mean, for purposes of this Section, securities brokers and dealers, banks, trust companies, clearing corporations and other entities, some of whom directly or indirectly own DTC), any person claiming a beneficial ownership interest in the Certificates under or through DTC or any Participant, or any other person which is not shown on the registration records as being an Owner of Certificates, with respect to (i) the accuracy of any records maintained by DTC or any Participant, (ii) the payment by DTC or any Participant of any amount in respect of the principal amount or prepayment price of or interest evidenced by the Certificates (iii) any notice which is permitted or required to be given to Owners of Certificates hereunder, (iv) the selection by DTC or any Participant of any person to receive payment in the event of a partial prepayment of the Certificates, or (v) any consent given or other action taken by DTC as Owner of Certificates. OHS West260306950.4 40490-8 -24- The Trustee shall pay all principal amount and prepayment price of and interest evidenced by the Certificates only at the times, to the accounts, at the addresses and otherwise in accordance with the Representation Letter, and all such payments shall be valid and effective to satisfy fully and discharge the principal amount and prepayment price of and interest evidenced by the Certificates to the extent of the sum or sums so paid. Upon delivery by DTC to the Trustee of written notice to the effect that DTC has determined to substitute a new nominee in place of its then existing nominee, the Certificates will be transferable to such new nominee in accordance with subsection (c) of this Section. (b) In the event that the Corporation determines that the beneficial owners of the Certificates should obtain securities certificates, the Trustee shall, upon the written instruction of the Corporation, so notify DTC, whereupon DTC shall notify the Participants of the availability through DTC of securities certificates. In such event, the Certificates will be transferable in accordance with subsection (c) of this Section. DTC may determine to discontinue providing its services with respect to the Certificates at any time by giving written notice of such discontinuance to the Corporation and the Trustee and discharging its responsibilities with respect thereto under applicable law. In such event, the Certificates will be transferable in accordance with subsection (c) of this Section. Whenever DTC requests the Corporation and the Trustee to do so, the Trustee and the Corporation will cooperate with DTC in taking appropriate action after reasonable notice to arrange for another securities depository to maintain custody of all certificates evidencing the Certificates then Outstanding. In such event, the Certificates will be transferable to such securities depository in accordance with subsection (c) of this Section, and thereafter, all references in this Trust Agreement to DTC or its nominee shall be deemed to refer to such successor securities depository and its nominee, as appropriate. (c) In the event that any transfer or exchange of Certificates is authorized under subsection (a) or (b) of this Section, such transfer or exchange shall be accomplished upon receipt by the Trustee from the registered owner of the Certificates to be transferred or exchanged and appropriate instruments of transfer to the permitted transferee, all in accordance with the applicable provisions of Sections 2.08 and 2.09 hereof. In the event Certificates are delivered to Owners other than Cede & Co., its successor as nominee for DTC as Owner of all the Certificates, another securities depository as Owner of all the Certificates, or the nominee of such successor securities depository, the provisions of Sections 2.08 and 2.09 hereof shall also apply to, among other things, the registration, exchange and transfer of the Certificates and the method of payment of principal amount or prepayment price of and Interest Installments evidenced by the Certificates. ARTICLE III FUNDS AND ACCOUNTS Section 3.01 Installment Payments Held in Trust. The Installment Payments and any Additional Payments to be deposited in the Revenue Fund shall be held in trust by the Trustee for the benefit of the Owners from time to time of the Certificates, but shall nonetheless be disbursed, allocated and applied solely for the uses and purposes provided herein. OHS West:260306950.4 40490-8 -25- Section 3.02 Deposit of Installment Payments. The Trustee hereby agrees to establish, maintain and hold in trust the "City of Lodi Wastewater System Revenue Certificates of Participation, 2007 Series A Debt Service Fund" (the "Debt Service Fund") for so long as any Certificates shall be Outstanding hereunder. All Installment Payments, including any prepayments thereof pursuant to Section 7.1 of the Agreement, received by the Trustee shall be immediately deposited in the Debt Service Fund and shall be disbursed and applied only as hereinafter provided. Section 3.03 Establishment and Maintenance of Accounts in the Debt Service Fund. Subject to the provisions of Section 5.03, all money in the Debt Service Fund shall be set aside by the Trustee in the following respective special accounts within the Debt Service Fund (each of which is hereby created and each of which the Trustee hereby agrees and covenants to maintain) in the following order of priority: (a) Interest Account, (b) Principal Account, and (c) Prepayment Account All money in each of such accounts shall be held in trust by the Trustee for the benefit of the Owners and shall be applied, used and withdrawn only for the purposes hereinafter authorized in this Section. (d) Interest Account. On each Interest Payment Date, commencing on April 1, 2008, and on each other date when interest evidenced by the Certificates becomes due and payable, whether upon prepayment, acceleration or otherwise, the Trustee shall set aside from the Debt Service Fund and deposit in the Interest Account that amount of money which is equal to the amount of interest evidenced by the Certificates becoming due and payable on such Interest Payment Date. No deposit need be made to the Interest Account on any date if the amount contained therein is at least equal to the aggregate amount of interest evidenced by the Certificates becoming due and payable on such date. All money in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest as it shall become due and payable (including accrued interest on Certificates purchased or prepaid prior to their respective Certificate Payment Date). (e) Principal Account. On each Certificate Payment Date, the Trustee shall set aside from the Debt Service Fund and deposit in the Principal Account an amount of money equal to the principal amount of the Outstanding Certificates maturing on such date. No deposit need be made to the Principal Account on any date if the amount contained therein is at least equal to the aggregate principal amount of Outstanding Certificates maturing and subject to mandatory sinking fund prepayment on such date. OHS West:260306950.4 40480-$ -26- All money in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal amount of Certificates as they mature or are prepaid from mandatory sinking fund prepayments. (f) Prepayment Account. All prepayments of Installment Payments made by the City shall be deposited in the Prepayment Account and applied to the payment, including prepayment, or provision for the payment, of Outstanding Certificates as directed by the City. Section 3.04 Reserve Fund. (a) The Trustee shall establish and hold under this Trust Agreement a fund separate from any other fund established and maintained hereunder designated as the "City of Lodi Wastewater System Revenue Certificates of Participation 2007 Series A Reserve Fund (the "Reserve Fund). Moneys in the Reserve Fund, including the proceeds of draws on any Reserve Policy, shall be applied in accordance with this Section. (b) Upon the execution and delivery of the Certificates, the Trustee shall credit the deposit required by Section 2.03 hereof to the Reserve Fund to satisfy the initial Reserve Fund Requirement with respect to the Certificates. The Trustee shall deposit in the Reserve Fund all amounts paid by the City pursuant to 5.2(b) of the Agreement and shall accept any Reserve Policy which the City causes to be delivered pursuant to Section 5.2(b) of the Agreement. If upon the deposit of a Reserve Policy to the Reserve Fund, the amount credited to the Reserve Fund shall be in excess of the Reserve Fund Requirement, such excess mount may be applied to the cost of acquiring such Reserve Policy, and to the extent not so applied, such excess amount shall be applied to the costs of capital improvements to the System or transferred to the Principal Account or the Prepayment Account to be applied to the payment of the principal evidenced by the Certificates, in each case as directed in a Written Request of the City. (c) The Trustee hereby agrees and covenants to maintain the Reserve Fund so long as the Agreement has not been discharged in accordance with its terms or any Certificates remain Outstanding hereunder. To the extent that transfers from the Reserve Fund to the Debt Service Fund are from draws on the Reserve Policy as permitted under the definition of Reserve Fund Requirement in the Trust Agreement, transfers hereunder to restore the Reserve Fund shall be made to reimburse the provider of the Reserve Policy to the extent the Reserve Policy is reinstated. Moneys on deposit in the Reserve Fund shall be transferred, and, if the amount of money then on deposit in the Reserve Fund is insufficient therefor, amounts shall be drawn on any Reserve Policy credited to the Reserve Fund and transferred by the Trustee to the Debt Service Fund to pay principal of and/or interest evidenced by the Certificates on each date when such principal and/or interest is due and payable in the event amounts on deposit therein are insufficient for such purposes. All investments in the Reserve Fund shall be valued on March 1 and September 1 of each year beginning in Marchi 2008, and on such other dates as may be specified in a Written Request of the City, at the amortized cost thereof. Except as otherwise provided in subsection (b) of this Section with respect to the delivery of a Reserve Policy, amounts on deposit in the Reserve Fund in excess of the Reserve Fund Requirement shall be applied to the costs of capital improvements to the System or transferred to the Principal Account or the Prepayment Account to be applied to the payment of the principal evidenced by the Certificates, in each case as directed in a Written Request of the City, at the Written Request OHS West:260306950.4 40490-8 -27- of the City; provided that any such excess representing investment income of moneys in the Reserve Fund shall be transferred to the Interest Account. Section 3.05 Improvement Fund. (a) The Trustee shall establish, maintain and hold under this Trust Agreement a fund separate from any other fund established and maintained hereunder designated as the "City of Lodi Wastewater System Revenue Certificates of Participation 2007 Series A Improvement Fund" (the "Improvement Fund"). Moneys in the Improvement Fund shall be expended for Costs of the Project in accordance with this Section. (b) There shall be credited to the Improvement Fund the following amounts: (1) the proceeds of sale of the Certificates required to be deposited therein pursuant to Section 2.03 hereof; and (2) all amounts transferred to the Improvement Fund pursuant to Section 3.06 hereof; and (3) any other funds from time to time deposited with the Trustee to pay Costs of the Project. (c) The Trustee shall disburse moneys in the Improvement Fund from time to time to pay for Costs of the Project directly or to reimburse the City for payment thereof upon receipt by the Trustee of a Written Request of the City substantially in the form of Exhibit B hereto. The Trustee shall not be responsible for the representations made in such Requisition and may conclusively rely thereon. The Trustee shall be absolutely protected in making any disbursement from the Improvement Fund in reliance upon a Written Request of the City. (d) Upon delivery to the Trustee and the Certificate Insurer of a Certificate of Completion, the Trustee shall withdraw all remaining moneys in the Improvement Fund (other than any moneys retained therein to pay costs not then due and payable as certified in a Certificate of the City), and shall transfer such moneys to the account in the Debt Service Fund designated in a Certificate of the City. Section 3.06 Costs of Issuance Fund. (a) The Trustee shall establish, maintain and hold under this Trust Agreement a fund separate from any other fund established and maintained hereunder designated as the "City of Lodi Wastewater System Revenue Certificates of Participation 2007 Series A Costs of Issuance Fund" (the "Costs of Issuance Fund"). Moneys in the Costs of Issuance Fund shall be expended for Costs of Issuance in accordance with this Section. amounts: (b) There shall be credited to the Costs of Issuance Fund the following (1) the proceeds of sale of the Certificates required to be deposited therein pursuant to Section 2.03 hereof, and OHS West:260306950.4 40490-8 -28- (2) any other funds from time to time deposited with the Trustee to pay Costs of Issuance. (c) The Trustee shall disburse moneys in the Costs of Issuance Fund from time to time to pay for Costs directly or to reimburse the City for payment thereof upon receipt by the Trustee of a Written Request of the City substantially in the form of Exhibit C hereto. The Trustee shall not be responsible for the representations made in such Requisition and may conclusively rely thereon. The Trustee shall be absolutely protected in making any disbursement from the Costs of Issuance Fund in reliance upon a Written Request of the City. (d) Upon the earlier of May 1, 2008 or the Trustee's receipt of written certification from the City that all Costs of Issuance have been paid, the Trustee shall withdraw all remaining moneys in the Costs of Issuance Fund (other than any moneys retained therein to pay costs not then due and payable as certified by a City Representative), shall transfer such moneys to the Improvement Fund and shall close the Costs of Issuance Fund. Section 3.07 Rebate Fund. (a) The Trustee shall establish, maintain and hold under this Trust Agreement a fund separate from any other fund established and maintained hereunder designated as the "City of Lodi Wastewater System Revenue Certificates of Participation 2007 Series A Rebate Fund (the "Rebate Fund"),Within the Rebate Fund, the Trustee shall maintain such accounts as shall be necessary to comply with the terms of the Tax Certificate. Subject to the transfer provisions provided in paragraph (e) below, all money at any time deposited in the Rebate Fund shall be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement (as defined in the Tax Certificate), for payment to the government of the United States of America. None of the City, the Corporation nor the Owner of any Certificate shall have any rights in or claim to such money. All amounts deposited into or on deposit in the Rebate Fund shall be governed by this Section, by Section 6.17 of the Agreement and by the Tax Certificate (which is incorporated herein by reference). The Trustee shall be deemed conclusively to have complied with such provisions if it follows the directions of the City, including supplying all necessary information in the manner provided in the Tax Certificate, and shall have no liability or responsibility to enforce complianceby the City with the terms of the Tax Certificate. (b) Upon the City's written direction, an amount shall be deposited to the Rebate Fund by the Trustee from deposits by the City if and to the extent required, so that the balance of the Rebate Fund after such deposits shall equal the Rebate Requirement. Computations of the Rebate Requirement shall be furnished by or on behalf of the City in accordance with the Tax Certificate. (c) The Trustee shall have no obligation to rebate any amounts required to be rebated pursuant to this Section other than from moneys held in the Rebate Fund or from other moneys provided to it by the City. (d) The Trustee shall invest all amounts held in the Rebate Fund in Investment Securities as directed by the City, which directions shall be in compliance with the restrictions OHS West:260306950.4 40490-8 -29- set forth in the Tax Certificate. Money shall not be transferred from the Rebate Fund except as provided in paragraph (e) below. (e) Upon receipt of the City's written directions, the Trustee shall remit part or all of the balances in the Rebate Fund to the United States, as so directed. In addition, if the City so directs, the Trustee will deposit moneys into or transfer moneys out of the Rebate Fund from or into such accounts or funds as directed by the City's written directions; provided, however, only moneys in excess of the Rebate Requirement may be transferred out of the Rebate Fund to such other accounts or funds or to anyone other than the United States in satisfaction of the arbitrage rebate obligation. Any funds remaining in the Rebate Fund after prepayment and payment of all of the Certificates and payment and satisfaction of any Rebate Requirement, or provision made therefor satisfactory to the Trustee, shall be withdrawn and remitted to the City. (f) Notwithstanding any other provision of this Trust Agreement, including in particular Article VII hereof, the obligation to remit the Rebate Requirement to the United States and to comply with all other requirements of this Section, Section 6.17 of the Agreement and the Tax Certificate shall survive the defeasance or payment in full of the Certificates. Section 3.08 Deposit and Investments of Money in Accounts and Funds. (a) All money held by the Trustee in any of the accounts or funds established pursuant hereto shall be invested in Permitted Investments at the Written Request of the City (which shall be in compliance with Section 5.03 hereof) filed with the Trustee which such Permitted Investments shall, as nearly as practicable, mature on or before the dates on which such money is anticipated to be needed for disbursement hereunder, and the Trustee shall have no liability or responsibility for any loss resulting from any investment made in accordance herewith; provided, except for investment agreements approved by the Certificate Insurer, money in the Reserve Fund shall not be invested in any investment with a maturity extending beyond five years of the time of such investment. If no such Written Request of the City is received by the Trustee, the Trustee shall invest such money in those Permitted Investments described in clause (D) of the definition thereof. Subject to Section 5.03 hereof, all investment income received on any money in any fund or account held hereunder (other than the Reserve Fund, the Rebate Fund and the Improvement Fund, which investment income shall be retained in such funds) shall be deposited in the Interest Account in the Debt Service Fund. Transfers from the Reserve Fund shall be made only to the extent that the amount remaining in the Reserve Fund equals the Reserve Fund Requirement. (b) The Corporation (and the City by its execution of the Agreement) acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Corporation or the City the right to receive brokerage confirmations of security transactions as they occur, the Corporation and the City specifically waive receipt of such confirmations to the extent permitted by law. The Trustee will furnish the Corporation and the City monthly cash transaction statements which include detail for all investment transactions made by the Trustee hereunder. (c) The Trustee or any of its affiliates may act as principal or agent, sponsor, advisor, principal, agent or manager in connection with any investments made by the Trustee hereunder. For investment purposes only, the Trustee may commingle the funds and accounts established hereunder, but shall maintain separate records relating to the investments for fund or account. OHS West:260306950.4 40490-8 -30- (d) The Trustee shall not be liable for any loss from any Permitted Investments acquired, held or disposed of in compliance with this Section 3.08. (e) The Trustee may rely on the investment instructions from the City that the instructed investment is a permissible investment for the funds to be invested. Section 3.09 Reliance on Opinions. The Trustee may, in performing the obligations set out in Section 3.08(a) above, rely and shall be protected in acting or refraining from acting upon an Opinion of Counsel furnished by the City. ARTICLE IV SECURITY FOR CERTIFICATES Section 4.01 Assijznment of Alzreement: Enforcement of Obligations: Funds and Accounts. The Corporation hereby transfers, assigns and sets over to the Trustee all of the Installment Payments and any and all rights, title, interest and privileges it has in, to and under the Agreement (other than its rights to expenses and indemnification pursuant to the Agreement), including, without limitation, the right to collect and receive directly all of the Installment Payments and the right to enforce the provisions of the Agreement; and any Installment Payments collected or received by the Corporation shall be deemed to be held, and to have been collected or received, by the Corporation as the agent of the Trustee, and shall forthwith be paid by the Corporation to the Trustee. The Trustee also shall, subject to the provisions of this Trust Agreement, take all steps, actions and proceedings required to be taken as provided in any opinion of counsel delivered to it, reasonably necessary to maintain in force for the benefit of the Owners of the Certificates the Trustee's rights in and priority to the following security granted to it for the payment of the Certificates: the Trustee's rights as assignee of the Installment Payments and all of the Corporation's right, title, interest and privileges in, to and to the Agreement (other than the Corporation's rights to indemnification and expenses pursuant to the Agreement), and all other rights and property which the Trustee may receive in the future as security for the Certificates. All of the funds and accounts held by the Trustee pursuant to this Trust Agreement shall be held in trust by the Trustee and applied solely as provided in this Trust Agreement; provided, however, that notwithstanding anything in this Trust Agreement to the contrary, all amounts in such funds and accounts, other than the Rebate Fund, shall secure the payment of amounts due with respect to the Outstanding Certificates and in the event moneys available to the Trustee in the Debt Service Fund and the Reserve Fund are insufficient to pay when due the principal and premium of and interest on the Outstanding Certificates, the Trustee shall apply amounts in the funds and accounts held by it hereunder, other than the Rebate Fund, to such payment. ARTICLE V COVENANTS OF THE CORPORATION AND THE TRUSTEE Section 5.01 Compliance with Trust Agreement. The Trustee will not execute or deliver any Certificates in any manner other than in accordance with the provisions hereof, and the OHS Wmt:260306950.4 4,0490-9 -31- Corporation will not suffer or permit any default by it to occur hereunder, but will faithfully comply with, keep, observe and perform all the agreements and covenants to be observed or performed by it contained herein and in the Certificates. Section 5.02 Observance of Laws and Regulations. The Corporation will faithfully comply with, keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on them by contract, or prescribedby any law of the United States of America or of the State of California, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise, right or privilege now owned or hereafter acquired by them, including their right to exist and carry on their respective businesses, to the end that such franchises, rights and privileges shall be maintained and preserved and shall not become abandoned, forfeited or in any manner impaired. Section 5.03 Tax Covenants. (a) The Corporation hereby covenants with the Owners of the Certificates that, notwithstanding any other provisions of this Trust Agreement, it shall not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the Tax-exempt status of interest evidenced by the Certificates under Section 103 of the Code. The Corporation shall not, directly or indirectly, use or permit the use of proceeds of the Certificates or any of the property financed or refinanced with proceeds of the Certificates, or any portion thereof, by any person other than a governmental unit (as such term is used in Section 141 of the Code), in such manner or to such extent as would adversely affect the Tax-exempt status of interest evidenced by the Certificates. (b) The Corporation shall not take any action, or fail to take any action, if any such action or failure to take action would cause the Certificates to be "private activity bonds" within the meaning of Section 141 of the Code, and in furtherance thereof, shall not make any use of the proceeds of the Certificates or any of the property financed or refinanced with proceeds of the Certificates, or any portion thereof, or any other funds of the Corporation, that would cause the Certificates to be "private activity bonds" within the meaning of Section 141 of the Code. To that end, so long as any Certificates are Outstanding, the Corporation, with respect to such proceeds and property and such other funds, will comply with applicable requirements of the Code and all regulations of the United States Department of the Treasury issued thereunder, to the extent such requirements are, at the time, applicable and in effect. The Corporation shall establish reasonable procedures necessary to ensure continued compliance with Section 141 of the Code and the continued qualification of the Certificates as "governmental bonds." (c) The Corporation shall not, directly or indirectly, use or permit the use of any proceeds of any Certificates, or of any property financed or refinanced thereby, or other funds of the Corporation, or take or omit to take any action, that would cause the Certificates to be "arbitrage bonds" within the meaning of Section 148 of the Code. To that end, the Corporation shall comply with all requirements of Section 148 of the Code and all regulations of the United States Department of the Treasury issued thereunder to the extent such requirements are, at the time, in effect and applicable to the Certificates. OHS West:260306950.4 40490-8 -32- (d) The Corporation shall not make any use of the proceeds of the Certificates or any other funds of the Corporation, or take or omit to take any other action, that would cause the Certificatesto be "federally guaranteed" within the meaning of Section 149(b) of the Code. (e) In furtherance of the foregoing tax covenants, the Corporation covenants that it will comply with the provisions of the Tax Certificate, which is incorporated herein as if fully set forth herein. These covenants shall survive payment in full or defeasance of the Certificates. Section 5.04 Accounting Records and Reports. The Trustee will keep or cause to be kept proper books of record and accounts in which complete and correct entries shall be made of all transactions made by the Trustee relating to the receipts, disbursements, allocation and application of the Installment Payments and the proceeds of the Certificates, and such books shall be available for inspection by the Corporation, at reasonable hours and under reasonable conditions. Not more than 180 days after the close of each Fiscal Year, the Trustee shall furnish or cause to be furnished to the Corporation a complete financial statement covering receipts, disbursements, allocation and application of Installment Payments received by the Trustee for such Fiscal Year. The Corporation shall keep or cause to be kept such information as required under the Tax Certificate. Section 5.05 Prosecution and Defense of Suits. The Corporation will defend against every suit, action or proceeding at any time brought against the Trustee upon any claim to the extent arising out of the receipt, application or disbursement of any of the Installment Payments and the proceeds of the Certificates or to the extent involving the failure of the Corporation to fulfill its obligations hereunder; provided that the Trustee or any affected Owner at its election may appear in and defend any such suit, action or proceeding. The Corporation will indemnify and hold harmless the Trustee against any and all liability claimed or asserted by any person to the extent arising out of such failure by the Corporation, and will indemnify and hold harmless the Trustee against any attorney's fees or other expenses which it may incur in connection with any litigation to which it may become a party by reason of its actions hereunder, except for any loss, cost, damage or expense resulting from the active or passive negligence, willful misconduct or breach of duty by the Trustee. Notwithstanding any contrary provision hereof, this covenant shall remain in full force and effect even though all Certificates secured hereby may have been fully paid and satisfied. Section 5.06 Amendments to Agreement. The Corporation shall not supplement, amend, modify or terminate any of the terms of the Agreement, or consent to any such supplement, amendment, or modification, except as provided in Article VII hereof. Section 5.07 Recording and Filing. The Trustee upon receipt of a Written Request of the Corporation shall, at the expense of the Corporation, file, record, register, renew, refile and rerecord all such documents, including financing statements (or continuation statements in connection therewith), all in such manner, at such times and in such places as may be required and to the extent permitted by law in order to fully perfect, preserve and protect the security of the Owners and the rights and interests of the Trustee; provided, however, that the Trustee will not be required to execute a special or general consent to service of process, or to qualify as a foreign corporation in connection with any such filing, recording, registration, refzling or rerecording in any jurisdiction in which it is not now so subject. OHS West:260306950.4 40490-8 -33- Section 5.08 Notices to Rating Agencies. The Corporation shall provide the Rating Agencies, with copies to the City and the Certificate Insurer, with written notice upon the occurrence of- (i) £(i) the resignation or removal of the Trustee; or (ii) the acceptance of appointment as successor trustee hereunder promptly upon its becoming aware of such resignation, removal or acceptance. Section 5.09 Further Assurances. Whenever and so often as reasonably requested to do so by the Trustee or any Owner, the Corporation will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments, and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to further and more fully vest in the Trustee and the Owners all rights, interests, powers, benefits, privileges and advantages conferred or intended to be conferred upon them hereby. ARTICLE VI THE TRUSTEE Section 6.01 The Trustee. (a) The Bank of New York Trust Company, N.A., as the Trustee, shall receive all money which the Corporation is required to deposit with the Trustee hereunder and for the purpose of allocating, applying and using such money as provided herein and for the purpose of paying the interest and principal and prepayment premiums, if any, evidenced by the Certificates presented for payment and for the purpose of canceling all paid or prepaid Certificates as provided herein. The Corporation agrees that it will at all times maintain a Trustee having a corporate trust office in either San Francisco, California or Los Angeles, California. (b) The Corporation may at any time (unless there exists any Trust Event of Default as defined in Section8.01 hereof), and upon written direction from the Certificate Insurer shall, remove the Trustee initially appointed and any successor thereto and may appoint a successor or successors thereto by an instrument in writing; provided that any such successor shall be a banking corporation or trust company doing business and having a principal office in either San Francisco, California or Los Angeles, California, having a combined capital (exclusive of borrowed capital) and surplus of at least seventy-five million dollars ($75,000,000) and subject to supervision or examination by federal or state Corporation, acceptable to the Certificate Insurer. If such banking corporation or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining Corporation above referred to, then for the purpose of this Section the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee may at any time resign by giving written notice of such resignation to the Corporation and the Certificate Insurer and by mailing to the Owners notice of such resignation. Upon receiving such notice of resignation, the Corporation shall promptly appoint a successor Trustee by an instrument in writing. Any removal or resignation of a Trustee and appointment of a successor Trustee shall become effective only upon the acceptance of appointment by the successor Trustee. If, within thirty (30) days after notice of the removal or resignation of the Trustee no successor Trustee shall OHS West:260306950.4 40490-8 -34- have been appointed and shall have accepted such appointment, the removed or resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, which court may thereupon, after such notice, if any, as it may deem proper and prescribe and as may be required by law, appoint a successor Trustee having the qualifications required hereby. (c) The Trustee shall, prior to a Trust Event of Default, and after the curing of all Events of Default that may have occurred, perform such duties and only such duties as are specifically set forth in this Trust Agreement and no implied duties or obligations shall be read into this Trust Agreement. The Trustee shall, during the existence of any Trust Event of Default (that has not been cured), exercise such of the rights and powers vested in it hereby, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Section 6.02 Liability of Trustee. (a) The recitals of facts, agreements and covenants herein and in the Certificates shall be taken as recitals of facts, agreements and covenants of the Corporation, and the Trustee assumes no responsibility for the correctness of the same or makes any representation as to the sufficiency or validity hereof or of the Certificates, or shall incur any responsibility in respect thereof other than in connection with the rights or obligations assigned to or imposed upon it herein, in the Certificates or in law or equity. The Trustee shall not be liable in connection with the performance of its duties hereunder except for its own active or passive negligence, willful misconduct or breach of duty. (b) The Trustee shall not be liable for any error of judgment made in good faith by a responsible officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts. (c) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of not less than a majority in aggregate principal amount of the Certificates at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee hereunder. (d) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it hereby at the request, order or direction of any of the Owners pursuant to the provisions hereof unless such Owners shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby. The Trustee has no obligation or liability to the Owners for the payment of interest, principal or prepayment premium, if any, evidenced by the Certificates from its own funds; but rather the Trustee's obligations shall be limited to the performance of its duties hereunder. (e) The Trustee shall not be deemed to have knowledge of any default hereunder or default under the Agreement unless and until it shall have actual knowledge thereof or shall have received written notice thereof at its Corporate Trust Office. Except as otherwise expressly provided herein, the Trustee shall not be bound to ascertain or inquire as to the OHS West:260306950.4 40490-8 -35- performance or observance of any of the terms, conditions, covenants or agreements herein or of any of the documents executed in connection with the Certificates or as to the existence of a default hereunder. The Trustee shall be entitled to advice of counsel and other professionals concerning all matters of trust and its duty hereunder, but the Trustee shall not be answerable for the professional malpractice of any attorney-at-law or certified public accountant in connection with the rendering of his professional advice in accordance with the terms hereof, if such attorney-at-law or certified public accountant was selected by the Trustee with due care. The Trustee shall not be concerned with or accountable to anyone for the subsequent use (or application of any moneys which shall be released or withdrawn in accordance with the provisions hereof. (h) Whether or not therein expressly so provided, every provision hereof or of the Agreement or any related documents relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this article. (i) The Trustee shall be protected in acting upon any notice, requisition, resolution, request, consent, order, certificate, report, opinion, bond, facsimile transmission, electronic mail 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 Trustee may consult with counsel, who may be counsel of or to the Corporation, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it hereunder in good faith and in accordance therewith. U) Whenever in the administration of its rights and obligations hereunder the Trustee shall deem it necessary or desirable that a matter be established or proved prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of bad faith on the part of the Trustee, be deemed to be conclusively proved and established by a Certificate of the Corporation, which certificate shall be full warrant to the Trustee for any action taken or suffered under the provisions hereof upon the faith thereof, but in its discretion the Trustee may in lieu thereof accept other evidence of such matter or may require such additional evidence as it may deem reasonable. (k) No provision of this Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of its rights or powers. (1) The Trustee shall have no responsibility, opinion or liability with respect to any information, statement or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the execution and delivery of the Certificates. (m) All immunities, indemnifications and releases from liability granted herein to the Trustee shall extend to the directors, employees, officers and agents thereof. (n) Any company into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or OHS West:260306950.4 40490-8 -36- consolidation to which it shall be a parry or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, so long as such company shall meet the requirements set forth in Section 6.0 1, shall be the successor to the Trustee and vested with all of the title to the trust estate and all of the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any paper or further act, anything herein to the contrary notwithstanding. (0) The Trustee may become the owner or pledgee of any certificates with the same rights it would have if it were not Trustee. Section 6.03 Compensation and Indemnification of Trustee. The Corporation covenants to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it in the exercise and performance of any of the powers and duties hereunder of the Trustee, and the Corporation will pay or reimburse the Trustee upon its request for all expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence, default or willful misconduct. The Corporation, to the extent permitted by law, shall indemnify, defend and hold harmless the Trustee against any loss, damages, liability or expense incurred without negligence, default or willful misconduct on the part of the Trustee arising out of or in connection with (i) the acceptance or administration of the trusts created hereby, or the exercise or performance of any of its powers or duties hereunder, or (ii) any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading in any official statement or other offering circular utilized in connection with the sale of any of the Certificates, including costs and expenses (including attorneys' fees) of defending itself against any claim or liability in connection with the exercise or performance of any of its powers hereunder. The rights of the Trustee and the obligations of the Corporation under this section shall survive the discharge of the Certificates and this Trust Agreement and the resignation or removal of the Trustee. Section 6.04 Notices to Rating Agencies. The Trustee shall provide the Rating Agencies, with copies to the City and the Certificate Insurer, with written notice upon the occurrence of- (i) £(i) the discharge of liability on any Certificates pursuant to Section 10.02; (ii) the prepayment or purchase of all Certificates; or (iii) a material change in this Trust Agreement or the Agreement, upon its receipt of written notice of any such changes. The Trustee shall also notify any Rating Agency of any material changes to any of the documents to which the Trustee is a party, upon its receipt of written notification of any such changes. ARTICLE VII AMENDMENT OF THE TRUST AGREEMENT Section 7.01 Modification without Consent of Owners. The Corporation and the Trustee, without the consent of or notice to any Owners from time to time and at any time, but with the prior written consent of the Certificate Insurer and the City, and subject to the conditions and restrictions contained in this Trust Agreement may enter into a Supplemental Trust Agreement, which Supplemental OHS West:260306950.4 40490-8 -37- Trust Agreement thereafter shall form a part hereof, and the Trustee, without the consent of or notice to any Owners, from time to time and at any time, but with the prior written consent of the Certificate Insurer and the City, may consent to any Amendment to the Agreement; in each case for any one or more of the following purposes: (a) to add to the covenants and agreements of the Corporation contained in this Trust Agreement, or of the City or of the Certificate Insurer contained in the Agreement, other covenants and agreements thereafter to be observed, or to assign or pledge additional security for any of the Certificates, or to surrender any right or power herein or therein reserved to or conferred upon the Corporation or the City; provided, that no such covenant, agreement, assignment, pledge or surrender shall materially adversely affect the interests of the Owners of the Certificates; (b) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing, correcting or supplementing any defective provision contained in this Trust Agreement or the Agreement, or in regard to matters or questions arising under this Trust Agreement or the Agreement, as the Corporation may deem necessary or desirable and which shall not materially adversely affect the interests of the Owners of the Certificates; (c to modify, amend or supplement this Trust Agreement or any Trust Agreement supplemental hereto in such manner as to permit the qualification hereof or thereof under the Trust Agreement Act of 1939 or any similar federal statute hereafter in effect, and, if they so determine, to add to this Trust Agreement or any Supplemental Trust Agreement such other terms, conditions and provisions as may be permitted by said Trust Agreement Act of 1939 or similar federal statute, and which shall not adversely affect the interests of the Owners of the Certificates; (d) to provide for any additional procedures, covenants or agreements necessary to maintain the Tax -Exempt status of interest evidenced by the Certificates; provided that such amendment or supplement shall not materially adversely affect the interests of the Owners ofthe Certificates; (e) to modify or eliminate the book -entry registration system for any of the Certificates; (f) to provide for the procedures required to permit any Owner to separate the right to receive interest evidenced by the Certificates from the right to receive principal thereof and to sell or dispose of such rights, as contemplatedby Section 1286 of the Code; (g) to provide for the appointment of a co -trustee or the succession of a new Trustee; (h) to change Exhibit A to the Agreement in accordance with the provisions thereof and of the Tax Certificate; (i) to comply with requirements of any Rating Agency in order to obtain or maintain a rating on any Certificates; or OHS West260306950.4 40490-8 -38- 0) in connection with any other change which will not adversely affect the security for the Certificates or the Tax -Exempt status of interest evidenced thereby or otherwise materially adversely affect the Owners of the Certificates (such determination may be based upon an Opinion of Bond Counsel). Before the Corporation or the Trustee enters into a Supplemental Trust Agreement and before the Trustee consents to any Amendment pursuant to the provisions of this Section 7.01, the Corporation, or the Trustee, as the case may be, shall cause notice of the proposed execution of the Supplemental Trust Agreement or Amendment to be given by mail to the Certificate Insurer and each Rating Agency. A copy of the proposed Supplemental Trust Agreement or Amendment shall accompany such notice. Not less than one week after the date of the first mailing of such notice, the Corporation and/or the Trustee may execute and deliver such Supplemental Trust Agreement or Amendment, but only after there shall have been delivered to the Corporation, an Opinion of Bond Counsel stating that such Supplemental Trust Agreement or Amendment is: (i) authorized or permitted by this Trust Agreement; (ii) complies with their respective terms, in the case of a Supplemental Trust Agreement, will upon the execution and delivery thereof be a valid and binding agreement of the Corporation; and (iii) will not adversely affect the Tax -Exempt status of interest evidenced by the Certificates. Notwithstanding the foregoing provisions of this Section, the Trustee shall not be obligated to enter into any such Supplemental Trust Agreement which affects the Trustee's own rights, duties or immunities under this Trust Agreement or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such Supplemental Trust Agreement, and the Trustee shall not enter into any Supplemental Trust Agreement or consent to any Amendment without first obtaining the written consent of the City and the Certificate Insurer. The Trustee will give notice of the provisions of any Supplemental Trust Agreement authorized by the provisions of this Section 7.01 to the Rating Agencies and the Certificate Insurer. Section 7.02 Modification with Consent of Owners. With the consent of the Owners of not less than a majority in aggregate principal amount of the Certificates at the time Outstanding and the Certificate Insurer, (i) the Corporation and the Trustee may from time to time and at any time enter into a Supplemental Trust Agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Trust Agreement or of any Supplemental Trust Agreement; or (ii) the Trustee may consent to any Amendment to the Agreement and any other matters for which its consent is required pursuant to Section 6.05; provided, however, that no such Supplemental Trust Agreement or Amendment will have the effect of extending the time for payment or reducing any amount due and payable by the City pursuant to the Agreement without the consent of the Certificate Insurer and the Owners of all the Certificates then Outstanding; and that no such Supplemental Trust Agreement shall (1) extend the fixed maturity of any Certificate or reduce the rate of interest evidenced thereby or extend the time of payment of interest evidenced thereby, or reduce the amount of the principal evidenced thereby, or reduce any premium payable on the redemption thereof, without the consent of the Owner of each Certificate so affected, or (2) reduce the aforesaid percentage of Owners whose consent is required for the execution of such Supplemental Trust Agreements, or permit the creation of any lien on any of the assets transferred or assigned to the Trustee by the Corporation hereunder prior to or on a parity with the lien of this Trust Agreement, except as permitted herein, or permit the creation of any preference of any Owner over any other Owner, except as permitted herein, or OHS West:260306950.4 40490-8 -39- deprive the Owners of the Certificates of the lien created by this Trust Agreement upon the assets transferred or assigned by the Corporation to the Trustee hereunder, without the consent of the Certificate Insurer and the Owners of all the Certificates then Outstanding. Nothing in this paragraph shall be construed as making necessary the approval of any Owner of any Supplemental Trust Agreement or Amendment permitted by the provisions of Section 7.01. Upon receipt by the Trustee of (1) a resolution certified as being in full force and effect by the Secretary of the Corporation and authorizing the execution of any such Supplemental Trust Agreement or Amendment; (2) an Opinion of Bond Counsel stating that such Supplemental Trust Agreement or Amendment is: (i) authorized or permitted by this Trust Agreement; (ii) complies with their respective terms; (iii) in the case of a Supplemental Trust Agreement, will, upon the execution and delivery thereof, be a valid and binding agreement of the Corporation; and (iv) will not adversely affect the Tax -Exempt status of interest evidenced by the Certificates; and (3) evidence of the consent of the Owners, the Certificate Insurer, as aforesaid, the Trustee shall join with the Corporation in the execution of such Supplemental Trust Agreement or shall consent to such Amendment; provided, however, that (i) the Trustee shall not be obligated to enter into any such Supplemental Trust Agreement which affects the Trustee's own rights, duties or immunities under this Trust Agreement or otherwise, in which case the Trustee may in its sole discretion, but shall not be obligated to, enter into such Supplemental Trust Agreement; and (ii) the Trustee shall not enter into such Supplemental Trust Agreement or Amendment without first obtaining the City's and the Certificate Insurer's written consent thereto. It shall not be necessary for the consent of the Owners under this Section to approve the particular form of any proposed Supplemental Trust Agreement or Amendment, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the parties thereto of any Supplemental Trust Agreement or Amendment as provided in this Section, the Trustee shall mail a notice (prepared by the City) setting forth in general terms the substance of such Supplemental Trust Agreement or such Amendment to the Certificate Insurer, to each Owner at the address contained in the Certificate Register and to the applicable Rating Agencies. Any failure of the Trustee to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Trust Agreement or such Amendment. Section 7.03 Effect of Supplemental Trust Agreement or Amendment. Upon the execution of any Supplemental Trust Agreement or any Amendment to the Agreement pursuant to the provisions of this Article VII, this Trust Agreement or the Agreement, as the case may be, shall be and be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under this Trust Agreement and the Agreement of the Corporation, the Trustee, the City and all Owners of Outstanding Certificates shall thereafter be determined, exercised and enforced hereunder and under the Agreement subject in all respects to such Supplemental Trust Agreements and Amendments, and all the terms and conditions of any such Supplemental Trust Agreement or Amendment shall be part of the terms and conditions of this Trust Agreement or the Agreement, as the case may be, for any and all purposes. OHS Wmt260306950.4 40490-8 -40- Section 7.04 Required and Permitted Opinions of Counsel. Subject to the provisions of Section 7.01, the Trustee is entitled to receive an Opinion of Counsel and rely on such Opinion of Counsel as conclusive evidence that any Supplemental Trust Agreement or Amendment executed pursuant to the provisions of this Article VII complies with the requirements of this Article VII, that the appropriate consents have been obtained and that such Supplemental Trust Agreement or Amendment has been duly authorized by the Corporation. Section 7.05 Notation of Modification on Certificates: Preparation of New Certificates. Certificates authenticated and delivered after the execution of any Supplemental Trust Agreement pursuant to the provisions of this Article VII may bear a notation, at the Written Request of the Corporation, as to any matter provided for in such Supplemental Trust Agreement, and if such Supplemental Trust Agreement shall so provide, new Certificates, so modified as to conform, in the opinion of the Trustee and the Corporation, to any modification of this Trust Agreement contained in any such Supplemental Trust Agreement, may be prepared by the Corporation, authenticated by the Trustee and delivered without cost to the Owners of the Certificates then Outstanding, upon surrender for cancellation of such Certificates in equal aggregate principal amounts. The Corporation may rely upon advice of Bond Counsel in complying with the provisions of this paragraph. Section 7.06 Notice to Rating Agency. The Trustee shall give to each Rating Agency notice of any amendment made to this Trust Agreement, the Certificate Insurance Policy or the termination, expiration, extension or substitution of any Credit Facility, notice of any Amendment made to the Agreement, notice of any extraordinary redemptions or any redemption, purchase or defeasance of all of the Certificates and notice of any successor Trustee hereunder. Notwithstanding the foregoing, it is expressly understood and agreed that failure to provide any such notice to any Rating Agency or any defect therein will not (i) constitute a Trust Event of Default hereunder; and (ii) affect the validity of any action with respect to which notice is to be given or the effectiveness of any such action. Section 7.07 Amendment by Mutual Consent. The provisions of this article shall not prevent any Owner from accepting any amendment as to the particular Certificates held by him, provided that due notation thereof is made on such Certificates. ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF OWNERS Section 8.01 Trust Events of Default: Acceleration; Waiver of Default. The following shall be Trust Events of Default hereunder: (i) an Agreement Event of Default shall happen and be continuing or (ii) the Corporation shall default in the observance of any of the covenants, agreements or conditions on its part contained in this Trust Agreement, if such default shall have continued for a period of sixty (60) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the City and the Corporation by the Trustee, or to the City, the Corporation and the Trustee by the Owners of not less than twenty-five per cent (25%) in aggregate principal amount of the Certificates at the time Outstanding. OHS West:260306950.4 404W -s -41- Section 8.02 Remedies. If a Trust Event of Default shall happen and be continuing hereunder Trustee shall have the right: (a) to exercise the remedies provided to the Corporation in the Agreement; provided, that nothing contained herein shall affect or impact the right of action of any Owner to institute suit directly against the City to enforce payment of the obligation evidenced by such Owner's Certificates; (b) by mandamus or other action or proceeding or suit at law or in equity to enforce the Corporation's rights under the Agreement against the City or any officer or employee thereof, and to compel the City or any such officer or employee or the Corporation, as applicable, to perform or carry out its or his duties under law and the agreements and covenants required to be performed by it or him contained in the Agreement or this Trust Agreement; (c) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee; (d) by suit in equity upon the happening of any Trust Event of Default hereunder to enforce the Corporation's rights under the Agreement and the Trustee's rights under this Trust Agreement and to require the City and its officers and employees and the Corporation to account as the trustee of an express trust; or (e) by mandamus or other action or proceeding or suit at law or in equity, to pursue any other remedy now or hereafter existing in law or in equity or by statute or otherwise to enforce the performance of the Corporation's obligations hereunder and to otherwise protect the Trustee's rights and interests in connection with this Trust Agreement. Section 8.03 Non -Waiver. A waiver of any default or breach of any duty or contract by the Trustee shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or any acquiescence therein, and every right or remedy conferred upon the Trustee by law or by this article may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee. If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee, the Corporation, the Trustee and the City shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Section 8.04 Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Trustee or the Owners is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by law. OHS West:260306950.4 40490-9 -42- Section 8.05 No Liability by the City to the Owners. Except for the payment when due of the Installment Payments and the performance of the other agreements and covenants required to be performed by it contained in the Agreement, the City shall not have any obligation or liability to the Owners with respect to this Trust Agreement or the preparation, execution, delivery or transfer of the Certificates or the disbursement of the Installment Payments by the Trustee to the Owners, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained herein. Section 8.06 No Liability by the Trustee to the Owners. Except as expressly provided herein, the Trustee shall not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments by the City, or with respect to the performance by the City of the other agreements and covenants required to be performed by its contained in the Agreement. ARTICLE IX DEFEASANCE Section 9.01 Defeasance of Certificates. (a) Method . If and when any Outstanding Certificates shall be paid and discharged in any one or more of the following ways — (i) Payment: by well and truly paying or causing to be paid the principal and interest evidenced by such Certificates, together with any and prepayment premiums, as and when the same become due and payable; (ii) Cash: by irrevocably depositing with the Trustee, in trust, at or before maturity or the date of prepayment, as applicable, an amount of cash which (together with cash then on deposit in the Debt Service Fund and the Reserve Fund, in the event of payment or provision for payment of all Outstanding Certificates) is sufficient to pay such Certificates, including all principal and interest evidenced by such Certificates, together with any premium, as the same become due; provided, however, that if such Certificates are prepaid prior to their maturity dates, the Trustee shall have given, or shall receive irrevocable instructions to give, notice of such prepayment as provided in this Trust Agreement; or (iii) Defeasance Securities: by irrevocably depositing with the Trustee, in trust, at or before maturity or the date of prepayment, as applicable, noncallable Defeasance Securities together with cash, if required, in such amount as will, in the opinion of an independent certified public accountant delivered to the Trustee, together with interest to accrue thereon (and, in the event of payment or provision for payment of all Outstanding Certificates moneys then on deposit in the Debt Service Fund and the Reserve Fund together with the interest to accrue thereon), be fully sufficient to pay such Certificates (including all principal and interest evidenced by such Certificates, together with any and prepayment premiums), as the same became due; provided, however, that if such Certificates are prepaid OHS wea :260306950.4 40490-8 -43- prior to their maturity dates, the Trustee shall have given, or shall receive irrevocable instructions to give, notice of such prepayment as provided in this Trust Agreement; then, notwithstanding that any such Certificates shall not have been surrendered for payment, all obligations under this Trust Agreement of the Corporation (if any), the Trustee and the City with respect to such Certificates shall cease and terminate, except only the obligation of the Trustee to pay or cause to be paid, solely from funds deposited pursuant to paragraphs (i), (ii) or (iii) of this Section, as applicable, to the Owners of the Certificates not so surrendered and paid all sums due with respect to the principal and interest evidenced by such Certificates, and in the event of deposits pursuant to paragraphs (1), (2) and (3) of this Section, the Certificates shall continue to evidence proportionate interests of the Owners thereof in Installment Payments under the Agreement. If moneys or securities are deposited with and held by the Trustee as hereinabove provided, the Trustee shall mail a notice, first-class postage prepaid, to the Owners of the applicable Certificates at the addresses listed on the Certificate Register, stating that (a) moneys or Defeasance Securities are so held by it, and (b) that all obligations under this Trust Agreement with respect to such Certificates have been released in accordance with the provisions of this Section except only the obligation of the Trustee to pay or cause to be paid, solely from the funds and Defeasance Securities deposited pursuant to this Section, all sums due with respect to the principal and interest evidencedby such Certificates. Section 9.02 Discharge of Trust Agreement, When all Certificates shall have been paid and discharged as provided in Section 9.01 (except for the right of the Owner and the obligation of the Trustee to have the money and securities mentioned therein applied to the payment of Certificates as therein set forth), then and in that case the obligations created by this Trust Agreement shall thereupon cease, determine and become void except for the right of the Owners and the obligation of the Trustee to apply such moneys and securities to the payment of the Certificates as herein set forth and the right of the Trustee to collect any fees or expenses due hereunder and the Trustee shall turn over to the City, as an overpayment with respect to Installment Payments, all balances remaining in any of the funds or accounts held hereunder other than the Rebate Fund and moneys and Defeasance Securities held for the payment of the Certificates at maturity or on prepayment, which moneys and Defeasance Securities shall continue to be held by the Trustee in trust for the benefit of the Owners and shall be applied by the Trustee to the payment, when due, of the Installment Payments evidenced by the Certificates, and after such payment, this Trust Agreement shall become void. Upon receipt of a Request of the City, the Trustee shall cause an accounting for such period or periods as may be requested by the City to be prepared and filed with the City and shall execute and deliver to the City all such instruments as may be necessary or desirable to evidence the discharge and satisfaction of the Agreement and this Trust Agreement. Section 9.03 Surviving Provisions. Notwithstanding the satisfaction and discharge hereof, the Trustee shall retain such rights, powers and privileges hereunder as may be necessary or convenient for the payment of the principal, interest and prepayment premium, if any, on the Certificates and for the registration, transfer and exchange of the Certificates. OHS West:260306950.4 40490-9 -44- Section 9.04 Pavments by Certificate Insurer. Notwithstanding anything contained in this Trust Agreement to the contrary, in the event that the Interest Installments and/or the Principal Installments evidenced by any of the Certificates shall be paid by the Certificate Insurer pursuant to the Certificate Insurance Policy, such Certificates shall remain Outstanding hereunder for all purposes, shall not be defeased or otherwise satisfied and shall not be considered paid, and the assignment and pledge hereof and all agreements, covenants and other obligations of the City under the Agreement assigned to the Trustee for the benefit of the Owners of the Certificates shall continue to exist and shall run to the benefit of the Certificate Insurer, and the Certificate Insurer shall be subrogated to the rights of such Owners. ARTICLE X PROVISIONS RELATING TO CERTIFICATE INSURANCE POLICY AND RESERVE POLICY PROVISIONS Section 10.01 Certificate Insurer To Be Deemed Owner: Rights of the Certificate Insurer: Payments by the Certificate Insurer: Notices. (a) So long as the Certificate Insurer is not in default in its payment obligations under the Insurance Policy, the Certificate Insurer shall at all times be deemed the sole and exclusive Owner of the Outstanding Certificates for the purposes of all approvals, consents, waivers, institution of any action, and the direction of all remedies, including but not limited to approval of or consent to any amendment of or supplement to this Trust Agreement which requires the consent or approval of the Owners of a majority in aggregate amount of the Certificates pursuant to this Trust Agreement; provided, however, that the Certificate Insurer shall not be deemed to be the sole and exclusive Owner of the Outstanding Certificates with respect to any amendment or supplement to this Trust Agreement which seeks to amend or supplement this Trust Agreement for the purposes set forth in clauses (1) or (2) of Section 7.02 hereof, and provided, further, that the Certificate Insurer shall not be deemed the sole and exclusive Owner of the Outstanding Certificates with respect to any amendment or supplement to this Trust Agreement, and shall not have the right to direct or consent to Corporation, Trustee or Owner action as provided herein, if: (1) the Certificate Insurer shall be in payment default under the Certificate Insurance Policy; (2) any material provision of the Certificate Insurance Policy shall be held to be invalid by a final, non -appealable order of a court of competent jurisdiction, or the validity or enforceability thereof shall be contested by the Certificate Insurer; or (3) a proceeding shall have been instituted in a court having jurisdiction in the premises seeking an order for relief, rehabilitation, reorganization, conservation, liquidation or dissolution in respect of the Certificate Insurer under Article 16 of the Insurance Law of the State of New York or any successor provision thereto and such proceeding is not terminated for a period of 90 consecutive days or such court enters an order granting the relief sought in such proceeding. (b) To the extent that the Certificate Insurer makes payment of any principal of or interest on a Certificate, it shall be fully subrogated to all of the Owner's rights thereunder in OHS West:260306950.4 40490-8 —45— accordance with the terms of the Certificate Insurance Policy to the extent of such payment, including the Owner's rights to payment thereof. (c) In the event that the principal of or interest on a Certificate shall be paid by the Certificate Insurer pursuant to the terms of the Certificate Insurance Policy (i) such Certificate shall continue to be "outstanding" under this Trust Agreement, and (ii) the Certificate Insurer shall be fully subrogated to all of the rights of the Owner thereof in accordance with the terms and conditions of subsection (b) of this Section and the Certificate Insurance Policy. (d) This Trust Agreement shall not be discharged unless and until all amounts due to the Certificate Insurer have been paid in full or duly provided for. (e) The rights granted under this Trust Agreement to the Certificate Insurer to request, consent to or direct any action are rights granted to the Certificate Insurer in consideration of its issuance of the Certificate Insurance Policy. Any exercise by the Certificate Insurer of such rights is merely an exercise of the Certificate Insurer's contractual rights and shall not be construed or deemed to be taken for the benefit of or on behalf of the Owners, nor does such action evidence any position of the Certificate Insurer, positive or negative, as to whether Owner consent is required in addition to consent of the Certificate Insurer. (fl Notwithstanding any provision of this Trust Agreement to the contrary, no modification, amendment or supplement to this Trust Agreement shall become effective except upon obtaining the prior written consent of the Certificate Insurer. (g) In determining whether any amendment, consent, waiver or other action to be taken, or any failure to take action, under this Trust Agreement would adversely affect the security for the Certificates or the rights of the Owners, the Trustee shall consider the effect of any such amendment, consent, waiver, action or inaction as if there were no Certificate Insurance Policy. Section 10.02 Deposits to Policy Payments Account; Payments Under the Certificate Insurance Policy. (a) If, on the third Business Day prior to the related scheduled Interest Payment Date or Installment Payment Date ("Payment Date") there is not on deposit with the Trustee, after making all transfers and deposits required hereunder, moneys sufficient to pay the principal of and interest on the Certificates due on such Payment Date, the Trustee shall give notice to the Certificate Insurer and to its designated agent (if any) (the "Certificate Insurer's Fiscal Agent") by telephone or telecopy of the amount of such deficiency by 12:00 noon, New York City time, on such Business Day. If, on the second Business Day prior to the related Payment Date, there continues to be a deficiency in the amount available to pay the principal of and interest on the Certificates due on such Payment Date, the Trustee shall make a claim under the Certificate Insurance Policy and give notice to the Certificate Insurer and the Certificate Insurer's Fiscal Agent (if any) by telephone of the amount of such deficiency, and the allocation of such deficiency between the amount required to pay interest on the Certificates and the amount required to pay principal of the Certificates, confirmed in writing to the Certificate Insurer and the Certificate Insurer's Fiscal Agent by 12:00 noon, New York City time, on such second Business Day by filling in the form of Notice of Claim and Certificate delivered with the Certificate Insurance Policy. OHS West:260306950.4 40490-8 -46- (b) The Trustee shall designate any portion of payment of principal on Certificates paid by the Certificate Insurer, whether by virtue of mandatory sinking fund prepayment, maturity or other advancement of maturity, on its books as a reduction in the principal amount of Certificates registered to the then current Owner, whether DTC or its nominee or otherwise, and shall issue a replacement Certificate to the Certificate Insurer, registered in the name of Financial Security Assurance Inc., in a principal amount equal to the amount of principal so paid (without regard to authorized denominations); provided, however, that the Trustee's failure to so designate any payment or issue any replacement Certificate shall have no effect on the amount of principal or interest payable by the City on any Certificate or the subrogation rights of the Certificate Insurer. (c) Upon payment of a claim under the Certificate Insurance Policy, the Trustee shall establish a separate special purpose trust account for the benefit of Owners of Certificates referred to herein as the "Policy Payments Account" and over which the Trustee shall have exclusive control and sole right of withdrawal. The Trustee shall receive any amount paid under the Certificate Insurance Policy in trust on behalf of Owners of Certificates and shall deposit any such amount in the Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Trustee to Owners of Certificates in the same manner as principal and interest payments are to be made with respect to the Certificates under the provisions hereof regarding payment of Certificates. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Notwithstanding anything to the contrary otherwise set forth in this Trust Agreement, and to the extent permitted by law, in the event amounts paid under the Certificate Insurance Policy are applied to claims for payment of principal of or interest on the Certificates, interest on the principal of and interest on such Certificates shall accrue and be payable from the date of such payment at the Default Rate. Funds held in the Policy Payments Account shall not be invested by the Trustee and may not be applied to satisfy any costs, expenses or liabilities of the Trustee. Any funds remaining in the Policy Payments Account following a Payment Date shall promptly be remitted to the Certificate Insurer. (d) The Trustee shall keep a complete and accurate record of all funds deposited by the Certificate Insurer into the Policy Payments Account and the allocation of such funds to payment of interest on and principal paid in respect of any Certificate. The Certificate Insurer shall have the right to inspect such records at reasonable times upon reasonable notice to the Trustee. (e) The Certificate Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of this Trust Agreement. (f) The Certificate Insurer shall be entitled to pay principal of or interest on the Certificates that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the City (as such terms are defined in the Certificate Insurance Policy), whether or not the Certificate Insurer has received a Notice of Nonpayment (as such terms are defined in the Certificate Insurance Policy) or a claim upon the Certificate Insurance Policy. OHS West:260306950.4 40490-9 -47- Section 10.03 Renortinzy Reauirements. The Certificate Insurer shall be provided with the following information: (i) Annual audited financial statements of the City within 180 days after the end of the City's Fiscal Year and the City's annual budget within 30 days after the approval thereof, (ii) Notice of any draw upon the Reserve Fund within two Business Days after knowledge thereof other than (i) withdrawals of amounts in excess of the Reserve Fund Requirement; (iii) Notice of any default known to the Trustee within five Business Days after knowledge thereof, (iv) Prior notice of the advance refunding or prepayment of any of the Certificates, including the principal amount, maturities and CUSIP numbers thereof; (v) Notice of the resignation or removal of the Trustee and the appointment of, and acceptance of duties by, any successor thereto; (vi) Notice of the commencement of any proceeding by or against the City commenced under the United States Bankruptcy Code or any other applicable bankruptcy, insolvency, receivership, rehabilitation or similar law (an "Insolvency Proceeding"); (vii) Notice of the making of any claim in connection with any Insolvency Proceeding seeking the avoidance as a preferential transfer of any payment of principal of, or interest on, the Certificates; (viii) A full original transcript of all proceedings relating to the execution of any amendment or supplement to this Trust Agreement or the Continuing Disclosure Certificate; and (ix) All reports, notices and correspondence to be delivered under the terms of this Trust Agreement or the Continuing Disclosure Certificate. Section 10.04 Provisions of Article to Apply. The provisions of this Article shall apply, notwithstanding any other provisions of the Trust Agreement. ARTICLE XL MISCELLANEOUS Section 11.01 Benefits of this Trust Agreement. Nothing contained herein, expressed or implied, is intended to give to any person other than the Corporation, the Trustee, the City, the Certificate Insurer, the issuer of each Reserve Policy and the Owners any right, remedy or claim under or by reason hereof. Any agreement or covenant required herein to be performed by or on behalf of the OHS West260306950.4 40490-8 -48- Corporation or any member, officer or employee thereof shall be for the sole and exclusive benefit of the Trustee, the City, the Certificate Insurer, the issuer of each Reserve Policy and the Owners. Section 11.02 Provisions to Pay Amounts Relating to Reserve Policy. Notwithstanding anything to the contrary herein, this Trust Agreement may not be terminated unless provisions have been made to pay all amounts owed to the issuer of each Reserve Policy then in effect under the terms of each such Reserve Policy. Section 11.03 Successor Is Deemed Included In All References To Predecessor. Whenever herein either the Corporation or any member, officer or employee thereof is named or referred to, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the Corporation or such member, officer or employee, and all agreements and covenants required hereby to be performed by or on behalf of the Corporation or any member, officer or employee thereof shall bind and inure to the benefit of the respective successors thereof whether so expressed or not. Section 11.04 Execution of Documents by Owners. Any request, consent or other instrument required or permitted by this Trust Agreement to be signed and executed by Owners may be in any number of concurrent instruments of substantially similar tenor and shall be signed or executed by such Owners in person or by an agent or agents duly appointed in writing. Proof of the execution of any such request, consent or other instrument or of a writing appointing any such agent, or of the holding by any Person of Certificates shall be sufficient for any purpose of this Trust Agreement and shall be conclusive in favor of the Trustee and of the Corporation if made in the manner provided in this Section. The fact and date of the execution by any Person of any such request, consent or other instrument or writing may be proved by the certificate of any notary public or other officer of any jurisdiction, authorized by the laws thereof to take acknowledgments of deeds, certifying that the Person signing such request, consent or other instrument acknowledged the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer. The ownership of Certificates shall be proved by the Certificate Register. Any request, consent, or other instrument or writing of the Owner of any Certificate shall bind every future Owner of the same Certificate and the Owner of every Certificate issued in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the Corporation in accordance therewith or reliance thereon. Section 1 1.05 Unclaimed Money. Anything in this Trust Agreement to the contrary notwithstanding, any moneys held by the Trustee in trust for the payment and discharge of any of the Certificates which remain unclaimed for two years after the date when such Certificates have become due and payable, either at their stated maturity dates, prepayment or acceleration, if such moneys were held by the Trustee at such date, or for two years after the date of deposit of such moneys if deposited with the Trustee after the date when such Certificates became due and payable, shall, at the written request of the City be repaid by the Trustee to the City, as its absolute property and free and clear of any trust, lien, pledge or assignment securing said Certificates, and the Trustee shall thereupon be released OHS West:260306950.4 40490-5 -49- and discharged with respect thereto and the Owners of such Certificates shall look only to the City for the payment of such Certificates; provided, however, that before being required to make any such payment to the City, the Trustee shall, at the expense of the City, mail, postage prepaid to the Owners of such Certificates, at the last address, if any, appearing upon the Certificate Register a notice that said moneys remain unclaimed and that, after a date named in said notice, which date shall be not less than 30 days after the date of the mailing of such notice, the balance of such moneys then unclaimed shall be returned to the City. Section 11.06 Waiver of Personal Liability. No member, officer or employee of the Corporation shall be individually or personally liable for the payment of the Installment Payments evidenced by the Certificates by reason of their delivery, but nothing herein contained shall relieve any such member, officer or employee from the performance of any official duty provided by applicable provisions of law or hereby. Section 11.07 Content of Certificates. Every Certificate of the Corporation with respect to compliance with any agreement, condition, covenant or provision provided herein shall include (a) a statement that the person or persons making or giving such certificate have read such agreement, condition, covenant or provision and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements contained in such certificate are based, (c) a statement that, in the opinion of the signers, they have made or caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such agreement, condition, covenant or provision has been complied with; and (d) a statement as to whether, in the opinion of the signers, such agreement, condition, covenant or provision has been complied with. Any Certificate of the Corporation may be based, insofar as it relates to legal matters, upon an Opinion of Counsel unless the person making or giving such certificate knows that the Opinion of Counsel with respect to the matters upon which his certificate may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Any Opinion of Counsel may be based, insofar as it relates to factual matters or information with respect to which is in the possession of the Corporation, upon a representation by an officer or officers of the Corporation unless the counsel executing such Opinion of Counsel knows that the representation with respect to the matters upon which his opinion may be based, as aforesaid, is erroneous, or in the exercise of reasonable care should have known that the same was erroneous. Section 11.08 Accounts and Funds; Business Days. Any account or fund required herein to be established and maintained by the Trustee may be established and maintained in the accounting records of the Trustee either as an account or a fund, and may, for the purposes of such accounting records, any audits thereof and any reports or statements with respect thereto, be treated either as an account or a fund; but all such records with respect to all such accounts and funds shall at all times be maintained in accordance with this Trust Agreement and sound corporate trust industry practice and with due regard for the protection of the security of the Certificates and the rights of the Owners. Any action required to occur hereunder on a day which is not a Business Day shall be required to occur on the next succeeding Business Day with the same effect as if made on such non -Business Day. OHS West:260306950.4 40490-8 -50- Section 11.09 Notices. Unless otherwise provided herein, all notices, certificates or other communications hereunder shall be deemed sufficiently given upon actual receipt thereof when received by the City, the Corporation, the Trustee, the Certificate Insurer and the Rating Agencies, as the case may be, at the respective address provided pursuant to this Section or, if mailed by first class mail, postage prepaid, addressed to the appropriate address provided pursuant to this Section, six Business Days after deposit in the United States mail, the initial address for notices, counterparts and other communications hereunder is as follows: If to the Corporation: Lodi Public Improvement Corporation c/o City of Lodi 221 West Pine Street Lodi, California 95241-1910 Attention: City Clerk If to the City: City of Lodi 221 West Pine Street Lodi, California 95241-1910 Attention: City Manager If to the Trustee: The Bank of New York Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, CA 90017 Attention: If to the Certificate Insurer: [Tocome] If to S&P, to: Standard & Poor's Ratings Services 55 Water Street, 38th Floor New York, New York 10041 Attention: Municipal Structured Group Facsimile: (212) 438-2152 Telephone: (212) 438-2124 If to Fitch, to: Fitch Ratings 650 California Street, 8th Floor San Francisco, California 94018 Attention: U.S. Public Finance Group Facsimile: (415) 732-5770 Telephone: (415) 732-5610 The City, the Trustee, the Corporation, the Certificate Insurer and the Rating Agencies may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates or other communications shall be sent. Unless otherwise requested by the City, the Trustee, the Corporation, the Certificate Insurer or the Rating Agencies, any notice required to be given hereunder in writing may be given by any form of Electronic Notice capable of making a written record. Each such party shall file with the Trustee information appropriate to receiving such form of Electronic Notice. OHS West260306950.4 40490-8 -51- Section 11. 10 CUSIP Numbers. Neither the Corporation nor the Trustee shall be liable for any defect or inaccuracy in the CUSIP number that appears on any Certificate or in any prepayment notice relating thereto. The Trustee may, in its discretion, include in any prepayment notice relating to any of the Certificates a statement to the effect that the CUSIP numbers on the Certificates have been assigned by an independent service and are included in such notice solely for the convenience of the Owners and that neither the Corporation nor the Trustee shall be liable for any defects or inaccuracies in such numbers. Section 11.11 Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required hereby to be performed by or on the part of the Corporation or the Trustee shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants or portions thereof and shall in no way affect the validity hereof or of the Certificates, and the Owners shall retain all the benefit, protection and security afforded to them under any applicable provisions of law. The Corporation and the Trustee hereby declare that they would have executed and delivered this Trust Agreement and each and every other article, section, paragraph, subdivision, sentence, clause and phrase hereof and would have authorized the execution and delivery of the Certificates pursuant hereto irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases hereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 11.12 Disqualified Certificates. In determining whether the Owners of the requisite aggregate principal amount of Certificates have concurred in any demand, request, direction, consent or waiver under this Trust Agreement, Certificates which are owned or held by or for the account of the Authority or the City or by any Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the City shall be disregarded and deemed not to be Outstanding for the purpose of any such determination. Certificates so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of this Section if the pledges shall establish to the satisfaction of the Trustee the pledgee's right to vote such Certificates and that the pledges is not a Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the City. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Authority and the City shall specify in a certificate to the Trustee those Certificates disqualified pursuant to this Section and the Trustee may conclusively rely on such certificate. Section 11.13 Money Held for Particular Certificates. The money held by the Trustee for the payment of the interest, principal or redemption price due on any date with respect to particular Certificates (or portions of Certificates in the case of Certificates redeemed in part only) shall, on and after such date and pending such payment, be set aside on its books and held in trust by it for the Owners of the Certificates entitled thereto, subject, however, to the provisions of Section 11.05hereo£ Section 11.14 California Law. This Trust Agreement shall be construed and governed in accordance with the laws of the State of California. Section 11.15 Execution in Several Counterparts. This Trust Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed OHS West:260306950.4 404904 -52- to be an original; and all such counterparts, or as many of them as the Corporation and the Trustee shall preserve undestroyed, shall together constitute but one and the same instrument. Section 11.16 Concerning the Certificate Insurer. Whenever provision is made in this Trust Agreement for notice to be given to the Certificate Insurer or that any action hereunder requires the consent of the Certificate Insurer, or the Certificate Insurer is given the right to provide direction, each and every such provision shall require such notice or consent or direction to be in writing and shall cease and terminate and be of no further force or effect if the Certificate Insurer has defaulted in the payment of any amount due under the Certificate Insurance Policy after proper demand therefor has been made by the Trustee. Section 11.17 Complete Agreement. This Trust Agreement represents the complete agreement between the parties with respect to the Certificates and related matters. [Remainder of Page Intentionally Left Hlark. ] OHS West -.260306950.4 40490-8 -53- IN WITNESS WHEREOF, the Lodi Public Improvement Corporation has caused this Trust Agreement to be signed in its name by its President and The Bank of New York Trust Company, N.A., in token of its acceptance of the trusts created hereunder, has caused this Trust Agreement to he signed by one of its duly authorized officers, all as of the day and year first above written. LODI PUBLIC IMPROVEMENT CORPORATION President Attest: Secretary to the Corporation Attorney for the Corporation THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee am OHS West:260306950.4 40490-& Authorized Officer EXHIBIT A FORM OF CERTIFICATE WASTEWATER SYSTEM REVENUE CERTIFICATE OF PARTICIPATION, 2007 Series A Evidencing a Proportionate Interest of the Owner Hereof in Certain Installment Payments to be made by the CITY OF LODI Unless this Certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the City of Lodi 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. No. R- $ Certificate Interest Rate Payment Date Dated Date CUSIP % October 1, November —, 2008 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: $ THIS IS TO CERTIFY AND THIS CERTIFICATE EVIDENCES that the registered owner of this Certificate set forth above is the owner of a proportionate interest in certain installment payments (the "Installment Payments") to be made by the City of Lodi, a municipal corporation organized and existing under and by virtue of the Constitution and laws of the State of California (the "City") under and pursuant to that certain Installment Purchase Agreement (the "Agreement"), dated as of December 1, 2007, by and between the City and the Lodi Public Improvement Corporation (the "Corporation"). All of the rights to receive such Installment Payments have been assigned by the Corporation to The Bank of New York Trust Company, N.A., as trustee (which, together with any successor trustee thereunder, is referred to as the "Trustee") under that certain Trust Agreement (the "Trust Agreement"), dated as of December 1, 2007, between the Corporation and the Trustee. Capitalized terms used in this Certificate not otherwise defined herein shall have the meanings given such terms in the Trust Agreement. OHS West264306950.4 40490-8 A -I The registered owner of this Certificate is entitled to receive, subject to the terms of the Agreement, on the Certificate Payment Date set forth above, the principal amount set forth above, representing the registered owner's proportionate share of the principal component of Installment Payments becoming due and payable with respect to such Certificate Payment Date. The principal evidenced hereby is payable in lawful money of the United States of America upon surrender of this Certificate at the Corporate Trust Office of the Trustee in Los Angeles, California. The registered owner of this Certificate as shown in the registration books maintained by the Trustee as of the close of business on the applicable Record Date is entitled to receive such registered owner's proportionate share of the interest component the Installment Payments evidenced by this Certificate ( representing interest on the principal component of the Installment Payments owned by the registered owner hereof) at the interest rate set forth above from the Interest Payment Date next preceding the date of execution hereof by the Trustee; unless such date of execution is after a Record Date and on or before the following Interest Payment Date, in which event from such Interest Payment Date; or unless such date of execution is on or before March 15, 2008, in which event from the Dated Date specified above; provided that if at the time of such execution of this Certificate, interest evidenced by this Certificate is then in default, interest shall be payable from the Interest Payment Date to which the interest evidenced by this Certificate has previously been paid or made available for payment. Interest evidenced by this Certificate due on or before the Certificate Payment Date shall be payable in lawful money of the United States of America, by check mailed on such Interest Payment Date by first-class mail to the registered owner hereof; provided, that if the registered owner hereof shall be the owner of one million dollars ($1,000,000) or more in aggregate principal amount of Certificates, upon the written request of the registered owner hereof received by the Trustee at least three Business Days prior to the applicable Record Date (which request shall remain in effect until rescinded in writing by such registered owner), interest shall be paid by wire transfer in immediately available funds. Interest with respect to the Certificates will be paid on each Interest Payment Date provided that if any Interest Payment Date is not a Business Day, such interest shall be mailed or wired as provided above on the next succeeding Business Day and no interest shall accrue from the date when due. Interest Payment Date means each April 1 and October 1, commencing April 1,2008. Interest shall be computed on the basis of a 360 -day year of twelve 30 -day months. This Certificate is one of the duly authorized certificates of participation designated "Wastewater System Revenue Certificates of Participation, 2007 Series A (the "Certificates") aggregating Million Hundred Thousand Dollars ($ ) in principal amount, which have been executed and delivered by the Trustee under and pursuant to the provisions of the Trust Agreement. The obligation of the City to make the Installment Payments is a special obligation of the City payable solely from the System Net Revenues of the City's wastewater System as provided in the Agreement. The general fund of the City is not liable for, and neither the faith and credit nor the taxing power of the City is pledged to, the payment of the Installment Payments under the Agreement. The City has outstanding obligations, and may, as provided in the Agreement, incur other obligations, payable from the System Net Revenues on a parity with the Installment Payments. In the Agreement, the City has certified that all acts, conditions and things required by the Constitution and statutes of the State of California to have been performed, to have happened OHS West:260306950.4 40490-8 A-2 and to exist precedent to and in connection with the execution and delivery of the Agreement, have been performed, have happened and do exist in regular and due time, form and manner as required by law. Copies of the Agreement and the Trust Agreement are on file at the Corporate Trust Office of the Trustee and reference is hereby made to the Agreement and the Trust Agreement and to any and all amendments thereof and supplements thereto for a description of the agreements, conditions, covenants and terms of the Certificates, for the nature, extent and manner of enforcement of such agreements, conditions, covenants and terms, for the rights and remedies of the registered owners of the Certificates with respect thereto and for the other agreements, conditions, covenants and terms upon which the Certificates are executed and delivered thereunder. The Certificates maturing on and prior to October 1, are not subject to optional prepayment prior to their stated maturity dates. The Certificates maturing on and after October a are subject to optional prepayment prior to their stated maturity dates on any date on and after October 1, , as a whole or in part, at the option of the City, from any source of available funds at a prepayment price equal to the principal amount of the Certificates or portions thereof to be prepaid plus unpaid accrued interest thereon to the date fixed for prepayment, without premium. The Certificates maturing on October 1, are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1 thereafter to and including October 1, , from scheduled Installment Payments made by the City on such dates, at a prepayment price equal to the principal amount of the Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment. The Certificates maturing on October 1, are subject to mandatory prepayment prior to maturity, in part by lot, commencing on October 1, and on each October 1 thereafter to and including October 1, from scheduled Installment Payments made by the City on such dates, at a prepayment price equal to the principal amount of the Certificates to be prepaid, plus accrued interest thereon to the date fixed for prepayment. The amount of such Certificates subject to mandatory prepayment shall be reduced with respect to the principal amount of Certificates of such maturities optionally prepaid or purchased for retirement as provided in the Trust Agreement. This Certificate is transferable on the books required to be kept for that purpose at the Corporate Trust Office of the Trustee by the Person in whose name it is registered, in person or by his duly authorized attorney, upon payment of the charges provided in the Trust Agreement, and upon surrender of this Certificate for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form acceptable to the Trustee, and thereupon a new Certificate or Certificates evidencing a like amount of the principal component of Installment Payments coming due on the Certificate Payment Date set forth above, in Authorized Denominations, will be delivered to the transferee. This Certificate may be exchanged at the Corporate Trust Office of the Trustee, upon payment of the charges provided in the Trust Agreement, for Certificates evidencing a like amount of the principal component of Installment Payments coming due on the Certificate Payment Date set forth above of other Authorized Denominations. The Trustee may deem and treat the registered owner hereof as the absolute OHS West260306950.4 40490-8 A-3 owner hereof for the purpose of receiving payment of the interest and principal components of the Installment Payments evidenced hereby and for all other purposes, whether this Certificate shall be overdue or not, and the Trustee shall not be affected by any notice or knowledge to the contrary; and payment of the interest and principal components of the Installment Payments evidenced by this Certificate shall be made only to such registered owner, which payments shall be valid and effectual to satisfy and discharge liability on this Certificate to the extent of the sum or sums so paid. The Trustee has no obligation or liability to the Certificate owners for the payment of the interest or principal components of the Installment Payments evidenced by the Certificates; but rather the Trustee's sole obligations are those stated in the Trust Agreement. No member, officer or employee of the City or the Corporation shall be individually or personally liable for the payment of the interest or principal components of the Installment Payments evidenced by the Certificates or by reason of their delivery, but nothing herein contained shall relieve any such member, officer or employee from the performance of any official duty provided by applicable provisions of law or hereby. To the extent and in the manner permitted by the terms of the Trust Agreement, the provisions of the Trust Agreement may be amended by the parties thereto, but no such amendment shall (1) extend the Certificate Payment Date of this Certificate, or change the payment dates of, or reduce the rate of interest or principal components of the Installment Payments evidenced hereby, without the express written consent of the registered owner hereof, or (2) reduce the percentage of Certificates required for the written consent to any amendment, or (3) modify any rights or obligations of the Trustee without its prior written assent thereto. The Trust Agreement prescribes the manner in which it may be discharged and after which the Certificates shall no longer be secured by or entitled to the benefits of the Trust Agreement. IN WITNESS WHEREOF, this Certificate has been executed by the manual signature of an authorized signatory of the Trustee as of the date below. EXECUTION DATE: OHS West:260306950.4 404904 THE BANK OF NEW YORK TRUST COMPANY, N.A., as Trustee A-4 Authorized Signatory STATEMENT OF INSURANCE Financial Security Assurance Inc., New York, New York, has delivered its municipal bond insurance policy with respect to the scheduled payments due of principal of and interest on this Bond to The Bank of New York Trust Company, Los Angeles, California, or its successor, as trustee for the Certificates. Said Policy is on file and available for inspection at the Office of the Trustee and a copy thereof may be obtained from Financial Security or the Trustee. OHS West:260306950.4 404%-s A-5 [FORM OF ASSIGNMENT TO APPEAR ON CERTIFICATES] For value received the undersigned hereby sells, (Taxpayer Identification Number: all rights thereunder, and hereby irrevocably constitute attorney to transfer the within Certificate on the books 1 power of substitution in the premises. Dated: assigns and transfers ) the within ;s and appoints :ept for registration thereof, with full unto Certificate and Note: The signature to this Assignment must correspond with the name as written on the face of the Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: Notice: Signature must be guaranteed by an eligible guarantor institution. OHS WM 260306950.4 40490-8 A-6 10:4011:71180-i FORM OF IMPROVEMENT FUND REQUISITION The Bank of New York Trust Company, N.A., as Trustee 475 Sansome Street, 12th Floor San Francisco, California 94111 Attention: Corporate Trust Department RE: Disbursement from the Improvement Fund pursuant to Section 3.05 of the Trust Agreement (the "Trust Agreement"), dated as of December 1, 2007, by and between The Bank of New York Trust Company, N.A., as trustee (the "Trustee") and the Lodi Public Improvement Corporation (the "Corporation") REQUISITION NO. Amount; Payee. You are hereby instructed to pay to: at from the Improvement Fund established pursuant to the Trust Agreement the sum oft for the following -described Costs of the Project (as such terms are defined in the Trust Agreement) (describe expenditure): This cost has been properly incurred, is a proper charge against the Improvement Fund and has not been the basis of any previous disbursements. Check here if all Costs of the Project to be paid from the Improvement Fund have been paid and the Trustee is directed to undertake transfers from the Improvement Fund pursuant to Section 3.05 of the Trust Agreement. Very truly yours, CITY OF LODI City Representative OHS West:260306950A 40490-8 B-1 EXHIBIT C FORM OF COSTS OF ISSUANCE FUND REOUISITION The Bank of New York Trust Company, N.A., as Trustee 475 Sansome Street, 12th Floor San Francisco, California 94111 Attention: Corporate Trust Department RE: Disbursement from the Costs of Issuance Fund pursuant to Section 3.06 of the Trust Agreement (the "Trust Agreement"), dated as of December 1, 2007, by and between The Bank of New York Trust Company, N.A., as trustee (the "Trustee") and the Lodi Public Improvement Corporation (the "Corporation") REQUISITION NO. Amount; Payee. You are hereby instructed to pay to: at from the Costs of Issuance Fund established pursuant to the Trust Agreement the sum of $ for the following -described Costs of Issuance (as defined in the Trust Agreement) (describe expenditure): These costs have been properly incurred, are a proper charge against the Costs of Issuance Fund and has not been the basis of any previous disbursements. Check here if all Cost of Issuance to be paid from the Costs of Issuance Fund have been paid and the Trustee is directed to undertake transfers from the Costs of Issuance Fund pursuant to Section 3.06 of the Trust Agreement. very truly yours, CITY OF LODI City Representative OHS West:260306950.4 40490-8 C-1 ARTICLE I DEFINITIONS; EQUAL SECURITY............................................................ 2 Section1.01 Definitions............................................................................................ 2 Section 1.02 Rules of Construction........................................................................ 16 Section 1.03 Equal Security.................................................................................... 16 ARTICLE II THE CERTIFICATES................................................................................... 16 Section 2.01 The Certificates.................................................................................. 16 Section 2.02 General Terms of the Certificates...................................................... 17 Section 2.03 Procedure for the Delivery of Certificates ......................................... 18 Section 2.04 Optional Prepayment......................................................................... 19 Section 2.05 Mandatory Sinking Fund Prepayment ............................................... 19 Section 2.06 Selection of Certificates for Prepayment ........................................... 20 Section 2.07 Notice of Prepayment........................................................................ 20 Section 2.08 Execution of Certificates.................................................................... 21 Section 2.09 Transfer and Payment of Certificates ................................................ 21 Section 2.10 Exchange of Certificates.................................................................... 22 Section 2.11 Certificate Registration Books........................................................... 22 Section 2.12 Mutilated, Destroyed, Stolen or Lost Certificates ............................. 22 Section 2.13 Temporary Certificates...................................................................... 23 Section 2.14 Use of Book -Entry System for Certificates ....................................... 23 ARTICLE III FUNDS AND ACCOUNTS.......................................................................... 25 Section 3.01 Installment Payments Held in Trust ................................................... 25 Section 3.02 Deposit of Installment Payments....................................................... 25 Section 3.03 Establishment and Maintenance of Accounts in the Debt ServiceFund...................................................................................... 25 Section 3.04 Reserve Fund..................................................................................... 26 Section 3.05 Improvement Fund............................................................................. 27 Section 3.06 Costs of Issuance Fund...................................................................... 27 Section3.07 Rebate Fund....................................................................................... 28 Section 3.08 Deposit and Investments of Money in Accounts and Funds ............. 29 Section 3.09 Reliance on Opinions......................................................................... 30 ARTICLE IV SECURITY FOR CERTIFICATES.............................................................. 30 Section 4.01 Assignment of Agreement; Enforcement of Obligations; Funds andAccounts...................................................................................... 30 OHS West260306950.4 4[490-8 ARTICLE V COVENANTS OF THE CORPORATION AND THE TRUSTEE .............. 31 Section 5.01 Compliance with Trust Agreement .................................................... 31 Section 5.02 Observance of Laws and Regulations ................................................ 31 Section 5.03 Tax Covenants................................................................................... 31 Section 5.04 Accounting Records and Reports....................................................... 32 Section 5.05 Prosecution and Defense of Suits ...................................................... 32 Section 5.06 Amendments to Agreement............................................................... 32 Section 5.07 Recording and Filing......................................................................... 33 Section 5.08 Notices to Rating Agencies................................................................ 33 Section 5.09 Further Assurances............................................................................. 33 ARTICLE VI THE TRUSTEE............................................................................................. 33 Section6.01 The Trustee........................................................................................ 33 Section6.02 Liability of Trustee............................................................................ 34 Section 6.03 Compensation and Indemnification of Trustee .................................. 36 Section 6.04 Notices to Rating Agencies................................................................ 36 ARTICLE VII AMENDMENT OF THE TRUST AGREEMENT ....................................... 37 Section 7.01 Modification without Consent of Owners .......................................... 37 Section 7.02 Modification with Consent of Owners ............................................... 38 Section 7.03 Effect of Supplemental Trust Agreement or Amendment .................40 Section 7.04 Required and Permitted Opinions of Counsel ................................... 40 Section 7.05 Notation of Modification on Certificates; Preparation of New Certificates......................................................................................... 40 Section 7.06 Notice to Rating Agency.................................................................... 40 Section 7.07 Amendmentby Mutual Consent........................................................ 41 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF OWNERS ........................ 41 Section 8.01 Trust Events of Default; Acceleration; Waiver of Default ................ 41 Section8.02 Remedies............................................................................................ 41 Section 8.03 Non-Waiver........................................................................................ 41 Section 8.04 Remedies Not Exclusive.................................................................... 42 Section 8.05 No Liability by the City to theOwrmm.............................................. 42 Section 8.06 No Liability by the Trustee to the Owners ......................................... 42 ARTICLEIX DEFEASANCE.............................................................................................. 42 Section 9.01 Defeasance of Certificates................................................................. 42 OHS West260306950.4 40490-8 Section 9.02 Discharge of Trust Agreement........................................................... 43 Section 9.03 Surviving Provisions.......................................................................... 44 Section 9.04 Payments by Certificate Insurer......................................................... 44 ARTICLE X PROVISIONS RELATING TO CERTIFICATE INSURANCE POLICY AND RESERVE POLICY PROVISIONS ..................................... 44 Section 10.01 Insurer To Be Deemed Owrxw;Rights of the Insurer; Payments by the Insurer: Notices....................................................................... 44 Section 10.02 Deposits to Policy Payments Account; Payments Under the Insurance Policy................................................................................. 46 Section 10.03 Reporting Requirements.................................................................... 47 Section 10.04 Provisions of Article to Apply........................................................... 48 ARTICLE XI MISCELLANEOUS...................................................................................... 48 Section 11.01 Benefits of this Trust Agreement....................................................... 48 Section 11.02 Provisions to Pay Amounts Relating to Reserve Policy .................... 48 Section 11.03 Successor Is Deemed Included In All References To Predecessor........................................................................................ 48 Section 1 1.04 Execution of Documents by Owners ................................................. 48 Section 11.05 Unclaimed Money.............................................................................. 49 Section 11.06 Waiver of Personal Liability.............................................................. 49 Section 11.07 Content of Certificates....................................................................... 49 Section 11.08 Accounts and Funds; Business Days ................................................. 50 Section11.09 Notices............................................................................................... 50 Section 11.10 CUSIP Numbers................................................................................. 51 Section 1 1.11 Partial Invalidity................................................................................. 51 Section 1 1.12 Disqualified Certificates.................................................................... 52 Section 11.13 Money Held for Particular Certificates .............................................. 52 Section 1 1.14 California Law................................................................................... 52 Section 1 1.15 Execution in Several Counterparts..................................................... 52 Section 11.16 Concerning the Certificate Insurer ..................................................... 52 Section 1 1.17 Complete Agreement......................................................................... 52 EXHIBIT A FORM OF CERTIFICATE.......................................................................... A-1 EXHIBIT B FORM OF IMPROVEMENT FUND REQUISITION ................................ B-1 EXHIBIT C FORM OF COSTS OF ISSUANCE FUND REQUISITION ...................... C-1 OHS West:.260306950.4 40490-8 OHS West:260306950.4 40490-& OH&S DRAFT OF November 7,2007 INSTALLMENT PURCHASE AGREEMENT by and between CITY OF LODI and LODI PUBLIC IMPROVEMENT CORPORATION Dated as of December 1,2007 relating to Wastewater System Revenue Certificates of Participation, 2007 Series A OHS West:260306953.4 40490-8 Table of Contents Pae ARTICLE I DEFINITIONS................................................................................................. 2 Section1.1. Defirutions............................................................................................ 2 ARTICLE II REPRESENTATIONS AND WARRANTIES ................................................ 2 Section 2.1. Representations by the City................................................................. 2 Section 2.2. Representations and Warranties by the Corporation ........................... 2 ARTICLE III ACQUISITION OF THE PROJECT............................................................... 3 Section 3.1. Sale and Purchase of Project................................................................ 3 Section3.2. Title...................................................................................................... 3 ARTICLE IV INSTALLMENT PAYMENTS....................................................................... 3 Section4.1. Purchase Price...................................................................................... 3 Section 4.2. Installment Payments and Additional Payments .................................. 3 ARTICLEV SECURITY ...................................................................................................... 4 Section 5.1. Pledge of System Net Revenues.......................................................... 4 Section 5.2. Allocation of System Revenues........................................................... 5 Section 5.3. Additional Parity Debt......................................................................... 6 Section 5.4. Rate Stabilization Fund........................................................................ 7 ARTICLE VI COVENANTS OF THE CITY........................................................................ 8 Section6.1. Punctual Payment................................................................................. 8 Section6.2. Legal Existence.................................................................................... 8 Section 6.3. Against Encumbrances......................................................................... 8 Section 6.4. Against Sale or Other Disposition of the System ................................ 8 Section 6.5. Maintenance and Operation of System ................................................ 8 Section6.6. Insurance.............................................................................................. 8 Section 6.7. Eminent Domain Proceeds................................................................... 9 Section 6.8. Amounts of Rates, Fees and Charges ................................................ 10 Section 6.9. Enforcement of and Performance Under Contracts ........................... 10 Section 6.10. Collection of Charges, Fees and Rates .............................................. 11 Section 6.11. No Free Service.................................................................................. 11 Section 6.12. Prompt Acquisition and Construction of the Project ......................... 11 Section6.13. Payment of Claims............................................................................. 11 OHS West:260306953.4 40490-8 1 Table of Contents (continued) Page Section 6.14. Books of Record and Accounts; Financial Statements ...................... 11 Section 6.15. Payment of Taxes and Other Charges and Compliance with Governmental Regulations................................................................. 12 Section 6.16. Tax Covenants and Matters............................................................... 12 Section6.17. Rebate Fund....................................................................................... 13 Section 6.18. Continuing Disclosure....................................................................... 14 Section6.19. Further Assurances............................................................................. 14 Section 6.20. Provisions Relating to the Certificate Insurance ................................ 14 ARTICLE VII PREPAYMENT OF INSTALLMENT PAYMENTS ................................... 15 Section 7.1. Prepayment........................................................................................ 15 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION........................................................................................... 15 Section 8.1. Events of Default and Acceleration of Maturities ............................. 15 Section 8.2. Application of Funds Upon Acceleration .......................................... 17 Section 8.3. Other Remedies of the Corporation................................................... 17 Section 8.4. Non-Waiver........................................................................................ 18 Section 8.5. Remedies Not Exclusive.................................................................... 18 Section8.6. Notices............................................................................................... 18 ARTICLE IX DISCHARGE OF OBLIGATIONS............................................................... 19 Section 9.1. Discharge of Installment Payments ................................................... 19 Section 9.2. Accounting and Discharge Instruments ............................................. 19 ARTICLE X MISCELLANEOUS...................................................................................... 19 Section 10.1. Liability of City Limited to System Revenues .................................. 19 Section 10.2. Successor Is Deemed Included in all References to Predecessor ...... 19 Section 10.3. Waiver of Personal Liability.............................................................. 20 Section 10.4. Article and Section Headings, Gender and References ..................... 20 Section 10.5. Partial Invalidity................................................................................. 20 Section 10.6. Assignment........................................................................................ 20 Section 10.7. California Law................................................................................... 20 Section 10.8. Effective Date.................................................................................... 20 Section 10.9. Execution in Counterparts.................................................................. 20 OHS West:260306953.4 40490-8 11 Table of Contents (continued) Page Section 10.10. Indemnification.................................................................................. 20 Section10.11. Amendments...................................................................................... 22 EXHIBIT A - DESCRIPTION OF THE PROJECT.................................................................. A-1 EXHIBIT B - PRINCIPAL COMPONENTS OF INSTALLMENT PAYMENTS .................. B-1 EXHIBIT C - SCHEDULE OF INSTALLMENT PAYMENTS AS OF DELIVERY DATE........................................................................................................... C-1 OHS West:260306953.4 40490-8 911 INSTALLMENT PURCHASE AGREEMENT This INSTALLMENT PURCHASE AGREEMENT, made and entered into as of December 1,2007, by and between the CITY OF LODI, a municipal corporation duly organized and existing under and by virtue of the laws of the State of California (the "City"), and the LODI PUBLIC IMPROVEMENT CORPORATION, a nonprofit, public benefit corporation duly organized and existing under and by virtue of the laws of the State of California (the "Corporation"), WITNESSETH: WHEREAS, the City has established the System (capitalized terms used herein and not otherwise defined shall have the meanings given such terms pursuant to Section 1.1) to provide for the collection, treatment and disposal of wastewater; and WHEREAS, the City proposes to make certain additions, betterments, extensions, replacements and improvements to its System constituting the Project and more fully described in Exhibit A hereto; and WHEREAS, the City proposes to refinance the City's obligations to make installment payments under the 1991 Agreement in connection with the Existing Facilities and the 1991 Certificates; and WHEREAS, the Corporation is authorized to enter into contracts for the acquisition, construction, installation, equipping and sale of facilities such as the Existing Facilities and the Project; and WHEREAS, the Corporation has agreed to assist the City by acquiring the Existing Facilities and acquiring, constructing, installing and equipping or causing the acquisition, construction, installation and equipping of the Project as herein provided and selling the Existing Facilities and the Project to the City on the terms and conditions set forth herein; and WHEREAS, the City and the Corporation have duly authorized the execution of this Agreement; WHEREAS, the Corporation will assign certain of its rights hereunder, including its right to receive Installment Payments, to The Bank of New York Trust Company, N.A., as Trustee under the Trust Agreement, dated as of December 1, 2007, between the Corporation and The Bank of New York Trust Company, N.A. (as amended and supplemented, the "Trust Agreement"); and WHEREAS, pursuant to the Trust Agreement, the Trustee is to execute and deliver Wastewater System Revenue Certificates of Participation, 2007 Series A, evidencing the proportionate interests of the Owners thereof in the Installment Payments; and OHS West:260306953.4 1 40490-8 WHEREAS, a portion of the proceeds of the sale of the Certificates are to be applied to finance Costs of the Project; and WHEREAS, a portion of the proceeds of the Certificates are to be applied to the refinancing of the City's obligations to make installment payments under the 1991 Agreement in connection with the Existing Facilities by refunding the 1991 Certificates as provided in the Escrow Agreement. WHEREAS, all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this Installment Purchase Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law, and the parties hereto are now duly authorized to execute and enter into this Installment Purchase Agreement; NOW, THEREFORE, IN CONSIDERATION OF THESE PREMISES AND OF THE MUTUAL AGREEMENTS AND COVENANTS CONTAINED HEREIN AND FOR OTHER VALUABLE CONSIDERATION, THE PARTIES HERETO DO HEREBY AGREE AS FOLLOWS: ARTICLE I DEFINITIONS Section 1.1. Definitions. Unless the context otherwise requires, capitalized terms used in this Agreement shall for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein or therein have the meanings given such terms in the Trust Agreement, such definitions to be equally applicable to both the singular and plural forms of any of the defined terms. ARTICLE 11 REPRESENTATIONS AND WARRANTIES Section 2.1. Representations by the City. The City represents, warrants and certifies as follows: (a) The City is a municipal corporation duly organized and existing under and pursuant to the laws of the State of California. The City has full legal right, power and authority to enter into this Agreement and carry out its obligations hereunder, to carry out and consummate all transactions contemplated by this Agreement, and the City has complied with the provisions of all applicable law in all matters relating to such transactions. By proper action, the City has duly authorized the execution, delivery and due performance of this Agreement. (b) The City will not take or permit any action to be taken which results in the interest components of the Installment Payments being included in the gross income for purposes of federal income taxation or not being exempt from personal income taxes of the State of California. OHS %est:260306953.4 2 40490-8 (C The City has determined that it is necessary and proper for City uses and purposes within the terms of all applicable law that the City finance the acquisition of the Project in the manner provided for in this Agreement. (d) All acts, conditions and things required by the Constitution and statutes of the State to have been performed, to have happened and to exist precedent to and in connection with the execution and delivery of this Agreement, have been performed, have happened and do exist in regular and due time, form and manner as required by law. Section 2.2. Representations and Warranties by the Corporation. The Corporation represents and warrants that the Corporation is a nonprofit, public benefit corporation duly organized and in good standing under the laws of the State of California, has full legal right, power and authority to enter into this Agreement and to carry out and consummate all transactions contemplated by this Agreement and by proper action has duly authorized the execution, delivery and due performance of this Agreement. ARTICLE III THE PROJECT AND THE EXISTING FACILITIES Section 3.1 The Project. (a) The City, as agent for the Corporation, will cause the Project to be acquired, constructed, installed and equipped for and at the expense of the Corporation as herein provided substantially in accordance with the plans and specifications prepared by the City. Title to each component of the Project shall be in the Corporation and shall be transferred to the City as provided in this Agreement. (b) The Corporation hereby sells and conveys to the City and the City hereby purchases and acquires from the Corporation, upon the terms and conditions of this Agreement, the Corporation's right, title and interest in, the Project. As each component of the Project is completed and ready to be placed in service, as evidenced by the certification required by Section 3.7 hereof, all right, title and interest of the Corporation in and to such component will vest in the City, without the necessity of any further action on the part of the Corporation or the City or any other Person. The City is familiar with the state of the title of the Project and accepts the same subject to all matters and conditions affecting the same and the City shall, at its expense, defend the Corporation's right, title and interest in and to the Project. Upon the vesting of the Corporation's right, title and interest in and to each component of the Project in the City, the Corporation will take such action and execute such documents (including without limitation deeds, bills of sale and other title documents) as may be deemed necessary or desirable by the City to evidence and confirm such transfer. The City will pay all expenses and taxes (if any) applicable to or arising from any transfer of title as herein provided. (c) The City agrees to complete acquisition, construction, installation and equipping of the Project with all reasonable dispatch, delays incident to force majeure only excepted; but if for any reason such acquisition, construction, installation and equipping is not completed, there shall be no resulting liability on the part of the Corporation and no diminution in or postponement of Installment Payments or the Additional Payments required in Section 4.2 hereof, to be paid by the City. OHS West2W305953.4 3 40490-8 In order to effectuate the purposes of this Agreement, the City will make, execute, acknowledge and deliver, or cause to be made, executed, acknowledged and delivered, all contracts, orders, receipts, writings and instructions, in the name of the City or otherwise, with or to other Persons, and in general do or cause to be done all such other things as may be requisite or proper for the acquisition, construction, installation and equipping of the Project and fulfilling the obligations of the City under this Agreement. The Corporation hereby grants to the City the right, privilege and authority to take all action and to do all other things necessary to effectuate the purposes of this Agreement. Section 3.2. Purchase of Existing Facilities by Corporation. In consideration of the application of the proceeds of the Certificates as provided in Section 2.03 of the Trust Agreement, the City hereby sells, assigns, and transfers to the Corporation, and the Corporation hereby purchases from the City, all of the City's right, title and interest in the Existing Facilities. In consideration of the agreement of the City to make the Installment Payments as provided in Section 4.2 hereof, the Corporation hereby sells, assigns, and transfers to the City, and the City hereby purchases from the Corporation, all of the Corporation's right, title and interest in the Existing Facilities. Section 3.3. Sale of the Certificates. In order to provide funds for payment of the Cost of the Project, and the refunding of the 1991 Certificates, the Corporation, as soon as practicable after the execution of this Agreement, will cause the sale and delivery of the Certificates to the initial purchasers thereof and pay the proceeds thereof to Trustee who shall deposit the proceeds of such sale received by the Trustee as provided in Section 2.03 of the Trust Agreement. Section 3.4. Payments from Improvement Fund. The Corporation has, in the Trust Agreement, authorized and directed Trustee to make payments from the Improvement Fund to pay, from time to time, the Cost of the Project, upon receipt by Trustee of Written Requests of the City (upon which both the Corporation and Trustee shall rely and shall be protected in relying), stating with respect to each payment to be made: (1) the requisition number, (2) the name and address of the Person to whom payment is due or has been made, (3) the amount to be paid, (4) that each obligation, item of cost or expense mentioned therein has been properly paid or incurred, is a proper charge against the Improvement Fund and has not been the basis of any previous withdrawal. Section 3.5 Obligations of the Parties to Cooperate in Furnishing Documents. The City and the Corporation agree to cooperate in furnishing to Trustee any documents referred to in Section 3.4 hereof that are required to effect payments out of the Improvement Fund, and agree to cause such orders to be directed to Trustee as may be necessary to effect payments out of the Improvement Fund in accordance with Section 3.4 hereof. Such obligation shall not extend beyond the moneys in the Improvement Fund available for payment under the terms of the Trust Agreement. The City further agrees to cooperate with the Corporation in order that the Corporation may comply fully with the requirements of the Trust Agreement. Section 3.6. Revision of Plans and Specifications. The City may revise the plans and specifications for the Project at any time and from time to time prior to the Completion Date OHS West260306953.4 4 40490-& provided that in the case of any change that would materially render inaccurate the description of the Project contained in Exhibit A-1 hereto, there shall first be delivered to Trustee and the Corporation (i) a revised Exhibit A-1 containing a description of the Project as revised by the revision in the plans and specifications for the Project, the accuracy of which shall have been certified by a Certificate of the City, and (ii) a Favorable Opinion of Bond Counsel with respect to such revision. Section 3.7. Certificate of Completion of Proiect. As each component of the Project is completed and ready to be placed in service, the City shall so notify Trustee by a Certificate of the City. Upon the earlier of the Completion Date for all components of the Project or the date the City determines that all Costs of the Project to be paid from the Improvement Fund have been paid or requisitions therefor submitted to the Trustee, the City shall promptly submit the Certificate of Completion to the Trustee. Notwithstanding the foregoing, the Certificate of Completion shall state that it is given without prejudice to any rights against third parties which exist at the date of such Certificate or which may subsequently come into being. Section 3.8. Completion of Proiect if Improvement Fund Moneys Inadequate: Surplus in Improvement Fund. To the extent that the moneys in the Improvement Fund available for payment of the Cost of the Project are not sufficient to pay the Cost of the Project in full, the City will use its best efforts to complete or cause to be completed the Project in accordance with the plans and specifications prepared by the City and pay or cause to be paid from legally available funds all of that portion of the Cost of the Project in excess of the moneys available therefor in the Improvement Fund. The Corporation does not make any warranty, either express or implied, that the moneys which will be paid into the Improvement Fund will be sufficient to pay all Costs of the Project. In respect of the payment by the City of any portion of the Cost of the Project pursuant to the provisions of this Section, it shall not be entitled to any reimbursement therefor from the Corporation, Trustee or the Owners of any of the Certificates, nor shall it be entitled to any diminution in or postponement of the Installment Payments or the Additional Payments required in Section 4.2 hereof, to be paid by the City. If, upon the completion of the Project, there shall be any surplus funds remaining in the Improvement Fund not required to provide for the payment of the Cost of the Project, such funds shall be applied as provided in Section 3.05 of the Trust Agreement. Section 3.9. The City to Pursue Remedies Against Contractors in Event of Breach of Contract. In the event of default by any contractor or subcontractor under any contract made by it in connection with the Project or in the event of a breach of warranty with respect to any materials, workmanship or performance guarantee, the City may proceed, either separately or in conjunction with others, to pursue such remedies against the contractor or subcontractor so in default and against each surety for the performance of such contract as it may deem advisable. The City will advise the Corporation of the steps it intends to take in connection with any such default. If the City shall so notify the Corporation, the City may, in its own name or in the name of the Corporation, prosecute any action or proceeding or take any other action involving any such contractor, subcontractor or surety which the City deems reasonably necessary, and in such event the Corporation will cooperate fully with the City. Any amounts recovered by way of damages, refunds, adjustments or otherwise in connection with the foregoing prior to the OHS West:260306953.4 5 40490-8 Completion Date shall be paid into the Improvement Fund or, if recovered after the Completion Date and full disposition of the Improvement Fund, shall be retained by or paid to the City. Section 3.10. Escrow Fund. The Corporation has, in the Trust Agreement, authorized and directed the Trustee to deposit a portion of the proceeds of the Certificates into the Escrow Fund. Amounts in the Escrow Fund are to be invested, and applied to the refunding of the 1991 Certificates, as provided in the Escrow Agreement. The City hereby approves the form of the Trust Agreement and the Escrow Agreement and the performance by the parties thereto of their respective obligations under such documents. Section 3.11, Investment of Moneys in Funds Created Under Trust Agreement. Any moneys held as a part of the Improvement Fund, Debt Service Fund or any other fund created pursuant to the Trust Agreement shall, at the Written Request of the City (or, if the City is in default under this Agreement, at the Written Request of the Corporation), be invested or reinvested by Trustee as provided in Article V of the Trust Agreement. The City approves and agrees with the investment provisions of the Indentures. The City acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Corporation or the City the right to receive brokerage confirmations of security transactions as they occur, the City specifically waives receipt of such confirmations to the extent permitted by law. ARTICLE IV INSTALLMENT PAYMENTS Section4.1. Purchase Price. (a) The Purchase Price to be paid by the City to the Corporation for the purchase of the Project and the Existing Facilities is the sum of the principal components of the Installment Payments set forth in Exhibit B hereto plus the interest components of the Installment Payments which consist of the sum of the interest to accrue on the unpaid balance of each such principal component at the interest rate set forth in Exhibit B hereto. (b) The interest components of the Installment Payments shall accrue from the Delivery Date to the date of payment of the applicable principal component, including any prepayment thereof pursuant to Article VII. The interest components shall be computed on the basis of a 360 -day year of twelve 30 -day months. The interest components of the Installment Payments shall be paid by the City as and constitute interest paid on the principal components of the Installment Payments. Section 4.2. Installment Payments and Additional Payments. The City shall, subject the provisions of Section 8.1 and Section 10.1 and to any rights of prepayment provided in Article VII, pay the Corporation the Purchase Price in installments as follows: (i) each principal component of the Installment Payments is payable on the Installment Payment Date preceding the Certificate Payment Date for such principal component set forth in Exhibit B hereto in the amount specified for such date in Exhibit B hereto; and (ii) the interest components of the Installment Payments shall be payable on the Installment Payment Date preceding each Interest Payment Date OHS West260306953.4 6 40490-8 in the amount of accrued interest on the unpaid balance of the principal components of the Installment Payments at the respective interest rates per annum set forth in Exhibit B hereto. The schedule of the principal and interest components as of the Delivery Date are set forth in Exhibit C hereto. The amounts shown in Exhibit C hereto shall automatically be adjusted to account for any prepayment of Installment Payments made by the City pursuant to Article VII and any discharge of Installment Payments pursuant to Article IX. Each Installment Payment shall be paid to the Corporation in lawful money of the United States of America. In the event the City fails to make any of the payments required to be made by it under this Section, such payment shall continue as an obligation of the City until such amount shall have been fully paid; and the City agrees to pay the same with interest accruing thereon at the highest rate of interest then applicable to the remaining unpaid principal components of the Installment Payments. The obligation of the City to make the Installment Payments, but only from the sources specified in Section 10.01, is absolute and unconditional, and, until such time as the Purchase Price shall have been paid in full (or provision for the payment thereof shall have been made pursuant to Article IX), the City will not discontinue or suspend the payment of any Installment Payment required to be made by it under this Section, whether or not the System or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part. This Agreement shall be deemed and construed to be a net contract, and the City shall pay absolutely net during the term hereof the Installment Payments and all other payments required hereunder, and such payments shall be net payments and shall not be subject to deduction, abatement reduction or diminution, whether by offset or otherwise, and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. In addition to the Installment Payments, the City shall also pay such amounts ("Additional Payments") as shall be required for the payment of all fees and administrative costs of the Corporation and the Trustee under the Trust Agreement or otherwise relating to the Certificates, including without limitation all expenses, compensation and indemnification of the Corporation and the Trustee payable by the City hereunder and under the Trust Agreement, fees of auditors, accountants, attorneys or engineers, and all other necessary administrative costs of the Corporation or charges required to be paid by it to comply with the terms hereof of the Certificates or of the Trust Agreement or to indemnify the Corporation and its employees, officers and directors and the Trustee. [The City shall, to the extent permitted by law, pay or reimburse the Certificate Insurer any and all Certificate Insurer Expenses. If the City shall fail to pay any Policy Costs in accordance with the provisions in the Trust Agreement, the Certificate Reserve Insurer shall be entitled to exercise any and all legal and equitable remedies available to it.] ARTICLE V SECURITY Section 5.1. Pledgeystem Net Revenues. All System Net Revenues and all amounts on deposit in the System Revenue Fund are, pursuant to the Pledge Law, hereby Otis Wesv260306953.4 7 40490-8 irrevocably pledged to the payment of the Installment Payments as provided herein and shall not be used for any other purpose until all Installment Payments have been fully paid or provision has been made for such payment in accordance with Section 9.1; provided that out of the System Revenues and amounts on deposit in the System Revenue Fund, there may be apportioned such sums for such purposes as are expressly permitted herein. This pledge, together with the pledge of System Net Revenues and amounts in the System Revenue Fund securing all other Parity Debt, shall, subject to application as permitted herein, constitute a first lien on System Net Revenues and amounts on deposit in the System Revenue Fund. Section 5.2. Allocation of System Revenues. In order to carry out and effectuate the pledge and lien contained herein, the City agrees and covenants that all System Revenues shall be received by the City in trust hereunder and, except for Net Proceeds, shall be deposited when and as received in a special fund designated as the "System Revenue Fund, which fund the City has heretofore established and which fund the City agrees and covenants to maintain and to hold separate and apart from other funds until all Installment Payments have been fully paid or provision has been made therefor in accordance with Section 9.1. To the extent the City has an existing fund which satisfies the foregoing requirements, then such fund shall be deemed to be the "System Revenue Fund" and the City shall not be required to create a new fund. The City may maintain separate accounts within the System Revenue Fund. The amounts in the System Revenue Fund shall be invested in Authorized Investments. Moneys in the System Revenue Fund shall be used and applied by the City as provided in this Agreement. The City shall, from the moneys in the System Revenue Fund, pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as such Operation and Maintenance Costs become due and payable. Thereafter, all remaining moneys in the System Revenue Fund shall be set aside by the City at the following times for the transfer to the following respective special funds in the following order of priority; and all moneys in each of such funds shall be held in trust and shall be applied, used and withdrawn only for the purposes set forth in this Section and, as to funds held under the Trust Agreement, the Trust Agreement: (a) Installment Payments. Not later than each Installment Payment Date, the City shall, from the moneys in the System Revenue Fund, transfer to the Trustee the Installment Payment due and payable on that Installment Payment Date. The City shall also, from the moneys in the System Revenue Fund, transfer when due to the applicable trustee for deposit in the respective payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, any Parity Obligation Payments in accordance with the provisions of the applicable Parity Obligations. (b) Reserve Fund On or before the first Business Day of each month, the City shall, from the remaining moneys in the System Revenue Fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the Trustee as provided in Section 3.04 of the Trust Agreement for deposit in the Reserve Fund in accordance with the Trust Agreement and to the applicable trustee for such other debt service reserve funds, if any, as may have been established in connection with Parity Obligations that sum, if any, necessary to restore: (i) the Reserve Fund to an amount equal to the OHS West:260306953.4 8 40490-8 Reserve Fund Requirement and otherwise replenish the Reserve Fund for any withdrawals (including draws upon the Reserve Policy) to pay the Installment Payments due hereunder; and (ii) necessary to restore such other debt service reserve funds for Parity Obligations to an amount equal to the amount required to be maintained therein; provided that payments to restore the Reserve Fund after a withdrawal may be made in monthly installments equal to 1/12 of the aggregate amount needed to restore the Reserve Fund to the Reserve Fund Requirement as of the date of the withdrawal. To the extent that transfers from the Reserve Fund to the Debt Service Fund are from draws on the Reserve Policy as permitted under the definition of Reserve Fund Requirement in the Trust Agreement, transfers hereunder to restore the Reserve Fund shall be made to reimburse the provider of the Reserve Policy to the extent the Reserve Policy is reinstated. If consented to by the Certificate Insurer, in lieu of funding the Reserve Fund Requirement with cash, the City may cause one or more Reserve Policies to be delivered to the Trustee to the credit of the Reserve Fund and the Reserve Fund Requirement shall be satisfied up to the stated amount available to be drawn under such Reserve Policies. (c) Surplus. Moneys on deposit in the System Revenue Fund not necessary to make any of the payments required above in a Fiscal Year may be expended by the City at any time for any purpose permitted by law, including but not limited to payments vtt respect to Subordinate Obligations and deposits to the Rate Stabilization Fund. Section 5.3. Additional Parity Debt. The City may at any time enter into or otherwise incur Parity Debt in addition to the obligations under this Agreement and the Parity Payment Obligations under the Prior Agreements; provided: (a) The City shall be in compliance with all agreements, conditions, covenants and terms contained in this Agreement required to be observed or performed by it, and a Certificate of the City to that effect shall have been filed with the Trustee (with the consent of the Certificate Insurer this condition shall not apply where the purpose of the proposed Parity Debt is to cure such non-compliance). (b) Any debt service reserve fund established for such Parity Debt shall satisfy the following criteria: (i) such debt service reserve fund shall be held by an independent trustee (who may be other than the Trustee); (ii) the required amount of such debt service reserve fund shall not exceed the lesser of the maximum annual debt service of such Parity Debt (calculated on the basis of a year ending on the final day of the Fiscal Year) or the maximum amount permitted under the Code, provided that, if such Parity Debt is a loan from a governmental agency, then a debt service reserve fund shall be established in the amount, if any, required or permitted by such governmental agency; and (iii) the City shall not be required to replenish withdrawals from such debt service reserve fund on terms less favorable to the City than the terms for replenishing the Reserve Fund pursuant to Section 5.2(b). (c) The System Net Revenues for the last completed Fiscal Year or any 12 consecutive months within the last 18 months preceding the date of entry into or incurrence of such Parity Debt, as shown by a Certificate of the City on file with the Trustee, plus an allowance for increased System Net Revenues arising from any increase in the rates, fees and OHS West:260306953.4 9 44490-& charges of the System which was duly adopted by the City Council of the City prior to the date of the entry into or incurrence of such Parity Debt but which, during all or any part of such 12 month period, was not in effect, in an amount equal to the amount by which the System Net Revenues would have been increased if such increase in rates, fees and charges had been in effect during the whole of such 12 month period, as shown by a Certificate of the City on file with the Trustee, shall have produced a sum equal to at least 110 percent of the Maximum Annual Debt Service as calculated after the entry into or incurrence of such Parity Debt; provided, that in the event that all or a portion of such Parity Debt is to be issued for the purpose of refunding and retiring any Parity Debt then outstanding, interest and principal payments on the Parity Debt to be so refunded and retired from the proceeds of such Parity Debt being issued shall be excluded from the foregoing computation of Maximum Annual Debt Service;provided further, that the City may at any time enter into or incur Parity Debt without compliance with the foregoing conditions if the Annual Debt Service for each Fiscal Year during which such Parity Debt is outstanding will not be increased by reason of the entry into or incurrence of such Parity Debt; andprovidedfurther, an adjustment shall be made in the amount of System N& Revenues as provided in Section 5.4. Nothing contained in this Section shall limit the issuance of any revenue bonds, notes or other evidences of indebtedness or the entry into any installment purchase agreement by the City payable from the System Net Revenues and secured by a lien and charge on the System Net Revenues if, after the issuance of such revenue bonds or entry into such installment purchase agreement, all of the Installment Payments shall have been fully paid or provision has been made therefor in accordance with Section 9.1. Furthermore, nothing contained in this Section shall limit the issuance or incurrence of any Subordinate Obligations. Section 5.4. Rate Stabilization Fund. The City has heretofore established a special fund known as the "Rate Stabilization Fund" which shall be held and maintained by the City until all Installment Payments have been fully paid or provision has been made therefor in accordance with Section 9.1. The City may, subject to the provisions of Section 5.2, during or within 210 days after a Fiscal Year, transfer surplus System Net Revenues attributableto such Fiscal Year (on the basis of Generally Accepted Accounting Principles) from the System Revenue Fund to the Rate Stabilization Fund. The City may at any time transfer moneys from the Rate Stabilization Fund to the System Revenue Fund. Notwithstanding anything to the contrary provided herein, System Net Revenues deposited into the Rate Stabilization Fund shall not be taken into account as System Revenues for the Fiscal Year to which such deposited System Net Revenues are attributable for purposes of the calculations in Sections 5.3 and 6.8(b) and amounts withdrawn from the Rate Stabilization Fund and deposited into the System Revenue Fund may be taken into account as System Revenues for purposes of the calculations required under Sections 5.3 and 6.8(b) for the Fiscal Year in which such deposit is made; provided that, for purposes of the calculation required under Section 6.8(b), the amount of System Net Revenues before any credits for transfers from the Rate Stabilization Fund to the System Revenue Fund may not be less than 100%of Annual Debt Service for such Fiscal Year. The amounts in the Rate Stabilization Fund shall be invested in the Authorized Investments. OHS West:260306953.4 10 40490-8 ARTICLE VI COVENANTS OF THE CITY Section 6.1. Punctual Payment. The City will punctually pay the Installment Payments in strict conformity with the terms hereof and will faithfully satisfy, observe and perform all agreements, conditions, covenants and terms hereof. Section 6.2. Legal Existence. The City will use all means legally available to maintain its existence. Section6.3. Aizainst Encumbrances. The City will not mortgage or otherwise encumber, pledge or place any charge or lien upon System Revenues. The City will not mortgage or otherwise encumber, pledge or place any lien or charge upon any of the System Net Revenues on a parity with the pledge securing the payment of the Installment Payments except for Parity Obligations as provided herein. The City will not issue or incur any obligations secured by System Net Revenues senior to the Parity Debt. The City may at any time issue any Subordinate Obligations. Section 6.4. Aizainst Sale or Other Disposition of the System. The City will not sell or otherwise dispose of the System or any part thereof essential to the proper operation of the System or to the maintenance of the System Net Revenues, unless the Installment Payments have been fully paid or provision has been made therefor in accordance with Section 9.1. The City will not enter into any lease or agreement which impairs the operation of the System or any part thereof necessary to secure adequate System Net Revenues for the payment of the Parity Debt, or which would otherwise impair the rights of the Owners with respect to the System Net Revenues or the operation of the System. Section6.5. Maintenance and Operation of System. The City will maintain and preserve the System in good repair and working order at all times and will operate the System in an efficient and economical manner. Section 6.6. Insurance. (a) To the extent such insurance is available for reasonable premiums from a reputable insurance company, the City will procure and maintain at all times insurance on the System against such risks (including accident to or destruction of the System) and in such amounts as are usually insured in connection with operations in California similar to the System; provided, that such insurance coverage may be satisfied under a self-insuranceprogram which is actuarially sound. (b) The City shall procure and maintain or cause to be procured and maintained public liability insurance covering claims against the City (including its city council, officers and employees) for bodily injury or death, or damage to property occasioned by reason of the City's operations, including any use of the System, and such insurance shall afford protection in such amounts as are usually covered in connection with operations in California similar to the System; provided, that such insurance coverage may be satisfied under a self-insurance program which is actuarially sound. OHS West:260306953.4 11 44490-8 (c) The provisions of this subsection (c) are subject to the requirements of the Prior Agreements with respect to the application of Net Proceeds consisting of insurance payments. If all or any part of the System shall be damaged or destroyed, the Net Proceeds realized by the City as a result thereof shall be deposited by the City with the Trustee in a special fund which the Trustee shall establish as needed in trust and applied by the City to the cost of acquiring and constructing repairs, replacements, additions, betterments, extensions or improvements to the System if (A) the City first secures and files with the Trustee a Certificate of the City showing (i) the loss in annual System Revenues, if any, suffered, or to be suffered, by the City by reason of such damage or destruction, (ii) a general description of the repairs, replacements, additions, betterments, extensions or improvements to the System then proposed to be acquired and constructed by the City from such proceeds, and (iii) an estimate of the System Revenues to be derived after the completions of such repairs, replacements, additions, betterments, extensions or improvements; and (B) the Trustee has been furnished a Certificate of the City, certifying that the System Revenues after such repair, replacement, addition, betterment, extension or improvement of the System will sufficiently offset on a timely basis the loss of System Revenues resulting from such damage or destruction so that the ability of the City to pay all Parity Debt when due will not be substantially impaired, and such Certificate of the City shall be final and conclusive, and any balance of such proceeds not required by the City for such purpose shall be deposited in the System Revenue Fund and applied as provided in Section 5.2; provided, that if the foregoing conditions are not met, then such proceeds shall be deposited with the Trustee and applied to make Installment Payments and Parity Obligation Payments as they shall become due ratably without any discrimination or preference; provided further that the foregoing procedures for the application of Net Proceeds consisting of insurance payments shall be subject to any similar provisions for Parity Debt on a pro rata basis. If such damage or destruction has had no effect, or at most an immaterial effect, upon the System Revenues and the security of the Parity Debt, and a Certificate of the City to such effect has been filed with the Trustee, then the City shall forthwith deposit such proceeds in the System Revenue Fund, to be applied as provided in Section 5.2. Section 6.7. Eminent Domain Proceeds. The provision of this Section are subject to the requirements of the Prior Agreements with respect to the application of the Net Proceeds consisting of awards under eminent domain proceedings. If all or any part of the System shall be taken by eminent domain proceedings, the Net Proceeds realized by the City therefrom shall be deposited by the City with the Trustee in a special fund which the Trustee shall establish as needed in trust and applied by the City to the cost of acquiring and constructing additions, betterments, extensions or improvements to the System if (A) the City first secures and files with the Trustee a Certificate of the City showing (i) the loss in annual System Revenues, if any, suffered, or to be suffered, by the City by reason of such eminent domain proceedings, (ii) a general description of the additions, betterments, extensions or improvements to the System then proposed to be acquired and constructed by the City from such proceeds, and (iii) an estimate of the additional System Revenues to be derived from such additions, betterments, extensions or improvements; and (B) the Trustee has been furnished a Certificate of the City, certifying that such additional System Revenues will sufficiently offset on a timely basis the loss of System Revenues resulting from such eminent domain proceedings so that the ability of the City to pay all Parity Debt when due will not be substantially impaired, and such Certificate of the City shall be final and conclusive, and any balance of such proceeds not required by the City for such purpose OHS West:260306953.4 12 40490-8 shall be deposited in the System Revenue Fund and applied as provided in Section 5.2, provided, that if the foregoing conditions are not met, then such proceeds shall be deposited with the Trustee and applied to make Installment Payments and Parity Obligation Payments as they shall become due ratably without any discrimination or preference; provided further that the foregoing procedures for the application of Net Proceeds consisting of awards under eminent domain proceedings shall be subject to any similar provisions for Parity Debt on a pro rata basis. If such eminent domain proceedings have had no effect, or at most an immaterial effect, upon the System Revenues and the security of the Parity Debt, and a Certificate of the City to such effect has been filed with the Trustee, then the City shall forthwith deposit such proceeds in the System Revenue Fund, to be applied as provided in Section 5.2. Section 6.8. Amounts of Rates. Fees and Charges, (a) The City will, at all times until all Installment Payments have been fully paid or provision has been made therefor in accordance with Section 9. 1, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Revenues at least sufficient, after making reasonable allowances for contingencies and errors in the estimates, to pay the following amounts during such Fiscal Year: (i) All current Operation and Maintenance Costs. (ii) The Installment Payments, all other Parity Obligation Payments and all payments on Subordinate Obligations as they become due and payable. (iii) All payments required for compliance with the terms of the Trust Agreement and hereof, including restoration of the Reserve Fund to an amount equal to the Reserve Fund Requirement. (iv) All payments to meet any other obligations of the City which are charges, liens or encumbrances upon, or payable from, the System Revenues. (b) In addition to the requirements of the foregoing subsection (a) of this Section, the City will, at all times until all Installment Payments have been fully paid or provision has been made therefor in accordance with Section 9. 1, to the maximum extent permitted by law, fix, prescribe and collect rates, fees and charges and manage the operation of the System for each Fiscal Year so as to yield System Net Revenues during such Fiscal Year equal to at least 110% per cent of the Annual Debt Service in such Fiscal Year; provided, an adjustment shall be made to the amount of System Net Revenues as provided in Section 5.4. The City may make or permit to be made adjustments from time to time in such rates, fees and charges and may make or permit to be made such classification thereof as it deems necessary, but shall not reduce or permit to be reduced such rates, fees and charges below those then in effect unless the System Revenues from such reduced rates, fees and charges will at all times be sufficient to meet the requirements of this Section. Section 6.9. Enforcement of and Performance Under Contracts. The City shall enforce all material provisions of any contracts to which it is a parry, an assignee, successor in interest to a OHS West:260306953.4 13 40490-8 party or third -party beneficiary, in any case where such contracts provide for material payments or services to be rendered to the System. Further, the City will comply with, keep, observe and perform all material agreements, conditions, covenants and terms, express or implied, required to be performed by it, contained in all contracts affecting or involving the System, to the extent that the City is a party thereto. Section 6.10. Collection of Charges, Fees and Rates. The City will have in effect at all times rules and regulations requiring each user of the System to pay the applicable charges, fees and rates and providing for the billing thereof and for a due date and a delinquency date for each bill. In each case where such bill remains unpaid in whole or in part after it becomes delinquent, the City will enforce the collection procedures contained in such rules and regulations. Section 6.11. No Free Service. The City will not permit any part of the System or any facility thereof to be used or taken advantage of free of charge by any corporation, firm or person, or by any public agency (including the State of California and any city, county, public agency, political subdivision, public corporation or agency or any thereof), unless otherwise required by law or existing written agreements. Section 6.12. Prompt Acquisition and Construction of the Project. From the moneys on deposit in the Improvement Fund and other moneys available therefor in the System Revenue Fund, the City will acquire and construct the Project, as agent for the Corporation as provided in Section 3. 1, with all practicable dispatch, and such acquisition and construction will be made in an expeditious manner and in conformity with the law so as to complete the same as soon as possible. Section 6.13. Pavment of Claims. The City will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the System or upon the System Revenues or any part thereof, or upon any funds held by the Trustee, or which might impair the security of the Installment Payments; provided, that nothing herein contained shall require the City to make any such payments so long as the City in good faith shall contest the validity of any such claims and such nonpayment will not materially adversely affect the City's ability to perform its obligations hereunder. Section 6.14. Books of Record and Accounts, Financial Statements. The City will keep proper books of record and accounts in which complete and correct entries shall be made of all transactions relating to the System, the System Revenue Fund and all other accounts or funds established pursuant hereto, and upon request will provide information concerning such books of record and accounts to the Trustee. The City will prepare annually, not later than one hundred eighty (180) days after the close of each Fiscal Year, until all Installment Payments have been fully paid or provision has been made therefor in accordance with Section 9.1, an audited financial statement of the City relating to the System Revenue Fund and all other accounts or funds established pursuant hereto for the preceding Fiscal Year prepared by an Independent Certified Public Accountant, showing the balances in each such account or fund as of the beginning of such Fiscal Year and all deposits in and withdrawals from each such account or fund during such Fiscal Year and the balances in each such account or fund as of the end of such Fiscal Year, which audited financial statement shall include a statement as to the manner and extent to which the City has complied with the OHS West:260306953.4 14 40490-8 provisions hereof as it relates to such accounts and funds. The City will furnish a copy of such audited financial statement to the Trustee, the Certificate Insurer and to the Information Services upon request, and will furnish such reasonable number of copies thereof to investment bankers, security dealers and others interested in the Certificates. Section 6.15. Payment of Taxes and Other Charges and Compliance with Governmental Regulations. The City will pay and discharge all taxes, service charges, assessments and other governmental charges which may hereafter be lawfully imposed upon the System or any properties owned by the City, or upon the System Revenues, when the same shall become due; provided, that nothing herein contained shall require the City to make any such payments so long as the City in good faith shall contest the validity of any such taxes, service charges, assessments or other governmental charges and such nonpayment will not materially adversely affect the City's ability to perform its obligations hereunder. The City will duly comply with all applicable state, federal and local statutes and all valid regulations and requirements of any governmental authority relative to the operation of the System or any part thereof, but the City shall not be required to comply with any regulations or requirements so long as the validity or application thereof shall be contested in good faith and such noncompliance will not materially adversely affect the City's ability to perform its obligations hereunder. Section 6.16. Tax Covenants and Matters. (a) General. The City hereby covenants, for the benefit of the Corporation and the owners and beneficial owners of the Certificates that, notwithstanding any other provisions of this Agreement, they shall not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of interest evidenced by the Certificates under Section 103 of the Code. The City shall not, directly or indirectly, use or permit the use of proceeds of the Certificates or any of the property financed with proceeds of the Certificates, or any portion thereof, by any person other than a governmental unit (as such term is used in Section 141 of the Code) in such manner or to such extent as would result in the loss of exclusion from gross income for federal income tax purposes of interest evidenced by the Certificates. (b) Arbitrage. The City shall not, directly or indirectly, use or permit the use of any proceeds of any Certificates, or of any property financed thereby, or other funds of the City, or take or omit to take any action, that would cause the Certificates to be "arbitrage bonds" within the meaning of Section 148 of the Code. To that end, the City shall comply with all requirements of Section 148 of the Code and all regulations of the United States Department of the Treasury issued thereunder to the extent such requirements are, at the time, in effect and applicable to the Certificates. (c) Federal Guarantee. The City shall not make any use of the proceeds of the Certificates or any other funds of the City, or take or omit to take any other action, that would cause the Certificates to be "federally guaranteed within the meaning of Section 149(b) of the Code. OHS West:260306953.4 15 40490-8 (d) Compliance with Tax Certificate. In furtherance of the foregoing tax covenants of this Section, the City covenants that it will comply with the provisions of the Tax Certificate, which is incorporated herein as if fully set forth herein. These covenants shall survive payment in full or defeasance of the Certificates. Section 6.17. Rebate Fund. (a) Establishment. Pursuant to the Trust Agreement, the Trustee will hold in the Rebate Fund any amounts required to satisfy the requirement to make rebate payments to the United States pursuant to Section 148 of the Code and the Treasury Regulations promulgated thereunder. Such amounts shall be governed by this Section, Section 6.16, Section 3.07 of the Trust Agreement and by the Tax Certificate, unless and to the extent that the City delivers to the Trustee a Favorable Opinion of Certificate Counsel with respect to any departure from such requirements. All money at any time deposited in the Rebate Fund shall be held by the Trustee in trust for payment to the United States Treasury. (i) Computation of Rebate Amount. Within 55 days of the end of each CertificateYear (as such term is defined in the Tax Certificate), the City shall calculate or cause to be calculated the amount of "rebate amount," in accordance with Section 148(0(2) of the Code and Section 1.148-3 of the Treasury Regulations (taking into account any applicable exceptions with respect to the computation of the "rebate amount," described, if applicable, in the Tax Certificate (e.g., the temporary investments exceptions of Section 148(f)(4)(A)(ii) or Section 148(0(4)(B) of the Code, the expenditure requirements of Section 148(f)(4)(B) or Section 148(0(4)(C) of the Code or Section 1.148-7(d) of the Treasury Regulations, the exception for certain "small governmental issuers" as set forth in Section 148(f)(4)(D) of the Code, and taking into account whether the election pursuant to Section 148(f)(4)(C)(vii) of the Code (the "1 %% Penalty") has been made)), for this purpose treating the last day of the applicable Certificate Year as a computation date, within the meaning of Section 1.148-1(b) of the Treasury Regulations. (ii) Transfer of Moneys. Within 55 days of the end of each such Certificate Year, the City shall deposit to the Rebate Fund from System Revenues as an Operation and Maintenance Cost, if and to the extent required so that the balance in the Rebate Fund shall equal the "rebate amount" so calculated in accordance with this Section. (b) Deficiencies in the Rebate Fund. In the event that, prior to the time of any payment required to be made from the Rebate Fund, the amount in the Rebate Fund is not sufficient to make such payment when such payment is due, the City shall calculate or cause to be calculated the amount of such deficiency and deposit from System Revenues as an Operation and Maintenance Cost, an amount equal to such deficiency prior to the time such payment is due. (c) Record Keeping. The City shall retain records of all determinations made hereunder until six years after payment in full of the Installment Payments. (d) Survival of Defeasance. Notwithstanding anything in this Agreement to the contrary, the obligation to comply with the requirements of this Section shall survive the OHS West:260306953.4 16 40490-8 payment in full of the Installment Payments or provision for such payment in accordance with Section 9.1. Section 6.18. Continuing Disclosure. The City hereby covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of this Agreement, failure of the City to comply with the Continuing Disclosure Certificate shall not be considered an Agreement Event of Default; however, any Participating Underwriter or any Owner or beneficial owner of the Certificates may take such actions as described under the Continuing Disclosure Certificate to cause the City to comply with its obligations under this Section. Section 6.19. Further Assurances. The City will adopt, make, execute and deliver any and all such further documents, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance hereof. Section 6.20. Provisions Relating to the Certificate Insurance. For so long as, and only during such time as, the Certificate Insurer is not in default under a Certificate Insurance Policy, the following provisions shall be in effect, and any conflict between the provisions of this Section and the provisions of any other Section hereof shall be governed by the provisions of this Section. (a) Information and Reports. As soon as practicable after the filing thereof with the Corporation, the City shall provide the Certificate Insurer a copy of any financial statement of the City and a copy of any audit and annual report of the City delivered by the City pursuant Section 6.14 hereof and a copy of any report or notice required to be filed with a National Repository and/or State Repository (as such terms are defined in the Continuing Disclosure Certificate) pursuant to the Continuing Disclosure Certificate. (b) Acceleration. Any acceleration of unpaid Installment Payments pursuant to 8.01 hereof or any annulment thereof shall be subject to the prior written consent of the Certificate Insurer. (c) Installment Pavments Not Discharged. Notwithstanding anything contained herein to the contrary, in the event that any Installment Payment shall be paid by the Certificate Insurer pursuant to a Certificate Insurance Policy, the Installment Payments shall remain unpaid hereunder for all purposes, shall not be discharged or otherwise satisfied and shall not be considered paid by the City, and the assignment and pledge thereof and all agreements, covenants and other obligations of the City hereunder with respect thereto shall continue to exist and shall run to the benefit of the Certificate Insurer. (d) Parity Oblizations. In connection with the execution and delivery of any Parity Obligations under the terms of Section 5.3, the City shall deliver or cause to be delivered to the Certificate Insurer a copy of the disclosure document, if any, circulated with respect to such Panty Obligations. Section 6.21. Compliance with Trust Agreement. The City shall perform all obligations and shall otherwise comply with all the provisions of the Trust Agreement applicable to the City, including the provisions relating to the requisition and investment of funds held thereunder. OHS West:260306953.4 17 40490-8 ARTICLE VII PREPAYMENT OF INSTALLMENT PAYMENTS Section 7.1. Prepayment. The City shall have the right at any time or from time to time from any available funds to prepay all or any part of the Installment Payments; provided that any prepayment of a principal component of the Installment Payments to be applied to the prepayment or defeasance of Certificates shall be in an amount sufficient to provide for such prepayment or defeasance of Certificates in Authorized Denominations and otherwise in accordance with the provisions of the Trust Agreement. The Corporation shall accept such prepayments when the same are tendered by the City. All prepayments of Installment Payments made by the City pursuant to this Section shall be deposited upon receipt with the Trustee in the appropriate account in the Debt Service Fund specified by the City. All amounts in the Prepayment Account shall be applied to the payment, prepayment or provision for the payment, of Outstanding Certificates in the manner and subject to the terms and conditions set forth in the Trust Agreement as directed in a Certificate of the City. With respect to prepayments of Installment Payments pursuant to this Section, the City shall determine which Installment Payments are to be prepaid, including the principal component of the Installment Payment due on each Installment Payment Date to be paid or prepaid with such prepayments, and, subject to the provisions of this Section, the date on which each such prepayment is to be made. Before making any prepayment pursuant to this Section, the City shall give written notice to the Corporation specifying the date on which the prepayment will be paid, which date shall be not less than fifty (50) days from the date such notice is given; provide d, that notwithstanding any such prepayment, the City shall not be relieved of its obligations hereunder, including specifically its obligations under Article IV, until all Installment Payments shall have been fully paid or provision for payment thereof shall have been made pursuant to Section 9.1. ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION Section 8.1. Events of Default and Acceleration of Maturities. There shall be an Agreement Event of Default if one or more of the following shall happen, that is to say -- (I) if default shall be made by the City in the due and punctual payment of any Installment Payment or any other Parity Debt when and as the same shall become due and payable; (2) if default shall be made by the City in the performance of any of the other agreements or covenants required herein to be performed by it, and such default shall have continued for a period of thirty (30) days after the City shall have been given notice in writing of such default by the Corporation or the Trustee; provided that such default shall not constitute an Agreement Event of Default hereunder if OHS WvW.260306953.4 18 40490-& the City shall commence to cure such default within such thirty (30) day period and thereafter diligently and in good faith shall proceed to cure such default within a reasonable period of time; (3) if the City shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or without the consent of the City seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competentjurisdiction shall assume custody or control of the City or of the whole or any substantial part of its property; or (4) if payment of the principal of any Parity Debt is accelerated in accordance with its terms; then, and in each and every such case during the continuance of an Agreement Event of Default specified in clauses (3) and (4) above, the Corporation shall, and for any other Agreement Event of Default the Corporation may (and at the direction of the Certificate Insurer, shall), by notice in writing to the City, declare all unpaid principal components of the Installment Payments and the accrued interest thereon to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable; provided that any such declaration of acceleration shall be subject to the prior written consent of the Certificate Insurer. This subsection however, is subject to the condition that if, at any time after all unpaid principal components of the Installment Payments and the accrued interest thereon shall have been so declared due and payable and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the City shall deposit with the Corporation a sum sufficient to pay the unpaid principal components and interest components of the Installment Payments then due and payable (other than the principal components of the Installment Payments and the accrued interest thereon due and payable solely by reason of such declaration), with interest on such overdue Installment Payments at the highest rate applicable to the remaining unpaid principal component of the Installment Payments, and the reasonable expenses of the Corporation, the Trustee and the Certificate Insurer shall have been paid or provision deemed by the Corporation, the Trustee or the Certificate Insurer, as applicable, to be adequate shall have been made therefor, and any and all other Agreement Events of Default shall have been made good or cured to the satisfaction of the Corporation and the Certificate Insurer or provision deemed by the Corporation and the Certificate Insurer to be adequate shall have been made therefor, then and in every such case the Corporation and the Certificate Insurer, by written notice to the City, may rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair or exhaust any right or power consequent thereon. OHS Wm!260306953.4 19 40490-8 Section 8.2. Application of Funds Upon Acceleration. Upon the date of the declaration of acceleration as provided in Section 8.1, all System Revenues thereafter received shall be applied in the following order (subject to the applicable provisions of Prior Agreements) - First, to the payment, without preference or priority, and in the event of any insufficiency of such System Revenues ratably without any discrimination or preference, of the fees, costs and expenses of the Corporation and Trustee, in carrying out the provisions of this article, and the trustee for any other Parity Debt, if any, in complying with the terms of such Parity Debt, including reasonable compensation to accountants and counsel and similar costs with respect to Parity Debt; Second, to the payment of Operation and Maintenance Costs; Third, to the payment of all unpaid principal components of the Installment Payments and the unpaid principal amount of all other Parity Debt and the accrued interest thereon, with interest on the overdue Installment Payments at the highest rate of interest applicable to the unpaid principal components of the Installment Payments and, with respect to such other Parity Debt, as required by the terms of such other Parity Debt; and Fourth, to the Certificate Insurer, any amounts owed pursuant to Sections 6.20 and 8.1. and to amounts due to any provider of credit enhancement for other Panty Debt. Section 8.3. Other Remedies of the Comoration. In addition to remedies elsewhere provided in this Agreement, upon the continuance of an Agreement Event of Default, the Corporation shall have the right with the written consent of the Certificate Insurer to, and at the direction of the Certificate Insurer shall: (a) by mandamus or other action or proceeding or suit at law or in equity, enforce its rights against the City or any director, officer or employee thereof, and compel the City or any such director, officer or employee to perform and carry out its or his duties under applicable law and the agreements and covenants required to be performed by it or him contained herein; (b) by suit in equity, enjoin any acts or things which are unlawful or violate the rights of the Corporation; (c) by suit in equity, to require the City and its directors, officers and employees to account as the trustee of an express trust; or (d) by mandamus or other action or proceeding or suit at law or in equity, pursue any other remedy now or hereafter existing in law or in equity or by statute or otherwise enforce the performance of the City's obligations hereunder and to otherwise protect the Corporation's rights and interests in connection with this Agreement. Notwithstanding anything contained herein, the Corporation shall have no security interest in or mortgage on the Project, the System or other facilities of the City or any other real property of the City and no default hereunder shall result in the loss of the Project, the System or other facilities of the City or any other real property of the City. OHS West:260306953.4 20 40490-8 Section 8.4. Non -Waiver. Nothing in this article or in any other provision hereof shall affect or impair the obligation of the City, which is absolute and unconditional, to pay the Installment Payments to the Corporation at the respective due dates from the System Net Revenues, and amounts in the System Revenue Fund pledged for such payment, or shall affect or impair the right of the Corporation, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied herein. A waiver of any default or breach of duty or contract by the Corporation shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Corporation to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Corporation by applicable law or by this article may be enforced and exercised from time to time and as often as shall be deemed expedientby the Corporation. If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Corporation, the City and the Corporation shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Section 8.5. Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Corporation is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any other law. Section 8.6. Notices. Notwithstanding any other provision hereof, the Trustee shall immediately notify the Certificate Insurer if at any time there are insufficient moneys to make any Installment Payments as required and immediately upon the occurrence of any Agreement Event of Default hereunder. OHS West:260306953.4 21 40490-8 ARTICLE IX DISCHARGE OF OBLIGATIONS Section 9.1. Discharge of Installment Payments. The principal component of any Installment Payment, and the interest components of the Installment Payments related to such principal component, shall be deemed paid and all obligations of the City with respect thereto shall cease and terminate (except for payment from deposited funds and Defeasance Securities as provided in Article IX of the Trust Agreement) when the Certificates evidencing an ownership interest in such principal component of the Installment Payments and the interest thereon, have been paid or deemed paid in accordance with the applicable provisions of Article IX of the Trust Agreement. Section 9.2. Accounting and Discharge Instruments. After the payment, or provision for the payment as provided in Section 9.1, of all Installment Payments and prepayment premiums, if any, and payment in full of all fees and expenses of the Corporation and the Trustee, the Corporation, upon request of the City, shall cause an accounting for such period or periods as may be requested by the City to be prepared and filed with the City and the Corporation shall execute and deliver to the City all such instruments as may be necessary or desirable to evidence such total discharge and satisfaction of this Agreement. ARTICLE X MISCELLANEOUS Section 10.1. Liability of City Limited to System Revenues. Notwithstanding anything contained herein, the City shall not be required to advance any moneys derived from any source of income other than the System Revenues, the System Revenue Fund and the other funds provided herein for the payment of the Installment Payments or for the performance of any agreements or covenants required to be performed by it contained herein. The City may, however, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the City for such purpose. The obligation of the City to make the Installment Payments and any other payments hereunder is a special obligation of the City payable solely from the System Net Revenues, and does not constitute a debt of the City or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. Section 10.2. Successor Is Deemed Included in all References to Predecessor. Whenever either the City or the Corporation is named or referred to herein, such reference shall be deemed to include the successor to the powers, duties and functions that are presently vested in the City or the Corporation, and all assignees of the City or the Corporation permitted hereunder. All agreements and covenants required hereby to be performed by or on behalf of the City or the Corporation shall bind and inure to the benefit of the respective successors and assigns thereof whether so expressed or not. OHS West:260306953.4 22 40490-8 Section 10.3. Waiver of Personal Liability. No director, officer or employee of the City shall be individually or personally liable for the payment of the Installment Payments or be subject to any personal liability by reason of the execution of this Agreement or the execution and delivery of the Certificates. Section 10.4. Article and Section Headings, Gender and References. The headings or titles of the several articles and sections hereof and the table of contents appended hereto shall be solely for convenience of reference and shall not affect the meaning, construction or effect hereof, and words of any gender shall be deemed and construed to include all genders. Unless otherwise specified, all references herein to "Articles," "Sections" and other subdivisions or clauses are to the corresponding articles, sections, subdivisions or clauses hereof; and the words "hereby", "herein," "hereof," "hereto," "herewith" and other words of similar import refer to this Agreement as a whole and not to any particular article, section, subdivision or clause hereof. Section 10.5. Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required hereby to be performed by or on the part of the City or the Corporation shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants or portions thereof and shall in no way affect the validity hereof. The City and the Corporation hereby declare that they would have executed this Agreement, and each and every other article, section, paragraph, subdivision, sentence, clause and phrase hereof, irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases hereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 10.6. Assignment. The City may not assign this Agreement or any of its obligations hereunder without the prior consent of the Corporation and any such assignment without such consent shall be null and void. The City acknowledges and agrees that the Installment Payments, and certain of the Corporation's rights under this Agreement, will be assigned to the Trustee and pledged under the Trust Agreement to the payment of the Certificates. The City consents to such assignment. Section 10.7. California Law. This Installment Purchase Agreement shall be construed and governed in accordance with the laws of the State of California relating to contracts made and to he performed in the State of California. Section 10.8. Effective Date. This Agreement shall become effective upon its execution and delivery, and shall terminate when the provisions of Section 9.2 have been satisfied. Section 10.9. Execution in Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument. Section 10.10. Indemnification. To the fullest extent permitted by law, the City agrees to indemnify, hold harmless and defend the Corporation and the Trustee, and each of their respective officers, governing board members, directors, officials, employees, attorneys and agents (collectively, the "Indemnified Parties"), against any and all losses, damages, claims, actions, OHS West:260306953.4 23 40490-8 liabilities, costs and expenses of any conceivable nature, kind or character (including, without limitation, reasonable attorneys' fees, litigation and court costs, amounts paid in settlement and amounts paid to discharge judgments) to which the Indemnified Parties, or any of them, may become subject under federal or state securities laws or any other statutory law or at common law or otherwise arising out of or based upon or in any way relating to: (i) the Trust Agreement, this Agreement or the execution or amendment thereof or in connection with transactions contemplated thereby, including the execution and delivery of the Certificates; any act or omission of the City or any of its agents, contractors, servants, employees or licensees in connection with this Agreement or the Project, the operation of the Project, or the condition, environmental or otherwise, occupancy, use, possession, conduct or management of work done in or about, or from the planning, design, acquisition, construction or development of, the Project or any part thereof, (iii) any lien or charge upon payments by the City to the Corporation and the Trustee hereunder, or any taxes (including, without limitation, all ad valorem taxes and sales taxes), assessments, impositions and other charges imposed on the Corporation or the Trustee in respect of any portion of the Project; (iv) any violation of any environmental law, rule or regulation with respect to, or the release of any toxic substance from, the Project or any part thereof; (v) the defeasance and/or redemption, in whole or in part, of the Certificates; (vi) any untrue statement or misleading statement or alleged untrue statement or alleged misleading statement of a material fact contained in any offering statement or document for the Certificates or any of the documents relating to the Certificates to which the City is a party, or any omission or alleged omission from any offering statement or document for the Certificates of any material fact necessary to be stated therein in order to make the statements made therein by the City, in the light of the circumstances under which they were made, not misleading; (vii) the Trustee's acceptance or administration of the trust of the Trust Agreement, or the exercise or performance of any of its powers or duties thereunder or under any of the documents relating to the Certificates to which it is a parry; except (a) in the case of the foregoing indemnification of the Trustee or any of their respective officers, members, directors, officials, employees, attorneys and agents, to the extent such damages are caused by the negligence or willful misconduct of such Indemnified Parry; or (b) in the case of the foregoing indemnification of the Corporation or any of its officers, members, directors, officials, employees, attorneys and agents, to the extent such damages are caused by the willful misconduct of such Indemnified Parry. In the event that any action or proceeding is brought against any Indemnified Paxty with respect to which indemnity may be sought hereunder, the City, upon written notice from the Indemnified Parry, shall assume the investigation and defense thereof, including the employment of counsel selected by the Indemnified Parry, and shall assume the payment OHS West:260306953.4 24 40490-8 of all expenses related thereto, with full power to litigate, compromise or settle the same in its sole discretion; provided that the Indemnified Party shall have the right to review and approve or disapprove any such compromise or settlement. Each Indemnified Party shall have the right to employ separate counsel in any such action or proceeding and participate in the investigation and defense thereof, and the City shall pay the reasonable fees and expenses of such separate counsel; provided, however, that such Indemnified Party may only employ separate counsel at the expense of the City if in its judgment a conflict of interest exists by reason of common representation or if all parties commonly represented do not agree as to the action (or inaction) of counsel. The rights of any persons to indemnify hereunder and rights to payment of fees and reimbursement of expenses pursuant to Section 4.2 shall survive the final payment or defeasance of the Installment Payments and the Certificates and in the case of the Trustee any resignation or removal. The provisions of this Section shall survive the termination of this Agreement. Section 10.11. Amendments. This Agreement may only be amended in accordance with the terms of Trust Agreement. Any Rating Agency rating the Certificates shall receive notice of each amendment to this Agreement and a copy thereof at least 15 days in advance of its execution. The Certificate Insurer shall be provided with a full transcript of all proceedings relating to any amendment or supplement hereto. Section 10.12. Concerniny, the Certificate Insurer. Whenever provision is made in this Trust Agreement for notice to be given to the Certificate Insurer or that any action hereunder requires the consent of the Certificate Insurer, or the Certificate Insurer is given the right to provide direction, each and every such provision shall require such notice or consent or direction to be in writing and shall cease and terminate and be of no further force or effect if the Certificate Insurer has defaulted in the payment of any amount due under the Certificate Insurance Policy after proper demand therefor has been made by the Trustee. Section 10.13. Complete Agreement. This Indenture represents the complete agreement between the parties with respect to the Bonds and related matters. OHS West:260306953.4 25 40490-8 IN WITNESS WHEREOF, the parties hereto have executed and attested this Agreement by their officers thereunto duly authorized as of the day and year first written above. CITY OF LODI Attest: City Clerk F.'1... G]i/D City Attorney City Manager LODI PUBLIC IMPROVEMENT CORPORATION I� President Attest: Secretary of the Corporation APPROVED: Attorney for the Corporation OHS West:260306953.4 26 40490-8 EXFIIBIT A-1 DESCRIPTION OF THE PROJECT The Project consists of the following additions, betterments, extensions, replacements and improvements to the System: • Phase 3 improvements to the City's White Slough Water Pollution Control Facility (the "White Slough Facility"). Phase 3 improvements include headworks improvements, acquisition and installation of an additional digester, two additional aeration basins, an additional secondary clarifier and improvements to the control room. These improvements are intended to improve de -nitrification and restore the facility's permitted treatment capacity to 8.5 mgd. • Installation of the above equipment along with associated equipment, structures and appurtenances. • Engineering, environmental, legal and other expenses associated with the above improvements. The Project shall also include such other betterments, extensions, replacements and improvements to the System as shall be specified in a Certificate of the City delivered to the Trustee accompanied by a Favorable Opinion of Certificate Counsel with respect to the payment of the Costs of such additional betterments, extensions, replacements and improvements with the proceeds of the Certificates. OHS Wem:260306953.4 40490-9 A-1 EXHIBIT A-2 DESCRIPTION OF THE EXISTING FACILITIES The Existing Facilities consist of the following additions, betterments, extensions, replacements and improvements to the System: The expansion of the domestic treatment system capacity of the White Slough Facility, including improvements relating to domestic wastewater and the disposal of the resulting sludge; acquisition of two new primary clarifiers; a new aeration basin; two new secondary clarifiers; conversion of existing clarifiers to chlorine contact tanks; new sludge digester; expansion and modification of existing sludge storage lagoons; modifications to the imgation conveyance system; piping and plumbing improvements; installation of ground water monitoring wells; and the acquisition of approximately 275 acres of agricultural land contiguous to the existing agricultural disposal lands. OHS West:260306953.4 40490-8 A-2 EXHIBIT B PRINCIPAL COMPONENTS OF INSTALLMENT PAYMENTS The principal components of the Installment Payments shall consist of the sum of the following amounts, with each said principal component being payable on the 15th day of the month preceding the date for such principal component set forth below and with each such principal component bearing interest at the interest rate per annum set forth below: Due Date Principal Component Interest Rate October 1 OHS West:260306953.4 40490-8 B-1 EXHIBIT C SCHEDULE OF INSTALLMENT PAYMENTS AS OF DELIVERY DATE As of the Delivery Date, the Installment Payments consist of the following amounts of principal components and interest components and are payable on Installment Payment Dates which are the 15th day of the month preceding each of the dates set forth below: Date Principal Component Interest Component Total OHS West:260306953.4 40490-8 C-1 ESCROW DEPOSIT AND TRUST AGREEMENT by and between the CITY OF LODI, CALIFORNIA and U.S. BANK NATIONAL ASSOCIATION, as Escrow Bank Dated December 2007 OHS West:260326408.4 40490-8 OH&S Draft November 2,2007 ESCROW DEPOSIT AND TRUST AGREEMENT This CERTIFICATES ESCROW DEPOSIT AND TRUST AGREEMENT is made and entered into this _th day of December, 2007, by and between the CITY OF LODI, a general law city and municipal corporation organized and existing by virtue of Constitution and laws of the State of California (the "City"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association duly organized and existing under the laws of the United States, as Escrow Bank (the "Escrow Bank"); WITNESSETH: WHEREAS, the City has heretofore entered into an Installment Sale Agreement, dated as of December 1, 1991, by and between the Lodi Public Improvement Corporation (the "Corporation") and the City (the "Prior Agreement"), pursuant to which the Corporation agreed to sell certain real property, improvements and equipment (the "Project") to the City, and the City agreed to make certain Installment Payments (the "Prior Payments") to the Corporation; WHEREAS, the Prior Agreement provides that the City may prepay the Prior Payment in full by paying the total unpaid principal component of the Prior Payments through a deposit of cash in the amount sufficient to pay the total unpaid principal component of the Prior Payments together with any unpaid Prior Payments plus a prepayment premium, as to a prepayment date of February 1,2008, of one and one-half percent of the principal component of the Prior Payments which are prepaid; and WHEREAS, the City has determined to prepay on February 1, 2008, the full $ principal component of the Prior Payments outstanding on such date; and WHEREAS, the Prior Agreement provides that in the event that the City deposits, or causes the deposit on its behalf of, moneys in an amount sufficient to make the Prior Payments when due and for the redemption thereof in accordance with instructions of the City, then all of the obligations of the City under the Prior Agreement and all of the security provided by the City for such obligations, excepting only the obligation of the City to make the Prior Payments from said deposit, shall cease and terminate, and unencumbered title to the Project shall be vested in the City without further action by the City or the Corporation; and or certain Federal Securities (as defined in the Prior Agreement, and which may include United States Treasury notes, bonds, bills or certificates of indebtedness or obligations for which the full faith and credit of the United States are pledged for the payment of principal and interest, including United States Treasury (book entry) certificates, notes and bonds, state and local government series), WHEREAS, pursuant to an Assignment Agreement, dated as of December 1, 1991 (the "Prior Assignment Agreement"), by and between the Corporation and the Escrow Bank, as successor trustee (the "Prior Trustee"), the Corporation assigned to the Prior Trustee its rights to receive Prior Payments from the City under the Prior Agreement and the right to exercise such rights and remedies conferred on the Corporation under the Prior Agreement to enforce payment of the Prior Payments; and OHS West:260326408.4 40490-8 WHEREAS, pursuant to a Trust Agreement, dated as of December 1, 1991, by and among the City, the Corporation and the Prior Trustee (the "Prior Trust Agreement"), there have been executed and delivered certificates of participation (the "Prior certificates") representing undivided fractional interests of the owners thereof to receive Prior Payments made by the City and the Prior Trustee is to apply such Prior Payments to the payment of principal and interest with respect to the Prior Certificates, and to administer certain funds and accounts, created pursuant to the Prior Trust Agreement, including a reserve fund; and WHEREAS, the City has determined that, as a result of favorable financial market conditions, it is in the best interests of the City at this time to refinance the City's obligation to make the Prior Payments under the Prior Agreement and, as a result thereof, to provide for the payment of the Prior Certificates on February 1,2008, at the redemption price of 101.5% of the principal amount thereof, plus accrued interest, and to that end, the City proposes to sell the Project to the Corporation and to re -purchase the Project from the Corporation pursuant to that certain Installment Sale Agreement, dated as of December 1, 2007 (the "Installment Purchase Agreement"); and WHEREAS, the City proposes to make the deposit of moneys referenced in Section 10.02 and Section 10.05 of the Prior Agreement and to appoint the Escrow Bank as its agent for the purpose of applying said deposit to the prepayment of Prior Payments in accordance with the instructions provided by this Escrow Deposit and Trust Agreement and of applying said Prior Payments to the payment and redemption of the Prior Certificates in accordance with the Prior Trust Agreement, and the Escrow Bank desires to accept said appointment; and WHEREAS, to obtain moneys to make such deposit, the City and the Corporation have entered into the Installment Purchase Agreement to The Bank of New York Trust Company, N.A., as trustee (the "Trustee"), pursuant to a Trust Agreement, dated as of December 1, 2007 (the "Trust Agreement"), by and between the Corporation and the Trustee, whereby the Trustee has executed and delivered certificates of participation in the principal amount of [$ ] (the "Certificates"), each evidencing a proportionate ownership interest in the Installment Payments made by the City under the Installment Purchase Agreement; and WHEREAS, the City wishes to make such a deposit with the Escrow Bank and to enter into this Escrow Deposit and Trust Agreement for the purpose of providing the terms and conditions for the deposit and application of amounts so deposited; and WHEREAS, the Escrow Bank has full powers to act with respect to the irrevocable escrow and trust created herein and to perform the duties and obligations to be undertaken pursuant to this Escrow Deposit and Trust Agreement. NOW, THEREFORE, in consideration of the above premises and of the mutual promises and covenants herein contained and for other valuable consideration, the parties hereto do hereby agree as follows: Section 1. Definition of Federal Securities. As used herein, the term "Federal Securities" shall mean non -callable, direct general obligations of the United States of America (including -2- OHS West:260326408.4 40490-9 obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America). Section 2. Appointment of Escrow Bank. The City hereby appoints the Escrow Bank as escrow bank for all purposes of this Escrow Deposit and Trust Agreement and in accordance with the terms and provisions of this Escrow Deposit and Trust Agreement, and the Escrow Bank hereby accepts such appointment. Section 3. Establishment of Escrow Fund. There is hereby created by the City with, and to be held by, the Escrow Bank, as security for the prepayment of the Prior Payments as hereinafter set forth, an irrevocable escrow to be maintained in trust by the Escrow Bank on behalf of the City and for the benefit of the owners of the Prior Certificates, said escrow to be designated the "Escrow Fund." All moneys and Federal Securities deposited in the Escrow Fund shall be held as a special fund for the payment of the principal and interest due with respect to the Prior Certificates in accordance with the provisions of the Prior Trust Agreement. If at any time the Escrow Bank shall receive actual knowledge that the moneys and Federal Securities in the Escrow Fund will not be sufficient to make any payment required by Section 5 hereof, the Escrow Bank shall notify the City of such fact. The Escrow Bank may rely upon the conclusion of Causey Demgen &- Moore Inc. that the Federal Securities listed on Exhibit A, together with interest to accrue thereon, and cash then on deposit in the Escrow Fund will be fully sufficient to redeem all outstanding Prior Certificates on February 1, 2008, at the redemption price of 101.5% of the principal amount thereof, plus accrued interest to such redemption date. Section 4. Deposit into Escrow Fund: Investment of Amounts. Concurrently with delivery of the Certificates, the City shall cause to be transferred to the Escrow Bank for deposit into the Escrow Fund the amount of $ in immediately available funds, derived as follows: (a) from the proceeds of sale of the Certificates, the amount of $ ' (b) from the reserve fund established pursuant to the Prior Trust Agreement (the "Prior Reserve Fund"), the amount of $ pursuant to Section 8 hereof, (c) from the installment payment fund established pursuant to the Prior Trust Agreement (the "Prior Installment Payment Fund"), the amount of $ pursuant to Section 8 hereof, [and (d) from the rebate fund established pursuant to the Prior Trust Agreement (the "Prior Rebate Fund") in the amount of $ pursuant to Section 8 hereofJ. The Escrow Bank shall invest all of the moneys deposited into the Escrow Fund pursuant to the preceding paragraph in the Federal Securities set forth in Exhibit A attached hereto and by this reference incorporated herein (the "Escrowed Federal Securities"). The Escrowed Federal Securities shall be deposited with and held by the Escrow Bank in the Escrow Fund solely for the uses and purposes set forth herein. The Escrow Bank shall not be liable or responsible for any loss resulting from any reinvestment made pursuant to this Escrow Deposit and Trust Agreement and in full compliance with the provisions hereof. -3- OHS WesC260326408.4 40490-8 Section 5. Instructions as to Application of Deposit. The City hereby irrevocably directs and instructs the Escrow Bank to apply all amounts received in connection with the Escrowed Federal Securities and cash on deposit in the Escrow Fund to call and redeem the outstanding Prior Certificates prior to maturity on February 1,2008, as more particularly set forth in Exhibit B attached hereto and hereby made a part hereof. For such purpose of call and redemption prior to maturity, the City hereby instructs the Escrow Bank, as Prior Trustee, and the Escrow Bank, as Prior Trustee, hereby agrees to give notice of redemption of the Prior Certificates, such notice of redemption to be given timely for redemption of the Prior Certificates on February 1, 2008, in accordance with the applicable provisions of the Prior Trust Agreement. Section 6. Investment of Any Remaining Moneys. At the written direction of the City received at least two (2) Business Days in advance, the Escrow Bank shall invest and reinvest the proceeds received from any of the Escrowed Federal Securities originally deposited into the Escrow Fund for a period ending not later than January 31,2008, in Federal Securities; provided, however, that (a) such written directions of the City shall be accompanied by (i) the opinion of an independent certified public accountant or firm of certified public accountants of favorable national reputation experienced in the refunding of obligations of political subdivisions, that amounts in the Escrow Fund after such investment, together with interest to be derived therefrom, shall be in an amount at all times at least sufficient to make the payments specified in Section 5 hereof, and (ii) an opinion of nationally recognized bond counsel ("Bond Counsel") that investment in accordance with such directions will not affect, for federal income tax purposes, the exclusion from gross income of interest due with respect to the Prior Certificates or the Certificates, and (b) if the City directs such investment or reinvestment to be made in United States Treasury Securities - State and Local Government Series, the City shall, at its cost, cause to be prepared and delivered all necessary subscription forms therefor to enable the Escrow Bank to acquire such securities not less than two (2) Business Days prior to the date of making such investment. In the event that the City shall fail to file any such written directions with the Escrow Bank concerning the reinvestment of any such proceeds, such proceeds shall be held uninvested by the Escrow Bank. Any interest income resulting from investment or reinvestment of moneys pursuant to this Section 6 and not, in the opinion of an independent certified public accountant or firm of certified public accountants of favorable national reputation experienced in the refunding of obligations of political subdivisions, required for the purposes set forth in Section 5 shall be paid to the City for deposit in the Improvement Fund established under the Trust Agreement promptly upon the receipt of such interest income by the Escrow Bank. Section 7. Substitution or Withdrawal of Federal Securities. The City may, at any time, direct the Escrow Bank in writing to substitute Federal Securities for any or all of the Escrowed Federal Securities then deposited in the Escrow Fund, or to withdraw and transfer to the City any portion of the Federal Securities then deposited in the Escrow Fund, provided that any such direction and substitution or withdrawal shall be simultaneous with, and shall be accompanied by: (a) a certification of an independent certified public accountant or firm of certified public accountants of favorable national reputation experienced in the refunding of obligations of political subdivisions that the Federal Securities then to be so deposited in the Escrow Fund together with interest to be derived therefrom, or in the case of withdrawal the Federal Securities to be remaining in the Escrow Fund following such withdrawal together with the interest to be derived therefrom, shall be in an amount at all times at least sufficient to make the payments specified in Section 5 hereof, and (b) an opinion of Bond Counsel that the substitution or -4- OHS West 260326408 4 40490-8 withdrawal will not affect, for Federal income tax purposes, the exclusion from gross income of interest due with respect to the Prior Certificates or the Certificates. In the event that, following any such substitution of Federal Securities pursuant to this Section 7, there is an amount of moneys or Federal Securities in excess of an amount necessary to make the payments required by Section 5 hereof, such excess shall be paid to the City for deposit in the Improvement Fund established under the Trust Agreement. Section 8. Application of Prior Funds. On the date of original delivery of the Certificates and the deposit of a portion of the proceeds thereof in the Escrow Fund pursuant to Section 4, the Prior Trustee shall (a) withdraw all amounts ($ on deposit in the Prior Reserve Fund and transfer such sum to the Escrow Fund, (b) withdraw all amounts ($ ) on deposit in the Prior Installment Payment Fund and transfer such sum to the Escrow Fund, and (c) withdraw all amounts ($ ) on deposit in the Prior Rebate Fund and transfer such sum to the Escrow Fund. Any amounts remaining in any other fund or account created with respect to the Prior Certificates, including interest earnings received by the Prior Trustee with respect to the Prior Reserve Fund, the Prior Installment Payment Fund or the Prior Rebate Fund, shall, after payment of all fees and expenses of the Prior Trustee, be transferred to the Trustee for deposit in the Installment Payment Fund and applied to the payment of Installment Payments as the same shall become due. Section 9. Application of Certain Terms of Prior Trust Agreement. All of the terms of the Prior Trust Agreement relating to the making of payments of principal and interest with respect to the Prior Certificates are incorporated in this Escrow Deposit and Trust Agreement as if set forth in full herein. The provisions of the Prior Trust Agreement relating to the limitations from liability and protections afforded the Prior Trustee and the resignation and removal of the Prior Trustee are also incorporated in this Escrow Deposit and Trust Agreement as if set forth in full herein and shall be the procedure to be followed with respect to any resignation or removal of the Escrow Bank hereunder. Section 10. Compensation to Escrow Bank. The City shall pay the Escrow Bank full compensation for its duties under this Escrow Deposit and Trust Agreement, including out-of- pocket costs such as publication costs, prepayment or redemption expenses, legal fees and other costs and expenses relating hereto and, in addition, fees, costs and expenses relating to the purchase of any Federal Securities after the date hereof, pursuant to a separate agreement between the City and the Escrow Bank. Under no circumstances shall amounts deposited in the Escrow Fund be deemed to be available for said purposes. Section 11. Liabilities and Obligations of Escrow Bank. The Escrow Bank shall have no obligation to make any payment or disbursement of any type or incur any financial liability in the performance of its duties under this Escrow Deposit and Trust Agreement unless the City shall have deposited sufficient funds with the Escrow Bank. The Escrow Bank may rely and shall be protected in acting upon the written instructions of the City or its agents relating to any matter or action as Escrow Bank under this Escrow Deposit and Trust Agreement. The City hereby assumes liability for, and hereby agrees (whether or not any of the transactions contemplated hereby are consummated) to indemnify, protect, save and hold harmless the Escrow Bank and its respective successors, assigns, agents and servants from and -5- OHS West:260326408A 40490-S against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements (including legal fees and disbursements) of whatsoever kind and nature which may be imposed on, incurred by, or asserted against, at any time, the Escrow Bank (whether or not also indemnified against by any other person under any other agreement or instrument) and in any way relating to or arising out of the execution and delivery of this Escrow Deposit and Trust Agreement, the establishment of the Escrow Fund, the retention of the moneys therein and any payment, transfer or other application of moneys or securities by the Escrow Bank in accordance with the provisions of this Escrow Deposit and Trust Agreement, or as may arise by reason of any act, omission or error of the Escrow Bank made in good faith in the conduct of its duties; provided, however, that the City shall not be required to indemnify the Escrow Bank against its own negligence or misconduct. The indemnities contained in this Section 11 shall survive the termination of this Escrow Deposit and Trust Agreement. Section 12. Amendment. This Escrow Deposit and Trust Agreement may be modified or amended at any time by a supplemental agreement which shall become effective when the written consents of the owners of one hundred percent (100%) in aggregate principal amount of the Prior Certificates then outstanding shall have been filed with the Escrow Bank. This Escrow Deposit and Trust Agreement may be modified or amended at any time by a supplemental agreement, without the consent of any such owners, but only (1) to add to the covenants and agreements of any party, other covenants to be observed, or to surrender any right or power herein or therein reserved to the City, (2) to cure, correct or supplement any ambiguous or defective provision contained herein, (3) in regard to questions arising hereunder or thereunder, as the parties hereto or thereto may deem necessary or desirable and which, in the opinion of counsel, shall not adversely affect the interests of the owners of the Prior Certificates or the Certificates, and that such amendment will not cause interest on the Prior Certificates or represented by the Certificates to become subject to federal income taxation. Section 13. Termination: Unclaimed Money, This Escrow Deposit and Trust Agreement shall terminate when the principal of and interest on all Prior Certificates have been paid; provided, however, that money held by the Escrow Bank pursuant to this Escrow Agreement for the payment and discharge of any of the Prior Certificates (which shall not be payable as to interest from and after the date set for redemption) which remain unclaimed for two (2) years after such payments were due, shall be repaid by the Escrow Bank to the City free from the trust created by the Prior Trust Agreement and this Escrow Deposit and Trust Agreement, and the Escrow Bank shall thereupon be released and discharged with respect thereto and hereto and all liability of the Escrow Bank with respect to such money shall thereupon cease. Section 14. Severability. If any section, paragraph, sentence, clause or provision of this Escrow Deposit and Trust Agreement shall for any reason be held to be invalid or unenforceable, the invalidity or unenforceability of such section, paragraph, sentence clause or provision shall not affect any of the remaining provisions of this Escrow Deposit and Trust Agreement. Section 15. Notice of Escrow Bank and City. Any notice to or demand upon the Escrow Bank may be served and presented, and such demand may be made, at the principal corporate trust office of the Escrow Bank as specified by the Escrow Bank as Prior Trustee in accordance with the provisions of the Prior Trust Agreement or by physical delivery with confirmation of receipt or by confirmed telecopy. Any notice to or demand upon the City shall be deemed to M OHS West 260326408 4 40490-8 have been sufficiently given or served for all purposes by being mailed by registered or certified mail, and deposited, postage prepaid, in a post office letter box, addressed to such party as provided in the Prior Agreement (or such other address as may have been filed in writing by the City with the Escrow Bank). Section 16. Merger or Consolidation of Escrow Bank. Any company into which the Escrow Bank may be merged or converted or with which may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Escrow Bank may sell or transfer all or substantially all of its corporate trust business, provided such company shall be eligible to act as Trustee under the Trust Agreement and the Prior Trust Agreement, shall be the successor hereunder to the Escrow Bank without the execution or filing of any paper or any further act. -7- OHS West;260326408,4 40490-9 IN WITNESS WHEREOF, the City and the Escrow Bank have each caused this Escrow Deposit and Trust Agreement to be executed by their duly authorized officers all as of the date first above written. (SEAL) Attest: City Clerk -8- OHS West: 260326408.4 40490-8 CITY OF LODI, CALIFORNIA LIM Mayor US. BANKNATIONAL ASSOCIATION, as Escrow Bank Trust Officer EXHIBIT A PAYMENT SCHEDULE OF ESCROWED FEDERAL SECURITIES Maturity Type Date Coupon Par Amount Price cost Accrued Total Cost Exhibit A OHS West:260326408.4 40490-8 EXHIBIT B PAYMENT SCHEDULE OF PRIOR CERTIFICATES Interest Payment Redemption Date Principal Interest Premium Total P February 1,2008 Exhibit B OHS West:260326408,4 40440-8 29079-171 JH.CKI PURCHASE CONTRACT CITY OF LODI WASTEWATER SYSTEM REVENUE CERTIFICATES OF PARTICIPATION, 2007 SERIES A . 2007 City of Lodi 221 West Pine Street Lodi, California 95241-1910 Ladies and Gentlemen: 10-2-07 10-23.07 10-25-07 The undersigned (collectively, the "Underwriter"), offers to enter into tfris purchase contract (the "Purchase Contract") with the City of Lodi (the "City"), which will be binding upon the City and the Underwriter upon the acceptance hereof by the City. This offer is made subject to its acceptance by the City by execution of this Purchase Contract and its delivery to the Underwriter on or before 5:00 p.m., California time, on the date hereof. All terms used herein and not otherwise defined shall have the meanings given to such terms in the Trust Agreement (as hereafter defined). 1. Purchase and Sale. Upon the terms and conditions and upon the basis cf the representations, warranties and agreements hereinafter set forth, the Underwriter hereby agrees to purchase, and the City hereby agrees to cause to be delivered to the Underwriter, all (but not less than all) of the $ aggregate principal amount of the above -captioned certificates cf participation (the "Certificates' at a purchase price of $ (being an amount equal to the principal amount of the Certificates, plus net original issue premium of $ less an underwriter s discount of $_), 2. Purpose; Authorizing Instruments and Law. The Certificates are being sold to provide funds for the following purposes: (i) to finance the costs cf certain improvements to the wastewater collection, treatment and disposal system of the City (the "System"), (ii) to allow the City to prepay Outstanding installmena payment obligations of the City (the 111991 Installment Paymentsl and, as a result, to cause a redemption cf the outstanding Certificates of Participation (1991 Wastewater Treatment Plant Expansion Refunding Project) (the "1991 Certificates"), to fund a deposit to a reserve fund for the Certificates, and (iv) to pay costs of delivery of the Certificates. The City will acquire certain facilities from the Lodi Public Improvement Corporation (the "Corporation") pursuant to an Installment Purchase Agreement, dated as of December 1, 2007, by and between the City and the Corporation (the "Installment Purchase Agreement"). The Certificates will evidence and represent fractional undivided interests cf the owners thereof in installment payments (the "Installment Payments") to be made by the City to the Corporation pursuant to the Installment Purchase Agreement. The Certificates will be executed and delivered pursuant to a Trust Agreement, dated as of December 1, 2007 (the "Trust Agreement"), by and among The Bank of New York Trust Company, N.A., as trustee (the "Trustee"), the Corporation and the City. The Certificates shall be as described in the Trust Agreement and the Official Statement (as hereafter defined). The payment of Installment Payments is secured by a pledge of the "System Net Revenues" (as defined in the Installment Purchase Agreement) of the System. The City's pledge of System Net Revenues to the Installment Payments is on a parity with the City's pledge of System Net Revenues to the following (the "Existing Parity Obligations-): (i) 2003 Installment Payments; 2003 CSCDA Bonds. The City entered into an Installment Purchase Agreement, -dated as of October 1, 2003 (the "2003 Installment Purchase Agreement"), by and between the City and the California Statewide Communities Development Authority ("CSCDA"), pursuant to which the City is obligated to make certain installment payments (the' 2003 Installment Payments') to CSCDA which 2003 Installment Payments secure a portion of the debt service on the CSCDA $9,855,000 initialrincipal amount Water and Wastewater Revenue Bonds (Pooled Financing Programrzces 20038 (the "2003 CSCDA Bonds"). (") 2004 Certificates. On May. 12, 2004, the City caused execution and delivery (ii) the $27,360,000 initial p76pal amount Wastewater System Revenue Certificates of Participation, 2004 Series A (the "2004 certificates"). The 2004 Certificates are secured by and payable from installment payments (the "2004 Installment Payments") payable by the City under an Installment Purchase Agreement, dated as of May 1,2004 (the "2004 Installment Purchase Agreement")between the City and the Corporation. In addition, the Installment Purchase Agreement provides that the City may incur Parity Debt secured byy a pledge of System Net Revenues on a parity basis with the Installment Payments only upon t3�e satisfaction cf certain conditions as described therein. Concurrently with execution and delivery of the Certificates, (the "Insurer") will issue (i) a municipal bond insurance policy (the "Municipal Bond Insurance Policy") to insure payment of principal of and interest with respect to the Certificates and (ii) a debt service reserve fund surety bond (the "Surety Bond"). The City will enter into an Escrow Deposit Agreement, dated as of December 1, 2007 (the "Escrow Agreement"), with U.S. Bank National Association, as escrow agent (the "Escrow Agent"), in order to implement the prepayment of the 1991 Installment Payments and the 1991 Certificates. 3. Public Offerin . The Underwriter agrees to make a bona fide public offering of all the Certificates initially at t Ze public offering prices (or yields) set forth on Appendix A attached hereto and incorporated herein by reference. Subsequent to the initial public offering, the Underwriter reserves the right to change the public offering prices (or yields) as it deems necessary in connection with the marketing of the Certificates, prodded that the Underwriter shall not change the interest rates set forth on Appendix A. The Certificates may be offered and sold to certain dealers at prices lower than such initial public offering prices. 4. DeliveU of Official Statement; Continuing Disclosure. Pursuant to the authorization of the City, the Underwriter has distributed copies of the Preliminary Official Statement dated November 8, 2007, relating to the Certificates (the "Preliminary Official Statement") to prospective purchasers of the Certificates. By its acceptance of this proposal, the City hereby ratifies such use by the Underwriter of the Preliminary Official Statement; and the City agrees to approve a final Official Statement relating to the Certificates (the "Official Statement") which will consist cf the Preliminary Official Statement with such changes as may be made thereto, with the approval of the City and the Underwriter, and toprovide copies thereof to the Underwriter as set forth in Section 6(o) hereof. The Underwriter Hereby agrees to deposit the Official Statement with a nationally recognized municipal securities information depository. The City hereby authorizes the Underwriter to use and distribute, in connection with the offer and sale cf the Certificates, the Preliminary Official Statement, the Official Statement, the Trust Agreement, the Continuing Disclosure Certificate (defined below), the Installment Purchase -2- Agreement, the Escrow Agreement and this Purchase Contract and all information contained herein, and all other documents, certificates and statements furnished by the City to the Underwriter in connection with the transactions contemplated by this Purchase Contract. In connection with distribution cf the Preliminary Official Statement, the City will execute a certificate in the form attached hereto as Exhibit B. The City will undertake, pursuant to the Installment Purchase Agreement and a Continuing Disclosure Certificate One "Continuing Disclosure Certificate"), to provide certain annual financial information and notices of the occurrence of certain events, if material. A description of such undertaking is set forth in the Preliminary Official Statement and will also be set forth in the Official Statement. 5. The Closing. At 8:00 a.m., California time, on December _, 2007 or at such other time or on such earlier or later business day as shall have been mutually agreed upon by the City and the Underwriter, the City will cause to be delivered (i) the Certificates, through the facilities cf The Depository Trust Company, to the Underwriter in New York, New York, and (ii) the closi-ig documents hereinafter mentioned at the offices cf Orrick, Herrington & Sutcliffe LLP ("Specid Counsel"), San Francisco, California, or another place to be mutually agreed upon by the City and the Underwriter. The Underwriter will accept such delivery and pay the purchase price cf the Certificates as set forth in Section 1 hereof in immediately available funds. This payment and delivery, together with the delivery of the aforementioned documents, is herein called the "Closing." The Certificates will be delivered in such denominations and deposited in the account or accounts specified by the Underwriter pursuant to written notice to the City not later than five business days prior to Closing. 6. Representations, Warranties and Covenants. The City represents, warrants to and covenants with to the Underwriter that: (a) Due Organization Existence and Authority. The City is a municipal corporation and general law city duly organized and existing under the Constitution and laws of the State of California (the ' State"), with full right, power and authority to execute, deliver and perform its obligations under this Purchase Contract, the Trust Agreement, the Instalhnent Purchase Agreement, the Escrow Agreement and the Continuing Disclosure Certificate (collectively, the "City Documents") and to carry out and consummate the transactions on its part contemplatedby the City Documents and the Official Statement. (b) Due Authorization and Approval. By all necessary official action of the City, the City has duly authorized and approved the execution and delivery of, and the performance by the City of the obligations on itspart contained in the City Documents; and as of the date hereof, such authorizations and approvals are in fill force and effect and have not been amended, modified or rescinded. The City has complied, and will at the Closing be in compliance in all respects, with its obligations under the City Documents and the documents relating to the Existing Parity Obligations (the "Existing Parity Obligations Documents"). (c) Official Statement Accurate and Complete. The Preliminary Official Statement was as cf its date, and the Official Statement is, and at all times subsequent to the date of the Official Statement up to and includin the Closing will be, true and correct in all material respects, and the Preliminary Official Statement and the Official Statement contain and up to and including the Closing will contain no misstatement of any material fact and do not, and up to and including the Closing will not, omit any statement necessary to make the statements contained therein, in the light of the circumstances in which such statements were made. not misleading. (d) Underwriter's Consent to Amendments and Supplements to Official Statement. The City will advise the Underwriter promptly of any proposal to amena or supplement the -3. Official Statement and will not effect or consent to any such amendment or supplement without the consent cf the Underwriter, which consent will not be unreasonably withheld. The City will advise the Underwriter promptlyy 4 the institution of any proceedings known to it by any governmental agency prohibiting or otherwise affecting the use cf the Official Statement in connection with the offering, sale or distribution cf the Certificates. (e) Agency Agreement to Amend or Supplement Official Statement. if after the date cf this Purchase Contract and until 25 days after the end of the "underwriting period' (as defined below), any event occurs as a result of` which the Official Statement as then amended or supplemented would include an untrue statement cf a material fact, or omit to state any material fact necessary in or4der to make the statements contained therein, in the light cf the circumstances under ich they were made, not misleading, and, in the reasonable opinion cf the Underwriter, an amended or supplemented Official Statement should be delivered in connection with the offers or sales cf the Certificates to reflect such event, the City promptly will prepare at its expense an amendment or supplement which will correct such statement or omission and the City shall promptly furnish to the Underwriter a reasonable number cf copies cf such amendment or supplement. Unless the Underwriter otherwise advises the City m writing that the end o fthe underwriting period shall be another specified date, the end cf the underwriting period shall be the day cf Closing. (1} No Material Change in Finances. At the time cf the Closing, there shall not have been any material adverse changes in the financial condition of the City since the date hereof. (g)No Breach or Default. As cf the time cf acceptance hereof and as cf the time cf the Closing, the City is not and will not be, in any manner which would adversely affect the transactions on the part cf the City contemplated hereby and by the City Documents, in breach cf or in default under any applicable constitutional provision, law or administrative rule or regulation cf the State or the United States, or any applicable judgment or decree or any trust agreement, loan agreement, bond, note, resolution, ordinance, agreement or other instrument to which the City is a party or is otherwise subject, and no event has occurred and is continuing which, with the passage cf time or the giving cf notice, or both, would constitute, in any manner which would adversely affect the transactions on the part of the City contemplated hereby and by the City Documents, a default or event cf default under any :such instrument; and, as of such times, the authorization, execution and delivery cf the City Documents and compliance with the provisions cf each cf such agreements or instruments do not and will not conflict with or constitute a breach of or default under any applicable constitutional provision, law or administrative rule or regulation of the State or the United States, or any applicable 'udgment, decree, license, permit, trust agreement, loan agreement, bond, note, resolution, ordinance, agreement or other instrument to which the City (or any cf its officers in their respective capacities as such) is subject, or by which it or any cf its properties is bound, nor will any such authorization, execution, delivery or compliance result in the creation or imposition cf any lien, charge or other security interest or encumbrance cf any nature whatsoever upon any cf its assets or properties or under the terms of any such law, regulation or instrument, except as may be provided by the City Documents. (h) No Litigation. As cf the time of acceptance hereof and as of the date cf the Closing, no action, suit, proceeding, inquiry or invest�'gation, at law or inequity, before or by any court, government agency, public board or body, is pending with respect to which the City has been served with process, to the best knowledge cf the City after due investigation, threatened (i) in ajly way questioning the corporate existence of the City or the titles cf the officers cf the qty to their respective offices; (ii) affecting, contesting or seeking to prohibit, restrain or enjoin the execution and delivery of the Certificates, or in any way contesting or affecting the validity cf the City Documents or the -4- consummation of' the transactions contemplated thereby, or contesting the exclusion of' interest evidenced and represented by the Certificates from gross income for federal income tax purposes or contesting the powers cf the City to enter into the City Documents; (iii) which may result in any material adverse impact on the financial condition of the City; or (iv) contesting the completeness or accuracy of' the Preliminary Official Statement or the Official Statement or any supplement or amendment thereto or asserting that the Preliminary Official Statement or the Official Statement contained any untrue statement of' a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in the light cf the circumstances under which they were made, not misleading, and there is no known basis for any action, suit, proceeding, inquiry or investigation of the nature described in clauses (i) through (iv) cf this sentence. (i) Further Cooperation, Blue Sky. The City will furnish such information, execute such instruments and take such other action in cooperation with the Underwriter as the Underwriter may reasonably request in order (i) to qualify the Certificates for offer and sale under the Blue Sky or other securities laws and regulations of such states and other jurisdictions cf the United States as the Underwriter may designate and (ii) to determine the eligibility of the Certificates for investment under the laws of such states and other jurisdictions; provided, however, that the City shall not be required to execute a general or special consent to service of process or qualify to do business in connection with any such qualificafim or determination in any jurisdiction. (j) Consents and Approvals. All authorizations, approvals, licenses, permits, consents and orders cf or filings with an governmental authority, legislative body, board, agency or couffnission having jurisdiction in the matters which are required for the due authorization of, which would constitute a condition precedent to or the absence of which would adversely affect the due performance by the City CC its obligations in connection with, the City Documents have been duly obtained or made, except as may be required under the Blue Sky or securities laws of any state in connection with the offenng and sale of' the Certificates. (k) Validity ci City Documents. The City Documents, when executed and delivered by the City and other parties thereto, will be legally valid and binding obligations cf the City enforceable in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally. (1) No Other Obligations. Other than the Existing Parity Obligations, there is no other lien or encumbrance on the SystemNet Revenues of the System. (m) Certificates. Any certificate signed by any official of the City and delivered to the Underwriter shall be deemed to be a representation and warranty by the City to the Underwriter as to the statements made therein. (n) Compliance With Rule 25c2-12. (i) The Pre Iimin y Official Statement heretofore delivered to the Underwriter is deemed fin I by the City as of its date and as of the date hereof, except for the omission of' such information as is permitted to be omitted in accordance with paragraph (b)(1) cf Rule 15c2-12. The City hereby covenants and agrees that, within seven business days from the date hereof, the City shall cause a final printed form cf the Official Statement to be delivered to the Underwriter in sufficient quantity to corny with paragraph (b) (4) of Rule 15c2- 12 and Rules cf the Municipal Securities Rulemaking Board. (ii) The City has not previously failed to comply with any continuing disclosure obligation undertaken pursuant to Rule 15c2-12. -5- 7. Closing Conditions. The Underwriter has entered into this Purchase Contract in reliance upon tfie representations, warranties and covenants of the City herein and the performance by the City cf its obligations hereunder, both as of the date hereof and as of the date cf the Closing. The Underwriter's obligations under this Purchase Contract are and shall be subject to the following additional conditions: (a) Bring -Down Representation. The representations, warranties and covenants cf the City contained herein shall be true and correct at the date hereof and at the time CC the Closing, as if made on the date of the Closing. (b) Executed Agreements and Performance Thereunder. At the time of the Closi'ng (i) the City Documents shall be in full force and effect, and shall not have been amended, modified or supplemented except with the written consent cf the Underwriter, (ii)there shall be in full force and effect such resolutions (the "Resolutions")as, in the opinion of Special Counsel, shall be necessary in connection with the transactions contemplated by the Official Statement and the City Documents, (iii) the City shall perform or have performed its obligations required as specified in this Purchase Contract or the City Documents to be performed at or prior to Closing, (iv)the Corporation shall perform or have performed its obligations re uired as specified in the Trust Agreement or the Installment Purchase Agreement ?collectively, the "Corporation Documents") to be performed at or prior to Closing, and (v) the Official Statement shall not have been supplemented or amended, except pursuant to Paragraph 6(e) or as otherwise may have been agreed to in writing by the Underwriter. (c)No Default. At the time cf the Closing, no defmlt shall have occurred or be existing under the Resolutions, the Corporation Documents or the City Documents, and the City shall not be in default in the payment cf any cf its bonded indebtedness or any of` its other obligations, which default would adversely impact the ability of the City to make Installment Payments. (d) Termination Events. The Underwriter shall have the right to terminate this Purchase Contract, without liability therefor, by written notification to the Corporation and the City if at any time at or prior to the Closing: (1)Any event shall occur which causes any statement contained in the Official Statement to be materially misleading or results in a failure cf the Official Statement to state a material fact necessary to make the statements in the Official Statement, in the light of` the circumstances under which they were made, not misleading; or (2) The marketability of the Certificates or the market price thereof, in the opinion cf the Underwriter, has been materially adversely affected, by an amendment to the Constitution of the United States or by any legislation in or by the Congress of` the United States or by the State, or the amendment CC legislation pending as cf the date cf this Purchase Contract in the Congress cf the United States, or the recommendation to Congress or endorsement for passage (by press release, other form of notice or otherwise) cf legislation by the President of the United States, the Treasury Department cf the United States, the Internal Revenue Service or the Chairman or ranking minority member cf the Committee on Finance cf the United States Senate or the Committee on Ways and Means cf the United States House cf Representatives, or the proposal for consideration cf legislationby either such Committee or by any member thereof, or the presentment cf legislation for consideration as an option by either such Committee, or by the staff of the Joint Committee on Taxation cf the Congress of the United States, or the favorable reporting for passage cf legislation to either House of the Congress cf the United 'States by a Committee Cf such House to which such legislation has been referred for consideration, or any decision cf any 0 federal or State court or any ruling or regulation (£iral,temporary or proposed) or official statement on behalf of the United States Treasury Department, the Internal Revenue Service or other federal or State authority materially adversely affecting the federal or State tax status of the City or the Copp oration, or the interest on bonds or notes or obligations of the general character cf the Certificates; or (3) An legislation, ordinance, rule or regulation shall be introduced in, or be enacted by any governmental body, department or agency of the State, or a decision b any court cf competent jurisdiction within the State or any court of the Unite States shall be rendered which, in the reasonable opinion cf the Underwriter, materially adversely affects the market price cf the Certificates; or (4) Legislation shall be enacted by the Congress cf the United States, or a decision by a court of the United States shall be rendered, or a stop order, ruling, regulation or official statement by, or on behalf of, the Securities and Exchange Commission or any other governmental agency having jurisdiction cf the subject matter shall be issued or made to the effect that the execution, delivery, offering or sale cf securities of the general character cf the Certificates, or the execution, delivery, offering or sale of the Certificates, including all underlying obligations, as contemplated hereby or by the Official Statement, is in violation or would be in violation of, or that securities cf the general character of the Certificates, or the Certificates, are not exempt from regstration under, any provision of the federal securities laws, including the Securities Act cf 1933, as amended and as then in effect, or that the Trust Agreement needs to be qualified under the Trust Indenture Act cf 1939, as amended and as then in effect; or (5) Additional material restrictions not in force as cf the date hereof shall have been imposed upon trading in securities generall by any governmental authom or by any national securities exchange which restrictions materially adversely affect the Underwriter's ability to trade the Certificates; or (6) A general banking moratorium shall have been established by federal or State authorities; or (7) The United States has become engaged in hostilities which have resulted in a declaration cC war or a national emergency or there has occurred any other outbreak of hostilities or a national or international calamity or crisis, financial or otherwise, the effect cf such outbreak, calamity or crisis on the financial markets of the United States, being such as, in the reasonable opinion cf the Underwriter, would affect materially and adversely the ability of the Underwriter to market or deliver the Certificates; or (8) Any rating cf the securities of the City shall have been downgraded, suspended or withdrawn by a national rating service, which, in the Underwriter's reasonably oop�inion, materially adversely affects the marketability or market price of the Certificates; or (9) The commencement cf any action, suit or proceeding described in paragraphs 6(h) hereof which, in the judgment of the Underwriter, materially adversely affects the market price cf the Certificates; or (10) There shall be in force a general suspension of trading on the New York Stock Exchange. (e) Closing Documents. At or prior to the Closing, the Underwriter shall receive (unless the context otherwise indicates) the following documents: -7- (1) Final Opiniow An approving opinion cf Special Counsel dated the date of the Closing and substantially in the form included as Appendix F to the Official Statement, together with a letter from such counsel, dated the date of the Closing and addressed to the Underwriter, to the effect that the foregoing opinion addressed to the City may be relied upon by the Underwriter to the same extent as if such opinion were addressed to it. (2) Supplemental Opinion. A supplemental opinion cf Special Counsel addressed to the Underwriter, in form and substance acceptable to the Underwriter, and dated the date cf the Closing substantially to the following effect: (i) The statements contained in the Official Statement under the cantions '"THE 2007 CE JIFJ RTES." "SECLJRITY AND SOURCES OF PAYMENT FOR THE 2007 CERTIFICATES." and "TAX MATTERS." and in Appendix D and Appendix F thereto, excluding any material that may be treated as included under such captions by cross-reference, insofar as such statements expressly summarize certain provisions cf the Certificates, the Trust Agreement, the Installment Purchase Agreement and the form and content cf Special Counsel's opinion, are accurate in all material respects; and (ii) The Certificates are not subject to the registration requirements cf the Securities Act cf 1933, as amended, and the Trust Agreement is exempt from qualificationpursuant to the Trust Indenture Act cf 1939, as amended (provided no opinion need be expressed with respect to the Mi ici al Bond Insurance Policy or the Surety Bond issued by the Insurer (3) City Attorney Opinion. Anopinion cf the City Attorney, dated the date cf the Closing and addressed to the Underwriter, in form and substance acceptable to the Underwriter substantially to the following effect: (i)The City is a municipal corporation and general law city, duly organized and validly existing under the Constitution and the laws cf the State cf California; (ii) The City has full legal power and lawful authority to enter into the City Documents; (iii) The City Documents have been duly authorized, executed and delivered by the City and constitute the legal, valid and bindin agreements of the City enforceable against the City in accordance wit their respective terms, except as enforcement may be limited by bankruptcyD insolvency, reorganization moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (iv) The resolutions ("City Resolutions") cf the City approving and authorizing the execution and delivery cf the City Documents, and proving the Official Statement, were duly adopted at meetings of the City Council called and held pursuant to law and with all public notice required by law and at which a quorum was present and acting throughout and the City Resolutions are in full force and effect and have not been modified, amended or rescinded; (v) The execution and delivery cf the City Documents and compliance with the provisions thereof, under the circumstances contemplated thereby, do not and will not in any material respect conflict 10 with, or constitute on the part of the City a breach of or default under, any agreement or other instrument to which the City is a party or by which it is bound or any existing law, regulation, court order or consent decree to which the City is subject; (vi)No additional authorization, approval, consent, waiver or any other action by any person, board or body, public or private, not previously obtained is required as of the date of the Closing for the City to enter into the City Documents, or to perform its obligations thereunder; (vii) Except as otherwise disclosed in the Official Statement, there is no litigation, proceeding, action, suit, or investigation at law or in equity before or by any court, governmental agency or body, pending or, to the best knowledge cf such counsel after due investigation, threatened against the City, challenging the creation, organization or existence CC the City, or the validity of the City Documents or seeking to restrain or enjoin the Installment Payments or in any way contesting or affecting the validity of the City Documents or any of the transactions referred to therein or contemplated thereby or contesting the authority cf the City to enter into or perform its obligations under any cf the City Documents, or under which a determination adverse to the City would have a material adverse effect upon the financial condition or the revenues of the City, or which, in any manner, questions or affects the right or ability cc the City to enter into the City Documents or affects in any manner the right or ability of the City to make Installment Payments; (viii) That nothing has come to the attention of such counsel which would lead it to believe that the Official Statement (excluding therefrom the financial and statistical data and forecasts included therein and information about the Insurer and The Depository Trust Company, as to which no opinion need be expressed) contains any untrue statement cf a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (4) Trustee Counsel Opinion. The opinion of counsel to the Trustee, dated the date cf the Closing, addressed to the Underwriter, to the effect that: (i) The Trustee has all necessary power to enter into, accept and administer the trust created under the Trust Agreement; (ii) The Trust Agreement has been duly authorized, executed and delivered by the Trustee and the Trust Agreement constitutes the legal, valid and binding obligation cf the Trustee enforceable in accordance with its terms, except as enforcement thereof maybe limited by bankruptcy, insolvency or other laws affecting the enforcement cf creditors' rights generally and by the application of equitable principles, if equitable remedies are sought; and (iii)The Certificates have been executed by a duly authorized officer of the Trustee. (5 Escrow Agent Counsel Opinion. The opinion cf counsel to the Escrow Agent, dated the date cf the Closing, addressed to the Underwriter, to the effect that: (i) The Escrow Agent has all necessary power to enter into, accept and administer the trust created under the Escrow Agreement; and In (ii) The Escrow Agreement has been duly authorized, executed and delivered by the Escrow Agent and the Escrow Agreement constitutes the legal, valid and binding obligation of the Escrow Agent enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other laws affecting the enforcement cf creditors' rights generally and by the application cf equitWe principles, if equitable remedies are sought. (6) corporation Counsel Opinion. An opinion cf the City Attorney, as general counsel to the Corporation, dated the date of the Closing and addressed to the Underwriter, in form and substance acceptable to the Underwriter substantially to the following effect: (i) The Corporation is a nonprofit, public benefit corporation, duly organized and validly existing under the Constitution and the laws of the State of California; (ii)The Corporation has full legal power and lawful authority to enter into the Corporation Documents; (iii) The Corporation Documents have been duly authorized, executed and delivered by the Corporation and constitute the legal, valid and binding agreements of the Corporation enforceable against the Corporation in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (iv) The resolutions ("Corporation Resolutions") of the Corporation approving and authorizir g the execution and delivery of the Corporation Documents, were duly adopted at meetings of the Board of Directors of the Corporation called and held pursuant to law and with all public notice required by law and at which a quorum was present and acting throughout and the Corporation Resolutions are in full force and effect and have not been modified, amended or rescinded; (v) The execution and delivery of the Corporation Documents and compliance with the provisions thereof, under the circumstances contemplated thereby, do not and will not in any material respect conflict with, or constitute on the part cf the Corporation a breach cf or default under, any agreement or other instrument to which the Corporation is a parry or by which it is bound or any existing law, regulation, court order or consent decree to which the Corporation is subject; (vi) No additional authorization, approval, consent, waiver or any other action by any person, board or body, public or private, not previously obtained is required as of the date of the Closing for the Corporation to enter into the Corporation Documents, or to perform its obligations thereunder; (vii) Except as otherwise disclosed in the Official Statement, there is no lit' ation, proceeding, action, suit, or investigation at law or in equity before or by any court, governmental agency or body, pending or, to the best knowledge cf such counsel after due investigation, threatened against the Corporation, challenging the creation, organization or existence of the Corporation, or the validity cf the Corporation Documents or in any way contesting or affecting the validity of the Corporation Documents or any cf the transactions referred to therein or contemplated thereby or contesting the authority of the Corporation to -10- enter into or perform its obligations under any cf' the Corporation Documents; (7) City Closing Certificate. A certificate cf the City, dated the date of the Closing, signed on behalf of the City b�y the City Manager, the Deputy City Manager, or other duly authorized officer of the City to the effect that: (i) The representations, warranties and covenants of the City contained herein are true and correct in all material respects on and as CC the date of the Closing as if made on the date cf the Closing and the City has complied with all cf the terms and conditions cf this Purchase Contract required to be complied with by the City at or prior to the date cf the Closing; and (ii)No event affectnO the City has occurred since the date cf the Official Statement which has not �Ueen disclosed therein or in any supplement or amendment thereto which event should be disclosed in the Official Statement in order to make the statements therein, in the light cf the circumstances under which they were made, not misleading. (8)corporation Closing Certificate. A certificate cf the Corporation, dated the date cf the Closing, signed on behalf cf the Corporation by a duly authorized officer of the Corporation to the effect that: (i) The Corporation is a nonprofit, public benefit corporation, duly created and lawfully existing under the laws of the State, with full right, power and authority to execute, deliver and perform its obligations under the Corporation Documents and to carry out and consummate the transactions on its part contemplated by the Corporation Documents and the Official Statement; (ii) By all necessary official action, the Corporation has duly authorized and approved the execution and delivery of, and the performance by the Corporation cf the obl�'gations on its Part contained in the Corporation Documents and as cf the Closing Date, such authorizations and approvals are in full force and effect and have not been amended, modified or rescinded. The Corporation is in compliance in all material respects with the terms cf the Corporation Documents; (iii) The Corporation is not, in any manner which would adversely affect the transactions contemplated by the Corporation Documents, in breach cf or in default under any ap licable constitutional provision, law or administrative rule or regulation cf the tate or the United States, or any applicable judgment or decree or any trust agreement, loan agreement, bond, note, resolution, ordinance, agreement or other instrument to which the Corporation is a party or is otherwise subject, and no event has occurred and is continuing which, with the passage cf time or the giving cf notice, or both, would constitute, in any manner which would adversely affect the transactions contemplated by the Corporation Documents, a default or event cf default under any such instrument; and the authorization, execution and delivery cf the Corporation Documents and compliance with the provisions cf each of such agreements or instruments do not and will not conflict with or constitute a breach of or default under any applicable constitutional provision, law or administrative rule or regulation cf the State or the United States or any applicable judgment, decree, license, permit, trust agreement, loan agreement, bond, note, resolution, ordinance, agreement or other instrument to which the Gooration (or any cf its officers in their respective capacities as such) is subject, or by which it or any cf its properties is bound, nor will any such authorization, execution, delivery or compliance result in the creation or imposition cf any lien, charge or other security interest or encumbrance cf any nature whatsoever upon any cf its assets -11- or properties or under the terms of any such law, regulation or instrument, except as may be provided by the Corporation Documents; (iv) There is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, public board or body, pending with respect to which the Corporation has been served with process or, to the best knowledge of the Corporation after due investigation, threatened (a) in any way questioning the existence cf the Corporation or the titles of the officers of the Corporation to their respective offices; (b) affecting, owdesting or seeking to prohibit, restrain or enjoin the execution and delivery of the Certificates, or in any way contesting or affecting the validity of the Corporation Documents or the consummation of the transactions contemplated thereby, or contesting the owers of` the Corporation to enter into the Corporation Documents; or rc} which may result in any material adverse impact on the financial condition of the Corporation, and there is no basis for any action, suit, proceedin , inquiry or investigation cf the nature described in clauses (a) through (c� of this sentence; (v) The Corporation Documents are valid and binding obligations cf the Corporation enforceable in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (vi) All authorizations, approvals, licenses, permits, consents and orders of or filings with any governmental authority, legislative body, board, agency or commission having jurisdiction in the matters which are required for the due authorization of, which would constitute a condition precedent to or the absence cf which would adversely affect the due performance by the Corporation cf its obligations in connection with, the Corporation Documents have been duly obtained or made, except as may be required under the Blue Sky or securities laws cf any state in connection with the offering and sale of the Certificates; and (vii) No event affecting the Corporation has occurred since the date of the Official Statement which has not been disclosed therein or in any supplement or amendment thereto which event should be disclosed in the Official Statement in order to make the statements with respect to the Corporation therein, in the light of the circumstances under which they were made, not misleading. (9) Trustee's Certificate. A certificate cf the Trustee, dated the date cf Closing, addressed to the City and the Underwriter, in form and substance acceptable to the Underwriter, to the following effect: (i) The Trustee has all necessary power to enter into, accept and administer the trust created under the Trust Agreement; (ii) The Trust Agreement has been duly authorized, executed and delivered by the Trustee and the Trust Agreement constitutes the legal, valid and binding obligation cf the Trustee enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other laws affecting the enforcement cf creditors' rights generally and by the application cf equitable principles, if equitable remedies are sought; (iii) No consent, approval, authorization or other action by any governmental or regulatory authority having jurisdiction over the Trustee that ,as not been obtained is or will be required for the execution and delivery of the Trust Agreement or the performance by the Trustee of its duties and obligations under the Trust Agreement; -12- (iv) The Certificates have been executed by a duly authorized officer cf the Trustee; (v) The execution and delivery by the Trustee of the Trust Agreement and compliance with the terms thereof will not conflict with, or result in a violation or breach of, or constitute a default under, any loan agreement, indenture, bond, note, resolution or any other agreement or instrument to which the Trustee is a parry or by which it is bound, or any law or any rule, regulation, order or decree of any court orgovernmental agency or body having jurisdiction over the Trustee or any of its activities or properties (except that no representation, warranty or agreement need be made by such counsel with respect to any federal or State securities or blue sky laws or regulations); and (vi) There is no action, suit, proceeding or investigation, at law or in equity, before or by any court or governmental agency, public board or body pending, or to the best knowledge cf the Trustee, threatened against the Trustee which in the reasonable judgment cf the Trustee would affect the existence of the Trustee or in any way contesting or affecting the validity or enforceability Cf the Trust Agreement or contesting the powers cf the Trustee or its authority to enter into and perform its obligation thereunder. (10 Escrow Agent's Certificate. A certificate of the Escrow Agent, dated the date of Closingg, addressed to the Agency and the Underwriter, in form and substance acceptable t o the Underwriter, to the following effect: (i) The Escrow Agent has all necessary power to enter into, accept and administer the trust created under the Escrow Agreement; (ii) The Escrow Agreement has been duly authorized, executed and delivered by the Escrow Agent and the Escrow Agreement constitutes the legal, valid and binding obligation of the Escrow Agent enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally and by the application of equitable principles, if equitable remedies are sought; (iii) No consent, approval, authorization or other action by any governmental or regulatory authority having jurisdiction over the Escrow Agent that has not been obtained is or will be required for the execution and delivery of the Escrow Agreement or the performance by the Escrow Agent cf its duties and obligations under the Escrow Agreement; (iv) The execution and delivery by the Escrow Agent of the Escrow Agreement and compliance with the terms thereof w i I I not conflict with, or result in a violation or breach of, or constitute a default under, any loan agreement, indenture, bond, note, resolution or any other agreement or instrument to which the Escrow Agent is a party or by which it is bound, or any law or an rule, regulation, order or decree of any court or governmental agency or body having jurisdiction over the Escrow Agent or any of its activities or properties (except that no representation, warranty or agreement need be made by such counsel with respect to any federal or State securities or blue sky laws or regulations); and (v) There is no action, suit, proceeding or investigation, at law or in equity, before or by any count or governmental agency, public board or body ending, or to the best lrnowledge of the Escrow Agent, threatened against the Escrow Agent which in the reasonable judgment CC the Escrow Agent would affect the existence of the Escrow Agent or in any way contesting or affecting the -13- validity or enforceability of the Escrow Agreement or contesting the powers cf the Escrow Agent or its authority to enter into and perform its obligation thereunder. (11) Underwriter Counsel Opinion. A letter of Jones Hall, A Professional Law Corrp�oration, counsel to the underwriter, dated the Closing Date, and addressed to the Undervniter, to the effect that: (i) during the course of serving as counsel in connection with the execution and delivery cf the Certificates and without having undertaken to determine independently or assuming any responsibilky for the accuracy, completeness or fairness cf the statements contained in the Official Statement, no information came to the attention cf the attorneys in such firm rendering legal services in connection with the issuance cf the Certificates that would lead them to believe that the Official Statement (excludi therefrom the financial statements, any financial or statistical data, or forecasts, charts, numbers, estimates, projections, assumptions or expressions cf opinion included in the Official Statement, information regarding DTC and its book -entry system, or the Insurer and its Bond Insurance Policy and Surety Bond, and the appendices to the Official Statement as to which no opinion need be expressed), as cf the date thereof or the Closing Date, contains any untrue statement cf a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light cf the circumstances under which they were made, not misleading; and (ii) the Certificates are exempt from registration pursuant to the Securities Act cf 1933, as amended; (12) Transcripts. Two transcripts of all proceedings relating to the authorization, execution and delivery of the City Documents, the Corporation Documents and the Certificates. (13)O cial Statement, The Official Statement and each supplement or amendment, 'it any, thereto, executed on behalf of the City by a duly authorized officer of the City. (14)Documents. An original executed copy of each of the Corporation Documents and each cf the City Documents. (15) City Resolutions. Certified copies of the City Resolutions, certified by the City Clerk. (16) 8038. Evidence that the federal tax information form 8038-G has been prepared for filing. (17) Nonarbitrage Certificate. A tax and nonarbitrage certificate in form satisfactory to Special Counsel. (18) CDIAC Statements. A copy of the Notices cf Sale required to be delivered to the California Debt Investment and Advisory Commission pursuant to Section 53583 of the California Government Code. (19) Municipal Bond Insurance Policy; Surety Bond. The Municipal Bond Insurance Policy and the Surety Bond issued by the Insurer. (20) Insurer Certifications. A certificate and/or opinion of counsel, satisfactory to the City and Special Counsel, of the Insurer regarding the enforceability of the -14 Municipal Bond Insurance Policy, the Surety Bond and the statements in the Official Statement regarding the Insurer, the Surety Bond and the Municipal Bond Insurance Policy. (21) Compliance with Existing Parity Obligations. Evidence of compliance with the provisions cf the Existing Parity Obligations Documents with respect to issuance of obligations secured by System Net Revenues on a parity with the Existing Parity Obligations. (22) Defeasance Provisions. A defeasance opinion of Special Couanseipursuant to Section 10.05 of the Installment Sale Agreement dated as of December 1,1991 relating to the 1991 Certificates. (23 Escrow Verification Report. A report of Causey Demgen & Moore Inc. verifying the sufficiency of amounts deposited into the Escrow Fund established under the Escrow Agreement to accomplish the proposed defeasance and prepayment of the 1991 Installment Payments and the 1991 Certificates. (24) Additional Documents. Such additional certificates, instruments and other documents as the Underwriter or its counsel may reasonably deem necessary. If the City shall be unable to satisfy the conditions contained in this Section 7, or if the obligations cf the Underwriter shall be terminated for any reason permitted by this Purchase Contract, this Purchase Contract shall terminate and neither the Underwriter nor the City shall be under further obligation hereunder, except as further set forth in Section 8 hereof. 8. Exses The Underwriter shall be under no obligation to pay, and the City shall pay or cause ts4M, the expenses incident to the performance of the ob igations of the City hereunder including but not limited to (a) the costs cf the preparation an printing, or other reproduction (for distribution on or prior to the date hereof) cf the Corporation Documents, the City Documents, and the cost cf preparing, printing, executing and delivering the Certificates; (b) the fees and disbursements of the Trustee, any accountants or other experts or consultants retained by the City; (c) the fees and disbursements of Special Counsel; (d) the cost of preparation and printing of the Preliminary Official Statement and any supplements and amendments thereto and the cost of preparation and printing cf the Official Statement, including a reasonable number cf copies thereof for distribution by the Underwriter; (e) the premium for the Municipal Bond Insurance Policy and the Surety Bond and (f) the fees of any rating agencies. The Underwriter shall pay, and the City shall be under no obligation to pay, all expenses incurred by it in connection with the public offering and distribution cf the Certificates (including the fees and expenses of its counsel), applicable CDIAC fees and any advertising expenses. 9. Notice. Any notice or other communication to be given to the City under this Purchase Contract may be given by delivering the same in writing to such entity at the address first written above. Any notice or other communication to be given to the Underwriter under tris Purchase Contract may be given by delivering the same in writing to Stone & Youngberg LLC, One Ferry Building, San Francisco, CA 94111, Attn: Eileen Gallagher. 10. Entire Agreement. This Purchase Contract, when accepted by the City, shall constitute the entire agreement between the City and the Underwriter and is made solei for the benefit of the City and the Underwriter (including the successors or assigns ofyany Underwriter). No other person shall acquire or have any right hereunder by virtue hereof, except as provided herein. All cf the City's representations, warranties and agreements 1ithis Purchase Contract shall remain operative and in full force and effect, regardless cf any -15- investigation made by or on behalf of the Underwriter, until the earlier of (a) delivery of and payment for the Certificates hereunder, and (b) any termination of this Purchase Contract. 11. Counterparts. This Purchase Contract may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 12. Severability. In case any one or more of the provisions contained herein shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof. 13. State Law Governs. The validity, interpretation and performance of this Purchase Contract shall be governed by the laws of the State. 14. No Assignment. The rights and obligations created by this Purchase Contract shall not be subjectto assignmentby the Underwriter or the City without the prior written consent of the other party hereto. Accepted as of the date fust stated above: CITY OF LODI By: City Manager STONE & YOUNGBERG LLC, on behalf of itself and Bear, Stearns & Co., Inc. By Authorized Representative -16- APPENDIX A Principal Principal Interest Payment Date Amount Rate Yield Price Total $ C =priced to first par call date of —1, 20_. A-1 APPENDIX B CITY OF LODI WASTEWATER SYSTEM REVENUE CERTIFICATES OF PARTICIPATION, 2007 SERIES A CERTIFICATE REGARDING FINALITY OF PRELINUNARY OFFICIAL STATEMENT The undersigned hereby certifies and represents that he is the duly appointed and acting City Manager of the City cf Lodi (the "Agency"), and as such is duly authorized to execute and deliver this Certificate and further hereby certifies and reconfirms on behalf cf the City as follows: This Certificate is delivered in connection with the offering and sale of the above -referenced certificates cf participation (the "Certificates") in order to enable the underwriter of the Certificates to comply with Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange Act cf 1934 (the "Rule"). (2) In connection with the offering and sale of the Certificates, there has been prepared a Preliminary Official Statement, settingg firth information concerning the Certificates and the City (the "PreliminaryPcial Statement"). (3) As used herein, "Permitted Omissions" shall mean the offering price(s), interest rate (s), selling compensation, aggregate principal amount., principat amount per maturity, delivery dates, ratings and other terms cf the Certificates depending on such matters, all with respect to the Certificates. (4) The Preliminary Official Statement is, except for the Permitted Omissions, deemed final within the meaning cf Rule I5c2-12, and the information therein is accurate and complete except for the Permitted Omissions. IN WITNESS WHEREOF, I have hereunto set my hand as cf _ 2007. CITY OF LODI By: B-1 City Manager 29079-171 JH:CKL 10-2-07 10-25-07 CITY OF LODI WASTEWATER SYSTEM REVENUE CERTIFICATES OF PARTICIPATION, 2007 SERIES A CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (this "Disclosure Certificate") is executed and delivered by the City of Lodi (the "City") in connection with the execution and delivery of the above -referenced certificates of participation (the "Certificates"). The Certificates evidence the direct, undivided fractional interests of the owners thereof in installment payments to be made by the City under an Installment Purchase Agreement dated as of December 1, 2007 (the "Installment Purchase Agreement") between the Lodi Public Improvement Corporation (the "Corporation") as seller and the City as purchaser. The Certificates will be delivered under and subject to the terms and provisions of a Trust Agreement dated as of December 1, 2007 (the "Trust Agreement) among the City, the Corporation and The Bank of New York Trust Company, N.A., as trustee (the "Trustee"). The City covenants and agrees as follows: Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the holders and beneficial owners of the Certificates and in order to assist the Participating Underwriters in complying with Rule 15c2 - 12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Section 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, 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 3 and 4 of this Disclosure Certificate. "CPO" means the Internet -based filing system currently located at www.DisclosureUSA.org, or such other similar filing system approved by the Securities and Exchange Commission. "Dissemination Agent' means The Bank of New York Trust Company, N.A., the City or any successor Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation. "Listed Events" means any of the events listed in Section 5(a) of this Disclosure Certificate. "National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. "Participating Underwriter" means any of the original underwriters of the Certificates required to comply with the Rule in connection with offering of the Certificates. "Repository' means each National Repository and each State Repository. "Rule" means Rule 15c2 -12(b)(5) adopted by the Securities and Exchange Commission under the Securities ExchangeAct 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 Certificate, there is no State Repository. Section 3. Provision of Annual Reoorts. (a) The City shall, or shall cause the Dissemination Agent to, not later than 210 days after the end of the City's fiscal year, commencing with the report for the 2006-07 fiscal year, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. Not later than 15 Business Days prior to said date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). 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 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if 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 5(c). b If the City is unable to provide to the Repositories an Annual Report by the date requiredin subsection (a), the City shall send a notice to (i) each National Repository or the Municipal Securities Rulemaking Board and (ii) the appropriate State Repository, if any, in substantially the form attached as Exhibit A. In lieu of filing the notice with each Repository, the City or the Dissemination Agent may file such notice with the CPO. (c) With respectto the Annual Reports, the Dissemination Agent shall: (i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any; and (ii) if the Dissemination Agent is other than the City, file a reportwith the City certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided and listing all the Repositories to which it was provided. (d) In lieu of filing the Annual Report with each Repository in accordance with the preceding paragraph (c), the City or the Dissemination Agent may file such Annual Report solely with the CPO. 2 Section 4. 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 required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) To the extent not contained in the audited financial statements filed under the preceding clause (a), the Annual Report shall contain the following: (i) Updated information comparable to the information in the chart entitled "City of Lodi Wastewater System Number of Connections by User Type" as it appears in the Official Statement relating to the Certificates (the "Official Statement"); (iii Updated information comparable to the information in the chart entitled "City of Lodi Wastewater System Largest Users by Service Charge Revenues" as it appears in the Official Statement; (iii) Updated information with respect to current rates and charges comparable to the information in the charts entitled "City of Lodi Wastewater System Schedule of Service Charges" as it appears in the Official Statement; (iv) Updated information comparable to the information in the charts entitled "City of Lodi Wastewater System Historic Operating Results and Debt Service Coverage," as it appears in the Official Statement; and (v) A description of any additional indebtedness incurred during the prior fiscal year which is payable from System Net Revenues on a parity with the Installment Payments. (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 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. 3 Section 5. Reporting of Significant Events. (a) Pursuantto the provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material: (1) Principal and interest payment delinquencies. (2) Non-payment related defaults. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions or events affecting the tax-exempt status of the security. (7) Modificationsto rights of security holders. (8) Contingent or unscheduled bond calls. (9) Defeasances. (1 Q) Release, substitution, or sale of property securing repayment of the securities. (11) Rating changes. (b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall as soon as possible determine if such event would be material under applicable Federal securities law. (c) If the City determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the City shall promptly file a notice of such occurrence with (i) each National Repository or the Municipal Securities Rulemaking Board and (ii) each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (9) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Certificates pursuant to the Trust Agreement. In lieu of filing the notice of Listed Event with each Repository in accordance with the preceding paragraph, the City or the DisseminationAgent may file such notice of a Listed Event with the CPO. Section 6. Termination of Reporting Obligation. The City's obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the City shall give notice of such termination in the same manner as for a Listed Event under Section 5(c). Section 7. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. 4 Section 8. Amendment: Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied: (a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Certificates, or 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 Certificates, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the proposed amendment or waiver either (i) is approved by holders of the Certificates in the manner provided in the Trust Agreement for amendments to the Trust Agreement with the consent of holders, or (ii) does not, in the opinion of the Trustee or nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Certificates. 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 filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order 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 5(c). Section 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. 61 Section 10. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate any holder or beneficial owner of the Certificates may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance. Section 11. Duties. Immunities and Liabilities of Dissemination Aaent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriters and holders and beneficial owners from time to time of the Certificates, and shall create no rights in any other person or entity. Date: ,2007 CITY OF LODI By P Authorized Representative EXHIBIT A NOTICE OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: City of Lodi Name of Issue: $ Wastewater System Revenue Certificates of Participation, 2007 Series A Date of Issuance: 12007 NOTICE IS HEREBY GIVEN that the City of Lodi (the "City") has not provided an Annual Report with respect to the above-named Certificates as required by Section 6.18 of the Installment Purchase Agreement dated as of December 1, 2007 between the Lodi Public Improvement Corporation and the City. The City anticipates that the Annual Report will be filed by Dated: 7 CITY OF LODI By Name: Title: FIRST SUPPLEMENTAL TRUST AGREEMENT by and between LODI PUBLIC IMPROVEMENT CORPORATION and UNION BANK OF CALIFORNIA, N.A., as Trustee Dated as of December 1,2007 Relating to Wastewater System Revenue Certificates of Participation, 2004 Series A OHS West:260330542.1 40490-5 MONK OH&S Draft of November 1,2007 FIRST SUPPLEMENTALTRUST AGREEMENT THIS FIRST SUPPLEMENTAL TRUST AGREEMENT, dated as of December 1,2007 (the "First Supplemental Trust Agreement"), by and between the LODI PUBLIC IMPROVEMENT CORPORATION, a nonprofit, public benefit corporation duly organized and existing under and by virtue of the laws of the State of California (the "Corporation"), and UNION BANK OF CALIFORNIA, N.A., a national banking association duly organized and existing under and by virtue of the laws of the United States of America (the "Trustee"); WITNESSETH: WHEREAS, in order to provide for the acquisition by the City of the additions, betterments, extensions, replacements and improvements to the System (capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms pursuant to Section 1.01 hereof) constituting the Project, the City and the Corporation have entered into the Agreement; and WHEREAS, pursuant to the Agreement the City is to make certain Installment Payments to the Corporation; and WHEREAS, the Installment Payments and all of the Corporation's rights and privileges under the Agreement (other than rights to indemnification and expenses) have been assigned and transferred by the Corporation to the Trustee pursuant to the Trust Agreement; and WHEREAS, in consideration of such assignment and the execution and entering into of the Original Trust Agreement, the Trustee has executed and delivered the Certificates, with each Certificate evidencing a proportionate ownership interest in the Installment Payments; and WHEREAS, the City has requested that the Corporation and the Trustee enter into a Supplemental Trust Agreement to amend the definition of "Operation and Maintenance Costs" in the Original Trust Agreement as herein provided; and WHEREAS, the Certificate Insurer has consented to the aforementioned amendment to the definition of "Operation and Maintenance Costs"; and WHEREAS, the Corporation has determined that all acts, conditions and things required by law to exist, to have happened and to have been performed precedent to and in connection with the execution and delivery of this First Supplemental Trust Agreement do exist, have happened and have been performed in regular and due time, form and manner as required by law and the Trust Agreement, and the execution and delivery of this First Supplemental Trust Agreement have been in all respects duly authorized; NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants herein, and for other valuable consideration, the parties hereto do hereby covenant and agree, as follows: OHS West:260330542.I 40490-5 PEO/MOL ARTICLE I DEFINITIONS AND AUTHORITY Section 1.01 Definitions. In addition to terms defined in this First Supplemental Trust Agreement, unless the context otherwise requires, the terms defined in that certain Trust Agreement, dated as of May 1, 2004, between the Corporation and the Trustee (the "Original Trust Agreement") shall, for all purposes of this First Supplemental Trust Agreement, have the meanings therein specified. Section 1.02 Sunnlemental Agreement. This First Supplemental Trust Agreement is supplemental to the Original Indenture. Section 1.03 Authority for this First Supplemental Trust Agreement. This First Supplemental Trust Agreement is entered into in accordance with Article VII of the Original Trust Agreement. ARTICLE It Section2.01 Amendment. The definition of the tern "Operation and Maintenance Costs" contained in Section 1.01 of the Original Trust Agreement is hereby amended in its entirety to read as follows: "Operation and Maintenance Costs" means the reasonable and necessary costs paid or incurred by the City for maintaining and operating the System, determined in accordance with Generally Accepted Accounting Principles, including all reasonable expenses of management and repair and all other expenses necessary to maintain and preserve the System in good repair and working order, including all other reasonable and necessary costs of the City or charges required to be paid by it to comply with the terms hereof or of any Supplemental Agreement or of any resolution authorizing the execution of any Parity Obligations, such as compensation, reimbursement and indemnification of the Trustee and the Corporation, fees and expenses of Independent Certified Public Accountants and deposits to the Rebate Fund; but excluding in all cases (i) payment of Parity Debt and Subordinate Obligations, (ii) costs of capital additions, replacements, betterments, extensions or improvements which under Generally Accepted Accounting Principles are chargeable to a capital account, (iii) depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles, (iv) City Administrative Costs, and (v) transfers from the System Revenue Fund to other funds or accounts of the City." Section 2.02 Additional Definition. Section 1.01 of the Original Trust Agreement is hereby amended and supplemented to add the following definition: The term "City Administrative Costs" means those costs and expenses of the general administration of the City of Lodi that are apportioned to the operation of the System such as: salaries and wages of employees that do not work primarily for the System, or for the System and the City of Lodi's water system; the allocated overhead of the City of Lodi; taxes and payments in lieu of taxes (if any) payable to the City of Lodi; and insurance premiums for insurance not limited to the System or its operations, or the System and the City of Lodi's water OHS West260330542.I 40490-8 PEO/MOL -2- system or their operations (including payments required to be paid into any self-insurance funds not maintained from Revenues). Section2.03 Applicability of Amendment and Supplement. The amendment to the term "Operation and Maintenance Costs" contained in Section 2.01 hereof shall be applicable for all purposes of the Agreement, including Section 5.3 and Section 6.8 thereof, and the Trust Agreement for any period of time whether before or after the execution and delivery of this First Supplemental Trust Agreement by the Corporation and the Trustee. ARTICLE III MISCELLANEOUS Section 3.01 Trust Agreement to Remain in Effect. Save and except as amended and supplemented by this First Supplemental Trust Agreement, the Original Trust Agreement shall remain in full force and effect. Section 3.02 Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required hereby to be performed by or on the part of the Corporation or the Trustee shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof shall be null and void and shall be deemed separable from the remaining agreements and covenants or portions thereof and shall in no way affect the validity hereof or of the Original Trust Agreement, and the Owners shall retain all the benefit, protection and security afforded to them under any applicable provisions of law. The Corporation and the Trustee hereby declare that they would have executed and delivered this First Supplemental Trust Agreement and each and every other article, section, paragraph, subdivision, sentence, clause and phrase hereof irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases hereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid. Section 3.03 Execution in Several Counterparts. This First Supplemental Trust Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts, or as many of them as the Corporation and the Trustee shall preserve undestroyed, shall together constitute but one and the same instrument. [Remainder of Page Intentionally Left Blank.] OHS West:260330542.1 40490-8 PEONOL -3- IN WITNESS WHEREOF, the Lodi Public Improvement Corporation has caused this First Supplemental Trust Agreement to be signed in its name by its President and Union Bank of California, N.A., has caused this First Supplemental Trust Agreement to be signed by one of its duly authorized officers, all as of the day and year first above written. Attest: Secretary to the Corporation APPROVED: Attorney for the Corporation LODI PUBLIC IMPROVEMENT CORPORATION U8.2 President UNION BANK OF CALIFORNIA,N.A., as Trustee an Authorized Officer OHS West:2W330542. I 40490-8 PEO/MOL -4- ARTICLE I DEFINITIONS AND AUTHORITY.............................................................. 2 Section1.01 Definitions............................................................................................ 2 Section 1.02 Supplemental Agreement..................................................................... 2 Section 1.03 Authority for this First Supplemental Trust Agreement ...................... 2 ARTICLEII.......................................................................................................................... 2 Section2.01 Amendment.......................................................................................... 2 Section 2.02 Applicability of Amendment............................................................... 2 ARTICLE III MISCELLANEOUS........................................................................................ 3 Section 3.01 Trust Agreement to Remain in Effect .................................................. 3 Section 3.02 Partial Invalidity................................................................................... 3 Section 3.03 Execution in Several Counterparts....................................................... 3 OHS West:260330542.1 40490-8 PEO/M0L