NEW ISSUE—BOOK-ENTRY ONLY RATING: S&P: “AA+”

See “RATING” herein. In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject, however, to certain qualifications described in this Official Statement, under existing law, interest on the Bonds (i) is excludable from the gross income of the owners thereof for federal income tax purposes, and (ii) is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but interest on the Bonds is taken into account, however, in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. The Bonds are “qualified tax-exempt obligations” under Section 265(b)(3) of the Internal Revenue Code of 1986, as amended. In addition, in the opinion of Bond Counsel, interest on the Bonds is exempt from personal income taxation imposed by the State of California. See “TAX MATTERS” herein.

$17,305,000

MISSION VIEJO COMMUNITY DEVELOPMENT FINANCING AUTHORITY (Orange County, California)

Lease Revenue Refunding Bonds, 2009 Series A (Bank Qualified)

Dated: Date of Delivery Due: May 1, as shown below The $17,305,000 Mission Viejo Community Development Financing Authority Lease Revenue Refunding Bonds, 2009 Series A (the “Bonds”), are being issued by the Mission Viejo Community Development Financing Authority, a joint exercise of powers entity organized and existing under the laws of the State of California (the “Authority”), pursuant to Article 4, Chapter 5, Division 7, Title 1 (commencing with section 6584) of the California Government Code, a resolution of the Authority authorizing the issuance of the Bonds and an Indenture, dated as of December 1, 2009 (the “Indenture”), by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Bonds are being issued to (a) refinance the costs of the acquisition, construction, installation and equipping of certain public capital improvements, including the refunding of (i) the outstanding City of Mission Viejo Certificates of Participation (1996 Mission Viejo Public Library Financing Project), and (ii) the outstanding Mission Viejo Community Development Financing Authority Lease Revenue Bonds, 2001 Series A (City Hall Construction and Library Expansion Project), (b) fund a reserve fund for the Bonds, and (c) pay costs of issuance of the Bonds. See “THE REFUNDING PLAN” and “ESTIMATED SOURCES AND USES OF FUNDS” herein. The Bonds are secured by a pledge of and lien on the Revenues (as defined herein) and the amounts in the Reserve Fund (as defined herein). The Bonds are issuable in denominations of $5,000 and any integral multiple thereof. Interest on the Bonds is payable on May 1 and November 1 of each year, commencing May 1, 2010. See “THE BONDS” herein. The Bonds will be delivered in fully registered form only, and, when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository of the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only. Principal of, premium, if any, and interest on the Bonds will be paid by the Trustee to DTC or its nominee, which will in turn remit such payment to its participants for subsequent disbursement to the beneficial owners of the Bonds. See “THE BONDS” herein and APPENDIX E—”BOOK-ENTRY ONLY SYSTEM.” The Bonds are subject to optional and mandatory redemption as described herein. See “THE BONDS—Redemption” herein. The City will lease certain real property and the improvements thereon from the Authority pursuant to a Lease Agreement, dated as of December 1, 2009 (the “Lease Agreement”), by and between the Authority and the City. Under the Lease Agreement, the City is required to make Lease Payments (as defined herein) from legally available funds in amounts calculated to be sufficient to pay principal of and interest on the Bonds when due, subject to abatement, as described herein. All of the Authority’s right, title and interest in and to the Lease Agreement (except for the right to receive any Additional Payments (as defined herein) to the extent payable to the Authority and certain rights to indemnification), including the right to receive Lease Payments under the Lease Agreement, are assigned to the Trustee under the Indenture for the benefit of the Bondowners. See “SECURITY FOR THE BONDS” herein. THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM AND SECURED SOLELY BY THE REVENUES PLEDGED UNDER THE INDENTURE. THE BONDS ARE NOT A DEBT OF THE CITY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS, EXCEPT THE AUTHORITY TO THE EXTENT DESCRIBED HEREIN, AND NEITHER THE CITY, THE STATE OF CALIFORNIA NOR ANY OF ITS POLITICAL SUBDIVISIONS, EXCEPT THE AUTHORITY TO THE EXTENT DESCRIBED HEREIN, IS LIABLE THEREON. IN NO EVENT SHALL THE BONDS OR ANY INTEREST OR REDEMPTION PREMIUM THEREON BE PAYABLE OUT OF ANY FUNDS OR PROPERTIES OTHER THAN THOSE OF THE AUTHORITY AS SET FORTH IN THE INDENTURE. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. NEITHER THE MEMBERS OF THE AUTHORITY, THE CITY NOR ANY PERSONS EXECUTING THE BONDS ARE LIABLE PERSONALLY ON THE BONDS BY REASON OF THEIR ISSUANCE.

MATURITY SCHEDULE*

CUSIP Prefix: 60519N †

Maturity Principal Interest CUSIP Maturity Principal Interest CUSIP (May 1) Amount Rate Yield Suffix† (May 1) Amount Rate Yield Suffix†

2010 $165,000 5.000% 0.430% BF3 2021 $ 845,000 3.875% 4.060% BS5 2011 430,000 5.000 0.770 BG1 2022 885,000 4.000 4.120 BT3 2012 450,000 4.000 1.060 BH9 2023 910,000 4.000 4.190 BU0 2013 530,000 5.000 1.350 BJ5 2024 960,000 5.000 4.260c BV8 2014 615,000 5.000 1.790 BK2 2025 1,005,000 5.000 4.340c BW6 2015 640,000 5.000 2.270 BL0 2026 1,050,000 5.000 4.420c BX4 2016 670,000 4.000 2.640 BM8 2027 1,110,000 5.000 4.500c BY2 2017 705,000 5.000 3.020 BN6 2028 935,000 4.375 4.580 BZ9 2018 735,000 5.000 3.350 BP1 2029 980,000 4.500 4.660 CA3 2019 770,000 5.000 3.630 BQ9 2030 1,025,000 5.250 4.750c CB1 2020 810,000 5.000 3.900c BR7 2031 1,080,000 5.250 4.850c CC9

This cover page contains information for quick reference only. It is not a summary of this issue. Potential purchasers must read the entire Official Statement to obtain information essential to making an informed investment decision. The Bonds will be offered when, as and if issued, and received by the Underwriter, subject to the approval as to their validity by Quint & Thimmig LLP, San Francisco, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the City and the Authority by Richards, Watson & Gershon, Los Angeles, California, Authority Counsel and City Attorney, and by Quint & Thimmig LLP, San Francisco, California, Disclosure Counsel, and for the Underwriter by Nossaman LLP, Irvine, California. It is anticipated that the Bonds will be available for delivery through DTC in New York, New York, on or about December 22, 2009.

Dated: December 9, 2009 † Copyright 2009, American Bankers Association. CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by the CUSIP Service Bureau, operated by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services Bureau. CUSIP numbers have been assigned by an independent company not affiliated with the Authority or the City and are included solely for the convenience of the registered owners of the Bonds. Neither the Authority nor the City is responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Bonds or as included herein. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds. c Priced to the 5/1/2019 par call date.

MISSION VIEJO COMMUNITY DEVELOPMENT FINANCING AUTHORITY

CITY OF MISSION VIEJO

City of Mission Viejo 200 Civic Center

Mission Viejo, CA 92691 (949) 470-3000

http://www.cityofmissionviejo.org

Authority Board of Directors and City Council

Frank Ury, Chair/Mayor Lance R. MacLean, Vice Chair/ Mayor Pro Tem*

Trish Kelley, Board Member/Council Member John Paul Ledesma, Board Member/Council Member

Cathy Schlicht, Board Member/Council Member

Authority/City Staff

Dennis R. Wilberg, Executive Director/City Manager Irwin B. Bornstein, Treasurer/Assistant City Manager/Director of Administrative Services

Karen Hamman, Secretary/City Clerk

Professional Services

Richards, Watson & Gershon Los Angeles, California

Authority Counsel and City Attorney

Quint & Thimmig LLP San Francisco, California

Bond Counsel and Disclosure Counsel

Fieldman, Rolapp & Associates Irvine, California Financial Advisor

The Bank of New York Mellon Trust Company, N.A.

Los Angeles, California Trustee and 1996 Escrow Bank

Union Bank, N.A.

Los Angeles, California 2001 Escrow Bank

*Mr. MacLean is the subject of a recall election to be held in February 2010. The voters will be asked whether to recall him and, if recalled, to select a replacement Council member.

No dealer, broker, salesperson or other person has been authorized by the Authority, the City or

the Underwriter to give any information or to make any representations other than as set forth herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the Authority, the City or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

This Official Statement is not to be construed as a contract with the purchasers of the Bonds.

Statements contained in this Official Statement that involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts.

The information set forth in this Official Statement has been obtained from official sources and

other sources that are believed to be reliable, but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation of the Underwriter. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Authority or the City since the date hereof. This Official Statement is submitted in connection with the sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

Certain statements included or incorporated by reference in this Official Statement constitute

“forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. No assurance is given that actual results will meet the Authority’s or the City’s forecasts in any way, regardless of the level of optimism communicated in the information. The Authority is not obligated to issue any updates or revisions to the forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur. See “CONTINUING DISCLOSURE” herein.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR

EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE BONDS TO CERTAIN DEALERS AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE OF THIS OFFICIAL STATEMENT, AND SUCH PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

The City maintains a website, however, the information presented therein is not a part of this Official

Statement and should not be relied on in making an investment decision with respect to the Bonds.

TABLE OF CONTENTS

INTRODUCTION................................................................ 1 General Description ........................................................ 1 Terms of the Bonds ......................................................... 1 Book-Entry Only.............................................................. 2 Source of Payment for the Bonds.................................. 2 Reserve Account .............................................................. 2 Additional Bonds ............................................................ 3 The City............................................................................. 3 The Authority................................................................... 3 Limited Liability .............................................................. 3 Continuing Disclosure.................................................... 3 Tax Matters....................................................................... 4 Certain Risk Factors ........................................................ 4 Other Information ........................................................... 4

ESTIMATED SOURCES AND USES OF FUNDS........... 5

THE PROPERTY.................................................................. 5

THE REFUNDING PLAN.................................................. 6 Refunding of the 1996 Certificates ................................ 6 Refunding of the 2001 Bonds......................................... 6

THE BONDS......................................................................... 7 General .............................................................................. 7 Transfer and Exchange of Bonds .................................. 7 Optional Redemption ..................................................... 8 Extraordinary Redemption from Insurance or

Condemnation Proceeds .............................................. 8 Selection of Bonds for Redemption .............................. 8 Notice of Redemption..................................................... 8 Partial Redemption of Bonds......................................... 9 Effect of Redemption ...................................................... 9

SECURITY FOR THE BONDS........................................... 9 General .............................................................................. 9 Lease Payments and Additional Payments ............... 10 Insurance and Condemnation Awards ...................... 11 Reserve Account ............................................................ 12 Abatement ...................................................................... 12 Insurance ........................................................................ 12 Debt Service Schedule................................................... 14 Additional Bonds .......................................................... 14

THE AUTHORITY ............................................................ 14

THE CITY ........................................................................... 15

CITY FINANCIAL INFORMATION.............................. 15 Financial Statements ..................................................... 15 Budgetary Process ......................................................... 16 City Financial Management Policies .......................... 18 Current Investments ..................................................... 19 Reliance on State Budget .............................................. 19 Principal Sources of General Fund Revenues ........... 19 General Fund Revenues and Expenditures ............... 21 Sales Taxes...................................................................... 22

Motor Vehicle In-Lieu Tax ........................................... 23 Transient Occupancy Taxes ......................................... 24

PROPERTY TAXES ........................................................... 24 Ad Valorem Property Taxes .......................................... 24 Tax Levies and Delinquencies ..................................... 26

OTHER FINANCIAL INFORMATION......................... 28 Labor Relations .............................................................. 28 Risk Management.......................................................... 28 Deferred Compensation Plan ...................................... 30 Employee Retirement Plans......................................... 30 Other Post Employment Benefits (OPEB).................. 32 General Fund Obligations............................................ 34 Overlapping Debt.......................................................... 34

CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS .......................................................... 36

Article XIIIA of the California Constitution .............. 36 Article XIIIB of the California Constitution............... 37 Proposition 218 .............................................................. 38 Proposition 1A of 2004.................................................. 39 Future Initiatives ........................................................... 41

RISK FACTORS ................................................................. 41 Limited Obligation ........................................................ 41 Lease Payments Are Not Debt .................................... 41 Valid and Binding Covenant to Budget and

Appropriate.................................................................. 42 Abatement ...................................................................... 42 Risk of Uninsured Loss................................................. 43 Eminent Domain............................................................ 43 Hazardous Substances.................................................. 43 Bankruptcy ..................................................................... 44 Limitations on Remedies.............................................. 45 No Liability of Authority to the Owners ................... 45 Risk of Tax Audit........................................................... 45 State Budgets.................................................................. 46 Loss of Tax Exemption ................................................. 54 Limited Secondary Market........................................... 54 Changes in Law ............................................................. 55

TAX MATTERS.................................................................. 55

CERTAIN LEGAL MATTERS ......................................... 57

FINANCIAL STATEMENTS ........................................... 58

LITIGATION...................................................................... 58

UNDERWRITING ............................................................. 58

FINANCIAL ADVISOR ................................................... 59

CONTINUING DISCLOSURE ........................................ 59

ADDITIONAL INFORMATION .................................... 60

APPENDIX A: GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY APPENDIX B: COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE

FISCAL YEAR ENDED JUNE 30, 2009 APPENDIX C: CITY INVESTMENT POLICY APPENDIX D: SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS APPENDIX E: PROPOSED FORM OF BOND COUNSEL OPINION APPENDIX F: FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX G: BOOK-ENTRY ONLY SYSTEM

CITY OF MISSION VIEJO LOCATION MAPS

OFFICIAL STATEMENT

$17,305,000 MISSION VIEJO COMMUNITY DEVELOPMENT FINANCING AUTHORITY

(Orange County, California) Lease Revenue Refunding Bonds, 2009 Series A

INTRODUCTION

The following introduction presents a brief description of certain information in connection with the Bonds (as defined below) and is qualified in its entirety by reference to the entire Official Statement and the documents summarized or described herein. References to, and summaries of, provisions of the Constitution and the laws of the State of California (the “State”) and any documents referred to herein do not purport to be complete and such references are qualified in their entirety by reference to the complete provisions thereof. Capitalized terms used in this Official Statement and not defined elsewhere herein have the meanings given such terms in the Indenture. See APPENDIX D—“SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS—Definitions.”

General Description

This Official Statement, including the cover page, the inside cover page and the attached appendices (this “Official Statement”), provides certain information concerning the issuance of $17,305,000 aggregate principal amount of Mission Viejo Community Development Financing Authority Lease Revenue Refunding Bonds, 2009 Series A (the “Bonds”), by the Mission Viejo Community Development Financing Authority, a joint exercise of powers entity organized under the laws of the State (the “Authority”). The Bonds are being issued pursuant to Article 4, Chapter 5, Division 7, Title 1 (commencing with section 6584) of the California Government Code, a resolution of the Authority authorizing the issuance of the Bonds (the “Authority Resolution”) and an Indenture, dated as of December 1, 2009 (the “Indenture”), by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Bonds are being issued to (a) refund the City of Mission Viejo Certificates of Participation (1996 Mission Viejo Public Library Financing Project), evidencing the direct undivided fractional interests in lease payments made by the City of Mission Viejo (the “City”) for certain property pursuant to a lease agreement with the Mission Viejo Public Improvement Corporation (the “Corporation”), of which $2,465,000 remains outstanding the “1996 Certificates”), (b) refund the $17,450,000 Mission Viejo Community Development Financing Authority Lease Revenue Bonds, 2001 Series A (City Hall Construction and Library Expansion Project), of which $14,955,000 remains outstanding (the “2001 Bonds”), (c) fund a reserve fund for the Bonds and (d) pay costs of issuance of the Bonds. See “THE REFUNDING PLAN” and “ESTIMATED SOURCES AND USES OF FUNDS.”

Terms of the Bonds

The Bonds will mature on the dates and in the principal amounts set forth on the cover page of this Official Statement. Interest on the Bonds is payable semiannually on each May 1 and November 1 (each, an “Interest Payment Date”), commencing May 1, 2010, computed at the respective rates of interest set forth on the inside cover page of this Official Statement. The Bonds will be issuable in denominations of $5,000 or any integral multiple thereof. The Bonds are subject to optional and mandatory redemption as described herein. See “THE BONDS.”

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Book-Entry Only

The Bonds will be issuable in fully registered form only and, when issued and delivered, will be registered in the name of Cede & Co., as nominee of the Depository Trust Company, New York, New York (“DTC”). DTC will act as the depository of the Bonds and all payments due on the Bonds will be made to DTC or its nominee. Ownership interests in the Bonds may be purchased in book-entry form only. See APPENDIX G—“BOOK-ENTRY ONLY SYSTEM.”

Source of Payment for the Bonds

Pursuant to the Site and Facility Lease, dated as of December 1, 2009 (the “Site and Facility Lease”), by and between the City and the Authority, the City will lease to the Authority certain real property and certain facilities and improvements located thereon (the “Property”) owned by the City. See “THE PROPERTY.” Concurrently, the City will sublease the Property from the Authority pursuant to a Lease Agreement, dated as of December 1, 2009 (the “Lease Agreement”), by and between the Authority and the City. Under the Lease Agreement, subject to abatement as provided therein, the City is required to make lease payments (the “Lease Payments”) from legally available funds for use and occupancy of the Property in amounts calculated to be sufficient to pay principal of and interest on the Bonds when due. The City has covenanted in the Lease Agreement to take such action as may be necessary to include the Lease Payments in each of its annual budgets during the Term of the Lease Agreement and has further covenanted to make the necessary annual appropriations for all such Lease Payments. All of the Authority’s right, title and interest in and to the Lease Agreement (apart from certain rights to receive Additional Payments to the extent payable to the Authority and to indemnification), including the right to receive Lease Payments under the Lease Agreement, are assigned to the Trustee under the Indenture for the benefit of the Bondowners.

Except to the extent of amounts held in the Reserve Account or otherwise available to the

City for payments under the Lease Agreement, during any period in which, by reason of material damage or destruction (other than by condemnation, which is provided for in the Lease Agreement) there is substantial interference with the use and occupancy by the City of any portion of the Property, Lease Payments will be adjusted or abated in the proportion in which the value of that portion of the Property rendered unusable bears to the entire value of the Property. Such adjustment or abatement will end with the substantial replacement or reconstruction of the Property. See “SECURITY FOR THE BONDS—Abatement.”

The Bonds are special limited obligations of the Authority payable solely from and

secured by the Revenues and certain other amounts (including proceeds of the sale of the Bonds) held by the Trustee in any fund or account established under the Indenture and pledged therefor, and the Revenues may not be used for any other purpose while any of the Bonds remain Outstanding; provided, however, that the Revenues may be applied for such other purposes as are permitted under the Indenture. “Revenues” means (i) all Lease Payments and other amounts paid, or caused to be paid, by the City, and received by the Authority pursuant to the Lease Agreement (but not Additional Payments), and (ii) all interest or other income from any investment of any money in any fund or account established pursuant to the Indenture (other than the Rebate Fund).

Reserve Account

A reserve account (the “Reserve Account”) will be established and held under the Indenture in order to secure the payment of principal of and interest on the Bonds in an amount, as of the Closing Date, equal to the Reserve Requirement. A portion of the proceeds of the Bonds will be deposited in the Reserve Account in an amount equal to the Reserve Requirement. If, on any Interest Payment Date for the Bonds, the amounts on deposit under the Indenture to pay the

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principal of and interest due on the Bonds are insufficient therefor, the Trustee will draw on the amounts in the Reserve Account to replenish the Interest Account or the Principal Account, in that order, to make up such deficiencies. See “SECURITY FOR THE BONDS—Reserve Account” and APPENDIX D—“SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS” for additional information on the Reserve Account.

Additional Bonds

The Authority may not issue additional bonds, notes or other indebtedness that would be payable out of the Revenues in whole or in part. See “SECURITY FOR THE BONDS—Additional Bonds.”

The City

The City is a municipal corporation and general law city of the State. See “THE CITY,” “CITY FINANCIAL INFORMATION” and APPENDIX A—”GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY.”

The Authority

The Authority is a joint exercise of powers entity formed on June 2, 1997, by agreement between the City and the Community Development Agency of the City of Mission Viejo (the “Redevelopment Agency”) pursuant to Articles 1 through 4, Chapter 5, Division 7, Title 1 of the California Government Code. See “THE AUTHORITY.”

Limited Liability

THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE AUTHORITY, PAYABLE SOLELY FROM AND SECURED SOLELY BY CERTAIN PROCEEDS OF THE BONDS HELD IN CERTAIN FUNDS AND ACCOUNTS PURSUANT TO THE INDENTURE AND THE REVENUES DERIVED FROM LEASE PAYMENTS AND OTHER PAYMENTS MADE OR CAUSED TO BE MADE BY THE CITY PURSUANT TO THE LEASE AGREEMENT. THE AUTHORITY IS NOT OBLIGATED TO PAY INTEREST ON OR PRINCIPAL OF THE BONDS EXCEPT FROM THE REVENUES. THE CITY HAS COVENANTED IN THE LEASE AGREEMENT TO TAKE SUCH ACTIONS AS MAY BE NECESSARY TO INCLUDE ALL LEASE PAYMENTS DUE THEREUNDER IN ITS ANNUAL BUDGETS AND TO MAKE THE NECESSARY ANNUAL APPROPRIATIONS THEREFOR. NEITHER THE BONDS NOR THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS CONSTITUTES AN INDEBTEDNESS OF THE AUTHORITY, THE CITY, THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION, OR A PLEDGE OF THE FAITH AND CREDIT OF THE CITY. THE AUTHORITY HAS NO TAXING POWER. THE OBLIGATION OF THE CITY TO MAKE LEASE PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION.

Continuing Disclosure

The ultimate security for the payments of principal and interest on the Bonds comes from the Lease Payments to be made by the City, and, therefore, the City, as an obligated person within the meaning of the Rule (as defined below), has agreed to undertake the continuing disclosure responsibilities required by the Rule. The Authority has not undertaken a commitment to provide any continuing disclosure required by the Rule.

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The City has covenanted in the Continuing Disclosure Certificate (the “Continuing Disclosure Certificate”) to provide, or cause to be provided, to each nationally recognized municipal securities information repository and any public or private repository or entity designated by the State as a state repository and any public or private repository for purposes of Rule 15c2–12(b)(5) adopted by the Securities and Exchange Commission (the “Rule”) certain annual financial information and operating data of the type set forth herein including, but not limited to, its audited financial statements and, in a timely manner, notice of certain material events. See “CONTINUING DISCLOSURE” and APPENDIX F—“FORM OF CONTINUING DISCLOSURE CERTIFICATE” for a description of the specific nature of the annual report and notices of material events and a summary description of the terms of the Continuing Disclosure Certificate pursuant to which such reports and notices are to be made. The City has never failed to comply with any previous undertakings with regard to said Rule to provide annual reports or notices of material events.

Tax Matters

In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject, however, to certain qualifications described in this Official Statement, under existing law, interest on the Bonds (i) is excludable from the gross income of the owners thereof for federal income tax purposes, and (ii) is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but interest on the Bonds is taken into account, however, in computing an adjustment used in determining the federal alternative minimum tax for certain corporations. In addition, in the opinion of Bond Counsel, interest on the Bonds is exempt from personal income taxation imposed by the State of California. The Bonds are “qualified tax-exempt obligations” under Section 265(b)(3) of the Internal Revenue Code of 1986, as amended. See “TAX MATTERS.”

Certain Risk Factors

Certain events could affect the ability of the City to make the Lease Payments when due. See “CERTAIN RISK FACTORS” for a discussion of certain factors that should be considered, in addition to other matters set forth herein, in evaluating an investment in the Bonds.

Other Information

The descriptions herein of the Indenture, the Lease Agreement and any other agreements relating to the Bonds are qualified in their entirety by reference to such documents, and the descriptions herein of the Bonds are qualified in their entirety by the forms thereof and the information with respect thereto included in the aforementioned documents. See APPENDIX D—“SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS.” Copies of the documents are on file and, upon request and payment to the City of a charge for copying, mailing and handling, from the Assistant City Manager/Director of Administrative Services, City of Mission Viejo, 200 Civic Center, Mission Viejo, CA 92691, telephone (949) 470-3000.

The information and expressions of opinion herein speak only as of their date and are

subject to change without notice. Neither the delivery of this Official Statement nor any sale made hereunder nor any future use of this Official Statement, under any circumstances, creates any implication that there has been no change in the affairs of the City or the Authority since the date hereof.

The presentation of information, including tables of receipt of revenues, is intended to

show recent historical information and is not intended to indicate future or continuing trends in the financial position or other affairs of the City or the Authority. No representation is made that

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past experience, as it might be shown by such financial and other information, will necessarily continue or be repeated in the future.

ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of funds realized upon the sale of, or in connection with, the Bonds as follows:

Estimated Sources and Uses of Funds

Estimated Sources: Principal Amount of Bonds $17,305,000.00 Plus: Net Original Issue Premium 853,583.25 Plus: Released 1996 Certificates Moneys 239,500.00 Plus: Released 2001 Bonds Moneys 1,142,934.75

Total Sources $19,541,018.00

Estimated Uses: Deposit to 1996 Escrow Fund (1) $ 2,530,240.00 Deposit to 2001 Escrow Fund (2) 15,395,798.47 Deposit to Reserve Account (3) 1,362,312.52 Deposit to Costs of Issuance Fund (4) 252,667.01

Total Uses $19,541,018.00 (1) Represents the amount estimated to be necessary to refund the 1996 Certificates. See “THE REFUNDING PLAN—

Refunding of the 1996 Certificates.” (2) Represents the amount estimated to be necessary to refund the 2001 Bonds. See “THE REFUNDING PLAN—

Refunding of the 2001 Bonds.” (3) Represents the Reserve Requirement. (4) Includes, but is not limited to, the Underwriter’s discount, the fees and expenses of Bond Counsel, Disclosure

Counsel, the Financial Advisor, the Trustee, the 1996 Escrow Bank, the 2001 Escrow Bank and the rating agencies, costs of printing the Official Statement, the premium for title insurance and other costs incurred by the Authority and the City in connection with the issuance and delivery of the Bonds.

THE PROPERTY

The Property consists of (a) an approximately 52,300-square-foot City Hall facility and

the site thereof, and (b) an approximately 41,875-square-foot municipal Library and the site thereof. The City Hall was constructed in 2001-02 and includes a City Council chambers, Emergency Operations Center, public meeting space, and administrative offices for the City's employees. The Library was constructed in 1996-97 and expanded in 2001-02. It houses a collection of 173,000 volumes and computer equipment for public use by library patrons. The facility also has workrooms for training and research, a community room and a City-owned and -operated communications center that produces television programming for the City's governmental access channel. The City estimates the insured value of the City Hall and the Library to be approximately $38,000,000. Other than the 1996 Certificates and the 2001 Bonds to be refunded, there are no other financings for which the Property has been used as the leased asset.

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THE REFUNDING PLAN

The Bonds are being issued to (a) refund the 1996 Certificates, (b) refund the 2001 Bonds, (c) fund a reserve fund for the Bonds, and (d) pay costs of issuance of the Bonds.

Refunding of the 1996 Certificates

The 1996 Certificates were executed and delivered pursuant to the terms of a trust agreement, dated as August 1, 1996, by and among the City, the Corporation and Harris Trust Company of California, since succeeded by The Bank of New York Mellon Trust Company, N.A., as trustee thereunder. In order to provide for the repayment of the 1996 Certificates, the Corporation leased certain real property and improvements to the City pursuant to a lease agreement, dated as of August 1, 1996, under which the City agreed to make lease payments to the Corporation from moneys in its General Fund and the City has budgeted and appropriated sufficient amounts in each year to pay the full amount of principal of and interest on the 1996 Certificates. The 1996 Certificates were executed and delivered to finance a portion of the costs of the library that constitutes a portion of the Property.

A portion of the proceeds of the Bonds, in the full amount required to provide for the

redemption of the 1996 Certificates in full on January 11, 2010, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest, will be deposited in an escrow fund (the “1996 Escrow Fund”) held in trust by The Bank of New York Mellon Trust Company, N.A., as escrow bank (the “1996 Escrow Bank”), under an escrow deposit and trust agreement with the Authority and the City. The amounts deposited in the 1996 Escrow Fund will be invested in direct obligations of the United States.

Upon the issuance of the Bonds and the deposit in the 1996 Escrow Fund of moneys

sufficient to provide for the refunding of the 1996 Certificates, the 1996 Certificates will be deemed defeased and no longer outstanding. The holders of the 1996 Certificates will be entitled to payment solely out of the moneys or securities deposited in the 1996 Escrow Fund.

Refunding of the 2001 Bonds

The 2001 Bonds were issued pursuant to the terms of an indenture, dated as March 1, 2001, by and between the Authority and Union Bank of California, N.A., now known as Union Bank, N.A., as trustee thereunder. In order to provide for the repayment of the 2001 Bonds, the Authority leased certain real property and improvements to the City pursuant to a lease agreement, dated as of March 1, 2001, under which the City agreed to make lease payments to the Authority from moneys in its General Fund and the City has budgeted and appropriated sufficient amounts in each year to pay the full amount of principal of and interest on the 2001 Bonds. The 2001 Bonds were issued to finance the costs of the City Hall that constitutes a portion of the Property and the costs of the expansion of the library that constitutes a portion of the Property.

A portion of the proceeds of the Bonds, in the full amount required to provide for the

redemption of the 2001 Bonds in full on January 11, 2010, at a redemption price equal to 102% of the principal amount thereof, plus accrued interest, will be deposited in an escrow fund (the “2001 Escrow Fund”) held in trust by Union Bank, N.A., as escrow bank (the “2001 Escrow Bank”), under an escrow deposit and trust agreement with the Authority and the City. The amounts deposited in the 2001 Escrow Fund will be invested in direct obligations of the United States.

Upon the issuance of the Bonds and the deposit in the 2001 Escrow Fund of moneys

sufficient to provide for the refunding of the 2001 Bonds, the 2001 Bonds will be deemed

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defeased and no longer outstanding. The holders of the 2001 Bonds will be entitled to payment solely out of the moneys or securities deposited in the 2001 Escrow Fund.

THE BONDS

General

The Bonds will be issued in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof. The Bonds will mature on May 1 in each of the years and in the amounts, and will bear interest (calculated on the basis of a 360-day year of twelve 30-day months) at the rates set forth on the cover page hereof.

Interest on the Bonds will be payable semiannually on each May 1 and November 1,

commencing May 1, 2010 (each, an “Interest Payment Date”), to the person whose name appears on the Registration Books as the Owner thereof as of the fifteenth calendar day of the month immediately preceding each such Interest Payment Date (each, a “Record Date”), such interest to be paid by check of the Trustee mailed by first-class mail to the Owners at the respective addresses of such Owners as they appear on the Registration Books; provided, however, that payment of interest may be made by wire transfer in immediately available funds to an account in the United States of America to any Owner of Bonds in the aggregate principal amount of $1,000,000 or more who furnishes written wire instructions to the Trustee at least five days before the applicable Record Date. Principal of any Bond and any premium upon redemption will be paid by check of the Trustee upon presentation and surrender thereof at the corporate trust office of the Trustee, except as provided in APPENDIX G—“BOOK-ENTRY ONLY SYSTEM.” Principal of and interest and premium (if any) on the Bonds will be payable in lawful money of the United States of America.

Each Bond will be dated as of its date of delivery and will bear interest from the Interest

Payment Date next preceding such date of authentication thereof, unless (a) it is authenticated after a Record Date and on or before the following Interest Payment Date, in which event it will bear interest from such Interest Payment Date, or (b) it is authenticated on or before April 15, 2010, in which event it will bear interest from the Closing Date; provided, however, that if, as of the date of authentication of any Bond, interest thereon is in default, such Bond will bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment thereon.

The Bonds, when issued, will be registered in the name of Cede & Co., as registered

owner and nominee of The Depository Trust Company, New York, New York (“DTC,” and together with any successor securities depository, the “Securities Depository”). DTC will act as Securities Depository for the Bonds. Individual purchases of the Bonds will be made in book-entry form. Purchasers will not receive certificates representing their ownership interest in the Bonds. So long as Cede & Co. is the registered owner of the Bonds, as nominee of DTC, references herein to the Bondholders or registered owners thereof means Cede & Co. as aforesaid, and not the Beneficial Owners of the Bonds. So long as Cede & Co. is the registered owner of the Bonds, principal of and interest on the Bonds are payable by wire transfer of same day funds by the Trustee to Cede & Co., as nominee for DTC. DTC is obligated, in turn, to remit such amounts to the Participants for subsequent disbursement to the Beneficial Owners. See APPENDIX G—“BOOK-ENTRY ONLY SYSTEM.”

Transfer and Exchange of Bonds

Any Bond may, in accordance with its terms, be transferred on the Registration Books by the person in whose name it is registered, in person or by his duly authorized attorney, upon

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surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer, duly executed in a form acceptable to the Trustee. Transfer of any Bond will not be permitted by the Trustee during the period established by the Trustee for selection of Bonds for redemption or if such Bond has been selected for redemption pursuant to the Indenture. Whenever any Bond or Bonds are required to be surrendered for transfer, the Authority will execute and the Trustee will authenticate and will deliver a new Bond or Bonds for a like aggregate principal amount and of like maturity. The Trustee may require the Bond Owner requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer.

Any Bond may be exchanged at the corporate trust office of the Trustee for a like

aggregate principal amount of Bonds of other authorized denominations and of like maturity. Exchange of any Bond will not be permitted during the period established by the Trustee for selection of Bonds for redemption or if such Bond has been selected for redemption. The Trustee may require the Bond Owner requesting such exchange to pay any tax or other governmental charge required to be paid with respect to such exchange.

Optional Redemption

The Bonds maturing on May 1, 2020, are subject to optional redemption prior to their stated maturity date, at the written direction of the Authority, from moneys deposited by the Authority or the City, in whole, or in part, on any date on or after May 1, 2019, from any available source of funds, at a redemption price equal to the principal amount of Bonds called for redemption, together with interest accrued thereon to the date fixed for redemption, without premium.

Extraordinary Redemption from Insurance or Condemnation Proceeds

The Bonds are also subject to redemption as a whole, or in part on a pro rata basis among maturities, on any date, in integral multiples of $5,000, to the extent of prepayments made by the City from insurance proceeds or condemnation proceeds not used to repair, reconstruct or replace any portion of the Property damaged or destroyed or elected by the City to be used for such purpose, at a redemption price equal to 100% of the principal amount thereof plus interest accrued thereon to the date fixed for redemption, without premium.

Selection of Bonds for Redemption

Whenever provision is made for the redemption of less than all of the Bonds of a particular maturity, the Trustee will select the Bonds to be redeemed from all Bonds of such maturity or such given portion thereof not previously called for redemption, by lot in any manner which the Trustee in its sole discretion deems appropriate. For purposes of such selection, the Trustee will treat each Bond as consisting of separate $5,000 portions and each such portion will be subject to redemption as if such portion were a separate Bond.

Notice of Redemption

Notice of redemption will be mailed by first-class mail, postage prepaid, not less than 30 nor more than 60 days before any redemption date, to the respective Owners of any Bonds designated for redemption at their addresses appearing on the Registration Books maintained by the Trustee, and to the Municipal Securities Rulemaking Board, the Securities Depositories and the Information Services. Each notice of redemption will state the date of the notice, the redemption date, the place or places of redemption, whether less than all of the Bonds (or all Bonds of a single maturity) are to be redeemed, the CUSIP numbers and (in the event that not all Bonds within a maturity are called for redemption) Bond numbers of the Bonds to be redeemed,

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the maturity or maturities of the Bonds to be redeemed and in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. Each such notice will also state that on the redemption date there will become due and payable on each of said Bonds the redemption price thereof, and that from and after such redemption date interest thereon will cease to accrue and will require that such Bonds be then surrendered. Neither the failure to receive any notice nor any defect therein will affect the sufficiency of the proceedings for such redemption or the cessation of accrual of interest from and after the redemption date. Notice of redemption of Bonds will be given by the Trustee, at the expense of the Authority, for and on behalf of the Authority.

So long as the book-entry system is used for the Bonds, the Trustee will give any notice of

redemption or any other notices required to be given to registered Owners of Bonds only to DTC. Any failure of DTC to advise any Participant, or of any Participant to notify the Beneficial Owner, of any such notice and its content or effect will not affect the validity of the redemption of the Bonds called for redemption or any other action premised on such notice. Beneficial Owners may desire to make arrangements with a Participant so that all notices of redemption or other communications to DTC which affect such Beneficial Owners, and notification of all interest payments, will be forwarded in writing by such Participant. See APPENDIX G—“BOOK-ENTRY ONLY SYSTEM.”

Partial Redemption of Bonds

Upon surrender of any Bonds redeemed in part only, the Authority will execute and the Trustee will authenticate and deliver to the Owner thereof, at the expense of the Authority, a new Bond or Bonds of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Bonds surrendered.

Effect of Redemption

If notice of redemption has been given, and moneys for payment of the redemption price of, together with interest accrued to the date fixed for redemption on, the Bonds (or portions thereof) so called for redemption are being held by the Trustee, on the redemption date designated in such notice, the Bonds (or portions thereof) so called for redemption will become due and payable, interest on the Bonds so called for redemption will cease to accrue, said Bonds (or portions thereof) will cease to be entitled to any benefit or security under the Indenture, and the Owners of said Bonds will have no rights in respect thereof except to receive payment of the redemption price thereof.

All Bonds redeemed pursuant to the provisions of the Indenture will be canceled by the

Trustee upon surrender thereof and destroyed.

SECURITY FOR THE BONDS General

The Bonds are special limited obligations of the Authority payable solely from and secured solely by the Revenues pledged therefor under the Indenture, together with amounts on deposit from time to time in the funds and accounts held by the Trustee, including proceeds of the sale of the Bonds.

Under the Indenture, the Authority assigns to the Trustee, for the benefit of the Owners

from time to time of the Bonds, all of the Revenues and all of the rights of the Authority in the Lease Agreement (except for the right to receive any Additional Payments to the extent payable

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to the Authority and certain rights to indemnification set forth therein). The Trustee is entitled to collect and receive all of the Revenues, and any Revenues collected or received by the Authority are required to be held, and to have been collected or received, by the Authority as the agent of the Trustee and must be paid by the Authority to the Trustee.

THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE

SOLELY FROM AND SECURED SOLELY BY THE REVENUES AND OTHER MONEYS PLEDGED THERETO IN THE INDENTURE. THE BONDS ARE NOT A DEBT OF THE AUTHORITY, THE CITY, THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS AND NEITHER THE AUTHORITY, THE CITY, THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS, EXCEPT THE AUTHORITY TO THE EXTENT DESCRIBED HEREIN, IS LIABLE THEREON. IN NO EVENT WILL THE BONDS OR ANY INTEREST OR REDEMPTION PREMIUM THEREON BE PAYABLE OUT OF ANY FUNDS OR PROPERTIES OTHER THAN THOSE OF THE AUTHORITY AS SET FORTH IN THE INDENTURE. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. NEITHER THE MEMBERS OF THE AUTHORITY NOR ANY PERSONS EXECUTING THE BONDS ARE LIABLE PERSONALLY ON THE BONDS BY REASON OF THEIR ISSUANCE.

Lease Payments and Additional Payments

The Lease Agreement requires the City, subject to abatement as provided therein, to deposit with the Trustee, as assignee of the Authority, on each April 15 and October 15, commencing on April 15, 2010 (the “Lease Payment Dates”), an amount equal to the aggregate Lease Payment coming due and payable on each such Lease Payment Date. The Lease Payments payable in any fiscal year of the City constitute payment for the use and possession of the Property during such fiscal year. The City will receive a credit towards payment of Lease Payments for amounts on deposit in the Revenue Fund (including the Interest Account and the Principal Account therein) on each Lease Payment Date.

The obligation of the City to make Lease Payments is subject to annual appropriations of

the City from funds lawfully available therefor. The obligation of the City to make Lease Payments under the Lease Agreement does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. Neither the full faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged to make Lease Payments under the Lease Agreement. The Authority has no taxing power. The Lease Payments are calculated to be sufficient to pay, when due, the principal of and interest on the Bonds.

In addition to the Lease Payments, the City is required to pay when due the following

Additional Payments: (a) any fees and expenses incurred by the Authority in connection with or by reason of its leasehold estate in the Property as and when the same become due and payable; (b) any amount due to the Trustee pursuant to the terms of the Indenture; (c) any reasonable fees and expenses of such accountants, consultants, attorneys, and other experts as may be engaged by the Authority or the Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Lease Agreement or the Indenture; and (d) any reasonable out-of-pocket expenses of the Authority in connection with the execution and delivery of the Lease Agreement, the Indenture or the Continuing Disclosure Certificate or in connection with the issuance of the Bonds.

Pursuant to the Lease Agreement, the City covenants to take such action as may be

necessary to include all Lease Payments and Additional Payments due thereunder in its annual budgets and to make annual appropriations therefor. As provided in the Lease Agreement, the covenants of the City thereunder are duties imposed by law, and it is the duty of each and every

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public official of the City to take such action and to do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease Agreement agreed to be carried out and performed by the City.

California law requires, and the Lease Agreement provides, that Lease Payments are

required to be abated in whole or in part during any period in which there is substantial interference with the use and occupancy of the Property by the City due to damage, destruction or taking in eminent domain proceedings. Under these circumstances, failure to make any Lease Payment will not be an event of default under the Lease Agreement. See “SECURITY FOR THE BONDS—Abatement” below.

Lease Payments made by the City to the Authority are payable from any revenues

lawfully available to the City therefor. The Lease Agreement and the Indenture require that Lease Payments be deposited in the Revenue Fund maintained by the Trustee, which fund is held for the benefit of the owners of the Bonds.

Insurance and Condemnation Awards

In the event of any damage to or destruction of any part of the Property covered by insurance, the Authority, except as hereinafter provided, is required to cause the proceeds of such insurance to be utilized for the repair, reconstruction or replacement of the damaged or destroyed portion of the Property, and the Trustee is required to hold said proceeds in a fund established by the Trustee for such purpose separate and apart from all other funds, to the end that such proceeds are required to be applied to the repair, reconstruction or replacement of the Property to at least the same good order, repair and condition as was the case prior to the damage or destruction, insofar as the same may be accomplished by the use of said proceeds. The Trustee is required to invest said proceeds in Permitted Investments pursuant to the Written Request of the City, as agent for the Authority under the Lease Agreement, and withdrawals of said proceeds are required to be made from time to time upon the filing of a Written Request of the City with the Trustee, stating that the City has expended moneys or incurred liabilities in an amount equal to the amount therein stated for the purpose of the repair, reconstruction or replacement of the Property, and specifying the items for which such moneys were expended, or such liabilities were incurred, in reasonable detail. The City is required to file a written certificate with the Trustee to the effect that sufficient funds from insurance proceeds or from any funds legally available to the City, or from any combination thereof, are available in the event it elects to repair, reconstruct or replace the Property. Any balance of such proceeds not required for such repair, reconstruction or replacement and the proceeds of use and occupancy insurance are required to be treated by the Trustee as Lease Payments. Alternatively, the City, at its option, if the proceeds of such insurance together with any other moneys then available for such purpose are sufficient to prepay all, in case of damage or destruction in whole of the Property, or that portion, in the case of partial damage or destruction of the Property, of the Lease Payments relating to the damaged or destroyed portion of the Property, may elect not to repair, reconstruct or replace the damaged or destroyed portion of the Property and thereupon is required to cause said proceeds to be used for the redemption of Outstanding Bonds. The City is not required to apply the proceeds of insurance to redeem the Bonds in part due to damage or destruction of a portion of the Property unless the Trustee receives a written certificate of the Authority to the effect that the Lease Payments on the undamaged portion of the Property will be sufficient to pay the initially-scheduled principal and interest on the Bonds remaining unpaid after such redemption.

No assurance can be given that the proceeds of any insurance or condemnation award

will be sufficient under all circumstances to repair or replace any damaged or taken Property or to prepay all Lease Payments with respect to the Property. Also, the City makes no

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representation as to the sufficiency of any insurance awards or the adequacy of any self-insurance to pay, when and as due, amounts payable under the Lease Agreement or the Bonds.

Reserve Account

The Reserve Account is established under the Indenture in an amount equal to the Reserve Requirement, which is $1,362,312.52. As defined in the Indenture, the term “Reserve Requirement” means a fixed amount equal to the least of (a) maximum annual debt service on the Bonds, (b) 125% of average annual debt service on the Bonds, and (c) 10% of the par amount of the Bonds, determined on the Closing Date. All amounts in the Reserve Account are required to be used and withdrawn by the Trustee solely for the purpose of (x) paying principal of or interest on the Bonds when due and payable to the extent that moneys deposited in the Interest Account or the Principal Account are not sufficient for such purpose, and (y) making the final payments of principal of and interest on Bonds on the date on which such Bonds are required to be retired or provision made therefor.

Abatement

The Lease Agreement provides for the abatement of Lease Payments during any period in which by reason of damage to or destruction of the Property (other than by eminent domain which may cause abatement of Lease Payments as described below), which causes substantial interference with the use and occupancy by the City of the Property or any portion thereof. The amount of such abatement will be an amount agreed upon by the City and the Authority such that the resulting Lease Payments represent fair consideration for the use and occupancy of the portions of the Property not damaged or destroyed or the portion of the Property completed and available for use and possession by the City. Such abatement will continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction. In the event of any such damage or destruction, the Lease Agreement will continue in full force and effect and the City waives any right to terminate the Lease Agreement by virtue of any such damage and destruction. There will be no abatement of the Lease Payments to the extent that moneys derived from any person as a result of such damage or destruction are available to pay the amount which would otherwise be abated or if there is any money available in the Bond Fund or the Reserve Account to pay the amount which would otherwise be abated. See “—Insurance—Rental Interruption Insurance.”

If all of the Property is taken permanently under the power of eminent domain or sold to

a government threatening to exercise the power of eminent domain, the Lease Agreement will terminate with respect to the Property as of the day possession is so taken. If less than all of the Property is taken permanently, or if all of the Property or any part thereof is taken temporarily under the power of eminent domain, (a) the Lease Agreement will continue in full force and effect, and (b) there will be a partial abatement of Lease Payments in an amount to be agreed upon by the City and the Authority such that the resulting Lease Payments for the Property represent fair consideration for the use and occupancy of the remaining usable portion of the Property.

Insurance

Fire and Extended Coverage Insurance. The City is required under the Lease Agreement to procure and maintain or cause to be procured and maintained, throughout the term of the Lease Agreement, insurance against loss or damage to any structures constituting any part of the Property by fire and lightning, with extended coverage insurance, vandalism, malicious mischief insurance and sprinkler system leakage insurance. Said extended coverage insurance is required to, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. Such

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insurance is required to be in an amount equal to the replacement cost (without deduction for depreciation) of all structures constituting any part of the Property, excluding the cost of excavations, of grading and filling, and of the land (except that insurance may be subject to deductible clauses for any one loss of not to exceed two hundred fifty thousand dollars ($250,000) or a comparable deductible adjusted for inflation), or, in the alternative, is required to be in an amount and in a form sufficient, in the event of total or partial loss, to enable a portion of all Bonds then Outstanding equal to the amount of such Bonds to be paid from Lease Payments to be redeemed. The City currently carries earthquake insurance on the Property although the Lease Agreement does not require it to do so. The City plans to continue to purchase earthquake insurance on the Property so long as such insurance can be obtained on the open market at reasonable rates. See “CERTAIN RISK FACTORS—Earthquakes.” The net proceeds of such insurance will be applied as provided under the caption “SECURITY FOR THE BONDS—Insurance and Condemnation Awards” above.

Rental Interruption Insurance. The Lease Agreement requires the City to procure and

maintain or cause to be procured and maintained rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of the Property as a result of certain hazards, in an amount at least equal to the maximum Lease Payments coming due and payable during any future 24-month period. Such insurance may be maintained as part of or in conjunction with any other property insurance coverage carried by the City, and may be maintained in whole or in part in the form of the participation by the City in a joint powers agency or other program providing pooled insurance; provided that such insurance may not be maintained in the form of self-insurance except for a time element deductible not to exceed sixty days in duration. The proceeds of such insurance, if any, will be paid to the Trustee and deposited in the Revenue Fund, and will be credited towards the payment of the Lease Payments as the same become due and payable.

Title Insurance. The City is required to obtain upon the execution and delivery of the

Lease Agreement, title insurance on the Property, in an amount not less than the aggregate principal amount of Bonds issued by a company of recognized standing duly authorized to issue the same, subject only to Permitted Encumbrances. Proceeds of such insurance are required to be delivered to the Trustee as a prepayment of rent and are required to be applied by the Trustee to the redemption of Bonds.

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Debt Service Schedule

The following table sets forth the debt service due on the Bonds.

Debt Service Schedule

Year Ending May 1 Principal Interest Total 2010 $ 165,000 $294,231.98 $ 459,231.98 2011 430,000 812,862.52 1,242,862.52 2012 450,000 791,362.52 1,241,362.52 2013 530,000 773,362.52 1,303,362.52 2014 615,000 746,862.52 1,361,862.52 2015 640,000 716,112.52 1,356,112.52 2016 670,000 684,112.52 1,354,112.52 2017 705,000 657,312.52 1,362,312.52 2018 735,000 622,062.52 1,357,062.52 2019 770,000 585,312.52 1,355,312.52 2020 810,000 546,812.52 1,356,812.52 2021 845,000 506,312.52 1,351,312.52 2022 885,000 473,568.76 1,358,568.76 2023 910,000 438,168.76 1,348,168.76 2024 960,000 401,768.76 1,361,768.76 2025 1,005,000 353,768.76 1,358,768.76 2026 1,050,000 303,518.76 1,353,518.76 2027 1,110,000 251,018.76 1,361,018.76 2028 935,000 195,518.76 1,130,518.76 2029 980,000 154,612.50 1,134,612.50 2030 1,025,000 110,512.50 1,135,512.50 2031 1,080,000 56,700.00 1,136,700.00

Pursuant to the Lease Agreement, the City is required to make Lease Payments which

have been calculated to be sufficient to make the interest and principal payments due on the Bonds. The City’s Lease Payments are due on the fifteenth calendar day of the month preceding each Interest Payment Date.

Additional Bonds

Pursuant to the Indenture, the Authority may not issue additional bonds, notes or other indebtedness which would be payable out of the Revenues in whole or in part. See “THE AUTHORITY.”

THE AUTHORITY The Authority is a public agency duly organized and existing pursuant to a Joint Exercise

of Powers Agreement (the “JPA Agreement”) between the City and the Agency, dated June 2, 1997. The Authority is governed by a board of directors comprised of the five member City Council of the City. The Authority is statutorily authorized by Article 4 of Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California and is empowered under the JPA Agreement to issue its bonds for, among other things, the purposes of the plan of financing described herein. The Authority is administered by the City staff.

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THE CITY

The City is located in the southern portion of Orange County (the “County”) in the area commonly referred to as the Saddleback Valley. With a current population of 100,242, it is the County’s ninth largest city. The City is comprised of a 10,000 acre planned community originally developed beginning in 1963 by the Mission Viejo Company, as well as approximately 800 acres annexed in 1992. At the present time, it is essentially built out.

See APPENDIX A—”GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION

RELATING TO THE CITY” for a general description of the City as well as certain demographic and statistical information.

CITY FINANCIAL INFORMATION

Financial Statements The City’s accounting policies conform to generally accepted accounting principles. The

audited financial statements also conform to the principles and standards for public financial reporting established by the Governmental Accounting Standards Board.

Basis of Accounting and Financial Statement Presentation. The government-wide financial

statements are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

Governmental fund financial statements are reported using the modified accrual basis of

accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due.

GASB No. 34. The Governmental Accounting Standards Board (GASB) published its

Statement No. 34 “Basic Financial Statements - and Management’s Discussion and Analysis - for State and Local Governments” on June 30, 1999. Statement No. 34 provides guidelines to auditors, comptrollers, and financial officers on requirements for financial reporting for all governmental agencies in the United States. Retroactive reporting is required four years after the effective date on the basic provisions for all major general infrastructure assets that were acquired or significantly reconstructed, or that received significant improvements, in fiscal years ending after June 30, 1980. The City was required to implement the provision of GASB 34 for the fiscal year ending June 30, 2003.

Audited Financial Statements. The City retained the firm of Mayer Hoffman McCann P.C.,

Certified Public Accountants & Consultants, Irvine, California, to examine the general purpose financial statements of the City as of and for the year ended June 30, 2009. The City is the recipient of the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting for the fiscal year ended June 30, 2008. The audited financial statements for fiscal year ended June 30, 2009, are attached hereto as APPENDIX B—”COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2009.” The City has not requested, and the auditor has not provided, any

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review or update of such financial statements in connection with their inclusion in this Official Statement.

Budgetary Process

The City Council adopts a biennial budget for all City funds prior to the beginning of

each biennium, which begins on July 1 of each odd-numbered year. Annual appropriations are approved by the Council prior to the beginning of each year of the biennial budget period. The City Council has the legal authority to amend the budget at any time during the fiscal year. The City maintains budgetary controls to ensure compliance with legal provisions embodied in the appropriated budget approved by the City Council. The level of budgetary control (that is, the level at which expenditures cannot legally exceed the appropriated amount) for the City’s operating budget is the program area within each fund and for the capital improvement budget is each individual capital improvement project within each fund. For the operating budget, the City Manager has the authority to move appropriations between accounts (without dollar limitation) within a budget program and within the same fund as long as the transfers are within the same program area. For the capital improvement program, the City Manager has the authority to transfer up to $30,000 in appropriations between capital projects within the same fund as long as the transfers are within the responsibility of the same department. All other appropriations changes require City Council approval.

All appropriations lapse at the end of the fiscal year unless specific carryovers are

approved by the City Council. The recommended general fund expenditures in fiscal year 2009-10 total $48,241,194

which represents a 4.6% decrease when compared to fiscal year 2008-09 expenditures. General fund revenues for fiscal year 2009-10 are projected to be $48,189,982, which represents a 2.4% decrease when compared to fiscal year 2008-09 revenue.

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The following table shows the City’s budget and actual results for general fund revenues and expenditures for fiscal years 2007-08 and 2008-09 and the adopted budget for fiscal year 2009-10.

City of Mission Viejo

General Fund Budget Summary Fiscal Years 2007-08 through 2009-10

FY 07-08 FY 07-08 FY 08-09 FY 08-09 FY 09-10 Budget Actual Budget Actual Budget Revenues

Sales & use $16,123,179 $15,089,492 $13,763,059 $12,983,343 $13,157,969 Property 24,708,360 24,569,778 24,729,000 24,511,907 24,377,785 Franchise 2,950,000 2,880,671 2,950,000 2,953,524 2,950,000 Transient lodging 538,000 589,199 510,000 475,577 459,000 Property Transfer 300,000 335,253 350,000 311,863 350,000 Other — — — — — Total Taxes 44,619,539 43,464,393 42,302,059 41,236,214 41,294,754 Licenses and permits 1,827,650 1,388,460 1,276,415 1,265,539 1,255,050 Intergovernmental 937,722 849,573 635,518 612,830 616,000 Charges for services 2,311,775 2,045,162 2,107,050 2,007,894 2,152,825 Fines and forteitures 812,500 781,503 687,026 651,962 688,500 Developer fees — — 274,474 274,474 — Investment earnings 2,150,090 2,906,120 1,758,600 2,140,064 1,810,441 Other 481,314 910,519 1,145,000 1,181,553 372,412

Total revenues 53,140,590 52,345,730 50,186,142 49,370,530 48,189,982 Expenditures

General government-legislative 1,941,568 1,536,513 2,105,145 2,057,338 1,570,103 General government-management and support

12,435,621 11,222,867 10,186,571 9,647,916 9,785,025

Public safety 14,708,600 14,487,681 15,136,902 15,059,639 15,795,439 Public works- engineering and transportation

3,037,210 2,536,735 1,872,516 1,657,271 2,009,426

Infrastructure maintenance 16,764,078 15,927,604 14,320,610 14,159,225 12,099,356 Community development 2,489,605 2,120,388 1,865,080 1,687,102 1,858,137 Recreation/community/library services

5,021,330 4,956,299 5,213,545 5,187,415 4,735,593

Capital projects 12,538,510 9,817,603 6,709,696 870,123 155,000 Debt service Principal 75,000 75,000 80,000 80,000 80,000 Interest 159,485 157,498 151,190 153,350 153,115

Total expenditures 69,171,007 62,838,188 57,641,255 50,559,379 48,241,194 Excess of revenues over (under) expenditures

(16,030,417) (10,492,458) (7,455,113) (1,188,849) (51,212)

Other financing sources (uses) Transfers in 1,186,176 332,956 664,347 696,118 668,613 Transfers out (1,673,773) (1,602,384) (1,631,585) (1,639,372) (2,132,822) Capital asset disposal — 22,896 15,000 23,099 — Proceeds of advances — — — — (170,000) Total other financing sources (uses) (487,597) (1,246,532) (952,238) (920,155) (1,634,209) Net change in fund balances $(16,518,014) $(11,738,990) $(8,407,351) $(2,109,004) $(1,685,421) Fund balance, beginning $48,562,115 $48,562,115 $36,823,125 $36,823,125 $34,714,121 Fund balance, ending $32,044,101 $36,823,125 $28,415,774 $34,714,121 $33,028,700

Source: City of Mission Viejo, Administrative Services Department.

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City Financial Management Policies

The City Council has adopted a comprehensive set of financial management policies to provide for: (i) establishing targeted general fund reserves; (ii) the prudent investment of City funds; and (iii) establishing parameters for issuing and managing debt supported by the general fund, Enterprise Funds and any other related funding entity of the City.

General Fund Reserve Policy. The City Council has adopted a general fund reserve policy,

confirmed annually, that established the goal of achieving reserve balances of 50% of revenues for budgetary/economic uncertainty and asset replacement. Appropriations from these reserves require approval by the City Council. At the time of adoption of this reserve policy the City Council voiced a commitment to fund these reserve levels over the subsequent future years.

Investment Policy. The investment of funds of the City (except pension and retirement

funds) is made in accordance with the City’s Investment Policy, as amended on September 21, 2009 (the “Investment Policy”), and section 53601 et seq. of the California Government Code. The Investment Policy is subject to revision at any time and is reviewed at least annually to ensure compliance with the stated objectives of safety, liquidity, yield, and current laws and financial trends. All amounts held under the Trust Agreement are invested at the direction of the City in Permitted Investments, as defined in the Trust Agreement, and are subject to certain limitations contained therein. See APPENDIX C—”CITY INVESTMENT POLICY” and APPENDIX D—”SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS—TRUST AGREEMENT—Investments.”

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Current Investments

The assets of the City’s investment portfolio, as of September 30, 2009, are shown in the following table:

Investment Portfolio of the City (As of September 30, 2009)

Percent of Securities Managed by Treasurer Weighted Maximum Average Purchase Yield Amortized Percent of Policy Remaining for Month Market Value Cost Portfolio Actual Limit Life Days (Annualized) United States Treasury Securities

$12,397,140.00 $12,067,416.19 34.19% 100% 346 3.863%

Federal Agency Securities 9,488,754.00 9,116,160.54 26.16% 70% 674 3.574% State Local Agency Investment Fund

6,922,187.14 6,911,401.13 19.09% 20% 1 0.750%

Government Money Market Funds

5,912,965.15 5,912,965.15 16.30% 20% 1 0.066%

Tax Allocation Notes 1,544,748.75 1,525,000.00 4.26% $2 Million 975 4.000% Subtotal 36,265,795.04 35,532,943.01 101.06% 100.00%

Investments Managed by Others:

Trustee-Managed Investments:

Government Money Market Funds

710,803.75 710,803.75 2.02% 1 0.000%

Grand Total - Investments 36,976,598.79 36,243,746.76 103.08%

Checking Account (1,088,914.02) (1,088,914.02) -3.10% Petty Cash 4,430.00 4,430.00 0.01% Grand Total - Cash and

Investments $35,892,114.77 $35,159,262.74 100.00%

Source: City of Mission Viejo. Reliance on State Budget

Approximately 77% of the City’s general fund revenues for fiscal year 2008-09 consisted

of payments collected by the State and passed-through to local governments or collected by the County and allocated to local governments by State law. Approximately 78% of the City’s general fund revenues for fiscal year 2009-10 are expected to come from such sources. There can be no assurance that current or future State budget difficulties will not adversely affect the City’s revenues or its ability to make payments under the Lease Agreement. See “RISK FACTORS—State Budgets.”

Principal Sources of General Fund Revenues

Property taxes were the single largest revenue source to the general fund in fiscal year 2008-09, representing approximately 49.6% of revenues, followed by sales taxes representing approximately 26.3%. These sources represented an aggregate of approximately 76% of the general fund revenues for fiscal year 2008-09 and represent an aggregate of approximately 78% of general fund revenues in the City’s fiscal year 2009-10 adopted budget. For a discussion of potential State Budget impacts on general fund revenues, see “—State Budgets.” For a discussion of sales tax revenues and property taxes, see “—Sales Tax” and “—Ad valorem Property Taxation.”

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In addition, the City receives the following local taxes: Franchise Taxes. The City levies a franchise tax on its gas, electric, cable television and

trash collection franchises. Transient Occupancy Taxes. The City levies a 8% transient occupancy tax on hotel and

motel bills. Property Transfer Taxes. A documentary stamp tax is assessed for recordation of real

property transfers. The following table shows the City’s general fund tax revenues by source for the most

recent five fiscal years:

City of Mission Viejo Tax Revenues by Source, Governmental Funds

Last Five Fiscal Years (modified accrual basis of accounting)

Real Transient

Fiscal Property Sales & Franchise Property Occupancy Year Tax Use Tax Tax Transfer Tax Tax Total 2005 $15,909,756 $17,301,046 $2,411,905 $897,540 $404,216 $36,924,463 2006 22,830,026 17,616,495 2,752,067 769,143 536,653 44,504,384 2007 25,194,371 17,632,233 2,927,803 573,226 581,347 46,908,980 2008 26,654,054 16,722,281 2,880,671 335,254 589,199 47,181,459 2009 26,582,596 14,420,066 2,953,525 311,863 475,577 44,743,627

Source: City of Mission Viejo.

In addition, the City receives the following general fund revenues: Licenses and Permits. These City general fund revenues consist primarily of business

license taxes and building construction permit fees. Fines, Forfeitures and Penalties. These City general fund revenues include fees from vehicle

and parking violations as well as infractions of local ordinances. Use of Money and Property. These City general fund revenues consist primarily of

investment earnings as well as rents and concession revenue. Charges for Services. The City charges for services including planning, building and

engineering related services, as well as park and recreation fees.

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General Fund Revenues and Expenditures The following two tables summarize the General Fund Balance Sheet and Statement of

Revenues, Expenditures and Changes in Fund Balance of the City’s general fund for the fiscal years 2004-05 through 2008-09.

City of Mission Viejo

General Fund Balance Sheet Fiscal Years 2004-05 through 2008-09

Fiscal Year Ended June 30, 2005 2006 2007 2008 2009 Assets Cash and investments $36,408,876 $39,429,724 $43,562,364 $31,075,086 $26,474,965 Taxes receivable 4,735,919 5,008,491 4,605,111 3,741,755 2,785,594 Interest receivalbe 438,721 477,933 635,275 459,029 305,516 Accounts receivable 45,990 25,269 90,115 36,078 117,086 Leases receivable 150,000 100,000 50,000 - - Intergovernmental receivable 534,534 - - - - Loans receivable - 21,798 17,377 16,834 24,848 Deposits 18,214 18,214 4,145 12,825 12,817 Prepaid items 238,623 335,558 1,095,338 241,985 90,346 Due from developers 2,456,862 2,488,404 1,873,994 1,690,549 1,895,949 Interfund receivable 2,458,963 1,910,687 3,002,739 3,449,331 6,119,219 Advances receivable 4,558,174 4,250,725 4,029,171 4,527,859 3,091,620 Total Assets 52,044,876 54,066,803 58,965,629 45,251,331 40,917,960 Liabilities and Fund Balance Accounts payable 3,552,242 2,537,973 4,773,587 2,957,253 1,915,143 Accrued payroll 380,183 351,514 493,300 545,213 642,754 Retainage payable 301,434 279,619 158,979 33,090 9,705 Deposits 1,819,268 2,152,474 1,821,269 2,286,738 1,600,889 Deferred revenue 4,239,868 3,887,439 3,156,379 2,605,912 2,035,348 Total liabilities 10,292,995 9,209,019 10,403,514 8,428,206 6,203,839 Fund balance Reserved 9,198,817 7,065,344 12,747,110 6,387,326 4,572,557 Unreserved 32,553,064 37,792,440 35,815,005 30,435,799 30,141,564 Total general fund 41,751,881 44,857,784 48,562,115 36,823,125 34,714,121 Total liabilities and fund balances $52,044,876 $54,066,803 $58,965,629 $45,251,331 $40,917,960 Source: City of Mission Viejo.

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City of Mission Viejo General Fund

Comparable Statement of Revenues, Expenditures and Changes in Fund Balance Fiscal Years 2004-05 through 2008-09

Fiscal Year Ended June 30, 2005 2006 2007 2008 2009 Revenues Taxes $33,092,957 $40,606,056 $43,144,437 $43,464,393 $41,236,214 Licenses and permits 1,050,504 1,631,189 1,673,856 1,388,460 1,265,539 Intergovernmental 6,833,368 2,450,133 932,366 849,573 612,830 Charges for services 1,721,550 1,899,152 2,257,803 2,045,162 2,007,894 Fines and forteitures 835,102 834,282 789,570 781,503 651,962 Developer fees - - - - 274,474 Investment earnings 1,235,885 1,588,896 2,890,819 2,906,120 2,140,064 Sale of capital assets - - - - - Other 841,243 1,701,836 1,777,752 910,519 1,181,553 Total revenues 45,610,609 50,711,544 53,466,603 52,345,730 49,370,530 Expenditures General government-legislative 1,640,829 1,272,859 1,454,655 1,536,513 2,057,338 General government-management and support

6,249,199 8,029,170 7,958,353 11,222,867 9,647,916

Public safety 11,513,403 12,306,492 12,851,772 14,487,681 15,059,639 Public works- engineering and transportation

3,226,832 3,467,857 2,507,813 2,536,735 1,657,271

Infrastructure maintenance 9,433,317 11,659,348 12,384,089 15,927,604 14,159,225 Community development 1,553,591 1,984,233 1,829,026 2,120,388 1,687,102 Recreation/community/library services

3,540,705 3,730,160 4,323,440 4,956,299 5,187,415

Capital projects 1,771,060 4,092,003 5,069,288 9,817,603 870,123 Debt service Principal 65,000 65,000 70,000 75,000 80,000 Interest 168,065 164,782 161,305 157,498 153,350 Total expenditures 39,162,001 46,771,904 48,609,741 62,838,188 50,559,379 Excess of revenues over (under) expenditures 6,448,608 3,939,640 4,856,862 (10,492,458) (1,188,849) Other financing sources (uses) Transfers in 861,233 710,719 355,014 332,956 696,118 Transfers out (1,562,521) (1,545,736) (1,516,883) (1,602,384) (1,639,372) Capital asset disposal 25,388 1,280 9,338 22,896 23,099 Total other financing sources (uses) (675,900) (833,737) (1,152,531) (1,246,532) (920,155) Net change in fund balances 5,772,708 3,105,903 3,704,331 (11,738,990) (2,109,004) Fund balance, beginning $35,979,173 $41,751,881 $44,857,784 $48,562,115 $36,823,125 Fund balance, ending $41,751,881 $44,857,784 $48,562,115 $36,823,125 $34,714,121 Source: City of Mission Viejo.

Sales Taxes

A sales tax is imposed on retail sales or consumption of personal property. As shown in

the table above, sales tax revenues represented approximately 26% of the City’s total general

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fund revenues in fiscal year 2008-09 and represent an aggregate of approximately 27% of general fund revenues in the City’s fiscal year 2009-10 adopted budget.

Triple Flip. On March 2, 2004, voters approved a bond initiative formally known as the

“California Economic Recovery Act.” This act authorized the issuance of $15 billion of economic recovery bonds to finance ongoing State budget deficits, which are payable from a fund established by the redirection of tax revenues known as the “Triple Flip.” Currently, the State has issued approximately $14.07 billion of economic recovery bonds. Under the “Triple Flip,” one-quarter of local governments’ 1% share of the sales tax imposed on taxable transactions within their jurisdiction was redirected to the State. In an effort to eliminate the adverse impact of the sales tax revenue redirection on local government, State legislation provided for certain property taxes to be redirected to local government. Because these property tax monies were previously earmarked for schools, the legislation provided for schools to receive other State general fund revenues. It is expected that the swap of sales taxes for property taxes will terminate once the economic recovery bonds are repaid, which is currently expected to occur in approximately 14 years.

Sales Tax Rates. The City’s sales tax revenue represents the City’s share of the sales and

use tax, imposed on taxable transactions occurring within the City’s boundaries. Sales and use taxes are imposed under the Bradley-Burns Uniform Local Sales and Use Tax Law. As of April 1, 2009, the basic statewide sales and use tax rate is 8.25%. Many of the State’s cities, counties, towns and communities have special taxing jurisdictions (districts), which impose a transactions (sales) and use tax. These districts increase the tax rate in a particular area by adding the district tax to the combined statewide tax rate of 8.25%. The rates for these districts range from 0.10% to 1.00% per district. More than one district tax may be in effect in a given area.

The following table shows components of the City’s current 8.75% sales and use tax rate.

City of Mission Viejo Sales Tax Rate

As of April 1, 2009

Jurisdiction Rate State 6.25% State (1) 1.00 City portion of State 1.00 Orange County Transportation Authority 0.50

Total 8.75% Source: State of California, Board of Equalization (1) As of April 1, 2009, the State temporarily increased its sales tax by 1%, which will be in effect until July 1, 2011

Motor Vehicle In-Lieu Tax

Vehicle license fees are assessed in the amount of 2% of a vehicle’s depreciation market value for the privilege of operating a vehicle on California’s public highways. A program to offset (or reduce) a portion of the vehicle license fees (“VLF”) paid by vehicle owners was established by Chapter 322, Statutes of 1998. Beginning January 1, 1999, a permanent offset of 25% of the VLF paid by vehicle owners became operative. Various pieces of legislation increased the amount of the offset in subsequent years to the existing statutory level of 67.5% of 2% (resulting in the current effective rate of 0.65%). This level of offset was estimated to provide tax relief of $3.95 billion in the fiscal year 2003-04. Beginning in fiscal year 2004-05, the State-local agencies agreement permanently reduced the VLF rate to 0.65% and eliminated the VLF offset program.

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In connection with the offset of the VLF, the Legislature authorized appropriations from the State general fund to “backfill” the offset so that the local governments, which receive all of the vehicle license fee revenues, would not experience any loss of revenues. The legislation that established the VLF offset program also provided that if there were insufficient general fund moneys to fully backfill the VLF offset, the percentage offset would be reduced proportionately (i.e., the license fee payable by drivers would be increased) to assure that local governments would not be disadvantaged. In June 2003, the State Director of Finance ordered the suspension of VLF offsets due to a determination that insufficient general fund moneys would be available for this purpose, and, beginning in October 2003, VLF paid by vehicle owners were restored to the 1998 level. However, the offset suspension was rescinded by the Governor on November 17, 2003, and offset payments to local governments resumed. Local governments received backfill payments totaling $3.80 billion in fiscal year 2002-03. Backfill payments totaling $2.65 billion were expected to be paid to local governments in fiscal year 2003-04. The State-local agreement also provided for the repayment in August 2006 of approximately $1.2 billion that was not received by local governments during the time period between the suspension of the offsets and the implementation of higher fees. This repayment obligation was codified by Proposition 1A, which was approved by voters in the November 2004 general election and was repaid early by the State in August 2005. For a description of Proposition 1A, see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS—Proposition 1A.”

The following table sets forth the Motor Vehicle In-Lieu Tax received by the City for the

last five fiscal years.

City of Mission Viejo Motor Vehicle In-Lieu Tax

Fiscal Years 2004-05 through 2007-08 and Estimated for Fiscal Year 2008-09

2005 2006 2007 2008 2009 Motor Vehicle In-Lieu Tax $640,093.51 $604,944.03 $602,818.83 $438,534.34 $337,212.79

Source: City of Mission Viejo.

Transient Occupancy Taxes

The transient occupancy tax, at the rate of 8%, is a general tax imposed on occupants for

the privilege of occupying room(s) in a hotel, motel or inn. Revenues from transient occupancy taxes represented approximately 1% of the City’s general fund revenues in fiscal year 2008-09.

PROPERTY TAXES

Ad Valorem Property Taxes Tax Levies, Collections and Delinquencies. Property taxes are levied by the County for each

fiscal year on taxable real and personal property which is situated in the County. Property taxes collected in advance are recorded as deferred revenue and recognized as revenue in the year they become available. The County levies, bills and collects property taxes for the City. Property taxes paid to the City by the County within 60 days after the end of the fiscal year are “available” and are, therefore, recognized as revenue.

For assessment and collection purposes, property is classified either as “secured” or

“unsecured” and is listed accordingly on separate parts of the assessment roll. The “secured roll” is that part of the assessment roll containing State/assessed public utilities property and

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property the taxes on which are a lien on real property sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the “unsecured roll.”

Secured and unsecured property taxes are levied based on the assessed value as of

January 1, the lien date, of the preceding fiscal year. Secured property tax is levied on October 1 and due in two installments, on November 1 and March 1. Collection dates are December 10 and April 10 which are also the delinquent dates. At that time, delinquent accounts are assessed a penalty of 10%. Accounts that remain unpaid on June 30 are charged an additional 1.5 % per month. Such property may thereafter be redeemed by payment of a penalty of 1.5% per month to the time of redemption, plus costs and a redemption fee. If taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by the County Treasurer.

Unsecured property tax is levied on July 1 and due on July 31, and has a collection date of

August 31 which is also the delinquent date. A 10% penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5:00 p.m. on October 31, an additional penalty of 1.5% attaches to them on the first day of each month until paid. The taxing authority has four ways of collecting delinquent unsecured personal property taxes: (1) bringing a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Clerk and County Recorder’s office in order to obtain a lien on certain property of the taxpayer; and (4) seizing and selling personal property, improvements, or possessory interests belonging or assessed to the assessee.

Assessed Valuation. All property is assessed using full cash value as defined by Article

XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, nonprofit hospitals and charitable institutions.

Future assessed valuation growth allowed under Article XIIIA (new construction, certain

changes of ownership, 2% inflation) will be allocated on the basis of “situs” among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and schools will share the growth of “base” revenues from the tax rate area. Each year’s growth allocation becomes part of each agency’s allocation in the following year. The availability of revenue from growth in tax bases to such entities may be affected by the establishment of redevelopment agencies which, under certain circumstances, may be entitled to revenues resulting from the increase in certain property values.

The passage of Assembly Bill 454 in 1987 changed the manner in which unitary and

operating nonunitary property is assessed by the State Board of Equalization. The legislation deleted the formula for the allocation of assessed value attributed to such property and imposed a State-mandated local program requiring the assignment of the assessment value of all unitary and operating non-unitary property in each county of each State assessee other than a regulated railway company. The legislation established formulas for the computation of applicable county-wide rates for such property and for the allocation of property tax revenues attributable to such property among taxing jurisdictions in the county beginning in fiscal year 1988-89. This legislation requires each County to issue each State assessee, other than a regulated railway company, a single tax bill for all unitary and operating nonunitary property.

Assessment Appeals. Property tax values determined by the County Assessor may be

subject to appeal by property owners. Assessment appeals are annually filed with the Assessment Appeals Board for a hearing and resolution. The resolution of an appeal may result in a reduction to the County Assessor’s original taxable value and a tax refund to the applicant/property owner.

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Each assessment appeal could result in a reduction of the taxable value of the real property, personal property or possessory interest of the property which is the subject of the appeal. Alternatively, an appeal may be withdrawn by the applicant or the Assessment Appeals Board may deny or modify the appeal at a hearing or by stipulation.

Effect of Delinquencies and Foreclosures on Property Tax Collections. As described above, once

an installment of property tax becomes delinquent, penalties are assessed commencing on the applicable delinquency date until the delinquent installment(s) and all assessed penalties are paid. In the event of foreclosure and sale of property by a mortgage holder, all past due property taxes, penalties and interest are required to be paid before the property can be transferred to a new owner.

The level of default and foreclosure activity has affected certain homeowners nationwide.

Within the State, the greatest impacts to date are in regions of the Central Valley, the Inland Empire, and other areas in the State where the large numbers of new mortgages were originated in more affordable areas. The increased level of default and foreclosure activity has resulted in downward pressure on home prices in the affected areas.

The following table shows assessed valuations in the City since fiscal year 2005-06.

City of Mission Viejo Assessed Full Cash Value of all Taxable Property

Fiscal Years 2005-06 to 2009-10 (dollars in Thousands)

Local Secured

Utility

Unsecured Total Before Rdv.

Increment Total After Rdv.

Increment 2005-06 $11,190,855,560 $2,170,951 $280,195,040 $11,473,221,551 $10,965,459,087 2006-07 12,127,246,001 2,109,983 320,407,523 12,449,763,507 11,884,760,078 2007-08 12,903,096,138 1,208,790 341,820,499 13,246,125,427 12,602,546,629 2008-09 13,007,414,758 2,417,580 347,733,335 13,357,565,673 12,628,257,224 2009-10 12,736,554,961 2,417,580 365,725,588 13,104,698,129 12,355,332,321

Source: California Municipal Statistics, Inc.

Tax Levies and Delinquencies

The County Tax Collector collects property tax levies for each fiscal year on taxable real

and personal property which is situated in the County as of the preceding January 1. Unsecured taxes are due on March 1 of each year and become delinquent August 31. One half of the secured tax levy is due November 1, and becomes delinquent December 10; the second half is due February 1, and becomes delinquent April 10. A 10% penalty is added to any late installment.

Property owners may redeem defaulted properties upon payment of delinquent taxes

and penalties. Such properties incur a redemption penalty of 1.5% of the tax due per month. Properties may be redeemed under an installment plan by paying current taxes, plus 20% of delinquent taxes for five (5) years. Interest accrues at 1.5% per month on the unpaid balance. If no payments have been made on delinquent taxes at the end of five fiscal years, the property is subject to public auction by the County Tax Collector as provided by law.

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The following table sets forth the levy, collection and delinquency history of property tax collections for the last ten years:

City of Mission Viejo

Property Tax Levies and Tax Collections Last Ten Fiscal Years

Collected within the

Fiscal Tax levied Fiscal Year of Levy Collections Total Collections to Date Year Ended for the Percent for Prior Percent

June 30 Fiscal Year Amount of Levy Years Amount of Levy

2000 $13,015,372 $12,670,878 97.35% $242,573 $12,913,451 99.22% 2001 15,921,462 15,316,144 96.20 170,186 15,486,330 97.27 2002 16,754,971 16,405,763 97.92 179,596 16,585,359 98.99 2003 17,977,467 17,550,504 97.63 210,406 17,760,910 98.80 2004 19,222,439 18,652,129 97.03 246,653 18,898,782 98.32 2005 20,667,323 20,233,207 97.90 206,307 20,439,514 98.90 2006 23,210,863 22,464,597 96.78 235,770 22,700,367 97.80 2007 24,702,934 23,882,142 96.68 306,257 24,188,399 97.92 2008 26,674,212 25,268,197 94.73 519,443 25,787,640 96.68 2009 26,965,638 25,587,957 94.89 844,471 26,432,428 98.02

Source: Orange County Auditor-Controller Note: The amounts presented include City property taxes and Agency tax increment and amounts collected by the City and the Agency that were passed through to other agencies.

In 1978, the voters of the State passed Proposition 8, a constitutional amendment to Article XIIIA that allows a temporary reduction in assessed value when real property suffers a decline in value. A decline in value occurs when the current market value of real property is less than the current assessed (taxable) factored base year value as of the lien date, January 1.

See also “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND

APPROPRIATIONS—Article XIIIA of the California Constitution.”

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Principal Taxpayers. The following table sets forth the principal secured property taxpayers in the City as of fiscal year 2009-10, the most current information available.

City of Mission Viejo

Principal Secured Property Taxpayers Fiscal Year 2009-10

(dollars in thousands)

Property Owner

Primary Land Use

2009-10 Assessed Valuation

% of Total (1)

1. Mission Viejo Associates Commercial $165,122,600 1.30% 2. Mission Viejo Medical LLC Medical Buildings 92,210,224 0.72 3. Mission Hospital Regional Medical Center

(2) Medical Buildings 67,406,485 0.53

4. EQR-Del Lago Vistas Inc. Apartments 60,105,578 0.47 5. Target Corporation Commercial 60,003,663 0.47 6. Prisa Acquisition LLC Industrial 55,540,761 0.44 7. OC&SD Holdings LLC Apartments 53,040,000 0.42 8. Oasis-California Inc. Apartments 50,697,306 0.40 9. MG Promenade Apt. LLC Apartments 49,280,948 0.39

10. MV Unisys LLC Industrial 46,387,615 0.36 11. Reef Plaza Del Lago Inc. Commercial 44,407,727 0.35 12. Mission Ridge Associates LLC Commercial 43,109,159 0.34 13. KT Kaleidoscope Inc. Commercial 40,767,166 0.32 14. Mission Foothill Associates LP Commercial 28,815,690 0.23 15. Madrid LLC Apartments 28,387,995 0.22 16. Mills Jeronimo LLC Commercial 27,371,757 0.21 17. Macy’s California Inc. Commercial 23,929,739 0.19 18. Park Ridge Villas Apartments 21,379,229 0.17 19. Park Place Land LXMV LP Commercial 21,114,000 0.17 20. MV Plaza Inc. Commercial 20,370,289 0.16

$999,447,931 7.85% Source: California Municipal Statistics, Inc. (1) 2009-10 Local Secured Assessed Valuation: $12,736,554,961 (2) Net taxable value.

OTHER FINANCIAL INFORMATION

Labor Relations None of the City employees are represented in a bargaining unit.

Risk Management The City is a member of the California Joint Powers Insurance Authority (the “Insurance

Authority”), composed of 122 California public entities. The purpose of the Insurance Authority is to arrange and administer programs for the pooling of self-insured losses, to purchase excess insurance or reinsurance, and to arrange for group purchased insurance for property and other coverages. The Insurance Authority’s pool began covering claims of its members in 1978. Each member government has an elected official as its representative on the Insurance Authority’s Board of Directors. The Board operates through a nine-member Executive Committee.

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Self-Insurance Programs of the Insurance Authority

General Liability - The City participates in the general liability pool administered by the Insurance Authority. Each member government pays a primary deposit to cover estimated losses for a fiscal year (claims year). Six months after the close of a fiscal year, outstanding claims are valued. A retrospective deposit computation is then made for each open claims year. Claims are pooled separately between police and non-police. Costs are spread to members as follows: the first $30,000 of each occurrence is charged directly to the member’s primary deposit; costs from $30,001 to $750,000 and the loss development reserves associated with losses up to $750,000 are pooled based on a member’s share of losses under $30,000. Losses from $750,001 to $2,000,000 and the associated loss development reserves are pooled based on payroll. Costs of covered claims from $2,000,001 to $50,000,000 are currently paid by excess insurance and are subject to a $3,000,000 aggregate annual deductible and a quota sharing agreement whereby the Insurance Authority is financially responsible for 40% of losses occurring within the $2,000,000 to $20,000,000 layer. Cost associated with the quota sharing agreement are estimated using actuarial models and pre-funded as a part of the primary and retrospective deposits.

Workers Compensation - The City also participates in the workers compensation

pool administered by the Insurance Authority. Each member pays a primary deposit to cover estimated losses for a fiscal year (claims year). Six months after the close of a fiscal year, outstanding claims are valued. A retrospective deposit computation is then made for each open claims year. Claims are pooled separately between public safety and non-public safety. Each member has a retention level of $50,000 for each loss and this is charged directly to the member’s primary deposit. Losses from $50,001 to $100,000 and the loss development reserve associated with losses up to $100,000 are pooled based on the member’s share of losses under $50,000. Losses from $100,001 to $2,000,000 and employer’s liability losses from $5,000,000 to $10,000,000 and loss development reserves associated with those losses are pooled based on payroll. Losses from $2,000,001 up to statutory limits are paid under an excess insurance policy. Protection is provided per statutory liability under California Worker’s Compensation law.

Claims covered under the definition of employers losses are pooled among

members to $2,000,000, coverage from $2,000,001 to $4,000,000 is purchased as part of excess insurance policy, and losses from $4,000,001 to $10,000,000 are pooled among the members. Purchased Insurance

Environmental Insurance - The City participates in the pollution legal liability and remediation legal liability insurance which is available through the Insurance Authority. The policy covers sudden and gradual pollution of scheduled property, streets, and storm drains owned by the City. Coverage is on a claims-made basis. There is a $50,000 deductible. The Insurance Authority has a limit of $50,000,000 for the 3-year period from July 1, 2008 through July 1, 2011. Each member of the Insurance Authority has a $10,000,000 limit during the 3-year term of the policy.

Property Insurance - The City participates in the all-risk property protection

program of the Insurance Authority. This insurance protection is underwritten by several insurance companies. City property is currently insured according to a schedule of covered property submitted by the City to the Insurance Authority. Total all-risk property insurance coverage is currently $102,476,874. There is a $5,000 deductible per occurrence except for non-emergency vehicle insurance which has a $1,000 deductible.

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Premiums for the coverage are paid annually and are not subject to retroactive adjustments.

Earthquake and Flood Insurance - The City purchases earthquake and flood

insurance on a portion of its property. The earthquake insurance is part of the property protection insurance program of the Insurance Authority. City property currently has earthquake protection in the amount of $80,465,740. There is a deductible of 5% of value with a minimum deductible of $100,000. Premiums for the coverage are paid annually and are not subject to retroactive adjustments.

Crime Insurance - The City purchases crime insurance coverage in the amount of

$1,000,000 with a $2,500 deductible. The fidelity coverage is provided through the Insurance Authority. Premiums are paid annually and are not subject to retroactive adjustments.

Special Event Tenant User Liability Insurance - The City further protects against

liability damages by requiring tenant users of certain property to purchase low-cost tenant user liability insurance for certain activities on the City property. The insurance premium is paid by the tenant user and is paid to the City according to a schedule. The City then pays for the insurance. Insurance is arranged by the Insurance Authority. During the past three fiscal (claims) years none of the above programs of protection have

had settlements or judgments that exceeded pooled or insured coverage. There have been no significant reductions in pooled or insured liability coverage from coverage in the prior year.

Deferred Compensation Plan

The City offers its employees a deferred compensation plan created in accordance with

Internal Revenue Code Section 457. The plan, available to all employees, permits them to defer annually up to $15,500, until future years. Employees over age 50 may elect to defer up to an additional $5,000 annually. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency.

The City has placed these assets in a trust held for the exclusive benefit of plan

participants and their beneficiaries, as prescribed by Internal Revenue Code Section 457(g). Consequently, these assets are not included in the City’s financial statements.

In addition to the plan discussed above, the City also offers its employees a deferred

compensation plan in accordance with Internal Revenue Code Section 401(a). The City contributes 1% of all employees’ gross wages to the plan. Employees may not make contributions under this plan. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency.

The City has placed these assets in a trust held for the exclusive benefit of plan

participants and their beneficiaries, as prescribed by Internal Revenue Code Section 401(a). Consequently, these assets are not included in the City’s financial statements.

Employee Retirement Plans

Defined Benefit Pension Plan.

Plan Description - The City contributes to the California Public Employees Retirement System (“PERS”), an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-

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living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by state statute and City ordinance. The City has adopted the 2.7% at 55 retirement plan with benefits based on final compensation that is the monthly average of the member’s highest 12 consecutive months’ full-time equivalent monthly pay. Copies of PERS’ annual financial report may be obtained from their executive office: 400 “P” Street, Sacramento, California 95814.

Funding Policy - Participants are required to contribute 8.0% of their annual

covered salary. For the year ending June 30, 2009, the City made 7% of the contribution required of City employees on their behalf and for their account. For the year ending June 30, 2010, the City is making 6% of the contribution required of City employees on their behalf and for their account. The City is required to contribute at an actuarially determined rate calculated as a percentage of payroll. The employer contribution rate for the year ended June 30, 2009 was 15.577% for non-safety employees. The City has no safety employees. The contribution requirements of plan members and the City are established and may be amended by PERS.

Annual Pension Cost - The following table shows the components of the City’s

annual pension cost for the year, the amount actually contributed to the plan, and changes in the City’s net pension asset:

Annual required contribution $ 1,592,973 Interest on net pension asset (22,144) Adjustment to annual required contribution 35,655

Annual pension cost 1,606,484 Contributions made (1,592,973)

Decrease in net pension asset 13,511 Net pension asset – beginning of year (285,728) Net pension asset – end of year $ (272,217)

Source: City of Mission Viejo

The net pension asset is reported in the government-wide and proprietary fund

statements as part of prepaid expenses. The required contribution was determined as part of the June 30, 2006 actuarial valuation

using the entry age normal actuarial cost method. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses), (b) projected annual salary increases that vary by age, service and type of employment, ranging from 3.25% to 14.45%, and (c) 2% per year cost-of-living adjustments. Both (a) and (b) included an inflation component of 3.0%. The actuarial value of PERS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period. The City’s unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll on a closed basis. The average remaining amortization period at June 30, 2006 was 13 years.

As of June 30, 2007, the most recent actuarial valuation date, the plan was 83.1% funded.

The actuarial accrued liability for benefits was $29.5 million, and the actuarial value of assets was $24.5 million, resulting in an unfunded actuarial accrued liability (UAAL) of $5.0 million. The covered payroll (annual payroll of active employees covered by the plan) was $8.8 million, and the ratio of the UAAL to the covered payroll was 56.2%.

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Developments in the financial markets have resulted in a decline in the PERS investment return for Fiscal Year 2007-08. As indicated above, in calculating the UAAL in an actuarial valuation, the PERS actuary assumes an investment return equal to 7.75%. The actual investment return for Fiscal Year 2007-08, net of expenses, was negative 5.1%. Employer contribution rates are affected by the investment return in a given fiscal year in the third fiscal year that follows. Therefore, the negative 5.1% return for Fiscal Year 2007-08 will first be reflected in employer contribution rates applicable for Fiscal Year 2010-11. However, PERS had achieved double digit investment returns in each of the four fiscal years prior to Fiscal Year 2007-08, which exceeded the assumed rate of investment return. Through PERS 15-year smoothing of investment returns, these previous positive returns will cushion the impact that the losses will have on employer contribution rates in Fiscal Year 2010-11. As of June 30, 2007, with the asset smoothing method, PERS had set aside approximately 14% of the stabilization fund created by PERS in 2005. The negative 5.1% return for Fiscal Year 2007-08, approximately 12.9% less than the 7.75% expected rate of return, uses most of the 14% stabilization fund. The estimated impact of the negative 5.1% investment return is a decrease of up to 0.1% of payroll in expected Fiscal Year 2010-11 employer rates, assuming all other actuarial assumptions are realized in aggregate. The investment return for Fiscal Year 2008-09 will first impact employer contribution rates in Fiscal Year 2011-12.

On July 21, 2009, PERS released its preliminary Fiscal Year 2008-09 investment

performance, noting a decline in the market value of its assets of 23.4% for the one year period ending June 30, 2009. It was the most severe single year decline experienced by PERS. But even with this decline, PERS reported that its long-term 20-year investment return remained at a positive 7.75%.

Other Post Employment Benefits (OPEB)

Plan Description. In addition to the retirement plan described in Note 18, the City of

Mission Viejo Retiree Insurances Program (RIP) provides eligible retired City employees and their spouses a monthly contribution towards medical, dental and vision insurance premium costs up to a fixed dollar cap that varies based on coverage election and full or part-time employment status. Benefit provisions are established and may be amended by the City Council. The RIP was originally adopted by the City Council in July, 2000. The City of Mission Viejo is participating in the California Employer’s Retiree Benefit Trust Program (CERBT) Prefunding Plan. CERBT is administered by the California Public Employee’s Retirement System (CalPERS) and is an agent multiple-employer plan. Copies of CalPERS annual financial report may be obtained from their executive office: 400 “P” Street, Sacramento, California 95814.

Eligibility. Employees of the City are eligible for retiree health benefits if they (1) have

been employed by the City for a minimum of twelve continuous years of service, (2) were eligible to participate in the City’s Fixed Monthly City Contribution to Benefits program prior to January 1, 2007, (3) are at least fifty years of age as of the last day of work prior to retirement, (4) are a vested member of CalPERS, (5) simultaneously retire from both the City of Mission Viejo and CalPERS on the same day, (6) receive a monthly retirement allowance check from CalPERS, and (7) have been enrolled in the insurance plan(s) at the desired benefit plan enrollment level for at least one year prior to retirement. The maximum monthly contribution amounts for full-time employees who retired from July 2000 through June 2008 were $825 for employee only coverage and $912 for employee plus one coverage. Membership in the plan consisted of the following at June 30, 2008, the date of the latest actuarial valuation:

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Retirees and beneficiaries receiving benefits 11 Terminated plan members entitled to but not yet

receiving benefits 0

Active plan members 132 Total 143

Source: City of Mission Viejo

The obligation of the City to contribute to the plan is established and may be amended by

the City Council. Employees are not required to contribute to the plan. The City has established a policy of contributing 100% of the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost of each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The ARC for fiscal year 2008-09 was $493,000, 5.9% of estimated covered payroll.

Annual OPEB Cost. The following table shows the components of the City’s annual OPEB

cost for the year, the amount actually contributed to the plan, and changes in the City’s net OPEB asset:

Annual required contribution $ 493,000 Interest on net OPEB asset (71,533) Adjustment to annual required contribution 80,062 Annual OPEB cost 501,529 Contributions made (493,000) Increase in net OPEB asset 8,529 Net OPEB asset – beginning of year (923,000) Net OPEB asset – end of year $(914,471)

Source: City of Mission Viejo

The net OPEB asset is reported in the government-wide and proprietary fund statements

as part of prepaid expenses. The required contribution was determined as part of the June 30, 2006, actuarial valuation

using the entry age normal actuarial cost method. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses); (b) aggregate payroll increases of 5% per year; (c) 3% per year increases, pre-retirement, to the City’s Fixed Monthly City Contribution to Benefits, and 0% per year, post-retirement; and (d) an annual inflation component of 3.0%. The actuarial value of the plan assets is equal to the market value. The City’s unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll over a fixed 30-year period. The average remaining amortization period at June 30, 2006, was 30 years.

Three Year Trend Information:

Annual OPEB Cost (AOC) Net OPEB (Employer Actual Percentage of AOC Obligation

Fiscal Year Contribution) Contribution Contributed (Asset) 6/30/07 N/A N/A N/A N/A 6/30/08 $527,000 $1,450,000 275% $(923,000) 6/30/09 501,529 493,000 98 (914,471)

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Schedule of Funding Progress:

Unfunded Actuarial Entry Age Actuarial Accrued Funded UAAL Normal Value of Liability (UAAL)/ Status Annual As a % Accrued Assets (Excess Based on Covered of

Date Liability (AVA) Assets) AVA Payroll Payroll 6/30/06 $3,964,000 $ 0 $3,964,000 0.00% $7,958,000 49.8% 6/30/08 4,751,000 1,462,000 3,289,000 30.80 8,356,000 39.4

For employees first eligible for City health benefits on or after January 1, 2007, in addition to the retirement plan described in Note 18, the City of Mission Viejo’s Supplemental Health Account for Retired Employees (SHARE) plan is a defined contribution plan intended to assist employees in saving for post-employment health insurance costs. Employer and employee contributions to the plan begin one year after the employee’s hire date. The City’s monthly contribution is $100 for full-time employees and is prorated based on full-time equivalency. Employees are required to contribute 1.5% of their salary to this plan. The contributions made by employees are not forfeitable. To receive the City’s contributions, employees must separate or retire from the City, have 15 continuous years of service, and attain age 55. As of June 30, 2009, 31 employees were eligible to participate in this plan. Required employer contributions were made during the year in the amount of $15,975 and required employee contributions totaled $9,855. At June 30, 2009, there were no retirees eligible to receive the City’s contributions under this plan.

General Fund Obligations

No General Obligation Bonds. The City has no outstanding general obligation bonds and

has no authorized but unissued general obligation debt. Long-Term Obligations. The City has no outstanding long term obligations. Lease Obligations. Following the issuance of the Bonds, the Bonds will represent the only

outstanding long-term general fund obligations of the City. The City has never defaulted on the payment of principal of or interest on any of its

indebtedness.

Overlapping Debt

Set forth below is a direct and overlapping debt report (the “Debt Report”) prepared by California Municipal Statistics, Inc. and effective November 1, 2009. The Debt Report is included for general information purposes only. The City has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith.

The Debt Report generally includes long-term obligations sold in the public credit

markets by public agencies whose boundaries overlap the boundaries of the City in whole or in part. Such long-term obligations generally are not payable from revenues of the City (except as indicated) nor are they necessarily obligations secured by land within the City. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency.

The contents of the Debt Report are as follows: (1) the first column indicates the public

agencies which have outstanding debt as of the date of the Debt Report and whose territory overlaps the City; (2) the second column shows the respective percentage of the assessed valuation of the overlapping public agencies identified in column 1 which is represented by

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property located in the City; and (3) the third column is an apportionment of the dollar amount of each public agency’s outstanding debt (which amount is not shown in the table) to property in the City, as determined by multiplying the total outstanding debt of each agency by the percentage of the City’s assessed valuation represented in column 2.

CITY OF MISSION VIEJO

Overlapping Debt as of November 1, 2009

2009-10 Assessed Valuation: $13,104,698,129 Redevelopment Incremental Valuation: 749,365,808 Adjusted Assessed Valuation: $12,355,332,321 OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable (1) Debt 11/1/09 Metropolitan Water District 0.685% $ 2,009,961 Capistrano Unified School District School Facilities Improvement District No. 1 10.777 5,515,122 Saddleback Valley Unified School District 18.577 25,578,671 Santa Margarita Water District Improvement District No. 1 99.996 449,982 Santa Margarita Water District Improvement District No. 4 0.008 9,259 Santa Margarita Water District Improvement District No. 4B 0.099 12,410 Mission Viejo Community Facilities District No. 92-1 100. 2,760,000 Capistrano Unified School District Community Facilities District No. 87-1 25.571 14,069,164 Orange County Community Facilities District No. 87-3 100. 24,753,406 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $75,157,975 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations 3.329% $13,737,851 Orange County Pension Obligations 3.329 1,975,208 Orange County Board of Education Certificates of Participation 3.329 646,825 Municipal Water District of Orange County Water Facilities Corporation 3.955 631,416 South Orange Community College District Certificates of Participation 7.730 2,433,404 Capistrano Unified School District Certificates of Participation 10.625 3,666,156 Moulton-Niguel Water District Certificates of Participation 14.872 3,998,979 City of Mission Viejo Certificates of Participation 100. 2,465,000 City of Mission Viejo Community Development Financing Authority 100. 39,616,610 (2) Orange County Fire Authority 6.474 232,417 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT $69,403,866 Less: MWDOC Water Facilities Corporation (100% self-supporting) 631,416

City of Mission Viejo Community Development Financing Authority (100% supported by sales tax revenues) 24,661,610

TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT $44,110,840 GROSS COMBINED TOTAL DEBT $144,561,841 (3) NET COMBINED TOTAL DEBT $119,268,815 (1) Based on 2008-09 ratios. (2) Excludes lease revenue refunding bonds to be sold. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-

bonded capital lease obligations. Ratios to 2009-10 Assessed Valuation: Total Overlapping Tax and Assessment Debt ........... 0.57% Ratios to Adjusted Assessed Valuation: Gross Combined Direct Debt ($42,081,610) ............... 0.34% Net Combined Direct Debt ($17,420,000)................... 0.14% Gross Combined Total Debt ......................................... 1.17% Net Combined Total Debt ............................................. 0.97% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09: $0 Source: California Municipal Statistics, Inc.

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CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS

Article XIIIA of the California Constitution

On June 6, 1978, California voters approved an amendment (commonly known as both

Proposition 13 and the Jarvis-Gann Initiative) to the California Constitution. This amendment, which added Article XIIIA to the California Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property value to mean “the county assessor’s valuation of real property as shown on the 1975-76 tax bill under “full cash value,” or thereafter, the appraised value of real property newly constructed, or when a change in ownership has occurred after the 1975 assessment.” The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or a reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to one percent of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition.

Legislation enacted by the California Legislature to implement Article XIIIA provides

that all taxable property is shown at full assessed value as described above. In conformity with this procedure, all taxable property value included in this Official Statement (except as noted) is shown at 100% of assessed value and all general tax rates reflect the $1 per $100 of taxable value. Tax rates for voter approved bonded indebtedness and pension liability are also applied to 100% of assessed value.

The voters of the State subsequently approved various measures which further amended

Article XIIIA. One such amendment generally provides that the purchase or transfer of (i) real property between spouses or (ii) the principal residence and the first $1,000,000 of the Full Cash Value of other real property between parents and children, do not constitute a “purchase” or “change of ownership” triggering reappraisal under Article XIIIA. Other amendments permitted the State Legislature to allow persons over the age of 55 who meet certain criteria or “severely disabled homeowners” who sell their residence and buy or build another of equal or lesser value within two years in the same county, to transfer the old residence’s assessed value to the new residence. Other amendments permit the State Legislature to allow persons who are either 55 years of age or older, or who are “severely disabled,” to transfer the old residence’s assessed value to their new residence located in either the same or a different county and acquired or newly constructed within two years of the sale of their old residence.

In the November 1990 election, the voters approved an amendment of Article XIIIA to

permit the State Legislature to exclude from the definition of “new construction” certain additions and improvements, including seismic retrofitting improvements and improvements utilizing earthquake hazard mitigation technologies constructed or installed in existing buildings after November 6, 1990.

Article XIIIA has also been amended to provide that there would be no increase in the

Full Cash Value base in the event of reconstruction of the property damaged or destroyed in a disaster.

Section 51 of the Revenue and Taxation Code permits county assessors who have reduced

the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently “recapture” such value (up to the pre-decline value of the property) at

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an annual rate higher than 2%, depending on the assessor’s measure of the restoration of value of the damaged property.

Section 4 of Article XIIIA also provides that cities, counties and special districts cannot,

without a two-thirds vote of the qualified electors, impose special taxes, which has been interpreted to include special fees in excess of the cost of providing the services or facility for which the fee is charged, or fees levied for general revenue purposes.

Both the California State Supreme Court and the United States Supreme Court have

upheld the validity of Article XIIIA.

Article XIIIB of the California Constitution On November 6, 1979, California voters approved Proposition 4, the Gann Initiative,

which added Article XIIIB to the California Constitution. In June 1990, Article XIIIB was amended by the voters through their approval of Proposition 111. Article XIIIB of the California Constitution limits the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted annually for changes in the cost of living, population and services rendered by the governmental entity. The “base year” for establishing such appropriation limit is fiscal year 1978-79. Increases in appropriations by a governmental entity are also permitted (1) if financial responsibility for providing services is transferred to the governmental entity, or (2) for emergencies so long as the appropriations limits for the three years following the emergency are reduced to prevent any aggregate increase above the Constitutional limit. Decreases are required where responsibility for providing services is transferred from the government entity.

Appropriations subject to Article XIIIB include generally any authorization to expend

during the fiscal year the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. Appropriations subject to limitation pursuant to Article XIIIB do not include debt service on indebtedness existing or legally authorized as of January 1, 1979, on bonded indebtedness thereafter approved according to law by a vote of the electors of the issuing entity voting in an election for such purpose, appropriations required to comply with mandates of courts or the Federal government, appropriations for qualified outlay projects, and appropriations by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. “Proceeds of taxes” include, but are not limited to, all tax revenues and the proceeds to any entity of government from (1) regulatory licenses, user charges, and user fees to the extent such proceeds exceed the cost of providing the service or regulation, (2) the investment of tax revenues and (3) certain State subventions received by local governments. As amended by Proposition 111, the appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate “proceeds of taxes” received by the City over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years.

As amended in June 1990, the appropriations limit for the City in each year is based on

the limit for the prior year, adjusted annually for changes in the costs of living and changes in population, and adjusted, where applicable, for transfer of financial responsibility of providing services to or from another unit of government. The change in the cost of living is, at the City’s option, either (1) the percentage change in California per capita personal income, or (2) the percentage change in the local assessment roll for the jurisdiction due to the addition of nonresidential new construction. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college (“K-14”) districts.

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Article XIIIB permits any government entity to change the appropriations limit by vote of the electorate in conformity with statutory and Constitutional voting requirements, but any such voter-approved change can only be effective for a maximum of four years.

The City’s appropriations limit for fiscal year 2008-09 was $230,093,209, and the amount

shown in the adopted budget as the appropriations subject to limitation was $45,206,064. The City’s appropriations limit for fiscal year 2009-10 is $278,568,250, and the amount shown in the adopted budget as the appropriations subject to limitation is $42,623,396.

Proposition 218

On November 5, 1996, the voters of the State approved Proposition 218, a constitutional

initiative, entitled the “Right to Vote on Taxes Act” (“Proposition 218”). Proposition 218 added Articles XIII C and XIII D to the California Constitution and contained a number of interrelated provisions affecting the ability of local governments, including the City, to levy and collect both existing and future taxes, assessments, fees and charges. The City is unable to predict whether and to what extent Proposition 218 may be held to be constitutional or how its terms will be interpreted and applied by the courts. Proposition 218 could substantially restrict the City’s ability to raise future revenues and could subject certain existing sources of revenue to reduction or repeal, and increase the City’s costs to hold elections, calculate fees and assessments, notify the public and defend its fees and assessments in court. However, the City does not presently believe that the potential financial impact on the City as a result of the provisions of Proposition 218 will adversely affect the City’s ability to pay its debt obligations and perform its other obligations payable from the General Fund as and when due.

Article XIII C requires that all new local taxes be submitted to the electorate before they

become effective. Taxes for general governmental purposes of the City require a majority vote and taxes for specific purposes, even if deposited in the City’s General Fund, require a two-thirds vote. Further, any general purpose tax that the City imposed, extended or increased without voter approval after December 31, 1994 may continue to be imposed only if approved by a majority vote in an election held within two years of November 5, 1996. The City has not enacted, imposed, extended or increased any tax without voter approval since January 1, 1995. These voter approval requirements of Proposition 218 reduce the flexibility of the City to raise revenues through General Fund taxes, and no assurance can be given that the City will be able to impose, extend or increase such taxes in the future to meet increased expenditure requirements.

Article XIII C also expressly extends to voters the power to reduce or repeal local taxes,

assessments, fees and charges through the initiative process, regardless of the date such taxes, assessments, fees or charges were imposed. This extension of the initiative power is not limited by the terms of Proposition 218 to fees imposed after November 6, 1996 and absent other legal authority could result in retroactive reduction in any existing taxes, assessments or fees and charges. SB 919 provides that the initiative powers extended to voters under Article XIII C likely excludes actions construed as impairment of contracts under the contract clause of the United States Constitution. SB 919 provides that the initiative power provided for in Proposition 218 “shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after November 6, 1998, assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights” protected by the United States Constitution. However, no assurance can be given that the voters of the City will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges that currently are deposited into the City’s General Fund. Further, “fees” and “charges” are not defined in Article XIII C or SB 919, and it is unclear whether these terms are intended to have the same meanings for purposes of Article XIII C as they do in Article XIII D. Accordingly, the scope of the initiative power under Article XIII C could include all sources of

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General Fund monies not received from or imposed by the federal or State government or derived from investment income.

The initiative power granted under Article XIII C of Proposition 218, by its terms, applies

to all local taxes, assessments, fees and charges. The City is unable to predict whether the courts will ultimately interpret the initiative provision to be limited to property related local taxes, assessments, fees and charges. No assurance can be given that the voters of the City will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges which are deposited into the City’s General Fund. The City believes that in the event that the initiative power was exercised so that all local taxes, assessments, fees and charges which may be subject to the provisions of Proposition 218 are reduced or substantially reduced, the financial condition of the City, including its General Fund, would be materially adversely affected. As a result, there can be no assurances that the City would be able to pay the Certificates as and when due or any of its other obligations payable from the General Fund.

Article XIII D of Proposition 218 adds several new requirements to make it more difficult

for local agencies to levy and maintain “assessments” for municipal services and programs. “Assessment” is defined in Proposition 218 and SB 919 as any levy or charge upon real property for a special benefit conferred upon the real property. This includes maintenance assessments imposed in City service areas and in special districts. In most instances, in the event that the City is unable to collect assessment revenues relating to specific programs as a consequence of Proposition 218, the City will curtail such services rather than use amounts in the General Fund to finance such programs. Accordingly, the City anticipates that any impact Proposition 218 may have on existing or future taxes, fees, and assessments will not adversely affect the ability of the City to pay the Certificates as and when due. However, no assurance can be given that the City may or will be able to reduce or eliminate such services in the event the assessments that presently finance them are reduced or repealed.

Article XIII D also adds several provisions, including notice requirements and restrictions

on use, affecting “fees” and “charges” which are defined as “any levy other than an ad valorem tax, a special tax, or an assessment, imposed by a local government upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service.” The annual amount of revenues that are received by the City and deposited into its General Fund which may be considered to be property related fees and charges under Article XIII D of Proposition 218 is not substantial. Accordingly, presently the City does not anticipate that any impact Proposition 218 may have on future fees and charges will not adversely affect the ability of the City to pay the principal of and interest on the Certificates as and when due. However, no assurance can be given that the City may or will be able to reduce or eliminate such services in the event the fees and charges that presently finance them are reduced or repealed.

Additional implementing legislation respecting Proposition 218 may be introduced in the

State legislature from time to time that would supplement and add provisions to California statutory law. No assurance may be given as to the terms of such legislation or its potential impact on the City.

Proposition 1A of 2004

The California Constitution and existing statutes give the legislature authority over

property taxes, sales taxes and the vehicle license fee (the “VLF”). The legislature has authority to change tax rates, the items subject to taxation and the distribution of tax revenues among local governments, schools, and community college districts. The State has used this authority for many purposes, including increasing funding for local services, reducing State costs, reducing taxation, addressing concerns regarding funding for particular local governments, and restructuring local finance.

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The California Constitution generally requires the State to reimburse the local governments when the State “mandates” a new local program or higher level of service. Due to the ongoing financial difficulties of the State, it has not provided in recent years reimbursements for many mandated costs. In other cases, the State has “suspended” mandates, eliminating both responsibility of the local governments for complying with the mandate and the need for State reimbursements.

The 2004 Budget Act, related legislation and the enactment of Proposition 1A of 2004

(described below) dramatically changed the State-local fiscal relationship. These constitutional and statutory changes implemented an agreement negotiated between the Governor and local government officials (the “State-local agreement”) in connection with the 2004 Budget Act.

One change related to the reduction of the VLF rate from 2% to 0.65% of the market value

of the vehicle. In order to protect local governments, which had previously received all VLF revenues, the 1.35 percent reduction in VLF revenue to cities and counties from this rate change was backfilled by an increase in the amount of property tax revenues they receive. This worked to the benefit of local governments, because the backfill amount annually increases in proportion to the growth in secured roll property tax revenues, which has historically grown at a higher rate than VLF revenues. Proposition 1A of 2004 requires the State to provide local governments with equal replacement revenues.

On November 3, 2004 the voters of the State approved Proposition 1A (“Proposition 1A

of 2004”). Proposition 1A of 2004 amended the State Constitution to, among other things, reduce the Legislature’s authority over local government revenue sources by placing restrictions on the State’s access to local governments’ property, sales, and VLF revenues as of November 3, 2004. Pursuant to Proposition 1A of 2004, the State is able to borrow up to 8% of local property tax revenues but only if the Governor proclaims such action is necessary due to a severe State fiscal hardship and two-thirds of both houses of the State Legislature approve the borrowing. Any amounts borrowed are required to be repaid within three years. Proposition 1A of 2004 also permits the State to borrow from local property tax revenues for no more than two fiscal years within a period of 10 fiscal years, and only if previous borrowings have been repaid. In addition, the State cannot reduce the local sales tax rate or restrict the authority of the local governments to impose or change the distribution of the Statewide local sales tax. Proposition 1A of 2004 generally prohibits the State from mandating activities on cities, counties, or special districts without providing the funding needed to comply with the mandates, and if the State does not provide funding for the activity that has been determined to be mandated, the requirement on cities, counties, or special districts to abide by the mandate is suspended. Proposition 1A of 2004 also expanded the definition of what constitutes a mandate to encompass State action that transfers to cities, counties, and special districts financial responsibility for a required program for which the State previously had partial or complete responsibility. The State mandate provisions of Proposition 1A of 2004 do not apply to schools or community colleges or to mandates relating to employee rights.

Pursuant to statutory changes made in conjunction with amendments to the fiscal year

2008-09 State Budget Act, the fiscal year 2009-10 State Budget Act and related budget legislation adopted by the State Legislature and signed by the Governor in February 2009 (collectively, the “February 2009 Budget Package”), the VLF rate increased from 0.65% to 1.15% effective May 19, 2009. Of this 0.50% increase, 0.35% will flow to the State General Fund, and 0.15% will support various law enforcement programs previously funded by the State General Fund. This increased VLF rate will be effective through fiscal year 2010-11.

See “RISK FACTORS—State Budgets” for information relating to Proposition 1A and the

suspension of Proposition 1A in the State’s 2009-10 budget.

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Future Initiatives Article XIIIA, Article XIIIB, Proposition 218 and Proposition 1A were each adopted as

measures that qualified for the ballot pursuant to the State’s initiative process. From time to time, other initiative measures could be adopted, which may place further limitations on the ability of the State, the City or local districts to increase revenues or to increase appropriations which may affect the City’s revenues or its ability to expend its revenues.

RISK FACTORS

This section provides a general overview of certain risk factors which should be considered, in addition to the other matters set forth in this Official Statement, in evaluating an investment in the Bonds. This section is not meant to be a comprehensive or definitive discussion of the risks associated with an investment in the Bonds, and the order in which this information is presented does not necessarily reflect the relative importance of various risks. Potential investors in the Bonds are advised to consider the following factors, among others, and to review this entire Official Statement to obtain information essential to the making of an informed investment decision. Any one or more of the risk factors discussed below, among others, could lead to a decrease in the market value and/or in the marketability of the Bonds. There can be no assurance that other risk factors not discussed herein will not become material in the future.

Limited Obligation

The Bonds are not City debt and are limited obligations of the Authority. Neither the full faith and credit of the Authority nor the City is pledged for the payment of the interest on or principal of the Bonds nor for the payment of Lease Payments. The Authority has no taxing power. The obligation of the City to pay Lease Payments when due is an obligation payable from amounts in the general fund of the City. The obligation of the City to make Lease Payments under the Lease Agreement does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. Neither the Bonds nor the obligation of the City to make Lease Payments under the Lease Agreement constitute a debt or indebtedness of the Authority, the City, the State or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restrictions.

Lease Payments Are Not Debt

The obligation of the City to make the Lease Payments under the Lease does not

constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. Neither the Bonds nor the obligation of the City to make Lease Payments constitute a debt of the City, the State of California or any political subdivision thereof (other than the Authority) within the meaning of any constitutional or statutory debt limitation or restriction.

The Bonds are not general obligations of the Authority, but are limited obligations

payable solely from and secured by a pledge of Revenues and amounts held in the funds and accounts created under the Indenture, consisting primarily of Lease Payments. The Authority has no taxing power.

Although the Lease does not create a pledge, lien or encumbrance upon the funds of the

City, the City is obligated under the Lease to pay the Lease Payments from any source of legally available funds and the City has covenanted in the Lease that, for so long as the Property is

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available for its use, it will make the necessary annual appropriations within its budget for the Lease Payments. The City is currently liable and may become liable on other obligations payable from general revenues, some of which may have a priority over the Lease Payments, or which the City, in its discretion, may determine to pay prior to the Lease Payments.

The City has the capacity to enter into other obligations payable from the City’s general

fund, without the consent of or prior notice to the Owners of the Bonds. To the extent that additional obligations are incurred by the City, the funds available to make Lease Payments may be decreased. In the event the City’s revenue sources are less than its total obligations, the City could choose to fund other municipal services before making Lease Payments. The same result could occur if, because of State constitutional limits on expenditures, the City is not permitted to appropriate and spend all of its available revenues. The City’s appropriations, however, have never exceeded the limitations on appropriations under Article XIIIB of the California Constitution. For information on the City’s current limitations on appropriations, see “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES, REVENUES AND APPROPRIATIONS–Article XIIIB of the California Constitution.”

Valid and Binding Covenant to Budget and Appropriate

Pursuant to the Lease Agreement, the City covenants to take such action as may be necessary to include Lease Payments due in its annual budgets and to make necessary appropriations for all such payments. Such covenants are deemed to be duties imposed by law, and it is the duty of the public officials of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform such covenants. A court, however, in its discretion may decline to enforce such covenants. Upon issuance of the Bonds, Bond Counsel will render its opinion (substantially in the form of APPENDIX E–”PROPOSED FORM OF BOND COUNSEL OPINION”) to the effect that, subject to the limitations and qualifications described therein, the Lease Agreement constitutes a valid and binding obligation of the City. As to the Authority’s practical realization of remedies upon default by the City, see “–Limitations on Remedies.”

Abatement

In the event of loss or substantial interference in the use and possession by the City of all

or any portion of the Property caused by material damage, title defect, destruction to or condemnation of the Property, Lease Payments will be subject to abatement. In the event that such component of the Property, if damaged or destroyed by an insured casualty, could not be replaced during the period of time that proceeds of the City’s rental interruption insurance will be available in lieu of Lease Payments, or in the event that casualty insurance proceeds or condemnation proceeds are insufficient to provide for complete repair or replacement of such component of the Property or prepayment of the Bonds, there could be insufficient funds to make payments to Owners in full. Reduction in Lease Payments due to abatement as provided in the Lease does not constitute a default thereunder.

It is not possible to predict the circumstances under which such an abatement of rental

may occur. In addition, there is no statute, case or other law specifying how such an abatement of rental should be measured. For example, it is not clear whether fair rental value is established as of commencement of the lease or at the time of the abatement. If the latter, it may be that the value of the Property is substantially higher or lower than its value at the time of the execution and delivery of the Bonds. Abatement, therefore, could have an uncertain and material adverse effect on the security for and payment of the Bonds.

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Risk of Uninsured Loss The City covenants under the Lease to maintain certain insurance policies on the

Property. See “SECURITY FOR THE BONDS—Insurance.” These insurance policies do not cover all types of risk, and the City need not obtain insurance except as available on the open market from reputable insurers. For instance, the City does not covenant to maintain earthquake insurance. The City currently carries earthquake insurance on the Property although the Lease Agreement does not require it to do so. The City plans to continue to purchase earthquake insurance on the Property so long as such insurance can be obtained on the open market at reasonable rates. The Property could be damaged or destroyed due to earthquake or other casualty for which the Property is uninsured. Additionally, the Property could be the subject of an eminent domain proceeding. Under these circumstances an abatement of Lease Payments could occur and could continue indefinitely. There can be no assurance that the providers of the City’s liability and rental interruption insurance will in all events be able or willing to make payments under the respective policies for such loss should a claim be made under such policies. Further, there can be no assurances that amounts received as proceeds from insurance or from condemnation of the Property will be sufficient to redeem the Bonds.

Under the Lease the City may obtain casualty insurance which provides for a deductible

up to $250,000. Should the City be required to meet such deductible expenses, the availability of general fund revenues to make Lease Payments may be correspondingly affected.

The City is not obligated under the Lease Agreement to procure and maintain, or cause to

be procured and maintained, earthquake insurance on the Property. The City currently carries earthquake insurance on the Property although the Lease Agreement does not require it to do so. The City plans to continue to purchase earthquake insurance on the Property so long as such insurance can be obtained on the open market at reasonable rates. Depending on its severity, an earthquake could result in abatement of Lease Payments under the Lease. See “—Abatement.”

Eminent Domain

If the Property is taken permanently under the power of eminent domain or sold to a

government threatening to exercise the power of eminent domain, the term of the Lease will cease as of the day possession is taken. If less than all of the Property is taken permanently, or if the Property or any part thereof is taken temporarily, under the power of eminent domain, (a) the Lease will continue in full force and effect and will not be terminated by virtue of such taking, and (b) there will be a partial abatement of Lease Payments as a result of the application of net proceeds of any eminent domain award to the prepayment of the Lease Payments, in an amount to be agreed upon by the City and the Authority such that the resulting Lease Payments represent fair consideration for the use and occupancy of the remaining usable portion of the Property. The City covenants in the Lease to contest any eminent domain award which is insufficient to either: (i) prepay the Lease Payments in whole, if all the Property is condemned; or (ii) prepay a pro rata share of Lease Payments, in the event that less than all of the Property is condemned.

Hazardous Substances

The existence or discovery of hazardous materials may limit the beneficial use of the

Property. In general, the owners and lessees of the Property may be required by law to remedy conditions of such parcel relating to release or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as “CERCLA” or the “Superfund Act,” is the most well known and widely applicable of these laws, but California laws with regard to hazardous substances are also similarly stringent. Under many of these laws, the owner or lessee is obligated to remedy a

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hazardous substance condition of the property whether or not the owner or lessee had anything to do with creating or handling the hazardous substance.

Further it is possible that the beneficial use of the Property may be limited in the future

resulting from the current existence on the Property of a substance currently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the current existence on the Property of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method in which it is handled. All of these possibilities could significantly limit the beneficial use of the Property.

The City is unaware of the existence of hazardous substances on the Property site which

would materially interfere with the beneficial use thereof.

Bankruptcy The City is a unit of State government and therefore is not subject to the involuntary

procedures of the United States Bankruptcy Code (the “Bankruptcy Code”). However, pursuant to Chapter 9 of the Bankruptcy Code, the City may seek voluntary protection from its creditors for purposes of adjusting its debts. In the event the City were to become a debtor under the Bankruptcy Code, the City would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding. Among the adverse effects of such a bankruptcy might be: (i) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the City or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the City; (ii) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (iii) the existence of unsecured or court-approved secured debt which may have a priority of payment superior to that of Owners of Bonds; and (iv) the possibility of the adoption of a plan for the adjustment of the City’s debt (a “Plan”) without the consent of the Trustee or all of the Owners of Bonds, which Plan may restructure, delay, compromise or reduce the amount of any claim of the Owners if the Bankruptcy Court finds that the Plan is fair and equitable.

In addition, the City could either reject the Lease or assume the Lease despite any

provision of the Lease which makes the bankruptcy or insolvency of the City an event of default thereunder. In the event the City rejects the Lease, the Trustee, on behalf of the Owners of the Bonds, would have a pre-petition claim that may be limited under the Bankruptcy Code and treated in a manner under a Plan over the objections of the Trustee or Owners of the Bonds. Moreover, such rejection would terminate the Lease and the City’s obligations to make payments thereunder.

The Authority is a public agency and, like the City, is not subject to the involuntary

procedures of the Bankruptcy Code. The Authority may also seek voluntary protection under Chapter 9 of the Bankruptcy Code. In the event the Authority were to become a debtor under the Bankruptcy Code, the Authority would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding. Such a bankruptcy could adversely affect the payments under the Indenture. Among the adverse effects might be: (i) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the Authority or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the Authority; (ii) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (iii) the existence of unsecured or court-approved secured debt which may have priority of payment superior to that of the Owners of the Bonds; and (iv) the possibility of the adoption

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of a plan for the adjustment of the Authority’s debt without the consent of the Trustee or all of the Owners of the Bonds, which plan may restructure, delay, compromise or reduce the amount of any claim of the Owners if the Bankruptcy Court finds that the Plan is fair and equitable. However, the bankruptcy of the Authority, and not the City, should not affect the Trustee’s rights under the Lease. The Authority could still challenge the assignment, and the Trustee and/or the Owners of the Bonds could be required to litigate these issues in order to protect their interests.

Limitations on Remedies

The rights of the Owners of Bonds are subject to the limitations on legal remedies against counties in the State, including applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors’ rights generally, now or hereafter in effect, and to the application of general principles of equity, including concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law.

Under Chapter 9 of the Bankruptcy Code (Title 11, United States Code), which governs

the bankruptcy proceedings for public agencies such as the City, there are no involuntary petitions in bankruptcy. If the City were to file a petition under Chapter 9 of the Bankruptcy Code, the Owners of Bonds, the Trustee and the Authority could be prohibited from taking any steps to enforce their rights under the Lease Agreement, and from taking any steps to collect amounts due from the City under the Lease Agreement.

All legal opinions with respect to the enforcement of the Lease Agreement and the

Indenture will be expressly subject to a qualification that such agreements may be limited by bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting creditors’ rights generally and by applicable principles of equity if equitable remedies are sought.

No Liability of Authority to the Owners

Except as expressly provided in the Indenture, the Authority will not have any obligation

or liability to the Owners of the Bonds with respect to the payment when due of the Lease Payments by the City, or with respect to the performance by the City of other agreements and covenants required to be performed by it contained in the Lease or the Indenture, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture.

Risk of Tax Audit

In December 1999, as a part of a larger reorganization of the Internal Revenue Service (the “IRS”), the IRS commenced operation of its Tax Exempt and Government Entities Division (the “TE/GE Division”), as the successor to its Employee Plans and Exempt Organizations division. The new TE/GE Division has a subdivision that is specifically devoted to tax-exempt bond compliance. Public statements by IRS officials indicate that the number of tax-exempt bond examinations (which would include the issuance of securities such as the Bonds) is expected to increase significantly under the new TE/GE Division. There is no assurance that if an IRS examination of the Bonds was undertaken that it would not adversely affect the market value of the Bonds. See “TAX MATTERS.”

The City has not been contacted by the IRS regarding the examination of any of its bond

transactions.

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State Budgets

Approximately 78% (consisting of the sales tax, property tax and the motor vehicle license fee) of the City’s fiscal year 2009-10 general fund budget consists of payments collected by the State and passed-through to local governments or collected by the County and allocated to local governments by State law. The financial condition of the State has an impact on the level of these revenues. In past years the State has reduced revenues to cities and counties to help solve the State’s budget problems.

The level of intergovernmental revenues that the City received from the State in fiscal

year 2009-10 and in subsequent fiscal years are affected by the financial condition of the State. The following information concerning the State’s 2007-08 fiscal year budget, the fiscal year 2008-

09 Budget and the fiscal year 2009-10 Budget has been obtained from publicly available information on the State Department of Finance, the State Treasurer and the California Legislative Analyst Office websites. The estimates and projections provided below are based upon various assumptions, which may be affected by numerous factors, including future economic conditions in the State and the nation, and there can be no assurance that the estimates will be achieved. For further information and discussion of factors underlying the State’s projections, see the aforementioned websites. The City believes such information to be reliable, however, the City takes no responsibility as to the accuracy or completeness thereof and has not independently verified such information.

Fiscal Year 2007-08. The 2007-08 Budget Act (the “2007 State Budget Act”) was adopted by

the Legislature on August 21, 2007 and signed by the Governor, after using his line item veto authority to reduce State General Fund appropriations by $703 million, on August 24, 2007. The 2007 State Budget projected $102.3 billion in budget-year revenues, an increase of 6.5% from fiscal year 2006-07; authorized expenditures of an equal amount (an increase of 0.6% from fiscal year 2006-07); and left the State General Fund with a year-end reserve of $4.1 billion (the same as assumed for fiscal year 2006-07), comprised of $2.6 billion in the State’s Special Fund for Economic Uncertainties and $1.5 billion in the Budget Stabilization Account, which Account was established when voters approved Proposition 58 in March 2004.

The 2007 State Budget Act proposed a major redirection of transportation funds,

reductions in social services, and a variety of other actions to eliminate a significant shortfall in fiscal year 2007-08, including among other things, (i) increases in funding for county Medi-Cal administration costs; (ii) a partial repayment of Proposition 42 transportation suspensions that occurred in fiscal years 2003-04 and 2004-05 as required by Proposition 1A of 2004 (defined herein); (iii) an assumption that $1 billion in one-time revenues from the sale of EdFund, the State’s nonprofit student loan guaranty agency will be received; and (iv) a suspension of a California Work Opportunity and Responsibility to Kids cost-of-living adjustment (a “COLA”) for one year and permanently delays the State Supplemental Security income/State Supplementary Program COLA for five months.

Based on the policies contained in the 2007 State Budget Act, according the State

Legislative Analyst’s Office, the nonpartisan fiscal and policy advisor to the State, the State would face operating shortfalls of more than $5 billion in both fiscal year 2008-09 and fiscal year 2009-10 because many of the solutions enacted in the 2007 State Budget Act were of a one-time nature.

Fiscal Year 2008-09. The 2008-09 Budget Act (the “2008 State Budget Act”) was adopted by

the Legislature on September 16, 2008 and signed by the Governor on September 23, 2008, reflecting a reduction of $850 million from the proposed budget bill adopted by the Legislature due to the line item veto by the Governor of $510 million in State General Fund appropriations and $340 million in State General Fund savings due to the delay in enacting the 2008 State

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Budget Act and the effect of Executive Order S-09-08 (which terminated the services of temporary employees and reduced overtime).

The 2008-Budget Act reported that the State General Fund began fiscal year 2008-09 with

a balance of $4 billion. The 2008 State Budget Act projected State General Fund revenues and transfers for fiscal year 2008-09 of $102 billion, a decrease of approximately 1% from the anticipated revenues and transfers for fiscal year 2007-08, and State General Fund expenditures of $103.4 billion, an increase of approximately 0.06% above the anticipated expenditures for fiscal year 2007-08. The 2008 State Budget Act projected ending fiscal year 2008-09 with a State General Fund balance of $2.6 billion, of which $885 million would be reserved for the liquidation of encumbrances and $1.7 billion would be deposited in a reserve for economic uncertainties.

The Governor’s economic forecasts for fiscal year 2008-09 reflected weaker economic

performance throughout the country and the State. The 2008 State Budget Act addressed a projected $24.3 billion budget shortfall which was identified in the Governor’s May Revision to the Proposed 2008-09 Budget with a combination of cuts in expenditures and projections of increased revenues. The 2008 State Budget Act included vetoes on behalf of the Governor in the amount of $510 million of spending approved by the State legislature. The 2008 State Budget Act included a proposal to increase the Budget Stabilization Account (the “BSA”) from 5% of State General Fund expenditures to 12.5%. In addition, the 2008 State Budget Act proposed an annual transfer to the BSA of 3% of the General Fund and the elimination of the ability to suspend such annual transfers. The State would only be permitted to transfer funds from the BSA if (1) actual revenues during such fiscal year are below a specified level and (2) funds transferred from the BSA to the State General Fund are appropriated in a stand-alone bill.

Certain of the features of the 2008 State Budget Act affecting local governments included

the following:

1. The 2008 State Budget Act proposed to fully fund the Proposition 1A of 2004 loan repayment for fiscal year 2008-09 in the amount of $83 million and the Proposition 42 transfer in the amount of $1.4 billion, which allocation included $573 million to the State Transportation Improvement Program and $286 million to the Public Transportation Account.

2. The Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006

(“Proposition 1B”) authorized $19.92 billion over the next nine years to fund existing and new Statewide transportation-related infrastructure programs and projects. Such amount included appropriations in fiscal year 2008-09 of $350 million for local transit, $250 million for local streets and roads, $201 million for the State & Local Partnership Program and $21 million for local seismic funding. In addition, AB 1252, enacted in June 2008, provided $149 million from Proposition lB to accelerate funding for local streets and roads projects.

3. Chapter 72 of the Statutes of 2005 requires the payment of mandated costs incurred prior

to fiscal year 2004-05 to begin in fiscal year 2006-07 and paid over a term of fifteen years. The 2008 State Budget Act included the elimination of $75 million in estimated reimbursement claims. The 2008 State Budget Act delayed the third payment of these claims by one year. The 2008 State Budget Act projected that the mandated costs incurred prior to 2004-05 is $956 million.

4. The 2008 State Budget Act included a veto from the Governor reducing proposed

Department of Social Services funding for the California Work Opportunity and Responsibility to Kids (“CalWORKs”) program in the amount of $70 million. Prior to this

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veto, such funding would have been available to counties as part of their single allocation and available for county administration, employment services, and child care.

5. The 2008 State Budget Act permanently suspended provision of the June 2008 and June

2009 State Supplementary Payment program cost of living adjustment (“COLA”). The 2008 State Budget Act provided the State Director of Finance with mid-year authority to freeze the COLA, rate increases or increases in State participation in local costs for up to 120 days and require the Governor to submit urgency legislation to permanently suspend the COLA and other rate increases; provided, however, if the Governor fails to act within 120 days, or the State legislature fails to adopt the suspension, the COLA and other rate increases are reinstated.

6. The 2008 State Budget Act reflected savings to the State of $107.2 million, of which $53.4

million was attributed to the General Fund, in funding for counties to determine eligibility for Medi-Cal services.

7. The 2008 State Budget Act included $1.49 billion in Mental Health Services Act

(“MHSA”) funds for Proposition 63, of which $100 million was committed by counties to the MHSA Housing Program. This funding was in addition to $300 million identified by counties in fiscal year 2007-08. This program makes funding available through the California Housing Finance Agency to develop permanent supportive housing serving persons with serious mental illness who are homeless or at risk of homelessness.

8. The 2008 State Budget Act included a veto from the Governor, which reduced proposed

funding for the Department of Social Services for County Administration and Automation Projects to $1,192,736,000 from $1,194,774,000. By eliminating funding for the Work Incentive Nutritional Supplement program in the amount of by $2,038,000, the Governor delayed implementation of this program for one year in order to allow the Department of Social Services to study this program and ensure it is consistent with federal rules.

9. The 2008 State Budget Act included a veto from the Governor reducing proposed

Department of Corrections funding for Adult Corrections and Rehabilitation Operations by approximately $28 million to approximately $4.9 billion.

Fiscal Year 2009-10. On February 20, 2009, the Governor signed into law the budget for

fiscal year 2009-10 (the “2009 State Budget Act”). The 2009 State Budget Act proposes to address the State’s projected $41 billion deficit and contains mid-year reductions to the 2008 State Budget Act.

The following are some of the major impacts of the 2009 State Budget Act on local

governments throughout the State, including the City:

1. The 2009 State Budget Act includes deferrals of payments to counties for social services and transportation. For February, March and April 2009, monthly transfers of fuel excise tax allocations to cities and counties will be deferred. Payments are scheduled to resume and deferred payments will be paid in May 2009. The 2009 State Budget Act also authorizes two-month deferrals of health and social services payments to counties from July and August to September 2009. Counties are scheduled to receive deferred payments from the State by September 30, 2009. Counties with populations under 40,000 persons are exempt from the deferral of payments for social services.

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2. The 2009 State Budget Act increases personal income tax liability by 0.25% in each personal income tax bracket, although the rate will drop to 0.125% if revenues from the ARRA reach $10 billion.

3. The 2009 State Budget Act increases the VLF rate from 0.65% to 1.15%, 0.15% of which

will be dedicated to local public safety programs. The remaining 0.35% of the increase will be deposited into the State’s General Fund. The 2009 State Budget Act also imposes a 0.65% rate on commercial vehicles effective May 19, 2009 through July 1, 2011 with a possible two-year extension under certain circumstances. See “–Motor Vehicle License Fees.”

4. Under the 2009 State Budget Act, the State’s portion of the sales and use taxes would

increase by 1%, beginning April 1, 2009 through July 1, 2011, with a possible one-year extension under certain circumstances.

5. Generation of approximately $6 billion in revenues for fiscal year 2009-10 based on voter

approval of three propositions on the ballot for the May 19, 2009 special election, including a proposed $5 billion borrowing from future lottery revenues (Proposition 1C). Each of these measures was defeated.

Impact of the American Recovery and Reinvestment Act of 2009 on the State. The 2009 State

Budget Act also includes a number of reductions and revenues tied to the ARRA. Certain reductions to CalWORKS grants, Medi-Cal benefits and reimbursements, SSI/SSP grants, in-home support services (“IHSS”), the judicial branch and higher education are scheduled to be enacted in statute and could be suspended if expected revenues from the ARRA are certified by the Department of Finance to equal $10 billion, including revenues anticipated to be received by June 30, 2010. If revenues from the ARRA are not sufficient to meet the $10 billion target, the reductions would be permanent. If revenues from the ARRA reach $10 billion, the reductions would not go into effect. A future statute would be required to enact the reductions should they become necessary. On March 4, 2009, the Department of Finance released a preliminary estimate that the State would receive approximately $8 billion in federal economic stimulus funds, $2 billion short of what is required to prevent the cuts. The Department of Finance and the State Treasurer’s Office are working with various interested entities to analyze the Department of Finance’s preliminary estimates.

May Revision to the 2009 State Budget Act. On May 14, 2009, the Governor released the May

Revision to the 2009 State Budget Act (together with the contingency proposals referenced therein, the “2009 May Revision”). The 2009 May Revision projected a budget gap of $21.3 billion through the remainder of fiscal year 2008-09 and fiscal year 2009-10 due to continued shortfalls in revenue collections and increased costs and the failure of five budget-related propositions included in the May 19, 2009 special election, which the 2009 May Revision proposed to address through program reductions and additional borrowings. The 2009 May Revision estimated fiscal year 2008-09 revenues and transfers of $85.95 billion, total expenditures of $91.89 billion and a year-end deficit of $3.63 billion, which includes a $2.31 billion prior-year State General Fund balance, a $4.71 billion withdrawal from the reserve for economic uncertainties and an allocation of $1.08 billion to the reserve for the liquidation of encumbrances. The 2009 May Revision projected fiscal year 2009-10 revenues and transfers of $92.22 billion, total expenditures of $85.46 billion and a year-end surplus of 53.13 billion (net of the $3.63 billion deficit from fiscal year 2008-09), of which $1.08 billion would be reserved for the liquidation of encumbrances and $2.05 billion would be deposited in a reserve for economic uncertainties. The 2009 May Revision indicated that the State’s economic outlook included negative growth for calendar year 2009, followed by weak growth in calendar year 2010 and increased growth in calendar year 2011.

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Features of the 2009 May Revision affecting local government included the following:

1. The 2009 May Revision proposed to reduce program expenditures by approximately $2.64 billion in fiscal year 2008-09 and $6.36 billion in fiscal year 2009-10, primarily through reductions in education funding and health and social services programs, including in-home support services, CalWORKS, immigrant assistance programs, child welfare services and SSI/SSP.

2. The 2009 May Revision proposed that the State borrow 8% of property tax revenues from

counties, cities and special districts for fiscal year 2009-10, totaling approximately $2 billion, which amount would be repaid within three years, all in accordance with Proposition 1A of 2004. The manner in which the borrowing would be allocated (i.e., the amount to be borrowed from particular local agencies), and whether the property taxes paid to local agencies by the State in-lieu of vehicle license fees and in-lieu of sales tax, remained subject to determination. The 2009 May Revision proposed to create a joint powers entity to allow local agencies to borrow against the State repayment as a group.

3. The 2009 May Revision proposed $750 million in reductions to the federal Medi-Cal

program, subject to receipt of a federal waiver.

4. The 2009 May Revision proposed to redirect $60 million in cigarette and tobacco products surtax revenues from county health programs.

5. The 2009 May Revision proposed to change sentencing options for low-level offenders

such that an offense that could be charged as a misdemeanor or felony would be punishable only by a term in county jail. The 2009 May Revision estimated that the State would save approximately $100 million from such shift. The potential impact of this proposal on counties is currently unknown as the details of the proposal have not yet been disclosed.

LAO May Overview of the 2009 May Revision. On May 21, 2009, the Legislative Analyst’s

Office, the State’s nonpartisan fiscal and policy advisor (the “LAO”) released an analysis of the 2009 May Revision entitled Overview of the 2009-10 May Revision (the “LAO 2009 May Overview”). The LAO 2009 May Overview stated that the economic and revenue forecasts and assessments of the State’s budgetary problems set forth in the 2009 May Revision were generally reasonable in light of the effects of the economic slowdown throughout the United States, but indicated that State General Fund expenditures across fiscal year 2008-09 and fiscal year 2009-10 could exceed revenues by approximately $3 billion more than the amount estimated in the 2009 May Revision.

The LAO 2009 May Overview stated that the 2009 May Revision relied on a number of

proposals that could return the budget to balance and result in a State General Fund reserve at the end of fiscal year 2009-10 of $2.1 billion, but that the largest proposals carried the largest risks. The LAO also noted that many of the proposals contained in the 2009 May Revision were one-time in nature and recommended that the State Legislature reduce its reliance on one-time measures, which could contribute to long-term negative effects for taxpayers and programs. The LAO 2009 May Overview set forth several budget recommendations for the State Legislature, including eliminating certain duplicative, inefficient, ineffective or over-budgeted education programs, borrowing additional transportation funds, increasing community college fees, reconsidering the dedication of certain vehicle license fees to local public safety programs, implementing additional user fees for government services, modifying the proposed property tax revenues borrowing to target specific agencies and reconsidering the use of revenue anticipation warrants for budget balancing and reserve building purposes, which, according to the LAO, sets a bad precedent and presents serious legal concerns.

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The LAO 2009 May Overview stated that the State Legislature would face a significant challenge to address the projected budget deficit in fiscal year 2008-09 and projected revenue shortfalls in fiscal year 2009-10 and must pay particular attention to closing the State’s ongoing structural mismatch between revenues and spending for future years. The LAO 2009 May Overview reiterated that the State Legislature should avoid proposed solutions that do not prioritize program reductions, add additional borrowing or debt and lead to a diminution of the State Legislature’s authority.

Governor’s Update to the 2009 May Revision. On May 26, 2009 and May 29, 2009, the

Governor released updates to the 2009 May Revision (collectively, the “2009 May Revision Update”). The 2009 May Revision Update projected a budget deficit of $3.10 billion through the remainder of fiscal year 2008-09 due to shortfalls in revenue collections and increased costs and the failure of five of the six budget-related propositions included in the May 19, 2009 special election ballot. The 2009 May Revision Update estimated fiscal year 2008-09 General Fund revenues and transfers of $85.95 billion, total General Fund expenditures of $91.35 billion and a year-end deficit of $3.10 billion, which included a $2.31 billion prior-year State General Fund balance and an allocation of $1.08 billion to the reserve for the liquidation of encumbrances. The 2009 May Revision Update projected fiscal year 2009-10 revenues and transfers of $92.22 billion, total expenditures of $83.52 billion and a year-end surplus of $5.60 billion (net of the $3.10 billion deficit from fiscal year 2008-09), of which $1.08 billion would be reserved for the liquidation of encumbrances and $4.52 billion would be deposited in a reserve for economic uncertainties. The 2009 May Revision and the 2009 May Revision Update collectively included proposals to reduce State General Fund spending in the amount of $3.12 billion during the remainder of fiscal year 2008-09 and $20.85 billion during fiscal year 2009-10. The 2009 May Revision Update withdrew the Governor’s 2009 May Revision proposal to issue revenue anticipation warrants in the amount of $5.6 billion to address a portion of the State General Fund deficit.

Features of the 2009 May Revision Update affecting local governments include the

following:

1. The 2009 May Revision Update proposed to eliminate CalWORKS, which was expected to reduce State General Fund spending by approximately $1.31 billion in fiscal year 2009-10. In the event the State eliminated CalWORKS, federal matching funds for the program would be eliminated.

2. The 2009 May Revision Update proposed to eliminate General Fund expenditures for

county programs relating to the Healthy Families Programs, Maternal, Child, and Adolescent Health, Mental Health Managed Care Services and the Early and Periodic Screening, Diagnosis, and Treatment Services program. The proposals were expected to reduce General Fund expenditures by $424.2 million.

3. The 2009 May Revision Update proposed to reduce the local share of the gasoline tax

from $1.05 billion to $300 million. Pursuant to this proposal, the State would apply the $750 million to pay current and prior year debt service on highway bonds.

Issuance of Registered Warrants. On June 24, 2009, the State Controller announced that the

State would issue registered warrants (“IOUs”) beginning July 2, 2009, to local governments for social services, private contractors, State vendors, taxpayers entitled to income and corporate tax refunds, and for payments for other State operations if immediate budget and cash solutions were not quickly adopted by the Governor and the State Legislature. All IOUs issued by the State in 2009 have been paid.

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Amendment of the 2009 State Budget Act. On July 23, 2009 through July 24, 2009, State Legislature voted on, and passed, a majority of the budget solutions amending the 2009 State Budget Act to address the combined $60 billion budget deficit over fiscal years 2008-09 and 2009 10 that resulted from the deepening recession. The amendments included spending cuts, borrowing, redirecting revenues from local governments, accounting maneuvers, and a $921 million reserve.

On July 28, 2009, the Governor signed an amendment to the 2009 State Budget Act (the

“Amended 2009 State Budget Act”) to include an additional $24.2 billion in budget solutions to address the further deterioration of the fiscal situation of the State identified in the 2009 May Revision. Because the State Legislature did not adopt budget solutions that eliminated the entire projected deficit, the Governor used his veto power to eliminate an additional $489 million in spending, leaving the State with a $500 million reserve.

The $24.2 billion in budget solutions contained in the Amended 2009 State Budget

include: (i) expenditure reductions of $8.5 billion from K-14 education and additional cuts to the State colleges and university systems (just under $2 billion total for fiscal year 2008-09 and fiscal year 2009-10); $785 million from the Department of Corrections, with specific program reforms to be determined upon the return of the State Legislature in August 2009, $1.7 billion from General Government, by suspending COLAs; leveraging State assets, consolidating and reorganizing boards and commissions ($50 million in fiscal year 2009-10) and IT procurement reform ($100 million); $820 million from State Employee Compensation by adopting third furlough day ($425 million), eliminating rural health care, and scoring health care savings; $3.0 billion from Health and Human Services by adopting long-term reforms to CalWORKs ($510 million in fiscal year 2009-10), changes and improvements to Medi-Cal eligibility and improved care coordination ($1.4 billion); reducing In-Home Supportive Services (IHSS) services for all but the most severely disabled and implementing anti-fraud initiatives ($264 million), funding to counties for Child Welfare Services ($80 million), changes to eligibility in the Healthy Families program and freezing of COLAs for IHSS and the Department of Developmental Services long-term care providers ($76 million) and elimination of funding for the Williamson Act Program which backfills property tax revenues that local governments forego when property is preserved for agriculture or open space uses; (ii) $1.0 billion in fund shifts, including a shift of redevelopment agency funds to schools ($1.7 billion) with the same amount of base school property tax shifted to the county-level Supplemental Revenue Augmentation Funds, from which $850 million will be used to fund courts, prisons, Medi-Cal, hospital, and K-12 school bond expenses that would otherwise be funded from the State General Fund and the remaining $850 million used to fund K-12 school costs offsetting Proposition 98 State General Fund costs; (iii) $3.5 billion in revenue augmentations, including optional personal income tax withholding changes; tax enforcement; permitting the State Compensation Insurance Fund (the “SCIF”) to invest in bonds issued by the State Treasurer to raise cash, and special fund transfers; (iv) $2.2 billion in borrowing, including suspension of Proposition 1A of 2004 ($1.9 billion), a loan from the State Highway Account ($135 million) and various loans and fund shifts to keep State parks open; and (v) pushing the last State worker payday of the fiscal year from June 30, 2010, to July 1, 2010, the start of the next fiscal year ($1.4 billion).

The Amended 2009 State Budget Act reflects the harsh reality of diminished resources

forced by the recession and the impact of the cuts are across the board. It expected that there will be a number of lawsuits by local governments resulting from the passage of the Amended 2009 State Budget Act over the suspension of Prop 1A of 2004, the redevelopment fund shift, securitization and other issues.

On July 28, 2009, the Governor announced that he will call a special session in late

September for legislators to consider the recommendations of the Commission on the 21st Century Economy for overhauling the State’s tax system.

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LAO 2010-11 Budget Report. On November 18, 2009, the LAO issued a report entitled “2010-11 Budget: California's Fiscal Outlook” (the “LAO 2010-11 Outlook Report”), which forecasts that the State must address a General Fund budget problem of $20.7 billion between such date and the time the Legislature enacts a 2010–11 state budget plan. The budget problem consists of a $6.3 billion projected deficit for 2009–10 and a $14.4 billion gap between projected revenues and spending in 2010–11. The LAO stated that addressing this large shortfall will require painful choices—on top of the difficult choices the Legislature made earlier in the year. The LAO 2010-11 Outlook Report states that the vast majority of the new budget problem can be attributed to the State’s inability to implement several major solutions in the July 2009 budget plan, such as: (a) the expected inability of several programs—in particular, the prison system and Medi–Cal—to collectively achieve billions of dollars of spending reductions assumed in the 2009–10 budget, (b) the expected inability of the State to sell the State Compensation Insurance Fund (SCIF), a quasi–public workers’ compensation insurer, for the budgeted amount of $1 billion in 2009–10, (c) the State’s loss of a court case that makes the General Fund unable to benefit from over $800 million in transportation funds in 2009–10, and (d) a nearly $1 billion increase in the Proposition 98 funding guarantee for K–14 education in 2009–10.

City Responses to the Amended 2009 State Budget Act. Pursuant to Proposition 1A of 2004

approved by the voters of the State in November 2004, the State may shift up to eight percent of local government property tax revenues to schools and community colleges during severe State financial hardship.

The City has estimated the potential effect of the State budget adopted in July,

particularly the Proposition 1A of 2004 borrowing proposal. The City currently projects that up to approximately 5.1% of its general fund revenues in fiscal year 2009-10 may be subject to State suspension of Proposition 1A of 2004.

Through the adoption of the 09-10 Fiscal Year Budget, the State elected to suspend Prop

1A payments to cities, counties, and special districts. The State adopted legislation allowing the California Statewide Communities Development Authority (“CSCDA”) to securitize those receivables. The State agreed to cover all issuance expenses so that the agencies would receive 100% of the suspended Prop 1A monies. The City enrolled in the CSCDA program and obtained Council adoption of resolutions and sales agreements for the City.

In connection with its approval of the budget for the State for the 1992-93, 1993-94, 1994-

95, 2002-03, 2003-04, and 2004-05 Fiscal Years, the State Legislature enacted legislation which, among other things, reallocated funds from redevelopment agencies to school districts by shifting a portion of each agency’s tax increment, net of amounts due to other taxing agencies, to school districts for such fiscal years for deposit in the Education Revenue Augmentation Fund (“ERAF”). The amount required to be paid by a redevelopment agency under such legislation was apportioned among all of its redevelopment project areas on a collective basis, and was not allocated separately to individual project areas. The State budgets for 2005-06, 2006-07 and 2007-08 had no new ERAF payment requirements. However, in connection with the State budget for Fiscal Year 2008-09, on September 30, 2008, the California Legislature enacted AB 1389. AB 1389 requires a one-time shift of $350 million from redevelopment agencies to their respective ERAF.

The validity of AB l389 was challenged in litigation in the Superior Court for Sacramento

County, California Redevelopment Association et al v. Genest et al., Case No. 34-2008-00028334-CUWM-GDS (“CRA v. Genest”). On April 30, 2009, the Sacramento Superior Court invalidated AB 1389. The State appealed the decision; however, on September 23, 2009, the State filed a notice of abandonment of its appeal with the Court, so that the Superior Court judgment became final and no longer subject to appeal on that date.

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In connection with legislation related to the budget for the State for Fiscal Year 2009-10, on July 24, 2009, the State Legislature adopted AB 26, which was signed by the Governor and became law on July 28, 2009. AB 26 requires a $1.7 billion one-year transfer, in the aggregate, from redevelopment agencies to their respective County Supplemental Educational Revenue Augmentation Fund (“SERAF”) in 2009-10, plus another $350 million aggregate transfer in 2010-11. A SERAF is similar to an ERAF, except that there is an additional requirement for the SERAF (in response, in part, to the CRA v. Genest litigation) that moneys in the SERAFs must be used by school districts and county offices of education to serve pupils living in redevelopment areas or in housing supported by redevelopment agency funds. The Agency’s 2009-10 SERAF payment is estimated by the California Redevelopment Association (the “CRA”) to be $1,774,161, and is due by May 10, 2010. The Agency’s 2010-11 SERAF payment is estimated by the CRA to be $365,268, and is due by May 10, 2011. The Agency fully expects to fund the entire amount of its 2009-10 SERAF payment by the May 10, 2010, deadline and the entire amount of its 2010-11 SERAF payment by the May 10, 2011, deadline.

On October 20, 2009, the CRA filed a lawsuit in Sacramento Superior Court challenging

the constitutionality of AB 26 and seeking to prevent the State from taking redevelopment funds for non-redevelopment purposes.

The Agency is currently evaluating its programs to determine the most optimal allocation

of monies from the various sources of funding available to it in order to make the 2009-10 SERAF payment, including but not limited to tax increment funds on hand and housing set aside monies, to the extent available for such purpose. In any event, it is not anticipated that the City or any General Fund moneys will be used to make the Agency’s 2009-10 SERAF payment or its 2010-11 SERAF payment, if either is ultimately required.

The City cannot predict the extent of the budgetary problems the State will encounter in

this or in any future fiscal year, and, it is not clear what measures would eventually be taken by the State to balance its budget, as required by law. Accordingly, the City cannot predict the final outcome of future State budget negotiations, the impact that such budgets will have on its finances and operations or the actions to be taken in the future.

Loss of Tax Exemption

As discussed under the caption “TAX MATTERS,” in order to maintain the exclusion

from gross income for federal income tax purposes of the interest on the Bonds, the City has covenanted in the Lease not to take any action, or fail to take any action, if such action or failure to take such action would adversely affect the exclusion from gross income of interest on the Bonds under section 103 of the Internal Revenue Code of 1986, as amended. Interest on the Bonds could become includable in gross income for purposes of Federal income taxation retroactive to the date the Bonds were issued, as a result of acts or omissions of the City in violation of the Code. Should such an event of taxability occur, the Bonds are not subject to early redemption and will remain outstanding to maturity or until prepaid under the optional redemption or mandatory sinking fund redemption provisions of the Indenture.

Limited Secondary Market

As stated herein, investment in the Bonds poses certain economic risks which may not be

appropriate for certain investors, and only persons with substantial financial resources who understand the risk of investment in the Bonds should consider such investment. There can be no guarantee that there will be a secondary market for purchase or sale of the Bonds or, if a secondary market exists, that the Bonds can or could be sold for any particular price.

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Changes in Law There can be no assurance that the electorate of the State will not at some future time

adopt additional initiatives or that the Legislature will not enact legislation that will amend the laws or the Constitution of the State resulting in a reduction of the general fund revenues of the City and consequently, having an adverse effect on the security for the Bonds.

TAX MATTERS

Federal tax law contains a number of requirements and restrictions which apply to the Bonds, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the proper use of bond proceeds and the facilities financed therewith, and certain other matters. The Authority and the City have covenanted to comply with all requirements that must be satisfied in order for the interest on the Bonds to be excludable from gross income for federal income tax purposes. Failure to comply with certain of such covenants could cause interest on the Bonds to become includable in gross income for federal income tax purposes retroactively to the date of issuance of the Bonds.

Subject to the Authority’s and the City’s compliance with the above referenced

covenants, under present law, in the opinion of Quint & Thimmig LLP, Bond Counsel, interest on the Bonds (i) is excludable from the gross income of the owners thereof for federal income tax purposes, and (ii) is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but interest on the Bonds is taken into account, however, in computing an adjustment used in determining the federal alternative minimum tax for certain corporations.

In addition, subject to the Authority’s and the City’s compliance with certain covenants,

in the opinion of Bond Counsel, the Bonds are “qualified tax-exempt obligations” under the small issuer exception provided under section 265(b)(3) of the Code, which affords banks and certain other financial institutions more favorable treatment of their deduction for interest expense than would otherwise be allowed under section 265(b)(2) of the Code.

Bond Counsel expects to deliver an opinion at the time of delivery of the Bonds in

substantially the form set forth in APPENDIX E—”FORM OF BOND COUNSEL’S OPINION.” Bond Counsel’s opinion represents its legal judgment based upon its review of the law

and the facts that it deems relevant to render such opinion and is not a guarantee of a result. The Internal Revenue Code of 1986, as amended (the “Code”), includes provisions for an

alternative minimum tax (“AMT”) for corporations in addition to the corporate regular tax in certain cases. The AMT, if any, depends upon the corporation’s alternative minimum taxable income (“AMTI”), which is the corporation’s taxable income with certain adjustments. One of the adjustment items used in computing the AMTI of a corporation (with certain exceptions) is an amount equal to 75% of the excess of such corporation’s “adjusted current earnings” over an amount equal to its AMTI (before such adjustment item and the alternative tax net operating loss deduction). “Adjusted current earnings” would include certain tax exempt interest, including interest on the Bonds.

Ownership of the Bonds may result in collateral federal income tax consequences to

certain taxpayers, including, without limitation, corporations subject to the branch profits tax, financial institutions, certain insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred (or continued) indebtedness to purchase or carry tax exempt obligations. Prospective

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purchasers of the Bonds should consult their tax advisors as to applicability of any such collateral consequences.

The issue price (the “Issue Price”) for each maturity of the Bonds is the price at which a

substantial amount of such maturity of the Bonds is first sold to the public. The Issue Price of a maturity of the Bonds may be different from the price set forth, or the price corresponding to the yield set forth, on the cover page hereof.

If the Issue Price of a maturity of the Bonds is less than the principal amount payable at

maturity, the difference between the Issue Price of each such maturity, if any, of the Bonds (the “OID Bonds”) and the principal amount payable at maturity is original issue discount.

For an investor who purchases an OID Bond in the initial public offering at the Issue

Price for such maturity and who holds such OID Bond to its stated maturity, subject to the condition that the Authority and the City comply with the covenants discussed above, (a) the full amount of original issue discount with respect to such OID Bond constitutes interest which is excludable from the gross income of the owner thereof for federal income tax purposes; (b) such owner will not realize taxable capital gain or market discount upon payment of such OID Bond at its stated maturity; (c) such original issue discount is not included as an item of tax preference in computing the alternative minimum tax for individuals and corporations under the Code, but is taken into account in computing an adjustment used in determining the alternative minimum tax for certain corporations under the Code, as described above; and (d) the accretion of original issue discount in each year may result in an alternative minimum tax liability for corporations or certain other collateral federal income tax consequences in each year even though a corresponding cash payment may not be received until a later year. Owners of OID Bonds should consult their own tax advisors with respect to the state and local tax consequences of original issue discount on such OID Bonds.

Owners of Bonds who dispose of Bonds prior to the stated maturity (whether by sale,

redemption or otherwise), purchase Bonds in the initial public offering, but at a price different from the Issue Price or purchase Bonds subsequent to the initial public offering should consult their own tax advisors.

If a Bond is purchased at any time for a price that is less than the Bond’s stated

redemption price at maturity or, in the case of an OID Bond, its Issue Price plus accreted original issue discount reduced by payments of interest included in the computation of original issue discount and previously paid (the “Revised Issue Price”), the purchaser will be treated as having purchased a Bond with market discount subject to the market discount rules of the Code (unless a statutory de minimis rule applies). Accrued market discount is treated as taxable ordinary income and is recognized when a Bond is disposed of (to the extent such accrued discount does not exceed gain realized) or, at the purchaser’s election, as it accrues. Such treatment would apply to any purchaser who purchases an OID Bond for a price that is less than its Revised Issue Price even if the purchase price exceeds par. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of such Bond. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Bonds.

An investor may purchase a Bond at a price in excess of its stated principal amount. Such

excess is characterized for federal income tax purposes as “bond premium” and must be amortized by an investor on a constant yield basis over the remaining term of the Bond in a manner that takes into account potential call dates and call prices. An investor cannot deduct amortized bond premium relating to a tax exempt bond. The amortized bond premium is treated as a reduction in the tax exempt interest received. As bond premium is amortized, it reduces the investor’s basis in the Bond. Investors who purchase a Bond at a premium should consult their

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own tax advisors regarding the amortization of bond premium and its effect on the Bond’s basis for purposes of computing gain or loss in connection with the sale, exchange, redemption or early retirement of the Bond.

There are or may be pending in the Congress of the United States legislative proposals,

including some that carry retroactive effective dates, that, if enacted, could alter or amend the federal tax matters referred to above or affect the market value of the Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to bonds issued prior to enactment. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation. Bond Counsel expresses no opinion regarding any pending or proposed federal tax legislation.

The Internal Revenue Service (the “Service”) has an ongoing program of auditing tax

exempt obligations to determine whether, in the view of the Service, interest on such tax exempt obligations is includable in the gross income of the owners thereof for federal income tax purposes. It cannot be predicted whether or not the Service will commence an audit of the Bonds. If an audit is commenced, under current procedures the Service may treat the Authority as a taxpayer and the Bondholders may have no right to participate in such procedure. The commencement of an audit could adversely affect the market value and liquidity of the Bonds until the audit is concluded, regardless of the ultimate outcome.

Payments of interest on, and proceeds of the sale, redemption or maturity of, tax exempt

obligations, including the Bonds, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any Bond owner who fails to provide an accurate Form W 9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any Bond owner who is notified by the Service of a failure to report any interest or dividends required to be shown on federal income tax returns. The reporting and backup withholding requirements do not affect the excludability of such interest from gross income for federal tax purposes.

The Bonds are issued to refund bonds issued before January 1, 2009, and therefore are

treated as issued before 2009 for purposes of section 265(b)(7) of the Code relating to interest expense deductibility for financial institutions. The treatment of interest expense for financial institutions owning such Bonds may be less favorable than the treatment provided to owners of tax exempt bonds treated as issued in 2009 or 2010. Financial institutions should consult their tax advisors concerning such treatment.

In the further opinion of Bond Counsel, interest on the Bonds is exempt from California

personal income taxes. Ownership of the Bonds may result in other state and local tax consequences to certain

taxpayers. Bond Counsel expresses no opinion regarding any such collateral consequences arising with respect to the Bonds. Prospective purchasers of the Bonds should consult their tax advisors regarding the applicability of any such state and local taxes.

CERTAIN LEGAL MATTERS

Legal matters incident to the authorization, issuance, sale and delivery by the Authority of the Bonds are subject to the approval as to their validity of Quint & Thimmig LLP, San Francisco, California, Bond Counsel. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the City and the Authority by Richards, Watson & Gershon, Los Angeles, California, Authority Counsel and City Attorney, and by Quint & Thimmig LLP, San Francisco, California,

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Disclosure Counsel, and for the Underwriter by Nossaman LLP, Irvine, California. Certain compensation of Bond Counsel and Disclosure Counsel is contingent upon the issuance and delivery of the Bonds.

FINANCIAL STATEMENTS

The City’s financial statements for the fiscal year ended June 30, 2009, included in APPENDIX B—”COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2009,” have been audited by Mayer Hoffman McCann P.C., Certified Public Accountants & Consultants, Irvine, California, as stated in their reports appearing in such appendix. Mayer Hoffman McCann P.C. has not undertaken to update its reports or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by Mayer Hoffman McCann P.C. with respect to any event subsequent to its report.

LITIGATION

To the best knowledge of the Authority and the City, except as otherwise disclosed in this Official Statement, there is no pending or threatened litigation concerning the validity of the Bonds or the pledge of the Revenues or challenging any action taken by the Authority or the City in connection with the authorization of the Indenture or the Lease Agreement, or any other document relating to the Bonds or the defeasance and prepayment of the Bonds to which the Authority or the City is or is to be become a party or the performance by the Authority or the City of any of their obligations under any of the foregoing.

RATING

Standard & Poor’s Ratings Services (“S&P”) has assigned its municipal bond rating of “AA+” to the Bonds. Such rating reflects only the views of S&P and an explanation of the significance of such rating may be obtained from S&P as follows: Standard & Poor’s Ratings Services, 55 Water Street, New York, NY 10041. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by S&P if, in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds.

UNDERWRITING

The Bonds are being purchased by E. J. De La Rosa & Co., Inc. (the “Underwriter”). The Underwriter has agreed to purchase the Bonds at a price of $18,092,997.30, which amount represents the principal amount of the Bonds of $17,305,000, less $65,585.95, representing the Underwriter’s discount, plus $853,583.25, representing net original issue premium. The contract of purchase pursuant to which the Bonds are being purchased by the Underwriter provides that the Underwriter will purchase all of the Bonds if any are purchased. The obligation of the Underwriter to make such purchase is subject to certain terms and conditions set forth in such contract of purchase. The Underwriter may offer and sell the Bonds to certain dealers and others at prices different from the prices stated on the inside cover page of this Official Statement. The offering prices may be changed from time to time by the Underwriter.

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FINANCIAL ADVISOR

Fieldman, Rolapp & Associates, Irvine, California, has served as Financial Advisor in connection with the authorization and delivery of the Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in the Official Statement. The fees of the Financial Advisor are contingent upon the sale and delivery of the Bonds. Fieldman, Rolapp & Associates is an independent advisory firm and is not engaged in the business of underwriting, trading or distributing municipal or other public securities.

CONTINUING DISCLOSURE

The ultimate security for the payments of principal and interest on the Bonds comes from the Lease Payments to be made by the City and, therefore, the City, as an obligated person within the meaning of the Rule, has agreed to undertake the disclosure responsibilities required by the Rule. The Authority has not undertaken to provide any continuing disclosure required by the Rule.

The City has covenanted to provide such annual financial statements and other

information in the manner required by Rule 15c2-12 of the Securities and Exchange Commission (17 C.F.R. § 240.15c-2-12) (the “Rule”). These covenants have been made in order to assist the Underwriter in complying with the Rule. The City will execute a continuing disclosure certificate (the “Continuing Disclosure Certificate”) for the benefit of the owners of the Bonds to provide certain financial information and operating data concerning the City to the Municipal Securities Rulemaking Board via its Electronic Municipal Market Access system of certain events, pursuant to the requirements of section (b)(5)(i) of Rule 15c2-12. See APPENDIX F—”FORM OF CONTINUING DISCLOSURE CERTIFICATE” for a description of the Continuing Disclosure Certificate. A failure by the City to provide any information required thereunder will not constitute an Event of Default under the Indenture or the Lease Agreement. The City has never failed to comply with any previous undertakings with regard to said Rule to provide annual reports or notices of material events.

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ADDITIONAL INFORMATION

Summaries and explanations of the Bonds and documents contained in this Official Statement do not purport to be complete, and reference is made to such documents for full and complete statements of their provisions.

The preparation and distribution of this Official Statement have been authorized by the

Authority and the City.

MISSION VIEJO COMMUNITY DEVELOPMENT FINANCING AUTHORITY By /s/ Dennis R. Wilberg

Executive Director CITY OF MISSION VIEJO By /s/ Dennis R. Wilberg

City Manager

Appendix A Page 1

APPENDIX A

GENERAL, ECONOMIC AND DEMOGRAPHIC INFORMATION RELATING TO THE CITY

General Information

The City is located in the southern portion of the County in the area commonly referred to as the Saddleback Valley. With a current population of 100,242, it is the County’s ninth largest city. The City is comprised of a 10,000 acre planned community originally developed beginning in 1963 by the Mission Viejo Company, as well as approximately 800 acres annexed in 1992. At the present time, it is essentially built out.

Government Organization

The City was incorporated in 1988 under the general laws of the State of California, following a vote in November 1987 by its residents, superseding the Mission Viejo Community Services District, which had been in existence since January 1986. The District had been responsible for street lighting, parks, and landscape maintenance services. Immediately following incorporation, the City assumed all of the responsibilities of the Community Services District as well as its assets and liabilities.

All five City Council members are elected at large to serve alternating four-year terms.

The mayor is selected by the City Council from among its membership for a one-year term. A City Manager is appointed by the City Council to administer municipal affairs.

The members of the City Council, the expiration dates of their terms and key

administrative personnel are set forth in the following table:

City Council

Council Member Term Expires Frank Ury, Mayor November, 2012 Lance MacLean, Mayor Pro Tempore November, 2010* Trish Kelley, Council Member November, 2010 John Paul Ledesma, Council Member November, 2010 Cathy Schlicht, Council Member November, 2012

*Mr. MacLean is the subject of a recall election to be held in February 2010. The voters will be asked whether to recall him and, if recalled, to select a replacement Council member.

The key administrative personnel of the City are set forth in the following table:

City Staff

Dennis R. Wilberg, City Manager Irwin B. Bornstein, Assistant City Manager/Director of Administrative Services Karen Hamman, City Clerk

The council-manager form of government combines the political leadership of elected

officials with the managerial experience of a professional local government administrator. The City Council establishes the policies and laws of the City, and the City Manager is responsible for their implementation and execution.

Appendix A Page 2

City Manager. The City Manager is the chief administrator of the City. He provides overall direction to City staff, implements municipal programs according to City Council policy direction, and coordinates departmental operations. The City Manager is responsible for proposing a fiscal budget for City Council consideration and adoption. He also serves as the Executive Director of the Community Development Agency.

City Clerk. The City Clerk is the chief legislative officer. The majority of the Clerk’s time

is allocated to the legislative process, which includes posting the agendas for City Council meetings, recording the minutes of those meetings, maintaining City records, overseeing the election process, and making City information available to the public.

City Attorney. The City Attorney is the chief legal counsel and provides legal advice to

the City Council and staff, prepares necessary legal documents, and prosecutes or defends actions to which the City is a party. Mission Viejo contracts with the firm of Richards, Watson & Gershon to provide these legal and litigation services.

Administrative Services. The Administrative Services Department is responsible for

managing the financial affairs of the City. This department’s activities include directing the financial planning efforts of the City; monitoring revenues; billing, collecting, investing, and disbursing all funds; reporting on accounting and financial activities; coordinating the City’s purchasing activities; administering all long-term debt; processing animal licenses; overseeing human resources and providing staff support to the Investment Advisory Commission.

Community Development. The Community Development Department is responsible for

planning, economic development, code enforcement, and building (permits and inspections). This department administers the City’s land use policies, including zoning, building, subdivision, and environmental regulations. In addition, Community Development staff members provide technical assistance and disseminate information to the Planning Commission, developers, and the public.

Information Technology. The Information Technology (IT) Department provides

technology tools and services to support the City’s staff, Council members and residents. The IT staff manages the City’s network infrastructure; telecommunication services, including voice, data and video communications; email systems; MVTV Channel 30 access cable television equipment; radio communications; printing and digital photocopying; wireless network (Wi-Fi); and audio/video and voting systems. In addition, IT is responsible for managing and maintaining the City’s internal and external web sites, coordinating training services, providing support to end users of all IT systems, and supporting emergency preparedness activities.

Library Services. The Library Department is responsible for managing and operating the

Mission Viejo Library as a full-service City program. In addition to overseeing daily library operations, staff also provides information programs and services for youths and adults, including an adult literacy program and a homebound delivery program.

Public Safety. Full-service law enforcement is provided to the residents of the City

through a contractual arrangement with the Orange County Sheriff’s Department. Mission Viejo Police Services is a subdivision of the Sheriff’s Department and operates from City Hall.

Fire protection and emergency medical services are provided in the City by the Orange

County Fire Authority (the “OCFA”), a fire prevention and suppression organization that serves nineteen Orange County cities and the unincorporated areas of the County as well. This regional approach to fire fighting gives the City ready access to additional trained personnel

Appendix A Page 3

and specialized equipment on an as-needed basis. A Council Member represents the City on the OCFA Board of Directors.

Public Works. The Public Works Department is comprised of three divisions:

Administration, Engineering and Transportation. This department oversees the design, construction, and operation of the City’s entire transportation network and reviews development proposals. The Public Works Department provides administration for major capital projects and oversees the solid waste franchise administration and water quality efforts.

Public Services. The Public Services Department is responsible for the Infrastructure

Maintenance program area as well as several programs in the Public Safety program area. This department oversees the upkeep of public buildings, streets, landscape right-of-ways, storm drains, striping, and the urban forest. Some of its major activities include street repairs and street sweeping, weed abatement, graffiti removal, fleet maintenance, park maintenance, tree trimming, building maintenance, storm drain maintenance, and street striping. In addition, the department conducts annual landscape inspections of commercial properties and reviews architectural and landscape architectural development city wide in conjunction with the Community Development Department. The programs in the Public Safety program area under Public Services’ direction include police, ongoing maintenance of streetlights, emergency preparedness and animal services.

Recreation and Community Services. The Recreation and Community Services Department

manages the City’s contracts for recreation classes, community and senior programs, a volunteer service program, and special events. It also oversees the Norman P. Murray Community and Senior Center, Oso Viejo Park/World Cup Soccer Center, three recreation centers, two tennis complexes, and an aquatics center. In addition, this department provides staff support to the Community Services Commission.

Appendix A Page 4

Demographic Statistics

The following chart indicates the population, median age, median household income, median housing value, average rent, percent of County population and unemployment rate of the City for fiscal years 2000-2009:

CITY OF MISSION VIEJO

Demographic Statistics Median Personal Per Capita Median Housing Income Personal Unemployment

Year Population (1) Age (2) Value (3) ($000) (4) Income (4) Rate (5)

2000 98,464 36.0 $264,238 106,003,904 $ 37,103 2.5% 2001 96,568 37.5 293,146 109,010,278 37,651 2.8 2002 98,268 37.5 361,000 111,750,294 38,169 3.6 2003 98,943 37.5 455,000 116,997,802 39,536 3.4 2004 97,752 39.7 592,000 125,800,000 42,260 3.1 2005 98,197 38.0 677,000 135,100,000 45,291 2.7 2006 97,997 38.1 669,750 145,400,000 48,767 2.4 2007 98,483 38.4 613,000 150,200,000 50,307 2.8 2008 98,572 39.6 520,500 156,200,000 51,700 3.8 2009 100,242 38.8 430,000 155,800,000 50,939 6.8

Sources: 1 California Department of Finance (as of Jan. 1) 2 Focus: Orange County (2000), Orange County Report (2001 & 2002), Money.cnn.com (2003-2009) 3 Focus: Orange County (2000), Orange County Report (2001) California Assoc of Realtors (2002 & 2003), Orange

County Register (2004-2009) 4 Data shown is for the County of Orange; data for City of Mission Viejo is not available. U. S. Bureau of Economic

Analysis through 2004; CalState Fullerton: Economic Forecast October 2008 (2005, 2006, 2007, 2008); CalState Fullerton: Economic Forecast October 2009 (Estimated) (2009)

5 Focus: Orange County (2000), U.S. Census Bureau (2001); Venturi Staffing (2004); California Employment Development Department (2002-2003, 2005-2009)

Personal Income

“Effective Buying Income” is defined as personal income less personal tax and nontax payments, a number often referred to as “disposable” or “after-tax” income. Personal income is the aggregate of wages and salaries, other labor-related income (such as employer contributions to private pension funds), proprietor’s income, rental income (which includes imputed rental income of owner-occupants of non-farm dwellings), dividends paid by corporations, interest income from all sources, and transfer payments (such as pensions and welfare assistance). Deducted from this total are personal taxes (federal, state and local), nontax payments (fines, fees, penalties, etc.) and personal contributions to social insurance. According to U.S. government definitions, the resultant figure is commonly known as “disposable personal income.”

Appendix A Page 5

CITY OF MISSION VIEJO, STATE OF CALIFORNIA AND UNITED STATES Median Household Effective Buying Income

Year(1) City of Mission Viejo Orange County State of California United States

2004 65,233 51,823 43,915 39,324 2005 66,854 53,099 44,681 40,529 2006 70,274 55,370 46,275 41,255 2007 74,812 58,727 48,203 41,792 2008 76,246 58,979 48,952 42,303

Source: “Survey of Buying Power,” Sales and Marketing Management Magazine; Claritas, Inc. NOTE: In 2005, Sales and Marketing Management ceased publishing the “Survey of Buying Power” report;

however, subsequent years’ data has been obtained from Claritas, Inc., who had previously prepared the data each year for the “Survey of Buying Power.”

(1) As of January 1. Employment and Industry

The City is located in the Orange County labor market area. Four major job categories constitute 56.5% of the work force. They are services (17.9%), wholesale and retail trade (16.2%), manufacturing (11.6%) and government (10.8%). The September, 2009 unemployment rate in the Orange County area was 9.4%. The State of California September, 2009 unemployment rate (unadjusted) was 12.0%. The distribution of employment in Orange County is presented in the following table:

ORANGE COUNTY MSA

WAGE AND SALARY WORKERS BY INDUSTRY (in thousands)

Industry 2004 2005 2006 2007 2008

Government 153,400 155,300 156,700 159,400 162,100 Services 254,900 264,300 274,500 273,300 267,900 Finance, Insurance & Real Estate 132,300 138,400 138,200 127,700 113,700 Wholesale & Retail Trade 235,600 241,100 244,500 248,100 241,600 Transportation & Public Utilities 29,200 28,700 28,200 28,900 29,400 Manufacturing: 183,500 182,900 182,700 180,400 173,800 Nondurable goods 127,100 128,300 128,000 126,200 122,300 Durable goods 56,400 54,600 54,700 54,200 51,500 Construction 92,200 99,900 106,600 103,100 91,200

Total Nonagricultural 1,456,700 1,491,000 1,518,900 1,515,500 1,484,700 Agriculture 6,700 5,600 5,300 5,000 4,700

Total (all industries) 1,463,400 1,496,500 1,524,300 1,520,500 1,489,300 Source: State of California, Employment Development Department, March 2008 Benchmark.

Appendix A Page 6

The following table summarizes the largest employers in the City, other than the City itself, as of June 30, 2009:

CITY OF MISSION VIEJO

Largest Employers

Employer

Number of Employees

Saddleback College 2,196 Mission Hospital Regional Medical Center 1,349 Unisys Corporation 1,000 Quest Diagnostics Inc 500 Coldwell Banker 410 Saddleback Valley Unified School District 400 Nordstrom 300 Macy's Department Store 275 United States Postal Service 250

Source: Selectory.com 2009 California Employment Development Department Orange County Golden 500 Commercial Activity

The following table summarizes the volume of retail sales and taxable transactions within the City for the years 2003 through 2007.

CITY OF MISSION VIEJO TOTAL TAXABLE TRANSACTIONS

(in thousands) 2003-2007 (1)

Total Taxable Retail Sales Retail Sales Transactions Issued Sales

Year ($000's) % Change Permits ($000's) % Change Permits

2003 1,186,641 — 1,298 1,356,743 — 2,979 2004 1,316,929 10.98% 1,366 1,511,913 11.43 2,985 2005 1,399,377 6.26 1,418 1,609,328 6.44 2,965 2006 1,394,587 -0.34 1,378 1,628,124 1.17 2,913 2007 1,305,358 -6.39 1,354 1,549,469 -4.83 2,853

Source: State Board of Equalization, “Taxable Sales in California.” (1) Latest available full-year data.

Appendix A Page 7

The following table compares taxable transactions for the City and surrounding cities for the years 2003 through 2007.

CHANGE IN TOTAL TAXABLE TRANSACTIONS

CITY OF MISSION VIEJO AND SURROUNDING CITIES (in thousands) 2003-2007 (1)

% Change

from City 2003 2004 2005 2006 2007 2003-2007

MISSION VIEJO 1,356,743 1,511,913 1,609,328 1,628,124 1,549,469 14.20% Laguna Hills 602,775 657,738 658,626 631,426 605,039 0.38 Laguna Niguel 953,851 1,001,824 1,024,372 1,020,805 995,104 4.32 Lake Forest 1,050,389 1,190,534 1,273,898 1,305,690 1,341,506 27.71 San Juan Capistrano 701,331 692,522 750,992 750,455 712,987 1.66 Source: State Board of Equalization, “Taxable Sales in California.” (1) Latest available full-year data.

Construction Activity

The following table summarizes commercial and residential construction activity in the

City for the most recent 5 years:

CITY OF MISSION VIEJO BUILDING PERMITS AND VALUATION

(Dollars in Thousands)

2004 2005 2006 2007 2008 Permit Valuation:

New Single-family $ 0 $ 0 $ 460 $ 0 $ 0 New Multi-family 0 0 2,035 0 0 Res. Alterations/Additions 15,541 18,057 19,268 11,461 11,316 Total Residential 15,541 18,057 21,763 11,461 11,316 Total Nonresidential 19,270 47,825 27,233 44,434 21,670

Total All Building $34,811 $65,882 $48,996 $55,895 $33,015 New Dwelling Units:

Single Family 0 0 1 0 0 Multiple Family 0 0 11 0 0

Total 0 0 12 0 0 Sources: Construction Industry Research Board: “Building Permit Summary.” Note: Totals may not add due to independent rounding.

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Appendix B

APPENDIX B

COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2009

THIS PAGE INTENTIONALLY LEFT BLANK

CITY OF MISSION VIEJO

CALIFORNIA

COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2009

CITY COUNCIL

Frank Ury, Mayor Lance R. MacLean, Mayor Pro Tem

Trish Kelley, Council Member John Paul “J. P.” Ledesma, Council Member

Cathy Schlicht, Council Member

CITY MANAGER

Dennis R. Wilberg

PREPARED BY

DEPARTMENT OF ADMINISTRATIVE SERVICES

Irwin B. Bornstein Assistant City Manager/ Director of Administrative Services

THIS PAGE INTENTIONALLY LEFT BLANK

CITY OF MISSION VIEJO Comprehensive Annual Financial Report

Year ended June 30, 2009

Table of Contents

Page INTRODUCTORY SECTION Letter of Transmittal .................................................................................................................................................. i GFOA Certificate of Achievement for Excellence in Financial Reporting ................................................................ vi Organizational Structure ........................................................................................................................................ vii List of Principal Officials ......................................................................................................................................... viii FINANCIAL SECTION Independent Auditors’ Report .................................................................................................................................. 1 Management’s Discussion and Analysis (Required Supplementary Information) .................................................... 5 Basic Financial Statements: Basic Financial Statements - Overview .............................................................................................................. 23 Government-wide Financial Statements: Statement of Net Assets .................................................................................................................................. 25 Statement of Activities ..................................................................................................................................... 26 Fund Financial Statements: Description of Governmental Funds ................................................................................................................ 28 Balance Sheet .............................................................................................................................................. 30 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets ......................... 33 Statement of Revenues, Expenditures and Changes in Fund Balances ...................................................... 34 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities ................................................... 36 Proprietary Funds: Statement of Net Assets .................................................................................................................................. 37 Statement of Revenues, Expenses and Changes in Fund Net Assets ............................................................ 38 Statement of Cash Flows ................................................................................................................................ 39 Fiduciary Fund: Statement of Fiduciary Assets and Liabilities - Agency Fund .......................................................................... 41 Notes to Basic Financial Statements .................................................................................................................. 43 Required Supplementary Information: Schedules of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual (Budgetary Basis): General Fund ................................................................................................................................................... 91 Measure M Special Revenue Fund ................................................................................................................. 92 Grants Special Revenue Fund ........................................................................................................................ 93 Ladera Funding Special Revenue Fund .......................................................................................................... 94 Low and Moderate Income Housing Special Revenue Fund ........................................................................... 95 Notes to Required Supplementary Information ................................................................................................... 97

CITY OF MISSION VIEJO Comprehensive Annual Financial Report

Year ended June 30, 2009

Table of Contents Supplementary Schedules –

Other Governmental Funds: ......................................................................................................................... 101

Other Special Revenue Funds .......................................................................................................................... 103

Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual

..................................................................................................................................... 108

ajor and Other Debt Service Funds: .................................................................................................................. 115

............................................................................................................................. 116

ajor Debt Service Fund: xpenditures and Changes in Fund Balances - Budget and Actual

Fund ................................................................................................................................ 118

ther Debt Service Funds: penditures and Changes in Fund Balances - Budget and Actual

rvice Fund ...................................................................................................................... 119

apital Projects Funds: ........................................................................................................................................ 125

Combining Balance Sheet .... Combining Statement of Revenues, Expenditures and Changes in Fund Balances ..................................... 102 Combining Balance Sheet ............................................................................................................................. 104 Combining Statement of Revenues, Expenditures and Changes in Fund Balances ..................................... 106 (Budgetary Basis): Gas Tax Fund ....... Library Operations Fund ............................................................................................................................ 109 Developer Fees Fund ................................................................................................................................. 110 Law Enforcement Grants Fund .................................................................................................................. 111 Air Quality Fund ......................................................................................................................................... 112 Senior Center Fund .................................................................................................................................... 113 M Other Debt Service Funds: Combining Balance Sheet Combining Statement of Revenues, Expenditures and Changes in Fund Balances ..................................... 117 M Schedule of Revenues, E (Budgetary Basis): CDA Debt Service O Schedule of Revenues, Ex (Budgetary Basis): CDA Notes Debt Se Mall Parking Lease Fund ............................................................................................................................... 120 CDFA 1999 Mall Bonds Fund ........................................................................................................................ 121 CDFA 1999 Revenue Bonds Fund ................................................................................................................ 122 CDFA 2001 City Hall / Library Expansion Bonds Fund ................................................................................. 123 C Combining Balance Sheet ................................................................................................................................ 126

CITY OF MISSION VIEJO Comprehensive Annual Financial Report

Year ended June 30, 2009

Table of Contents Combining Statement of Revenues, Expenditures and Changes in Fund Balances ............................................ 127

(Budgetary Basis) ......................... 128

pment Agency Projects Fund ........................................................................................ 129

Combining Statement of Net Assets ................................................................................................................ 132

Schedule of Changes in Assets and Liabilities ................................................................................................ 139

TATISTICAL SECTION

Schedule of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual Library Construction Fund ................................................................................................. Community Develo Enterprise Funds:................................................................................................................................................. 131 Combining Statement of Revenues, Expenses and Changes in Fund Net Assets .......................................... 133 Combining Statement of Cash Flows .............................................................................................................. 134 Agency Fund: ................................................................................................................................................... 137 S

ection Contents .......................................................................................................... 141

Net Assets by Component - Last Seven Fiscal Years ....................................................................................... 143 Last Seven Fiscal Years ............................................................................................ 144

Assessed Value and Estimated Actual Value of Taxable Property - Last Ten Fiscal Years ............................... 152 ping Property Tax Rates - Last Ten Fiscal Years ................................................................. 153

Ratios of Outstanding Debt by Type - Last Ten Fiscal Years ............................................................................ 156 erlapping Debt ............................................................................................................................ 157

Demographic and Economic Statistics - Last Ten Fiscal Years ......................................................................... 160 Principal Employers – Current Year and Seventeen Years Ago ........................................................................ 161

Description of Statistical S

Financial Trends: Changes in Net Assets - Fund Balances of Governmental Funds - Last Ten Fiscal Years....................................................................... 148 Changes in Fund Balances of Governmental Funds - Last Ten Fiscal Years.................................................... 149 Tax Revenues by Source - Last Ten Fiscal Years Fiscal Years ......................................................................... 150 Governmental Fund Revenues and Expenditures - Last Ten Fiscal Years ...................................................... 151 Revenue Capacity: Direct and Overlap Principal Property Taxpayers - Current Year and Nine Years Ago ..................................................................... 154 Property Tax Levies and Collections - Last Ten Fiscal Years ............................................................................ 155 Debt Capacity: Direct and Ov Legal Debt Margin Information - Last Ten Fiscal Years ..................................................................................... 158 Pledged - Revenue Coverage – Last Ten Fiscal Years ..................................................................................... 159 Demographic and Economic Information:

CITY OF MISSION VIEJO Comprehensive Annual Financial Report

Year ended June 30, 2009

Table of Contents Operating Information: Full-Time Equivalent City Government Employees by Function - Last Ten Fiscal Years .................................. 162 Operating Indicators by Function - Last Ten Fiscal Years ................................................................................. 163 Capital Asset Statistics by Function - Last Ten Fiscal Years ............................................................................. 164

Frank Ury Mayor

Lance R. MacLean City of Mission Viejo

Administrative Services Department

Mayor Pro Tem

Trish Kelley Council Member

John Paul “J.P.” Ledesma Council Member

Cathy Schlicht Council Member

November 13, 2009 Honorable Mayor, Members of the City Council, City Manager and Citizens of the City of Mission Viejo: The Comprehensive Annual Financial Report (CAFR) of the City of Mission Viejo for the fiscal year ended June 30, 2009 is submitted herewith. This report consists of management’s representations concerning the finances of the City of Mission Viejo. Management assumes full responsibility for the completeness and reliability of all of the information presented in this report, based on a comprehensive framework of internal control that has been established for this purpose. Because the cost of internal controls should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of material misstatement. The City’s financial statements have been audited by Mayer Hoffman McCann P.C., certified public accountants. The auditors have issued an unqualified (“clean”) opinion on these financial statements. Their report is located at the front of the financial section of this report. Management’s discussion and analysis (MD&A) immediately follows the independent auditor’s report and provides a narrative introduction, overview, and analysis of the basic financial statements. MD&A complements this letter of transmittal and should be read in conjunction with it. Profile of Mission Viejo Mission Viejo is located in southern California approximately halfway between Los Angeles and San Diego, in the southern-most portion of Orange County commonly referred to as the Saddleback Valley. The City's current population is 100,242, making it the largest city in the Saddleback Valley and the ninth largest of the county’s 34 cities. Mission Viejo incorporated in 1988. The City of Mission Viejo is a 17.4 square-mile city. Although the City incorporated in 1988, the first homes in the community were built in the mid-1960’s. It was developed as a master planned community by the former Mission Viejo Company. The City is best known for its recreational facilities and programs, and includes 41 park sites within its boundaries. The City is governed under the Council-Manager form of government, with a five-member City Council elected at-large on a non-partisan basis. Council members serve staggered, four-year terms, with a three consecutive term limit. Council elections are held in November of even-numbered years. The Mayor is selected by the City Council from among its membership and serves a one-year term. The City Manager is appointed by the City Council to carry out the policies and direction of the City Council, oversee the day-to-

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Honorable Mayor, Members of the City Council, City Manager and Citizens of the City of Mission Viejo November 13, 2009 day operations of the City and appoint the heads of the various City departments. The current City Manager, Dennis Wilberg, was appointed in November 2003. The City operates primarily as a "contract city," utilizing agreements with other governmental entities and private firms and individuals to provide many of the traditional municipal services to the community. The City provides a full range of municipal services, including police, public works, planning, recreation, library and animal control. Fire services are provided directly by the Orange County Fire Authority, and water and sewer services are provided by separate districts. The City is financially accountable for three legally separate entities, the Mission Viejo Public Improvement Corporation, the Community Development Agency of the City of Mission Viejo and the Mission Viejo Community Development Financing Authority, the activities of which are included in these financial statements. Additional information on all three of these legally separate entities can be found in the Note 1 to the basic financial statements. The City (the primary government) utilizes a two-year budget, which the Council adopts by June 30 or as soon thereafter as possible in odd-numbered years. Each year of the two-year budget is appropriated separately. The budget is prepared by program area (e.g., public safety), program (e.g., police patrol services) and fund. The City Manager can authorize appropriation transfers in the operating budget within the same program area and fund without limitation, and in the capital budget between capital projects within the same department and fund up to $30,000. The City Council must authorize all other budget changes. The Community Development Agency budget is also prepared on a two-year basis. The Community Development Financing Authority utilizes a one-year budget. Both of these budgets are controlled at the fund level. State law mandates that Mission Viejo can only raise local tax rates with voter approval. In addition, certain user fees require voter approval and increases in user fees must follow procedures set forth in State law. Local economy Being the largest city in South Orange County, the City is the home of major educational and health facilities for the area as well as a center of regional commerce. It has a relatively small industrial base. The City has three major employers with 1,000 or more employees each: Saddleback College, Mission Hospital Regional Medical Center and Unisys Corporation. All three have been major employers in the community since incorporation. Saddleback College, the City’s largest employer, is a two-year community college serving approximately 26,000 students annually. Mission Hospital Regional Medical Center, the City’s second largest employer, is a 301-bed facility and is the largest hospital in South Orange County and one of only three trauma centers in all of Orange County. The hospital is in the middle of a 20-year expansion program. As part of that program, the hospital anticipates opening their new patient care tower in November, 2009. This new tower will expand the hospital’s capacity by adding more beds, diagnostic imaging, nuclear medicine and a linear accelerator. The commercial section of the City is anchored by The Shops at Mission Viejo, a regional mall of 1.1 million square feet with approval to expand an additional 80,000-120,000 square feet. Six high-end auto dealers are also located in Mission Viejo.

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Honorable Mayor, Members of the City Council, City Manager and Citizens of the City of Mission Viejo November 13, 2009 Since its incorporation 21 years ago, Mission Viejo has had a strong and well-diversified tax base. The tax base has performed extremely well in good economic times, and it has also weathered well the slower economic times. Assessed valuation of property in the City has grown at an average annual rate of 6.6% since 1988. Despite two periods of no growth, during the early 1990’s and since 2007, our retail sales tax base has grown during the 21-year history of the City at an average annual rate of 4.9%. The median family income of Mission Viejo residents has always been relatively high, and last year it was ranked as the 19th highest of all U.S. cities. Over the years, the relatively high property values and income levels within the City have generated tax revenues sufficient to support a very high level of municipal services and facilities for the community to enjoy, as well as healthy fund balances. In addition, the City has been quite successful over the years in securing outside grant funding to maintain its infrastructure. Mission Viejo has had a low unemployment rate throughout its history. The rate has traditionally not only been below the State and national rates, but also below the County unemployment rate. Except during periods of recession in the early 1990’s and since 2008, the unemployment rate in the City has ranged between 1.4% and 2.9%. In the mid-1990’s, it peaked at 6.6% and it reached 6.8% this past year. Over the next two years, unemployment is expected to remain stable or decrease as the regional economy begins to recover from the recession, and the City’s economy in general is expected to perform as well as, or better than, the economies of the county and State. Long-term financial planning Over the past 10 years, revenues grew at an average annual rate of 4.8% in the City’s governmental funds (General Fund, special revenues funds, debt service funds and capital projects funds). Revenues exceeded operating expenditures in these funds each year. Operating expenditures grew at a 4.3% average annual rate over this same time period. Every two years, the City updates its Master Financial Plan (MFP), which includes a seven-year General Fund revenue forecast and expenditure plan. The 2009-16 revenue forecast indicates that like all other cities across the nation, we are in the midst of an economic recession that will impact local revenues for several more years. Our forecast projects three years of generally stagnant revenues, through FY 2011-12, followed by a slow climb thereafter. General Fund revenues are expected to grow at an average annual rate of 2.3% over the next seven years, and our plan is to constrain the average annual growth of General Fund operating expenditures to 0.7% over that same period, to maintain fund balances at the City Council’s target level of 50% of annual revenues. Managing the growth of ongoing expenditures to stay within the amount of revenue growth will be the major challenge during the next seven years. It will be accomplished by reducing staffing levels by 8% over the next two years and by constraining the growth in both personnel and non-personnel costs. Major initiatives In December, 2008, the City Council met to establish the strategic goals that would guide the development of the 2009-11 Budget and provide the overall direction for the City for the next five years. Six strategic planning areas were identified. In alphabetical order, they are: (1) community building, (2) economic development, (3) improving public relations and communication, (4) preserving and enhancing the beauty of the community, (5) public safety and emergency preparedness and (6) traffic flow and infrastructure

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Honorable Mayor, Members of the City Council, City Manager and Citizens of the City of Mission Viejo November 13, 2009 improvements. Executive management proceeded to develop more specific five-year goals and two-year objectives for each of the six planning areas. These goals and objectives were incorporated in the 2009-11 Budget that was adopted by the City Council in July 2009. Our most recent community opinion survey indicated that 96% of Mission Viejo residents are satisfied with the major services the City provides. The survey results indicated that the most important service need for the City to address is managing traffic congestion. The City has a multi-year plan to expand the capacity of most of the major east-west thoroughfares in town. The widening of Crown Valley Parkway is now complete. This was the largest street widening project in the City’s history with a total project cost of $18.2 million. The widened thoroughfare will enhance traffic flow through the major business district in town as well as to and from the Ladera community and the planned Rancho Mission Viejo community to the east of the City. Construction work on projects to improve two other major east-west thoroughfares will begin this year. The first project will widen portions of Oso Parkway (total estimated project cost of $9.4 million) and the second project will widen and improve the segment of La Paz Road near the City’s western boundary, including the bridge over the railroad tracks (total estimated project cost of $6.7 million). Nearly all the funding for these projects will come from developer fees or Federal, State and county revenue sources. An additional goal of the City for the past several years has been to address the affordable housing needs of the City in an acceptable manner that meets both community expectations and the State’s regional housing needs assessment (RHNA) requirements. The Community Development Agency, as required by the State, has been accumulating resources to assist and promote low- to moderate-income housing development. For the last three years the amount of these funds has reached the “excess surplus” level, as defined by State law. The agency has three years to commit “excess surplus” funds or face sanctions that restrict future operations of the agency and $570,000 must be committed to one or more housing projects by June 30, 2010. Awards and acknowledgements The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Mission Viejo for its comprehensive annual financial report for the fiscal year ended June 30, 2008. The Certificate is a prestigious national award that recognizes conformance with the highest standards for preparation of state and local government financial reports. To be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. Such CAFR must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. Mission Viejo received its first Certificate of Achievement in 1988-89, its first full year of incorporation as a city, and has received the certificate every year since then. I believe this 2008-09 CAFR continues to conform to the Certificate of Achievement program requirements, and it will be submitted to GFOA for award consideration. The City also received the GFOA Distinguished Budget Presentation Award and CSMFO Excellence in Operational Budgeting Award for its 2007-2009 biennial budget document. To qualify for the GFOA award, a governmental unit must publish a budget document that meets program criteria as a policy document, as an operations guide, as a financial plan, and as a communications device. The CSMFO award reflects

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Honorable Mayor, Members of the City Council, City Manager and Citizens of the City of Mission Viejo November 6, 2009

excellence in the budget document and the underlying budget process through which the budget is implemented.

The preparation and publication of the CAFR is a team effort, requiring the dedication and cooperation of the entire Administrative Services Department staff and the City's independent auditors, Mayer Hoffman McCann P.C., throughout the year as well as at year-end. I would like to acknowledge the following individuals who contributed significant effort toward the publication of this document: Accounting Manager Bob Barry, Senior Accountant Patricia Brunell, Accountant Kim Lashley, Administrative Assistant Sherry Merrifield and Purchasing Analyst Pat Sparks.

In closing, I want to express my thanks to the City Council and City Manager for their support and leadership, and for their continuing efforts to maintain the City's strong fiscal health.

Respectfully submitted,

~{>. /k>J1K~ Irwin B. Bomstein, CPA Assistant City Manager/Director of Administrative Services

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CITY OF MISSION VIEJO Comprehensive Annual Financial Report

June 30, 2009

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Mission Viejo for our Comprehensive Annual Financial Report for the fiscal year ended June 30, 2008. In order to be awarded a certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized Comprehensive Annual Financial Report, whose contents conform to industry standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current report continues to conform to Certificate of Achievement Program requirements, and we are submitting it to GFOA to determine its eligibility for another certificate.

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CITY OF MISSION VIEJO Organizational Structure

June 30, 2009

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MISSION VIEJO RESIDENTS

CITY COUNCIL

MAYOR Frank Ury

MAYOR PRO TEM Lance R. MacLean

COUNCIL MEMBERS Trish Kelley

John Paul Ledesma Cathy Schlicht

CITY ATTORNEY William P. Curley, III Richards, Watson

& Gershon

CITY MANAGER Dennis R. Wilberg

ASS’T CITY MANAGER

Irwin B. Bornstein

COMMUNITY RELATIONS & COMMUNICATIONS

Karen Wylie

CITY CLERK Karen Hamman

LIBRARY SERVICES

Valerie Maginnis

ADMINISTRATIVE SERVICES

Irwin B. Bornstein

INFORMATION TECHNOLOGY

A.Jackie Alexander

PUBLIC SERVICES RECREATION & COMMUNITY SERVICES

M. Kelly Doyle

RECREATION

COMMUNITY SERVICES

W. Keith Rattay

MAINTENANCE

ANIMAL SERVICES

EMERGENCY SERVICES

INFORMATION TECHNOLOGY

FINANCE LIBRARY ADMINISTRATION

HUMAN RESOURCES PUBLIC SERVICES

SUPPORT SERVICES

RISK MANAGEMENT

CIRCULATION SERVICES

PLANNING

BUILDING

CODE ENFORCEMENT

CDBG/HOUSING REHABILITATION

PUBLIC WORKS Mark Chagnon

ENGINEERING

CIP MANAGEMENT

TRANSPORTATION

COMMUNITY POLICE DEVELOPMENT Orange County Sheriff

Lt. Mike Gavin Charles E. Wilson

PATROL

INVESTIGATION

COMMUNITY SUPPORT

TRAFFIC PARKING ENFORCEMENT

CITY OF MISSION VIEJO List of Principal Officials

as of June 30, 2009

City Manager .................................................................................................................................... Dennis R. Wilberg City Attorney .................................................................................................................................. William P. Curley III City Clerk ............................................................................................................................................. Karen Hamman Assistant City Manager/ Director of Administrative Services ............................................................ Irwin B. Bornstein Deputy City Manager/Community Relations & Communications Manager ................................................ Karen Wylie Director of Community Development ................................................................................................ Charles E. Wilson Director of Information Technology ................................................................................................ A. Jackie Alexander Director of Library Services ................................................................................................................ Valerie Maginnis Director of Public Services ................................................................................................................... W. Keith Rattay Director of Public Works ........................................................................................................................ Mark Chagnon Director of Recreation and Community Services .................................................................................... M. Kelly Doyle Chief of Police Services (O.C. Sheriff Department) ................................................................................ Lt. Mike Gavin

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Mayer Hoffman McCann P.C. An Independent CPA Firm

2301 Dupont Drive, Suite 200 Irvine, California 92612 949-4 7 4-2020 ph 949-263-5520 fx www.mhm-pc.com

The Honorable Members of the City Council City of Mission Viejo Mission Viejo, California

Independent Auditors' Report

We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund , and the aggregate remaining fund information of the City of Mission Viejo, California as of and for the year ended June 30, 2009, which collectively comprise the City's basic financial statements, as listed in the accompanying table of contents. These financial statements are the responsibility of the management of the City of Mission Viejo, California. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year partial comparative information has been derived for the financial statements of the City of Mission Viejo for the year ended June 30, 2008, which were audited by other auditors, and whose opinion dated November 10, 2008 expressed an unqualified opinion of those statements. Our responsibility is to express opinions on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund , and the aggregate remaining fund information of the City of Mission Viejo, California, as of June 30, 2009, and the respective changes in financial position and cash flows, where applicable.

The information identified in the accompanying table of contents as management's discussion and analysis and required supplementary information are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it.

Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the City of Mission Viejo's basic financial statements. The introductory section, the combining and individual nonmajor fund financial statements and schedules, and the statistical schedules listed in the table of contents are presented for purposes of additional

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The Honorable Members of the City Council City of Mission Viejo Mission Viejo, California

analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical schedules have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them.

Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the City of Mission Viejo's basic financial statements. The introductory section, the combining and individual nonmajor fund financial statements and schedules, and the statistical schedules listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical schedules have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them.

In accordance with Government Auditing Standards, we have also issued a report dated November 6, 2009 on our consideration of the City's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

Irvine, California November 6, 2009

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

As management of the City of Mission Viejo (“City”), we offer readers of the City’s financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended June 30, 2009. Please read it in conjunction with the accompanying transmittal letter at the front of this report, and the basic financial statements, which follow this section. Financial Highlights

• The assets of the City exceeded its liabilities at June 30, 2009 by $714.4 million. This amount is referred to as the net assets of the City. Of this amount, $35.9 million is unrestricted net assets and may be used to meet the City’s ongoing obligations to citizens and creditors.

• The City’s net assets increased by $2.2 million during the past year; that is, total revenues exceeded total expenses by $2.2 million. This compares to the prior year increase of $6.5 million. FY 2008-09 revenues decreased by $3.6 million from FY 2007-08 levels, and expenses grew by $0.7 million.

• As of the close of the 2008-09 fiscal year, the City’s governmental funds reported combined ending fund balances of $55.8 million. Governmental fund expenditures and other financing sources/uses exceeded revenues by $0.8 million in FY 2008-09 as a result of the slowing economy, a decrease of $10.6 million from the prior year. Of the $55.8 million combined ending fund balances at June 30, 2009, $27.5 million is available for spending at the government’s discretion (termed the “unreserved fund balance”).

• As of June 30, 2009, the unreserved fund balance of the General Fund, the City’s chief operating fund, was $30.1 million, or 61% of General Fund revenues. This compares to an unreserved fund balance of 58% of revenues at June 30, 2008. Approximately $18.6 million of the June 30, 2009 balance has been designated by the City Council for rehabilitation and replacement of current City assets.

• The City’s total long-term liabilities decreased by $1.4 million, or 2.4%, during the fiscal year ending June 30, 2009, to a level of $56.3 million. The City’s issuer credit rating was increased to AAA from AA+ by Standard and Poor’s in June, 2009 and Moody’s Investors Service maintained its credit rating of Aa2.

Overview of the Financial Statements This discussion and analysis is an introduction to the City’s basic financial statements, which consist of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. This report also consists of supplementary information in addition to the basic financial statements. Government-wide financial statements. These statements are designed to provide readers with a broad overview of the City’s finances, in a manner similar to a private sector business. There are two government-wide financial statements: the Statement of Net Assets and the Statement of Activities. They present information for the government as a whole and present a longer-term view of the City’s finances.

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CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

These two statements help to answer the question: “Is the City as a whole better off or worse off as a result of this year’s activities?” The Statement of Net Assets presents information on all of the City’s assets and liabilities, with the difference between the two reported as net assets. In time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The Statement of Activities presents information on how the City’s net assets changed during the fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Therefore, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (for example, uncollected taxes and earned but unused employee leaves). Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include police services, public works, infrastructure maintenance, most general government activities, recreation and community services, community development and library services. The business-type activities of the City include animal services and government-access cable television. The government-wide financial statements include not only the City of Mission Viejo itself (known as the primary government), but also two other legally separate entities: the City’s redevelopment agency, known as the Community Development Agency of the City of Mission Viejo (the “Agency” or “CDA”); and the Mission Viejo Community Development Financing Authority (the “Authority”), a joint powers authority formed by the City and the Agency to issue bonds for the construction of major capital facilities. The City is financially accountable for both of these legally separate entities, which are referred to as component units. The Agency and Authority function for all practical purposes as departments of the City, and therefore, these component units have been included in these financial statements as an integral part of the primary government. The government-wide financial statements can be found on pages 25-27 of this report. Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other State and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds and fiduciary funds. Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at

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CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

the end of the fiscal year. Such information may be useful in evaluating a government’s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government’s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The City maintains 19 individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund, Measure M Fund, Grants Fund, Low and Moderate Income Housing Fund, Ladera Funding Fund, and CDA Debt Service Fund, which are considered to be the City’s six major funds. Data from the other 13 governmental funds are combined into a single, aggregate presentation. Individual fund data for each of these other governmental funds is provided in the form of combining statements elsewhere in the report. The City (the primary government) adopts a biennial budget for all its governmental and proprietary funds. The Community Development Agency also adopts a two-year budget. Annual appropriations are approved prior to the beginning of each year of the biennial budget period. The Authority adopts an annual budget. A budgetary comparison statement has been provided for each of the governmental funds to demonstrate compliance with this budget. The definition of the General Fund for purposes of these audited financial statements is different than for budgetary purposes. For budgeting purposes, the City maintains two asset replacement funds separate from the General Fund, but for these financial statements, these funds are combined into the General Fund. The basic governmental fund financial statements can be found on pages 30-36 of this report. Proprietary funds. The City maintains two enterprise funds, a type of proprietary fund. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for its animal services operation and government-access cable television station. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide combined information for the animal services and television operations, because both are considered to be non-major funds of the City. Individual fund data for the two enterprise funds is provided in the form of combining statements elsewhere in the report. The basic proprietary fund financial statements can be found on pages 37-40 of this report.

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CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

Fiduciary funds. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of these funds are not available to support the City’s own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The City utilizes one agency fund, which is a type of fiduciary fund, to account for assets of Community Facilities District No. 92-1 (Mission Viejo Freeway Center). The basic fiduciary fund financial statements can be found on page 41 of this report. Notes to the basic financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 43-88 of this report. Other information. In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information concerning the City’s “modified approach” method of accounting for its street infrastructure assets, and budgetary comparisons for the general fund and major special revenue funds. Required supplementary information can be found on pages 91-95 of this report. The combining statements referred to earlier in connection with other governmental funds are presented immediately following the required supplementary information as supplementary schedules. Combining and individual fund statements and schedules can be found on pages 101-106 of this report. Government-wide Financial Analysis Net assets. As noted earlier, net assets may serve over time as a useful indicator of a government’s financial position. In the case of the City, net assets were approximately $714.4 million as of June 30, 2009. Net assets increased $2.2 million, or 0.3%, during fiscal year 2008-09. Assets decreased 0.1% and liabilities decreased by 3.6% compared to June 30, 2008. By far the largest portion of the City’s net assets at June 30, 2009 ($660.9 million, or 92.5% of total net assets) reflects its investment in capital assets (e.g., land, infrastructure, buildings, machinery and equipment) less any related debt used to acquire those assets that is still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City’s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities.

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CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

TotalPercentage

Change2009 2008 2009 2008 2009 2008 2008-2009

Current and other non-current assets 74.6$ 76.8$ 2.3$ 2.2$ 76.9$ 79.0$ -2.7%Capital assets 703.8 702.2 2.5 2.4 706.3 704.6 0.2% Total assets 778.4 779.0 4.8 4.6 783.2 783.6 -0.1%

Long-term liabilities Outstanding 56.2 57.7 0.1 - 56.3 57.7 -2.4%Other liabilities 12.4 13.6 0.1 0.1 12.5 13.7 -8.8% Total liabilities 68.6 71.3 0.2 0.1 68.8 71.4 -3.6%

Net assets: Invested in capital assets, net of debt 658.4 655.4 2.5 2.4 660.9 657.8 0.5% Restricted 17.6 18.1 - - 17.6 18.1 -2.8% Unrestricted 33.8 34.2 2.1 2.1 35.9 36.3 -1.1% Total net assets 709.8$ 707.7$ 4.6$ 4.5$ 714.4$ 712.2$ 0.3%

City of Mission ViejoNet Assets at Year-End

(in millions)

ActivitiesGovernmental

Activities TotalBusiness-Type

An additional $17.6 million of the City’s net assets is restricted net assets, representing resources that are subject to external restrictions on how they may be used. The remaining $35.9 million is unrestricted net assets, which may be used to meet the government’s ongoing obligations to citizens and creditors. Unrestricted net assets decreased $0.4 million, or 1.1% from June 30, 2008. Changes in net assets. As noted in the following table, the City’s net assets grew by $2.2 million, or 0.3%, during the current fiscal year. The FY 2008-09 growth in net assets compares to the FY 2007-08 increase of $6.5 million.

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CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

TotalPercentage

Change2009 2008 2009 2008 2009 2008 2008-2009

RevenuesProgram revenues: Charges of services 5.6$ 5.9$ 0.6$ 0.9$ 6.2$ 6.8$ -8.8% Operating grants and contributions 4.2 4.8 0.8 0.5 5.0 5.3 -5.7% Capital grants and contributions 9.5 8.8 - - 9.5 8.8 8.0%

General revenues: Taxes: Property taxes 34.2 33.5 - - 34.2 33.5 2.1% Sales and use taxes 10.6 12.2 - - 10.6 12.2 -13.1% Property taxes in lieu of sales and use taxes 3.9 4.1 - - 3.9 4.1 -4.9% Other taxes 3.4 3.6 - - 3.4 3.6 -5.6% Motor vehicle in lieu fees 0.3 0.4 - - 0.3 0.4 -25.0% Investment earnings 2.0 3.7 0.1 0.1 2.1 3.8 -44.7% Other 0.2 0.5 - - 0.2 0.5 -60.0% Total revenues 73.9 77.5 1.5 1.5 75.4 79.0 -4.6%

Expenses

General government- legislative 2.2 1.5 - - 2.2 1.5 46.7% General government- management/support 14.7 15.0 - - 14.7 15.0 -2.0% Public safety 16.2 15.7 - - 16.2 15.7 3.2% Community development 1.9 2.6 - - 1.9 2.6 -26.9% Public works – engineering/transportation 3.4 3.4 - - 3.4 3.4 0.0% Infrastructure maintenance 21.9 21.4 - - 21.9 21.4 2.3% Recreation, community and library services 9.4 8.8 - - 9.4 8.8 6.8% Animal services and other - - 1.7 1.3 1.7 1.3 30.8% Mission Viejo television - - 0.2 0.2 0.2 0.2 0.0% Interest on long-term debt 1.6 2.6 - - 1.6 2.6 -38.5% Total expenses 71.3 71.0 1.9 1.5 73.2 72.5 1.0% Increase/(decrease) in net assets before transfers 2.6 6.5 (0.4) - 2.2 6.5 -66.2%

Transfers (0.5) (0.5) 0.5 0.5 - - 0.0%

Increase in net assets 2.1 6.0 0.1 0.5 2.2 6.5 -66.2%

Net assets, beginning of year 707.7 701.7 4.5 4.0 712.2 705.7 0.9%

Net assets, end of year 709.8$ 707.7$ 4.6$ 4.5$ 714.4$ 712.2$ 0.3%

City of Mission ViejoChanges in Net Assets

(in millions)

Activities Governmental

Activities Total Business-type

The City’s total revenues were $75.4 million in FY 2008-09, while the total cost of all programs and services was $73.2 million. Revenues decreased by $3.6 million, or 4.6%, over prior year levels and expenses increased by $0.7 million, or 1.0%.

See independent auditors’ report -10-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

Approximately 69% of all revenues this past year came from some form of tax (up slightly from 68% in FY 2007-08). Property tax revenue (including property tax increment revenues to the City’s Community Development Agency), the City’s largest revenue source, this year accounted for 45% of total City revenues, compared to 42% last year and 40% the year before. Sales tax revenue, including the ¼-cent of sales tax diverted by the State and paid to cities as additional property tax revenue, was the second largest revenue source at 19% of total revenues, down from 21% last year and 22% the year before. Governmental activities. Revenues associated with governmental activities decreased by $3.6 million compared to FY 2007-08 due to the slowing economy. The only two areas of growth were property tax revenue, up $0.7 million, or 2.1%, from FY 2007-08, the result of higher property assessed valuations, and capital grants and contributions, which increased $0.7 million primarily as a result of increased street improvement project reimbursements from the Ladera development to the east of the City. The two largest declines in revenues in terms of dollars for the year were sales and use tax and investment earnings. Sales and use tax was down $1.6 million when compared to FY 2007-08 due to the effects of the recession on local sales. Investment earnings were lower by $1.7 million for the year due to a decline in yields earned on City investments and due to the decline in the size of the City’s investment portfolio.

Property Tax45%

Sales Tax (incl In Lieu)

19%Other Taxes

5%

Motor Vehicle In Lieu

0%Charges for

Services8%

Operating Grants/Contri

butions7%

Capital Grants/Contri

butions13%

Investment Earnings, All

Other3%

Revenue SourcesFiscal Year Ended June 30, 2009

Expenses associated with governmental activities increased this past year by $0.3 million, or 0.4%. The cost of all governmental activities in FY 2008-09 was $71.3

illion. That cost was financed by: m

• Those who directly benefited from the programs and services (8%);

General Govt23%

Public Safety22%

Community Development

2%

Public Works-Engr/Transp

5%Infrastructure Maint30%

Recreation, Community,

Library Services

13%

Business-Type

Activities3%

Interest on Long-Term

Debt2%

Functional ExpensesFiscal Year Ended June 30, 2009

• Other governments and organizations that subsidized certain programs and projects with grants and contributions (19%); and

• General tax revenues and other general revenues of the City (73%). These are the same percentages as in FY 2007-08

See independent auditors’ report -11-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

As shown in the Changes in Net Assets table above, the largest increase in total cost of services this year was in the general government – legislative program area. This area’s costs were up $0.7 million due to the funding of events and activities related to the City’s 20th anniversary and due to costs incurred for the November 2008 election. Recreation, community and library services costs were up $0.6 million due primarily to the Norman P. Murray Community and Senior Center expansion being operational for the entire fiscal year as compared to only one quarter in fiscal year 2007-08. Public Safety expenditures increased $0.5 million this fiscal year due to increases in costs included in the police services contract with the Orange County Sheriff’s Department. Infrastructure maintenance expenditures increased $0.5 million, due to increased spending on maintenance for parks, streets, sidewalks, medians and slopes. Expenditures for community development for the year decreased by $0.7 million caused by decreased spending in the City’s housing rehabilitation program and decreased building activity in the City. The $1.0 million decrease in interest on long-term debt was the result of lower interest payments made on variable rate bonds during the year, due to declining short-term interest rates. The following table illustrates that the net cost of governmental services rose $0.5 million this year while the overall percentage of the total cost of services that was funded from general revenues was about the same as in the prior year (72.8% compared to 72.4%). Community Development activities were fully paid for through charges for services and operating contributions and grants. Public works –

engineering/transportation and infrastructure maintenance were the other two program areas that required a smaller percentage of costs to be borne by general tax revenues in FY 2008-09 than in FY 2007-08. The net cost of services for public works – engineering/transportation declined due to an increase in operating contributions and grants received this year while the net cost of infrastructure maintenance services declined due to an increase in the amount of capital grants and contributions received. Recreation, community and library services required a higher percentage of costs to be borne by general tax revenues in FY 2008-09 than in FY 2007-08. This higher percentage is the result of the

2009 2008% of Total % of Total

Total Cost Net Cost Cost Borne By Total Cost Net Cost Cost Borne Byof Services of Services General Revenues of Services of Services General Revenues

General government- legislative 2.2$ 2.2$ 100.0% 1.5$ 1.5$ 100.0%General government- management/support 14.7$ 14.6$ 99.3% 15.0$ 14.7$ 98.0%Public safety 16.2 15.4 95.1% 15.7 14.6 93.0%Community development 1.9 (0.2) -10.5% 2.6 0.3 11.5%Public works- engineering/ transportation 3.4 2.4 70.6% 3.4 2.8 82.4%Infrastructure maintenance 21.9 9.1 41.6% 21.4 10.2 47.7%Recreation, community and library services 9.4 6.8 72.3% 8.8 4.7 53.4%Interest on long-term debt 1.6 1.6 100.0% 2.6 2.6 100.0%

71.3$ 51.9$ 72.8% 71.0$ 51.4$ 72.4%

City of Mission ViejoNet Cost of Governmental Activities

(in millions)

See independent auditors’ report -12-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

completion of the expansion of the Norman P. Murray Community and Senior Center in FY 2007-08 and a reduction in the amount of grant funds received for its construction in 2008-09 when compared to the prior year as well as an increase in the operating costs for the expanded center due to the increase in classes and programs offered. Business-type activities. The business-type activities of the City continue to be a relatively small component of overall City operations, representing less than 1% of total City net assets. Business-type activities of the City generated a $0.1 million increase in net assets in FY 2008-09, compared to an increase of $0.5 million in FY 2007-08. The amount of increase in net assets for FY 2008-09 was less than the FY 2007-08 amount due to a large unexpected bequest received in FY 2007-08 resulting in a higher than normal increase in net assets that year.

0

5

10

15

20

25

$ mill

ions

Expenses and Program Revenues -Governmental Activities

Year ending June 30, 2009

Expenses Program Revenue

Financial Analysis of the City’s Funds As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds. The focus of the City’s governmental funds is to provide information on near-term inflows, outflows and balances of spendable resources. Such information is useful in assessing the City of Mission Viejo’s financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government’s net resources available for spending at the end of a fiscal year. The City’s governmental funds (as presented in the balance sheet on pages 28-36 reported combined ending fund balances of $55.8 million as of June 30, 2009. This represents a decrease of $0.8 million compared to the prior year. Approximately $27.5 million of this total amount constitutes unreserved fund balances, which are available for spending at the City’s discretion. The remaining amount ($28.3 million) is reserved to indicate that it is not available for new spending because it has either already been committed or is not yet available to spend. The major reservations are: 1) debt service requirements ($9.5 million), 2) low- and moderate-income housing ($8.0 million), 3) encumbrances, to liquidate contracts and purchase orders of the prior period ($4.6 million), 4) advances and long-term receivables between City funds that are not immediately due ($3.0 million) and 5) long-term receivables from outside sources ($3.0 million).

See independent auditors’ report -13-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

The General Fund is the chief operating fund of the City. As of June 30, 2009, the unreserved fund balance of the General Fund was $30.1 million, while the total fund balance was $34.7 million. As a measure of the General Fund’s relative fiscal strength, it is useful to compare the unreserved fund balance amount as a percentage of total fund revenues. At June 30, 2009, unreserved fund balance was 61% of total FY 2008-09 General Fund revenues. This percent compares to the prior year percentages of 58%. As noted earlier, the General Fund in these audited financial statements includes funding for asset replacement that is maintained as two separate funds for budgetary purposes. A total of $18.6 million of unreserved fund balance is designated for asset replacement at June 30, 2009. Excluding this money set aside for asset replacement, the year-end unreserved fund balance of the General Fund of $11.5 million was still 23% of FY 2008-09 General Fund revenues. The comparable number at June 30, 2008 was $10.7 million.

0

10

20

30

40

2008 2009

$ in millions

Fiscal Year-End

General FundUnreserved Fund Balance

Designated for Asset Replacement

Other Designations

Undesignated

The other designation of unreserved fund balance of the General Fund, totaling $4.7 million, represents earmarking by the City Council of funds set aside in the City’s budget for subsequent years’ expenditures (unspent operating and capital budget appropriations as of June 30, 2009 to be carried over to FY 2009-10). This leaves the undesignated portion of unreserved fund balance at $6.8 million as of June 30, 2009, which is an increase of $1.8 million from the $5.0 million level at June 30, 2008. The total fund balance (reserved and unreserved portions) of the City’s General Fund decreased by $2.1 million during the year ended June 30, 2009. The key factors for the current year decline in the fund balance are as follows: ● Capital expenditures of $0.9 million were incurred for 11 capital projects, including Montanoso

tennis lighting replacement, traffic safety, playground renovations and the Marguerite Tennis Renovation and Lighting project.

● Significant one-time expenditures were incurred totaling $0.5 million, for such items as 20th City

anniversary events and activities, and costs associated with administering the November 2008 general election.

● The City also decided to continue to provide a high level of service to the community that

resulted in the use of reserves to fund a portion of the overall operations. As an example, spending for public safety was increased $0.4 million, rather than decreasing public safety services provided to citizens. It is anticipated that revenues will increase in the coming years to a level where they will once again fully pay for the services provided.

See independent auditors’ report

-14-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

The City has five other major funds: the Measure M Fund, the Grants Fund, the Low and Moderate Income Housing Fund, the Ladera Funding Fund, and the CDA Debt Service Fund. The Measure M Fund ended the year with a total fund balance of $2.3 million, an increase of $0.2 million from the prior year. This increase is $0.2 million less than last year’s increase of $0.4 million due to the net effect of lower revenues (down $0.4 million) and lower expenditures for capital projects (down $0.2 million) in the current year. The Grants Fund had an overall fund deficit as of June 30, 2009 of $0.2 million, compared to a fund deficit of $1.1 million at June 30, 2008. The smaller deficit this year is primarily the result of the receipt of grant funds on the Norman P. Murray Community and Senior Center Expansion project that had not been received from the State at the end of last year. The Low and Moderate Income Housing Fund had an overall fund balance of $11.1 million at the end of fiscal year 2008-09, compared to $9.4 million at the end of the prior year. The increase is due to the continued accumulation of funds for low and moderate income housing projects. Of the $11.1 million total fund balance, $3.0 million represents long-term receivables from developers and is not currently available for spending. The $8.1 million that is available for spending puts the CDA into an “excess surplus” condition as defined by State law. The Agency has until July 1, 2010 to rectify this condition by spending a portion of these funds on eligible projects. The Ladera Funding Fund has a total fund deficit of $0.7 million as of June 30, 2009. The prior year’s fund deficit was $0.4 million. The increase in the fund deficit is due to an increase in unreimbursed expenditures compared to last year. The CDA Debt Service Fund at June 30, 2009 had a total fund deficit of $0.8 million versus $2.3 million last year. The deficit is the result of loans due in future years to the General Fund, which will be repaid from future property tax increment revenue. The $1.5 million decrease in the size of the fund deficit was the result of a net increase of property tax increment revenue received in FY 2008-09 when compared to last year and a reduction in operating transfers out to other funds due to no new advances being transferred to the CDA Projects Fund in FY 2008-09 ($1.3 million was transferred for this purpose in FY 2007-08). Proprietary funds. The City’s proprietary funds provide the same type of information found in the government-wide financial statements for the City’s business-type activities, but in more detail. Unrestricted net assets of the combined proprietary funds at the end of fiscal year 2008-09 were $2.1 million, unchanged from fiscal year 2007-08. The combined operating loss for the two proprietary fund operations (animal services and government-access cable television station) was $0.5 million in FY 2008-09. In FY 2007-08 the combined operating loss was $0.1 million. The smaller operating loss in FY 2007-08 was due to an unexpected bequest received for the Animal Services operation. General Fund Budgetary Highlights Under the budgetary basis of accounting, expenditures include all encumbrances in existence at year-end, in addition to all expenditures as defined by generally accepted accounting principles. Encumbrances are commitments to outside vendors that have been made in the form of outstanding contracts and purchase orders. As a result, using the budgetary basis of accounting, General Fund revenues for FY 2008-09 were less than General Fund expenditures by a greater margin than the amount based on generally accepted accounting principles (GAAP). On the budgetary basis, revenues were less

See independent auditors’ report -15-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

than expenditures by $2.4 million, whereas on a GAAP basis, revenues were less than expenditures by $1.2 million. As in prior years, a number of amendments were made to the budget during the year. Most of these amendments affected the General Fund. The General Fund revenue budget was decreased by $2.1 million during the year, the operating budget increased by a net amount of $0.3 million during the year due to appropriations carried over from FY 2007-08 of $2.1 million and decreases made during the year to the operating budget of $1.8 million. The General Fund capital budget was increased by $4.9 million. The increase in the capital expenditure budget during the year was due to: $3.2 million of additional funding for the Marguerite Tennis Renovation and Lighting project; $1.5 million of carry over appropriations from FY 07-08; and $0.2 million of net budget increases to various construction projects.

010203040506070

Revenues Expenditures and Encumbrances

$ in millions

General FundFY 2008-09 Final Budget vs Actual

Final Budget Actual

Actual revenues for the year were $0.8 million less than the revised budget estimates and actual expenditures and encumbrances combined were $5.9 million less than the appropriations budget. The reason that actual revenues came in short of budget was underestimation of the effect of the recession on all local revenue sources except investment earnings and other revenues. Investment earnings exceeded the revised budget due to interest received on a loan paid off by the CDA that was not budgeted and an unrealized gain on investments, which was not budgeted but is required to be recorded under Governmental Accounting Standards Board Statement No. 31. Of the total $5.9 million by which combined expenditures and encumbrances were less than budget, operating expenditures were $0.7 million less than budget and capital projects came in $5.2 million under budget. Operating budget savings were achieved in large part by less than anticipated use of consultants and less building activity in the City than expected. Capital budget savings were the result of five large projects not yet significantly underway as of fiscal year-end: Marguerite Tennis Center Renovation, Marguerite Aquatics Decking, Oso/Marguerite Parkway Intersection Improvements, the 2007 Playground Renovations and the Solar Photovoltaic Panel System at City Hall. The unspent appropriations for these projects, however, are being carried over to FY 2009-10.

See independent auditors’ report -16-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

Capital Asset and Debt Administration Capital Assets. Capital assets net of depreciation increased by $1.7 million, or 0.2%, during FY 2008-09.

TotalPercentage

Change2009 2008 2009 2008 2009 2008 2008-2009

Land 48.7$ 48.7$ 1.0$ 1.0$ 49.7$ 49.7$ 0.0%Rights of way 241.4 239.6 - - 241.4 239.6 0.8%Buildings and Improvements 81.3 83.7 1.0 1.3 82.3 85.0 -3.2%Machinery, equipment and furniture 3.6 2.2 0.5 0.1 4.1 2.3 79.3%Vehicles 0.2 0.1 - - 0.2 0.1 100.0%Infrastructure 307.2 309.5 - - 307.2 309.5 -0.7%Construction in progress 21.4 18.4 - - 21.4 18.4 16.3%

Total 703.8$ 702.2$ 2.5$ 2.4$ 706.3$ 704.6$ 0.2%

Activities Activities Total

City of Mission ViejoCapital Assets At Year-End

(Net of Depreciation, in Millions)

Governmental Business-Type

As allowed by GASB Statement No. 34, the City has adopted an alternative process for recording depreciation expense on selected infrastructure assets. Under this alternative method, referred to as the modified approach, the City expenses certain maintenance and preservation costs and does not report depreciation expense. The assets accounted for under the modified approach are the 228 miles of roads that the City is responsible for maintaining. The City has continued to maintain the assessed condition of its roads at a high level. The City Council’s established minimum condition level is for all three categories of roads to have an average condition of “very good” or better, using the Pavement Condition Index (PCI) methodology. The most recent condition assessment, completed for fiscal year 2007-08, indicated that arterials, collector and local/residential roadways were all in a “very good” condition. With average PCI ratings in 2008 of 84, 77 and 79 respectively for the arterials, collectors and local/residential roadways, the scores have continued a slight downward trend since 2004, but all of the City’s streets are still comfortably above the minimum acceptable level, the lowest score for the “very good” category of 71.

See independent auditors’ report -17-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

For the last five fiscal years, actual maintenance and preservation expenditures exceeded the original estimates. The amounts actually spent were higher than the estimates due to the drastic increase in the cost of asphalt and the assumptions used to calculate the estimate. The estimate assumes the streets in the worst condition will be repaired first. However, for street maintenance purposes the City is divided into seven geographic areas. By grouping the streets into these seven areas the City can maintain and preserve its streets in a more economical and productive manner. Once every seven years all streets in each area receive the required maintenance and preservation work required to maintain the streets at or above the condition level adopted by City Council. Due to the grouping of the streets in each area, some years may experience costs higher than estimated while other years will experience lower costs than estimated.

0

20

40

60

80

100

Arterials Collectors Local/Residential

PCI ScorePCI Scores for City Streets

2004

20062008

The primary government’s fiscal year 2009-10 capital budget is $32.2 million, including $26.1 million of unspent capital project appropriations carried forward from FY 2008-09, and $1.2 million of budget amendments to date. The four largest projects and their remaining budgets are the Oso/Marguerite Parkway Intersection Improvement project ($6.6 million), the residential resurfacing project ($3.8 million), the La Paz Road railroad bridge widening project ($3.8 million), and Marguerite Tennis Center renovation and lighting project ($3.7 million). More detailed information about the City’s capital assets is presented in Note 6 of the Notes to the Basic Financial Statements on pages 43-88 of this report and Note 1 of the Notes to the Required Supplementary Information on pages 97-100. Long-Term Liabilities. As of June 30, 2009, the City had total long-term liabilities outstanding of $56.3 million, a decrease of $1.4 million, or 2.4% from June 30, 2008.

See independent auditors’ report -18-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

TotalPercentage

Change2009 2008 2009 2008 2009 2008 2008-2009

Certificates of Participation $ 2.5 $ 2.6 $ - $ - $ 2.5 $ 2.6 -3.8%Revenue bonds 52.0 53.5 - - 52.0 53.5 -2.8%Subtotal – bonds payable 54.5 56.1 - - 54.5 56.1 -2.9%

Compensated absences 1.7 1.6 0.1 - 1.8 1.6 12.5%

Total $ 56.2 $ 57.7 $ 0.1 $0.0 $ 56.3 $ 57.7 -2.4%

Total

City of Mission ViejoLong-Term Liabilities at Year-End

(in millions)

Governmental Activities

Business-TypeActivities

During the 2008-09 fiscal year no new debt was issued. Outstanding principal for the revenue bonds was reduced by $1.5 million and the outstanding principal for the Certificates of Participation was reduced by $0.1 million. The liability for compensated absences (earned but unused employee leave) increased by $0.2 million. The City was successful in increasing its issuer credit rating from Standard and Poor’s during FY 2008-09 to AAA from AA+. The City’s issuer credit rating from Moody’s Investors Service remains at Aa2. The California State Constitution limits the amount of general obligation bond debt a city may incur to 3.75% of its total assessed valuation, which for the City of Mission Viejo was $501 million at June 30, 2009. The City has no general obligation bond debt outstanding. Additional information on the City’s long-term liabilities can be found in Note 7 of the Notes to the Basic Financial Statements on pages 43-88 of this report. Economic Factors and Next Year’s Budget, Tax Rates and Fee Levels Mission Viejo’s economy and tax base weakened during the past year, consistent with the weakening in the economy at the county, state and national levels. Total City revenues declined by 4.6% this past year, and tax revenues fell 2.4%. Property tax revenue continued to grow but at a slower pace and there were significant declines in sales tax and other tax revenues. There continued to be job losses in Orange County this past year. The City’s unemployment rate increased from 3.8% to 6.8% this past year, but this continued to compare very favorably to the Orange County rate of 9.3%, the State unemployment rate of 11.6%, and the national unemployment rate of 9.5%.

See independent auditors’ report -19-

CITY OF MISSION VIEJO

Management’s Discussion and Analysis Year ended June 30, 2009

See independent auditors’ report -20-

Total assessed valuation of property in the City grew 0.8% during FY 2008-09, compared to 6.4% in FY 2007-08 and 8.5% in FY 2006-07. Retail sales activity in Mission Viejo was lower than the same quarter in the prior year for all four quarters of FY 2008-09. In addition, the local housing market continued to soften during FY 2008-09. The median housing value in the City dropped 17% this past year, from $520,500 to $430,000. Fortunately, at the same time, the rate of inflation decreased dramatically. Inflation, as measured by the Consumer Price Index for all urban consumers, was a negative 2.2% in the Los Angeles-Riverside-Orange County area for the 12 months ending June 30, 2009. This was a substantial reduction from fiscal year 2007-08 rate of 5.41%. The average inflation rate for U.S. cities for FY 2008-09 was a negative 1.4%. The State government’s fiscal health is also of continuing importance. California’s budget deficits reached record levels in 2008-09. The challenge to balance the State’s budget led to the first ever suspension of Proposition 1A revenue protections for local governments. To balance their 2009-10 budget the State will be borrowing 8% of local property tax revenues in fiscal year 2009-10 and repaying the borrowed amounts no later than June 2013. The City has elected to participate in the California Statewide Communities Development Authority securitization program, as a result of which it is anticipated the City will be made whole in FY 2009-10 for the property taxes to be borrowed. The continuing recession was taken into account in the development of the City’s two year budget for fiscal years 2009-10 and 2010-11. Property tax estimates were tempered and sales tax estimates were reduced based on the recent economic trends. As a result, budgeted appropriations were also reduced. To address critical capital project needs, fund balances in a number of funds were drawn down more than they otherwise would have been. All of the City’s transportation projects rely significantly on outside sources of funding such as Measure M, Proposition 1A (State Transportation Congestion Relief funding) Proposition 1B and the American Recovery and Reinvestment Act (ARRA). Only two transportation projects require funding from the General Fund. For FY 2009-10, Mission Viejo will again live within its current tax rate levels and no fee increases are planned. California cities have little flexibility in raising tax rates. Mission Viejo’s tax rates have been at the same level since incorporation in 1988. Requests for Information This financial report is designed to provide a general overview of the City of Mission Viejo’s finances and to demonstrate the City’s accountability for the money it receives. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Assistant City Manager/Director of Administrative Services, City of Mission Viejo, 200 Civic Center, Mission Viejo, California 92691 or to adminservices@cityofmissionviejo.org.

BASIC FINANCIAL STATEMENTS

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CITY OF MISSION VIEJO

Basic Financial Statements - Overview Year ended June 30, 2009

See independent auditors’ report. -23-

The following basic financial statements, which consist of Government-wide Financial Statements and Fund Financial Statements, along with the Notes to Basic Financial Statements, present an overview of the City’s financial position at June 30, 2009 and the results of its operations and cash flows for the fiscal year. Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the City’s finances, in a manner similar to a private-sector business. These financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The Statement of Net Assets presents information on all of the City’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The Statement of Activities presents information showing how the City’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement on the full accrual basis of accounting even though some items will only result in cash flows in future fiscal periods. Fund Financial Statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. All funds of the City can be divided in to three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Fund Types These funds (General, Special Revenue, Debt Service and Capital Projects) are those through which most governmental functions are typically financed. The governmental fund measurement focus is on “financial flow”, the accounting for sources and uses of available spendable resources, not on net income determination. Proprietary Fund Type The Proprietary funds are used to account for activities similar to those found in the private sector, where the determination of net income is necessary and useful for sound financial management. This fund type is accounted for on a cost of services or “capital maintenance” measurement focus. This means that all assets and all liabilities (whether current or non-current) associated with their activity are included on their balance sheets. Fiduciary Fund Type This fund type (Agency) is used to account for assets held by the City as an agent for others.

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-24-

Governmental Business-TypeActivities Activities 2009 2008

Assets:Cash and investments (note 2) 57,046,553$ 2,239,152$ 59,285,705$ 62,977,379$ Taxes receivable 3,049,392 36,486 3,085,878 4,063,621 Interest receivable 348,519 - 348,519 548,061 Accounts receivable 117,086 25 117,111 37,519 Intergovernmental receivable 6,079,334 15,831 6,095,165 3,488,256 Loans receivable 2,017,446 - 2,017,446 1,782,047 Due from developers (note 5) 4,662,568 - 4,662,568 4,617,149 Deposits 12,817 - 12,817 12,825 Prepaid items 1,205,020 72,014 1,277,034 1,450,713 Capital assets, not depreciated (note 6) 510,157,535 1,000,764 511,158,299 506,247,190 Capital assets, depreciated, net (note 6) 193,674,483 1,472,650 195,147,133 198,336,302

Total assets 778,370,753 4,836,922 783,207,675 783,561,062

Liabilities:Accounts payable 3,246,073 61,987 3,308,060 4,763,490 Accrued payroll 777,742 66,638 844,380 691,569 Accrued interest payable 1,304,397 - 1,304,397 1,355,408 Retainage payable 1,326,482 - 1,326,482 930,987 Intergovernmental payable 1,638,387 744 1,639,131 1,499,332 Advances from other governments 2,317,129 - 2,317,129 1,957,342 Deposits 1,607,205 6,760 1,613,965 2,298,084 Unearned revenue 94,778 - 94,778 149,286 Long-term liabilities (note 7): Due within one year 3,138,432 69,833 3,208,265 2,830,495 Due in more than one year 53,098,696 - 53,098,696 54,885,484

Total liabilities 68,549,321 205,962 68,755,283 71,361,477

Net assets (note 9):Invested in capital assets, net of related debt 658,433,369 2,473,414 660,906,783 657,770,090 Restricted for:

Capital projects 618,488 - 618,488 2,678,694 Specific projects and programs 16,989,178 - 16,989,178 14,721,902

Unrestricted 33,780,397 2,157,546 35,937,943 37,028,899

Total net assets 709,821,432$ 4,630,960$ 714,452,392$ 712,199,585$

Totals

CITY OF MISSION VIEJOStatement of Net Assets

June 30, 2009(with comparative totals as of June 30, 2008)

See accompanying notes to basic financial statements.-25-

Operating CapitalCharges for Contributions Contributions

Expenses Services and Grants and GrantsGovernmental activities:

General government - legislative 2,186,488$ 3,708$ -$ -$ General government - management and support 14,766,918 36,056 123,906 - Public safety 16,223,078 661,643 130,602 - Community development 1,910,720 1,714,191 441,145 - Public works - engineering and transportation 3,367,924 482,480 165,086 274,474 Infrastructure maintenance 21,870,932 196,141 3,380,009 9,174,423 Recreation, community and library services 9,393,228 2,560,945 15,068 23,833 Interest on long-term debt 1,591,463 - - -

Total governmental activities 71,310,751 5,655,164 4,255,816 9,472,730

Business-type activities:Animal services 1,788,096 634,515 659,188 - Mission Viejo Television 175,541 404 142,268 -

Total business-type activities 1,963,637 634,919 801,456 -

Total primary government 73,274,388$ 6,290,083$ 5,057,272$ 9,472,730$

General revenues: Taxes: Property taxes Sales and uses taxes Property taxes in lieu of sales and uses taxes Other Unrestricted motor vehicle in lieu fees Investment earnings Other Gain (loss) on sale of propertyTransfers Total general revenues and transfers

Change in net assets

Net assets at beginning of year

Net assets at end of year

CITY OF MISSION VIEJOStatement of Activities

Year ended June 30, 2009

Program Revenues

(with comparative totals for the year ended June 30, 2008)

Functions/Programs

See accompanying notes to basic financial statements.-26-

Governmental Business-typeActivities Activities 2009 2008

(2,182,780)$ -$ (2,182,780)$ (1,537,970)$ (14,606,956) - (14,606,956) (14,731,407) (15,430,833) - (15,430,833) (14,647,797)

244,616 - 244,616 (266,751) (2,445,884) - (2,445,884) (2,802,499) (9,120,359) - (9,120,359) (10,189,238)

(6,793,382) - (6,793,382) (4,744,905) (1,591,463) - (1,591,463) (2,529,391)

(51,927,041) - (51,927,041) (51,449,958)

- (494,393) (494,393) (63,995) - (32,869) (32,869) (30,873)

- (527,262) (527,262) (94,868)

(51,927,041) (527,262) (52,454,303) (51,544,826)

34,221,795 - 34,221,795 33,527,411 10,557,007 - 10,557,007 12,231,539 3,863,059 - 3,863,059 4,088,418 3,429,101 - 3,429,101 3,620,011

337,213 - 337,213 438,534 2,014,231 90,070 2,104,301 3,823,809

305,386 - 305,386 309,758 (111,522) 770 (110,752) 13,039 (521,260) 521,260 - -

54,095,010 612,100 54,707,110 58,052,519

2,167,969 84,838 2,252,807 6,507,693

707,653,463 4,546,122 712,199,585 705,691,892

709,821,432$ 4,630,960$ 714,452,392$ 712,199,585$

CITY OF MISSION VIEJOStatement of Activities (Continued)

Year ended June 30, 2009(with comparative totals for the year ended June 30, 2008)

Totals

Net (Expenses) Revenuesand Changes in Net Assets

See accompanying notes to basic financial statements.-27-

CITY OF MISSION VIEJO

Basic Financial Statements - Overview Year ended June 30, 2009

See independent auditors’ report and notes to basic financial statements. - 28 -

DESCRIPTION OF GOVERNMENTAL FUNDS

MAJOR GOVERNMENTAL FUNDS: GENERAL FUND

The General Fund, which is required to be classified as a major fund, is used to account for resources traditionally associated with government which are not required legally or by sound financial management to be accounted for in another fund. SPECIAL REVENUE FUNDS Special Revenue Funds are used to account for specific revenues (other than major capital projects) and the related expenditures which are legally required to be accounted for in a separate fund. The City of Mission Viejo has the following major Special Revenue Funds: MEASURE M – This fund represents funds received by the City as a result of the voter-approved ballot measure in 1990 to increase sales tax by ½ percent in Orange County to fund transportation projects, and includes both Measure M apportionment and funds awarded through competitive allocation. GRANTS – The City receives grant awards from various sources based on an application process. Currently included in these funds are monies from Federal, State, and County governments which are used to fund several specific transportation and park capital improvement projects. LOW AND MODERATE INCOME HOUSING – To account for Community Development Agency tax increment revenues required by law to be set aside for low and moderate income housing projects. LADERA FUNDING –To account for receipts and expenditures of developer fees from the Rancho Mission Viejo Company to fund road improvements in the City made necessary as a result of the development of the Ladera community to the east of the City. DEBT SERVICE FUNDS:

Debt Service Funds are used to account for the accumulation of resources for, and the payment of, long-term debt principal and interest. The City of Mission Viejo has the following major Debt Service Fund: CDA DEBT SERVICE – To accumulate funds for payment of Community Development Agency debt other than the 2006 and 2009 Tax Allocation Notes. Debt service is financed by property tax increment.

CITY OF MISSION VIEJO

Basic Financial Statements - Overview Year ended June 30, 2009

See independent auditors’ report and notes to basic financial statements. - 29 -

DESCRIPTION OF GOVERNMENTAL FUNDS (CONTINUED)

OTHER GOVERNMENTAL FUNDS: These funds constitute all other governmental funds that do not meet the criteria to be a major fund, which is 10% or more of assets, liabilities, revenues or expenditures for the governmental funds and 5% or more of total assets, liabilities, revenues or expenditures for the total governmental and enterprise funds combined. These funds include other Special Revenue Funds, other Debt Service Funds, and all of the Capital Projects Funds of the City.

Low andGeneral Measure Moderate Ladera

Fund M Grants Income Housing Funding

Cash and investments (note 2) 26,474,965$ 3,783,559$ 2,724,985$ 8,047,078$ -$ Taxes receivable 2,785,594 163,388 - - - Interest receivable 305,516 - - - - Accounts receivable 117,086 - - - - Intergovernmental receivable - 1,022,120 1,920,458 - 2,662,423 Loans receivable 24,848 - 1,421,664 570,934 - Deposits 12,817 - - - - Prepaid items 90,346 - - - - Due from developers (note 5) 1,895,949 - - 2,766,619 - Interfund receivable (note 3) 6,119,219 - 2,587 - - Advances receivable (note 4) 3,091,620 - - - -

Total assets 40,917,960$ 4,969,067$ 6,069,694$ 11,384,631$ 2,662,423$

Liabilities:Accounts payable 1,915,143$ 232,021$ 515,494$ 12$ 193,469$ Accrued payroll 642,754 4,732 3,622 - -

Assets

CITY OF MISSION VIEJOGovernmental Funds

Liabilities and Fund Balances

Special Revenue Funds

(with comparative totals as of June 30, 2008)

Balance SheetJune 30, 2009

See accompanying notes to basic financial statements.-30-

Retainage payable 9,705 5,192 330,295 - 938,538 Intergovernmental payable - - - - - Advances from other governments - 440,574 1,876,555 - - Deposits 1,600,889 - - - - Deferred revenue 2,035,348 1,022,120 2,178,995 308,247 735,945 Interfund payable (note 3) - 1,009,011 1,346,000 11,195 1,530,416 Advances payable (note 4) - - - - -

Total liabilities 6,203,839 2,713,650 6,250,961 319,454 3,398,368 Fund balances (deficits) (note 10):

Reserved 4,572,557 731,939 1,530,982 11,065,177 342,187 Unreserved:

Designated, reported in:General fund 23,310,609 - - - - Special revenue funds - 1,523,478 - - - Capital projects funds - - - - -

Undesignated, reported in:General fund 6,830,955 - - - - Special revenue funds - - (1,712,249) - (1,078,132) Debt service funds - - - - - Total fund balances (deficits) 34,714,121 2,255,417 (181,267) 11,065,177 (735,945)

Total liabilities and fund balances 40,917,960$ 4,969,067$ 6,069,694$ 11,384,631$ 2,662,423$

See accompanying notes to basic financial statements.-30-

CDA OtherDebt Governmental

Service Funds 2009 2008

2,555,050$ 13,460,916$ 57,046,553$ 60,818,046$ 27,466 72,944 3,049,392 4,028,274 26,792 16,211 348,519 548,061

- - 117,086 37,494 - 151,222 5,756,223 3,488,256 - - 2,017,446 1,782,047 - - 12,817 12,825 - - 90,346 241,985 - - 4,662,568 4,617,149 - 374,670 6,496,476 3,888,600 - - 3,091,620 4,527,859

2,609,308$ 14,075,963$ 82,689,046$ 83,990,596$

28,506$ 361,428$ 3,246,073$ 4,728,657$ - 126,634 777,742 648,473

CITY OF MISSION VIEJOGovernmental Funds

Balance Sheet (Continued)June 30, 2009

Totals

Debt Service Funds

(with comparative totals as of June 30, 2008)

See accompanying notes to basic financial statements.-31-

- 42,752 1,326,482 930,987 1,446,448 191,939 1,638,387 1,414,002

- - 2,317,129 1,957,342 - 6,316 1,607,205 2,292,024 - 151,222 6,431,877 7,047,409

374,670 2,225,184 6,496,476 3,888,600 1,566,620 1,525,000 3,091,620 4,527,859 3,416,244 4,630,475 26,932,991 27,435,353

- 10,050,261 28,293,103 34,812,267

- - 23,310,609 25,388,612 - 2,619,812 4,143,290 4,719,838 - 263,118 263,118 463,171

- - 6,830,955 5,047,187 - (1,962,703) (4,753,084) (10,045,709)

(806,936) (1,525,000) (2,331,936) (3,830,123) (806,936) 9,445,488 55,756,055 56,555,243

2,609,308$ 14,075,963$ 82,689,046$ 83,990,596$

See accompanying notes to basic financial statements.-31-

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-32-

Fund balances of governmental funds 55,756,055$

Amounts reported for governmental activities in the statement of net assets are different because:

Capital assets have not been included as financial resources in governmental fund activity:

Capital assets 778,394,278 Accumulated depreciation (74,562,260)

Long-term liabilities applicable to the City governmental activities are not due and payable in the current period and accordingly are not reported as fund liabilities All liabilities, both current and long-term, are reported in the Statement of Net Assets. Balances at June 30, 2009 are:

Revenue bonds payable (52,032,326) Certificates of participation (2,545,000) Compensated absenses (1,659,802)

Accrued interest payable for the current portion of interest due on bonds payable has not been reported in the governmental funds. (1,304,397)

Long-term receivables that are not available for current use. Amounts are recorded as deferred revenue under the modified accrual basis of accounting. 6,337,099

Long-term assets that are not available for current use. Amounts are not reported in the governmental funds. 1,114,674

Accrued insurance refund that is not collectible in the current period and accordingly are not reported as fund assets. 323,111

Net assets of governmental activities 709,821,432$

June 30, 2009

CITY OF MISSION VIEJOReconciliation of the Balance Sheet of Governmental Funds

to the Statement of Net Assets

See accompanying notes to basic financial statements.-33-

Low andGeneral Measure Moderate Ladera

Fund M Grants Income Housing FundingRevenues:

Taxes 41,236,214$ -$ -$ -$ -$ Licenses and permits 1,265,539 - - - - Intergovernmental 612,830 1,211,634 4,928,162 - - Charges for services 2,007,894 - - - - Fines and forfeitures 651,962 - - - - Investment earnings 2,140,064 137,911 75,063 284,058 - Developer fees 274,474 - - - 3,610,634 Other 1,181,553 - 91,798 - -

Total revenues 49,370,530 1,349,545 5,095,023 284,058 3,610,634

Expenditures:Current:

General government - legislative 2,057,338 - - - - General government - management and support 9,647,916 592 8,307 - - Public safety 15,059,639 - - - -

CITY OF MISSION VIEJOGovernmental Funds

Special Revenue Funds

Statement of Revenues, Expenditures and Changes in Fund BalancesYear ended June 30, 2009

(with comparative totals for the year ended June 30, 2008)

See accompanying notes to basic financial statements.-34-

y , ,Community development 1,687,102 - 584,853 81,706 - Public works - engineering and transportation 1,657,271 56,885 192,400 - - Infrastructure maintenance 14,159,225 - - - - Recreation/community/library services 5,187,415 - - - -

Debt service:Principal 80,000 - - - - Interest and fiscal charges 153,350 - - - -

Capital projects 870,123 1,103,124 3,354,524 - 3,985,368

Total expenditures 50,559,379 1,160,601 4,140,084 81,706 3,985,368

Excess of revenues over (under) expenditures (1,188,849) 188,944 954,939 202,352 (374,734)

Other financing sources (uses):Transfers in (note 11) 696,118 - - 1,433,565 - Transfers out (note 11) (1,639,372) - - - - Proceeds from sale of capital assets 23,099 - - - -

Total other financial sources (uses) (920,155) - - 1,433,565 -

Net change in fund balances (2,109,004) 188,944 954,939 1,635,917 (374,734)

Fund balances (deficits), beginning of year 36,823,125 2,066,473 (1,136,206) 9,429,260 (361,211)

Fund balances (deficits), end of year 34,714,121$ 2,255,417$ (181,267)$ 11,065,177$ (735,945)$

See accompanying notes to basic financial statements.-34-

CDA OtherDebt Governmental

Service Funds 2009 2008

7,105,696$ 3,569,544$ 51,911,454$ 53,701,448$ - - 1,265,539 1,388,460 - 4,021,638 10,774,264 10,208,033 - 240,605 2,248,499 2,357,708 - 147,690 799,652 921,669

52,824 490,535 3,180,455 4,378,762 - - 3,885,108 3,165,749 - 47,819 1,321,170 988,181

7,158,520 8,517,831 75,386,141 77,110,010

- - 2,057,338 1,536,513 3,476,043 242,132 13,374,990 14,958,723

- 1,027,280 16,086,919 15,610,489

CITY OF MISSION VIEJOGovernmental Funds

Statement of Revenues, Expenditures and Changes in Fund Balances (Continued)Year ended June 30, 2009

Totals

Debt Service Funds

(with comparative totals for the year ended June 30, 2008)

See accompanying notes to basic financial statements.-35-

, , , , , ,- 69,846 2,423,507 2,922,531 - 1,229,053 3,135,609 3,197,302 - 2,233,509 16,392,734 17,808,967 - 2,723,220 7,910,635 7,538,916

- 1,455,000 1,535,000 1,505,000 64,951 1,620,362 1,838,663 3,022,592

- 1,618,634 10,931,773 19,872,424

3,540,994 12,219,036 75,687,168 87,973,457

3,617,526 (3,701,205) (301,027) (10,863,447)

- 3,240,609 5,370,292 6,312,178 (2,119,339) (2,132,841) (5,891,552) (6,864,666)

- - 23,099 22,896

(2,119,339) 1,107,768 (498,161) (529,592)

1,498,187 (2,593,437) (799,188) (11,393,039)

(2,305,123) 12,038,925 56,555,243 67,948,282

(806,936)$ 9,445,488$ 55,756,055$ 56,555,243$

See accompanying notes to basic financial statements.-35-

Net change in fund balances - total governmental funds (799,188)$

Capital expenditures 8,094,804 Disposition of capital assets (119,530) Depreciation expense (6,309,732)

Principal payments 1,535,000

Retirement expenses (20,656) Interest expense 51,011 Compensated absences (111,157)

408,441

Some revenues reported in the governmental funds are for funds that become available in the

in prior years. (561,024)

Changes in net assets of governmental activities 2,167,969$

CITY OF MISSION VIEJOReconciliation of the Statement of Revenues, Expenditures,

and Changes in Fund Balances of Governmental Funds

Governmental funds report capital outlays as expenditures. However, in the Statement of Activities, the cost of those assets is allocated over the estimated useful lives as depreciation expense. This is the amount by which capital expense exceeded depreciation in the current period:

Some expenses reported in the Statement of Activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds:

The issuance of long-term debt provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transactions, however, has any effect on net assets. These amounts are the net effect of these differences in the treatment of long-term debt and related items:

to the Statement ActivitiesYear ended June 30, 2009

Amounts reported for governmental activities in the Statement of Activities are different because:

Claims payable expenses reported in the Statement of Activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. This amount represents the net increase/decrease in claims liabilities/refunds for the current year.

current year. These funds were already reported as revenues in the Statement of Activities

See accompanying notes to basic financial statements.-36-

2009 2008Assets

Current assets:Cash and investments (note 2) 2,239,152$ 2,159,333$ Taxes receivable 36,486 35,347 Accounts receivable 25 25 Intergovernmental receivable 15,831 - Prepaid items 72,014 73,398

Total current assets 2,363,508 2,268,103

Noncurrent assets:Capital assets, not depreciated (note 6) 1,000,764 1,000,764 Capital assets, depreciated, net (note 6) 1,472,650 1,416,252

Total noncurrent assets 2,473,414 2,417,016

Total assets 4,836,922 4,685,119

LiabilitiesCurrent liabilities:

Accounts payable 61,987 34,833 Accrued payroll 66,638 43,096 Intergovernmental payable 744 - Deposits 6,760 6,060 Compensated absences payable 69,833 55,008

Total current liabilities 205,962 138,997

Net assets:Invested in capital assets 2,473,414 2,417,016 Unrestricted 2,157,546 2,129,106

Total net assets 4,630,960$ 4,546,122$

Other Enterprise Funds

(with comparative totals for the year ended June 30, 2008)

CITY OF MISSION VIEJOProprietary Funds

Statement of Net AssetsJune 30, 2009

See accompanying notes to basic financial statements.-37-

2009 2008Operating revenues:

Franchise taxes 142,205$ 140,024$ Licenses and permits 446,350 363,905 Charges for services 741,300 513,588 Fines and forfeitures 49,506 28,256 Other 57,014 352,712

Total operating revenues 1,436,375 1,398,485

Operating expenses:Personnel services 1,104,277 882,398 Supplies 183,738 112,694 Utility 86,553 90,170 Contractual services 416,712 270,057 Rent 1,912 2,342 Depreciation 162,641 129,611 Other 7,804 6,081

Total operating expenses 1,963,637 1,493,353

Operating income (loss) (527,262) (94,868)

Nonoperating revenues (expenses):Investment earnings 90,070 124,938 Gain on sale of capital assets 770 -

Total nonoperating revenues (expenses) 90,840 124,938

Income (loss) before transfers (436,422) 30,070

Transfers in (note 11) 521,260 552,488

Changes in net assets 84,838 582,558

Net assets at beginning of year 4,546,122 3,963,564

Net assets at end of year 4,630,960$ 4,546,122$

Other Enterprise Funds

CITY OF MISSION VIEJOProprietary Funds

Statement of Revenues, Expenses and Changes in Fund Net AssetsYear ended June 30, 2009

(with comparative totals for the year ended June 30, 2008)

See accompanying notes to basic financial statements.-38-

2009 2008CASH FLOWS FROM OPERATION ACTIVITIES:

Receipts from customers 1,420,105$ 1,424,554$ Payments to suppliers for goods and services (667,437) (544,153) Payments to employees for services (1,065,910) (875,015)

NET CASH PROVIDED (USED) BY OPERATION ACTIVITIES (313,242) 5,386

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:

Received from other funds 521,260 552,488

NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 521,260 552,488

CASH FLOWS FROM CAPITAL ANDRELATED FINANCING ACTIVITIES:

S l f it l t 770

Other Enterprise Funds

CITY OF MISSION VIEJOProprietary Funds

Statement of Cash Flows

(with comparative totals for the year ended June 30, 2008)Year ended June 30, 2009

Sale of capital assets 770 - Acquisition and construction of capital assets (219,039) (86,707)

NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (218,269) (86,707)

CASH FLOWS FROM INVESTING ACTIVITIES:Interest received 90,070 124,938

NET CASH PROVIDED BY INVESTING ACTIVITIES 90,070 124,938

NET INCREASE IN CASH AND CASH EQUIVALENTS 79,819 596,105

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,159,333 1,563,228

CASH AND CASH EQUIVALENTS - END OF YEAR 2,239,152$ 2,159,333$

(Continued)

See accompanying notes to basic financial statements.-39-

2009 2008RECONCILIATION OF OPERATING LOSS TO NET

CASH PROVIDED (USED) BY OPERATING ACTIVITIES:Operating loss (527,262)$ (94,868)$ Adjustments to reconcile operating loss to net

cash provided (used) by operating activities:Depreciation 162,641 129,611 Changes in operating assets and liabilities:

(Increase) decrease in taxes receivable (1,139) (1,080) (Increase) decrease in accounts receivables - (25) (Increase) decrease in intergovernmental receivables (15,831) 26,954 (Increase) decrease in prepaid items 1,384 (48,605) Increase (decrease) in accounts payable 27,154 (13,389) Increase (decrease) in accrued payroll 23,542 12,393 Increase (decrease) in intergovernmental payable 744 - Increase (decrease) in deposits payable 700 220

Other Enterprise Funds

Year ended June 30, 2009

CITY OF MISSION VIEJOProprietary Funds

Statement of Cash Flows (Continued)

(with comparative totals for the year ended June 30, 2008)

Increase (decrease) in deposits payable 700 220 Increase (decrease) in compensated absences 14,825 (5,825)

TOTAL ADJUSTMENTS 214,020 100,254

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (313,242)$ 5,386$

Noncash Financing and Investing Transactions

For the years ended June 30, 2009 and 2008, there were no significant noncash financing or investing transactions.

See accompanying notes to basic financial statements.-40-

2009 2008Assets

Cash and investments (note 2) 853,409$ 822,738$

Total assets 853,409$ 822,738$

Liabilities

Accounts payable 189,812$ -$ Due to bondholders 663,597 822,738

Total liabilities 853,409$ 822,738$

Community Facilities District 92-1

June 30, 2009

CITY OF MISSION VIEJOAgency Funds

Statement of Fiduciary Assets and Liabilities

(with comparative totals for the year ended June 30, 2008)

See accompanying notes to basic financial statements.-41-

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-42-

CITY OF MISSION VIEJO Notes to Basic Financial Statements

Year ended June 30, 2009

See independent auditors’ report. - 43 -

(1) Summary of Significant Accounting Policies

The financial statements of the City of Mission Viejo, California have been prepared in conformity with accounting principles generally accepted in the United States of America as applied to government units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The following is a summary of the significant policies:

(a) Reporting Entity

The City of Mission Viejo was incorporated on March 31, 1988 under the laws of the State of California and enjoys all the rights and privileges pertaining to “General Law” cities. The City operates under a council-manager form of government and currently provides public safety, animal control, planning, building, code enforcement, engineering, street maintenance, street lighting, parks, recreation, library and general administrative services. This report includes all fund types of the City of Mission Viejo (the “primary government”), as well as its component units, entities for which the City is considered to be financially accountable. The City is considered to be financially accountable for an organization if the City appoints a voting majority of that organization’s governing body and the City is able to impose its will on that organization or there is a potential for that organization to provide specific financial benefits to or impose specific financial burdens on the City. The City is also considered to be financially accountable if that organization is fiscally dependent (i.e., it is unable to adopt its budget, levy taxes, set rates or charges, or issue bond debt without approval from the City). Blended Component Units All of the City’s component units are considered to be blended component units. Blended component units, although legally separate entities, are, in substance, part of the City’s operations and so data from these units are reported with the interfund data of the City. The governing boards of the component units are comprised of the same membership as the City Council. The City may impose its will on the component units, including the ability to appoint, hire, reassign or dismiss management. There are also financial benefit/burden relationships between the City and these entities.

The following organizations are considered to be component units of the City:

Mission Viejo Public Improvement Corporation (Corporation) was formed on July 9, 1990, and operates as a tax-exempt corporation under Section 501(a) of the Internal Revenue Code. The corporation was formed with the purpose of facilitating the acquisition of necessary capital facilities for the City. The activities of the Corporation are recorded in a capital projects fund. There was no activity for fiscal year ended June 30, 2009.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 44 -

(1) Summary of Significant Accounting Policies (Continued) (a) Reporting Entity (Continued)

Blended Component Units (Continued) Community Development Agency of the City of Mission Viejo (Agency) was activated on February 27, 1991 pursuant to the State of California Health and Safety Code Section 33000, entitled “Community Redevelopment Law.” Its purpose is to prepare and carry out plans for improvement, rehabilitation and redevelopment of blighted areas within the territorial limits of the project area. The activities of the Agency are recorded in the Low and Moderate Income Housing special revenue fund, the CDA Debt Service and the CDA Notes Debt Service funds, and the CDA Projects capital projects fund. Mission Viejo Community Development Financing Authority (Authority) was formed as a joint powers authority on June 2, 1997 by the City and Agency. Its purpose is to serve as the issuer of bonds for the construction of capital facilities for the City. The activities of the Authority are recorded in the 1999 Mall Bonds, 1999 Revenue Bonds and 2001 City Hall / Library Expansion Bonds debt service funds. Separate financial statements of the Agency are available at City Hall, 200 Civic Center, Mission Viejo, California 92691. Separate financial statements are not prepared for the Mission Viejo Public Improvement Corporation or the Mission Viejo Community Development Financing Authority.

(b) Basis of Accounting and Measurement Focus

The basic financial statements of the City are composed of the following:

• Government-wide financial statements • Fund financial statements • Notes to basic financial statements

Financial reporting is based upon all GASB pronouncements, as well as the FASB Statements and Interpretations, APB Opinions, and Accounting Research Bulletins that were issued on or before November 30, 1989 that do not conflict with or contradict GASB pronouncements. Government-wide Financial Statements Government-wide financial statements display information about the reporting government as a whole, except for its fiduciary activities. These statements include separate columns for the governmental and business-type activities of the primary government (including its blended

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 45 -

(1) Summary of Significant Accounting Policies (Continued)

(b) Basis of Accounting and Measurement Focus (Continued) Government-wide Financial Statements (Continued) component units), as well as it’s discretely presented component units. The City of Mission Viejo has no discretely presented component units. Eliminations have been made in the Statement of Activities so that certain allocated expenses are recorded only once (by the function to which they were allocated). However, general government expenses have not been allocated as indirect expenses to the various functions of the City. Government-wide financial statements are presented using the economic resources measurement focus and the accrual basis of accounting. Under the economic resources measurement focus, all (both current and long-term) economic resources and obligations of the reporting government are reported in the government-wide financial statements. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Under the accrual basis of accounting, revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange-like transactions are recognized when the exchange takes place. As a general rule the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are payments for personnel costs where the amounts are reasonably equivalent in value to the interfund services provided. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Program revenues include charges for services, special assessments, and payments made by parties outside of the reporting government’s citizenry if that money is restricted to a particular program. Program revenues are netted with program expenses in the statement of activities to present the net cost of each program. Amounts paid to acquire capital assets are capitalized as assets in the government-wide financial statements, rather than reported as an expenditure. Proceeds of long-term debt are recorded as a liability in the government-wide financial statements, rather than as an other financing source. Amounts paid to reduce long-term indebtedness of the reporting government are reported as a reduction of the related liability, rather than as an expenditure.

Fund Financial Statements The underlying accounting system of the City is organized and operated on the basis of separate funds, each of which is considered to be a separate accounting entity. The operations of each

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 46 -

(1) Summary of Significant Accounting Policies (Continued) (b) Basis of Accounting and Measurement Focus (Continued)

Fund Financial Statements (Continued) fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures or expenses, as appropriate. Governmental resources are allocated to and accounted for in individual funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled. Fund financial statements for the primary government’s governmental, proprietary, and fiduciary funds are presented after the government-wide financial statements. These statements display information about the major funds individually and other funds in the aggregate for governmental and enterprise funds. Fiduciary statements include financial information for fiduciary funds. Fiduciary funds of the City primarily represent assets held by the City in a custodial capacity for other individuals or organizations.

Governmental Funds In the fund financial statements, governmental funds are presented using the modified accrual basis of accounting. Their revenues are recognized when they become measurable and available as net current assets. Measurable means that the amounts can be estimated, or otherwise determined. Available means that the amounts were collected during the reporting period or soon enough thereafter to be available to finance the expenditures accrued for the reporting period. The City uses an availability period of 60 days for all revenues except sales tax and highway user tax. For sales tax and highway user tax, the City uses an availability period of 90 days. Sales taxes, property taxes, transient occupancy taxes, highway users taxes, franchise fees, motor vehicle in lieu subventions, grants and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period to the extent normally collected within the availability period. Other revenue items are considered to be measurable and available when cash is received by the government. Revenue recognition is subject to the measurable and availability criteria for the governmental funds in the fund financial statements. Exchange transactions are recognized as revenues in the period in which they are earned (i.e., the related goods or services are provided). Locally imposed derived tax revenues are recognized as revenues in the period in which the underlying exchange transaction upon which they are based takes place. Imposed nonexchange transactions are recognized as revenues in the period for which they were imposed. If the period of use is not specified, they are recognized as revenues when an enforceable legal claim to the revenues arises or when they are received, whichever occurs first. Government-mandated and

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 47 -

(1) Summary of Significant Accounting Policies (Continued) (b) Basis of Accounting and Measurement Focus (Continued)

Governmental Funds (Continued) voluntary nonexchange transactions are recognized as revenues when all applicable eligibility requirements have been met. In the fund financial statements, governmental funds are presented using the current financial resources measurement focus. This means that only current assets and current liabilities are generally included on their balance sheets. The reported fund balance (net current assets) is considered to be a measure of “available spendable resources.” Governmental fund operating statements present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in net current assets. Accordingly, they are said to present a summary of sources and uses of “available spendable resources” during a period. Non-current portions of long-term receivables due to governmental funds are reported on their balance sheets in spite of their spending measurement focus. However, special reporting treatments are used to indicate that they should not be considered “available spendable resources,” since they do not represent net current assets. Revenues, expenditures, assets, and liabilities resulting from nonexchange transactions are recognized in accordance with the requirements of GASB Statement No. 33 which requires that local governments defer grant revenue that is not received within 60 days after the fiscal year ends to meet the “available” criteria of revenue recognition. In the past, the industry practice for grants was to recognize revenue in the fiscal year in which the related expense was incurred. Therefore recognition of governmental fund type revenue represented by non-current receivables is deferred until the receivables meet the availability criteria. Non-current portions of other long-term receivables are offset by fund balance reserve accounts.

Because of their spending measurement focus, expenditure recognition for governmental funds excludes amounts represented by noncurrent liabilities. Since they do not affect net current assets, such long-term amounts are not recognized as governmental fund type expenditures or fund liabilities. Amounts expended to acquire capital assets are recorded as expenditures in the year that resources were expended, rather than as fund assets. The proceeds of long-term debt are recorded as other financing sources rather than as a fund liability. Amounts paid to reduce long-term indebtedness are reported as fund expenditures.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 48 -

(1) Summary of Significant Accounting Policies (Continued) (b) Basis of Accounting and Measurement Focus (Continued)

Governmental Funds (Continued) When both restricted and unrestricted resources are combined in a fund, expenses are considered to be paid first from restricted resources, and then from unrestricted resources. Proprietary Funds The City’s enterprise funds are proprietary funds. In the fund financial statements, the proprietary funds are presented using the accrual basis of accounting. Revenues are recognized when they are earned and expenses are recognized when the related goods or services are delivered. In the fund financial statements, proprietary funds are presented using the economic resources measurement focus. This means that all assets and all liabilities (whether current or noncurrent) associated with their activity are included on their balance sheets. Proprietary fund type operating statements present increases (revenues) and decreases (expenses) in total net assets. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues of the City’s enterprise funds are charges to customers for sales and services. In the Mission Viejo Television proprietary fund the City also recognizes as operating revenue a portion of franchise fees received from the City’s cable television provider. Operating expenses for the enterprise funds include the cost of sales and services, administrative expenses, and depreciation of capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. Proprietary fund operating revenues, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Non-operating revenues, such as subsidies, taxes, and investment earnings result from nonexchange transactions or ancillary activities. Amounts paid to acquire capital assets are capitalized as assets in the enterprise fund financial statements, rather than reported as an expenditure. Proceeds of long-term debt are recorded as a liability in the enterprise fund financial statements, rather than as an other financing source. Amounts paid to reduce long-term indebtedness of the enterprise fund are reported as a reduction of the related liability, rather than as an expenditure.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 49 -

(1) Summary of Significant Accounting Policies (Continued) (b) Basis of Accounting and Measurement Focus (Continued)

Fiduciary Funds The City’s fiduciary fund is an agency fund, which has no measurement focus. Agency funds are custodial in nature (assets equal liabilities) and do not involve the recording of City revenues and expenses.

(c) Fund Classifications

The City reports the following major governmental funds:

General Fund - This is the primary operating fund of the City. It accounts for all activities of the general government, except those required to be accounted for in another fund. Measure M Fund - This special revenue fund represents funds received by the City as a result of the voter-approved ballot measure in 1990 to increase sales tax by ½ percent in Orange County to fund transportation projects, and includes both Measure M apportionment and funds awarded through competitive allocation. Grants Fund - This special revenue fund is used to account for grant awards received by the City from various sources based on an application process. Currently included in this fund are monies from Federal, State and County governments which are used to fund several specific transportation and park capital improvement projects. Low and Moderate Income Housing Fund – This special revenue fund is used to account for the monies set aside from tax increment revenues for low and moderate income housing projects. Ladera Funding Fund – This special revenue fund is used to account for receipts and expenditures of developer fees from the Rancho Mission Viejo Company to fund road improvements in the City made necessary as a result of the development of the Ladera community to the east of the City. CDA Debt Service Fund - This debt service fund is used to accumulate funds for payment of Community Development Agency debt other than the 2006 and 2009 Tax Allocation Notes. Debt service is financed by property tax increment.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 50 -

(1) Summary of Significant Accounting Policies (Continued) (c) Fund Classifications (Continued)

The City’s fund structure also includes the following fund types: Special Revenue Funds – The City maintains a total of ten special revenue funds, four major special revenue funds discussed above and six other special revenue funds. The other funds account for financial resources related to state gas tax, library operations, developer fees, law enforcement grants, air quality, and senior center operations. These funds account for specific revenues that are legally restricted and expended for these specific purposes. Debt Service Funds – The City maintains a total of six debt service funds, one major debt service fund discussed above and five other funds. These other funds account for the resources accumulated and payments made on long-term debt of the governmental funds. Capital Projects Funds – The City maintains two capital projects funds. One fund accounts for projects related to the development and construction of the City library and its expansion. The other fund accounts for projects related to the preparation and execution of plans for improvement, rehabilitation, and redevelopment of blighted areas within the Community Development Agency’s project area. Enterprise Funds - The City maintains two enterprise funds, for animal services and government access cable television channel operations. The costs of these two activities are partially funded by user fees and charges. The City provides animal licensing, field patrol and shelter services to residents of Mission Viejo, the City of Laguna Niguel, and the City of Aliso Viejo and shares operating and capital costs of the program net of revenues, with Laguna Niguel and Aliso Viejo on a basis proportional to population. Government access channel costs are funded by user fees and charges, as well as by a portion of the franchise fee paid by the City’s cable television provider.

Agency Fund - This fund is used to account for Mission Viejo Community Facilities District No. 92-1 for which the City acts as an agent for debt service activity.

(d) Cash and Investments

Investments are reported in the accompanying balance sheet at fair value except for certain certificates of deposit that are reported at cost because they are not transferable and they have terms that are not affected by changes in market interest rates. Changes in fair value that occur during a fiscal year are recognized as investment earnings reported for the fiscal year. Interest earnings, changes in fair value, and any gains or losses realized upon the liquidation or sale of investments are the primary components of investment earnings.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 51 -

(1) Summary of Significant Accounting Policies (Continued)

(d) Cash and Investments (Continued) The City pools cash and investments of all funds, except for assets held by fiscal agents. Each fund’s share in this pool is displayed in the accompanying financial statements as cash and investments. Investment income earned by the pooled investments is allocated to the various funds based on each fund’s average cash and investment balance.

For purposes of the statement of cash flows, cash equivalents are defined as investments with original maturities of 90 days or less, which are readily convertible to known amounts of cash and not subject to significant changes in value from interest rate fluctuations.

(e) Advances to Other Funds

Long-term interfund advances are recorded as a receivable and as reserved fund balance by the advancing governmental fund.

(f) Capital Assets Capital assets (including infrastructure) are recorded at cost where historical records are available and at an estimated historical cost where no historical records exist. Contributed capital assets are valued at their estimated fair market value at the date of the contribution. Generally, capital asset purchases in excess of $2,000 are capitalized if they have an expected useful life of 5 years or more. Capital assets include public domain (infrastructure) general capital assets consisting of certain improvements other than buildings, including roads, bridges, curbs and gutters, streets and sidewalks, drainage systems and lighting systems. All infrastructure assets have been recorded as capital assets. Capital assets used in operations are depreciated over their estimated useful lives, except for streets, which the City reports based on the modified approach. The City uses the straight-line method in the government-wide financial statements for depreciating buildings and improvements, equipment and furniture, vehicles, curbs and gutters, sidewalks, roadway bridges, traffic signals, medians and parkways, and storm drains. Depreciation is charged as an expense against operations and accumulated depreciation is reported on the respective statement of net assets. The range of lives used for depreciation purposes for each capital asset class is as follows:

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 52 -

(1) Summary of Significant Accounting Policies (Continued)

(f) Capital Assets (Continued) Item Useful Life

Buildings and improvements 31.5 years Equipment, furniture and vehicles 5-7 years Infrastructure – curbs and gutters 75 years Infrastructure – sidewalks 75 years Infrastructure – roadway bridges 75 years Infrastructure – traffic signals 30 years

Infrastructure – trees 75 years Infrastructure – storm drains 75 years

The City has elected to use the modified approach to report a certain subsystem of its street infrastructure network. Under the modified approach, infrastructure assets that are part of a network or subsystem of a network are not required to be depreciated as long as two requirements are met. First, the government manages the eligible infrastructure assets using an asset management system that has the following characteristics:

• Has an up-to-date inventory of eligible infrastructure assets • Performs condition assessments of the eligible infrastructure assets and summarizes the

results using a measurement scale • Estimates each year the annual amount to maintain and preserve the eligible infrastructure

assets at the condition level established and disclosed by the government. Second, the government documents that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government. If eligible infrastructure assets meet all requirements and are not depreciated, all expenditures made for those assets (except for additions and improvements) are expensed in the period incurred. Additions and improvements to eligible infrastructure assets are capitalized. Additions or improvements increase the capacity or efficiency of infrastructure assets rather than preserve the useful life of the assets.

(g) Compensated Absences

The City provides to its employees a comprehensive annual leave program. Leave pay is payable at the time it is taken or upon termination. There is also an optional, voluntary buy back program, subject to certain limitations. An employee cannot accrue more than three times his/her annual entitlement.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 53 -

(1) Summary of Significant Accounting Policies (Continued) (g) Compensated Absences (Continued)

The City accounts for compensated absences in accordance with GASB Code Section C60. Expenditures related to compensated absence liabilities are only recognized in the fund financial statements when they become due and payable.

(h) Property Taxes

Property tax revenue is recognized in accordance with GASB Code Section P70; that is, in the fiscal year for which the taxes have been levied providing they become available. Available means due, or past due and receivable within the current period and collected within the current period or expected to be collected soon enough thereafter (not to exceed 60 days) to be used to pay liabilities in the current period. Under California law, property taxes are assessed and collected by the counties at up to 1% of assessed value, plus other increases approved by the voters. The property taxes go into a pool, and are then allocated to the cities based on complex formulas. The County of Orange collects property taxes for the City. Tax liens attach annually as of 12:01 a.m. on the first day of January preceding the fiscal year for which the taxes are levied. Taxes are levied on July 1 and cover the fiscal period July 1 to June 30. All secured personal property taxes and one-half of the taxes on real property are due November 1; the second installment is due February 1. All taxes are delinquent, if unpaid, on December 10 and April 10, respectively. Unsecured personal property taxes become due on March 1 each year, and are delinquent, if unpaid, on August 31.

(i) Prepaid Items

Prepaid items are reported in the governmental funds under the consumption method and are offset by a reservation of fund balance to indicate that they are not available for appropriation and are not expendable financial resources.

(j) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 54 -

(1) Summary of Significant Accounting Policies (Continued)

(k) Comparative Data Comparative total data for the prior year have been presented in order to provide an understanding of changes in the financial position and operations of the City. This information does not represent a complete presentation in accordance with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the City’s prior year financial statements, from which this selected financial data was derived.

(2) Cash and Investments

Cash and investments as of June 30, 2009 are classified in the accompanying financial statements as follows:

Statement of Net Assets: Cash and investments $ 59,285,705 Fiduciary Fund Statement of Assets and Liabilities: Cash and investments 853,409 Total cash and investments $ 60,139,114

Cash and investments at June 30, 2009, consisted of the following: Cash on hand $ 4,430 Deposits (overdraft) with financial institutions (924,676) Investments 61,059,360 Total cash and investments $ 60,139,114

Three separate investment portfolios are maintained by the City: the City portfolio (for the primary government), the Community Development Agency portfolio, and the Community Development Financing Authority portfolio. The Authority portfolio contains only debt proceeds and resources to pay debt service, held by bond trustees. Investments Authorized by the California Government Code and the City of Mission Viejo’s Investment Policy The tables below identify the investment types that are authorized for the City and Agency by the California Government Code (or the City of Mission Viejo’s and the Mission Viejo Community Development Agency’s investment policies where more restrictive). The tables also identify certain provisions of the investment policies that address interest rate risk, credit risk and concentration of credit risk. These tables do not address investments of debt proceeds held by bond trustees, which are governed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City’s or Agency’s investment policies:

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 55 -

(2) Cash and Investments (Continued) Investments Authorized by the California Government Code and the City of Mission Viejo’s Investment Policy (Continued) City of Mission Viejo:

Authorized

Investment Type

Maximum Maturity

Maximum Percentage of

Portfolio*

Maximum Investment

in One Issuer US Securities 5 years 100% None US Government Sponsored Entities Securities (FFC, FHLB, FNMA, FHLMC)

5 years Greater of $14M or 70%

Greater of $7M or 35% of total portfolio

Banker’s Acceptances 180 days Greater of $4M or 20%

Greater of $1M or 5% of total portfolio

Certificates of Deposit 180 days Greater of $4M or 20%

Greater of $1M or 5% of total portfolio

Repurchase Agreements 30 days Greater of $2M or 10%

Greater of $1M or 5% of total portfolio

Commercial Paper 180 days 15% Greater of $1M or 5% of total portfolio Local Agency Investment Fund N/A Greater of $4M or

20% N/A

Local Agency Sponsored Investment Pools 5 years Greater of $3M or 15%

Greater of $1M or 5% of total portfolio

Government Money Market Funds 1 year 20% 10% of total portfolio Bonds or Notes of Community Development Agency of City of MV

3 years $2M N/A

Bonds or Notes of MV Community Development Financing Authority

3 years $2M N/A

* Excluding amounts held by bond trustees, which are not subject to investment policy restrictions.

Mission Viejo Community Development Agency:

Authorized

Investment Type

Maximum Maturity

Maximum Percentage of

Portfolio

Maximum Investment

in One Issuer US Securities 1 year 100% None US Government Sponsored Entities Securities (FFC, FHLB, FNMA, FHLMC)

180 days 100% None

US Government Sponsored Entities Securities (FFC, FHLB, FNMA, FHLMC)

181 days to 1 year

35% Greater of $500K or 10% of total portfolio

Certificates of Deposit 180 days 20% None Repurchase Agreements 5 days 100% None Local Agency Investment Fund N/A 35% (100% if portfolio <

$1M) N/A

Local Agency Sponsored Investment Pools 1 year 15% None Government Money Market Funds 1 year 20% 10% of total portfolio

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 56 -

(2) Cash and Investments (Continued)

Investments Authorized by Debt Agreements

Investment of debt proceeds held by bond trustees are governed by provisions of debt agreements rather than the general provisions of the California Government Code or the City’s or Agency’s investment policies. The table identifies the investment types that are authorized for investments held by bond trustees. The table identifies certain provisions of these debt agreements that address interest rate risk, credit rate risk, and concentration of credit risk. 1999 Series A Variable Rate Demand Revenue Bonds, 1999 Series B Subordinate Lien Taxable Revenue Bonds, 1999 Series C Revenue Bonds and 1996 Certificates of Participation:

Authorized

Investment Type

Maximum Maturity

Maximum

Percentage Allowed

Maximum Investment

In One Issuer US Securities None 100% None US Government Sponsored Entities and Federal Agency Securities

None 100% None

Certificates of Deposit 180 days 100% None Commercial Paper 180 days 100% None Repurchase Agreements 30 days 100% None Local Agency Investment Fund N/A 100% N/A Government Money Market Funds None 100% None

2001 Series A Lease Revenue Bonds:

Authorized

Investment Type

Maximum Maturity

Maximum Percentage

Allowed

Maximum Investment

in One Issuer US Securities 5 years 100% None US Government Sponsored Entities Securities

5 years Greater of $14M or 70% Greater of $7M or 35% of total portfolio

Banker’s Acceptances 180 days Greater of $4M or 20% Greater of $1M or 5% of total portfolio

Certificates of Deposit 180 days Greater of $4M or 20% Greater of $1M or 5% of total portfolio

Repurchase Agreements 30 days Greater of $2M or 10% Greater of $1M or 5% of total portfolio

Commercial Paper 180 days 15% Greater of $1M or 5% of total portfolio

Local Agency Investment Fund N/A Greater of $4M or 20% N/A Government Money Market Funds 1 year 20% 10% of total portfolio

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 57 -

2) Cash and Investments (Continued) Disclosures Relating to Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The City manages its exposure to interest rate risk by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow liquidity needed for operations. The City’s and Agency’s investment policies require that investments only be in fixed-rate, fixed coupon securities and prohibit investments in securities with embedded options and securities that may return all or parts of their principal prior to their stated final maturity date. The investment policies set a Benchmark Index for each portfolio. The Benchmark Index has characteristics similar to those of the portfolio in terms of types of securities and maturities. The City manages its exposure to interest rate risk by keeping the average duration of the portfolio in line with the duration of the Benchmark Index. For the fiscal year ended June 30, 2009, the average duration of the Benchmark Index was 1.22 for the City portfolio and .16 for the Agency portfolio.

City of Mission Viejo:

Investment Type

Market Value

Modified Duration (in years)

US Treasury Notes $13,465,316 1.05 US Government Sponsored Entities Securities

12,260,534 1.46

Government Money Market Funds

7,261,426

-

Local Agency Investment Fund 7,060,123 - Held by Trustee: Money Market Funds 860,788 - Total $40,908,187 .80

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 58 -

(2) Cash and Investments (Continued) Disclosures Relating to Interest Rate Risk (Continued) Community Development Agency:

Investment Type

Market Value

Modified Duration (in years)

US Treasury Bills, Notes $ 8,018,584 .23 Local Agency Investment Fund 3,207,858 - Total $11,226,442 .16

Mission Viejo Community Development Financing Authority:

Information about the sensitivity of the fair values of the Authority’s investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the following table that shows the distribution of the Authority’s investments by maturity:

Investment Type

Market Value

Remaining Maturity

12 Months or Less More than 60 Months

Held by Trustee: Government Money Market Funds

$ 1,638,062

$ 1,638,062

$ -

Local Agency Investment Fund 4,316,234 4,316,234 - 1999 Special Tax Refunding Bonds 2,970,435 - 2,970,435

Total $ 8,924,731 $ 5,954,296 $ 2,970,435

Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations

The City’s investments (including investments held by bond trustees) do not include investments that are highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the information provided above).

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 59 -

(2) Cash and Investments (Continued) Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of the rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code, the City’s investment policy or debt agreements, and the Standard and Poor’s rating as of year end for each investment type

Rating as of Year End

Investment Type

Market Value

Minimum Legal Rating

Exempt from Disclosure

AAA

A1/P1

Not

Rated

US Treasury bills and notes $21,483,900

N/A

$21,483,900

$ -

$ -

$ -

US Government Sponsored Entities Securities

12,260,534

N/A

-

12,260,534

-

-

Government money market Funds

7,261,426

AAA

-

7,261,426

-

-

Local Agency Investment Fund 10,267,981

N/A

-

-

-

10,267,981

Held by Trustee: Government money market funds

2,498,850 AAA - 2,498,850 - -

1999 Special Tax Refunding Bonds

2,970,435

N/A

-

-

-

2,970,435

Local Agency Investment Fund

4,316,234

N/A -

-

-

4,316,234

Total $61,059,360 $21,483,900 $22,020,810 $ - $17,554,650

Concentration of Credit Risk The investment policies of the City and Agency contain limitations on the amount that can be invested in any one issuer beyond that stipulated by the California Government Code (see preceding tables). Investments at June 30, 2009 in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represent 5% or more of total portfolio investments (excluding investments held by trustee) were as follows:

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 60 -

(2) Cash and Investments (Continued)

Concentration of Credit Risk (Continued)

Portfolio

Issuer

Investment Type

%

Reported Amount

City Federal Farm Credit US Government Sponsored Entities Securities 10.24% $4,189,375

City Federal Home Loan Bank US Government Sponsored Entities Securities 15.77% $6,315,001

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial risk for investments is the risk that in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the City’s investment policies do not contain legal or policy requirements that would limit the exposure to custodial risk for deposits or investments, other than as follows. The California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure City deposits by pledging first trust deed mortgage notes having a value of 150% of secured public deposits. The investment policies for all three portfolios require delivery vs. payment procedures and that all securities be held in safekeeping by a third party bank trust department.

As of June 30, 2009 all of the City’s deposits with financial institutions in excess of federal depository insurance limits were collateralized by an interest in an undivided collateral pool as required by State law.

Investment in State Investment Pool The City is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code under the oversight of the Treasurer of the State of California. The fair value of the City’s investment in this pool is reported in the accompanying financial statements at amounts based upon the City’s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 61 -

(3) Interfund Balances

Interfund balances at June 30, 2009 consisted of the following:

Interfund Receivables Interfund Payables Amount General Fund Measure M Fund $ 1,009,011 Grants Fund 1,346,000 Low and Moderate Income Housing Fund 8,608 Ladera Funding Fund 1,530,416 Other governmental funds 2,225,184 Grants Fund Low and Moderate Income Housing Fund 2,587 Other governmental funds CDA Debt Service Fund $ 374,670 Totals $ 6,496,476

All interfund balances are short-term in nature and are expected to be repaid within one year. Generally, these balances result from interfund borrowings to cover short-term operating deficits. The General Fund interfund receivable from other governmental funds includes $1,987,807 of park development fees that will be received by the City upon the sale of a vacant parcel by a private party for housing development.

(4) Interfund Advances Interfund advances at June 30, 2009 consisted of the following:

Advances receivable Advances payable Amount General Fund CDA Debt Service Fund $1,566,620 CDA Notes Debt Service Fund 1,525,000

Total General Fund $3,091,620

Interfund advances between the General Fund and the CDA Debt Service Fund consist of monies loaned by the City to the Community Development Agency to finance operations. The loan agreements provide for reimbursement to the City within six years from any and all funds legally available to the Agency for such payment. Interest is computed from the time of the City’s advance of funds to the date of repayment by the Agency at a rate equivalent to interest earned on short term investments. Interest is recorded when it becomes payable from available spendable resources.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 62 -

(4) Interfund Advances (Continued) Interfund advances between the General Fund and the CDA Notes Debt Service Fund consist of Tax Allocation Notes (TAN) issued by the CDA and purchased in their entirety by the City. The TANs provide for repayment to the City three years after the date of issuance from any and all funds legally available to the Agency for such repayment. Interest is computed at the rate of 4.0% per annum. Interest is recorded when it becomes payable from available spendable resources.

(5) Due from Developers

In October 1994, the Mission Viejo Community Development Agency loaned $401,000 to a developer in accordance with an affordable housing agreement executed by the Agency and the Developer on July 1, 1994. The note bears no interest during the first two years after the date of the note, and thereafter until the note is paid in full, bears simple interest at the rate of 3% per annum. No payments were required to be made on the note during the first five years. Thereafter, annual payments of principal and interest amortized over a thirty year period are due. At June 30, 2009, the outstanding balance is $351,782 which includes unpaid accrued interest of $36,410. In August 1998, the Mission Viejo Community Development Agency loaned $2,143,000 to a developer in accordance with an affordable housing agreement executed by the Agency and Developer on April 20, 1998. The first $900,000 of the note bears simple interest of 4% per annum for the first six years of the note. The remaining $1,243,000 bears no interest during the first six years after the date of the note. Commencing upon the sixth anniversary date of the note, the entire principal balance bears simple interest at the rate of 4% per annum until paid in full. No payments are required to be made on the note during the first six years. Thereafter, principal payments equal to 100% of the developer’s annual net profits up to $142,733 will be due. In addition, principal payments equal to 50% of the developer’s annual net profits in excess of $142,733 per year will be due for the remaining balance of the note. A portion of each payment received must be spent on approved Community Development Block Grant items. Principal payments are due annually on April 1 beginning on April 1, 2006. On the 32nd anniversary of the note, any remaining outstanding balance of principal and interest will be due and payable. The outstanding balance at June 30, 2009 is $2,414,837 which includes unpaid accrued interest of $271,837. On May 11, 1999, the Mission Viejo Community Development Financing Authority issued $31,100,000 of 1999 Series A Variable Rate Demand Revenue Bonds to finance a portion of the costs of the acquisition, construction, installation and equipping of various public capital improvements to the Mission Viejo Mall (The Shops at Mission Viejo). As a result of the issuance of these bonds, the mall owner, Simon Properties Group entered into an agreement with the City. Under terms of this agreement, Simon Properties Group is obligated to pay the annual letter of credit, remarketing and other variable debt-related costs related to the Series A Bonds. At June 30, 2009, the amount due from the developer for these costs was $1,895,949.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 63 -

(6) Capital Assets Capital asset activity for the year ended June 30, 2009 was as follows:

Balance at Balance at

Governmental activities: June 30, 2008 Additions Deletions June 30, 2009 Capital assets, not depreciated: Land $48,687,918 $ - $ - $ 48,687,918 Rights of way 239,547,441 1,852,456 - 241,399,897 Construction in progress 18,355,018 5,652,393 2,593,740 21,413,671 Infrastructure – Street network:

Streets 198,656,049 - - 198,656,049 Total capital assets,

not depreciated 505,246,426 7,504,849 2,593,740 510,157,535 Capital assets, being depreciated: Buildings and improvements 106,558,406 1,080,250 149,823 107,488,833 Equipment and furniture 5,573,857 2,015,808 699,204 6,890,461 Vehicles 1,104,344 87,637 28,934 1,163,047 Infrastructure – Street network: Curbs and gutters 34,287,274 - - 34,287,274 Sidewalks 31,619,888 - - 31,619,888 Roadway bridges 6,289,000 - - 6,289,000

Traffic signals 10,499,956 - - 10,499,956 Infrastructure – Medians and Parkways network: Trees 30,497,237 - - 30,497,237 Infrastructure – Storm Drains network: Storm Drains 39,501,047 - - 39,501,047 Total capital assets, being depreciated $ 265,931,009 $3,183,695 $877,961 $268,236,743

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 64 -

(6) Capital Assets (Continued)

Balance at Balance at Governmental activities: June 30, 2008 Additions Deletions June 30, 2009 Less accumulated depreciation for: Buildings and improvements $ (22,879,519) $ (3,396,439) $ (60,455) $ (26,215,503) Equipment and furniture (3,441,280) (569,400) (675,896) (3,334,784) Vehicles (960,885) (68,834) (22,080) (1,007,639) Infrastructure – Street network: Curbs and gutters (8,416,571) (457,163) - (8,873,734) Sidewalks (7,982,423) (421,599) - (8,404,022) Roadway bridges (1,662,877) (83,853) - (1,746,730)

Traffic signals (5,998,220) (350,000) - (6,348,220) Infrastructure – Medians and Parkways network: Trees (7,781,435) (406,630) - (8,188,065) Infrastructure – Storm Drains network: Storm Drains (9,887,749) (555,814) - (10,443,563)

Total accumulated

depreciation (69,010,959) (6,309,732) (758,431) (74,562,260) Total capital assets being depreciated, net 196,920,050 (3,126,037) 119,530 193,674,483 Governmental activities capital assets, net $702,166,476 $4,378,813 $2,713,270 $703,832,018

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 65 -

(6) Capital Assets (Continued) Balance at Balance at

Business-type activities: June 30, 2008 Additions Deletions June 30, 2009 Capital assets, not depreciated: Land $1,000,764 $ - $ - $ 1,000,764 Total capital assets, not depreciated 1,000,764 - - 1,000,764 Capital assets, being depreciated: Buildings 1,641,647 - - 1,641,647 Improvements other than buildings 371,419 - - 371,419 Machinery and equipment 795,722 220,300 115,133 900,889 Total capital assets, being depreciated 2,808,788 220,300 115,133 2,913,955

Less accumulated depreciation for: Buildings (641,411) (53,344) - (694,755) Improvements other than buildings (106,861) (12,453) - (119,314) Machinery and equipment (644,264) (96,844) (113,872) (627,236) Total accumulated depreciation (1,392,536) (162,641) (113,872) (1,441,305) Total capital assets, being depreciated, net 1,416,252 57,659 1,261 1,472,650 Business-type activities capital assets, net $2,417,016 $57,659 $ 1,261 $ 2,473,414 Depreciation expense was charged to the following functions of governmental activities in the Statement of Activities: General Government - Legislative $ 231,073 General Government - Management and Support 1,492,255 Health and Public Safety 62,083 Public Works-Engineering and Transportation 217,069 Infrastructure Maintenance 2,474,484 Recreation, Community and Library Services 1,832,768 $6,309,732

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 66 -

6) Capital Assets (Continued)

Depreciation expense was charged to the following functions of business-type activities as follows: Animal Services $ 97,861 Mission Viejo Television 64,780 $ 162,641 Construction and Other Significant Commitments The City has active capital improvement projects as of June 30, 2009. The projects include improvements to roads, bridges, transportation and intersections. At year-end the City’s major commitments with contractors are as follows:

Remaining Projects: Spent to date Commitment Crown Valley Parkway Widening $ 17,397,669 $ 877,902 Oso/Marguerite Widening & Intersection Improvements 2,983,513 564,804 La Paz Bridge Widening 1,183,619 145,302

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 67 -

(7) Long-Term Liabilities

Changes in the long-term liabilities for the year ended June 30, 2009 were as follows:

Beginning Ending Due Within Due Beyond Balance Additions Deletions Balance One Year One Year

Governmental Activities:

Bonds/notes payable:

Certificates of participation $ 2,625,000 $ - $ (80,000) $ 2,545,000 $ 80,000 $ 2,465,000

Revenue bonds 53,487,326 - (1,455,000) 52,032,326 1,580,000 50,452,326

Total bonds/notes payable 56,112,326 - (1,535,000) 54,577,326 1,660,000 52,917,326

Other liabilities:

Compensated absences 1,548,645 1,017,241 (906,084) 1,659,802 1,478,432 181,370

Governmental activities

long-term liabilities $ 57,660,971 $ 1,017,241 $ (2,441,084) $ 56,237,128 $ 3,138,432 $ 53,098,696

Business-type Activities:

Other liabilities:

Compensated absences $ 55,008 $ 74,072 $ (59,247) $ 69,833 $ 69,833 $ -

For governmental activities, compensated absences are generally liquidated by the General Fund and Library Operations Fund.

Certificates of Participation

On August 1, 1996, the Mission Viejo Public Improvement Corporation issued $3,265,000 in Certificates of Participation to partially finance the construction of the Mission Viejo Public Library. The average interest rate of this debt at the date of issue was 5.91%. The certificates will mature serially through August 1, 2026. The legal reserve requirement of $239,500 was fully funded at June 30, 2009. The certificates utilize an asset transfer structure whereby, concurrent with the above debt issuance, the City entered into a noncancelable long-term lease with the Mission Viejo Public Improvement Corporation as lessee for Oso Viejo Park including all site improvements. At June 30, 2009 the outstanding balance was $2,545,000. Debt service requirements to maturity of the Library Certificates of Participation are as follows:

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 68 -

(7) Long-Term Liabilities Certificates of Participation (Continued)

Year ending June 30, Principal Interest Totals 2010 $ 80,000 $ 148,990 $ 228,990 2011 85,000 144,410 229,410 2012 90,000 139,465 229,465 2013 95,000 134,169 229,169 2014 105,000 128,419 233,419 2015 110,000 122,100 232,100 2016 115,000 115,350 230,350 2017 125,000 108,150 233,150 2018 130,000 100,500 230,500 2019 140,000 92,400 232,400 2020 150,000 83,700 233,700 2021 155,000 74,550 229,550 2022 165,000 64,950 229,950 2023 175,000 54,750 229,750 2024 190,000 43,800 233,800 2025 200,000 32,100 232,100 2026 210,000 19,800 229,800 2027 225,000 6,750 231,750 $ 2,545,000 $ 1,614,353 $ 4,159,353 Revenue Bonds

1999 Series A Variable Rate Demand Revenue Bonds

On May 11, 1999, the Mission Viejo Community Development Financing Authority issued $31,100,000 of 1999 Series A Variable Rate Demand Revenue Bonds to finance a portion of the costs of the acquisition, construction, installation and equipping of various public capital improvements to the Mission Viejo Mall (The Shops at Mission Viejo). On May 1, 1999, the City of Mission Viejo Community Development Financing Authority and the City of Mission Viejo entered into a lease agreement obligating the City to provide annual lease payments of 50% of sales tax revenues generated by the mall provided that the City shall retain a minimum of $1.5 million annually in sales tax revenues generated by the mall. The $1.5 million increases each year for the first ten years by the growth rates in the sales tax consultant’s study that was part of the bond issue and then by the consumer price index. Furthermore, the Mission Viejo Community Development Agency

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 69 -

(7) Long-Term Liabilities (Continued) Revenue Bonds (Continued) 1999 Series A Variable Rate Demand Revenue Bonds (Continued) entered into a pledge agreement on May 1, 1999 with the Authority, requiring the Agency to pledge property tax revenues generated by the site. Pledged revenues not needed for debt service are either paid to Simon Properties Group as holders of the 1999 Series B Subordinate Lien Taxable Revenue Bonds (subject to certain sales tax, interest rate and bond cost thresholds) or returned to the City.

Interest on the bonds is calculated weekly at a rate determined to reflect the current market conditions. At any time, the Authority may elect to convert the bonds to a fixed interest rate. Principal amounts mature between September 1, 2002 and September 1, 2028 in amounts ranging from $400,000 to $1,900,000. The bond reserve requirement of $2,373,252 was fully funded at June 30, 2009. The amount of principal outstanding at June 30, 2009 is $26,700,000. In order to limit its risk with respect to rising interest rates on the bonds, the Authority entered into a contract with SMBC Derivative Products Limited (SMBC) for the purchase of an interest rate cap to limit the Authority’s payment of interest to a maximum of 5.5%. The contract was entered into on October 26, 2006. The notional amount of the cap agreement amortizes based on the outstanding principal on the bonds. At June 30, 2009, the notional amount was $26,700,000. The contract called for the Authority to pay SMBC $32,151 on October 26, 2006. In return, SMBC is required to pay the Authority monthly an amount equal to the excess of the BMA Municipal Bond Swap Index over the cap rate. The agreement terminates on November 1, 2010. The fair value of this contract as of June 30, 2009 was $597 based on market valuation data provided by SMBC. The maximum amount of loss due to credit risk that the Authority would incur if SMBC failed to perform according to the terms of the contract is $597 which is the fair value of the derivative at June 30, 2009. The Authority or SMBC may terminate the contract if the other party fails to perform under the terms of the contract. The Authority is exposed to rollover risk on the agreement as a result of the agreement terminating prior to the final maturity date for the associated bonds. When the agreement terminates and if the agreement is not renewed, the Authority will not realize the potential interest rate savings on the bonds that are offered by the agreement. The bonds provide for an option exercisable by each bondholder for the bonds held by that bondholder to be purchased by the Authority at a price equal to one hundred percent of the principal amount of the bonds purchased plus accrued interest, if any. The purchase price and principal of, and interest on, the Series A Bonds purchased under this option are payable from amounts available to be drawn by the Trustee under an irrevocable direct pay letter of credit issued by Union Bank of California (UBOC). This letter of credit terminates on May 18, 2013. The Trustee is permitted to draw on the letter of credit to pay the principal, redemption amounts, and interest on the Series A Bonds and the purchase price of any Series A Bonds tendered but not remarketed to the extent that other moneys are not available. During the year ended June 30, 2009, letter of credit commitment fees in the amount of $89,760 were paid to UBOC.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 70 -

(7) Long-Term Liabilities (Continued) Revenue Bonds (Continued) 1999 Series A Variable Rate Demand Revenue Bonds (Continued) If Union Bank of California fails to honor a draw request, an irrevocable confirming letter of credit issued by the California State Teachers’ Retirement System has been established to honor the draw. During the year ended June 30, 2009, letter of credit commitment fees in the amount of $72,416 were paid to the California State Teachers’ Retirement System. Debt service requirements to maturity of the 1999 Series A Variable Rate Demand Revenue Bonds are as follows: Year ending June 30, Principal Interest * Totals 2010 $ 900,000 $ 45,390 $ 945,390 2011 900,000 43,860 943,860 2012 1,000,000 42,446 1,042,446 2013 1,000,000 40,630 1,040,630 2014 1,100,000 38,930 1,138,930 2015 1,100,000 37,060 1,137,060 2016 1,100,000 35,286 1,135,286 2017 1,200,000 33,320 1,233,320 2018 1,200,000 31,280 1,231,280 2019 1,300,000 29,240 1,329,240 2020 1,300,000 27,104 1,327,104 2021 1,400,000 24,820 1,424,820 2022 1,500,000 22,440 1,522,440 2023 1,500,000 19,890 1,519,890 2024 1,600,000 17,388 1,617,388 2025 1,600,000 14,620 1,614,620 2026 1,600,000 11,900 1,611,900 2027 1,700,000 9,180 1,709,180 2028 1,800,000 6,307 1,806,307 2029 1,900,000 1,628 1,901,628 $ 26,700,000 $ 532,719 $ 27,232,719 * The above debt service requirements to maturity were calculated using the interest rate as of June 30, 2009 of 0.17%.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 71 -

(7) Long-Term Liabilities (Continued)

1999 Series B Subordinate Lien Taxable Revenue Bonds On May 19, 1999, the Mission Viejo Community Development Financing Authority authorized $10,000,000 and issued $115,000 of 1999 Series B Subordinate Lien Taxable Revenue Bonds to finance a portion of the costs of the acquisition, construction, installation and equipping of various public capital improvements to the Mission Viejo Mall. Through June 30, 2009 an additional $7,232,326 of Series B Bonds was issued. As of June 30, 2009, a total of $7,347,326 of 1999 Series B bonds has been issued. The interest rate on the bonds is equal to the six-month London Interbank Offered Rate plus 1½%, not to exceed 8% per annum. If the 1999 Series A Bonds are converted to a fixed interest rate, interest on the 1999 Series B Bonds will be equal to the fixed interest rate plus 1%. Interest is payable annually commencing September 1, 1999, subject to certain preconditions. If, in any year, revenues are insufficient to pay interest due on the Series B Bonds, such interest shall remain due and payable. Principal payments on the bonds will commence at the earlier of the conversion of the 1999 Series A Bonds to a fixed interest rate or after two consecutive years of two times debt service coverage for the 1999 Series A Bonds. Annual principal payments will be an amount that is proportional to the principal of the 1999 Series A Bonds. The bonds mature on September 1, 2028, at which time, if any outstanding principal or accrued interest remains, such amounts shall cease to be payable. At June 30, 2009, the outstanding principal is $7,347,326 and the unpaid interest is $1,028,477. No debt service requirement to maturity schedule has been included since neither of the two conditions for the initiation of principal payments had been met as of June 30, 2009. 1999 Series C Revenue Bonds On August 1, 1999, the Mission Viejo Community Development Financing Authority issued $4,990,000 of Series C Revenue Bonds to provide funds to acquire the 1999 Special Tax Refunding Bonds (see note 8) and to provide for new money for the construction of certain public facilities. Interest rates on the bonds range from 4.0% to 5.6% and are payable semi-annually on February 1 and August 1 of each year until maturity. The interest and principal of the bonds are payable from assessment revenues generated by the CFD 1999 Special Tax Refunding Bonds. Principal amounts mature between August 1, 2001 and August 1, 2017 in amounts ranging from $185,000 to $410,000. The amount of principal outstanding at June 30, 2009 was $3,030,000. Debt service requirements to maturity of the 1999 Series C Revenue Bonds are as follows:

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 72 -

(7) Long-Term Liabilities (Continued) 1999 Series C Revenue Bonds (Continued) Year ending June 30, Principal Interest Totals 2010 $ 270,000 $ 154,185 $ 424,185 2011 290,000 139,833 429,833 2012 300,000 124,565 424,565 2013 315,000 108,418 423,418 2014 335,000 91,192 426,192 2015 350,000 72,952 422,952 2016 370,000 53,600 423,600 2017 390,000 33,080 423,080 2018 410,000 11,275 421,275 $ 3,030,000 $ 789,100 $ 3,819,100 2001 Series A Lease Revenue Bonds On March 1, 2001, the Mission Viejo Community Development Financing Authority issued $17,450,000 of Series A Lease Revenue Bonds to finance the construction of the City Hall facility and expansion of the Mission Viejo Library.

Interest on the bonds range from 4.125% to 5.10% and is payable semi-annually on May 1 and November 1 of each year. Principal amounts mature between May 1, 2003 and May 1, 2031 in amounts ranging from $320,000 to $3,095,000. The bond reserve requirement of $1,140,334 was fully funded at June 30, 2009. The amount of principal outstanding at June 30, 2009 was $14,955,000.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 73 -

(7) Long-Term Liabilities (Continued)

2001 Series A Lease Revenue Bonds (Continued) Debt service requirements to maturity of the City Hall 2001 Series A Revenue Bonds are as follows:

Year ending Sinking June 30, Principal Fund Interest Totals 2010 $ 410,000 $ - $ 728,735 $ 1,138,735 2011 425,000 - 711,310 1,136,310 2012 440,000 - 693,248 1,133,248 2013 460,000 - 674,328 1,134,328 2014 480,000 - 654,548 1,134,548 2015 500,000 - 633,428 1,133,428 2016 520,000 - 610,928 1,130,928 2017 545,000 - 586,878 1,131,878 2018 570,000 - 560,990 1,130,990 2019 595,000 - 533,345 1,128,345 2020 625,000 - 503,595 1,128,595 2021 655,000 - 472,345 1,127,345 2022 - 690,000 439,595 1,129,595 2023 - 725,000 405,095 1,130,095 2024 - 765,000 368,845 1,133,845 2025 800,000 - 330,595 1,130,595 2026 - 840,000 290,595 1,130,595 2027 - 885,000 248,595 1,133,595 2028 930,000 - 204,345 1,134,345 2029 - 980,000 157,845 1,137,845 2030 - 1,030,000 107,864 1,137,864 2031 1,085,000 - 55,334 1,140,334 $ 9,040,000 $ 5,915,000 $ 9,972,386 $ 24,927,386

(8) Community Facilities District Bonds

On December 2, 1992, $4,950,000 of special tax bonds dated December 1, 1992 were issued for the Mission Viejo Community Facilities District No. 92-1 pursuant to the Mello Roos Community Facilities Act of 1982. The bond proceeds were used to finance the acquisition and construction of public flood control facilities. On August 1, 1999, the City of Mission Viejo issued $4,601,699 of 1999 Special Tax Refunding Bonds to provide for the advance refunding of the 1992 bonds. All of the 1999 bonds were purchased by the Mission Viejo Community Development Financing Authority. The bonds are not general obligations of the City, and neither the faith nor the taxing power of the City is pledged to the payment of these bonds. Therefore, the bonds are not recorded as liabilities of the City. The City has no obligation beyond the balances in the agency fund for any delinquent District bond payments. The bonds are limited obligations of the District payable solely from the special tax or funds held pursuant to the bond indenture agreement. The principal amount of bonds outstanding at June 30, 2009 was $2,912,191. An amount of $853,409 is

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 74 -

(8) Community Facilities District Bonds (Continued) being held by the City and is reflected as due to bondholders at June 30, 2009 in the Statement of Fiduciary Assets and Liabilities.

(9) Net Assets As of June 30, 2009, all of the net assets in the proprietary funds, except those invested in capital assets

were unrestricted. As provided under accounting principles generally accepted in the United States of America, restrictions are only established in proprietary funds for equity legally restricted by parties external to the governmental unit.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 75 -

(10) Fund Balances Fund balances at June 30, 2009 consisted of the following reserves and designations:

General Fund

_________ Measure M _________

Grants _________

Low and Moderate Income Housing

_________

Ladera Funding

_________

CDA Debt Service

_________

Other Governmental

Funds _________

Totals _________

Reserved for:

Encumbrances $1,182,893 $731,939 $1,530,982 - $342,187 - $771,239 $4,559,240 Advances to other funds 3,047,000 - - - - - - 3,047,000 Deposits 12,817 - - - - - - 12,817 Prepaid items 90,347 - - - - - - 90,347 Debt service requirements 239,500 - - - - - 9,268,503 9,508,003 Long term receivables - - - 3,029,306 - - - 3,029,306 Targeted donations - - - - - - 10,519 10,519 Low and Moderate income housing - - - 8,035,871 - - - 8,035,871

_________ _________ _________ _________ _________ _________ _________ _________ Total reserved 4,572,557 731,939 1,530,982 11,065,177 342,187 - 10,050,261 28,293,103

_________ _________ _________ _________ _________ _________ _________ _________ Unreserved:

Designated for:

Subsequent years expenditures 4,721,586 1,523,478 - - - - 1,679,854 7,924,918 Special fund purposes - - - - - - 939,958 939,958 Future capital projects - - - - - - 263,118 263,118 Asset replacement 18,589,023 - - - - - - 18,589,023

_________ _________ _________ _________ _________ _________ _________ _________ Total unreserved, designated 23,310,609 1,523,478 - - - - 2,882,930 27,717,017

_________ _________ _________ _________ _________ _________ _________ _________ Undesignated 6,830,955 - (1,712,249) - (1,078,132) (806,936) (3,487,703) (254,065)

_________ _________ _________ _________ _________ _________ _________ _________ Total fund balances (deficits) $34,714,121 $2,255,417 $(181,267) $11,065,177 $(735,945) $(806,936) $9,445,488 $55,756,055

_______ __ _________ _________ _________ _________ _________ _________ ____ _____

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 76 -

(11) Interfund Transfers

Interfund transfers for the year ended June 30, 2009 consisted of the following: Transfers In Transfers Out Amount

General Fund Other governmental funds $ 696,118 Low and Moderate Income Housing Fund CDA Debt Service Fund 1,433,565 Other governmental funds General Fund 1,118,112 CDA Debt Service Fund 685,774 Other governmental funds 1,436,723 Animal Services enterprise fund General Fund 521,260 $ 5,891,552 Significant transfers included in the accompanying financial statements are described as follows: Transfers to Major Funds Of the $696,118 transferred to the General Fund, $664,347 was received from the CDFA 1999 Mall Bonds Debt Service Fund representing the 2008 release of the rolling reserve, other than for reimbursement of bond administrative costs on the 1999 Series A Variable Rate Demand Revenue Bonds transferred by the bond trustee and $31,771 was received from the Library Construction Fund as payment for capital expenditures. The $1,433,565 transferred to the Low and Moderate Income Housing Special Revenue Fund was the transfer of 20% of property tax revenue from the CDA Debt Service Fund. Transfers from Major Funds The General Fund transferred $1,118,112 to the CDFA 2001 City Hall/Library Expansion Bonds Debt Service Fund for payment of the debt service on those bonds and $521,260 was transferred to the Animal Services Enterprise Fund representing Mission Viejo’s proportionate share of the net costs of the Animal Services operation for the year, as estimated in the budget. The $685,774 transferred from the CDA Debt Service Fund was for the transfer of the mall portion of property tax increment received to the CDFA 1999 Mall Bonds Debt Service Fund.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 77 -

(12) Fund Deficits and Expenditures in Excess of Appropriations The following funds reported a deficit in fund balance as of June 30, 2009: Deficit Balances Major Governmental Funds: Special Revenue Fund: Grants $ (181,267) Ladera Funding $ (735,945) Debt Service Funds: CDA Debt Service $ (806,936) Other Governmental Funds: Special Revenue Fund: Developer Fees $ (1,644,841) Debt Service Funds: CDA Notes Debt Service $ (1,525,000)

The special revenue fund deficits will be remedied as the grants are billed and received and from developer fees still expected to be received.

The debt service fund deficits are due to the provisions of GASB Statement No. 34, which requires interfund advances and loans to be recorded on the governmental fund balance sheet. The fund deficits will be remedied with the receipt of future property tax increment revenue. The following funds reported expenditures in excess of appropriations based on the level of budgetary control: Actual Final (Budgetary Major Governmental Funds: Budget Basis) Variance

Grants Fund Montanoso Rec Ctr Renovations $ 0 366 (366)

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 78 -

(13) Liability, Property and Workers Compensation Protection

The City is a member of the California Joint Powers Insurance Authority (Authority). The Authority is composed of 122 California public entities and is organized under a joint powers agreement pursuant to California Government Code Section 6500, et seq. The purpose of the Authority is to arrange and administer programs for the pooling of self-insured losses, to purchase excess insurance or reinsurance, and to arrange for group purchased insurance for property and other coverages. The Authority’s pool began covering claims of its members in 1978. Each member government has an elected official as its representative on the Board of Directors. The Board operates through a nine-member Executive Committee. Self-Insurance Programs of the Authority

General Liability The City participates in the general liability pool administered by the Authority. Each member government pays a primary deposit to cover estimated losses for a fiscal year (claims year). Six months after the close of a fiscal year, outstanding claims are valued. A retrospective deposit computation is then made for each open claims year. Claims are pooled separately between police and non-police. Costs are spread to members as follows: the first $30,000 of each occurrence is charged directly to the member’s primary deposit; costs from $30,001 to $750,000 and the loss development reserves associated with losses up to $750,000 are pooled based on a member’s share of losses under $30,000. Losses from $750,001 to $2,000,000 and the associated loss development reserves are pooled based on payroll. Costs of covered claims from $2,000,001 to $50,000,000 are currently paid by excess insurance and are subject to a $3,000,000 annual aggregate deductible and a quota sharing agreement whereby the Authority is financially responsible for 40% of losses occurring within the $2,000,000 to $10,000,000 layer. Cost associated with the quota sharing agreement are estimated using actuarial models and pre-funded as a part of the primary and retrospective deposits.

Workers Compensation The City also participates in the workers compensation pool administered by the Authority. Each member pays a primary deposit to cover estimated losses for a fiscal year (claims year). Six months after the close of a fiscal year, outstanding claims are valued. A retrospective deposit computation is then made for each open claims year. Claims are pooled separately between public safety and non-public safety. Each member has a retention level of $50,000 for each loss and this is charged directly to the member’s primary deposit. Losses from $50,001 to $100,000 and the loss development reserve associated with losses up to $100,000 are pooled based on the member’s share of losses under $50,000. Losses from $100,001 to $2,000,000 and the loss development reserve associated with those losses are pooled based on payroll. Losses from $2,000,001 up to statutory limits are paid under an excess insurance policy. Protection is provided per statutory liability under California Worker’s Compensation law.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 79 -

(13) Liability, Property and Workers Compensation Protection (Continued) Workers Compensation, (Continued) Claims covered under the definition of employers losses are pooled among members to $2,000,000, coverage from $2,000,001 to $4,000,000 is purchased as part of excess insurance policy, and losses from $4,000,001 to $10,000,000 are pooled among the members. Purchased Insurance Environmental Insurance The City participates in the pollution legal liability and remediation legal liability insurance which is available through the Authority. The policy covers sudden and gradual pollution of scheduled property, streets, and storm drains owned by the City. Coverage is on a claims-made basis. There is a $50,000 deductible. The Authority has a limit of $50,000,000 for the 3-year period from July 1, 2008 through July 1, 2011. Each member of the Authority has a $10,000,000 limit during the 3-year term of the policy. Property Insurance The City participates in the all-risk property protection program of the Authority. This insurance protection is underwritten by several insurance companies. City property is currently insured according to a schedule of covered property submitted by the City to the Authority. Total all-risk property insurance coverage is currently $102,476,874. There is a $5,000 deductible per occurrence except for non-emergency vehicle insurance which has a $1,000 deductible. Premiums for the coverage are paid annually and are not subject to retroactive adjustments.

Earthquake and Flood Insurance The City purchases earthquake and flood insurance on a portion of its property. The earthquake insurance is part of the property protection insurance program of the Authority. City property currently has earthquake protection in the amount of $80,465,740. There is a deductible of 5% of value with a minimum deductible of $100,000. Premiums for the coverage are paid annually and are not subject to retroactive adjustments. Crime Insurance The City purchases crime insurance coverage in the amount of $1,000,000 with a $2,500 deductible. The fidelity coverage is provided through the Authority. Premiums are paid annually and are not subject to retroactive adjustments.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 80 -

(13) Liability, Property and Workers Compensation Protection (Continued) Special Event Tenant User Liability Insurance The City further protects against liability damages by requiring tenant users of certain property to purchase low-cost tenant user liability insurance for certain activities on the City property. The insurance premium is paid by the tenant user and is paid to the City according to a schedule. The City then pays for the insurance. Insurance is arranged by the Authority. During the past three fiscal (claims) years none of the above programs of protection have had settlements or judgments that exceeded pooled or insured coverage. There have been no significant reductions in pooled or insured liability coverage from coverage in the prior year.

(14) Joint Venture

Orange County Fire Authority In January 1995, the City of Mission Viejo entered into a joint powers agreement with the Cities of Buena Park, Cypress, Dana Point, Irvine, Laguna Hills, Laguna Niguel, Lake Forest, La Palma, Los Alamitos, Placentia, San Clemente, San Juan Capistrano, Seal Beach, Stanton, Tustin, Villa Park and Yorba Linda and the County of Orange to create the Orange County Fire Authority (Authority). Since the creation of the Authority, the Cities of Aliso Viejo, Laguna Woods, Rancho Santa Margarita and Westminster joined the Authority as members eligible for fire protection services. The purpose of the Authority is to provide for mutual fire protection, prevention and suppression services and related and incidental services including, but not limited to, emergency medical and transport services, as well as providing facilities and personnel for such services. The effective date of formation was March 1, 1995. The Authority’s governing board consists of one representative from each city and two from the County. The operations of the Authority are funded with fire fees collected by the County through the property tax roll for the unincorporated area and on behalf of all member cities except for the Cities of Stanton, Tustin, San Clemente, Buena Park, Placentia and Seal Beach. The County pays all structural fire fees it collects to the Authority. The Cities of Stanton, Tustin, San Clemente, Buena Park, Placentia and Seal Beach are considered “cash contract cities” and accordingly make cash contributions based on the Authority’s annual budget. The City of Mission Viejo does not have an equity interest in the assets of the Orange County Fire Authority. Complete financial statements may be obtained from the Orange County Fire Authority, One Fire Authority Road, Irvine, California 92602.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 81 -

15) Other Significant Commitments

The Agency and the City entered into a cooperation agreement on September 29, 1993 whereby the Agency is committed to pay for a portion of certain traffic infrastructure improvements, after such improvements have been incurred, up to a maximum cost to the Agency of $1,008,500. In turn, any related development fees collected by the City will be paid by the City to the Agency. Costs incurred to date under this agreement are $69,448.

Owner Participation Agreements In 1996, the Agency entered into an owner participation agreement with Kaleidoscope Partners, L.P., the owners of certain real property located at the northeast corner of the San Diego Freeway (I-5) and Crown Valley Parkway. The developer constructed a commercial shopping, entertainment, and retail facility on the site. This agreement obligates the Agency to pay the owners 100% of property tax increment revenues generated by the site, less amounts retained for set aside and pass through obligations, subject to the project generating sales tax revenues above certain agreed-upon minimum thresholds. The payments are due semi-annually on May 1 and November 1 commencing upon the first date that the site generates property tax increment. The payments will continue until the earliest of May, 2024, the date on which the developer has received $1,400,000, or the date on which the annual net operating income to the developer exceeds 12% of total project costs. The amount to be paid under this agreement is contingent upon the receipt of future project revenues. Total payments made as of June 30, 2009 are $96,916. In addition, the Agency made an equity investment in the project of $2,000,000 in order to facilitate the acquisition of certain rights of way for the project. This investment is being repaid with sales tax revenues generated by the project over a period of eleven years through June 2010, with interest being earned on the unpaid portion at the Bank of America prime rate. The amount of principal outstanding at June 30, 2009 is $1,154,909. In April 2000, the Agency entered into an owner participation agreement with GSM Development, L.L.C. to assist in property acquisition and provide commercial rehabilitation assistance for the development of an Infiniti dealership within the City of Mission Viejo. The agreement obligates the Agency to pay up to $2,003,331 to the developer over eleven years based on sales tax revenues generated by the site. Payments are due quarterly with the first payment due March 2002. Payments will cease with the forty-fourth payment or on the date which the maximum amount payable is incurred by the Agency, whichever is earlier.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 82 -

(16) Lease Commitment

On December 1, 2000, the City entered into a lease agreement with the Santa Margarita Water District for office and storage space. The lease terminates on November 30, 2010. Minimum annual lease commitments as of June 30, 2009 are as follows: Year Ending June 30 Amount 2010 $ 38,973 2011 16,239 $ 55,212

(17) Deferred Compensation Plan

The City offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan, available to all employees, permits them to defer annually up to $16,500, until future years. Employees over age 50 may elect to defer up to an additional $5,500 annually. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency. The City has placed these assets in a trust held for the exclusive benefit of plan participants and their beneficiaries, as prescribed by Internal Revenue Code Section 457(g). Consequently, these assets are not included in the City’s financial statements. In addition to the plan discussed above, the City also offers its employees a deferred compensation plan in accordance with Internal Revenue Code Section 401(a). The City contributes 1% of all employees’ gross wages to the plan. Employees may not make contributions under this plan. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency. The City has placed these assets in a trust held for the exclusive benefit of plan participants and their beneficiaries, as prescribed by Internal Revenue Code Section 401(a). Consequently, these assets are not included in the City’s financial statements.

(18) Defined Benefit Pension Plan Plan Description The City of Mission Viejo contributes to the California Public Employees Retirement System (PERS), an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 83 -

(18) Defined Benefit Pension Plan (Continued) Plan Description (Continued) state statute and City ordinance. The City has adopted the 2.7% at 55 retirement plan with benefits based on final compensation that is the monthly average of the member’s highest 12 consecutive months’ full-time equivalent monthly pay. Copies of PERS’ annual financial report may be obtained from their executive office: 400 “P” Street, Sacramento, California 95814. Funding Policy Participants are required to contribute 8.0% of their annual covered salary. For the year ending June 30, 2008 the City made 7% of the contribution required of City employees on their behalf and for their account. The City is required to contribute at an actuarially determined rate calculated as a percentage of payroll. The employer contribution rate for the year ended June 30, 2009 was 15.577% for non-safety employees. The City has no safety employees. The contribution requirements of plan members and the City are established and may be amended by PERS. Annual Pension Cost The following table shows the components of the City’s annual pension cost for the year, the amount actually contributed to the plan, and changes in the City’s net pension asset: Annual required contribution $ 1,592,973 Interest on net pension asset (22,144) Adjustment to annual required contribution 35,655 Annual pension cost 1,606,484 Contributions made (1,592,973) Decrease in net pension asset 13,511 Net pension asset – beginning of year (285,728) Net pension asset – end of year $ (272,217) The net pension asset is reported in the government-wide and proprietary fund statements as part of prepaid expenses.

The required contribution was determined as part of the June 30, 2006 actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses), (b) projected annual salary increases that vary by age, service and type of employment, ranging from 3.25% to 14.45%, and (c) 2% per year cost-of-living adjustments. Both (a) and (b) included an inflation component of 3.0%. The actuarial value of PERS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period. The City’s unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll on a closed basis. The average remaining amortization period at June 30, 2006 was 13 years.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 84 -

(18) Defined Benefit Pension Plan, (Continued) Annual Pension Cost (Continued)

Five-Year Trend Information Annual Pension Cost (APC) Net Pension Fiscal (Employer Actual Percentage of Obligation Year Contribution) Contribution APC Contributed (Asset) 6/30/05 961,588 961,588 100% -0- 6/30/06 1,133,440 1,443,344 127% (309,904) 6/30/07 1,276,054 1,264,417 99% (298,267) 6/30/08 1,443,350 1,430,811 99% (285,728) 6/30/09 1,606,484 1,592,973 99% (272,217) As of June 30, 2007, the most recent actuarial valuation date, the plan was 83.1% funded. The actuarial accrued liability for benefits was $29.5 million, and the actuarial value of assets was $24.5 million, resulting in an unfunded actuarial accrued liability (UAAL) of $5.0 million. The covered payroll (annual payroll of active employees covered by the plan) was $8.8 million, and the ratio of the UAAL to the covered payroll was 56.2%. The schedule of funding progress presented below presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. Five-Year Schedule of Funding Progress Unfunded Actuarial Accrued Entry Age Actuarial Liability Funded Market Funded UAAL Normal Value of (UAAL)/ Status Value of Status Annual As a % Accrued Assets (Excess Based Assets Based Covered of Date Liability (AVA) Assets) on AVA (MVA) on MVA Payroll Payroll

6/30/03* $15,677,368 $12,383,795 $3,293,573 79.0% N/A N/A $6,503,340 50.6% 6/30/04** 18,263,026 14,499,539 3,763,487 79.4% $ 14,301,516 78.3% 6,563,553 57.3% 6/30/05 20,980,529 17,028,313 3,952,216 81.2% 17,496,441 83.4% 6,995,561 56.5% 6/30/06 24,346,044 20,312,606 4,033,438 83.4% 21,361,601 87.7% 7,681,993 52.5% 6/30/07 29,475,073 24,506,369 4,968,704 83.1% 27,789,959 94.3% 8,835,113 56.2% * Changes in actuarial assumption and method ** New plan changes and changes in actuarial methods

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 85 -

(19) Other Post Employment Benefits (OPEB)

Plan Description

In addition to the retirement plan described in Note 18, the City of Mission Viejo Retiree Insurances Program (RIP) provides under a sole employer defined benefit post-employment benefits plan eligible retired City employees and their spouses a monthly contribution towards medical, dental and vision insurance premium costs up to a fixed dollar cap that varies based on coverage election and full or part-time employment status. Benefit provisions are established and may be amended by the City Council. The RIP was originally adopted by the City Council in July, 2000. The City of Mission Viejo is participating in the California Employer’s Retiree Benefit Trust Program (CERBT) Prefunding Plan for the purposes of holding in trust irrevocable contributions restricted for the provision of these benefits. CERBT is administered by the California Public Employee’s Retirement System (CalPERS). Copies of CalPERS annual financial report may be obtained from their executive office: 400 “P” Street, Sacramento, California 95814.

Eligibility

Employees of the City are eligible for retiree health benefits if they (1) have been employed by the City for a minimum of twelve continuous years of service, (2) were eligible to participate in the City’s Fixed Monthly City Contribution to Benefits program prior to January 1, 2007, (3) are at least fifty years of age as of the last day of work prior to retirement, (4) are a vested member of CalPERS, (5) simultaneously retire from both the City of Mission Viejo and CalPERS on the same day, (6) receive a monthly retirement allowance check from CalPERS, and (7) have been enrolled in the insurance plan(s) at the desired benefit plan enrollment level for at least one year prior to retirement. The maximum monthly contribution amounts for full-time employees who retired from July 2000 through June 2008 were $825 for employee only coverage and $912 for employee plus one coverage. Membership in the plan consisted of the following at June 30, 2008, the date of the latest actuarial valuation:

Retirees and beneficiaries receiving benefits 11

Terminated plan members entitled to but not yet receiving benefits 0 Active plan members 132 Total 143

Funding Policy

The obligation of the City to contribute to the plan is established and may be amended by the City Council. Employees are not required to contribute to the plan. The City has established a policy of contributing to the irrevocable CERBT trust administered by CalPERS 100% of the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost of each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The ARC for fiscal year 2008-09 was $493,000, 5.9% of estimated covered payroll.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 86 -

(19) Other Post Employment Benefits (OPEB), (Continued) Annual OPEB Cost The following table shows the components of the City’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City’s net OPEB asset: Annual required contribution $ 493,000 Interest on net OPEB asset (71,533) Adjustment to annual required contribution 80,062 Annual OPEB cost 501,529 Contributions made (493,000) Decrease in net OPEB asset 8,529 Net OPEB asset – beginning of year (923,000) Net OPEB asset – end of year $(914,471) The net OPEB asset is reported in the government-wide and proprietary fund statements as part of prepaid expenses. The required contribution was determined as part of the June 30, 2006, actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses); (b) aggregate payroll increases of 5% per year; (c) 3% per year increases, pre-retirement, to the City’s Fixed Monthly City Contribution to Benefits, and 0% per year, post-retirement; and (d) an annual inflation component of 3.0%. The actuarial value of the plan assets is equal to the market value. The City’s unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll over a fixed 30-year period. The average remaining amortization period at June 30, 2006 was 30 years. Three Year Trend Information:

Fiscal Year

Annual OPEB Cost (AOC) (Employer

Contribution) Actual

Contribution Percentage of AOC

Contributed Net OPEB

Obligation (Asset) 6/30/07 N/A N/A N/A N/A 6/30/08 $527,000 $1,450,000 275% $(923,000) 6/30/09 $501,529 $ 493,000 98% $(914,471)

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 87 -

(19) Other Post Employment Benefits (OPEB), (Continued)

Annual OPEB Cost (Continued)

Schedule of Funding Progress:

Date

Entry Age Normal Accrued Liability

Actuarial Value of Assets (AVA)

Unfunded Actuarial Accrued

Liability (UAAL)/ (Excess Assets)

Funded Status

Based on AVA

Annual Covered Payroll

UAAL As a %

of Payroll

6/30/06

$ 3,964,000

$ -0-

$ 3,964,000

0%

$ 7,958,000

49.8%

6/30/08 4,751,000 1,462,000 3,289,000 30.8% 8,356,000 39.4%

For employees first eligible for City health benefits on or after January 1, 2007, in addition to the retirement plan described in Note 18, the City of Mission Viejo’s Supplemental Health Account for Retired Employees (SHARE) plan is a defined contribution plan intended to assist employees in saving for post-employment health insurance costs. Employer and employee contributions to the plan begin one year after the employee’s hire date. The City’s monthly contribution is $100 for full-time employees and is prorated based on full-time equivalency. Employees are required to contribute 1.5% of their salary to this plan. The contributions made by employees are not forfeitable. To receive the City’s contributions, employees must separate or retire from the City, have 15 years of service, and attain age 55. As of June 30, 2009, 31 employees were eligible to participate in this plan. Required employer contributions were made during the year in the amount of $15,975 and required employee contributions totaled $9,855. At June 30, 2009, there were no retirees eligible to receive the City’s contributions under this plan.

(20) Subsequent Events

State Action to Borrow Local Government Property Tax Funds in Fiscal Year 2009-10 On July 28, 2009, legislation was signed into law that enabled the State of California to borrow a portion of the property tax revenue due to be remitted to local governments in fiscal year 2009-10. This action was taken to replace a portion of the shortfall in state revenues associated with current economic conditions. The amount to be borrowed in 2009-10 from each local government represents approximately 8% of the general levy property taxes received by that local government in fiscal year 2008-09. The amount to be borrowed from the City of Mission Viejo is $2,435,615. The California Constitution requires the State to repay the borrowed property tax funds within three years of the borrowing with interest (an annual rate of 2%). The California Constitution prohibits the State from borrowing additional funds from local governments until the first borrowing has been repaid. No more than two borrowings are permitted within a given ten year period under current state law.

CITY OF MISSION VIEJO

Notes to Basic Financial Statements (Continued) Year ended June 30, 2009

See independent auditors’ report. - 88 -

(20) Subsequent Events (Continued) State Action to Borrow Local Government Property Tax Funds in Fiscal Year 2009-10 (Continued) Legislation has been passed that authorized the California Statewide Communities Development Authority (CSCDA), a joint powers agency, to issue debt that would be used to provide to participating local governments funds to replace the property tax revenue borrowed by the state. If such debt is issued, the State would be responsible for repayment of the bonds. The City has elected to participate in the CSCDA debt program. Participation in this program requires the City to sell its receivable from the State to the CSCDA. In return for the sale of its receivable the City will receive funds from the CSCDA bond issue on the same dates and in the same amounts as the State borrows the property tax revenues from the City. All risk of repayment of these bonds by the State will be borne by the bondholders. Under the modified accrual basis of accounting, the re-directed property taxes are not permitted to be recognized as revenue in the fund financial statements until the tax revenues (or the substituted funds provided by the planned CSCDA debt issue) are received by the local government (i.e., collected during that local government’s “availability period”). In the government-wide financial statements, the property tax revenues are recognized for the year in which they were levied (fiscal year 2009-10) as a receivable to be collected upon the State’s repayment of the withheld property taxes.

REQUIRED SUPPLEMENTARY INFORMATION

See independent auditors’ report. - 89 -

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- 90 -

CITY OF MISSION VIEJOGeneral Fund

Schedule of Revenues, Expenditures, and Changes in Fund BalancesBudget and Actual (Budgetary Basis)

Year ended June 30, 2009Variance with

Actual Final Budget-Budgeted Amount Budgetary (Budgetary Positive

Original Final Actual Adjustments Basis) (Negative)Revenues:

Taxes 44,494,197$ 42,302,059$ 41,236,214$ -$ 41,236,214$ (1,065,845)$ Licenses & permits 1,562,200 1,276,415 1,265,539 - 1,265,539 (10,876) Intergovernmental 729,030 635,518 612,830 - 612,830 (22,688) Charges for services 2,227,240 2,107,050 2,007,894 - 2,007,894 (99,156) Fines and forfeitures 812,500 687,026 651,962 - 651,962 (35,064) Investment earnings 1,978,490 1,758,600 2,140,064 - 2,140,064 381,464 Developer fees - 274,474 274,474 - 274,474 - Other 473,420 1,145,000 1,181,553 - 1,181,553 36,553

Total revenues 52,277,077 50,186,142 49,370,530 - 49,370,530 (815,612)

Expenditures:Current:

General government- legislative 1,451,196 2,105,145 2,057,338 75 2,057,413 47,732 General government- management and support 9,819,513 10,186,571 9,647,916 283,752 9,931,668 254,903 Public safety 15,169,451 15,136,902 15,059,639 37,189 15,096,828 40,074 Community development 2,199,191 1,865,080 1,687,102 45,330 1,732,432 132,648 Public works- engineering and transportation 2,544,614 1,872,516 1,657,271 97,163 1,754,434 118,082 Infrastructure maintenance 14,205,417 14,320,610 14,159,225 23,254 14,182,479 138,131 Recreation/community/library services 5,058,956 5,213,545 5,187,415 16,186 5,203,601 9,944

Debt servicePrincipal 80,000 80,000 80,000 - 80,000 - Interest and fiscal charges 151,190 151,190 153,350 - 153,350 (2,160)

Capital projects:Site Security Lighting 225,000 120,281 371 - 371 119,910 2007 Playground Renovations 650,000 637,954 135,246 41,947 177,193 460,761 Site Fencing Repairs/Replacements - 25,441 8,000 - 8,000 17,441 Marguerite Aquatics Decking 320,000 444,319 35,058 96,496 131,554 312,765 Montanoso Tennis Lighting Replacement - 183,534 183,534 - 183,534 - Oso Creek Trail Signage - 32,492 14,814 1,110 15,924 16,568 Solar PV System-City Hall - 226,000 - - - 226,000 Montanoso Locker Room 150,000 135,283 86,506 6,500 93,006 42,277 Marguerite Tennis Renovation and Lighting 440,000 3,788,327 77,175 447,540 524,715 3,263,612 Library Expansion - (7,836) (7,836) - (7,836) - Traffic Safety Program - 143,500 143,500 - 143,500 - Oso/Marguerite Intersection Improvements - 822,727 36,081 86,351 122,432 700,295 Montanoso Rec Center Renovations - (366) (366) - (366) - Felipe & Marguerite Tennis Center Improvements - - - - - - Murray Community Senior Center Expansion - 158,040 158,040 - 158,040 -

Total expenditures 52,464,528 57,641,255 50,559,379 1,182,893 51,742,272 5,898,983

Excess of revenues over (under) expenditures (187,451) (7,455,113) (1,188,849) (1,182,893) (2,371,742) 5,083,371

Other financing sources (uses):Transfers in 664,347 664,347 696,118 - 696,118 31,771 Proceeds from sale of capital assets - 15,000 23,099 - 23,099 8,099 Transfers out (1,691,695) (1,631,585) (1,639,372) - (1,639,372) (7,787)

Total other financing sources (uses) (1,027,348) (952,238) (920,155) - (920,155) 32,083 Net change in fund balances (1,214,799) (8,407,351) (2,109,004) (1,182,893) (3,291,897) 5,115,454

Fund balances, beginning of year 36,823,125 36,823,125 36,823,125 - 36,823,125 -

Fund balances, end of year 35,608,326$ 28,415,774$ 34,714,121$ (1,182,893)$ 33,531,228$ 5,115,454$

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CITY OF MISSION VIEJOMajor Special Revenue Funds

Measure M FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Variance withActual Final Budget-

Budgeted Amount Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Intergovernmental 1,401,529$ 7,380,393$ 1,211,634$ -$ 1,211,634$ (6,168,759)$ Investment earnings 60,417 60,417 137,911 - 137,911 77,494

Total revenues 1,461,946 7,440,810 1,349,545 - 1,349,545 (6,091,265)

Expenditures:Current:

General government - management and support - 592 592 - 592 - Public works - engineering and transportation 7,000 110,209 56,885 3,324 60,209 50,000 Infrastructure maintenance - 100,000 - - - 100,000

Capital projects:Olympiad Resurfacing

La Paz to Jeronimo - 5,113 150 - 150 4,963 Jeronimo to Marguerite 250,000 32,987 32,987 - 32,987 -

O R f i C t Cl b/ECLOso Resurfacing Country Club/ECL - 567 338 567,338 3 907 3,907 1 343 1,343 5 250 5,250 562 088 562,088 Crown Valley Widening - 783,359 50,000 246,079 296,079 487,280 La Paz RR Bridge Widening - 728,144 14,157 112,405 126,562 601,582 LaPaz Road Widening/Chrisanta - I5 - 1,161,563 17,580 57,299 74,879 1,086,684 Traffic Safety Program - Montanoso - 49,193 - - - 49,193 Cabot/Camino Capistrano Bridge - 61,378 15,639 27,561 43,200 18,178 Marg Resurface CV-Avery - 418,164 - - - 418,164 Oso Parkway Widening - 257,468 58,690 131,934 190,624 66,844 Traffic Safety Program - 18,887 (31,113) - (31,113) 50,000 Avery Parkway Resurfacing - 13,938 13,937 - 13,937 1 Traffic Safety/Signal Coord 100,000 200,000 28,414 119,891 148,305 51,695 Marg Resurfacing Oso to La Paz - 210,000 - - - 210,000 Sidewalk Repair Program - Ongoing 150,000 150,000 17,470 - 17,470 132,530 Arterial Highway Slurry Seal 23,518 40,129 32,501 725 33,226 6,903 Residential Resurfacing 1,065,417 1,005,910 331,588 15,597 347,185 658,725 Oso-Marguerite Intersection Improvements 100,000 3,878,269 517,217 15,780 532,997 3,345,272

Total expenditures 1,695,935 9,792,641 1,160,601 731,938 1,892,539 7,900,102

Excess of revenues over (under) expenditures (233,989) (2,351,831) 188,944 (731,938) (542,994) 1,808,837

Fund balances, beginning of year 2,066,473 2,066,473 2,066,473 - 2,066,473 -

Fund balances (deficit), end of year 1,832,484$ (285,358)$ 2,255,417$ (731,938)$ 1,523,479$ 1,808,837$

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CITY OF MISSION VIEJOMajor Special Revenue Funds

Grants FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Variance withActual Final Budget-

Budgeted Amount Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Intergovernmental 3,190,967$ 13,450,995$ 4,928,162$ -$ 4,928,162$ (8,522,833)$ Investment earnings 35,000 35,000 75,063 - 75,063 40,063 Other - - 91,798 - 91,798 91,798

Total revenues 3,225,967 13,485,995 5,095,023 - 5,095,023 (8,390,972)

Expenditures:Current:

General government - management and support 8,285 10,900 8,307 - 8,307 2,593 Community development 494,193 674,749 584,853 - 584,853 89,896 Public works - engineering and transportation - 192,400 192,400 - 192,400 -

Capital projects:Olympiad Resurfacing

Jeronimo to Marguerite - 217,170 - - - 217,170 Oso Creek Trail Signage - 285,120 1,339 - 1,339 283,781 Crown Valley Parkway

Widening/Puerta Real-ECL 145,662 1,250,353 1,104,691 - 1,104,691 145,662 La Paz RR Bridge Widening - 3,131,191 55,013 32,898 87,910 3,043,281 Intelligent Tranportation System - 71,291 15,900 55,390 71,290 1 Cabot/Camino Capistrano Bridge - 1,232,863 54,483 196,355 250,838 982,025 Avery Parkway Resurfacing - (9,081) (13,937) - (13,937) 4,856 Arterial Highway Slurry Seal 330,482 348,400 - - - 348,400 Residential Resurfacing 934,583 3,751,601 2,136,669 1,047,535 3,184,204 567,397 Oso-Marguerite

Intersection Improvements 500,000 783,785 - 198,805 198,805 584,980 Montanoso Rec Center Renovation - - 366 - 366 (366)

Total expenditures 2,413,205 11,940,742 4,140,084 1,530,983 5,671,066 6,269,676

Excess of revenues over (under) expenditures 812,762 1,545,253 954,939 (1,530,983) (576,043) (2,121,296)

Fund balances (deficit), beginning of year (1,136,206) (1,136,206) (1,136,206) - (1,136,206) -

Fund balances (deficit), end of year (323,444)$ 409,047$ (181,267)$ (1,530,983)$ (1,712,249)$ (2,121,296)$

-93-

CITY OF MISSION VIEJOMajor Special Revenue Funds

Ladera Funding FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Variance withActual Final Budget-

Budgeted Amount Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Developer fees -$ 4,916,677$ 3,610,634$ -$ 3,610,634$ (1,306,043)$

Total revenues - 4,916,677 3,610,634 - 3,610,634 (1,306,043)

Expenditures:Capital projects:

Crown Valley ParkwayWidening/Puerta Real-ECL - 3,644,623 3,190,187 342,188 3,532,375 112,248

Oso Marguerite Intersection - 893,921 795,181 - 795,181 98,740

Total expenditures - 4,538,544 3,985,368 342,188 4,327,556 210,988

Excess of revenues over (under) expenditures - 378,133 (374,734) (342,188) (716,922) (1,095,055)

Fund balances (deficit), beginning of year (361,211) (361,211) (361,211) - (361,211) -

Fund balances (deficit), end of year (361,211)$ 16,922$ (735,945)$ (342,188)$ (1,078,133)$ (1,095,055)$

-94-

Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Investment earnings 304,000$ 304,000$ 284,058$ -$ 284,058$ (19,942)$

Total revenues 304,000 304,000 284,058 - 284,058 (19,942)

Expenditures:Current:

Community development 3,286,900 3,286,900 81,706 - 81,706 3,205,194

Total expenditures 3,286,900 3,286,900 81,706 - 81,706 3,205,194

Excess of revenues over (under) expenditures (2,982,900) (2,982,900) 202,352 - 202,352 3,185,252

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOMajor Special Revenue Funds

Low and Moderate Income Housing FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Other financing sources (uses):Transfers in 1,335,600 1,335,600 1,433,565 - 1,433,565 97,965

Total other financing sources (uses) 1,335,600 1,335,600 1,433,565 - 1,433,565 97,965

Net change in fund balances (1,647,300) (1,647,300) 1,635,917 - 1,635,917 3,283,217

Fund balances, beginning of year 9,429,260 9,429,260 9,429,260 - 9,429,260 -

Fund balances, end of year 7,781,960$ 7,781,960$ 11,065,177$ -$ 11,065,177$ 3,283,217$

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CITY OF MISSION VIEJO Notes to Required Supplementary Information

Year ended June 30, 2009

See independent auditors’ report. - 97-

(1) Capital Assets – Modified Approach for Infrastructure

The City has elected to use the modified approach to report a certain subsystem of its street infrastructure network. Under the modified approach, infrastructure assets that are part of a network or subsystem of a network are not required to be depreciated as long as two requirements are met. First, the government manages the eligible infrastructure assets using an asset management system that has the following characteristics:

• Has an up-to-date inventory of eligible infrastructure assets • Performs condition assessments of the eligible infrastructure assets and summarize the

results using a measurement scale • Estimates each year the annual amount to maintain and preserve the eligible infrastructure

assets at the condition level established and disclosed by the government. Second, the government documents that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government. If eligible infrastructure assets meet all requirements and are not depreciated, all expenditures made for those assets (except for additions and improvements) are expensed in the period incurred. Additions and improvements to eligible infrastructure assets are capitalized. Additions or improvements increase the capacity or efficiency of infrastructure assets rather than preserve the useful life of the assets. Streets The condition of road pavement is measured using the Nichols Consulting Engineers Pavement Management System. The streets are classified by their associated functional classification: Arterial, Collector or Residential/Local streets. For each street, the pavement management program catalogs roadway information such as pavement condition, recommended treatments to each pavement section, a recommended year to perform the treatment, and the associated costs for the treatment. Pavement management work generally includes two types of treatments: preventive maintenance (such as street slurrying) and rehabilitation (which includes repair treatment such as pavement overlay). A Pavement Condition Index (PCI) is calculated for each segment, to reflect the roadway segment’s overall pavement condition. The PCI is a rating mechanism used to describe the condition of the City’s pavement. Ranging between “0” and “100,” a PCI of “0” would correspond to a badly deteriorated pavement with virtually no remaining life, while a PCI of “100” would correspond to the pavement representative of a new street.

CITY OF MISSION VIEJO Notes to Required Supplementary Information (Continued)

Year ended June 30, 2009

See independent auditors’ report. - 98-

(1) Capital Assets – Modified Approach for Infrastructure (Continued) Streets (Continued)

The table below identifies the PCI ranges established for the City of Mission Viejo, and the corresponding descriptive condition summary for each range:

City of Mission Viejo PCI Index

PCI Range Condition 86-100 Excellent 71-85 Very Good 56-70 Good 41-55 Fair 26-40 Poor 11-25 Very Poor 0-10 Failed

According to the PCI system, an “Excellent” road condition is defined as having “no significant distress,” whereas a “Very Good” condition is exemplified by “little distress, with the exception of utility patches in good condition, or slight hairline cracks; may be slightly weathered.”

It is the City Council’s policy to maintain each of the three categories of City streets at an average condition level of “very good” or better. Following are the results of the last three condition assessments: Condition Levels: 2004 Study 2006 Study 2008 Study Arterials Excellent Excellent Very Good Collectors Very Good Very Good Very Good Local/Residential Very Good Very Good Very Good

The June 2008 study indicated that the average pavement condition of the City’s streets is “Very Good” for Arterials, Collector and Residential/Local streets. The average PCI for Arterials was assessed at 84 PCI, for Collectors at 77 PCI, and for Local/Residential streets at 79 PCI. In comparison, the 2006 study assessed Arterials at 88 PCI, Collectors at 80 PCI and Local/Residential streets at 79 PCI and the 2004 study assessed Arterials at 89 PCI, Collectors at 85 PCI and Local Residential streets at 83 PCI. To continue to maintain the pavement integrity of this subsystem, the Pavement Management System recommends preventive and repair treatments on applicable roadway segments for a seven-year period. Following are the annual maintenance costs, estimated by the Pavement Management System, required to maintain and preserve the City’s streets at the “very good” or better condition level, along with the actual maintenance amounts expensed for the past five fiscal years.

CITY OF MISSION VIEJO Notes to Required Supplementary Information (Continued)

Year ended June 30, 2009

See independent auditors’ report. - 99-

(1) Capital Assets – Modified Approach for Infrastructure (Continued) Streets (Continued)

Comparison of Needed to Actual Maintenance/Preservation

Overall System: 2004-05 2005-06 2006-07 2007-08 2008-09

Needed $ 1,822,538 $ 1,940,538 $ 2,842,680 $ 2,581,404 $3,006,379

Actual 2,402,625 3,874,912 4,028,024 3,405,547 3,594,516

Difference $ 580,087 $ 1,934,374 $ 1,185,344 $ 824,143 $ 588,137

(2) Budgetary Policy and Control

General Budget Policies The City Council adopts a biennial budget for all funds of the primary government, as submitted by the City Manager, prior to the beginning of each biennium, which begins on July 1 of each odd-numbered year. Annual budgets are adopted for the Community Development Agency and Community Development Financing Authority. Public discussions are conducted prior to the budget’s adoption by the Council. Annual appropriations are approved by the Council prior to the beginning of each year of the biennial budget period. All appropriations lapse at year-end. The City Council has the legal authority to amend the budget at any time during the fiscal year. For the operating budget, the City Manager has the authority to move appropriations between accounts (without dollar limitation) within a budget program and within the same fund as long as the transfers are within the same program area. For the capital improvement program, the City Manager has the authority to transfer up to $30,000 in appropriations between capital projects within the same fund as long as the transfers are within the responsibility of the same department. All other appropriations changes require City Council approval. The total additional appropriations for fiscal year ended June 30, 2009 were $33,511,110. The City maintains budgetary controls to ensure compliance with legal provisions embodied in the appropriated budget approved by the City Council. The level of budgetary control (that is, the level at which expenditures cannot legally exceed the appropriated amount) for the primary government’s operating budget is the program area within each fund and for the capital improvement budget is each individual capital improvement project within each fund. For the Community Development Agency and Community Development Financing Authority budgets, the level of budgetary control is the fund.

CITY OF MISSION VIEJO Notes to Required Supplementary Information (Continued)

Year ended June 30, 2009

See independent auditors’ report. - 100-

(2) Budgetary Policy and Control (Continued) Encumbrances Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditure of funds are recorded in order to reserve that portion of the applicable appropriation, is employed in the governmental funds. Open encumbrances are recorded as reservations of fund balance since encumbered appropriations at year-end are recommended to the City Council for carryover, and the commitments are paid by subsequent years’ budget appropriations. Encumbrances do not constitute expenditures or liabilities. Continuing Appropriations

Unexpended and unencumbered appropriations that are available and recommended for continuation to the following fiscal year are approved by the City Council for carryover. These commitments are reported as a designation of fund balance. Budgetary Basis of Accounting Budgets for the governmental funds (which include encumbrances and interfund borrowings and repayments) are administered on a basis which differs from generally accepted accounting principles (GAAP). The Schedules of Revenues, Expenditures and Changes in Fund Balances – Budget and Actual present comparisons of the legally adopted budget with actual data on the budgetary basis. Encumbrances at year end are considered expenditures on the budgetary basis. Furthermore, on a budgetary basis, interfund borrowings are considered to be other financing uses and repayments are considered to be expenditures. The differences between the budgetary basis and GAAP are presented on the same financial statements. Budgeted amounts are as originally adopted and as further amended by the City Council.

Special Debt CapitalRevenue Service Projects Totals

Cash and investments 3,854,005$ 9,014,556$ 592,355$ 13,460,916$ Taxes receivable 72,944 - - 72,944 Interest receivable - 16,211 - 16,211 Intergovernmental receivable 151,222 - - 151,222 Interfund receivable 38,896 335,774 - 374,670

Total assets 4,117,067$ 9,366,541$ 592,355$ 14,075,963$

Liabilities:Accounts payable 359,695$ -$ 1,733$ 361,428$ Accrued payroll 126,634 - - 126,634 Retainage payable 42,752 - - 42,752 Intergovernmental payable - - 191,939 191,939 Deposits 6,316 - - 6,316

June 30, 2009

Liabilities and Fund Balances

Assets

CITY OF MISSION VIEJOOther Governmental FundsCombining Balance Sheet

Deferred revenues 151,222 - - 151,222 Interfund payable 2,126,606 98,038 540 2,225,184 Advances payable - 1,525,000 - 1,525,000

Total liabilities 2,813,225 1,623,038 194,212 4,630,475

Fund balances:Reserved:

Encumbrances 636,214 - 135,025 771,239 Targeted donations 10,519 - - 10,519 Debt service - 9,268,503 - 9,268,503

Unreserved:Designated for:

Subsequent years expenditures 1,679,854 - - 1,679,854 Special fund purposes 939,958 - - 939,958 Future capital projects - - 263,118 263,118

Undesignated (1,962,703) (1,525,000) - (3,487,703)

Total fund balances 1,303,842 7,743,503 398,143 9,445,488

Total liabilities and fund balances 4,117,067$ 9,366,541$ 592,355$ 14,075,963$

-101-

Special Debt CapitalRevenue Service Projects Totals

Revenues:Taxes 2,070,690$ 1,498,854$ -$ 3,569,544$ Intergovernmental 4,021,638 - - 4,021,638 Charges for services 240,605 - - 240,605 Fines and forfeitures 147,690 - - 147,690 Investment earnings 180,510 296,272 13,753 490,535 Other 28,636 - 19,183 47,819

Total revenues 6,689,769 1,795,126 32,936 8,517,831

Expenditures:Current:

General government - management and support 87,416 66 154,650 242,132 Public safety 1,027,280 - - 1,027,280 Community development 20,000 - 49,846 69,846 Public works - engineering and transportation 1,229,053 - - 1,229,053 Infrastructure maintenance 2,233,509 - - 2,233,509

CITY OF MISSION VIEJO

Combining Statement of Revenues, Expenditures and Changes in Fund BalancesYear ended June 30, 2009

Other Governmental Funds

Recreation/community/library services 2,723,220 - - 2,723,220 Debt service:

Principal - 1,455,000 - 1,455,000 Interest and fiscal charges - 1,620,362 - 1,620,362

Capital projects 1,313,923 - 304,711 1,618,634

Total expenditures 8,634,401 3,075,428 509,207 12,219,036

Excess (deficiency) of revenuesover (under) expenditures (1,944,632) (1,280,302) (476,271) (3,701,205)

Other financing sources (uses):Transfers in - 3,240,609 - 3,240,609 Transfers out - (2,101,070) (31,771) (2,132,841)

Total other financing sources (uses) - 1,139,539 (31,771) 1,107,768

Net change in fund balances (1,944,632) (140,763) (508,042) (2,593,437)

Fund balances at beginning of year 3,248,474 7,884,266 906,185 12,038,925

Fund balances at end of year 1,303,842$ 7,743,503$ 398,143$ 9,445,488$

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-103-

OTHER SPECIAL REVENUE FUNDS Special revenue funds are used to account for specific revenues (other than major capital projects) and the related expenditures which are legally required to be accounted for in a separate fund. The City of Mission Viejo has the following Other Special Revenue Funds: GAS TAX - To account for receipts and expenditures of money apportioned under Streets and Highways Code Sections 2105, 2106, 2107 and 2107.5 of the State of California, as well as funds exchanged with Orange County Transportation Authority as part of the gas tax exchange program. These funds are earmarked for maintenance, rehabilitation or improvement of public streets. LIBRARY OPERATIONS - This fund is used to account for the receipts and expenditures resulting from Library activities. Library operations are funded primarily by property taxes restricted for Library purposes, originally levied by the County of Orange and transferred to the City effective July 1, 1996. DEVELOPER FEES - This fund was established to account for receipts and expenditures of developer fees to fund various projects in the City. LAW ENFORCEMENT GRANTS - To account for the receipts and expenditures of funds resulting from the Citizen’s Option for Public Safety (COPS) program, the California Law Enforcement Equipment Program (CLEEP), and the Local Law Enforcement Block Grant (LLEBG) program. COPS and CLEEP are state funded programs; LLEBG is a federally funded program. AIR QUALITY - This fund was established to account for the City’s portion of motor vehicle registration fees collected pursuant to AB2766 passed during the 1990 State legislative session. This fee was levied to fund programs to reduce air pollution from mobile sources such as cars, trucks and buses. It also includes funds allocated through a competitive process as a result of this legislation. SENIOR CENTER - This fund is used to account for receipts and expenditures resulting from Senior Center activities. The Senior Center was funded in part through the State of California Senior Center Bond Act which requires that revenues generated at the facility be used to benefit seniors.

LawLibrary Developer Enforcement

Gas Tax Operations Fees Grants

Cash and investments 1,955,428$ 781,866$ 597,886$ -$ Taxes receivable - 44,944 - - Intergovernmental receivable - - 151,222 - Interfund receivable - 38,896 - -

Total assets 1,955,428$ 865,706$ 749,108$ -$

Liabilities:Accounts payable 230,058$ 40,047$ 73,369$ -$ Accrued payroll - 126,329 - - Retainage payable - - 42,752 - Deposits - - - - Deferred revenues - - 151,222 - Interfund payable - - 2,126,606 -

Total liabilities 230,058 166,376 2,393,949 -

Fund balances (deficits):Reserved for:

Encumbrances 74,947 19,198 303,189 - Targeted donations - - - -

Unreserved:Designated for: Subsequent years expenditures 1,665,096 14,758 - - Special fund purposes - 665,374 - - Undesignated (14,673) - (1,948,030) -

Total fund balances (deficits) 1,725,370 699,330 (1,644,841) -

Total liabilities and fund balances 1,955,428$ 865,706$ 749,108$ -$

Liabilities and Fund Balances

Assets

CITY OF MISSION VIEJOOther Special Revenue Funds

Combining Balance SheetYear ended June 30, 2009

-104-

Air Senior Quality Center Totals

319,180$ 199,645$ 3,854,005$ 28,000 - 72,944

- - 151,222 - - 38,896

347,180$ 199,645$ 4,117,067$

6,637$ 9,584$ 359,695$ - 305 126,634 - - 42,752 - 6,316 6,316 - - 151,222 - - 2,126,606

6,637 16,205 2,813,225

238,880 - 636,214 - 10,519 10,519

- - 1,679,854 101,663 172,921 939,958

- - (1,962,703)

340,543 183,440 1,303,842

347,180$ 199,645$ 4,117,067$

Year ended June 30, 2009

CITY OF MISSION VIEJOOther Special Revenue Funds

Combining Balance Sheet (Continued)

-105-

LawLibrary Developer Enforcement

Gas Tax Operations Fees Grants

Taxes -$ 2,070,690$ -$ -$ Intergovernmental 3,526,586 285,418 - 94,434 Charges for services - 196,546 - - Fines and forfeitures - 147,690 - - Investment earnings 63,658 36,966 16,588 132 Other - 22,508 - -

Total revenues 3,590,244 2,759,818 16,588 94,566

Expenditures:Current:

General government - management and support 2,050 83,420 - - Public safety 913,671 - - 113,609 Community development - - - - Public works - engineering and transportation 1,229,053 - - - Infrastructure maintenance 1,890,560 342,949 - - Recreation/community/ library services - 2,612,736 - -

Capital projects 684,717 - 511,898 -

Total expenditures 4,720,051 3,039,105 511,898 113,609

Excess (deficiency) of revenues over (under) expenditures (1,129,807) (279,287) (495,310) (19,043)

Fund balances (deficits) at beginning of year 2,855,177 978,617 (1,149,531) 19,043

Fund balances (deficits) at end of year 1,725,370$ 699,330$ (1,644,841)$ -$

Revenues:

CITY OF MISSION VIEJOOther Special Revenue Funds

Combining Statement of Revenues, Expenditures, and Changes in Fund BalancesYear ended June 30, 2009

-106-

Air SeniorQuality Center Totals

-$ -$ 2,070,690$ 115,200 - 4,021,638

- 44,059 240,605 - - 147,690

9,019 54,147 180,510 - 6,128 28,636

124,219 104,334 6,689,769

1,946 - 87,416 - - 1,027,280

20,000 - 20,000

- - 1,229,053 - - 2,233,509

- 110,484 2,723,220 117,308 - 1,313,923

139,254 110,484 8,634,401

(15,035) (6,150) (1,944,632)

355,578 189,590 3,248,474

340,543$ 183,440$ 1,303,842$

CITY OF MISSION VIEJOOther Special Revenue Funds

Combining Statement of Revenues, Expenditures, and Changes in Fund Balances (Continued)Year ended June 30, 2009

-107-

CITY OF MISSION VIEJOOther Special Revenue Funds

Gas Tax FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Variance withActual Final Budget-

Budgeted Amount Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Intergovernmental 3,852,500$ 3,852,500$ 3,526,586$ -$ 3,526,586$ (325,914)$ Investment earnings 85,000 85,000 63,658 - 63,658 (21,342)

Total revenues 3,937,500 3,937,500 3,590,244 - 3,590,244 (347,256)

Expenditures:Current:

General government - management and support 2,050 2,050 2,050 - 2,050 - Public safety 847,179 913,671 913,671 - 913,671 - Public works - engineering and transportation 525,000 1,229,577 1,229,053 - 1,229,053 524 Infrastructure maintenance 1,776,212 1,910,885 1,890,560 - 1,890,560 20,325

Capital projects:Marg Resurf - Oso to La Paz 900,000 1,586,797 86,068 74,947 161,015 1,425,782 Sidewalk Repair Program-Ongoing - 68,111 - - - 68,111 Residential Resurfacing - 769,852 598,649 - 598,649 171,203

Total expenditures 4,050,441 6,480,943 4,720,051 74,947 4,794,998 1,685,945

Excess of revenues over (under) expenditures (112,941) (2,543,443) (1,129,807) (74,947) (1,204,754) 1,338,689

Fund balances, beginning of year 2,855,177 2,855,177 2,855,177 - 2,855,177 -

Fund balances (deficit), end of year 2,742,236$ 311,734$ 1,725,370$ (74,947)$ 1,650,423$ 1,338,689$

-108-

Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Taxes 2,072,931$ 2,072,931$ 2,070,690$ -$ 2,070,690$ (2,241)$ Intergovernmental 251,066 278,566 285,418 - 285,418 6,852 Charges for services 271,500 271,500 196,546 - 196,546 (74,954) Fines and forfeitures 130,200 130,200 147,690 - 147,690 17,490 Investment earnings 66,700 66,700 36,966 - 36,966 (29,734) Other 27,000 37,000 22,508 - 22,508 (14,492)

Total revenues 2,819,397 2,856,897 2,759,818 - 2,759,818 (97,079)

Expenditures:Current:

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Special Revenue Funds

Library Operations FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

General government - management and support 55,450 100,958 83,420 16,470 99,890 1,068 Infrastructure maintenance 347,360 347,360 342,949 2,728 345,677 1,683 Recreation/community/ library services 2,644,262 2,716,488 2,612,736 - 2,612,736 103,752

Total expenditures 3,047,072 3,164,806 3,039,105 19,198 3,058,303 106,503

Excess of revenues over (under) expenditures (227,675) (307,909) (279,287) (19,198) (298,485) 9,424

Fund balances, beginning of year 978,617 978,617 978,617 - 978,617 -

Fund balances (deficit), end of year 750,942$ 670,708$ 699,330$ (19,198)$ 680,132$ 9,424$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Investment earnings -$ -$ 16,588$ -$ 16,588$ 16,588$ Developer fees - 3,935,000 - - - (3,935,000)

Total revenues - 3,935,000 16,588 - 16,588 (3,918,412)

Expenditures:Current:Capital projects:

Crown Valley ParkwayWidening/Puerta Real-ECL - 803,085 453,208 164,562 617,770 185,315

Oso Parkway Widening - 257,468 58,690 131,933 190,623 66,845

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Special Revenue Funds

Developer Fees FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Crown Valley WideningI-5 to Cabot - 125,342 - 6,694 6,694 118,648

Oso Marguerite Intersection - 1,585,000 - - - 1,585,000

Total expenditures - 2,770,895 511,898 303,189 815,087 1,955,808

Excess of revenues over (under) expenditures - 1,164,105 (495,310) (303,189) (798,499) (1,962,604)

Fund balances (deficit), beginning of year (1,149,531) (1,149,531) (1,149,531) - (1,149,531) -

Fund balances (deficit), end of year (1,149,531)$ 14,574$ (1,644,841)$ (303,189)$ (1,948,030)$ (1,962,604)$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Intergovernmental 190,000$ 100,000$ 94,434$ -$ 94,434$ (5,566)$ Investment earnings - - 132 - 132 132

Total revenues 190,000 100,000 94,566 - 94,566 (5,434)

Expenditures:Current:

Public safety 190,000 119,175 113,609 - 113,609 5,566

Total expenditures 190,000 119,175 113,609 - 113,609 5,566

E f ( d )

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Special Revenue Funds

Law Enforcements Grants FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Excess of revenues over (under) expenditures - (19,175) (19,043) - (19,043) 132

Fund balances, beginning of year 19,043 19,043 19,043 - 19,043 -

Fund balances (deficit), end of year 19,043$ (132)$ -$ -$ -$ 132$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Intergovernmental 131,100$ 131,100$ 115,200$ -$ 115,200$ (15,900)$ Investment earnings 7,500 7,500 9,019 - 9,019 1,519

Total revenues 138,600 138,600 124,219 - 124,219 (14,381)

Expenditures:Current:

General government - management and support 1,685 1,947 1,946 - 1,946 1 Community development 15,000 20,050 20,000 - 20,000 50 Public works -

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Special Revenue Funds

Air Quality FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

engineering and transportation 30,000 30,000 - - - 30,000 Capital projects:

Traffic Safety/Signal Coord 238,880 356,188 117,308 238,880 356,188 -

Total expenditures 285,565 408,185 139,254 238,880 378,134 30,051

Excess of revenues over (under) expenditures (146,965) (269,585) (15,035) (238,880) (253,915) 15,670

Fund balances, beginning of year 355,578 355,578 355,578 - 355,578 -

Fund balances (deficit), end of year 208,613$ 85,993$ 340,543$ (238,880)$ 101,663$ 15,670$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Charges for services 38,280$ 38,280$ 44,059$ -$ 44,059$ 5,779$ Investment earnings 32,500 32,500 54,147 - 54,147 21,647 Other 4,150 4,150 6,128 - 6,128 1,978

Total revenues 74,930 74,930 104,334 - 104,334 29,404

Expenditures:Current:

Recreation/community/ library services 127,804 127,732 110,484 - 110,484 17,248

Total expenditures 127 804 127 732 110 484 110 484 17 248

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Special Revenue Funds

Senior Center FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Total expenditures 127,804 127,732 110,484 - 110,484 17,248

Excess of revenues over (under) expenditures (52,874) (52,802) (6,150) - (6,150) 46,652

Fund balances, beginning of year 189,590 189,590 189,590 - 189,590 -

Fund balances, end of year 136,716$ 136,788$ 183,440$ -$ 183,440$ 46,652$

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MAJOR AND OTHER DEBT SERVICE FUNDS

Debt Service Funds are used to account for the accumulation of resources for, and the payment of, long-term debt principal and interest. The City of Mission Viejo has the following major Debt Service Funds: CDA DEBT SERVICE - To accumulate funds for payment of Community Development Agency (CDA) debt other than the 2006 and 2009 Tax Allocation Notes. Debt service is financed by property tax increment. The City of Mission Viejo has the following other Debt Service Funds: CDA NOTES DEBT SERVICE - To accumulate funds for payment of the 2006 and 2009 Tax Allocation Notes. MALL PARKING LEASE - To accumulate funds in accordance with a lease agreement between the City and the CDFA, pursuant to which the City makes annual lease payments to the CDFA limited generally to 50% of annual sales tax revenues generated at the Shops at Mission Viejo for the use of public parking facilities owned by the CDFA at the mall. CDFA 1999 MALL BONDS - To accumulate funds for payment of the CDFA 1999 Series A and B Revenue Bonds. Debt service is financed by property tax increment from the CDA generated by the Shops at Mission Viejo and City lease revenue for the use of public parking facilities at the Shops at Mission Viejo. CDFA 1999 REVENUE BONDS - To accumulate funds for payment of the CDFA 1999 Series C Revenue Bonds. Debt service is financed by revenues received by the Authority from CFD 1999 Special Tax Refunding Bonds, which it owns. CDFA 2001 CITY HALL/LIBRARY EXPANSION BONDS - To accumulate funds for payment of the CDFA 2001 Series A Lease Revenue Bonds.

CDFA2001 City

Mall CDFA CDFA Hall/LibraryCDA Parking 1999 Mall 1999 Revenue ExpansionNotes Lease Bonds Bonds Bonds Totals

Assets

Cash and investments -$ 89,825$ 4,795,840$ 2,981,634$ 1,147,257$ 9,014,556$ Interest receivable - - 11,897 - 4,314 16,211 Interfund receivable - - 335,774 - - 335,774

Total assets - 89,825 5,143,511 2,981,634 1,151,571 9,366,541

Liabilities and Fund Balances

Liabilities:Interfund payable - - 80,296 - 17,742 98,038 Advances payable 1,525,000 - - - - 1,525,000

Total liabilities 1,525,000 - 80,296.00 - 17,742.00 1,623,038

CITY OF MISSION VIEJOOther Debt Service FundsCombining Balance Sheet

June 30, 2009

Fund balances:Reserved for:

Debt service - 89,825 5,063,215 2,981,634 1,133,829 9,268,503 Unreserved:

Undesignated (1,525,000) - - - - (1,525,000)

Total fund balances (1,525,000) 89,825 5,063,215 2,981,634 1,133,829 7,743,503

Total liabilities and fund balances -$ 89,825$ 5,143,511$ 2,981,634$ 1,151,571$ 9,366,541$

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CDFA2001 City

Mall CDFA CDFA Hall/LibraryCDA Parking 1999 Mall 1999 Revenue ExpansionNotes Lease Bonds Bonds Bonds Totals

Revenues:Taxes 62,131$ 1,436,723$ -$ -$ -$ 1,498,854$ Investment earnings 394 3,273 80,155 185,674 26,776 296,272

Total revenues 62,525 1,439,996 80,155 185,674 26,776 1,795,126

Expenditures:Current:

General government -management and support - - - 11 55 66

Debt service:Principal - - 800,000 260,000 395,000 1,455,000 Interest and fiscal charges 62,525 - 642,619 167,570 747,648 1,620,362

Total expenditures 62,525 - 1,442,619 427,581 1,142,703 3,075,428

CITY OF MISSION VIEJOOther Debt Service Funds

Combining Statement of Revenues, Expenses and Changes in Fund BalancesYear ended June 30, 2009

Total expenditures 62,525 1,442,619 427,581 1,142,703 3,075,428

Excess of revenues over(under) expenditures - 1,439,996 (1,362,464) (241,907) (1,115,927) (1,280,302)

Other financing sources (uses):Transfers in - - 2,122,497 - 1,118,112 3,240,609 Transfers out - (1,436,723) (664,347) - - (2,101,070)

Total other financingsources (uses) - (1,436,723) 1,458,150 - 1,118,112 1,139,539

Net change in fund balances - 3,273 95,686 (241,907) 2,185 (140,763)

Fund balances (deficit), beginning of year (1,525,000) 86,552 4,967,529 3,223,541 1,131,644 7,884,266

Fund balances (deficit), end of year (1,525,000)$ 89,825$ 5,063,215$ 2,981,634$ 1,133,829$ 7,743,503$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Taxes 6,616,575$ 6,616,575$ 7,105,696$ -$ 7,105,696$ 489,121$ Investment earnings 75,000 75,000 52,824 - 52,824 (22,176)

Total revenues 6,691,575 6,691,575 7,158,520 - 7,158,520 466,945

Expenditures:Current:

General government -management and support 3,491,443 3,858,526 3,476,043 - 3,476,043 382,483

Debt service:Principal 1,555,000 1,555,000 - - - 1,555,000 Interest and fiscal charges 140,000 140,000 64,951 - 64,951 75,049

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOMajor Debt Service FundsCDA Debt Service Fund

Schedule of Revenues, Expenditures, and Changes in Fund Balances

Total expenditures 5,186,443 5,553,526 3,540,994 - 3,540,994 2,012,532

Excess of revenues over (under) expenditures 1,505,132 1,138,049 3,617,526 - 3,617,526 2,479,477

Other financing sources (uses): Debt proceeds 116,040 205,917 - - - (205,917) Transfers out (2,035,600) (2,035,600) (2,119,339) - (2,119,339) (83,739)

Total other financing sources (uses) (1,919,560) (1,829,683) (2,119,339) - (2,119,339) (289,656)

Net change in fund balances (414,428) (691,634) 1,498,187 - 1,498,187 2,189,821

Fund balances (deficit), beginning of year (2,305,123) (2,305,123) (2,305,123) - (2,305,123) -

Fund balances (deficit), end of year (2,719,551)$ (2,996,757)$ (806,936)$ -$ (806,936)$ 2,189,821$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Taxes 61,425$ 61,425$ 62,131$ -$ 62,131$ 706$ Investment earnings 1,100 1,100 394 - 394 (706)

Total revenues 62,525 62,525 62,525 - 62,525 -

Expenditures:Debt service:

Principal 1,525,000 1,525,000 - 1,525,000 1,525,000 - Interest and fiscal charges 62,525 62,525 62,525 - 62,525 -

Total expenditures 1,587,525 1,587,525 62,525 1,525,000 1,587,525 -

Excess of revenues over (under) expenditures (1,525,000) (1,525,000) - (1,525,000) (1,525,000) -

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Debt Service Funds

CDA Notes Debt Service FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

expenditures (1,525,000) (1,525,000) (1,525,000) (1,525,000)

Other financing sources (uses): Proceeds of notes 1,525,000 1,525,000 - 1,525,000 1,525,000 -

Total other financing sources (uses) 1,525,000 1,525,000 - 1,525,000 1,525,000 -

Net change in fund balances - - - - - -

Fund balances (deficit), beginning of year (1,525,000) (1,525,000) (1,525,000) - (1,525,000) -

Fund balances (deficit), end of year (1,525,000)$ (1,525,000)$ (1,525,000)$ -$ (1,525,000)$ -$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Taxes 1,631,000$ 1,436,723$ 1,436,723$ -$ 1,436,723$ -$ Investment earnings - - 3,273 - 3,273 3,273

Total revenues 1,631,000 1,436,723 1,439,996 - 1,439,996 3,273

Other financing sources (uses): Transfers out (1,631,000) (1,436,723) (1,436,723) - (1,436,723) -

Total other financing sources (uses) (1,631,000) (1,436,723) (1,436,723) - (1,436,723) -

Net change in fund balances - - 3,273 - 3,273 3,273

Fund balances, beginning of year 86,552 86,552 86,552 - 86,552 -

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Debt Service FundsMall Parking Lease Fund

Schedule of Revenues, Expenditures, and Changes in Fund Balances

Fund balances, end of year 86,552$ 86,552$ 89,825$ -$ 89,825$ 3,273$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Investment earnings 180,000$ 180,000$ 80,155$ -$ 80,155$ (99,845)$

Total revenues 180,000 180,000 80,155 - 80,155 (99,845)

Expenditures:Debt service:

Principal 800,000 800,000 800,000 - 800,000 - Interest and fiscal charges 1,200,000 1,200,000 642,619 - 642,619 557,381

Total expenditures 2,000,000 2,000,000 1,442,619 - 1,442,619 557,381

Excess of revenues over (under)

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Debt Service Funds

CDFA 1999 Mall Bonds FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

( ) expenditures (1,820,000) (1,820,000) (1,362,464) - (1,362,464) 457,536

Other financing sources (uses): Transfers in 2,331,000 2,331,000 2,122,497 - 2,122,497 (208,503) Transfers out (664,347) (664,347) (664,347) - (664,347) -

Total other financing sources (uses) 1,666,653 1,666,653 1,458,150 - 1,458,150 (208,503)

Net change in fund balances (153,347) (153,347) 95,686 - 95,686 249,033

Fund balances, beginning of year 4,967,529 4,967,529 4,967,529 - 4,967,529 -

Fund balances, end of year 4,814,182$ 4,814,182$ 5,063,215$ -$ 5,063,215$ 249,033$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Investment earnings 250,000$ 250,000$ 185,674$ -$ 185,674$ (64,326)$

Total revenues 250,000 250,000 185,674 - 185,674 (64,326)

Expenditures:Current:

General government -management and support - - 11 - 11 (11)

Debt service:Principal 260,000 260,000 260,000 - 260,000 - Interest and fiscal charges 174,070 174,070 167,570 - 167,570 6,500

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Debt Service Funds

CDFA 1999 Revenue Bonds FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Total expenditures 434,070 434,070 427,581 - 427,581 6,489

Excess of revenues over (under) expenditures (184,070) (184,070) (241,907) - (241,907) (57,837)

Fund balances, beginning of year 3,223,541 3,223,541 3,223,541 - 3,223,541 -

Fund balances (deficit), end of year 3,039,471$ 3,039,471$ 2,981,634$ -$ 2,981,634$ (57,837)$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Investment earnings 35,000$ 35,000$ 26,776$ -$ 26,776$ (8,224)$

Total revenues 35,000 35,000 26,776 - 26,776 (8,224)

Expenditures:Current:

General government - management and support - - 55 - 55 (55)

Debt service:Principal 395,000 395,000 395,000 - 395,000 - Interest and fiscal charges 750,325 750,325 747,648 - 747,648 2,677

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJOOther Debt Service Funds

CDFA 2001 City Hall/Library Exp Bonds FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

Total expenditures 1,145,325 1,145,325 1,142,703 - 1,142,703 2,622

Excess of revenues over (under) expenditures (1,110,325) (1,110,325) (1,115,927) - (1,115,927) (5,602)

Other financing sources (uses): Transfers in 1,110,325 1,110,325 1,118,112 - 1,118,112 7,787

Total other financing sources (uses) 1,110,325 1,110,325 1,118,112 - 1,118,112 7,787

Net change in fund balances - - 2,185 - 2,185 2,185

Fund balances, beginning of year 1,131,644 1,131,644 1,131,644 - 1,131,644 -

Fund balances, end of year 1,131,644$ 1,131,644$ 1,133,829$ -$ 1,133,829$ 2,185$

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CAPITAL PROJECTS FUNDS

The Capital Projects Funds are used to account for the financial resources to be used for the acquisition and construction of major capital facilities. The City of Mission Viejo has the following Capital Projects Funds: LIBRARY CONSTRUCTION - This fund was established to account for the capital project related to the development and construction of a City library and the library expansion. CDA PROJECTS - The purpose of the CDA Projects Fund is to account for the revenues and expenditures associated with the preparation and execution of plans for improvement, rehabilitation and redevelopment of blighted areas within the territorial limits of the project area.

Library CDAConstruction Projects Totals

Assets

Cash and investments -$ 592,355$ 592,355$

Total assets -$ 592,355$ 592,355$

Liabilities and fund balances

Liabilities:Accounts payable -$ 1,733$ 1,733$ Intergovernmental payable - 191,939 191,939 Interfund payable - 540 540

Total liabilities - 194,212 194,212

Fund balances:

CITY OF MISSION VIEJOOther Capital Projects Funds

Combining Balance SheetJune 30, 2009

Fund balances:Reserved for:

Encumbrances - 135,025 135,025 Unreserved:

Designated for future capital projects - 263,118 263,118

Total fund balances - 398,143 398,143

Total liabilities and fund balances -$ 592,355$ 592,355$

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Library CDAConstruction Projects Totals

Revenues:Investment earnings -$ 13,753$ 13,753$ Other 19,183 - 19,183

Total revenues 19,183 13,753 32,936

Expenditures:Current:

General government - management and support - 154,650 154,650 Community development - 49,846 49,846

Capital projects - 304,711 304,711

Total expenditures - 509,207 509,207

Excess of revenues over (under) expenditures 19,183 (495,454) (476,271)

Other financing sources (uses):Transfers out (31,771) - (31,771)

Other Capital Projects FundsCITY OF MISSION VIEJO

Combining Statement of Revenues, Expenses and Changes in Fund Net AssetsYear ended June 30, 2009

Total other financing sources (uses) (31,771) - (31,771)

Net change in fund balances (12,588) (495,454) (508,042)

Fund balances, beginning of year 12,588 893,597 906,185

Fund balances, end of year -$ 398,143$ 398,143$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Other -$ -$ 19,183$ -$ 19,183$ 19,183$

Total revenues - - 19,183 - 19,183 19,183

Expenditures:

Total expenditures - - - - - -

Excess of revenues over (under) expenditures - - 19,183 - 19,183 19,183

Other financing sources (uses):

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJONonmajor Capital Projects Funds

Library Construction FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

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Other financing sources (uses): Transfers out - - (31,771) - (31,771) (31,771)

Total other financing sources (uses) - - (31,771) - (31,771) (31,771)

Net change in fund balances - - (12,588) - (12,588) (12,588)

Fund balances, beginning of year 12,588 12,588 12,588 - 12,588 -

Fund balances (deficit), end of year 12,588$ 12,588$ -$ -$ -$ (12,588)$

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Variance withActual Final Budget-

Budgetary (Budgetary PositiveOriginal Final Actual Adjustments Basis) (Negative)

Revenues:Investment earnings 9,000$ 9,000$ 13,753$ -$ 13,753$ 4,753$

Total revenues 9,000 9,000 13,753 - 13,753 4,753

Expenditures:Current:

General government - management and support 153,700 154,337 154,650 - 154,650 (313) Community development 55,000 64,931 49,846 - 49,846 15,085

Capital projects:Crown Valley Parkway

Budget and Actual (Budgetary Basis)Year ended June 30, 2009

Budgeted Amount

CITY OF MISSION VIEJONonmajor Capital Projects Funds

CDA Projects FundSchedule of Revenues, Expenditures, and Changes in Fund Balances

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Widening/Puerta Real-ECL 250,000 250,000 - - - 250,000 Cabot/Camino Capistrano Bridge 243,000 243,000 - 16,645 16,645 226,355 Crown Valley Widening

I-5 to Cabot - 423,091 304,711 118,380 423,091 -

Total expenditures 701,700 1,135,359 509,207 135,025 644,232 491,127

Excess of revenues over (under) expenditures (692,700) (1,126,359) (495,454) (135,025) (630,479) 495,880

Other financing sources (uses): Debt proceeds 335,000 335,000 - - - (335,000)

Total other financing sources (uses) 335,000 335,000 - - - (335,000)

Net change in fund balances (357,700) (791,359) (495,454) (135,025) (630,479) 160,880

Fund balances, beginning of year 893,597 893,597 893,597 - 893,597 -

Fund balances (deficit), end of year 535,897$ 102,238$ 398,143$ (135,025)$ 263,118$ 160,880$

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ENTERPRISE FUNDS

Enterprise Funds may be used to report any activity for which a fee is charged to external users for goods or services. The City of Mission Viejo utilizes enterprise funds for two activities partially funded by fees and charges. The City of Mission Viejo has the following Enterprise Funds: ANIMAL SERVICES - To account for the City’s animal services program, which provides animal licensing, field patrol and shelter services to residents of Mission Viejo, the City of Laguna Niguel, and the City of Aliso Viejo and shares operating and capital costs of the program with those cities on a basis proportional to population. MISSION VIEJO TELEVISION - To account for the operation of Mission Viejo Television (MVTV), a government access channel funded by user fees and charges as well as by a portion of the franchise fee paid by the City’s cable television provider.

MissionAnimal Viejo

Services Television 2009 2008Assets

Current assets:Cash and investments 1,979,523$ 259,629$ 2,239,152$ 2,159,333$ Taxes receivable - 36,486 36,486 35,347 Accounts receivable 25 - 25 25 Intergovernmental receivable 15,831 - 15,831 - Prepaid items 72,014 - 72,014 73,398

Total current assets 2,067,393 296,115 2,363,508 2,268,103

Noncurrent assets:Capital assets, not depreciated 1,000,764 - 1,000,764 1,000,764 Capital assets, depreciated, net 1,387,901 84,749 1,472,650 1,416,252

Total noncurrent assets 2 388 665 84 749 2 473 414 2 417 016

Totals

CITY OF MISSION VIEJOOther Enterprise Funds

Combining Statement of Revenues, Expenses and Changes in Fund Net AssetsYear ended June 30, 2009

(with comparative totals for the year ended June 30, 2008)

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Total noncurrent assets 2,388,665 84,749 2,473,414 2,417,016

Total assets 4,456,058 380,864 4,836,922 4,685,119

Liabilities

Current liabilities:Accounts payable 56,973 5,014 61,987 34,833 Accrued payroll 66,638 - 66,638 43,096 Intergovernmental payable 744 - 744 - Deposits 6,760 - 6,760 6,060 Compensated absences payable 69,833 - 69,833 55,008

Total current liabilities 200,948 5,014 205,962 138,997

Net assets:Invested in capital assets 2,388,665 84,749 2,473,414 2,417,016 Unrestricted 1,866,445 291,101 2,157,546 2,129,106

Total net assets 4,255,110$ 375,850$ 4,630,960$ 4,546,122$

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MissionAnimal Viejo

Services Television 2009 2008Operating revenues:

Franchise taxes -$ 142,205$ 142,205$ 140,024$ Licenses and permits 446,350 - 446,350 363,905 Charges for services 740,896 404 741,300 513,588 Fines and forfeitures 49,506 - 49,506 28,256 Other 56,951 63 57,014 352,712

Total operating revenues 1,293,703 142,672 1,436,375 1,398,485

Operating expenses:Personnel services 1,104,277 - 1,104,277 882,398 Supplies 179,279 4,459 183,738 112,694 Utilities 57,127 29,426 86,553 90,170 Contractual services 340,928 75,784 416,712 270,057 Rent 1,912 - 1,912 2,342 Depreciation 97,861 64,780 162,641 129,611 Other 6,712 1,092 7,804 6,081

Totals

CITY OF MISSION VIEJOOther Enterprise Funds

Combining Statement of Revenues, Expenses and Changes in Fund Net Assets

(with comparative totals for the year ended June 30, 2008)Year ended June 30, 2009

Other 6,712 1,092 7,804 6,081

Total operating expenses 1,788,096 175,541 1,963,637 1,493,353

Operating income (loss) (494,393) (32,869) (527,262) (94,868)

Nonoperating revenues (expenses):Investment earnings 80,061 10,009 90,070 124,938 Gain on sale of capital assets 770 - 770 -

Total nonoperating revenues (expenses) 80,831 10,009 90,840 124,938

Income (loss) before transfers (413,562) (22,860) (436,422) 30,070

Transfers in 521,260 - 521,260 552,488

Change in net assets 107,698 (22,860) 84,838 582,558

Net assets, beginning of year 4,147,412 398,710 4,546,122 3,963,564

Net assets, end of year 4,255,110$ 375,850$ 4,630,960$ 4,546,122$

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MissionAnimal Viejo

Services Television 2009 2008

CASH FLOWS FROM OPERATION ACTIVITIES:

Receipts from customers 1,278,572$ 141,533$ 1,420,105$ 1,424,554$ Payments to suppliers for goods and services (555,388) (112,049) (667,437) (544,153) Payments to employees for services (1,065,910) - (1,065,910) (875,015)

NET CASH PROVIDED (USED) BY OPERATION ACTIVITIES (342,726) 29,484 (313,242) 5,386

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:

Received from other funds 521,260 - 521,260 552,488

NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 521,260 - 521,260 552,488

CASH FLOWS FROM CAPITAL ANDRELATED FINANCING ACTIVITIES:

Sale of capital assets 770 - 770 -

CITY OF MISSION VIEJOOther Enterprise Funds

Combining Statement of Cash Flows

(with comparative totals for the year ended June 30, 2008)Year ended June 30, 2009

Totals

Sale of capital assets 770 - 770 - Acquisition and construction of capital assets (217,199) (1,840) (219,039) (86,707)

NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (216,429) (1,840) (218,269) (86,707)

CASH FLOWS FROM INVESTING ACTIVITIES:Interest received 80,061 10,009 90,070 124,938

NET CASH PROVIDED BY INVESTING ACTIVITIES 80,061 10,009 90,070 124,938

NET INCREASE IN CASH AND CASH EQUIVALENTS 42,166 37,653 79,819 596,105

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,937,357 221,976 2,159,333 1,563,228

CASH AND CASH EQUIVALENTS - END OF YEAR 1,979,523$ 259,629$ 2,239,152$ 2,159,333$

(Continued)

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MissionAnimal Viejo

Services Television 2009 2008RECONCILIATION OF OPERATING LOSS TO NET

CASH PROVIDED (USED) BY OPERATING ACTIVITIES:Operating loss (494,393)$ (32,869)$ (527,262)$ (94,868)$ Adjustments to reconcile operating loss to net

cash provided (used) by operating activities:Depreciation 97,861 64,780 162,641 129,611 Changes in operating assets and liabilities:

(Increase) decrease in taxes receivable - (1,139) (1,139) (1,080) (Increase) decrease in accounts receivable - - - (25) (Increase) decrease in intergovernmental receivable (15,831) - (15,831) 26,954 (Increase) decrease in prepaid items 1,384 - 1,384 (48,605) Increase (decrease) in accounts payable 28,442 (1,288) 27,154 (13,389) Increase (decrease) in accrued payroll 23,542 - 23,542 12,393 Increase (decrease) in intergovernmental payable 744 - 744 - Increase (decrease) in deposits 700 - 700 220 I (d ) i d b 14 825 14 825 (5 825)

Totals

CITY OF MISSION VIEJOOther Enterprise Funds

Combining Statement of Cash Flows (Continued)Year ended June 30, 2009

(with comparative totals for the year ended June 30, 2008)

Increase (decrease) in compensated absences 14,825 - 14,825 (5,825)

TOTAL ADJUSTMENTS 151,667 62,353 214,020 100,254

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (342,726)$ 29,484$ (313,242)$ 5,386$

Noncash Financing and Investing Transactions

For the years ended June 30, 2009 and 2008, there were no significant noncash financing or investing transactions.

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AGENCY FUND

The Agency Fund is used to account for assets held by the City as an agent for individuals, private organizations, other governments and/or other funds. The City of Mission Viejo maintains the following agency fund: COMMUNITY FACILITIES DISTRICT No. 92-1 - This fund is used to account for assets and liabilities of the Community Facilities District No. 92-1, a district formed to finance the acquisition and construction of public flood control facilities in the area of the Mission Viejo Freeway Center.

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Balance at Balance atJune 30, 2008 Additions Deletions June 30, 2009

ASSETS:Cash and investments 822,738$ 472,674$ 442,003$ 853,409$

LIABILITIES:Accounts payable -$ 189,812$ -$ 189,812$ Due to bondholders 822,738 268,861 428,002 663,597

Total liabilities 822,738$ 458,673$ 428,002$ 853,409$

Community Factilities District 92-1

CITY OF MISSION VIEJOAgency Fund

Statement of Changes in Assets and LiabilitiesYear ended June 30, 2009

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City of Mission Viejo Statistical Tables and Other Schedules

Year ended June 30, 2009

This part of the City of Mission Viejo’s comprehensive annual financial report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about the City’s overall financial health. Contents Page Financial Trends ........................................................................................................................................ 143

These schedules contain trend information to help the reader understand how the City’s financial performance and well-being have changed over time.

Revenue Capacity ..................................................................................................................................... 152

These schedules contain information to help the reader assess the City’s most significant local revenue source, property tax revenues.

Debt Capacity ............................................................................................................................................ 156

These schedules present information to help the reader assess the affordability of the City’s current levels of outstanding debt and the City’s ability to issue additional debt in the future.

Demographic and Economic Information ................................................................................................... 160

These schedules offer demographic and economic indicators to help the reader understand the environment within which the City’s financial activities take place.

Operating Information ................................................................................................................................ 162

These schedules contain service and infrastructure data to help the reader understand how the information in the City’s financial report relates to the services the City provides and the activities it performs.

Sources: Unless otherwise noted, the information in these schedules is derived from the City’s Comprehensive Annual Financial Report for the relevant year.

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CITY OF MISSION VIEJO Net Assets by Component Last Seven Fiscal Years 1

(accrual basis of accounting)

$0

$200

$400

$600

$800

2003 2004 2005 2006 2007 2008 2009

$ in millions

2003 2004 2005 2006 2007 2008 2009Governmental activities: Invested In capital assets, net of related debt 517,743,671 627,925,097 625,779,491 632,460,889 640,300,604 655,353,074 658,433,369 Restricted 10,897,807 10,851,075 13,153,006 14,737,582 13,544,769 18,087,908 17,607,666 Unrestricted 34,287,556 33,805,512 43,435,759 44,037,190 47,882,955 34,212,481 33,780,397

Total governmental activities net assets 562,929,034 672,581,684 2 682,368,256 691,235,661 701,728,328 707,653,463 709,821,432

Business-type activities: Invested in capital assets, net of related debt 2,796,914 2,658,310 2,530,813 2,415,502 2,459,920 2,417,016 2,473,414 Unrestricted 929,828 1,035,120 1,203,564 1,397,343 1,503,644 2,129,106 2,157,546

Total business-type activities net assets 3,726,742 3,693,430 3,734,377 3,812,845 3,963,564 4,546,122 4,630,960

Primary government: Invested in capital assets, net of related debt 520,540,585 630,583,407 628,310,304 634,876,391 642,760,524 657,770,090 660,906,783 Restricted 10,897,807 10,851,075 13,153,006 14,737,582 13,544,769 18,087,908 17,607,666 Unrestricted 35,217,384 34,840,632 44,639,323 45,434,533 49,386,599 36,341,587 35,937,943

Total primary government net assets 566,655,776 676,275,114 686,102,633 695,048,506 705,691,892 712,199,585 714,452,392

1 The City of Mission Viejo implemented GASB 34 for the fiscal year ended June 30, 2003. Information prior to the implementation of GASB 34 is not available.

2 The increase in net assets for governmental activities in 2004 was due primarily to the addition of two infrastructure networks, Medians and Parkways and Storm Drains.

Fiscal Year

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CITY OF MISSION VIEJO Changes in Net Assets

Last Seven Fiscal Years 1 (accural basis of accounting)

2003 2004 2005 2006 2007 2008 2009

Expenses: Governmental activities: General government-legislative 1,211,733 1,417,807 1,643,865 1,278,397 1,458,585 1,539,469 2,186,488 General government-management and support 6,998,036 8,872,595 10,545,172 13,767,465 6 13,359,098 15,012,892 14 14,766,918

Public safety 10,577,967 12,099,669 12,367,812 13,237,344 13,846,244 15,682,611 15 16,223,078

Community development 1,964,511 1,895,841 2,093,381 2,180,574 2,114,820 2,619,254 1,910,720 Public works-engineering and transportation 4,274,363 3,344,704 3,616,133 4,050,960 3,278,156 3,396,587 3,367,924 Infrastructure maintenance 13,715,602 9,989,256 15,084,522 2 17,208,589 7 20,828,414 10 21,399,169 21,870,932

Recreation, community and library services 5,814,132 5,933,112 6,498,561 6,965,590 7,696,128 11 8,811,784 16 9,393,228 Interest on long-term debt 2,403,823 2,292,056 2,495,852 2,716,028 3,415,025 12 2,529,391 1,591,463 Total governmental activities expenses 46,960,167 45,845,040 54,345,298 61,404,947 65,996,470 70,991,157 71,310,751

Business-type activities:

Animal services 918,653 957,177 990,544 1,093,211 1,157,320 1,321,913 17 1,788,096

Mission Viejo television 148,710 162,784 162,000 159,592 171,321 171,440 175,541 Total business-type activities expenses 1,067,363 1,119,961 1,152,544 1,252,803 1,328,641 1,493,353 1,963,637

Total primary government expenses 48,027,530 46,965,001 55,497,842 62,657,750 67,325,111 72,484,510 73,274,388

Program revenues:

Governmental activities: Charges for services: Public safety 772,991 962,083 966,906 848,928 800,345 796,364 661,643 Community development 1,322,044 1,460,268 1,656,023 2,165,061 2,033,209 1,768,485 1,714,191 Public works-engineering and transportation 451,103 613,377 450,693 518,244 855,540 557,467 482,480 Recreation, community and library services 1,352,406 1,370,860 1,801,927 2,082,022 2,225,515 2,439,763 2,560,945 Other activities 141,672 650,272 560,480 794,574 497,762 163,670 235,905

Operating grants and contributions 4,040,396 8,245,441 4,638,084 3 4,500,264 4,938,351 4,750,898 4,255,816

Capital grants and contributions 1,955,568 518,267 3,815,060 3 6,188,556 8 7,907,221 8,847,033 9,472,730

Total governmental activities program revenues 10,036,180 13,820,568 13,889,173 17,097,649 19,257,943 19,323,680 19,383,710

Business-type activities: Charges for services: Animal services 266,430 323,380 394,365 475,944 502,477 863,528 634,515 Mission Viejo television 660 2,221 2,156 1,054 539 543 404 Operating grants and contributions 360,711 382,985 339,577 390,156 459,977 534,414 801,456

Capital grants and contributions 416,999 5,806 - - - - - Total business-type activities program revenues 1,044,800 714,392 736,098 867,154 962,993 1,398,485 1,436,375

Total primary government program revenues 11,080,980 14,534,960 14,625,271 17,964,803 20,220,936 20,722,165 20,820,085

(continued)

Fiscal Year

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CITY OF MISSION VIEJO Changes in Net Assets

Last Seven Fiscal Years 1 (accural basis of accounting)

(Continued)

2003 2004 2005 2006 2007 2008 2009

Net (expense)/revenue:

Governmental activities (36,923,987) (32,024,472) (40,456,125) (44,307,298) (46,738,527) (51,667,477) (51,927,041)

Business-type activities (22,563) (405,569) (416,446) (385,649) (365,648) (94,868) (527,262)

Total net expense/revenue (36,946,550) (32,430,041) (40,872,571) (44,692,947) (47,104,175) (51,762,345) (52,454,303)

General revenues and other changes in net assets:

Governmental activities:

Taxes:

Property taxes 16,528,480 16,822,016 20,439,513 4 28,315,994 9 31,183,198 33,527,411 34,221,795

Sales taxes 14,818,509 15,463,156 13,558,656 13,590,547 13,099,593 12,231,539 10,557,007 18

Property taxes in lieu of sales and use taxes - - 4,344,402 5 4,567,285 4,381,834 4,088,418 3,863,059

Other 4,430,803 3,429,715 3,713,661 3,720,600 4,082,376 3,620,011 3,429,101

Unrestricted motor vehicle in lieu fees 5,585,512 4,533,335 6,906,017 608,665 611,463 438,534 337,213

Investment income 1,870,344 1,101,787 1,454,287 1,920,079 3,715,080 13 3,698,871 2,014,231 19

Other 234,605 461,817 235,941 879,905 590,355 322,797 305,386 Transfers (385,046) (360,727) (432,018) (428,372) (432,705) (552,488) (521,260) Gain (loss) on sale /disposal of capital assets (2,329) 22,238 - - - (111,522)

Total governmental activities 43,080,878 41,451,099 50,242,697 53,174,703 57,231,194 57,375,093 54,095,010

Business-type activities:

Investment earnings 43,294 11,530 25,375 35,745 83,662 124,938 90,070

Transfers 385,046 360,727 432,018 428,372 432,705 552,488 521,260

Gain (loss) on sale/disposal of capital assets (756) - 770

Total business-type activities 427,584 372,257 457,393 464,117 516,367 677,426 612,100

Total primary government 43,508,462 41,823,356 50,700,090 53,638,820 57,747,561 58,052,519 54,707,110

Changes in net assets:

Governmental activities 6,156,891 9,426,627 9,786,572 8,867,405 10,492,667 5,707,616 2,167,969

Business-type activities 405,021 (33,312) 40,947 78,468 150,719 582,558 84,838 Total primary government 6,561,912 9,393,315 9,827,519 8,945,873 10,643,386 6,290,174 2,252,807

3 Operating grants and contributions were down and capital grants and contributions were up due to a reclassification of certain grants deemed operating grants FY 2004.

(continued)

1 The City of Mission Viejo implemented GASB 34 for the fiscal year ended June 30, 2003. Information prior to the implementation of GASB 34 is not available.

2 Infrastructure maintenance expenditures increased in FY2005 due to an increase in capital project activity.

Fiscal Year

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CITY OF MISSION VIEJO Changes in Net Assets

Last Seven Fiscal Years 1 (accural basis of accounting)

(Continued)

4 Property tax revenue increased significantly in FY2005 due to the continued strong housing market which resulted in an increase in assessed valuation . of the properties

area from Public Works.

programs are offered.

Source: Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances

10 Infrastructure maintenance increased due to an increase in road resurfacing and slurry seal costs, and increases in street, park and median maintenance.

9 The substantial increase was due to the swap by the state of motor vehicle in lieu fees for additional property tax revenue.

8 Capital grants and contributions increased as a result of federal disaster assistance for emergency slope failure repair work, reimbursements from the Ladera

6 General government costs increases primarily due to higher insurance costs.

development, and reinstatement of Proposition 42 traffic congestion relief funds.

5 In 2005 the City began receiving property taxes in lieu of a portion of sales tax from the State, commonly referred to as "Triple Flip" revenue.

7 Infrastructure maintenance increased due primarily to the transfer of certain environmental maintenance and community center utility costs to this

18 Sales Tax decrease was due to the national recession.

19 Investment Income decreased due to a decline in yields earned on City investments and a decline in the size of the City portfolio.

14 General government - management and support increased primarily due to the jumpstart in prefunding other post-employment retiree health benefit costs.

13 Investment earning increased due to higher yields on investments and higher invested balances.

12 The increase in interest on long-term debt was the result of higher interest payments made on variable rate bonds during the year.

11 Recreation, community and library services costs increased due to an increase in personnel costs and an increase in the number of sites where recreation

17 Animal services increased due to increased personnel costs associated with operating the shelter.

16 Recreation, community and library services increased due to increases in the number of programs offered and the number of patrons using City facilities.

15 Public Safety increase due to the addition of two School Resource Officer positions.

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CITY OF MISSION VIEJO Fund Balances of Governmental Funds

Last Ten Fiscal Years (modified accrual basis of accounting)

Fiscal Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

General fund: Reserved 6,095,510 5,906,089 5,922,239 8,851,699 6,847,283 9,198,817 7,065,344 12,747,110 6 6,387,326 4,572,557 Unreserved 19,891,998 19,331,449 23,077,548 24,968,403 29,131,890 32,553,064 37,792,440 35,815,005 30,435,799 7 30,141,564 Total general fund 25,987,508 25,237,538 28,999,787 33,820,102 35,979,173 41,751,881 44,857,784 48,562,115 36,823,125 34,714,121

All other governmental funds: Reserved 13,819,599 32,114,671 2 18,493,678 18,357,694 19,142,865 20,007,732 34,221,856 4 31,200,022 28,437,107 23,720,546 Unreserved, reported in: Special revenues funds 3,555,467 (2,600,412) 3 873,809 2,487,513 1,758,008 1,566,645 (8,892,769) 5 (8,264,397) 5 (5,338,036) 5 (609,794) Debt service funds (63,503) - - (3,791,930) 1 (3,810,925) (4,175,531) (4,183,223) (3,524,440) (3,830,123) (2,331,936) Capital projects funds 542,810 1,494,655 965,900 466,833 121,742 215,481 230,623 (25,018) 463,170 263,118

Total all other governmental funds 17,854,373 31,008,914 20,333,387 17,520,110 17,211,690 17,614,327 21,376,487 19,386,167 19,732,118 21,041,934

Notes:1 Represents Community Development Agency of the City of Mission Viejo's recording of loans and notes due to the City of Mission Viejo's General Fund. The Agency will repay these loans from future financial resources.

2 Includes unexpended bond proceeds from the Community Development Financing Authority 2001 City Hall/Library Expansion Bonds.

3 Represents grant-related expenditures in several funds not reimbursed during the fiscal year.

4 The large increase in FY 2006 is due to large encumbered balances at year-end for capital improvement projects.

5 Large encumbered balances for capital improvement projects funded by reimbursement-based grants and developer fees resulted in unreserved fund deficits in several special revenue funds.

6 The large increase in 2007 is due to large encumbered balances at year-end for ongoing capital projects.

7 The large decrease in 2008 is due to increases in expenditures and decreases in revenues compared to the prior year, as well as a reduction in the encumbered balances.

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CITY OF MISSION VIEJO Changes in Fund Balances of Governmental Funds

Last Ten Fiscal Years (modified accrual basis of accounting)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Revenues

Taxes 27,933,303 32,667,916 33,032,949 35,832,043 37,791,653 41,454,221 49,990,351 5 52,897,806 53,701,448 51,911,454 Licenses and permits 1,970,563 1,348,489 773,484 890,258 1,022,612 1,050,504 1,631,189 1,673,856 1,388,460 1,265,539 Intergovernmental 11,967,062 11,864,312 18,596,268 13,044,562 13,509,239 14,299,965 11,100,513 10,274,757 10,131,158 10,774,264 Charges for services 1,887,211 1,601,322 1,503,063 1,583,802 1,752,372 2,066,709 2,208,203 2,650,875 2,357,708 2,248,499 Fines and forteitures 728,943 810,857 891,262 803,964 1,025,448 964,061 971,164 929,781 921,669 799,652 Developer fees 964,639 314,123 59,148 1,571,440 44,218 387,691 1,829,832 2,219,907 3,165,749 3,885,108 Investment earnings 2,198,429 3,584,705 2,756,251 2,641,143 1,104,595 1,902,109 2,509,971 4,296,276 8 4,378,762 8 3,180,455 Sale of capital assets - - - - - - - - - - Other 1,590,698 1,006,864 864,447 708,523 959,571 891,006 1,777,565 1,850,303 1,065,056 1,321,170 Total revenues 49,240,848 53,198,588 58,476,872 57,075,735 57,209,708 63,016,266 72,018,788 76,793,561 77,110,010 75,386,141

ExpendituresGeneral government-legislative1 10,315,703 9,045,150 1,262,188 1,176,379 1,408,127 1,640,829 1,272,859 1,454,655 1,536,513 2,057,338 General government-management and support - - 8,291,565 8,587,327 9,481,875 9,472,632 11,619,765 6 11,500,722 14,958,723 10 13,374,990 Public safety 8,504,512 9,433,027 9,107,844 10,520,150 11,977,994 12,342,183 13,202,638 13,821,556 15,610,489 11 16,086,919 Public works- engineering and transportation2 14,119,696 13,012,064 3,333,862 3,793,426 3,199,844 3,641,733 3,821,094 3,046,499 3,197,302 3,135,609 Infrastructure maintenance2 - - 10,505,822 10,408,333 10,522,399 11,036,227 13,369,920 7 14,361,764 17,808,967 12 16,392,734 Community development 2,047,533 1,772,672 1,548,084 1,933,804 1,862,875 2,035,609 2,512,625 2,318,741 2,922,531 2,423,507 Recreation/community/library services 4,393,261 4,612,333 4,285,666 4,862,031 4,965,716 5,624,495 5,935,518 6,692,548 7,538,916 7,910,635 Capital projects 21,873,676 14,587,346 25,658,169 5,424,868 9,020,728 6,981,864 8,624,841 16,446,670 9 19,872,424 10,931,773 Debt service Principal 3,153,266 3 887,919 520,000 1,333,231 1,463,231 1,588,231 1,240,000 1,370,000 1,505,000 1,535,000 Interest 1,797,869 4 2,264,014 2,703,661 2,280,939 2,063,261 2,072,358 3,124,373 3,643,027 3,022,592 1,838,663 Total expenditures 66,205,516 55,614,525 67,216,861 50,320,488 55,966,050 56,436,161 64,723,633 74,656,182 87,973,457 75,687,168

Excess of revenues over (under) expenditures (16,964,668) (2,415,937) (8,739,989) 6,755,247 1,243,658 6,580,105 7,295,155 2,137,379 (10,863,447) (301,027)

Other financing sources (uses)Transfers in 2,930,995 8,246,625 3,230,519 5,291,720 5,962,430 5,924,515 5,987,436 5,184,096 6,312,178 5,370,292 Transfers out (3,201,940) (8,586,355) (3,577,369) (5,669,165) (6,323,157) (6,356,533) (6,415,808) (5,616,801) (6,864,666) (5,891,552) Capital asset disposal 10,833 23,370 25,388 1,280 9,338 22,896 23,099 Issuance of debt 12,049,111 17,312,200 1,923,955 29,137 15,779 1,870 - - - - Proceeds of advances 1,511,552 657,689 249,606 - - - - - - - Total other financing sources (uses) 13,289,718 17,630,159 1,826,711 (337,475) (321,578) (404,760) (427,092) (423,367) (529,592) (498,161)

Net change in fund balances (3,674,950) 15,214,222 (6,913,278) 6,417,772 922,080 6,175,345 6,868,063 1,714,012 (11,393,039) (799,188)

Debt service as a percentage of noncapital expenditures 15.192% 6.933% 4,5 7.605% 7.646% 8.123% 8.494% 8.499% 8.584% 6.630% 4.991%

1 Beginning in FY 2002, the general government function was divided into general government-legislative and general government-management and support for reporting purposes. 2 Beginning in FY 2002, the public works function was divided into public works-engineering and transportation and infrastructure maintenance for reporting purposes. 3 Represents the repayment of the 1997 Tax Allocation Notes and loans from the City to the Community Development Agency.4 Debt service on the 1999 mall bonds commenced in FY 2000. 5 The growth in tax revenue is due to the strong economy and real estate market in the City, and the swap by the State of Motor Vehicle in lieu fees for additional property tax revenue.6 The increase is attributable to increased insurance costs and an advance payment made to pay down the unfunded liability in the City's defined benefit pension plan.7 Increase due to certain reclassification of costs from public works-engineering and transportation and recreation/community/library services, as well as increased maintenance expenditures for streets, sidewalks, parks, medians and recreation centers.8 Increase due to higher yields on investment and higher invested balances.9 Increase due to the commencement of work on two major projects during the year, the Norman P. Murray Center Expansion and Crown Valley Widening projects.10 Increase due to the jumpstart in prefunding other post-employment retiree health benefit costs and increased spending on information technology.11 Increase primarily due to the addition of two School Resource Officer positions.12 Increase due to higher spending on maintenance of City parks, streets, sidewalks, medians and slopes.

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CITY OF MISSION VIEJO Tax Revenues by Source

Last Ten Fiscal Years (modified accrual basis of accounting)

CityRedevelopment

Agency

2000 11,381,078 1,532,373 12,389,345 1,910,082 482,787 237,638 27,933,303

2001 12,204,069 3,282,261 14,138,058 2,099,441 512,514 431,573 32,667,916

2002 13,014,217 3,571,142 13,289,667 2,227,160 527,899 402,865 33,032,950

2003 13,704,799 4,056,110 14,818,509 2,206,246 649,645 396,734 35,832,043

2004 14,551,779 4,347,003 15,463,156 2,232,287 777,481 419,947 37,791,653

2005 15,909,756 4,529,758 17,301,046 2,411,905 897,540 404,216 41,454,221

2006 22,830,026 5,485,967 17,616,495 2,752,067 769,143 536,653 49,990,351

2007 25,194,371 5,988,826 17,632,233 2,927,803 573,226 581,347 52,897,806

2008 26,654,054 6,519,989 16,722,281 2,880,671 335,254 589,199 53,701,448

2009 26,582,596 7,167,827 14,420,066 2,953,525 311,863 475,577 51,911,454

Property TaxSales & Use

TaxFranchise

Tax

Real PropertyTransfer

Tax

TransientOccupancy

Tax Total

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CITY OF MISSION VIEJO Governmental Fund Revenues and Expenditures

(Last Ten Fiscal Years)

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

($ in millions)

Governmental Fund Expenditures

Debt service: Principal & Interest

Capital projects

Public works/Infrastructure maintenanceRecreation/community/library services

Community development

Public safety

General government

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

($ in millions)

Governmental Fund Revenues

All other

Use of money and property

Developer fees

Charges for services

Intergovernmental

Licenses and permits

Taxes

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CITY OF MISSION VIEJO

Assessed Value and Estimated Actual Value of Taxable Property Last Ten Fiscal Years

(in thousands of dollars)

-152-

Fiscal Year Taxable TotalEnded Public Assessed Public Incremental Direct Tax

June 30 Secured Utility Unsecured Value 1 Secured Utility Unsecured Valuation Rate 3

2000 7,348,760 1,223 225,378 7,575,360 - 2 - 2 - 2 135,533 0.16470%2001 7,954,313 1,249 318,755 8,274,317 - 2 - 2 - 2 300,512 0.16470%2002 8,535,210 1,274 300,509 8,836,993 - 2 - 2 - 2 337,232 0.16470%2003 9,034,496 1,157 294,978 9,330,631 316,981 136 76,866 393,983 0.16470%2004 9,580,126 3,283 299,230 9,882,639 351,633 2,329 76,308 430,269 0.16470%2005 10,214,708 2,222 297,265 10,514,195 363,471 1,303 68,168 432,943 0.16470%2006 11,190,844 2,171 280,342 11,473,356 444,269 1,306 62,187 507,762 0.16470%2007 12,127,246 2,110 320,408 12,449,764 486,643 1,297 77,063 565,003 0.16470%2008 12,903,096 1,209 341,820 13,246,125 556,199 1,209 86,171 643,579 0.16470%2009 13,007,415 2,418 347,733 13,357,566 630,632 2,418 96,259 729,309 0.16470%

Note:In 1978 the voters of the State of California passed Proposition 13 which limited property taxes to a total maximum rateof 1% based upon the assessed value of the property being taxed. Each year, the assessed value of property may beincreased by an "inflation factor" (limited to a maximum increase of 2%). With few exceptions, property is only re-assessed at the time that it is sold to a new owner. At that point, the new assessed value is reassessed at the purchaseprice of the property sold. The assessed valuation data shown above represents the only data currently available with respect to the actual market value of taxable property and is subject to the limitations described above.

1 City amounts include Community Development Agency incremental valuation.

2 The details of the taxable assessed values are not available for these years.

3 City general fund direct rate only.

Sources: CDA: Orange County Auditor-ControllerCity: 2000-2006 HdL Coren & Cone 2007-2009 Orange County Auditor Controller

City Community Development Agency

CITY OF MISSION VIEJO Direct and Overlapping Property Tax Rates

Last Ten Fiscal Years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

City Direct Rate 0.16470 0.16470 0.16470 0.16470 0.16470 0.16470 0.16470 0.16470 0.16470 0.16470

Overlapping Rates: Capistrano Unified School District General Fund 0.36940 0.36940 0.36940 0.36940 0.36940 0.36940 0.36940 0.36940 0.36940 0.36940 Educational Revenue Augmentation Fund 0.14000 0.13361 0.13361 0.13361 0.13361 0.13361 0.13361 0.13361 0.13361 0.13361 Orange County Cemetery Fund 0.00051 0.00051 0.00051 0.00051 0.00051 0.00051 0.00051 0.00051 0.00051 0.00051 Orange County Department of Education 0.01674 0.01674 0.01674 0.01674 0.01674 0.01674 0.01674 0.01674 0.01674 0.01674 Orange County Fire Department 0.10896 0.11535 0.11535 0.11535 0.11535 0.11535 0.11535 0.11535 0.11535 0.11535 Orange County Flood Control District General 0.02030 0.02030 0.02030 0.02030 0.02030 0.02030 0.02030 0.02030 0.02030 0.02030 Orange County General Fund 0.05303 0.05303 0.05303 0.05303 0.05303 0.05303 0.05303 0.05303 0.05303 0.05303 Orange County Harbors Beaches & Parks CSA 0.01569 0.01569 0.01569 0.01569 0.01569 0.01569 0.01569 0.01569 0.01569 0.01569 Orange County Transportation Authority 0.00288 0.00288 0.00288 0.00288 0.00288 0.00288 0.00288 0.00288 0.00288 0.00288 Orange County Vector Control 0.00115 0.00115 0.00115 0.00115 0.00115 0.00115 0.00115 0.00115 0.00115 0.00115 Santa Margarita Water District 0.01558 0.01558 0.01558 0.01558 0.01558 0.01558 0.01558 0.01558 0.01558 0.01558 Santa Margarita Water Improvement District 1W 0.00021 0.00021 0.00021 0.00021 0.00021 0.00021 0.00021 0.00021 0.00021 0.00021 South Orange County Community College District 0.09085 0.09085 0.09085 0.09085 0.09085 0.09085 0.09085 0.09085 0.09085 0.09085

Total Proposition 13 rate (see note below) 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000

Metropolitan Water District 0.00890 0.00880 0.00770 0.00670 0.00610 0.00580 0.00520 0.00470 0.00450 0.00430 Capistrano Unified School District 1999 Bond 2000 A - 0.00860 0.00307 0.00332 0.00392 0.00340 0.00312 0.00273 0.00293 0.00279 Capistrano Unified School District 1999 Bond 2001 B - - 0.00527 0.00505 0.00597 0.00544 0.00494 0.00430 0.00468 0.00445 Capistrano Unified School District 1999 Bond 2002 C - - - 0.00217 0.00303 0.00307 0.00272 0.00244 0.00258 0.00247 Santa Margarita Water District Improvement District #1 Bond 0.25000 0.15500 0.14100 0.13200 0.06400 0.02400 0.02400 - -

Total Direct and Overlapping Rate 1.25890 1.17240 1.15704 1.14924 1.08302 1.04171 1.03998 1.01417 1.01469 1.01401

Note:

Source: Orange County Auditor-ControllerHdL Coren & Cone

This schedule shows information for tax rate area 27-006, the largest general fund tax rate area by assessed value.

In 1978, California voters passed Proposition 13, which sets the property tax rate at 1.00% of market value (assessed value).This 1.00% is shared by all taxing agencies in which the subject property resides. In addition to the 1.00% fixed rate, property owners are charged taxes as a percentage of assessed property values for the payment of various voter-approved school and water district bonds.

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CITY OF MISSION VIEJO Principal Property Tax Payers

Current Year and Ten Years Ago

Percent of Percent ofTotal City Total CityTaxable Taxable

Assessed Assessed Assessed AssessedTaxpayer Value Rank Value Value Rank ValueMission Viejo Associates 134,617,581$ 1 1.01% 86,771,872 1 1.15%Mission Viejo Medical LLC 90,402,182 2 0.68% - - Mission Hospital Regional Medical Center 66,849,046 3 0.50% - - Target Corporation 63,210,755 4 0.47%EQR-Del Lago Vistas Inc. 58,976,954 5 0.44% 49,098,938 3 0.65%Mission Ridge Associates LLC 57,589,861 6 0.43%Laguna Cabot Road Business Park 54,446,688 7 0.41%OC SD Holdings LLC 54,000,000 8 0.40%Oasis-California Inc 49,672,899 9 0.37% - MG Promenade Apartment LLC 48,314,655 10 0.36%Samsung PDP Kaleidoscope - - 47,397,496 2 0.63%First American Company Trust - - 17,101,214 4 0.23%May Department Stores Company - - 15,941,724 5 0.21%Coldwell Banker Real Estate Hold - - 15,300,000 8 0.20%Mission Viejo Medical Office Building - - 12,367,433 7 0.16%Home Depot USA Inc. - - 10,948,448 9 0.14%Cox Communications Orange - - 28,179,031 4 0.37%Mission Heritage LLC - - 8,861,211 5 0.12%

678,080,621$ 5.08% 291,967,367$ 3.85%

Source: HdL Coren & Cone.

Presented in order of highest to lowest estimated property tax revenue paid to City and Community Development Agency.

2009 2000

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CITY OF MISSION VIEJO Property Tax Levies & Collections

Last Ten Fiscal Years

Fiscal Tax levied CollectionsYear Ending for the Percent for Prior Percent

June 30 Fiscal Year Amount of Levy Years 1 Amount of Levy

2000 13,015,372 12,670,878 97.35% 242,573 12,913,451 99.22%2001 15,921,462 15,316,144 96.20% 170,186 15,486,330 97.27%2002 16,754,971 16,405,763 97.92% 179,596 16,585,359 98.99%2003 17,977,467 17,550,504 97.63% 210,406 17,760,910 98.80%2004 19,222,439 18,652,129 97.03% 246,653 18,898,782 98.32%2005 20,667,323 20,233,207 97.90% 206,307 20,439,514 98.90%2006 23,210,863 22,464,597 96.78% 235,770 22,700,367 97.80%2007 24,702,934 23,882,142 96.68% 306,257 24,188,399 97.92%2008 26,674,212 25,268,197 94.73% 519,443 25,787,640 96.68%2009 26,965,638 25,587,957 94.89% 844,471 26,432,428 98.02%

Note:

Total Collections to DateFiscal Year of LevyCollected within the

1 The table above shows the total amount of delinquent taxes collected in each fiscal year. The Orange County Auditor-Controller does not provide information regarding the levy year to which delinquent tax collections pertain.

The amounts presented include City property taxes and Community Development Agency tax increment. This schedule also includes amounts collected by the City and Community Redevelopment Agency that were passed-through to other agencies.

Source: Orange County Auditor-Controller

-155-

CITY OF MISSION VIEJO Ratios of Outstanding Debt by Type

Last Ten Fiscal Years

Lease Certificates Percentage Revenue of of Personal Per

Fiscal Year Bonds Participation Income 1 Capita 1

2000 - 3,120,000 0.09% 31.69 2001 17,450,000 3,070,000 0.56% 212.49 2002 17,450,000 3,015,000 0.55% 208.26 2003 17,130,000 2,960,000 0.51% 203.05 2004 16,795,000 2,900,000 0.48% 201.48 2005 16,450,000 2,835,000 0.43% 196.39 2006 16,095,000 2,770,000 0.40% 192.51 2007 15,730,000 2,700,000 0.37% 187.14 2008 15,350,000 2,625,000 0.36% 182.35 2009 14,955,000 2,545,000 0.34% 174.58

Total Percentage Revenue Note Capitalized Primary of Personal Per

Fiscal Year Bonds Payable Leases Government 2 Income 1 Capita 1

2000 41,553,111 967,180 - 45,640,291 1.25% 463.52 2001 41,358,111 1,003,167 - 62,881,278 1.73% 651.16 2002 43,057,326 1,042,907 - 64,565,233 1.72% 657.03 2003 42,462,326 708,813 - 63,261,139 1.62% 639.37 2004 41,757,326 361,361 - 61,813,687 1.51% 632.35 2005 40,942,326 - - 60,227,326 1.35% 613.33 2006 40,122,326 - - 58,987,326 1.25% 601.93 2007 39,187,326 - - 57,617,326 1.16% 585.05 2008 38,137,326 - - 56,112,326 1.11% 569.25 2009 37,077,326 - - 54,577,326 1.07% 544.46

Note: Details regarding the City's outstanding debt can be found in the notes to the financial statements.

1 See the Demographic and Economic Statistics schedule for personal income and population information.

2 Includes general bonded debt and other governmental activities debt.

Other Governmental Activities Debt

General Bonded Debt

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CITY OF MISSION VIEJO Direct and Overlapping Debt

As of June 30, 2009

Debt Outstanding

Estimated Share of Overlapping

Debt

Metropolitan Water District 293,425,000 0.685 % 2,009,961 Capistrano Unified School District School Facilities Improvement District No. 1 53,689,930 10.777 5,786,164 Saddleback Valley Unified School District 140,200,000 18.577 26,044,954 Santa Margarita Water District Improvement District Nos. 1 and 4 121,685,000 0.008-99.996 859,633 Santa Margarita Water District Improvement District Nos. 4B 12,870,000 0.099 12,741 Capistrano Unified School District Community Facilities District No. 87-1 59,285,000 25.571 15,159,767 Orange County Community Facilities District No. 87-3 28,114,199 100.000 28,114,199

Total overlapping tax and assessment debt 709,269,129 77,987,419

Orange County General Fund Obligations 462,152,000 3.329 % 15,385,040 Orange County Pension Obligations 69,713,001 3.329 2,320,746 Orange County Board of Education Certificates of Participation 19,430,000 3.329 646,825 Municipal Water District of Orange County Water Facilities Corporation 17,685,000 3.955 699,442 South Orange Community College District Certificates of Participation 32,875,000 7.730 2,541,238 Capistrano Unified School District Certificates of Participation 34,505,000 10.625 3,666,156 Moulton-Niguel Water District Certificates of Participation 27,595,234 14.872 4,103,963 Orange County Fire Authority 7,040,000 6.474 455,770

Total overlapping general fund obligation debt 670,995,235 29,819,180

Total overlapping debt 1,380,264,364$ 107,806,599

City direct debt 54,577,326

Total direct and overlapping debt 162,383,925$

Notes:

1

Source for overlapping debt: California Municipal Statistics, Inc.Source for City direct debt: City of Mission Viejo Administrative Services Department

For debt repaid with property taxes, the percentage of overlapping debt applicable is estimated using taxable assessed property values. Applicable percentageswere estimated by determining the portion of another government unit's taxable assessed value that is within the City's boundaries and dividing it by each unit'stotal taxable assessed value.

Overlapping governments are those that coincide, at least in part, with the geographic boundaries of the City. This schedule estimates the portion of theoutstanding debt of those overlapping governments that is borne by the residents and businesses of the City. This process recognizes that, when consideringthe City's ability to issue and repay long-term debt, the entire debt burden borne by the residents and businesses should be taken into account. However,this does not imply that every taxpayer is a resident, and therefore responsible for repaying the debt, of each overlapping government.

Overlapping debt excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation and non-bonded capital leaseobligations.

Overlapping general fund obligation debt:

Overlapping tax and assessment debt:

Estimate Percentage Applicable 1

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CITY OF MISSION VIEJO Legal Debt Margin Information

Last Ten Fiscal Years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Assessed valuation 7,575,360,302$ 8,274,317,004$ 8,836,992,884$ 9,330,631,428$ 9,882,638,615$ 10,514,195,052$ 11,473,356,454$ 12,449,763,507$ 13,246,125,427$ 13,357,565,673$

Conversion percentage 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

Adjusted assessed valuation 1,893,840,076 2,068,579,251 2,209,248,221 2,332,657,857 2,470,659,654 2,628,548,763 2,868,339,114 3,112,440,877 3,311,531,357 3,339,391,418

Debt limit percentage 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%

Debt limit 284,076,011$ 310,286,888$ 331,387,233$ 349,898,679$ 370,598,948$ 394,282,314$ 430,250,867$ 466,866,132$ 496,729,704$ 500,908,713$

Total net debt applicable to limit - - - - - - - - - -

Legal debt margin 284,076,011$ 310,286,888$ 331,387,233$ 349,898,679$ 370,598,948$ 394,282,314$ 430,250,867$ 466,866,132$ 496,729,704$ 500,908,713$

Total net debt applicable to the limit as percentage of debt lim 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

The Government Code of the State of California provides for a legal debt limit of 15% of gross assessed valuation. However, this provisionwas enacted when assessed valuation was based upon 25% of market value. Effective with the 1981-82 fiscal year, each parcel is nowassessed at 100% of market value (as of the most recent change in ownership for that parcel). The computations shown above reflecta conversion of assessed valuation data for each fiscal year from the current full valuation perspective to the 25% level that was in effectat the time that the legal debt margin was enacted by the State of California for local governments located within the State.

Source: City of Mission Viejo Administrative Services Department Orange County Auditor-Controller

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CITY OF MISSION VIEJO Pledged-Revenue Coverage

Last Ten Fiscal Years

Fiscal Year Principal Interest Coverage

2000 24,064$ -$ 24,064$ -$ 709,408$ 0.03$ 3

2001 500,222 1,322,050 1,822,272 - 1,077,642 1.69 2002 625,795 1,452,380 2,078,175 629,413 3.30 2003 622,202 1,602,811 2,225,013 400,000 386,698 2.83 2004 621,351 1,752,672 2,374,023 500,000 299,663 2.97 2005 661,618 2,125,209 2,786,827 600,000 403,261 2.78 2006 658,243 2,048,916 2,707,159 600,000 771,553 1.97 2007 736,610 1,810,528 2,547,138 700,000 993,795 1.50 2008 670,539 1,632,789 2,303,328 800,000 939,475 1.32 2009 685,774 1,436,723 2,122,497 800,000 430,566 1.72

Special Total Assessment Available

Fiscal Year Revenues 5 Revenue Principal Interest Coverage

2000 467,420 467,420 - 133,479 3.50 2001 496,582 496,582 195,000 247,684 1.12 2002 447,631 447,631 185,000 239,991 1.05 2003 434,697 434,697 195,000 232,006 1.02 2004 418,321 418,321 205,000 223,201 0.98 6

2005 448,161 448,161 215,000 213,617 1.05 2006 460,555 460,555 220,000 203,365 1.09 2007 439,552 439,552 235,000 192,328 1.03 2008 465,764 465,764 250,000 180,320 1.08 2009 471,759 471,759 260,000 167,570 1.10

1 The bonds were issued May 11, 1999.2 Revenues are derived from all property tax increment and 50% of the sales tax revenue (after minimum thresholds are met) generated by the Shops at Mission Viejo.3 The remaining funds required for debt service came from capitalized interest and investment earnings.4 The bonds were issued August 1, 1999.5 Principal and interest payments on the 1999 Series C Revenue bonds are secured by special assessment revenues

generated by the Community Facilities District No. 92-1 Special Tax Refinancing Bonds.6 The remaining funds required for debt service came from investment earnings.

Note: Details regarding the City's outstanding debt can be found in the notes to the financial statements.

Debt Service

1999 Series C Revenue Bonds 4

Property Tax Increment 2 Sales Tax 2

Total Available Revenue

Debt Service

1999 Series A Variable Rate Demand Revenue Bonds 1

-159-

CITY OF MISSION VIEJO Demographic and Economic Statistics

Last Ten Fiscal Years

Personal Median Income Per Capita

Median Housing (thousands Personal UnemploymentYear Population 1 Age 2 Value 3 of dollars) 4 Income 4 Rate 5

2000 98,464 36.0 264,238 106,003,904 37,103 1.6%2001 96,568 37.5 293,146 109,010,278 37,651 1.4%2002 98,268 37.5 361,000 111,750,294 38,169 2.3%2003 98,943 37.5 455,000 116,997,802 39,536 2.5%2004 97,752 39.7 592,500 125,800,000 42,260 2.1%2005 98,197 38.0 677,000 135,100,000 45,291 2.7%2006 97,997 38.1 669,750 145,400,000 48,767 2.6%2007 98,483 38.4 613,000 150,200,000 50,307 2.8%2008 98,572 39.6 520,500 156,200,000 51,700 3.8%2009 100,242 38.8 430,000 155,800,000 50,939 6.8%

Sources: 1

2

3

HdL Coren & Cone (2009)4

5

California Assoc of Realtors (2002 & 2003) , Orange County Register (2004-2008)

Data shown is for the County of Orange; data for City of Mission Viejo is not available.U. S. Bureau of Economic Analysis through 2004

California Department of FinanceFocus: Orange County(2000), Orange County Report (2001 & 2002), Money.cnn.com (2003-2009)Focus: Orange County (2000), Orange County Report (2001)

California Employment Development Department ( 2002-2003, 2005-2009)

CalState Fullerton: Economic Forecast October 2009 (2005, 2006, 2007,2008),

Focus: Orange County (2000), U.S. Census Bureau (2001)Venturi Staffing( 2004)

CalState Fullerton: Economic Forecast October 2009 (Estimated) (2009)

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CITY OF MISSION VIEJO Principal Employers

Current Year and Seventeen Years Ago

Percentage Percentage 2

of Total City of Total City Employer Employees Rank Employment Employees Rank Employment

Saddleback College 2,196 1 3.95% 1,700 2 -Mission Hospital Regional Medical Center 1,349 2 2.43% 1,200 3 -Unisys Corporation 1,000 3 1.80% 1,000 4 -Quest Diagnostics Inc 500 4 0.90% - 0 -Coldwell Banker 410 5 0.74% 425 5 -Saddleback Valley Unified School District 400 6 0.72% 1,894 1 -Nordstrom 300 7 0.54% - - -Macy's Department Store 275 8 0.49% - - -City of Mission Viejo 260 9 0.47% - - -Bristol Farms 250 10 0.45% - - -Bullocks Department Store - - - 300 6 -May Company Department Store - - - 250 7 -Mission Viejo Company - - - 190 8 -Nolte & Associates - - - 165 9 -Santa Margarita Water District - - - 155 10 -

Total 6,940 12.48% 7,279

Source:

Telephone Survey

1 Information for 2000 is not available. Information is from City's 1992 Comprehensive Annual Financial Report2 Information not available

Selectory.com 2009California Employment Development DepartmentOrange County Golden 500- 1991-92 EditionFocus: Orange County - 1991-92 Edition

2009 1992 1

Percentage of "Total City Employment" based on total number of City residents employed in 2009

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CITY OF MISSION VIEJO Full-time Equivalent City Government Employees by Function

Last Ten Fiscal Years

Function 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

General government - legislative 11.603 11.603 11.630 11.880 11.230 11.030 10.930 10.880 10.880 10.880General government - management & support 27.820 28.570 28.295 28.870 27.795 26.345 27.470 28.720 28.720 29.795Public safety 9.350 10.500 10.550 10.400 10.500 10.650 11.000 11.000 11.950 15.650 5

Community development 9.440 8.540 9.700 9.650 9.650 9.650 9.500 9.650 9.650 9.650Public works - engineering and transportation 11.125 12.125 12.275 11.730 11.730 12.225 12.225 12.225 14.175 2 14.175Infrastructure maintenance 15.350 14.350 14.350 15.895 14.895 16.600 16.000 16.150 18.250 3 18.350Recreation/community/library services 34.900 33.900 35.325 36.700 41.150 1 47.975 1 51.725 1 51.950 55.175 1,4 57.675 6

Total 119.588 119.588 122.125 125.125 126.950 134.475 138.850 140.575 148.800 156.175

Source: City budget documents

3 Increased staffing for facilities and landscape maintenance

4 Increased staffing to accommodate the expansion of programs offered at the Norman P. Murray Community and Senior Center

5 Increased staffing to accommodate the addition of the City of Aliso Viejo to the Animal Services program

6 Includes conversion of part-time regular positions to full-time status to meet increasing service demands in the Library's youth services and circulation/passport services divisions

1 Includes conversion of temporary positions to regular positions2 Increased staffing in the transportation area

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CITY OF MISSION VIEJO Operating Indicators by Function

Last Ten Fiscal Years

Function 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

General government - legislative Public Records Act requests 101 100 142 165 140 109 133 137 335 10 408

General government - management and support Service requests/complaint cases 1,928 3,365 2,332 2,746 2,649 2,319 3,155 2,834 2,940 2,780 Number of computer network nodes supported 311 325 316 350 399 425 415 460 748 11 742 Number of vendor checks issued 6,930 6,656 6,668 6,805 6,338 6,289 7,011 6,985 7,223 7,282

Public safety 2

Calls for police services 33,110 35,315 36,125 38,468 42,062 48,297 3 52,534 50,964 49,272 46,664 Average response time-Priority 1 call in minutes 6:36 7:20 5:15 4 6:00 6:11 5:34 5:14 5:03 5:11 5:07

Community development Building inspections 10,488 10,653 7,948 8,092 7,000 7,200 8,719 11,753 11,026 9,673 Zoning plan checks 1,500 1,900 1,692 1,939 1,300 1,325 1,501 1,350 1,325 807 12

Public works - engineering and transportation Street resurfacing (lane miles) 12.54 18.38 29.33 3.70 7 7.53 7 23.85 11.32 23.20 31.00 17.50 Intersections on the city's interconnect system 100 104 105 106 109 109 110 110 110 110 Daily traffic count- La Paz Rd, Marguerite Pkwy to Spadra 27,700 27,500 28,400 31,200 27,800 29,600 27,100 26,800 25,000 24,739

Infrastructure maintenance Acres of medians and parkways renovated 1 - 1 - 1 - 1 - 1 4 7 9 9 9.80 5.85

Recreation/community/library services Attendance at recreation and tennis centers 156,968 170,000 172,252 144,943 5 129,000 5 180,742 211,265 242,000 9 266,303 281,011 Library circulation 533,007 540,000 545,000 673,305 6 720,000 727,599 727,253 738,456 833,488 945,298 Youth participating in organized sports on City fields8 9,135 9,078 8,843 8,444 7,872 7,655 7,620 7,750 7,750 7,750

dispatched to the deputy's arrival on scene.

Sources: Various city departments

1 Information not available2 All of the measures are based on calendar year statistics (2004=calendar year 2003)

9 Increase is due to increased usage by existing members and an increase in the number of members10 Increase is due to tracking procedure improvements11 Increase is due to growth in number of staff supported and implementation of VoIP12 Decrease is due to a decline in the construction activity

3 Deputy observations/self-initiated activity included in calls for services as of April 15, 2004 per new Sheriff's Department policy4 Response time from 1998-2001 based on time call received to the deputy's arrival on scene. Response time from 2002 forward based on time deputy

5 Montanoso recreation center closed for renovation6 Library expansion completed7 Shorter segments were identified to maintain efficient grouping of resurfacing projects8 Decline primarily related to general decline in AYSO registration and non-residents forming leagues in their communities

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CITY OF MISSION VIEJO Capital Asset Statistics by Function

Last Ten Fiscal Years

Function/Program 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Public safety Police (provided by Orange County Sheriffs Department) Patrol units 18 18 19 19 19 20 20 22 21 24 Animal shelter buildings: Main shelter 1 1 1 1 1 1 1 1 1 1 Cattery 1 1 1 1 1 1 1 1 1 1 Rabbit shelter 0 0 0 0 0 0 1 1 1 1 Cat isolation 0 0 0 0 0 0 1 1 1 1

Public works Streets (center miles) 223 226 226 226 228 228 228 228 228 228 Traffic signals 106 106 108 110 111 111 111 111 111 114

Infrastructure maintenance Number of park sites 40 40 40 40 40 40 40 41 41 41 Acreage: parks, open space,medians and slopes 1115 1122 1122 1122 1122 1122 1122 1122 1122 1122

Recreation/community/library services Facilities (buildings) 8 8 8 9 9 9 9 9 9 9 Athletic fields: Baseball/softball diamonds 19 19 19 19 19 19 19 19 19 19 Soccer/football fields 33 33 33 33 33 33 33 33 35 35

Note: No capital asset indicators are available for general government or community development functions.

Source: Various City departments

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Appendix C

APPENDIX C

CITY INVESTMENT POLICY

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The City of Mission Viejo Investment Policy

Fiscal Year 2009-10 I. Investment Philosophy

A. Policy

1. This Investment Policy is set forth by the City of Mission Viejo (the City) for the following purposes:

a. To establish a clear understanding for the City Council, the

Investment Advisory Commission, City management, responsible employees, citizens and third parties of the objectives, policies and guidelines for the investment of the City's idle and surplus funds.

b. To offer guidance to investment staff and any external

investment advisers on the investment of the City funds. c. To establish a basis for evaluating investment results.

2. The City establishes investment policies which meet its current investment goals. The City shall review this policy annually, and may change its policies more frequently as its investment objectives change.

B. Objectives

The objectives of this investment policy are, in order of priority:

1. To ensure the safety of invested funds in compliance with all Federal,

State and local laws governing the investment of moneys under the control of the City Treasurer.

2. To maintain sufficient liquidity to meet cash flow needs 3. To attain a “market average rate of return” consistent with the primary

objectives of safety and liquidity. The expected rate of return on the Agency's portfolio is more specifically defined in Section IV.

C. Prudence

1. The Prudent Investor Standard shall be used by investment

officials, and shall be applied in the context of managing an overall portfolio. Investment staff acting in accordance with written procedures and the investment policy and exercising due diligence

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shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported within 30 days and appropriate action is taken to control adverse developments.

2. The Prudent Investor Standard: Governing bodies of local agencies

or persons authorized to make investment decisions on behalf of those local agencies investing public funds pursuant to this chapter are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, that a prudent investor acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part to an overall strategy, a trustee is authorized to acquire investments as authorized by law.

D. Ethics and Conflicts of Interest

State law, City statutes and City personnel and purchasing policies shall be followed to avoid conflict of interest or the appearance thereof. In addition to the applicable requirements of the Political Reform Act and Government Code Section 1090, the City Treasurer, Treasury Manager and City Manager, members of the City Council, members of the Investment Advisory Commission, their spouses and investment consultants shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions on behalf of the City. In addition, these individuals shall disclose to the City Manager any financial interests in or financial relationships with financial institutions that conduct business with the City, and shall subordinate their personal investment transactions to those of the City’s, particularly with regard to the timing of purchases and sales. Unless otherwise prohibited by State law, City statutes, policies or regulations, it is permissible for the City to purchase securities from firms in which members of the Investment Advisory Commission are officers, partners, members, or employees, provided that: (1) multiple bids are obtained for such purchases; (2) the affected member abstains from participation in the recommendation of the Investment Advisory Commission as to the firm with which the member has an employment or ownership relationship; (3) the member’s relationship to the securities firm is stated in the minutes of the Investment Advisory Commission; and (4) the affected member of the Investment Advisory Commission does not participate in the sale of securities to the City as an officer, partner, member, or employee of the securities firm; and (5) the firm meets the requirements of Section II. C. of this Investment Policy. All bond issue providers including but not limited to underwriters, bond counsel, financial advisors, brokers and dealers, will disclose any fee sharing

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arrangements or fee splitting to the City Manager prior to the execution of any transactions. The providers must disclose the percentage share and approximate dollar amount share to the City prior to the execution of any transactions.

II. Operational and Procedural matters

A. Scope

This investment policy applies to all financial assets and investment activities of the City except for proceeds of debt issuance. Debt proceeds shall be invested in accordance with the investment objectives of the City as set forth in this policy; however, such proceeds are invested in accordance with permitted investment provisions of their specific bond indentures. All deviations from investments authorized in this policy for other City funds shall be disclosed to the City Council at the time bond documents are considered for approval. Proceeds of debt issuance shall be subject to the operational and reporting requirements of this policy.

B. Delegation of Authority

1. Authority to manage the City's investment program is derived from the California Government Code Sections 53600 et seq.

2. The City of Mission Viejo Municipal Code, Chapter 3.08, authorizes

the City Treasurer to invest funds in accordance with California Government Code Section 53600 et seq. The Treasurer shall be responsible for all transactions undertaken by the City's internal staff, and shall establish a system of controls to regulate the activities of internal staff and external investment advisers engaged in accordance with Section II B (5).

3. In the absence of the City Treasurer, the investment responsibilities

are hereby delegated to the Treasury Manager.

4. In the absence of both the City Treasurer and the Treasury Manager the City Manager has that responsibility.

5. The City Council may, upon recommendation of the Investment

Advisory Commission, engage the services of one or more external investment managers to assist in the management of the City's investment portfolio in a manner consistent with the City's objectives. Such external managers may be granted limited discretion to purchase and sell investment securities in accordance with this Investment Policy. Such managers must be registered under the Investment Advisers Act of 1940, or be exempt from such registration. Such external managers shall be prohibited from 1) selecting broker/dealers, 2) executing safekeeping arrangements,

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and 3) executing wire transfers. This Section does not preclude the City Treasurer from retaining portfolio consultants within existing authority.

C. Authorized Financial Dealers and Institutions

1. The Treasurer will maintain a list of financial institutions authorized to provide investment services to the City. Institutions eligible to transact investment business with the City include:

a. Primary government dealers as designated by the Federal

Reserve Bank, b. Nationally or state-chartered banks, c. The Federal Reserve Bank, and

d. Direct issuers of securities eligible for purchase by the City.

2. Selection of financial institutions and broker/dealers authorized to

engage in transactions with the City shall be at the sole discretion of the City.

3. The Treasurer and the Investment Advisory Commission (IAC) shall

obtain information from qualified financial institutions to determine if the institution makes markets in securities appropriate for the City's needs, can assign qualified sales representatives and can provide written agreements to abide by the conditions set forth in the City of Mission Viejo Investment Policy. Investment accounts with all financial institutions shall be standard non-discretionary accounts and may not be margin accounts.

4. All financial institutions which desire to become qualified bidders for

investment transactions must supply the Treasurer with the following:

a. Audited financial statements for the institution's three most

recent fiscal years. b. At least three references from California local agencies

whose portfolio size, investment objectives and risk preferences are similar to the City's.

c. A statement certifying that the institution has reviewed the

California Government Code Section 53600 et seq. and the City's Investment Policy and that all securities offered to the City shall comply fully and in every instance with all provisions of the California Government Code.

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5. The signatures of two individuals shall be required for the opening

and closing of any bank account and broker account (the Treasurer or City Manager, and the Mayor or Mayor Pro Tem). The Accounting Manager, who is independent of the investment function, shall keep a record of all opened and closed accounts. On an annual basis, the Accounting Manager shall provide this list of accounts to the City’s independent auditor.

6. The authorized list of broker/dealers will be established for a two-

year period. 7. Public deposits shall be made only in qualified public depositories

within the State of California as established by State law. Deposits shall be insured by the Federal Deposit Insurance Corporation, or, to the extent the amount exceeds the insured maximum, shall be collateralized with securities in accordance with State law.

8. Whenever possible, investment staff shall obtain a minimum of two

quotations, preferably three, prior to entering into an investment transaction. Staff will buy or sell at the price that is most advantageous to the city and meets investment requirements.

D. Delivery vs. payment

All investment transactions of the City shall be conducted using standard delivery-vs.-payment procedures.

E. Safekeeping of securities

To protect against potential losses by collapse of individual securities dealers, and to enhance access to securities, interest payments and maturity proceeds, all securities owned by the City shall be held in safekeeping by a third party bank trust department, acting as agent for the City under the terms of a custody agreement executed by the bank and by the City. The only exception to the foregoing shall be securities purchases made with: (1) local government investment pools; and (2) money market mutual funds, since these securities are not deliverable. From time to time, the City may invest funds received late in the day in one to thirty day repurchase agreements with its depository bank. Securities used as collateral for such repurchase agreements may be held in safekeeping by the City's depository bank. Investments are to be held in the City’s name in conjunction with industry standards, including collateral held for repurchase agreements by depository banks.

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III. Permitted investments and portfolio risk management

A. Investments authorized for purchase by City staff

All investments shall be made in accordance with Sections 53600 et seq. of the Government Code of California and as described within this Investment Policy. Limits identified are to be based on the “market value” of the investment. Permitted investments under this policy shall include:

1. Securities issued by the US Treasury, provided that there shall be

no maximum allowable investment in US Treasury securities.

2. Federal Deposit Insurance Corporation (FDIC) Guaranteed Obligations. Senior debt (commercial paper and corporate notes) guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (TLGP).

a. A maximum of the greater $7 million or 35% of the portfolio

shall be invested in this category.

b. No more than $4 million or 20% of the portfolio shall be invested in securities issued by any single corporation.

3. Securities issued and backed as to payment by one of the following

Government Sponsored Entities (GSE’s): the Federal Farm Credit Bank, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association, provided that

a. A maximum of the greater of $14 million or 70% of the

portfolio be invested in agency securities, and b. No more than the greater of $7 million or 35% of the portfolio

be invested in securities issued by any single agency. c. Investment in mortgage-backed bonds and collateralized

mortgage obligations (CMOs) is prohibited, even if such bonds are issued by agencies of the US Government.

4. Banker's acceptances provided that

a. They are issued by domestic institutions the short-term obligations of which are rated a minimum of P1 by Moody's Investor Services (Moody's) or A1 by Standard & Poor (S&P).

b. The acceptance is eligible for purchase by the Federal

Reserve System.

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c. The maturity does not exceed 180 days. d. No more than the greater of $4 million or 20% of the total

portfolio may be invested in banker's acceptances, and

5. Federally insured time deposits (Non-negotiable certificates of deposit) interest bearing deposits (such as money market accounts) and passbook savings accounts in state or national banks, or state or federal savings associations with a maximum maturity of 180 days. Funds may be placed directly with a commercial bank, savings bank or savings and loan association that uses a private sector entity to assist in the placement of insured certificates of deposit as authorized by the California Government Code Section 53601.8 effective through January 1, 2012. a. The Certificate of Deposit Account Registry Service

(CDARS) offered by Promontory Inter-Financial Network, LLC, is such a placement service. No more than the greater of $2 million or 10% of the total portfolio may be invested in any Section 53601.8 authorized program.

6. Time deposits (Non-negotiable certificates of deposit), interest

bearing deposits (such as money market accounts) and passbook savings accounts in California banks in excess of insured amounts which are fully collateralized with securities in accordance with California law, provided that:

a. No more than the greater of $4 million or 20% of the portfolio

shall be invested in a combination of federally insured and collateralized time deposits, and

b. The federally insured and/or collateralized time deposits are

issued by institutions which have long term debt rated “A” or higher by S&P or “A2” or higher by Moody's; and/or have short term debt rated at least A1 by S&P or P1 by Moody's.

c. The maturity of such deposits does not exceed 180 days.

7. Negotiable certificates of deposit (NCDs) provided that

a. They are issued by institutions which have long term debt rated “A” or higher by S&P or “A2” or higher by Moody's; and/or have short term debt rated at least A1 by S&P or P1 by Moody's.

b. The maturity does not exceed 180 days.

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c. No more than the greater of $4 million or 20% of the total

portfolio may be invested in NCDs.

8. Repurchase agreements collateralized with securities authorized under Sections III (A1-2) of this policy maintained at a level of at least 102% of the market value of the repurchase agreements, provided that:

a. The maximum maturity of repurchase agreements shall be

30 days. b. No more than the greater of $2 million or 10% of the portfolio

shall be invested in repurchase agreements, and c. Securities used as collateral for repurchase agreements

shall be specifically identified and shall be delivered to the City's custodian bank, except that securities used as collateral for the one to thirty day repurchase agreements with the City's depository bank may be held in safekeeping by the depository bank's trust department in the name of the City, as evidenced by appropriate receipts of trust. (See Section II E).

d. The repurchase agreements are the subject of a master

repurchase agreement between the City and the provider of the repurchase agreement. The master repurchase agreement shall be substantially in the form developed by the Public Securities Association.

e. Repurchase agreements shall only be executed with large,

nationally recognized banks and brokerage houses. 9. Commercial paper provided that

a. The maturity does not exceed 180 days from the date of purchase.

b. The issuer is a corporation organized and operating in the

United States with assets in excess of $500 million. c. The paper is rated a minimum of P1 by Moody's and A1 by

S&P, and has a minimum long-term credit rating of A by both rating agencies.

d. No more than 15% of the portfolio is invested in commercial

paper.

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10. State of California Local Agency Investment Fund (LAIF), provided that:

a. No more than the greater of $4 million or 20% of the total

portfolio shall be invested in LAIF.

b. LAIF investments in instruments prohibited by or not specified in the City's policy do not exclude it from the City's list of allowable investments, provided that the fund's reports allow the Treasurer to adequately judge the risk inherent in LAIF's portfolio, and provided that disclosure of such investments, if any, is made annually to the City Council.

11. Local agency sponsored investment pools specifically approved for

investment by the City Council upon recommendation of the IAC, provided that:

a. All pool investments must be permitted under California

Government Code Section 53601 et seq. b. The pool shall have achieved a rating of Aaa by Moody's or

AAA by S&P, or shall be insured by a municipal insurance corporation.

c. The pool marks its portfolio to market at least weekly. d. The pool provides comprehensive, timely monthly reports

which include detailed transaction listings; reports realized and unrealized gains and losses, provides accurate market values for each security, provides a quality rating for all investment securities, takes delivery of all securities prior to payment, provides for third party safekeeping of all investments, and for whom an audit is conducted annually by an independent auditor other than the local agency's internal auditors.

e. No more than the greater of $3 million or 15% of the total

portfolio shall be invested in such pools.

f. The City's investment in any pool shall comprise no more than 5% of the market value of the total assets of the investment pool, measured at month end.

g. Pool investments in instruments prohibited by or not

specified in the City's policy do not exclude it from the City's list of allowable investments, provided that the Pool's reports allow the Treasurer to adequately judge the risk inherent in the Pool's portfolio, and provided that disclosure of such

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investments is made prior to any investment in such Pool, and annually to the City Council.

12. Mutual funds invested in US government securities permitted under

this policy and under the California Government Code Section 53601 with final stated maturities of one year or less (“Government money market funds”). In order to be eligible for investment under this section, one investment objective of such a fund must be to maintain a price of $1.00 per share. The following criteria must also be met: a. The fund shall have a minimum of $500 million in total

portfolio value. d. The fund shall be registered with the Securities and

Exchange Commission, and shall have achieved a rating of Aaa by Moody's and AAA by S&P.

e. No more than 10% of the portfolio may be invested in any one fund.

d. The fund shall have retained an adviser which is

registered with the SEC, or which is exempt from such registration.

e. Investment in such funds shall not exceed 20% of the City's

total portfolio. f. Investments in instruments prohibited by or not specified in

the City's policy do not exclude it from the City's list of allowable investments, provided that the fund's reports allow the Treasurer to adequately judge the risk inherent in the fund’s portfolio, and provided that disclosure of such investments is made prior to any investment in such fund and annually to the City Council.

13. Bonds or notes of the Community Development Agency of the City

of Mission Viejo or the Mission Viejo Community Development Financing Authority

a. Investment in these securities shall not exceed $2 million.

b. The maximum stated final maturity of these securities shall

be three years.

B. Prohibited investment vehicles and practices

1. State law notwithstanding, any investments not specifically

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described herein including, but not limited to, medium term corporate notes, mutual funds, other than government money market funds as described in Section III A (11), unregulated and/or unrated investment pools or trusts, except as specified above, futures and options, strips, variable rate securities and securities with embedded options.

2. Trading securities for the sole purpose of speculating on the future

direction of interest rates is prohibited. 3. Purchasing or selling securities on margin is prohibited. 4. The use of reverse repurchase agreements, securities lending or

any other form of borrowing or leverage is prohibited.

5. Borrowing for investment purposes is prohibited.

C. Investments and practices permitted for use by external investment managers.

1. Professional investment managers that may be retained by the City

may request more latitude in their choice of investment vehicles and practices than is allowed under this policy. As an integral part of their service to the City, such advisers shall recommend additional investment vehicles and practices, with limitations and restrictions on their use. The City Council must approve the investment vehicles and practices, upon the recommendation of the IAC, and adopt an appropriate amendment to this policy prior to their implementation.

D. Mitigating credit risk in the portfolio

Credit risk is the risk that a security or a portfolio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay its debt. The City shall mitigate credit risk by adopting the following strategies:

1. The diversification requirements included in Section III (A) are

designed to mitigate credit risk in the portfolio. 2. No more than the greater of $1 million or 5% of the total portfolio

may be invested in securities of any single issuer, except that limits on investment securities issued by government agencies shall be governed by Section III A 2 b. Limits are to be based on the “market value” of the investment.

3. The City may elect to sell a security prior to its maturity and record

a capital gain or loss in order to improve the quality, liquidity or yield of the portfolio in response to market conditions or the City's risk

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preferences. 4. If securities owned by the City are downgraded by either Moody's

or S&P to a level below the quality required by this Investment Policy, it shall be the City's policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio.

a. If a security is downgraded two grades below the level

required by the City, the security shall be sold immediately.

b. If a security is downgraded one grade below the level required by this policy, the Treasurer will use discretion in determining whether to sell or hold the security based on its current maturity, the loss in value, the economic outlook for the issuer, and other relevant factors.

c. If a decision is made to retain a downgraded security in the

portfolio, its presence in the portfolio will be monitored and reported monthly to the City Manager and City Council.

E. Mitigating market risk in the portfolio

Market risk is the risk that the portfolio will decline in value (or will not optimize its value) due to changes in the general level of interest rates. The City recognizes that, over time, longer-term portfolios achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The City shall mitigate market risk by providing adequate liquidity for short-term cash needs, and by making some longer-term investments only with funds which are not needed for cash flow purposes. The City further recognizes that certain types of securities, including variable rate securities, securities with principal pay downs prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to market risk:

1. The maximum stated final maturity of individual securities in the

portfolio shall be five years. 2. The City shall maintain a minimum of one month of projected

capital and operating expenditures (excluding expenditures financed with bond proceeds) in investments maturing within thirty days.

3. To the extent necessary, investment maturities shall match the City's projected cash flow requirements over the following twelve months.

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4. The City shall invest only in fixed rate, fixed coupon securities. 5. The City shall invest only in securities which do not include

embedded options (i.e., calls or puts, swaps, etc.). 6. The City shall not invest in securities which may return all or part of

their principal prior to their stated final maturity date. 7. The City may elect to sell a security prior to its maturity and record

a capital gain or loss in order to change the portfolio's exposure to market risk.

8. In order to minimize the need to sell securities prior to their stated

maturity, and to eliminate reliance on interest rate forecasting, the City shall structure its investment portfolio as a maturity ladder. Funds not required for purposes of meeting cash flow needs (see Section III E 2-3) shall be invested in permitted securities with the objective of maintaining the average duration of the portfolio in line with the duration of the Benchmark Index.

IV. Specific objectives and expectations

A. Overall objective. The investment portfolio shall be designed with the overall objective of obtaining a total rate of return throughout economic cycles, commensurate with investment risk constraints and cash flow needs.

B. Specific objective. The investment performance objective for the portfolio

shall be to earn a total rate of return over a market cycle which is approximately equal to the return on the Benchmark Index. The Benchmark Index, an index with characteristics similar to those of the portfolio in terms of types of securities and maturities, will be set at the beginning of each year. In addition, an index comprised of U. S. Treasury securities with a maturity distribution similar to that of the Benchmark Index will be presented for comparison purposes.

V. Reporting, disclosure and program evaluation

A. Monthly reports

Monthly investment reports shall be submitted by the Treasurer to the City Manager and the City Council within 30 days of the last day of the month, to be agendized for official action at the second regular Council meeting thereafter. These reports shall disclose information about the risk characteristics of the City's portfolio and shall include: 1. Treasurer’s Monthly Report cover page:

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a) cash receipts, disbursements and balances in total, b) a summary of the portfolio at month-end,

c) information regarding interest earnings,

d) a statement of compliance with investment policy, including a

schedule of any transactions or holdings which do not comply with this policy or with the California Government Code, including a justification for their presence in the portfolio and a timetable for resolution.

e) a statement of the City’s ability to meet its expenditure

requirements for the next six months.

f) cost and market value of the portfolio

g) sector allocation

2. One-page summary report of portfolio characteristics including modified duration of the portfolio and the benchmark index, average maturity, maturity distribution in years, average yield and time weighted total rate of return.

3. Graphical comparison of the portfolio composition and maturity

distribution information for the current month compared to the prior month.

4. Reconciliation of cash disbursements.

5. Listing of individual investment transactions during the month as

required by Government Code section 53607.

6. An asset listing showing par value, cost and accurate and complete market value of each security, type of investment, issuer, maturity date and interest rate.

B. Annual reports

1. The investment policy shall be reviewed and adopted at least annually within the first 90 days of each fiscal year to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends.

2. A comprehensive annual report for the prior fiscal year shall be

presented in conjunction with the investment policy review. This

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report shall include comparisons of the City's return to the Benchmark Index return, shall suggest policies and improvements that might enhance the investment program, and shall include an investment plan for the coming year.

C. Internal controls

The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. Internal controls shall be in writing and shall address the following points: control of collusion, separation of transaction authority from accounting and record keeping, safekeeping of assets and written confirmation of telephone transactions for investments and wire transfers.

D. Annual audit

The Treasurer shall establish an annual process of independent review by an external auditor to assure compliance with internal controls.

E. Special audits

The City Council may at any time order an audit of the investment portfolio and/or the City Treasurer's investment practices.

F. Independent investment adviser

In its discretion, the City Council may retain the services of an independent investment adviser to review the investment program from time to time. The adviser will review compliance with policies and procedures, independently calculate the market value of the City's holdings, report on overall portfolio risk exposure and investment results, and make recommendations, if needed, regarding investment strategy, risk, or any aspect of the investment program.

G. Investment Advisory Commission

Responsibilities It shall be the responsibility of the IAC to:

1. Oversee the implementation of the City's investment program, assuring its consistency with the investment policy and recommend changes to the investment policy for consideration by the City Council.

2. Receive and review the monthly investment reports described

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in Section V (A) at their quarterly meetings.

3. Approve the lists of authorized banks, dealers, brokers and direct issuers used by the City, as well as any additions to or deletions from such lists.

4. Review the City's portfolio activity and performance for

suitability and compliance with this policy. 5. Make recommendations to the City Treasurer regarding portfolio

activity, performance and compliance with this policy.

6. Make recommendations to the City Council regarding the hiring of external managers and permitted investments and investment strategies for such external managers.

7. Make recommendations to the City Council regarding the use of specific local agency investment pools.

8. Inform the City Council of unaddressed concerns with the

management of the City's investment portfolio.

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GLOSSARY OF INVESTMENT TERMS

Banker's acceptance. A high quality, short-term money market instrument used to finance international trade. There has never been an instance of a failure to pay a banker's acceptance in full at its maturity date.

Benchmark. A segment of the securities market with characteristics similar to the subject portfolio. It is used to compare portfolio performance to the performance of the appropriate segment of the market.

Collateral. Securities, evidence of deposits or other property that a borrower pledges

to secure repayment of a loan. It also refers to securities pledged by a bank to secure deposits of public monies. In California, repurchase agreements, reverse repurchase agreements, negotiable CDs purchased at a California institution, and public deposits must be collateralized.

Commercial paper. Short-term, negotiable unsecured promissory notes of

corporations. Federal agency securities. The federal agency securities market is divided into two

sectors: the federally related institution securities market and the federally sponsored agency securities market. Federally related institutions are arms of the federal government and their securities are backed by the full faith and credit of the US Government.

Federally sponsored agencies, referred to as government-sponsored entities

(GSE’s), are privately owned, publicly chartered entities and they issue securities directly in the marketplace. Not all GSE securities are backed by the full faith and credit of the US government including the Federal Farm Credit Bank, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.

Local agency investment fund (LAIF). A pooled investment vehicle for local agencies

in California sponsored by the State of California and administered by the State Treasurer.

Local agency sponsored investment pool. A pooled investment vehicle sponsored

by a local agency or a group of local agencies for use by other local agencies. Market cycle. A market cycle is defined as a period of time which includes a minimum

of two consecutive quarters of falling interest rates followed by a minimum of two consecutive quarters of rising interest rates.

Modified duration. A measure of exposure to market risk of a security or a portfolio. It

is the percent change in the price of a security (portfolio) for a 100 basis point change in the security's (portfolio's) yield.

Negotiable certificate of deposit. A large denomination certificate of deposit which

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can be sold in the open market prior to maturity. Repurchase agreement. An investment transaction wherein an investors agrees to

purchase securities at an agreed upon price, and simultaneously agrees to sell the securities back to the contra party on an agreed upon future date at an agreed upon price.

Temporary Liquidity Guarantee Program (TLGP). A program initiated by the FDIC to

temporarily guarantee certain debt issued in the U.S. The program was initiated in October 2008 in response to the credit crisis, caused initially by the sub-prime mortgage meltdown, but which made it difficult for banks and other financial institutions to issue debt. Under the TLGP, the FDIC guarantees payment of principal and interest on qualifying newly-issued debt of approved financial institutions. Obligations of the FDIC are backed by the full faith and credit of the United States. This debt is considered highly safe and liquid due to the FDIC guarantee and large liquid secondary market. The current program (subject to change) is subject to an issuance window which expires 10/31/09, and a final maturity limit of 12/31/12.

Time certificate of deposit. A non-negotiable certificate of deposit which cannot be

sold prior to maturity. Time-weighted total rate of return. A measurement of portfolio return which

eliminates the effect of the timing of contributions to and withdrawals from the fund.

G:\FIN\WP\I A C\inv pol city FINAL 2009 2010.doc

Appendix D Page 1

APPENDIX D

SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS

The following is a brief summary of certain provisions of the Indenture, the Site and Facility Lease and the Lease Agreement prepared for Bonds. The following also includes definitions of certain terms used therein and in this Official Statement. Such summary is not intended to be definitive. Reference is directed to said documents for the complete text thereof. Except as otherwise defined in this summary, the terms previously defined in this Official Statement have the respective meanings previously given. Copies of said documents are available from the City and from the Trustee.

DEFINITIONS

“Authority” means the Mission Viejo Community Development Financing Authority, a joint

exercise of powers authority organized and existing under and by virtue of the laws of the State, and any successor thereto.

“Authorized Representative” means: (a) with respect to the Authority, its Chair, Executive Director

or Treasurer or any other person designated as an Authorized Representative of the Authority by a Written Certificate of the Authority signed by its Executive Director, and filed with the City, and the Trustee; and (b) with respect to the City, its Mayor, City Manager, Assistant City Manager/Director of Administrative Services, or any other person designated as an Authorized Representative of the City by a Written Certificate of the City signed by its City Manager and filed with the Authority and the Trustee.

“Bond Counsel” means (a) Quint & Thimmig LLP, or (b) any other attorney or firm of attorneys

appointed by or acceptable to the Authority of nationally-recognized experience in the issuance of obligations the interest on which is excludable from gross income for federal income tax purposes under the Code.

“Bond Year” means each twelve-month period extending from May 2 in one calendar year to May

1 of the succeeding calendar year, both dates inclusive; provided that the first Bond Year with respect to the Bonds shall commence on the Closing Date and end on May 1, 2010.

“Bonds” means the Mission Viejo Community Development Financing Authority Lease Revenue

Refunding Bonds, 2009 Series A, authorized by and at any time Outstanding pursuant to the Indenture. “Business Day” means a day (other than a Saturday or a Sunday) on which banks are not required

or authorized to remain closed in the city in which the Office of the Trustee is located. “City” means the City of Mission Viejo, a general law city and municipal corporation organized

and existing under and by virtue of its charter and the laws of the State. “Closing Date” means the date of delivery of the Bonds to the Original Purchaser. “Code” means the Internal Revenue Code of 1986 as in effect on the Closing Date or (except as

otherwise referenced in the Indenture) as it may be amended to apply to obligations issued on the Closing Date, together with applicable proposed, temporary and final regulations promulgated, and applicable official public guidance published, under such Code.

“Continuing Disclosure Certificate” means that certain Continuing Disclosure Certificate executed

by the City and the Authority and dated the date of execution and delivery of the Bonds, as originally executed and as it may be amended from time to time in accordance with the terms thereof.

“Costs of Issuance” means all expenses incurred in connection with the authorization, issuance,

sale and delivery of the Bonds, including but not limited to all compensation, fees and expenses (including but not limited to fees and expenses for legal counsel) of the Authority or the City, initial fees and expenses of the Trustee (including but not limited to fees and expenses for legal counsel), compensation to any financial consultants or underwriters, legal fees and expenses, filing and recording

Appendix D Page 2

costs, rating agency fees, costs of preparation and reproduction of documents, out-of-pocket expenses of the Authority or the City, Authority and City staff costs and costs of printing.

“Costs of Issuance Fund” means the fund by that name established and held by the Trustee

pursuant to the Indenture. “Debt Service” means, during any period of computation, the amount obtained for such period by

totaling the following amounts: (a) the principal amount of all Outstanding Bonds coming due and payable by their terms in such period; and (b) the interest which would be due during such period on the aggregate principal amount of Bonds which would be Outstanding in such period if the Bonds are retired as scheduled, but deducting and excluding from such aggregate amount the amount of Bonds no longer Outstanding.

“Defeasance Obligations” means (a) cash (insured at all times by the Federal Deposit Insurance

Corporation); (b) obligations of, or obligations guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States, including: (i) United States treasury obligations; (ii) all direct or fully guaranteed obligations; (iii) certificates of beneficial ownership of the Farmers Home Administration; (iv) participation certificates of the General Services Administration; (v) guaranteed Title XI financings of the U.S. Maritime Administration; (vi) Government National Mortgage Association obligations; and (vii) State and Local Government Series.

“Event of Default,” with respect to the Indenture, means any of the events specified in the

Indenture and, with respect to the Lease Agreement, means any of the events specified in the Lease Agreement.

“Facility” means the improvements more particularly described in Exhibit B to the Lease

Agreement. “Federal Securities” means: (a) any direct general obligations of the United States of America

(including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America), the payment of principal of and interest on which are unconditionally and fully guaranteed by the United States of America; (b) obligations of any agency or department of the United States of America which represent the full faith and credit of the United States of America or the timely payment of the principal of and interest on which are secured or guaranteed by the full faith and credit of the United States of America; and (c) any obligations issued by the State of California or any political subdivision thereof the payment of and interest and premium (if any) on which are fully secured by Federal Securities described in the preceding clauses (a) or (b), as verified by an independent certified public accountant, and rated “AAA” and “Aaa” by S&P and Moody’s, respectively.

“Fiscal Year” means any twelve-month period extending from October 1 in one calendar year to

September 30 of the succeeding calendar year, both dates inclusive, or any other twelve-month period selected and designated by the Authority or the City, as applicable, as its official fiscal year period.

“Indenture” means the Indenture of Trust, dated as of December 1, 2009, by and between the

Authority and the Trustee, as originally executed or as it may from time to time be supplemented, modified or amended by any Supplemental Indenture pursuant to the provisions thereof.

“Independent Accountant” means any certified public accountant or firm of certified public

accountants appointed and paid by the Authority or the City, and who, or each of whom (a) is in fact independent and not under domination of the Authority or the City; (b) does not have any substantial interest, direct or indirect, in the Authority or the City; and (c) is not connected with the Authority or the City as an officer or employee of the Authority or the City but who may be regularly retained to make annual or other audits of the books of or reports to the Authority or the City.

“Information Services” means Financial Information, Inc.’s “Daily Called Bond Service,” 30

Montgomery Street, 10th Floor, Jersey City, NJ 07302, Attention: Editor; Mergent/FIS, Inc., 5250 77 Center Drive, Suite 150 Charlotte, NC 28217, Attention: Called Bond Dept.; Kenny S&P, 55 Water Street, New York, NY 10041, Attention: Notification Department; and, in accordance with then current guidelines of

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the Securities and Exchange Commission; or to such other addresses and/or such other national information services providing information with respect to the redemption of bonds as the Authority may designate in a Written Certificate of the Authority delivered to the Trustee.

“Insurance and Condemnation Fund” means the fund by that name established and held by the

Trustee pursuant to the Indenture. “Interest Account” means the account by that name established in the Revenue Fund pursuant to

the Indenture. “Interest Payment Date” means each May 1 and November 1, commencing May 1, 2010. “Lease Agreement” means that certain Lease Agreement, dated as of December 1, 2009, by and

between the Authority and the City, as originally executed and as it may from time to time be supplemented, modified or amended in accordance with the terms thereof and of the Indenture.

“Lease Payment Date” means, with respect to any Interest Payment Date, commencing with the

May 1, 2010, Interest Payment Date, the fifteenth (15th) calendar day of the month preceding such Interest Payment Date.

“Lease Payments” means the aggregate amount of all the payments required to be paid by the City

pursuant to the Lease Agreement. “Moody’s” means Moody’s Investors Service, New York, New York, or its successors. “Net Proceeds” means amounts derived by the City from any policy of casualty insurance with

respect to any portion of the Property, or the proceeds of any taking of the Property or any portion thereof in eminent domain proceedings (including sale under threat of such proceedings), to the extent remaining after payment therefrom of all expenses incurred in the collection and administration thereof.

“1996 Certificates” means the $3,265,000 City of Mission Viejo Certificates of Participation (1996

Mission Viejo Public Library Financing Property), evidencing the direct undivided fractional interests in lease payments for certain property pursuant to a lease agreement with the Mission Viejo Public Improvement Corporation, of which $2,465,000 remains outstanding on the Closing Date.

“1996 Escrow Agreement” means that certain escrow deposit and trust agreement, dated as of the

Closing Date, by and among the Authority, the City and the 1996 Escrow Bank, relating to the refunding of the 1996 Certificates.

“1996 Escrow Bank” means The Bank of New York Mellon Trust Company, N.A., as escrow bank

under the 2001 Escrow Agreement. “1996 Escrow Fund” means the fund by that name held by the 1996 Escrow Bank under the 2001

Escrow Agreement. “Office” means, with respect to the Trustee, the corporate trust office of the Trustee located in Los

Angeles, California, except that with respect to presentation of Bonds for payment or for registration of transfer and exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate agency business shall be conducted.

“Original Purchaser” means the original purchaser of the Bonds upon their delivery by the Trustee

on the Closing Date. “Outstanding,” when used as of any particular time with reference to Bonds, means (subject to the

provisions of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except: (a) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (b) Bonds with respect to which all liability of the Authority shall have been discharged in accordance with the Indenture, including Bonds (or portions thereof) described in the

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Indenture; and (c) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.

“Owner,” whenever used in the Indenture with respect to a Bond, means the person in whose

name the ownership of such Bond is registered on the Registration Books. “Participating Underwriter” shall have the meaning ascribed thereto in the Continuing Disclosure

Certificate. “Permitted Encumbrances” means, as of any particular time: (a) liens for general ad valorem taxes

and assessments, if any, not then delinquent, or which the City may, pursuant to provisions of the Lease Agreement, permit to remain unpaid; (b) the Site and Facility Lease; (c) the Lease Agreement; (d) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law; (e) easements, rights-of-way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which the City certifies in writing will not materially impair the use of the Property; and (f) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease Agreement and to which the Authority and the City agree in writing do not reduce the value of the Property.

“Permitted Investments” means any of the following which at the time of investment are legal

investments under the laws of the State for the moneys proposed to be invested therein and are consistent with the City’s investment policies, but only to the extent that the same are acquired at Fair Market Value (provided the Trustee may rely upon the Request of the Authority directing investment under the Indenture as a determination that such investment is a Permitted Investment):

(a) direct obligations of (including obligations issued or held in book entry form on the books of)

the Department of the Treasury of the United States of America. (b) debentures of the Federal Housing Administration to the extent such obligations are

guaranteed by the full faith and credit of the United States of America; (c) obligations of the following agencies which are not guaranteed by the United States of

America: (i) participation certificates or debt obligations of the Federal Home Loan Mortgage Corporation; (ii) consolidated system-wide bonds and notes of the Farm Credit Banks (consisting of Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives); (iii) consolidated debt obligations or letter of credit-backed issues of the Federal Home Loan Banks; (iv) mortgage-backed securities (excluding stripped mortgage securities which are valued greater than par on the portion of unpaid principal) or debt obligations of the Federal National Mortgage Association; or (v) letter of credit-backed issues or debt obligations of the Student Loan Marketing Association; provided, however, that not more than ten percent (10%) of the proceeds of the Bonds may, in the aggregate, be invested in any such obligations at one time;

(d) Federal funds, negotiable certificates of deposit, time deposits and bankers acceptances

(having maturities of not more than 180 days) of banks (including the Trustee and its affiliates) the short-term obligations of which are rated in one of the two highest Rating Categories by Moody’s and S&P;

(e) deposits (including those of the Trustee and its affiliates) which are fully insured by the

Federal Deposit Insurance Corporation (“FDIC”); (f) debt obligations (excluding securities that do not have a fixed par value and/or whose terms

do not promise a fixed dollar amount at maturity or call date) rated in one of the two highest Rating Categories by Moody’s and S&P, without regard to gradations;

(g) commercial paper (having original maturities of not more than 270 days) rated in one of the

two highest Rating Categories by Moody’s and S&P, without regard to gradations; (h) money market funds or money market mutual funds rated “Aam” or higher by S&P and, if

rated by Moody’s, rated “Aa2” or higher, including any mutual fund for which the Trustee or an affiliate

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of the Trustee serves as investment manager, administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or an affiliate of the Trustee receives fees from funds for services rendered, (ii) the Trustee collects fees for services rendered pursuant to the Indenture, which fees are separate from the fees received from such funds, and (iii) services performed for such funds and pursuant to the Indenture may at times duplicate those provided to such funds by the Trustee or an affiliate of the Trustee;

(i) demand deposits, including interest bearing money market accounts, trust funds, trust

accounts, overnight bank deposits, interest-bearing deposits or certificates of deposit, including those placed by a third party pursuant to an agreement between the Trustee and the Authority, including in the case of any such deposit, fund or account of the Trustee or any of its affiliates, rated in the AA long-term ratings category or higher by S&P or Moody’s, without regard to gradations, or which are fully FDIC-insured;

(j) Collateralized investment agreements with qualified financial institutions rated AAA by at

least one national rating service; investments shall be collateralized with treasuries or government agencies at one hundred and ten percent (110%) of funds deposited and subject to the Agencies’ retaining the right to sell the instrument if the financial institution’s rating falls below AA;

(k) the Local Agency Investment Fund of the State, created pursuant to section 16429.1 of the

California Government Code, to the extent the Trustee is authorized to register such investment in its name; and

(l) other forms of investments that satisfy the City’s Statement of Investment Policy.

“Principal Account” means the account by that name established in the Revenue Fund pursuant to

the Indenture. “Property” means, collectively, the Site and the Facility. “Qualified Reserve Fund Credit Instrument” means a surety bond issued to the Trustee by an

insurance company rated in the highest category by Moody’s and S&P and, if rated by A.M. Best & Company, rated in the highest rating category by A.M. Best & Company.

“Rating Category” means, with respect to any Permitted Investment, one of the generic categories

of rating by Moody’s and S&P applicable to such Permitted Investment, without regard to any refinement or graduation of such rating category by a plus or minus sign or a numeral.

“Record Date” means, with respect to any Interest Payment Date, the fifteenth (15th) calendar day

of the month preceding such Interest Payment Date, whether or not such day is a Business Day. “Redemption Fund” means the fund by that name established pursuant to the Indenture. “Registration Books” means the records maintained by the Trustee pursuant to the Indenture for

the registration and transfer of ownership of the Bonds. “Regulations” means the regulations of the United States Department of Treasury issued under

the Code. “Reserve Account” means the account by that name in the Revenue Fund established pursuant to

the Indenture. “Reserve Requirement” means a fixed amount equal to the least of (a) maximum annual debt

service on the Bonds, (b) 125% of average annual debt service on the Bonds, and (c) 10% of the par amount of the Bonds.

“Revenue Fund” means the fund by that name established and held by the Trustee pursuant to the

Indenture.

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“Revenues” means (a) all Lease Payments, prepayments, insurance proceeds, condemnation proceeds, and (b) subject to the provisions of the Indenture, all interest, profits or other income derived from the investment of amounts in any fund or account established pursuant to the Indenture.

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies,

Inc., New York, New York, or its successors. “Securities Depositories” means The Depository Trust Company, 55 Water Street, 50th Floor, New

York, NY 10041-0099, Attention: Call Notification Department, Fax (212) 855-7232; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the Authority may designate in a Written Certificate of the Authority delivered to the Trustee.

“Site” means that certain real property more particularly described in Exhibit A to the Site and

Facility Lease and in Exhibit A to the Lease Agreement. “Site and Facility Lease” means the Site and Facility Lease, dated as of December 1, 2009, by and

between the City, as lessor, and the Authority, as lessee, together with any duly authorized and executed amendments thereto.

“State” means the State of California. “Supplemental Indenture” means any indenture hereafter duly authorized and entered into

between the Authority and the Trustee, supplementing, modifying or amending the Indenture; but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture.

“Tax Certificate” means the certificate of the Authority dated the Closing Date, with respect to tax

matters. “Trustee” means The Bank of New York Mellon Trust Company, N.A., a national banking

association organized and existing under the laws of the United States of America, or its successor, as Trustee under and as provided in the Indenture.

“2001 Bonds” means the $17,450,000 Mission Viejo Community Development Financing

Authority Lease Revenue Bonds, 2001 Series A (City Hall Construction and Library Expansion Property), of which $14,955,000 remains outstanding on the Closing Date.

“2001 Escrow Agreement” means that certain escrow deposit and trust agreement, dated as of the

Closing Date, by and among the Authority, the City and the 2001 Escrow Bank, relating to the refunding of the 2001 Bonds.

“2001 Escrow Bank” means Union Bank, N.A., as escrow bank under the 2001 Escrow Agreement. “2001 Escrow Fund” means the fund by that name held by the 2001 Escrow Bank under the 2001

Escrow Agreement. “Written Certificate,” “Written Request” and “Written Requisition” of the Authority or the City

mean, respectively, a written certificate, request or requisition signed in the name of the Authority or the City by its Authorized Representative. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument.

INDENTURE OF TRUST

Establishment and Application of Costs of Issuance Fund

The moneys in the Costs of Issuance Fund shall be used and withdrawn by the Trustee to pay the Costs of Issuance upon submission of Written Requisitions of the Authority stating the person to whom

Appendix D Page 7

payment is to be made, the amount to be paid, the purpose for which the obligation was incurred and that such payment is a proper charge against said fund. Each such Written Requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. On the date six months after the Closing Date, or upon the earlier Written Request of the Authority, all amounts remaining in the Costs of Issuance Fund shall be transferred by the Trustee to the Revenue Fund to be used for the payment of interest on the Bonds.

Pledge and Assignment; Revenue Fund

Subject only to the provisions of the Indenture permitting the application thereof for the purposes

and on the terms and conditions set forth therein, all of the Revenues and any other amounts (including proceeds of the sale of the Bonds) held in any fund or account established pursuant to the Indenture are pledged to secure the payment of the principal of, premium, if any, and interest on the Bonds in accordance with their terms and the provisions of the Indenture. Said pledge shall constitute a first lien on and security interest in such assets and shall attach, be perfected and be valid and binding from and after the Closing Date, without any physical delivery thereof or further act.

The Authority transfers in trust, grants a security interest in and assigns to the Trustee, for the

benefit of the Owners from time to time of the Bonds, all of the Revenues and all of the rights of the Authority in the Lease Agreement (except for certain rights to indemnification set forth therein), and in the Site and Facility Lease, (except for certain rights to indemnification set forth therein). The Trustee shall be entitled to and shall collect and receive all of the Revenues, and any Revenues collected or received by the Authority shall be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and shall forthwith be paid by the Authority to the Trustee. The Trustee also shall be entitled to and shall, subject to the provisions of the Indenture, take all steps, actions and proceedings which the Trustee determines to be reasonably necessary in its judgment to enforce, either jointly with the Authority or separately, all of the rights of the Authority, all of the obligations of the City under the Lease Agreement.

The assignment of the Lease Agreement and the Site and Facility Lease to the Trustee is solely in

its capacity as Trustee under the Indenture and the duties, powers and liabilities of the Trustee in acting thereunder shall be subject to the provisions of the Indenture. The Trustee shall not be responsible for any representations, warranties, covenants or obligations of the Authority.

The Trustee agrees to provide written notice to the City at least five Business Days prior to each

Lease Payment Date of the amount, if any, on deposit in the Revenue Fund which shall serve as a credit against, and shall relieve the City of making, the Lease Payments due from the City on such Lease Payment Date. All Revenues shall be promptly deposited by the Trustee upon receipt thereof in a special fund designated as the “Revenue Fund” which the Trustee shall establish, maintain and hold in trust; except that all moneys received by the Trustee and required under the Indenture or under the Lease Agreement to be deposited in the Redemption Fund or the Insurance and Condemnation Fund shall be promptly deposited in such Funds. Within the Revenue Fund there shall be established an Interest Account, a Principal Account and a Reserve Account. All Revenues deposited with the Trustee shall be held, disbursed, allocated and applied by the Trustee only as provided in the Indenture.

Allocation of Revenues

Not later than the Business Day preceding each Interest Payment Date, the Trustee shall transfer from the Revenue Fund and deposit into the following respective accounts (each of which the Trustee shall establish and maintain within the Revenue Fund), the following amounts in the following order of priority, the requirements of each such account (including the making up of any deficiencies in any such account resulting from lack of Revenues sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account subsequent in priority:

(a) The Trustee shall deposit in the Interest Account an amount required to cause the aggregate

amount on deposit in the Interest Account to be at least equal to the amount of interest becoming due and payable on such Interest Payment Date on all Bonds then Outstanding.

Appendix D Page 8

(b) The Trustee shall deposit in the Principal Account an amount, if any, required to cause the aggregate amount on deposit in the Principal Account to equal the principal amount of the Bonds coming due at maturity or upon sinking fund redemption and payable on such Interest Payment Date.

(c) The Trustee shall deposit in the Reserve Account an amount, if any, required to cause the

amount on deposit in the Reserve Account to be equal to the Reserve Requirement. (d) If the then applicable Interest Payment Date is November 1, all remaining moneys shall be

held by the Trustee in the Revenue Fund and applied for the next succeeding May 1 Interest Payment Date deposits. If the then applicable Interest Payment Date is May 1, all remaining moneys shall be transferred to the City for deposit to the General Fund of the City.

Application of Interest Account

All amounts in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity pursuant to the Indenture).

Application of Principal Account

All amounts in the Principal Account shall be used and withdrawn by the Trustee solely to pay the principal amount of the Bonds at their respective maturity dates.

Application of Reserve Account

Amounts in the Reserve Account shall be used and withdrawn by the Trustee solely for the

purpose of making transfers to the Interest Account and the Principal Account in such order of priority, in the event of any deficiency at any time in any of such accounts or for the retirement of all the Bonds then Outstanding, except that so long as the Authority is not in default under the Indenture, any amount in the Reserve Account in excess of the Reserve Requirement (as determined by the Trustee based upon a valuation of investments held in such account) shall be withdrawn from the Reserve Account semiannually on or before the Business Day preceding each May 1 and November 1 by the Trustee and deposited in the Interest Account. All amounts in the Reserve Account on the Business Day preceding the final Interest Payment Date shall be withdrawn from the Reserve Account and shall be transferred either (i) to the Interest Account and the Principal Account, in such order, to the extent required to make the deposits then required to be made pursuant to the Indenture or, (ii) if the Authority shall have caused to be transferred to the Trustee an amount sufficient to make the deposits required by the Indenture, then, at the Written Request of the Authority, to the Authority for deposit by the Authority into the Revenue Fund. The Trustee may conclusively presume that there has been no change in the Reserve Requirement unless notified in writing by the Authority.

At any time, moneys on deposit in the Reserve Account may be substituted by the Authority with

a Qualified Reserve Fund Credit Instrument, in an amount equal to the Reserve Requirement, upon presentation to the Trustee of such Qualified Reserve Fund Credit Instrument. Upon such substitution, the Trustee shall transfer amounts on deposit in the Reserve Account to the Revenue Fund up to an amount equal to the maximum limits or principal amount, as applicable, of such letter of credit, surety bond, bond insurance policy or other form of guarantee.

Application of Redemption Fund

The Trustee shall establish and maintain the Redemption Fund, amounts in which shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of and premium on the Bonds to be redeemed pursuant to S the Indenture; provided, however, that at any time prior to the selection of Bonds for redemption, the Trustee may apply such amounts to the purchase of Bonds at public or private sale, in accordance with the Indenture.

Appendix D Page 9

Insurance and Condemnation Fund Establishment of Fund. Upon the receipt of any proceeds of insurance or eminent domain with

respect to any portion of the Property, the Trustee shall establish and maintain an Insurance and Condemnation Fund, to be held and applied as set forth in the Indenture.

Application of Insurance Proceeds. Any Net Proceeds of insurance against accident to or destruction

of the Property collected by the City in the event of any such accident or destruction shall be paid to the Trustee by the City pursuant to the Lease Agreement and deposited by the Trustee promptly upon receipt thereof in the Insurance and Condemnation Fund. If the City fails to determine and notify the Trustee in writing of its determination, within forty-five (45) days following the date of such deposit, to replace, repair, restore, modify or improve the Property, then such Net Proceeds shall be promptly transferred by the Trustee to the Redemption Fund and applied to the redemption of Bonds to the extent that such Net Proceeds permit. All proceeds deposited in the Insurance and Condemnation Fund and not so transferred to the Redemption Fund shall be applied to the prompt replacement, repair, restoration, modification or improvement of the damaged or destroyed portions of the Property by the City, upon receipt of Written Requisitions of the City, as agent for the Authority, which: (i) states with respect to each payment to be made (A) the requisition number, (B) the name and address of the person to whom payment is due, (C) the amount to be paid and (D) that each obligation mentioned therein has been properly incurred, is a proper charge against the Insurance and Condemnation Fund, has not been the basis of any previous withdrawal; and (ii) specifies in reasonable detail the nature of the obligation. Each such Written Requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts. Any balance of the proceeds remaining after such work has been completed as certified by the City to the Trustee shall after payment of amounts due the Trustee be paid to the City.

Application of Eminent Domain Proceeds. If all or any part of the Property shall be taken by eminent

domain proceedings (or sold to a government threatening to exercise the power of eminent domain) the Net Proceeds therefrom shall be deposited with the Trustee in the Insurance and Condemnation Fund pursuant to the Lease Agreement and shall be applied and disbursed by the Trustee as follows:

(a) If the City has not given written notice to the Trustee, within forty-five (45) days

following the date on which such Net Proceeds are deposited with the Trustee, of its determination that such Net Proceeds are needed for the replacement of the Property or such portion thereof, the Trustee shall transfer such Net Proceeds to the Redemption Fund to be applied towards the redemption of the Bonds.

(b) If the City has given written notice to the Trustee, within forty-five (45) days

following the date on which such Net Proceeds are deposited with the Trustee, of its determination that such Net Proceeds are needed for replacement of the Property or such portion thereof, the Trustee shall pay to the City, or to its order, from said proceeds such amounts as the City may expend for such repair or rehabilitation, upon the filing of Written Requisitions of the City as agent for the Authority in the form and containing the provisions set forth above. Each such Written Requisition shall be sufficient evidence to the Trustee of the facts stated therein and the Trustee shall have no duty to confirm the accuracy of such facts.

Investments

All moneys in any of the funds or accounts established with the Trustee pursuant to the Indenture shall be invested by the Trustee solely in Permitted Investments. Such investments shall be directed by the Authority pursuant to a Written Request of the Authority filed with the Trustee at least two (2) Business Days in advance of the making of such investments (which Written Request shall certify that the investments constitute Permitted Investments). In the absence of any such directions from the Authority, the Trustee shall invest any such moneys in Permitted Investments described in clause (h) of the definition thereof. Permitted Investments purchased as an investment of moneys in any fund shall be deemed to be part of such fund or account. The Authority shall take the liquidity needs of the moneys held under the Indenture into account in making investments.

Appendix D Page 10

All interest or gain derived from the investment of amounts in any of the funds or accounts established under the Indenture shall be deposited in the Revenue Fund, except that interest or gain derived from the investment of the amount in the Reserve Account shall be retained therein to the extent required to maintain the Reserve Requirement. To the extent that any investment agreement requires the payment of fees, such fees shall be paid from available moneys in the Revenue Fund after the deposit of moneys required to be deposited therein. For purposes of acquiring any investments under the Indenture, the Trustee may commingle funds held by it under the Indenture. The Trustee or any of its affiliates may act as principal or agent in the acquisition or disposition of any investment and may impose its customary charges therefor. The Trustee or its affiliates may act as sponsor or depository with respect to any Permitted Investment. To the extent that any Permitted Investment purchased by the Trustee are registrable securities such Permitted Investment shall be registered in the name of the Trustee on behalf of the Owners. The Trustee shall incur no liability for losses arising from any investments made pursuant to the Indenture.

Such investments shall be valued by the Trustee not less often than quarterly, at the market value

thereof, exclusive of accrued interest. Deficiencies in the amount on deposit in any fund or account resulting from a decline in market value shall be restored no later than the succeeding valuation date. Investments purchased with funds on deposit in the Reserve Account shall have a term to maturity of not greater than five years. Certain Covenants

Punctual Payment. The Authority shall punctually pay or cause to be paid the principal of and interest and premium (if any) on all the Bonds in strict conformity with the terms of the Bonds and of the Indenture, according to the true intent and meaning thereof, but only out of Revenues and other assets pledged for such payment as provided in the Indenture.

Extension of Payment of Bonds. The Authority shall not directly or indirectly extend or assent to the

extension of the maturity of any of the Bonds or the time of payment of any claims for interest by the purchase of such Bonds or by any other arrangement, and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any default under the Indenture, to the benefits of the Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which shall not have been so extended. Nothing shall be deemed to limit the right of the Authority to issue Bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of the Bonds.

Against Encumbrances. The Authority shall not create, or permit the creation of, any pledge, lien,

charge or other encumbrance upon the Revenues and other assets pledged or assigned under the Indenture while any of the Bonds are Outstanding, except the pledge and assignment created by the Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, and reserves the right to issue other obligations for such purposes. Nothing in shall in any way limit the City’s ability to encumber its assets in accordance with the Lease Agreement.

Power to Issue Bonds and Make Pledge and Assignment. The Authority is duly authorized pursuant

to law to issue the Bonds and to enter into the Indenture and to pledge and assign the Revenues and other assets purported to be pledged and assigned, respectively, under the Indenture in the manner and to the extent provided in the Indenture. The Bonds and the provisions of the Indenture are and will be the legal, valid and binding special obligations of the Authority in accordance with their terms, and the Authority and the Trustee shall at all times, to the extent permitted by law, defend, preserve and protect said pledge and assignment of Revenues and other assets and all the rights of the Bond Owners under the Indenture against all claims and demands of all persons whomsoever.

Accounting Records. The Trustee shall at all times keep, or cause to be kept, proper books of record

and account, prepared in accordance with corporate trust industry standards, in which complete and accurate entries shall be made of all transactions made by it relating to the proceeds of Bonds, the Revenues, the Lease Agreement and all funds and accounts established pursuant to the Indenture. Such

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books of record and account shall be available for inspection by the Authority and the City, during business hours and under reasonable circumstances.

No Additional Obligations. The Authority covenants that no additional bonds, notes or other

indebtedness shall be issued or incurred which are payable out of the Revenues in whole or in part. Tax Covenants. The Authority covenants to and for the benefit of the Owners that,

notwithstanding any other provisions of the Indenture, it will: (a) neither make or use nor cause to be made or used any investment or other use of the proceeds

of the Bonds or the moneys and investments held in the funds and accounts established under the Indenture which would cause the Bonds to be arbitrage bonds under section 103(b) and section 148 of the Code and the Regulations issued under section 148 of the Code or which would otherwise cause the interest payable on the Bonds to be includable in gross income for federal income tax purposes;

(b) not take or cause to be taken any other action or actions, or fail to take any action or actions,

which would cause the interest payable on the Bonds to be includable in gross income for federal income tax purposes;

(c) at all times do and perform all acts and things permitted by law and necessary or desirable in

order to assure that interest paid by the Authority on the Bonds will be excluded from the gross income, for federal income tax purposes, of the Owners pursuant to section 103 of the Code; and

(d) not take any action or permit or suffer any action to be taken if the result of the same would

be to cause the Bonds to be “federally guaranteed” within the meaning of section 149(b) of the Code and the Regulations.

Collection of Amounts Due Under Lease Agreement. The Trustee shall promptly collect all amounts

due from the City pursuant to the Lease Agreement. The Trustee shall enforce, and take all steps, actions and proceedings which the Trustee determines to be reasonably necessary for the enforcement of all of its rights thereunder as assignee of the Authority, for the enforcement of all of the obligations of the City under the Lease Agreement.

The Authority shall not amend, modify or terminate any of the terms of the Lease Agreement, or

consent to any such amendment, modification or termination, without the prior written consent of the Trustee. The Trustee shall give such written consent only if (a) in the opinion of Bond Counsel, such amendment, modification or termination will not materially adversely affect the interests of the Owners, or (b) the Trustee first obtains the written consent of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding to such amendment, modification or termination.

Continuing Disclosure. The Authority covenants and agrees that it will comply with and carry out

all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Indenture, failure of the Authority to comply with the Continuing Disclosure Certificate shall not constitute an Event of Default under the Indenture; provided, however, that any Participating Underwriter or any Owner or beneficial owner of the Bonds may take such actions as may be necessary and appropriate to compel performance by the Authority of its continuing disclosure obligations, including seeking mandate or specific performance by court order.

Events of Default; Remedies

Events of Default. The following events shall be Events of Default under the Indenture: (a) Default in the due and punctual payment of the principal or sinking fund installments of any

Bonds when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption or otherwise.

(b) Default in the due and punctual payment of any installment of interest on any Bonds when

and as the same shall become due and payable.

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(c) Default by the Authority in the observance of any of the other covenants, agreements or conditions on its part in the Indenture or in the Bonds contained, if such default shall have continued for a period of thirty (30) days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority by the Trustee; provided, however, that if in the reasonable opinion of the Authority the default stated in the notice can be corrected, but not within such thirty (30) day period, such default shall not constitute an Event of Default under the Indenture if the Authority shall commence to cure such default within such thirty (30) day period and thereafter diligently and in good faith cure such failure in a reasonable period of time.

(d) The occurrence and continuation of an event of default under and as defined in the Lease

Agreement. Remedies. Upon the occurrence and continuance of any Event of Default, then and in every such

case the Trustee in its discretion may, and upon the written request of the Owners of not less than 25% in principal amount of the Bonds then Outstanding and receipt of indemnity to its satisfaction, and payment of its fees and expenses, including the fees and expenses of its counsel, shall in its own name and as the Trustee of an express trust:

(a) by mandamus, or other suit, action or proceeding at law or in equity, enforce all rights of the

Owners under, and require the Authority or the City to carry out any agreements with or for the benefit of the Owners of Bonds and to perform its or their duties under the Lease Agreement and the Indenture, provided that any such remedy may be taken only to the extent permitted under the applicable provisions of the Lease Agreement or the Indenture, as the case may be;

(b) bring suit upon the Bonds; (c) by action or suit in equity require the Authority to account as if it were the trustee of an

express trust for the Owners of Bonds; or (d) by action or suit in equity enjoin any acts or things which may be unlawful or in violation of

the rights of the Owners of Bonds under the Indenture. Upon the occurrence of an Event of Default, the Trustee shall be entitled as a matter of right to

the appointment of a receiver or receivers for the Revenues, ex parte, and without notice, and the Authority consents to the appointment of such receiver upon the occurrence of an Event of Default. In the case of any receivership, insolvency, bankruptcy, or other judicial proceedings affecting the Authority or the City, the Trustee shall be entitled to file such proofs of claims and other documents as may be necessary or advisable in order to have the claims of the Trustee and the Bond Owners allowed in such proceedings, without prejudice, however, to the right of any Bond Owner to file a claim on his or her own behalf; provided, the Trustee shall be entitled to compensation and reimbursement for the reasonable fees and expenses of its counsel and indemnity for its reasonable expenses and liability from the Authority, the City or the Bond Owners, as appropriate.

Application of Revenues and Other Funds After Default. If an Event of Default shall occur and be

continuing, all Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture shall be applied by the Trustee as follows and in the following order:

(a) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests

of the Owners of the Bonds and payment of reasonable fees, charges and expenses of the Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Indenture;

(b) To the payment of the principal of and interest then due on the Bonds (upon presentation of

the Bonds to be paid, and stamping or otherwise noting thereon of the payment if only partially paid, or surrender thereof if fully paid) in accordance with the provisions of the Indenture, as follows:

First: To the payment to the persons entitled thereto of all installments of interest then

due in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the

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payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and

Second: To the payment to the persons entitled thereto of the unpaid principal of any

Bonds which shall have become due, whether at maturity or by redemption, with interest on the overdue principal at the rate borne by the respective Bonds (to the extent permitted by law), and, if the amount available shall not be sufficient to pay in full all the Bonds, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference.

Amendments Permitted The Indenture and the rights and obligations of the Authority and of the Owners of the Bonds

and of the Trustee may be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Trustee may enter into when the written consents of the Owners of a majority in aggregate principal amount of all Bonds then Outstanding shall have been filed with the Trustee. No such modification or amendment shall (i) extend the fixed maturity of any Bonds, or reduce the amount of principal thereof or extend the time of payment, or change the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, without the consent of the Owner of each Bond so affected, or (ii) reduce the aforesaid percentage of Bonds the consent of the Owners of which is required to effect any such modification or amendment, or permit the creation of any lien on the Revenues and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture except as permitted in the Indenture, or deprive the Owners of the Bonds of the lien created by the Indenture on such Revenues and other assets (except as expressly provided in the Indenture), without the consent of the Owners of all of the Bonds then Outstanding. It shall not be necessary for the consent of the Bond Owners to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof.

The Indenture and the rights and obligations of the Authority, of the Trustee and the Owners of

the Bonds may also be modified or amended from time to time and at any time by a Supplemental Indenture, which the Authority and the Trustee may enter into without the consent of any Bond Owners, if the Trustee has been furnished an opinion of counsel that the provisions of such Supplemental Indenture shall not materially adversely affect the interests of the Owners of the Bonds, including, without limitation, for any one or more of the following purposes:

(i) to add to the covenants and agreements of the Authority in the Indenture contained

other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved in the Indenture to or conferred upon the Authority;

(ii) to make such provisions for the purpose of curing any ambiguity, inconsistency or

omission, or of curing or correcting any defective provision, contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the Authority may deem necessary or desirable;

(iii) to modify, amend or supplement the Indenture in such manner as to permit the

qualification thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute in effect under the Indenture, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute;

(iv) to modify, amend or supplement the Indenture in such manner as to cause interest

on the Bonds to remain excludable from gross income under the Code; or (v) to modify, alter, amend or supplement the Indenture in any other respect, including

amendments that would otherwise be described in the Indenture thereof, (A) if such amendment will take effect on a Purchase Date following the purchase of tendered Bonds, or (B) if notice of the proposed Supplemental Indenture is given to Bondholders (in the same manner as notices of redemption are given) at least thirty (30) days before the effective date thereof and, on or before

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such effective date, the Bondholders have the right to demand purchase of their Bonds pursuant to the Indenture.

The Trustee may in its discretion, but shall not be obligated to, enter into any such Supplemental

Indenture authorized by the Indenture which materially adversely affects the Trustee’s own rights, duties or immunities under the Indenture or otherwise.

Prior to the Trustee entering into any Supplemental Indenture under the Indenture, there shall be

delivered to the Trustee an opinion of Bond Counsel stating, in substance, that such Supplemental Indenture has been adopted in compliance with the requirements of the Indenture and that the adoption of such Supplemental Indenture will not, in and of itself, adversely affect the exclusion from gross income for purposes of federal income taxes of interest on the Bonds.

Written notice of any amendment or modification made pursuant to the Indenture shall be given

by the Authority to any rating agency then rating the Bonds at least thirty (30) days prior to the effective date of such amendment or modification.

Effect of Supplemental Indenture

Upon the execution of any Supplemental Indenture, the Indenture shall be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the Authority, the Trustee and all Owners of Bonds Outstanding shall thereafter be determined, exercised and enforced under the Indenture subject in all respects to such modification and amendment, and all the terms and conditions of any such Supplemental Indenture shall be deemed to be part of the terms and conditions of the Indenture for any and all purposes.

Discharge of Indenture

Any or all of the Outstanding Bonds may be paid by the Authority in any of the following ways,

provided that the Authority also pays or causes to be paid any other sums payable under the Indenture by the Authority:

(a) by paying or causing to be paid the principal of and interest and premium (if any) on such

Bonds, as and when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity, Defeasance Obligations in the

necessary amount (as provided in the Indenture) to pay or redeem such Bonds; or (c) by delivering to the Trustee, for cancellation by it, such Bonds. If the Authority shall also pay or cause to be paid all other sums payable under the Indenture by

the Authority, then and in that case, at the election of the Authority (evidenced by a Written Certificate of the Authority, filed with the Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Indenture), and notwithstanding that any of such Bonds shall not have been surrendered for payment, the Indenture and the pledge of Revenues and other assets made under the Indenture with respect to such Bonds and all covenants, agreements and other obligations of the Authority under the Indenture with respect to such Bonds shall cease, terminate, become void and be completely discharged and satisfied. In such event, upon the Written Request of the Authority, the Trustee shall execute and deliver to the Authority all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver to the City all moneys or securities or other property held by it pursuant to the Indenture which are not required for the payment or redemption of any of such Bonds not theretofore surrendered for such payment or redemption.

Discharge of Liability on Bonds

Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Indenture) to pay or redeem any Outstanding Bonds (whether upon or prior to the maturity or the redemption date of such Bonds), provided that, if such Bonds are to

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be redeemed prior to maturity, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the Authority in respect of such Bonds shall cease, terminate and be completely discharged, and the Owners thereof shall thereafter be entitled only to payment out of such money or securities deposited with the Trustee as aforesaid for their payment, subject, however, to the provisions of the Indenture.

The Authority may at any time surrender to the Trustee for cancellation by it any Bonds

previously issued and delivered, which the Authority may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired.

Deposit of Money or Securities with Trustee

Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture and shall be:

(a) lawful money of the United States of America in an amount equal to the principal amount of

such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount of such Bonds and all unpaid interest thereon to the redemption date; or

(b) Defeasance Obligations, the principal of and interest on which when due will, in the written

opinion of an Independent Accountant filed with the City, the Authority and the Trustee, provide money sufficient to pay the principal of and interest and premium (if any) on the Bonds to be paid or redeemed, as such principal, interest and premium become due, provided that in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice;

provided, in each case, that (i) the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Written Request of the Authority) to apply such money to the payment of such principal, interest and premium (if any) with respect to such Bonds, and (ii) the Authority shall have delivered to the Trustee an opinion of Bond Counsel to the effect that such Bonds have been discharged in accordance with the Indenture (which opinion may rely upon and assume the accuracy of the Independent Accountant’s opinion referred to above).

SITE AND FACILITY LEASE

The Site and Facility Lease is entered into between the City and the Authority. The City agrees to lease the Property to the Authority for a term continuous with the term of the Lease Agreement. The City and the Authority agree that the lease to the Authority of the City’s right, title and interest in the Property pursuant to the Site and Facility Lease serves the public purposes of the City by enabling the Authority to lease the Property back to the City.

THE LEASE AGREEMENT Lease of Property

The Authority leases the Property to the City, and the City leases the Property from the

Authority, upon the terms and conditions set forth in the Lease Agreement.

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Term of Lease

The Lease Agreement shall take effect on the Closing Date, and shall end on the earlier of May 1, 2031, or such earlier date on which the Bonds shall no longer be Outstanding under the Indenture. If, on May 1, 2031, the Indenture shall not be discharged by its terms or if the Lease Payments payable under the Lease Agreement shall have been abated at any time and for any reason, then the Term of the Lease Agreement shall be extended until there has been deposited with the Trustee an amount sufficient to pay all obligations due under the Lease Agreement, but in no event shall the Term of the Lease Agreement extend beyond May 1, 2041.

Lease Payments

Obligation to Pay. In consideration of the lease of the Property from the Authority under the Lease

Agreement, the City agrees to pay to the Authority, its successors and assigns, as rental for the use and occupancy of the Property during each Fiscal Year, the Lease Payments (denominated into components of principal and interest) for the Property in the respective amounts specified in the Lease Agreement, to be due and payable on the respective Lease Payment Dates specified in the Lease Agreement. Any amount held in the Revenue Fund (except the Reserve Account therein), the Interest Account, the Principal Account or the Sinking Account on any Lease Payment Date, derived from any source of funds of the City or the Authority, shall be credited towards the Lease Payment then due and payable. The Lease Payments coming due and payable in any Fiscal Year shall be for the use of the Property for such Fiscal Year.

The City’s obligation to pay Lease Payments under the Lease Agreement shall be absolute and

unconditional subject only to abatement, in the event and to the extent that there is substantial interference with the use and occupancy of the property or any portion there of.

Rate on Overdue Payments. In the event the City should fail to make any of the payments required

in the Lease Agreement, the payment in default shall continue as an obligation of the City until the amount in default shall have been fully paid, and the City agrees to pay the same with interest thereon, from the date of default to the date of payment at the highest rate of interest borne by any Outstanding Bond. Such interest, if received, shall be deposited in the Revenue Fund.

Fair Rental Value. The Lease Payments and Additional Payments coming due and payable in each

Fiscal Year shall constitute the total rental for the Property for each Fiscal Year and shall be paid by the City in each Fiscal Year for and in consideration of the right of the use and occupancy of, and the continued quiet use and enjoyment of, the Property during each Fiscal Year. The Authority and the City agree and determine that the total Lease Payments do not exceed the fair rental value of the Property. In making such determination, consideration has been given to the obligations of the parties under the Lease Agreement, the value of the Property, the uses and purposes which may be served by the Property and the benefits therefrom which will accrue to the City and the general public.

Source of Payments; Budget and Appropriation. Lease Payments shall be payable from any source of

available funds of the City, subject to the provisions of the Lease Agreement. The City covenants to take such action as may be necessary to include all Lease Payments due

under the Lease Agreement in each of its budgets during the Term of the Lease Agreement and to make the necessary annual appropriations for all such Lease Payments. The covenants on the part of the City contained in the Lease Agreement shall be deemed to be and shall be construed to be duties imposed by law and it shall be the duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease Agreement agreed to be carried out and performed by the City.

Assignment. The City understands and agrees that all Lease Payments have previously been

assigned by the Authority to the Trustee in trust, pursuant to the Indenture, for the benefit of the Owners of the Bonds, and the City assents to such assignment. The Authority directs the City, and the City agrees, to pay all of the Lease Payments to the Trustee at its Office.

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Security Deposit. Notwithstanding any other provision of the Lease Agreement, the City may on any date secure the payment of the Lease Payments for the Property in whole or in part by depositing with the Trustee an amount of cash which, together with other available amounts, including but not limited to amounts on deposit in the Revenue Fund and the Reserve Account, is either (i) sufficient to pay such Lease Payments, including the principal and interest components thereof, and premium, if any, in accordance with the Lease Payment schedule set forth in the Lease Agreement, or (ii) invested in whole or in part in Defeasance Obligations in such amount as will, in the opinion of an Independent Accountant, together with interest to accrue thereon and together with any cash which is so deposited, be fully sufficient to pay such Lease Payments when due under the Lease Agreement, as the City shall instruct at the time of said deposit. Said security deposit shall be deemed to be and shall constitute a special fund for the payment of Lease Payments in accordance with the provisions of the Lease Agreement.

Prepayment Option

The Authority grants an option to the City to prepay the principal component of the Lease Payments in full, or in part, without premium, as described in the Indenture with respect to the redemption of Bonds.

Quiet Enjoyment

During the Term of the Lease Agreement, the Authority shall provide the City with quiet use and enjoyment of the Property, and the City shall, during such Term, peaceably and quietly have and hold and enjoy the Property without suit, trouble or hindrance from the Authority, except as expressly set forth in the Lease Agreement. The Authority will, at the request of the City and at the City’s cost, join in any legal action in which the City asserts its right to such possession and enjoyment to the extent the Authority may lawfully do so. Notwithstanding the foregoing, the Authority shall have the right to inspect the Property as provided in the Lease Agreement.

Title

If the City pays all of the Lease Payments and Additional Payments during the Term of the Lease Agreement as the same become due and payable, or if the City posts a security deposit for payment of the Lease Payments pursuant to the Lease Agreement, and if the City has paid in full all of the Additional Payments coming due and payable as of such date, and provided in any event that no Event of Default shall have occurred and be continuing, all right, title and interest of the Authority in and to the Property shall be transferred to and vested in the City. The Authority agrees to take any and all steps and execute and record any and all documents reasonably required by the City to consummate any such transfer of title.

Additional Payments

In addition to the Lease Payments, the City shall pay when due the following Additional Payments:

(i) Any fees and expenses incurred by the Authority in connection with or by reason of its

leasehold estate in the Property as and when the same become due and payable; (ii) Any amounts due to the Trustee pursuant to the Indenture for all services rendered

under the Indenture and for all reasonable expenses, charges, costs, liabilities, legal fees and other disbursements incurred in and about the performance of its powers and duties under the Indenture;

(iii) Any reasonable fees and expenses of such accountants, consultants, attorneys and

other experts as may be engaged by the Authority or the Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Lease Agreement or the Indenture; and

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(iv) Any reasonable out-of-pocket expenses of the Authority in connection with the execution and delivery of the Lease Agreement or the Indenture, or in connection with the issuance of the Bonds, including any and all expenses incurred in connection with the authorization, issuance, sale and delivery of the Bonds, or incurred by the Authority in connection with any litigation which may at any time be instituted involving the Lease Agreement, the Bonds, the Indenture or any of the other documents contemplated thereby, or incurred by the Authority in connection with the Continuing Disclosure Certificate, or otherwise incurred in connection with the administration thereof.

Maintenance, Utilities, Taxes and Assessments

Throughout the Term of the Lease Agreement, as part of the consideration for the rental of the Property, all improvement, repair and maintenance of the Property shall be the responsibility of the City and the City shall pay for or otherwise arrange for the payment of all utility services supplied to the Property which may include, without limitation, janitor service, security, power, gas, telephone, light, heating, water and all other utility services, and shall pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Property resulting from ordinary wear and tear or want of care on the part of the City or any assignee or lessee thereof. In exchange for the Lease Payments provided in the Lease Agreement, the Authority agrees to provide only the Property, as hereinbefore more specifically set forth. The City waives the benefits of subsections 1 and 2 of section 1932 of the California Civil Code, but such waiver shall not limit any of the rights of the City under the terms of the Lease Agreement.

The City shall also pay or cause to be paid all taxes and assessments of any type or nature, if any,

charged to the Authority or the City affecting the Property or the respective interests or estates therein; provided, however, that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the City shall be obligated to pay only such installments as are required to be paid during the Term of the Lease Agreement as and when the same become due.

The City may, at the City’s expense and in its name, in good faith contest any such taxes,

assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom unless the Authority shall notify the City that, in the reasonable opinion of the Authority, by nonpayment of any such items, the interest of the Authority in the Property will be materially endangered or the Property or any part thereof will be subject to loss or forfeiture, in which event the City shall promptly pay such taxes, assessments or charges or provide the Authority with full security against any loss which may result from nonpayment, in form satisfactory to the Authority and the Trustee.

Modification of Property

The City shall, at its own expense, have the right to make additions, modifications and improvements to the Property. All additions, modifications and improvements to the Property shall thereafter comprise part of the Property and be subject to the provisions of the Lease Agreement. Such additions, modifications and improvements shall not in any way damage the Property or cause the Property to be used for purposes other than those authorized under the provisions of State and federal law; and the City shall file with the Trustee and the Authority a Written Certificate of the City stating that the Property, upon completion of any additions, modifications and improvements made thereto pursuant to the Lease Agreement, shall be of a value which is not substantially less than the value of the Property immediately prior to the making of such additions, modifications and improvements. The City will not permit any mechanic’s or other lien to be established or remain against the Property for labor or materials furnished in connection with any remodeling, additions, modifications, improvements, repairs, renewals or replacements made by the City pursuant to the Lease Agreement; provided, however, that if any such lien is established and the City shall first notify or cause to be notified the Authority of the City’s intention to do so, the City may in good faith contest any lien filed or established against the Property, and in such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and shall provide the Authority with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form

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satisfactory to the Authority. The Authority will cooperate fully in any such contest, upon the request and at the expense of the City.

Public Liability and Property Damage Insurance

The City shall maintain or cause to be maintained throughout the Term of the Lease Agreement, a standard comprehensive general insurance policy or policies in protection of the Authority, City, and their respective members, officers, agents, employees and assigns. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the operation of the Property. Said policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of $100,000 (subject to a deductible clause of not to exceed $5,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the City, and such liability insurance may be maintained in whole or in part in the form of self-insurance by the City, subject to the provisions of the Lease Agreement, or in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. The proceeds of such liability insurance shall be applied by the City toward extinguishment or satisfaction of the liability with respect to which paid.

Fire and Extended Coverage Insurance

The City shall procure and maintain, or cause to be procured and maintained, throughout the Term of the Lease Agreement, insurance against loss or damage to the improvements constituting a part of the Property by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Said extended coverage insurance, when required, shall, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance, and shall include earthquake coverage if such coverage is available at reasonable cost from reputable insurers in the judgment of the City. Such insurance shall be in an amount at least equal to the lesser of (a) one hundred percent (100%) of the replacement cost of all of the insured improvements, or (b) the aggregate principal amount of the outstanding Bonds. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the City, and may be maintained in whole or in part in the form of the participation by the City in a joint powers agency or other program providing pooled insurance; provided however, that such insurance may not be maintained by the City in the form of self-insurance. The Net Proceeds of such insurance shall be applied as provided in the Lease Agreement.

Rental Interruption Insurance

The City shall procure and maintain, or cause to be procured and maintained, throughout the Term of the Lease Agreement, rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of the Property as a result of any of the hazards covered in the insurance required by the Lease Agreement, in an amount at least equal to the maximum Lease Payments coming due and payable during any future twenty-four (24) month period. Such insurance may be maintained as part of or in conjunction with any other insurance coverage carried by the City, and may be maintained in whole or in part in the form of the participation by the City in a joint powers agency or other program providing pooled insurance; provided, however, that such insurance may not be maintained in the form of self-insurance. The proceeds of such insurance, if any, shall be paid to the Trustee and deposited in the Revenue Fund, and shall be credited towards the payment of the Lease Payments as the same become due and payable.

Recordation thereof; Title Insurance

The City shall provide, from moneys in the Costs of Issuance Fund or at its own expense, contemporaneously with the acquisition of the Property, a CLTA title insurance policy covering, and in the amount of not less than the principal amount of the Bonds, insuring the City’s leasehold estate in the Property, subject only to Permitted Encumbrances.

Appendix D Page 20

Net Proceeds of Insurance; Form of Policies

Each policy of insurance maintained pursuant to the Lease Agreement shall name the Trustee as loss payee so as to provide that all proceeds thereunder shall be payable to the Trustee. All required insurance policies shall be provided by a commercial insurer in one of the two highest rating categories by Moody’s and S&P (without regard to designations of plus (+) or minus (-)). The City shall pay or cause to be paid when due the premiums for all insurance policies required by the Lease Agreement. All such policies shall provide that the Trustee shall be given thirty (30) days’ notice of each expiration, any intended cancellation thereof or reduction of the coverage provided thereby. The Trustee shall not be responsible for the sufficiency or amount of any insurance or self-insurance required in the Lease Agreement and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss. The City shall cause to be delivered to the Trustee annually, no later than August 1 in each year, a certificate stating that all of the insurance policies required by the Lease Agreement are in full force and effect and identifying whether any such insurance is then maintained in the form of self-insurance.

In the event that any insurance maintained pursuant to the Lease Agreement shall be provided in

the form of self-insurance, the City shall file with the Trustee annually, within ninety (90) days following the close of each Fiscal Year, a statement of the City risk manager, insurance consultant or actuary identifying the extent of such self-insurance and stating the determination that the City maintains sufficient reserves with respect thereto. In the event that any such insurance shall be provided in the form of self-insurance by the City, the City shall not be obligated to make any payment with respect to any insured event except from such reserves. The results of such review shall be filed with the Trustee.

Installation of Personal Property

The City may, at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed items of equipment or other personal property in or upon any portion of the Property. All such items shall remain the sole property of the City, in which neither the Authority nor the Trustee shall have any interest, and may be modified or removed by the City at any time provided that the City shall repair and restore any and all damage to the Property resulting from the installation, modification or removal of any such items. Nothing in the Lease Agreement shall prevent the City from purchasing or leasing items to be installed pursuant to the Lease Agreement under a lease or conditional sale agreement, or subject to a vendor’s lien or security agreement, as security for the unpaid portion of the purchase price thereof, provided that no such lien or security interest shall attach to any part of the Property.

Liens

Neither the City nor the Authority shall, directly or indirectly, create, incur, assume or suffer to exist any mortgage, pledge, lien, charge, encumbrance or claim on or with respect to any portion of the Property, other than the respective rights of the Trustee, the Authority and the City as provided in the Lease Agreement and Permitted Encumbrances. Except as expressly provided in the Lease Agreement, the City and the Authority shall promptly, at their own expense, take such action as may be necessary to duly discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim, for which it is responsible, if the same shall arise at any time. The City shall reimburse the Authority for any expense incurred by it in order to discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim.

Tax Covenants

Private Activity Bond Limitation. The City shall assure that proceeds of the Bonds are not so used

as to cause the Bonds to satisfy the private business tests of section 141(b) of the Code or the private loan financing test of section 141(c) of the Code.

Federal Guarantee Prohibition. The City shall not take any action or permit or suffer any action to be

taken if the result of the same would be to cause any of the Bonds to be “federally guaranteed” within the meaning of section 149(b) of the Code.

Appendix D Page 21

Rebate Requirement. The City shall take any and all actions necessary to assure compliance with section 148(f) of the Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the Bonds.

No Arbitrage. The City shall not take, or permit or suffer to be taken by the Trustee or otherwise,

any action with respect to the proceeds of the Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date would have caused the Bonds to be “arbitrage bonds” within the meaning of section 148 of the Code.

Maintenance of Tax-Exemption. The City shall take all actions necessary to assure the exclusion of

interest with respect to the Bonds from the gross income of the Owners of the Bonds to the same extent as such interest is permitted to be excluded from gross income under the Code as in effect on the Closing Date.

Small Issuer Exemption from Bank Deductibility Restriction. (a) The City designates the Bonds as “qualified tax-exempt obligations” for the purposes and

within the meaning of section 265(b)(3) of the Code. In support of such designation, the City certifies that (A) the Bonds will be at no time “private activity bonds” (as defined in section 141 of the Code), (B) as of the Closing Date, other than the Bonds, no tax-exempt obligations of any kind have been issued (1) by or on behalf of the City, (2) by other issuers, any of the proceeds of which have been or will be used to make any loans to the City, or (3) any portion of which has been allocated to the City for purposes of section 265(b) of the Code, and (C) not more than $30,000,000 of obligations of any kind (including the Bonds) issued (1) by or on behalf of the City, (2) by other issuers any of the proceeds of which have been or will be used to make any loans to the City, or (3) any portion of which has been allocated to the City for purposes of section 265(b) of the Code during calendar year 2009 will be designated for purposes of section 265(b)(3) of the Code.

(b) The City is not subject to control by any entity, and there are no entities subject to control by

the City. (c) On the Closing Date, the City does not reasonably anticipate that for calendar year 2009 it will

issue, borrow the proceeds of or have allocated to it for purposes of section 265(b) of the Code, any Section 265 Tax-Exempt Obligations (other than the Tax-Exempt Bonds), or that any Section 265 Tax-Exempt Obligations will be issued on behalf of it. “Section 265 Tax-Exempt Obligations” are obligations the interest on which is excludable from gross income of the owners thereof under section 103 of the Code, except for private activity bonds, other than qualified 501(c)(3) bonds, both as defined in section 141 of the Code. The City will not, in calendar 2009, issue, permit the issuance on behalf of it or by any entity subject to control by the City (which may hereafter come into existence), borrow the proceeds of or agree to an allocation to it for purposes of section 265(b) of the Code, Section 265 Tax-Exempt Obligations (including the Bonds) that exceed the aggregate amount of $30,000,000 during calendar year 2009, unless it first obtains an opinion of bond counsel to the effect that such issuance, borrowing or allocation will not adversely affect the treatment of the Bonds as a “qualified tax-exempt obligation” for the purpose and within the meaning of section 265(b)(3) of the Code.

(d) The Bonds have not been sold in conjunction with any other tax exempt obligations.

Continuing Disclosure The City covenants and agrees that it will comply with and carry out all of the provisions of the

Continuing Disclosure Certificate. Notwithstanding any other provision of the Lease Agreement, failure of the City to comply with the Continuing Disclosure Certificate shall not constitute an Event of Default under the Lease Agreement; provided, however, that the Participating Underwriter or any Owner or beneficial owner of the Bonds may take such actions as may be necessary and appropriate to compel performance by the City of its obligations under the Lease Agreement, including seeking mandate or specific performance by court order.

Appendix D Page 22

Application of Net Proceeds From Insurance Award. The Net Proceeds of any insurance award resulting from any damage to or

destruction of the Property by fire or other casualty shall be paid by the City to the Trustee and shall be deposited in the Insurance and Condemnation Fund by the Trustee and applied as set forth in the Indenture.

From Eminent Domain Award. If the Property or any portion thereof shall be taken permanently or

temporarily under the power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the Net Proceeds resulting therefrom shall be deposited in the Insurance and Condemnation Fund and applied as set forth in the Indenture.

From Title Insurance Award. The Net Proceeds of any title insurance award shall be paid to the

Trustee, deposited in the Insurance and Condemnation Fund and applied as set forth in the Indenture.

Abatement of Lease Payments Abatement Due to Damage or Destruction of the Property; Non-Completion. The Lease Payments shall

be abated during any period in which by reason of damage to or destruction of the Property (other than by eminent domain) there is substantial interference with the use and occupancy by the City of the Property or any portion thereof. The amount of such abatement shall be an amount agreed upon by the City and the Authority such that the resulting Lease Payments represent fair consideration for the use and occupancy of the portions of the Property not damaged or destroyed and available for use and possession by the City. Such abatement shall continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction or the date when the remaining portion of the Property is available for use and possession by the City. In the event of any such damage, destruction or non-completion, the Lease Agreement shall continue in full force and effect and the City waives any right to terminate the Lease Agreement by virtue of any such damage, destruction or non-completion. There shall be no abatement of the Lease Payments to the extent that moneys derived from any person as a result of such damage or destruction are available to pay the amount which would otherwise be abated or if there is any money available in the Revenue Fund or the Reserve Account to pay the amount which would otherwise be abated.

Abatement Due to Eminent Domain. If all of the Property shall be taken permanently under the

power of eminent domain or sold to a government threatening to exercise the power of eminent domain, the Term of the Lease Agreement shall cease with respect to the Property as of the day possession shall be so taken. If less than all of the Property shall be taken permanently, or if all of the Property or any part thereof shall be taken temporarily under the power of eminent domain, (a) the Lease Agreement shall continue in full force and effect and shall not be terminated by virtue of such taking and the parties waive the benefit of any law to the contrary, and (b) there shall be a partial abatement of Lease Payments in an amount to be agreed upon by the City and the Authority such that the resulting Lease Payments for the Property represent fair consideration for the use and occupancy of the remaining usable portion of the Property.

Rights of Access

The City agrees that the Authority and any Authorized Representative of the Authority, and the

Authority’s successors or assigns, shall have the right at all reasonable times to enter upon and to examine and inspect the Property. The City further agrees that the Authority, any Authorized Representative of the Authority, and the Authority’s successors or assigns, shall have such rights of access to the Property as may be reasonably necessary to cause the proper maintenance of the Property in the event of failure by the City to perform its obligations under the Lease Agreement; provided, however, that the Authority’s assigns shall not be required to cause such proper maintenance.

Release and Indemnification Covenants

The City shall and agrees to indemnify and save the Authority, the Trustee and their respective officers, agents, successors and assigns, harmless from and against all claims, losses and damages, including legal fees and expenses, arising out of (a) the use, maintenance, condition or management of, or

Appendix D Page 23

from any work or thing done on the Property by the City, (b) any breach or default on the part of the City in the performance of any of its obligations under the Lease Agreement, (c) any act or negligence of the City or of any of its agents, contractors, servants, employees or licensees with respect to the Property, (d) any act or negligence of any lessee of the City with respect to the Property, or (e) the performance by the Trustee of its duties under the Lease Agreement or under the Indenture. No indemnification is made under the Lease Agreement for willful misconduct or negligence under the Lease Agreement by the Authority, the Trustee or any of their respective officers or employees. The indemnification under the Lease Agreement shall survive removal or resignation of the Trustee, termination of the Lease Agreement or discharge of the Bonds.

Assignment by the Authority

Certain rights of the Authority under the Lease Agreement, including the right to receive and enforce payment of the Lease Payments to be made by the City under the Lease Agreement, have been pledged and assigned to the Trustee for the benefit of the Owners of the Bonds pursuant to the Indenture, to which pledge and assignment the City consents. The assignment of the Lease Agreement to the Trustee is solely in its capacity as Trustee under the Indenture and the duties, powers and liabilities of the Trustee in acting under the Lease Agreement shall be subject to the provisions of the Indenture, including, without limitation, the provisions of the Lease Agreement.

Assignment and Subleasing by the City

The Lease Agreement may not be assigned by the City. The City may sublease the Property or any portion thereof, subject to, and delivery to the Authority of a certificate as to, all of the following conditions:

(a) The Lease Agreement and the obligation of the City to make Lease Payments under the Lease

Agreement shall remain obligations of the City; (b) The City shall, within thirty (30) days after the delivery thereof, furnish or cause to be

furnished to the Authority and the Trustee a true and complete copy of such sublease; (c) No such sublease by the City shall cause the Property to be used for a purpose other than as

may be authorized under the provisions of the laws of the State; and (d) The City shall furnish the Authority and the Trustee with a written opinion of Bond Counsel,

stating that such sublease is permitted by the Lease Agreement and the Indenture, and will not cause the interest on the Bonds to become included in gross income for federal income tax purposes.

Amendment of Lease

Substitution of Site. The City shall have, and is granted, the option at any time and from time to

time during the Term of the Lease Agreement to substitute other land (a “Substitute Site”) for the Site (the “Former Site”), or a portion thereof, provided that the City shall satisfy all of the following requirements which are declared to be conditions precedent to such substitution:

(a) The City shall file with the Authority and the Trustee an amendment to the Site and Facility

Lease which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site;

(b) The City shall file with the Authority and the Trustee an amendment to the Lease Agreement

which adds thereto a description of such Substitute Site and deletes therefrom the description of the Former Site;

(c) The City shall certify in writing to the Authority and the Trustee that such Substitute Site

serves the purposes of the City, constitutes property that is unencumbered (or the portion of such property to be to substituted is unencumbered), subject to Permitted Encumbrances, and constitutes property which the City is permitted to lease under the laws of the State;

Appendix D Page 24

(d) The City delivers to the Trustee and the Authority evidence that the Substitute Site (or the portions to be to substituted) is of equal or greater value than the Site (or the portions thereof) to be to substituted;

(e) The City shall certify the Substitute Site shall not cause the City to violate any of its covenants,

representations and warranties made in the Lease Agreement; (f) The City shall obtain an amendment to the title insurance policy required pursuant to the

Lease Agreement which adds thereto a description of the Substitute Site and deletes therefrom the description of the Former Site;

(g) The City shall certify that the Substitute Site is of the same or greater essentiality to the City as

was the Former Site; (h) The City shall certify that the Substitute Site has a useful life equal to or longer than the

remaining term of the Bonds; and (i) The City shall provide notice of such substitution to any rating agency then rating the Bonds. So long as the requirements set forth above are satisfied, any such substitution may be

accomplished administratively and shall not require separate approval by the City Council. Substitution of Facility. The City shall have, and is granted, the option at any time and from time to

time during the Term of the Lease Agreement to substitute a substitute facility or substitute facilities (a “Substitute Facility”) for the Facility (the “Former Facility”), or a portion thereof, provided that the City shall satisfy all of the following requirements which are declared to be conditions precedent to such substitution:

(a) The City shall file with the Authority and the Trustee an amendment to the Site and Facility

Lease which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility, if applicable;

(b) The City shall file with the Authority and the Trustee an amendment to the Lease Agreement

which adds thereto a description of such Substitute Facility and deletes therefrom the description of the Former Facility;

(c) The City shall certify in writing to the Authority and the Trustee that such Substitute Facility

serve the purposes of the City, constitutes property that is unencumbered (or the portion of such property to be to substituted is unencumbered), subject to Permitted Encumbrances, and constitutes property which the City is permitted to lease under the laws of the State;

(d) The City delivers to the Trustee and the Authority evidence that the Substitute Facility (or the

portions to be to substituted) is of equal or greater value than the property (or the portions thereof) to be to substituted;

(e) The City shall certify the Substitute Facility shall not cause the City to violate any of its

covenants, representations and warranties made in the Lease Agreement; (f) The City shall certify that the Substitute Facility is of the same or greater essentiality to the

City as was the Former Facility; (g) The City shall certify that the Substitute Facility has a useful life equal to or longer than the

remaining term of the Bonds; and (h) The City shall provide notice of such substitution to any rating agency then rating the Bonds. So long as the requirements set forth above are satisfied, any such substitution may be

accomplished administratively and shall not require separate approval by the City Council.

Appendix D Page 25

Release of Site. The City shall have, and is granted, the option at any time and from time to time during the Term of the Lease Agreement to release any portion of the Site, provided that the City shall satisfy all of the following requirements which are declared to be conditions precedent to such release:

(a) The City shall file with the Authority and the Trustee to the Site and Facility Lease which

describes the Site, as revised by such release; (b) The City shall file with the Authority and the Trustee an amendment to the Lease Agreement

which describes the Site, as revised by such release; (c) The City delivers to the Trustee and the Authority evidence that the Site, as revised by such

release, together with the Facility, has a total value at least equal to 1.1 times the principal amount of the Bonds then outstanding;

(d) The City shall obtain an amendment to the title insurance policy required pursuant to the

Lease Agreement which describes the Site, as revised by such release; and (e) The City shall provide notice of such release to any rating agency then rating the Bonds. Notwithstanding the foregoing, the City may, at any time in connection with a legal subdivision

of the Site, release all portions of the Site other than the legal footprint of the City Hall building, and shall not be required to satisfy the requirements of paragraphs (c), (d) or (e) above, and such release may be accomplished with the necessity of separate approval by the City Council.

Release of Facility. The City shall have, and is granted, the option at any time and from time to

time during the Term of the Lease Agreement to release any portion of the Facility provided that the City shall satisfy all of the following requirements which are declared to be conditions precedent to such release:

(a) The City shall file with the Authority and the Trustee an amendment to the Site and Facility

Lease which describes the Facility, as revised by such release; (b) The City shall file with the Authority and the Trustee an amendment to the Lease Agreement

which describes the Facility, as revised by such release; (c) The City delivers to the Trustee and the Authority evidence that the Facility, as revised by

such release, together with the Site, has a total value at least equal to 1.1 times the principal amount of the Bonds then outstanding; and

(d) The City shall provide notice of such release to any rating agency then rating the Bonds. So long as the requirements set forth above are satisfied, any such release may be accomplished

administratively and shall not require separate approval by the City Council. Notwithstanding the foregoing, the City may, at any time in connection with a legal subdivision

of the Site, release all portions of the Facility other than the City Hall building, and shall not be required to satisfy the requirements of paragraphs (c) or (d) above, and such release may be accomplished with the necessity of separate approval by the City Council.

Generally. The Authority and the City may at any time amend or modify any of the provisions of

the Lease Agreement, but only (a) with the prior written consents of the Owners of a majority in aggregate principal amount of

the Outstanding Bonds, or (b) without the consent of any of the Bond Owners, but only if such amendment or modification

is for any one or more of the following purposes:

Appendix D Page 26

(i) to add to the covenants and agreements of the City contained in the Lease Agreement, other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power reserved to or conferred upon the City in the Lease Agreement;

(ii) to make such provisions for the purpose of curing any ambiguity, or of curing,

correcting or supplementing any defective provision contained in the Lease Agreement, or in any other respect whatsoever as the Authority and the City may deem necessary or desirable, provided that, in the opinion of Bond Counsel, such modifications or amendments will not materially adversely affect the interests of the Owners of the Bonds; or

(iii) to amend any provision thereof relating to the Tax Code, to any extent whatsoever

but only if and to the extent such amendment will not adversely affect the exclusion from gross income of interest on the Bonds under the Code, in the opinion of Bond Counsel.

Events of Default Defined

The following shall be “Events of Default” under the Lease Agreement: (a) Failure by the City to pay any Lease Payment required to be paid under the Lease Agreement

at the time specified in the Lease Agreement. (b) Failure by the City to make any Additional Payment required under the Lease Agreement and

the continuation of such failure for a period of thirty (30) days. (c) Failure by the City to observe and perform any covenant, condition or agreement on its part to

be observed or performed, other than as referred to in the preceding clauses (a) or (b), for a period of sixty (60) days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Authority or the Trustee; provided, however, that if in the reasonable opinion of the City the failure stated in the notice can be corrected, but not within such sixty (60) day period, such failure shall not constitute an Event of Default if the City shall commence to cure such failure within such sixty (60) day period and thereafter diligently and in good faith shall cure such failure in a reasonable period of time.

(d) The filing by the City of a voluntary petition in bankruptcy, or failure by the City promptly to

lift any execution, garnishment or attachment, or adjudication of the City as a bankrupt, or assignment by the City for the benefit of creditors, or the entry by the City into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the City in any proceedings instituted under the provisions of applicable federal bankruptcy law, or under any similar acts which may hereafter be enacted.

Remedies on Default

Whenever any Event of Default referred to in the Lease Agreement shall have happened and be continuing, it shall be lawful for the Authority to exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that notwithstanding anything to the contrary in the Lease Agreement or in the Indenture, there shall be no right under any circumstances to accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable or to terminate the Lease Agreement or to cause the fee interest or the leasehold interest of the City in the Property to be sold, assigned or otherwise alienated. Each and every covenant thereof to be kept and performed by the City is expressly made a condition and, upon the breach thereof, the Authority may exercise any and all rights of entry and re-entry upon the Property. The City irrevocably consents to the Authority’s repossession of the Property if such an Event of Default shall occur and consents to the Authority’s re-letting of the Property for the account of the City. In the event of such default and notwithstanding any re-entry by the Authority, the City shall, expressly provided in the Lease Agreement, continue to remain liable for the payment of the Lease Payments and/or damages for breach of the Lease Agreement and the performance of all conditions contained in the Lease Agreement and, in any event, such rent and/or damages shall be payable to the Authority at the time and in the manner as provided in the Lease Agreement, to wit:

Appendix D Page 27

(a) The City agrees to and shall remain liable for the payment of all Lease Payments and the performance of all conditions contained in the Lease Agreement and shall reimburse the Authority for any deficiency arising out of the re-leasing of the Property, or, in the event the Authority is unable to re-lease the Property, then for the full amount of all Lease Payments to the end of the Term of the Lease Agreement, but said Lease Payments and/or deficiency shall be payable only at the same time and in the same manner as provided in the Lease Agreement for the payment of Lease Payments under the Lease Agreement, notwithstanding such entry or re-entry by the Authority or any suit in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Property or the exercise of any other remedy by the Authority.

(b) The City irrevocably appoints the Authority as the agent and attorney-in-fact of the City to

enter upon and re-lease the Property in the event of default by the City in the performance of any covenants contained in the Lease Agreement to be performed by the City and to remove all personal property whatsoever situated upon the Property to place such property in storage or other suitable place in San Joaquin County, for the account of and at the expense of the City, and the City exempts and agrees to save harmless the Authority from any costs, loss or damage whatsoever arising or occasioned by any such entry upon and re-leasing of the Property and the removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement.

(c) The City waives any and all claims for damages caused or which may be caused by the

Authority in re-entering and taking possession of the Property as provided in the Lease Agreement and all claims for damages that may result from the destruction of or injury to the Property and all claims for damages to or loss of any property belonging to the City that may be in or upon the Property.

(d) The City agrees that the terms of the Lease Agreement constitute full and sufficient notice of

the right of the Authority to re-lease the Property in the event of such re-entry without effecting a surrender of the Lease Agreement, and further agrees that no acts of the Authority in effecting such re-leasing shall constitute a surrender or termination of the Lease Agreement irrespective of the term for which such re-leasing is made or the terms and conditions of such re-leasing, or otherwise.

Limitation on Remedies

Notwithstanding the foregoing provisions of the Lease Agreement, neither the Authority nor the Trustee shall exercise any remedies against the Property to the extent such remedies would generate funds which are not available to satisfy the obligations of the Lease Agreement or the Indenture.

No Remedy Exclusive

No remedy in the Lease Agreement conferred upon or reserved to the Authority is intended to be exclusive and every such remedy shall be cumulative and shall, except as expressly provided in the Lease Agreement to the contrary, be in addition to every other remedy given under the Lease Agreement or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Authority to exercise any remedy reserved to it in the Lease Agreement it shall not be necessary to give any notice, other than such notice as may be required in the Lease Agreement or by law.

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Appendix E Page 1

APPENDIX E

PROPOSED FORM OF BOND COUNSEL OPINION

[Letterhead of Quint & Thimmig LLP]

[Closing Date] Mission Viejo Community Development Financing Authority 200 Civic Center Mission Viejo, California 92691

OPINION: $17,305,000 Mission Viejo Community Development Financing Authority Lease Revenue Refunding Bonds, 2009 Series A

Members of the Authority:

We have acted as bond counsel in connection with the delivery by the Mission Viejo Community Development Financing Authority (the “Authority”) of $17,305,000 aggregate principal amount of the bonds of the Authority designated the “Mission Viejo Community Development Financing Authority Lease Revenue Refunding Bonds, 2009 Series A” (the “Bonds”), pursuant to the provisions of Article 4 (commencing with section 6584) of Chapter 5 of Division 7 of Title 1 of the California Government Code (the “Law”), and pursuant to an indenture of trust, dated as of December 1, 2009 (the “Indenture”), by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee, and a resolution of the Authority adopted on November 16, 2009. The Bonds are secured by Revenues (as defined in the Indenture), including certain payments made by the City of Mission Viejo (the “City”) under a lease agreement, dated as of December 1, 2009 (the “Lease Agreement”), by and between the Authority and the City. We have examined the Law and such certified proceedings and other papers as we deem necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of the

Authority and the City contained in the Indenture and Lease Agreement, as applicable, and in the certified proceedings, and upon other certifications furnished to us, without undertaking to verify the same by independent investigation.

Based upon our examination we are of the opinion, under existing law, that: 1. The Authority is a duly constituted joint exercise of powers authority under the laws of the

State of California with power to enter into the Indenture, to perform the agreements on its part contained therein and to issue the Bonds.

2. The Bonds constitute legal, valid and binding special obligations of the Authority enforceable

in accordance with their terms and payable solely from the sources provided therefor in the Indenture. 3. The Indenture has been duly approved by the Authority and constitutes a legal, valid and

binding obligation of the Authority enforceable against the Authority in accordance with its terms. 4. The Indenture establishes a valid first and exclusive lien on and pledge of the Revenues (as

such term is defined in the Indenture) and other funds pledged thereby for the security of the Bonds, in accordance with the terms of the Indenture.

5. Subject to the Authority’s and the City’s compliance with certain covenants, interest on the

Bonds (i) is excludable from gross income of the owners thereof for federal income tax purposes, and (ii) is not included as an item of tax preference in computing the alternative minimum tax for individuals

Appendix E Page 2

and corporations under the Internal Revenue Code of 1986, as amended (the “Code”). Failure to comply with certain of such covenants could cause interest on the Bonds to be includable in gross income for federal income tax purposes retroactively to the date of issuance of the Bonds. It is also our opinion that the Bonds are “qualified tax exempt obligations” under section 265(b)(3) of the Code.

6. Interest on the Bonds is exempt from personal income taxation imposed by the State of

California. Ownership of the Bonds may result in other tax consequences to certain taxpayers, and we

express no opinion regarding any such collateral consequences arising with respect to the Bonds. The rights of the owners of the Bonds and the enforceability of the Bonds, the Indenture and the

Lease Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted and also may be subject to the exercise of judicial discretion in accordance with general principles of equity.

In rendering this opinion, we have relied upon certifications of the Authority, the City and others

with respect to certain material facts. Our opinion represents our legal judgment based upon such review of the law and the facts that we deem relevant to render our opinion and is not a guarantee of a result. This opinion is given as of the date hereof and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur.

Respectfully submitted,

Appendix F Page 1

APPENDIX F

FORM OF CONTINUING DISCLOSURE CERTIFICATE This CONTINUING DISCLOSURE CERTIFICATE (the “Disclosure Certificate”) is executed and

delivered by the CITY OF MISSION VIEJO (the “City”) in connection with the issuance by the Mission Viejo Community Development Financing Authority (the “Authority”) of $17,305,000 aggregate principal amount of Mission Viejo Community Development Financing Authority Lease Revenue Refunding Bonds, 2009 Series A (the “Bonds”). The Bonds are being issued pursuant to an indenture of trust, dated as of December 1, 2009 (the “Indenture”), by and between the Authority and The Bank of New York Mellon 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 Bonds and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any

capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 2, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by the City pursuant to, and as

described in, Sections 3 and 4 of this Disclosure Certificate. “Beneficial Owner” shall mean any person which (a) has the power, directly or indirectly, to vote

or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes.

“Dissemination Agent” shall mean Koppel & Gruber Public Finance or any successor

Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation. In the absence of such a designation, the City shall act as the Dissemination Agent.

“EMMA” or “Electronic Municipal Market Access” means the centralized on-line repository for

documents filed with the MSRB, such as official statements and disclosure information relating to municipal bonds, notes and other securities as issued by state and local governments or similar medium should EMMA no longer exist.

“Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Certificate. “MSRB” means the Municipal Securities Rulemaking Board, which has been designated by the

Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information which may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future.

“Participating Underwriter” shall mean the original underwriter of the Bonds, required to comply

with the Rule in connection with offering of the Bonds. “Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under

the Securities Exchange Act of 1934, as the same may be amended from time to time. Section 3. Provision of Annual Reports. (a) Delivery of Annual Report to MSRB. The City shall, or shall cause the Dissemination Agent to,

not later than March 31 of each year (being the last day of the 9th month after the end of the City’s fiscal year, which ends on June 30), commencing with the report for the 2008-2009 fiscal year, provide to the Participating Underwriter and to file with EMMA, in a readable PDF or other electronic format as prescribed by the MSRB, an Annual Report prepared by or on behalf of the City that is consistent with the

Appendix F Page 2

requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. The filing with EMMA of the final official statement for the Bonds shall satisfy the filing requirement for the 2008-09 fiscal year.

(b) Change of Fiscal Year. If the City’s fiscal year changes, it shall give notice of such change in the

same manner as for a Listed Event under Section 5(d). (c) Delivery of Annual Report to Dissemination Agent. Not later than fifteen (15) Business Days prior

to the date specified in subsection (a) for providing the Annual Report to EMMA, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall notify the City.

(d) Report of Non-Compliance. If the City is unable to provide an Annual Report by the date

required in subsection (a), the Dissemination Agent shall send a notice to EMMA in substantially the form attached as Exhibit A.

(e) Annual Compliance Certification. The Dissemination Agent shall, if the Dissemination Agent is

other than the City, file a report with the City certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided.

Section 4. Content of Annual Reports. The Annual Report shall contain or incorporate by

reference the following: (a) Audited financial statements of the City for the preceding fiscal year, prepared in accordance

with the laws of the State and including all statements and information prescribed for inclusion therein by the Controller of the State. 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 included in the audited financial statements of the City, the Annual Report

shall also include operating data with respect to the City for the preceding fiscal year, substantially similar to that provided in the corresponding tables and charts in the official statement for the Bonds, as follows:

(i) General Fund Budget Summary; (ii) Investment Portfolio of the City; (iii) Tax Revenues By Source, Governmental Funds; (iv) Sales Tax Rate; (v) Motor Vehicle In-Lieu Tax; (vi) Assessed Full Cash Value of All Taxable Property; (vii) Property Tax Levies and Tax Collections; (viii) Principal Secured Property Taxpayers; (ix) Annual Pension Cost; (x) Annual OPEB Cost; and (xi) Direct and Overlapping Debt Report

(c) Any or all of the items listed above may be included by specific reference to other documents,

including official statements of debt issues of the City or related public entities, which are available to the public on the MSRB’s Internet web site or filed with the Securities and Exchange Commission. The City shall clearly identify each such other document so included by reference.

If the document included by reference is a final official statement, it must be available from

EMMA.

Appendix F Page 3

(d) In addition to any of the information expressly required to be provided under paragraph (b) of this Section 4, the City shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading.

Section 5. Reporting of Significant Events. (a) Listed Events. Pursuant to 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 Bonds, if material:

(i) Principal and interest payment delinquencies. (ii) Non-payment related defaults. (iii) Unscheduled draws on debt service reserves reflecting financial difficulties. (iv) Unscheduled draws on credit enhancements reflecting financial difficulties. (v) Substitution of credit or liquidity providers, or their failure to perform. (vi) Adverse tax opinions or events affecting the tax-exempt status of the security. (vii) Modifications to rights of security holders. (viii) Contingent or unscheduled bond calls. (ix) Defeasances. (x) Release, substitution, or sale of property securing repayment of the securities. (xi) Rating changes.

(b) Determination of Materiality of Listed Events. 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 laws.

(c) Notice to Dissemination Agent. If the City has determined that knowledge of the occurrence of a

Listed Event would be material under applicable federal securities laws, the City shall promptly notify the Dissemination Agent (if other than the City) in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (d).

(d) Notice of Listed Events. The City shall file, or cause the Dissemination Agent to file, a notice of

the occurrence of a Listed Event, if material, with EMMA, in a readable PDF or other electronic format as prescribed by EMMA, with a copy to the Participating Underwriter. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(viii) and (ix) (defeasances) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Bondholders of affected Bonds.

Section 6. Identifying Information for Filings with EMMA. All documents provided to EMMA

under this Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB.

Section 7. Termination of Reporting Obligation. The City’s obligations under this Disclosure

Certificate shall terminate upon the defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under Section 5.

Section 8. Dissemination Agent. (a) Appointment of Dissemination Agent. The initial Dissemination Agent shall be Koppel & Gruber

Public Finance. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such agent, with or without appointing a successor Dissemination Agent. If the Dissemination Agent is not the City, the Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the City pursuant to this Disclosure Certificate. It is understood and agreed that any information that the Dissemination Agent may be instructed to file with EMMA shall be prepared and provided to it by the City. The Dissemination Agent has undertaken no responsibility with respect to any reports, notices or disclosures provided to it under this Continuing Disclosure Certificate, and has no liability to any person, including any Owner, with respect to any such reports, notices or disclosures. The

Appendix F Page 4

fact that the Dissemination Agent or any affiliate thereof may have any fiduciary or banking relationship with the City shall not be construed to mean that the Dissemination Agent has actual knowledge of any event or condition except as may be provided by written notice from the City.

(b) Compensation of Dissemination Agent. The Dissemination Agent shall be paid compensation by

the City for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the City from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the City, Holders or Beneficial Owners, or any other party. The Dissemination Agent may rely and shall be protected in acting or refraining from acting upon any direction from the City or an opinion of nationally recognized bond counsel. The Dissemination Agent may at any time resign by giving written notice of such resignation to the City.

Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure

Certificate, the City may amend this Disclosure Certificate (and the Dissemination Agent shall agree to any amendment so requested by the City that does not impose any greater duties or risk of liability on the Dissemination Agent), and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) Change in Circumstances. If the amendment or waiver relates to the provisions of Sections 3(a),

4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or the type of business conducted;

(b) Compliance as of Issue Date. The undertaking, as amended or taking into account such waiver,

would, in the opinion of a nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) Consent of Holders; Non-impairment Opinion. The amendment or waiver either (i) is approved by

the Bondholders in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Bondholders, or (ii) does not, in the opinion of nationally recognized bond counsel provided to the Dissemination Agent, materially impair the interests of the Bondholders or Beneficial Owners.

If this Disclosure Certificate is amended or any provision of this Disclosure Certificate is waived,

the City shall describe such amendment or waiver in the next following Annual Report and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the City. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(d), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to

prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 11. Default. In the event of a failure of the City to comply with any provision of this

Disclosure Certificate, any Bondholder or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to

Appendix F Page 5

comply with its obligations under this Disclosure Certificate. The sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance.

Section 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent

shall have only such duties as are specifically set forth in this Disclosure Certificate, and 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 and expenses) 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 Bonds.

Section 13. 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 Bonds, and shall create no rights in any other person or entity.

Date: [Closing Date]

CITY OF MISSION VIEJO By

Authorized Officer ACKNOWLEDGED: KOPPEL & GRUBER PUBLIC FINANCE, as Dissemination Agent By

Authorized Officer

Appendix F Page 6

EXHIBIT A

NOTICE TO EMMA OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Mission Viejo Community Development Financing Authority Name of Obligor: City of Mission Viejo, California Name of Issue: Mission Viejo Community Development Financing Authority Lease Revenue

Refunding Bonds, 2009 Series A Date of Issuance: [Closing Date]

NOTICE IS HEREBY GIVEN that the City of Mission Viejo has not provided an Annual Report

with respect to the above-named Bonds as required by the Continuing Disclosure Certificate dated December 16, 2009, furnished by the City in connection with the Bond Issue. The City anticipates that the Annual Report will be filed by _____________.

Dated: __________________

KOPPEL & GRUBER PUBLIC FINANCE, as Dissemination Agent By Name Title

cc: Trustee

Appendix G Page 1

APPENDIX G

BOOK-ENTRY ONLY SYSTEM The following description of the procedures and record keeping with respect to beneficial

ownership interests in the Bonds, payment of principal, redemption premium, if any, and interest with respect to the Bonds to The Depository Trust Company (“DTC”), New York, NY, its Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the Bonds and other related transactions by and between DTC, its Participants and the Beneficial Owners is based solely on the understanding of the Authority of such procedures and record keeping from information provided by DTC. Accordingly, no representations can be made concerning these matters and neither DTC, its 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 its Participants, as the case may be. The City, the Authority, the Trustee and the Underwriter understand that the current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and that the current “Procedures” of DTC to be followed in dealing with Participants are on file with DTC.

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered

securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, 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 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTTC is owned by users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants,

which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. 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 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are

registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their

Appendix G Page 2

registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct

Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Trust Agreement. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds 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 notices be provided directly to them.

Redemption notices shall be sent to DTC, if less than all of the Bonds within a maturity are being

redeemed. DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in each issue to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to

the Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the 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 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Payments of principal of, premium, if any, and interest on the Bonds will be made to Cede & Co.,

or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City, the Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee, the City or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payments of principal of, premium, if any, and interest on the Bonds by Cede & Co (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City, the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds at any time

by giving reasonable notice to the City, the Authority or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered.

The Authority may decide to discontinue use of the system of book-entry transfers through DTC

(or a successor securities depository). In that event, Bond certificates will be printed and delivered. The foregoing information concerning DTC and DTC’s book-entry system has been provided by

DTC, and neither the Authority nor the Trustee takes any responsibility for the accuracy thereof. NEITHER THE AUTHORITY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR

OBLIGATION TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS WITH RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS OR THE SELECTION OF BONDS FOR REDEMPTION.

Appendix G Page 3

Neither the Authority nor the Trustee can give any assurances that DTC, DTC Participants, Indirect Participants or others will distribute payments of principal of, premium, if any, and interest on the Bonds paid to DTC or its nominee, as the registered Owner, or any redemption or other notice, to the Beneficial Owners or that they will do so on a timely basis or that DTC will serve and act in a manner described in this Official Statement.

In the event that the book-entry system is discontinued as described above, the requirements of

the Trust Agreement will apply. The City, the Authority and the Trustee cannot and do not give any assurances that DTC, the

Participants or others will distribute payments of principal, interest or premium, if any, evidenced by the Bonds paid to DTC or its nominee as the registered owner, or will distribute any redemption notices or other notices, to the Beneficial Owners, or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. Neither the Authority nor the Trustee are responsible or liable for the failure of DTC or any Participant to make any payment or give any notice to a Beneficial Owner with respect to the Bonds or an error or delay relating thereto.

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