NEW ISSUE - BOOK-ENTRY-ONLY RATINGS

S&P: AAA

Fitch: AAA

S&P: A (underlying)

Fitch: A (underlying)

(Sec ··coNCLUDING INFORMATION - Ratings on the Bonds" herein)

In the opinion <?f Jones Hall. A Prqfessional Law Corporation. San Francisco, C'aN(ornia, Bond Counsel, su~ject, however to certain quaNfications described herein, under existing law, the interest on the Bonds is excluded from gross income .for .federal income tax purposes, such interest is not an item oj.tax preference for purposes of the federal alternative minimum tax imposed on individuals and co,porations. In the }Urther opinion o.f Bond Counsel, such interest is exempt .from CalifOrnia personal income taxes. See "LEGAL MAITERS - Tax Matters" herein.

BUTTE COUNTY STATE OF CALIFORNIA

$68,500,000 CHICO REDEVELOPMENT AGENCY

CHICO AMENDED AND MERGED REDEVELOPMENT PROJECT 2005 TAX ALLOCATION BONDS

Dated: Date of Delivery Due: April 1 as Shown on the Inside Front Cover

The cover page contains certain information for quick reference only. It is not a summary of the issue. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. See "BONDHOLDERS' RISKS" herein for a discussion of special risk factors that should be considered in evaluating the investment quality of the Bonds.

Proceeds from the sale of the Chico Redevelopment Agency (the "Agency") Chico Amended and Merged Redevelopment Project 2005 Tax Allocation Bonds (the "Bonds") will be used to (i) finance redevelopment activities of the Agency, (ii) satisfy the reserve requirement for the Bonds and (iii) provide for the costs of issuing the Bonds.

The Bonds will be issued under an Indenture of Trust, dated as of November l, 2005 (the "Indenture''), by and between the Agency and Union Bank of California, N.A., as Trustee (the "Trustee"). The Bonds arc special obligations of the Agency and are payable solely from and secured by a pledge of certain tax increment revenues of the Agency's Chico Aincnded and Merged Redevelopment Project (the "Project Arca") on a parity with certain other obligations of the Agency as described herein, and a pledge of amounts in certain funds and accounts established under the Indenture. as further discussed herein.

Interest on the Bonds is payable on April l, 2006. and scmiannua11y thereafter on October I and April I of each year until maturity or earlier sinking account payment or optional redemption (see "THE BONDS - General Provisions" and ''THE BONDS Redemption" herein).

Payment of the principal of and interest on the Bonds when due will be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation simultaneously with the delivery of the Bonds. See "SOlJRCES OF PAYMENT FOR THE BONDS Financial Guaranty Insurance.··

Ambac

The Bonds arc being offered when, as and if issued, subject to the approval as to their legality by Jones Hall, A Professional Law Corporation, San Francisco, California. Bond Counsel. Certain legal matters will be passed on for the Agency by Jones Hall, San Francisco, California, as Disclosure Counsel and by David Frank. as Agency Counsel. It is anticipated that the Bonds will he available for delivery through the facilities of The Depository Trust Company on or about November 17, 2005 (see "APPENDIX G

BOOK-ENTRY-ONLY SYSTEM" herein).

The date of the Qfficial Statement is ()ctober 26, 2005.

$68,500,000

CHICO REDEVELOPMENT AGENCY

CHICO AMENDED AND MERGED REDEVELOPMENT PROJECT

2005 TAX ALLOCATION BONDS

MATURITY SCHEDULE (Base CUSIP®t 168515)

$22,180,000 Serial Bonds

Maturity Date Principal Interest Reoffering

Aprill Amount Rate Yield CUSIP®i

2007 $ 165,000 3.50% 2.90%

2008 490,000 3.50 3.05

2009 785,000 3.50 3.20

2010 890,000 3.50 3.35

2011 920,000 3.75 3.50

2012 955,000 4.00 3.65

2013 995,000 4.00 3.75

2014 1,030,000 4.00 3.85

2015 1,070,000 4.00 3.95

2016 1,115,000 4.00 4.05

2017 1,180,000 4.00 4.15

2018 1,225,000 4.125 4.27

2019 1,275,000 4.25 4.36

2020 1,355,000 4.30 4.45

2021 1,410.000 4.375 4.54

2022 1,435,000 4.375 4.58

2023 1,495,000 4.50 4.62

2024 1,565,000 4.50" 4.66

2025 2,825,000 4.50 4.70

$11,665,000 5.00% Term Bond maturing April I, 2027, Yield 4.63%* CUSIPt BTO

$19,770,000 5.00% Term Bond maturing Aprill, 2030, Yield 4.69%* CUSIPt BU7

$14,885,000 5.00% Term Bond maturing Aprill, 2032, Yield 4.73%* CUSIPt BYS

*Priced to the first optional call date of April 1, 2016.

AYO

AZ?

BAI

BB9

BC?

BD5

BE3

BFO BG8

BH6

BJ2

BK9

BL7

BMS

BN3

BP8

BQ6

BR4

BS2

t CUSIPi!<) A registered trademark of the American Bankers Association. Copyright ~) 1999-2005 Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. CUSIP® data herein is provided by Standard & Poor's CUSIP® Service Bureau. This data in not intended to create a database and does not serve in any way as a substitute for the CUSIP® Service Bureau. CUSIP® numbers are provided for convenience of reference only. Neither the Agency. the Financial Advisor nor the Underwriter takes any responsibility for the accuracy of such numbers.

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

Use of Official Statement. This Official Statement is submitted in connection with the offer and sale of the Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. This Oflicial Statement is not to be construed as a contract with the purchasers of the Bonds.

Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the Agency in any press release and in any oral statement made with the approval of an authorized officer of the Agency or any other entity described or referenced herein, the words or phrases "will likely result," "'arc expected to," "'will continue," "'is anticipated," "'estimate/' ''project," .. forecast," "'expect," ''intcndn and similar expressions identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of l 995. Such statements arc subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there arc likely to be differences between forecasts and actual results, and those differences may be material.

Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the Agency to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the Agency, the Financial Advisor or the Underwriter. This Official Statement docs 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.

Involvement of Underwriter. The Underwriter bas submitted the following sentence for inclusion in this Oflicial Statement: The Underwriter bas reviewed the information in this Oflicial Statement in accordance with, and as a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter docs not guarantee the accuracy or completeness of such information.

Information Subject to Change. The information and expressions of opinions herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Agency or any other entity described or referenced herein since the date hereof. All summaries of the documents referred to in this Official Statement are made subject to the provisions of such documents, respectively, and do not putport to be complete statements of any or all of such provisions.

Stabilization of Prices. In connection with this offering, the Underwriter may ovcrallot 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, 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 set forth on the inside front cover page hereof and said public offering prices may be changed from time to time by the Underwriter.

THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

CHICO REDEVELOPMENT AGENCY CHICO, CALIFORNIA

CITY COUNCIL AND AGENCY GOVERNING BOARD

Scott Grucndl, Mayor and Chair Maureen Kirk, Vice Mayor and Vice Chair

Steve Bertagna, Council Member and Agency Member Dan Herbert, Council Member and Agency Member

Andy Holcombe, Council Member and Agency Member Ann Schwab, Council Member and Agency Member Larry Wahl, Council Member and Agency Member

CITY AND AGENCY STAFF

Thomas J. Lando, City Manager and Agency Executive Director Patricia Dunlap, Senior Assistant Ci/v Manager and Assistant Executive Director

David R. Frank, City Attorney and Agency Counsel Lori J. Barker, Assistant Ci/v Attorney and Assistant Agency Counsel

Jennifer Hennessy, Cit_v Finance Director and AgenCJ' Treasurer Cindy Pierce, Budget Officer

Deborah Presson, City Clerk and Agency Secretary

PROFESSIONAL SERVICES

Bond Counsel and Disclosure Counsel Jones Hall

A Professional Law Corporation San Francisco, California

Financial Advisor Harrell & Company Advisors, LLC

Orange, California

Trustee Union Bank of California, N .A.

San Francisco, California

TABLE OF CONTENTS

INTRODUCTION ...................................................... 1 The Agency ................................................................ I The City ..................................................................... I Security and Sources of Repayment .......................... 1 Purpose ...................................................................... 3 Legal Matters ............................................................. 3 Other Professional Services ....................................... 3 Offering of the Bonds ................................................ 3 Information Concerning this Official Statement... .... .4

THE BONDS ............................................................... 5 Genera] Provisions ..................................................... 5 Redemption ................................................................ 5 Scheduled Debt Service on the Bonds and the

Prior Loans .............................................................. 8 Issuance of Additional Debt.. ..................................... 9

THE F'INANCING PLAN ........................................ 11

SOURCES OF PAYMENT FOR THE BONDS ..... 12 Tax Allocation Financing ......................................... 12 Tax Revenues ........................................................... 12 Pledge of Tax Revenues ........................................... 13 Reserve Account ...................................................... 13 Financial Guaranty Insurance .................................. 14

THE AGENCY .......................................................... 17 Agency Powers ........................................................ 17 Redevelopment Plans ............................................... 18 Plan Limitations ....................................................... 19 Low and Moderate Income Housing ........................ 20

THE PROJECT AREA ............................................ 20 The Southeast Chico Redevelopment Project.. ........ 20 The Chico Municipal Airport Redevelopment

Project ................................................................... 22 The Central Chico Redevelopment Project... ........... 24 (ireater Chico Urban Area Redevelopment Project .25 Major Taxpayers ...................................................... 27 Assessment Appeals ................................................. 27 Tax Collections ........................................................ 28 Outstanding Indebtedness of the Project Area ......... 28 Projected Tax Revenues and Debt Service

Coverage ............................................................... 29

FINANCIAL INFORMATION ............................... 34 Agency Budgetary Process and Administration ...... 34 Agency Accounting Records and Financial

Statements ............................................................. 34 Tax Increment Revenues ......................................... 36 Tax Sharing Agreements .......................................... 39 Tax Sharing Statutes ................................................ 40

BONDHOLDERS' RISKS ....................................... 42 Factors Which May Affect Tax Revenues ............... 42 State ofCalifomia Fiscal Issues .............................. 45 Secondary Market .................................................... 4 5 Loss of Tax Exemption ............................................ 45

LEGAi, MATTERS .................................................. 46 Enforceability of Remedies ..................................... 46 Approval of Legal Proceedings .............................. .46 Tax Matters .............................................................. 46 Absence of Litigation .............................................. 47

CONCLUDING INFORMATION .......................... 47 Ratings on the Bonds ............................................... 47 The Financial Advisor ............................................ .47 Continuing Disclosure ............................................. 47 Underwriting ........................................................... 48 Additional Information ............................................ 48 References ............................................................... 48 Execution ................................................................ 48

APPENDIX A- SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

APPENDIX 8- CITY OF CHICO INFORMATION STATEMENT

APPENDIX C -AGENCY AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING JUNE 30, 2004

APPENDIX D - FORM OF CONTINUING DISCLOSURE CERTIFICATE

APPENDIX E - FORM OF BOND COUNSEL OPINION

APPENDIX F - SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY

APPENDIX G - BOOK-ENTRY-ONLY SYSTEM

[THIS PAGE INTENTIONALLY LEFT BLANK]

OFFICIAL STATEMENT

$68,500,000

CHICO REDEVELOPMENT AGENCY

CHICO AMENDED AND MERCED REDEVELOPMENT PROJECT

2005 TAX ALLOCATION BONDS

This Official Statement which includes the cover page and appendices (the "Official Statement") is provided to furnish certain information concerning the sale of the Chico Redevelopment Agency Chico Amended and Merged Redevelopment Project 2005 Tax Allocation Bonds (the "Bonds"), in the aggregate principal amount of $68,500,000.

INTRODUCTION This Introduction contains on(v a hrief description of this issue and does not purport to he complete. The Introduction is subject in all respects to more complete information in the entire Official Statement and the offering of the Bond, to potential investors is made only by means of the entire Official Statement and the documents summarized herein. Potential investors must read the entire Official Statement lo ohlain information essential to the making of an informed investment decision.

The Agency

The Chico Redevelopment Agency (the "Agency") is a public body, corporate and politic, existing under and by virtue of the Community Redevelopment Law of the State of California, constituting Part l of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State (the "Redevelopment Law"). The Agency was activated by the City Council of the City of Chico on August 7, 1980 by the adoption of an ordinance. The City Council, at the same time, declared itself to be the members of the Agency and appointed the City Manager to be the Agency's Executive Director (sec "THE AGENCY" herein).

The City

The City of Chico is located in the northern Sacramento Valley, 90 miles north of Sacramento and 174 miles northeast of San Francisco. It is the major retail trade, recreational, educational, financial and commerce center for Butte County and the surrounding area. Chico covers an area of approximately 28.4 square miles (see "APPENDIX B - CITY OF CHICO INFORMATION STATEMENT" herein).

Security and Sources of Repayment

The Bonds. The Bonds are issued and secured under an Indenture of Trust, dated as of November I, 2005 (the "Indenture"), by and between the Agency and Union Bank of California, N.A., as trustee (the "Trustee") (see "APPENDIX A- SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE" herein).

The Agency has pledged to the repayment of the Bonds, and has secured by a lien on, all of the Tax Revenues on a parity basis with payments to be made pursuant to the Agency's Loan Agreement, dated as of February I, 1996 as amended by a First Amendment to 1996 Loan Agreement dated November I, 2005 ( as amended, the "1996 Loan") and the Agency's Loan Agreement dated as of July I, 200 I as amended by a First Amendment to 2001 Loan Agreement dated November I, 2005 (as amended, the "2001 Loan" and together with the 1996 Loan, the "Prior Loans"). Tax Revenues means all of the Tax Increment Revenues, defined below, allocated to the Agency's Chico Amended and Merged Redevelopment Project (the "Project Arca") including that portion of tax increment revenues otherwise required to be deposited in the Agency's Low and Moderate Income Housing Fund to the extent permitted to pay that portion of the 2001 Loan or Parity Debt issued to finance or refinance amounts deposited in the Low and Moderate Income Housing Fund but excluding (i) all other tax increment revenues otherwise required to be deposited in the Agency's Low and Moderate Income Housing Fund, (ii) amounts required to be paid pursuant to the Tax Sharing Agreements and Tax Sharing Statutes to the extent not subordinated to the payment of debt service on the Bonds and the Prior Loans, all as defined herein and (iii) amounts payable to the County as a charge for collecting such tax increment revenues. Tax Increment Revenues consist of tax increment revenues receivable by the Agency with respect to the Project Arca pursuant to Article 6 of Chapter 6 of the Redevelopment Law. Sec "THE AGENCY - Low and Moderate Income Housing," "THE PROJECT AREA - Outstanding Indebtedness of the Project Arca," "FINANCIAL ll\FORMATION - Tax Increment Revenues" and "BONDHOLDERS' RISKS" herein.

The Project Area. The Project Area was created through an amendment of the Redevelopment Plans for the Agency's Chico Merged Redevelopment Project and Greater Chico Urban Area Redevelopment Project on June 14, 2004. The Chico Merged Redevelopment Project was created through an amendment of the Redevelopment Plans for the Agency's Southeast Chico Redevelopment Project, Chico Municipal Airport Redevelopment Project and Central Chico Redevelopment Project on June 4, 1992. The Southeast Chico Redevelopment Project component of the Project Area ( the "Southeast Chico Redevelopment Project") encompasses 1,846 acres, of which 240 arc zoned for public, quasi-public and open space uses and is developed with a mix of residential and commercial uses and some limited industrial use. The Chico Municipal Airport Redevelopment Project component of the Project Arca (the "Chico Municipal Airport Redevelopment Project") is comprised of 1,670 acres, of which 1,285 are zoned for public, quasi-public and open space uses (including the Chico Municipal Airport) and is developed with primarily industrial uses. The Central Chico Redevelopment Project component of the Project Area (the "Central Chico Redevelopment Project") is an area of approximately 385 acres and includes the City's central business district. The Greater Chico Urban Area Redevelopment Project is an area of approximately 6,500 acres and encompasses property within the City's incorporated area as well as areas outside the City limits but within the City's sphere of influence. The portion of the Greater Chico Urban Area Redevelopment Project within the City's boundaries is approximately 3,046 acres and is developed primarily with residential uses with commercial pockets interspersed throughout, and approximately 120 acres of manufacturing and warehouse developments along its southern boundary. See "THE PROJECT AREA" herein.

The Bonds are special obligations of the Agency. The Bonds do not constitute a debt or liability of the City of Chico, the County of Butte, the State of California or of any political subdivision thereof, other than the Agency. The Agency shall only be obligated to pay the principal of the Bonds, or the interest thereon, from the funds described herein, and neither the faith and credit nor the taxing power of the City of Chico, the County of Butte, the State of California or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Bonds. The Agency has no taxing power.

2

Purpose

The Bonds arc being issued to (i) finance additional redevelopment activities of the Agency, (ii) satisfy the Reserve Requirement for the Bonds and (iii) provide for the costs of issuing the Bonds. See "THE FINANCING PLAN" and "APPENDIX A - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE -Special Escrow Fund" herein.

Legal Matters

All legal proceedings in connection with the issuance of the Bonds arc subject to the approving opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, as Bond Counsel. Snch opinion, and certain tax consequences incident to the ownership of the Bonds, including certain exceptions to the tax treatment of interest, arc described more fully under the heading "LEGAL MATTERS" herein. Certain legal matters will be passed on for the Agency by Jones Hall, San Francisco, California, as Disclosure Counsel and by David Frank, Agency Counsel.

Other Professional Services

Union Bank of California, N.A. serves as trustee (the 'Trustee") under the Indenture. The Trustee will act on behalf of the Bondholders for the purpose of receiving all moneys required to be paid to the Trustee, to allocate, use and apply the same, to hold, receive and disburse the Tax Revenues and other funds held under the Indenture, and otherwise to hold all the offices and perform all the functions and duties provided in the Indenture to be held and performed by the Trustee.

Harrell & Company Advisors, LLC, Orange, California, (the "Financial Advisor"), advised the Agency as to the financial structure .and certain other financial matters relating to the Bonds and assisted the Agency with the preparation of this Official Statement. Fees payable to Bond Counsel, Disclosure Counsel and the Financial Advisor are contingent upon the sale and delivery of the Bonds.

The Agency's financial statements for the fiscal year ended June 30, 2004, attached hereto as "APPENDIX C" have been audited by Macias, Gini & Company LLP, Certified Public Accountants, Sacramento, California. The Agency's audited financial statements arc public documents and are included within this Official Statement without the prior approval of the auditor. The auditor has not performed any post-audit of the financial condition of the Agency.

Offering of the Bonds

Authority for Issuance. The Bonds are to be issued and secured pursuant to the Indenture, as authorized by Resolution No. RDA l 0-05 of the Agency adopted on August 16, 2005 and the Redevelopment Law.

Offering and Delivery of the Bonds. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Jones Hall. A Professional Law Corporation, San Francisco, California, as Bond Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery through the facilities of The Depository Trust Company on or about November 17, 2005.

3

Information Concerning this Official Statement

This Official Statement speaks only as of its date. The information set forth herein has been obtained by the Agency with the assistance of the Financial Advisor from sources which arc believed to be reliable and such information is believed to be accurate and complete, but such information is not guaranteed as to accuracy or completeness, nor has it been independently verified and is not to be construed as a representation by the Financial Advisor, Bond Counsel, Disclosure Counsel or the Underwriter. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended as such and arc not to be construed as representations of fact. The information and expressions of opinion herein are subject to change without notice and the delivery of this Official Statement shall not, under any circumstances, create any implication that there has been no change in the information or opinions set forth herein or in the affairs of the Agency since the date hereof.

The summaries and references contained herein with respect to the Indenture, the Bonds and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. Copies of the documents described herein arc available for inspection during the period of initial offering of the Bonds at the offices of the Financial Advisor, Harrell & Company Advisors, LLC, 333 City Boulevard West, Suite 1430, Orange, California 92868, telephone (714) 939-1464. Copies of these documents may be obtained after delivery of the Bonds from the Trustee al Corporate Trust Department, 475 Sansome Street, 12'h Floor, San Francisco, California 94111. The City may be contacted at 411 Main Street, P.O. Box 3420, Chico, California 95927, telephone (530) 896-7200, www.ci.chico.ca.us.

4

THE BONDS

General Provisions

Interest on the Bonds is payable at the rates per annum set forth on the inside front cover page hereof. Interest on the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30-day months.

Interest on the Bonds will be payable semiannually on April I and October I of each year ( each an "Interest Payment Date"), commencing April 1, 2006, and will be calculated on the basis of a 360-day year composed of twelve 30-day months. Each Bond will bear interest from the Interest Payment Date next preceding the date of authentication thereof unless: (i) it is authenticated as of an Interest Payment Date; (ii) it is authenticated after a Record Date (being the 15'h day of the month preceding any Interest Payment Date whether or not such day is a Business Day) and before the following Interest Payment Date, and if the Agency is not in default in the payment of interest due on such Interest Payment Date, in which event it shall bear interest from such Interest Payment Date; or (iii) it is authenticated prior to on or before March 15, 2006, in which event it shall bear interest from the Closing Date.

Interest on the Bonds will be paid by the Trustee (out of the appropriate funds) by check mailed by first class mail, postage prepaid on the Interest Payment Date to the registered owner as his/her name and address appears on the register kept by the Trustee at the close of business on the Record Date immediately preceding the Interest Payment Date or, upon request in writing made on or before the Record Date preceding the Interest Payment Date by an owner of$1,000,000 or more in principal amount of Bonds, payment will be made on the Interest Payment Date by wire transfer in immediately available funds to an account in the United States of America designated by such Bond owner to the Trustee. While the Bonds are held in the book-entry-only system of DTC, all such payments will be made to Cede & Co., as the registered owner of the Bonds. See "APPENDIX G - BOOK-ENTRY-ONLY SYSTEM." Principal of, and redemption premium (if any), on the Bonds arc payable in lawful money of the United States of America upon surrender of the Bonds at maturity or earlier redemption at the corporate trust office of the Trustee indicated in the Indenture.

Redemption

Optional Redemption. The Bonds maturing on or before April 1, 2016, are not subject to redemption prior to their respective stated maturities. The Bonds maturing on or after April I, 2017, arc subject to redemption at the option of the Agency from any available source of funds by such maturity or maturities as determined by the Agency and by lot within a maturity, as a whole or in part on any date, on or after April 1, 2016, at a redemption price equal to the principal amount of the Bonds lo be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium.

Mandatory Redemption From Sinking Fund Payments. The Bonds maturing on April I, 2027, April I, 2030 and April I, 2032 (collectively, the "Term Bonds") are also subject to mandatory redemption in part by lot at a redemption price equal to the principal amount thereof to be redeemed, without premium, in the aggregate respective principal amounts and on April I in the respective years as set forth in the following tables; provided, however, that if some but not all of the Term Bonds have been redeemed pursuant to optional redemption described above, the total amount of all future sinking fund payments shall be reduced by the aggregate principal amount of such Term Bonds so redeemed, to be allocated among such sinking fund payments on a pro rata basis in integral multiples of $5,000 (as set forth in a schedule provided by the Agency to the Trustee).

5

Term Bonds Maturing April 1, 2027

Sinking Fund Redemption Date

(April 1)

2026 2027 (maturity)

Principal Amount To Be Redeemed

$5,690,000

5,975,000

Term Bonds Maturing April 1, 2030

Sinking Fund Redemption Date

(April 1)

2028 2029

2030 (maturity)

Principal Amount To Be Redeemed

S6,270,000 6,585,000

6,915,000

Term Bonds Maturing April 1, 2032

Sinking Fund Redemption Date

(April 1)

2031 2032 (maturity)

General Redemption Provisions

Principal Amount To Be Redeemed

$7,260,000

7,625,000

Notice of Redemption, Rescission. The Trustee will mail (by first class mail, postage prepaid) notice of any redemption at least 30 but not more than 60 days prior to the redemption date, to the owners of each such Bonds designated for redemption at their respective addresses appearing on the registration books of the Trustee. Neither the failure to receive any such notice nor any defect therein will affect the sufficiency of the proceedings for the redemption of such Bonds. The notice of redemption must state the date of the notice, the redemption date, the redemption place and the redemption price and must designate the CUSIP numbers, the Bond numbers (if less than all Bonds of a maturity are to be redeemed) and the maturity or maturities (in the event of redemption of all of the Bonds of such maturity or maturities in whole) of the 'Bonds to be redeemed, and must require that such Bonds be then surrendered at the office of the Trustee identified in such notice for redemption at the redemption price, giving notice also that further interest on such Bonds will not accrue from and after the redemption date.

The Agency has the right to rescind any optional redemption by written notice to the Trustee on or prior to the date fixed for redemption. Any notice of optional redemption shall be cancelled and annulled if for any reason funds will not be or are not available on the date fixed for redemption for the payment in full of the Bonds then called for redemption, and such cancellation shall not constitute an Event of Default under the Indenture. The Agency and the Trustee have no liability to the Owners or any other party related to or arising from such rescission of redemption. The Trustee shall mail notice of such rescission of redemption in the same manner as the original notice of redemption was sent.

6

The actual receipt by the Bond owner of the notice of redemption shall not be a condition precedent to the redemption of the applicable Bond, and failure to receive notice shall not affect the validity of the proceedings for redemption of such Bond or the cessation of interest with respect to such Bond on the redemption date.

Partial Redemption. Upon surrender of any Bond redeemed in part only, the Agency shall execute and the Trustee shall authenticate and deliver to the registered owner, at the expense of the Agency, a new Bond or Bonds of authorized denominations equal in aggregate principal amount to the unredeemed portion of the Bond surrendered and of the same interest rate and same maturity. A partial redemption shall be valid upon payment of the amount required to be paid to the registered owner, and the Agency and the Trustee shall be released and discharged from all liability to the extent of such payment.

Effect of Redemption. Notice or redemption having been duly given, and moneys for payment of the principal of, premium, if any, and interest payable upon redemption of the Bonds being set-aside, the Bonds, or parts thereof, called for redemption shall, on the redemption date, become due and payable at the redemption price specified in the notice. Interest on the Bonds, or parts thereof, as the case may be, called for redemption shall cease to accrue and be payable from and after the redemption date. The Bonds, or parts thereof redeemed, shall cease to be entitled to any lien, benefit or security under the Indenture.

7

Scheduled Debt Service on the Bonds and the Prior Loans

The following is the scheduled annual Debt Service on the Bonds and the Prior Loans.

Total Combined Annual Debt Annual Prior Annual

Bond Year Ending Princil!al Interest Service Loan Payments (I) Debt Service

April I, 2006 s s 1,205,303.0l s 1,205,303.0l $ 4,312,523.76 s 5,517,826.77

April I, 2007 165,000.00 3,238,127.50 3,403,127.50 4,310.203.76 7,713,331.26

April I, 2008 490,000.00 3,232,352.50 3,722,352.50 4,314.178.76 8,036,531.26

April I, 2009 785,000.00 3,215,202.50 4,000,202.50 4,313,628.76 8,313,831.26

April I, 20!0 890,000.00 3,187,727.50 4,077, 727 .50 4,313,513.76 8,391,24 l.26

Aprill, 2011 920,000.00 3,156,577.50 4,076,577 .50 4.314,388.76 8,390,966.26

April I, 2012 955,000.00 3,122,077.50 4,077,077.50 4,311,451.26 8,388,528. 76

April I, 2013 995,000.00 3,083,877.50 4,078,877 .50 4,307,763.76 8,386,641.26

April I, 2014 1,030.000.00 3,044,077.50 4,074,077.50 4,312,053.76 8,386,13 l.26

April 1, 2015 1,070,000.00 3,002,877.50 4,072,877.50 4,310,447.52 8,383,325.02

April I, 2016 1,115,000.00 2,960,077.50 4,075,077.50 4.309,445.02 8,384,522.52

April I, 2017 1,180.000.00 2,915,477.50 4,095,477.50 4,420,748.76 8,516.226.26

April 1,2018 1,225,000.00 2,868.277.50 4,093,277.50 4.421,936.26 8,515,213.76

April 1,2019 1,275,000.00 2,817,746.26 4,092,746.26 4.422,966.26 8,515,712.52

April I, 2020 1,355,000.00 2,763,558.76 4,118,558.76 4,396, 106.26 8,514,665.02

April I, 202 l l,410,000.00 2,705,293.76 4,115,293.76 4,398,381.26 8,513,675.02

April I, 2022 l,435,000.00 2.643,606.26 4,078,606.26 4,166,537.50 8.245,143.76

April I, 2023 1,495,000.00 2,580,825.00 4,075,825.00 4,166,968.76 8.242,793.76

April 1, 2024 l ,565,000.00 2,513,550.00 4,078,550.00 4,162.468.76 8,241,018.76

April 1, 2025 2,825,000.00 2,443,125.00 5,268,125.00 2,737,725.00 8.005,850.00

April I, 2026 5,690,000.00 2.316,000.00 8,006,000.00 8,006,000.00

April I, 2027 5,975,000.00 2,031,500.00 8,006,500.00 8,006,500.00

April I, 2028 6,270,000.00 l,732,750.00 8,002,750.00 8,002,750.00

April I, 2029 6,585,000.00 1,419,250.00 8,004,250.00 8,004,250.00

April I, 2030 6,915,000.00 1,090.000.00 8,005,000.00 8,005,000.00

April 1, 203 l 7,260,000.00 744,250.00 8,004,250.00 8,004,250.00

April 1, 2032 7 625 000.00 381,250.00 8 006 250.00 8 006 250.00

Total $68,500,000.00 $66,414, 738.05 $134,914,738.05 $84,723,437.70 $219,638, 175.75

(1) Aggregate debt service on the 1996 Loan and 200 I Loan, including that portion of the 2001 Loan payable from amounts deposited in the Agency's Low and Moderate Income Housing Fund.

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Issuance of Additional Debt

Parity Debt. The Agency may issue Parity Debt in such principal amount as it determines, subject to the following conditions precedent:

(a) Compliance With Prior Loan Agreements. So long as the Agency's obligations under the Prior Loan Agreements remain unpaid, all of the conditions set forth in the Prior Loan Agreements must be met with respect to the issuance of such Parity Debt.

(b) No Defaults. No Event of Default (or no event with respect to which notice has been given and which, once all notice of grace periods have passed, would constitute an Event of Default) has occurred and is continuing, unless otherwise permitted by the Bond Insurer.

(c) Coverage Test.

(i) The amount of Tax Revenues for each future Fiscal Year, based on the most recent assessed valuation of taxable property in the Project Area must be at least equal to 130% of debt service coming due and payable in each Fiscal Year on all Agency Debt which will be Outstanding following the issuance of such Parity Debt.

However, if both (A) the Redevelopment Plan has not been amended to permit the collection Tax Revenues from the Southeast Chico Redevelopment Project component of the Project Area in any Fiscal Year during the term of the Outstanding Agency Debt, and (B) the assessed valuation of taxable property in the Greater Chico Urban Arca Redevelopment Project component of the Project for the current Fiscal Year is less than two times the base year assessed valuation of taxable property in the Greater Chico Urban Area Redevelopment Project, then the amount of Tax Revenues for each future Fiscal Year ending after September 1, 2032, based on the most recent assessed valuation of taxable property in the Project Area, must be at least equal to 150% of the amount of debt service coming due and payable on all Outstanding Agency Debt, in each such Fiscal Year in which the Agency is not permitted to collect Tax Revenues from the Southeast Chico Redevelopment Project, and for all prior Fiscal Years the requiremcntt. of the previous paragraph must be met.

(ii) For purposes of this subsection (c), the amount of Tax Revenues must be calculated based on the most recent assessed valuation of taxable property as evidenced in a written document from an appropriate official of the County, and must be calculated based on an assumed tax rate of l % of assessed value.

(iii) For purposes of this subsection ( c ), annual debt service on any Parity Debt the proceeds of which have been deposited into an escrow fund as provided in subsection ( c) below will be excluded.

(iv) The requirements of this subsection (c) do not apply to any Parity Debt issued to refund any Agency Debt in whole or in part, so long as the aggregate amount of debt service coming due and payable on such Parity Debt in each Fiscal Year during the term thereof docs not exceed the aggregate amount of debt service coming due and payable on the Agency Debt to be refunded during each of the corresponding years during the term thereof.

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(d) Parity Debt Document Requirements. The document providing for the issuance of such Parity Debt must provide that:

(i) interest on said Parity Debt is payable on April I and October I in each year of the term of such Parity Debt, except that interest during the first twelve month period may be payable on any April I or October I;

(ii) the principal of such Parity Debt is payable on April I in any year in which principal is payable; and

(iii) an amount is deposited into a reserve fund from the proceeds of the sale of such Parity Debt in an amount sufficient to cause the balance therein, together with the balance in all of the other reserve funds established for the Agency Debt, to equal the full amount of Maximum Annual Debt Service, calculated as of the date of issuance of such Parity Debt; which deposit may be provided in the form of a Qualified Reserve Account Credit Instrument.

( e) Escrow Fund Permitted. The proceeds of such Parity Debt may be deposited into an escrow fund from which amounts may be released to the Agency to the extent the amount of Tax Revenues for the most recent Fiscal Year (as evidenced in the written records of the County), meet the coverage test set forth in subsection (c) above.

( f) No Violation of Plan Limitations. The issuance of such Parity Debt docs not cause the Agency to exceed any applicable Plan Limitations. Without limiting the generality of the foregoing, the Agency may not issue any Parity Debt in the event and to the extent that either:

(i) the aggregate amount of debt service on all outstanding obligations of the Agency, including such Parity Debt, exceeds the aggregate amount of Tax Revenues which arc eligible under the Redevelopment Plans to be allocated and paid to the Agency during the period while such outstanding obligations remain outstanding, or

(ii) the aggregate principal amount of all outstanding obligations of the Agency, including such Parity Debt, exceeds any applicable limit in the Redevelopment Plans on the aggregate principal amount of indebtedness which the Agency is permitted to have outstanding at any one time.

(g) Certification of Compliance. The Agency must deliver to the Trustee and the Bond Insurer a Certificate of the Agency certifying that the conditions precedent to the issuance of such Parity Debt set forth in the Indenture and in the documents authorizing the issuance of all other Parity Debt have been satisfied.

Subordinate Debt. If the Agency is in compliance with all covenants set forth in the Prior Loan Agreements and the Indenture, the Agency may for any purpose issue or incur obligations having a lien on the Tax Revenues which is subordinate to the pledge of the Tax Revenues to the Prior Loans or the Bonds.

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THE FINANCING PLAN Under the provisions of the Indenture, the Trnstee will receive the proceeds from the sale of the Bonds, together with other available funds and will apply them as shown below.

Source of Funds

Par Amount of Bonds Original Issue Premium Total Sources of Funds

Uses of Funds

Project Fund Reserve Account Underwriter's Discount Costs of Issuance Fund ( 1'

Total Use of Funds

$68,500,000.00 998 535.80

$69.498,535.80

$64,058,099.56 4,092,746.27

297,171.15 1,050,518.82

$69 498.535.80

ill Expenses include fees and expenses of Bond Counsel, the Financial Advisor, Disclosure Counsel and the 1'rustee, costs of printing the Otlicial Statement, bond insurance premium and other costs of issuance of the Bonds.

Use of Proceeds Deposited in the Project Fund. The Agency expects to use the proceeds of the Bonds deposited in the Project Fund to fund redevelopment activities within the Project Arca. Such activities may include assisting with infrastrncture and other public improvements required for new development including, but not limited to streets, sidewalks, sanitary sewers, park and recreational facilities, airport improvements and utilities. The Agency may, in its discretion, finance other redevelopment activities within or of benefit to the Redevelopment Project.

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SOURCES OF PAYMENT FOR THE BONDS

Tax Allocation Financing

The Redevelopment Law and the Cal ifomia Constitution provide a method for financing and refinancing redevelopment projects based upon an allocation of taxes collected within a redevelopment project area. First, the assessed valuation of the taxable property in a project area, as last equalized prior to adoption of the redevelopment plan, is established and becomes the base roll. Thereafter, except for any period during which the assessed valuation drops below the base year level. the taxing agencies, on behalf of which taxes are levied on property within the project area, will receive the taxes produced by the levy of the then current tax rate upon the base roll. Taxes collected upon any increase in the assessed valuation of the taxable property in a project area over the levy upon the base roll may be pledged by a redevelopment agency to the repayment of any indebtedness incurred in financing the redevelopment project. Redevelopment agencies themselves have no authority to levy taxes on property and must look specifically to the allocation of taxes as indicated above.

Tax Revenues

As provided in each of the Redevelopment Plans for the constituent project areas (the constituent project areas arc individually referred to herein as "Redevelopment Projects" and the project area resulting from the merger of the Redevelopment Projects is referred to herein as the "Project Arca"), and pursuant to Article 6 of Chapter 6 of the Redevelopment Law, and Section 16 of Article XVI of the Constitution of the State, taxes levied upon taxable property in the Redevelopment Projects each year by or for the benefit of the State, for cities, counties, districts or other public corporations (collectively, the "Taxing Agencies") for fiscal years beginning after the effective date of each constituent Redevelopment Plan, will be divided as follows:

I. To Taxing Agencies: The portion of the taxes which would be produced by the rate upon which the tax is levied each year by or for each of said Taxing Agencies, as defined herein, upon the total sum of the assessed value of the taxable property in the project area as shown upon the assessment roll used in connection with the taxation of such property by such Taxing Agency last equalized prior to the establishment of the project area will be allocated to, and when collected will be paid into, the funds of the respective Taxing Agencies as taxes by or for said Taxing Agencies; and

2. To the Agency: The portion of such levied taxes each year in excess of such amount will be allocated to, and when collected, will be paid into a special fund of the Agency to the extent necessary to pay indebtedness of the Agency.

The Agency has no power to levy and collect property taxes, and any property tax limitation, legislative measure, voter initiative or provisions of additional sources of income to Taxing Agencies having the effect of reducing the property tax rate could reduce the amount of Tax Revenues that would otherwise be available to pay the Agency's obligations under the Indenture, the 1996 Loan Agreement and the 2001 Loan Agreement and thus reduce the amount of Tax Revenues available to pay the principal of, premium (if any) and interest on the Bonds and the Prior Loans. Likewise, broadened property tax exemptions could have a similar effect. Sec "BONDHOLDERS' RISKS" and "FINANCIAL INFORMATION Tax Increment Revenues" herein.

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Pledge of Tax Revenues

The Tax Revenues are pledged to the payment of principal of and interest on the Bonds pursuant to the Indenture until the Bonds, the Prior Loans and any Parity Debt have been paid, or until moneys have been set-aside irrevocably for that purpose. The Trustee will covenant to exercise such rights and remedies as may be necessary to enforce the payment of the Tax Revenues when due under the Indenture and otherwise to protect the interests of the Bondholders in the event of default by the Agency.

The Bonds arc limited obligations of the Agency. The Bonds do not constitute a debt or liability of the City of Chico, the State of California or of any political subdivision thereof, other than the Agency. The Agency shall only be obligated to pay the principal of the Bonds, or the interest thereon, from the funds described herein, and neither the faith and credit nor the taxing power of the City of Chico, the State of California or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Bonds. The Agency has no taxing power.

The Agency has irrevocably granted a pledge of, lien on, and security interest in the Tax Revenues for the repayment of the Bonds on a parity with the Prior Loans. Tax Revenues consist of all of the Tax Increment Revenues allocated to the Agency's Project Area including that portion of tax increment revenues otherwise required to be deposited in the Agency's Low and Moderate Income Housing Fund to the extent permitted to pay that portion of the 2001 Loan or Parity Debt issued to finance or refinance amounts deposited in the Low and Moderate Income Housing Fund but excluding (i) all other tax increment revenues otherwise required to be deposited in the Agency's Low and Moderate Income Housing Fund, (ii) amounts required to be paid pursuant to the Tax Sharing Agreements and Tax Sharing Statutes to the extent not subordinated to the payment of debt service on the Bonds and the Prior Loans, and (iii) amounts payable to the County as a charge for collecting such tax increment revenues. See "THE PROJECT AREA - Outstanding Indebtedness of the Project Arca," "THE AGENCY - Low and Moderate Income Housing," "FINANCIAL INFORMATION - Tax Increment Revenues" and 'Tax Sharing Statutes," and "BONDHOLDERS' RISKS" herein.

Reserve Account

The Trustee, in its capacity as trustee for the 1996 Bonds and the 2001 Bonds, has previously established a reserve account which is held by the Trustee in trust for the mutual benefit of the owners of the 1996 Bonds, the 2001 Bonds, and any Parity Debt. Under the Indenture, the Trustee also holds a Reserve Account which will secure the 1996 Bonds, the 2001 Bonds, the Bonds and any Parity Debt. The cumulative amount required to be maintained in all reserve accounts established for the 1996 Bonds, the 200 I Bonds, the Bonds and any Parity Debt, as of any date of calculation, is an amount equal to the Maximum Annual Debt Service on all outstanding 1996 Bonds, 2001 Bonds, the Bonds and Parity Debt excluding from such calculation either (a) Annual Debt Service with respect to the proceeds of the Bonds held in an escrow fund or (b) 10% of the issue price ( within the meaning of section 148 of the Code) of the Bonds held in an escrow fund (the "Reserve Requirement"). Subject to certain rights of the Trustee, in the event that the amount on deposit with the Trustee to pay principal and interest due on the Bonds is less than the full amount required for such purpose on the date due, the Trustee will withdraw from the Reserve Account, and transfer to the Interest Account and the Principal Account, as required, the difference between the amount required to be on deposit in any or all of those accounts and the amount available on such date. The Indenture provides that in lieu of a cash deposit, the Agency may satisfy all or a portion of the Reserve Requirement by means of a Qualified Reserve Account Credit Instrument, which consists of a qualifying letter of credit, surety bond, insurance policy or similar financial undertaking (see "APPENDIX A - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE -Establishment of Funds - Revenue Fund Reserve Account" herein).

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With respect to that portion of the Reserve Requirement attributable to the 1996 Bonds, the balance in the Reserve Account held under the indenture of trust for the 1996 Bonds is $2,738,025.00. With respect to that portion of the Reserve Requirement attributable to the 2001 Bonds, the balance in the Reserve Account held under the indenture of trust for the 2001 Bonds is $1,684,941.25. Upon issuance of the Bonds, the Reserve Requirement will increase by $4,092,746.27 to SS,515,712.52, and the Agency will deposit the amount necessary to meet the Reserve Requirement with the Trustee from proceeds of the Bonds.

Financial Guaranty Insurance

Payment Pursuant to Financial Guaranty Insurance Policy

Ambac Assurance has made a commitment to issue a financial guaranty insurance policy (the "Financial Guaranty Insurance Policy") relating to the Bonds effective as of the date of issuance of the Bonds. Under the terms of the Financial Guaranty Insurance Policy. Ambac Assurance will pay to The Bank of New York, New York, New York or any successor thereto (the "Insurance Trustee") that portion of the principal of and interest on the Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such terms arc defined in the Financial Guaranty Insurance Policy). Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Trustee. The insurance will extend for the term of the Obligations and, once issued, cannot be canceled by Ambac Assurance.

The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates and on mandatory sinking fund installment dates, in the case of principal, and on stated dates for payment, in the case of interest. If the Bonds become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Bonds, Ambac Assurance will remain obligated to pay principal of and interest on outstanding Bonds on the originally scheduled interest and principal payment dates including mandatory sinking fund redemption dates. In the event of any acceleration of the principal of the Bonds, the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration.

In the event the Trustee has notice that any payment of principal of or interest on a Bond which has become Due for Payment and which is made to a Holder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction, such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds arc not otherwise available.

The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment, as defined in the Policy. Specifically, the Financial Guaranty Insurance Policy docs not cover:

I. payment on acceleration, as a result of a call for redemption ( other than mandatory sinking fund redemption) or as a result of any other advancement of maturity.

2. payment of any redemption, prepayment or acceleration premium.

3. nonpayment of principal or interest caused by the insolvency or negligence of any Trustee, Paying Agent or Bond Registrar, if any.

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If it becomes necessary to call upon the Financial Guaranty Insurance Policy, payment of principal requires surrender of Bonds to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such Bonds to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy. Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of Holder entitlement to interest payments and an appropriate assignment of the Holder's right to payment to Ambac Assurance.

Upon payment of the insurance benefits, Ambac Assurance will become the owner of the Bond, appurtenant coupon, if any, or right to payment of principal or interest on such Bond and will be fully subrogated to the surrendering Holder's rights to payment.

In the event that Ambac Assurance were to become insolvent, any claims arising under the Policy would be excluded from coverage by the California Insurance Guaranty Association, established pursuant to the laws of the State of California.

Ambac Assurance Corporation

Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states. the District of Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, with admitted assets of approximately $8, 720,000,000 (unaudited) and statutory capital of $5,287,000,000 (unaudited) as of June 30, 2005. Statutory capital consists of Ambac Assurance's policyholders' surplus and statutory contingency reserve. Standard & Poor's Credit Markets Services, a Division of The McGraw-Hill Companies, Moody's Investors Service and Fitch Ratings have each assigned a triple-A financial strength rating to Ambac Assurance.

Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in its Financial Guaranty insurance policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor of the Bonds.

Ambac Assurance makes no representation regarding the Bonds or the advisability of investing in the Bonds and makes no representation regarding, nor has it participated in the preparation of, the Official Statement other than the information supplied by Ambac Assurance and presented under the heading "SOURCES OF PAYMENT FOR THE BONDS - Financial Guaranty Insurance."

Available lnf11rmation

The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the "Company"), is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These reports, proxy statements and other information can be read and copied at the SEC's public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains an internet site at http://www.scc.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC, including the Company. These reports, proxy statements and other information can also be read at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, New York 10005.

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Copies of Ambac Assurance's financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance. The address of Ambac Assurance's administrative offices and its telephone number are One State Street Plaza, 19th Floor, New York, New York, 10004 and (212) 668-0340.

Incorporation of Certain Documents by Reference

The following documents filed by the Company with the SEC (File No. 1-10777) are incorporated by reference in this Official Statement:

I. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and filed on March 15, 2005;

2. The Company's Current Report on Form 8-K dated April 5, 2005 and filed on April 11, 2005;

3. The Company's Current Report on Form 8-K dated and filed on April 20, 2005:

4. The Company's Current Report on Form 8-K dated May 3, 2005 and filed on May 5, 2005;

5. The Company's Quarterly Report on Form 10-0 for the fiscal quarterly period ended March 31, 2005 and filed on May I 0, 2005;

6. The Company's Current Report on Form 8-K dated and filed on July 20. 2005;

7. The Company's Current Report on Form 8-K dated July 28, 2005 and filed on August 2, 2005; and

8. The Company's Quarterly Report on Form I 0-0 for the fiscal quarterly period ended June 30, 2005 and filed on August 9, 2005.

All documents subsequently filed by the Company pursuant to the requirements of the Exchange Act after the date of this Official Statement will be available for inspection in the same manner as described above in "Available Information."

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THE AGENCY The Agency is a public body, corporate and politic, existing under and by virtue of the California Community Redevelopment Law, being Part I of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State (the "Redevelopment Law"). The Agency was activated in 1980, and is governed by a seven-member board which consists of all members of the City Council. The Mayor of the City is appointed as the Chair of the Agency. The Agency's members and term expiration dates arc as follows:

Board Member Term Exl!ircs 0CCUl!8tion

Scot! Gruendl, Mayor December, 2006 Glenn County Administrator

Maureen Kirk, Vice Mayor December, 2006 Dental Hygienist

Steve Bertagna December, 2008 Business Owner

Dan Herbert December, 2006 Business Executive

Andy Holcombe December, 2008 Attorney Ann Schwab December, 2008 Non-profit Assistant Director

Larry Wahl December, 2008 Small Business Owner

The City performs certain general administrative functions for the Agency. The City Manager serves as the Agency's Executive Director and the City's Finance Director serves as Agency Treasurer. The costs of such functions, as well as additional services performed by City staff are allocated annually to the Agency. The Agency reimburses the City for such allocated costs out of available Tax Increment Revenues. Such reimbursement is subordinate to any outstanding bonds, loans and other indebtedness of the Agency. Current City Staff assigned to administer the Agency include:

Thomas J. Lando, City Manager and Executive Director

Patricia Dunlap, Senior Assistant City Manager and Assistant Executive Director

Jennifer Hennessy, Finance Director and Treasurer

David R. Frank, City Attorney and Agency Counsel

Lori J. Barker, Assistant City Attorney and Assistant Agency Counsel

Deborah Presson, City Clerk and Agency Secretary

Cindy Pierce, Budget Officer Dennis McLaughlin, Housing Officer

Agency Powers

All powers of the Agency are vested in its members. Pursuant to the Redevelopment Law, the Agency is a separate public body and exercises governmental functions, including planning and implementing the Project Arca.

The Agency may exercise the right to issue or incur loans, advances or other indebtedness for authorized purposes and to expend their proceeds, and the right to acquire, sell, rehabilitate, develop, administer or lease property. The Agency may demolish buildings, clear land and cause to be constructed certain improvements, including but not limited to streets, sidewalks, sanitary sewers, park and recreational facilities, airport improvements and utilities, and can further prepare for use as a building site any real property which it owns or administers. The Agency may, from any funds made available to it for such purposes. and subject to certain conditions, pay for all or part of the value of land and the cost of buildings, facilities or other improvements to be publicly owned and operated. The Agency may not construct or develop buildings, with the exception of public buildings and housing, and must sell or lease cleared property which it acquires within a redevelopment project for redevelopment in conformity with a

17

particular redevelopment plan, and may further specify a period within which such redevelopment must begin and be completed. The Agency does not currently possess power of eminent domain.

Redevelopment Plans

Under the Redevelopment Law the governing board is required to adopt, by ordinance, a redevelopment plan for each redevelopment project. A redevelopment agency may only undertake those activities within a redevelopment project specifically authorized in the adopted redevelopment plan. A redevelopment plan is a legal document, the content of which is largely prescribed in the Redevelopment Law rather than a "plan" in the customary sense of the word. The general objectives of the Agency's Redevelopment Plans are to encourage investment in the project areas by the private sector. The Redevelopment Plans provide for the acquisition of property, the demolition of buildings and improvements, the relocation of any displaced occupants, and the construction of streets, sanitary sewers, park and recreational facilities, airport improvements, parking facilities, utilities and other public improvements. The Redevelopment Plans also allow the redevelopment of land by private enterprise, the rehabilitation of structures, the rehabilitation or construction of low and moderate income housing, and participation by owners and the tenants of properties in the project areas.

The City Council approved and adopted the Redevelopment Plan for the Southeast Chico Redevelopment Project on October 14, 1980. It was amended on November 15, 1983 to add additional acreage and on May 5, 1992 to fiscally merge the project area with the Chico Municipal Redevelopment Airport Project and the Central Chico Redevelopment Project. It was also amended on December 20, 1994 to add limitations prescribed by AB 1290 (sec "THE AGENCY - Plan Limitations" below), on December 16, 2003 to extend such limitations pursuant to SB 1045, and on May 17, 2005 to further extend such limitations pursuant to SB I 096.

The City Council approved and adopted the Redevelopment Plan for the Chico Municipal Airport Redevelopment Project on April 19, 1983. It was amended on May 5, 1992 to fiscally merge the project area with the Southeast Chico Redevelopment Project and the Central Chico Redevelopment Project. It was also amended on December 20, 1994 to add limitations prescribed by AB 1290, on December 16, 2003 to extend such limitations pursuant to SB 1045, and on May 17, 2005 to further extend such limitations pursuant to SB I 096.

The City Council approved and adopted the Redevelopment Plan for the Central Chico Redevelopment Project on July 16, 1985. It was amended on May 5, 1992 to fiscally merge the project area with the Southeast Chico Redevelopment Project and the Chico Municipal Airport Redevelopment Project. It was also amended on December 20, 1994 to add limitations prescribed by AB 1290, and on December 16, 2003 to exten~ such limitations pursuant to SB l 045.

The City Council approved 'and adopted the Redevelopment Plan for the Greater Chico Urban Area Redevelopment Project on October 25, 1993. It was subsequently amended on July 2, 1996 to clarify intentions and powers of the Redevelopment Plan.

The Agency concluded proceedings to fiscally merge the Redevelopment Projects on June 14, 2004. The amendment to each original redevelopment plan on that date also eliminated the time limit to incur indebtedness in the Southeast Chico Redevelopment Project, the Chico Municipal Airport Redevelopment Project and the Central Chico Redevelopment Project, established a single limit on the cumulative amount of tax increment revenues for the Project Area and established a single limit on the amount of bonded indebtedness that can be outstanding for the Project Area.

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Plan Limitations

In 1993, the State Legislature adopted Assembly Bill 1290 (AB 1290), which imposed certain time limitations on ( 1) the allocation of Tax Increment Revenues to the constituent redevelopment projects, (2) the effectiveness of each Redevelopment Plan and (3) the incurrence of debt. Prior to subsequent changes, Section 33333.6 of the Redevelopment Law provided that a redevelopment agency may not pay indebtedness or receive property taxes pursuant to Section 33670 of the Redevelopment Law after ten years from the termination of the effectiveness of a Redevelopment Plan (which was limited to the later of January 1, 2009 or 40 years after the adoption of such Redevelopment Plan). In 1998, the State Legislature adopted Assembly Bill 1342 (AB 1342), which allowed redevelopment agencies to extend plan limitations to such maximum terms if such agency's existing plan limits were shorter. In 2002, the State Legislature adopted Senate Bill 2 JI (SB 211 ), allowing the elimination of the Agency's limitation on incurring debt. More recently, Senate Bill I 045 (SB 1045) provided that the City Council could adopt an ordinance to extend the limits on the termination of a redevelopment plan and the authority to collect Tax Increment Revenues by one additional year if the Agency was required to make a payment to ERAF in 2003/04 (see "BONDHOLDERS' RISKS- State of California Fiscal Issues" herein) and Senate Bill 1096 (SB I 096) provided that the City Council could adopt an ordinance to extend the limits on the termination of a redevelopment plan and the authority to collect Tax Increment Revenues by one additional year if the Agency was required to make a payment to ERAF in 2004/05 and 2005/06. Even though the constituent Redevelopment Projects have been merged, the limitations established with respect to a constituent Redevelopment Project continue to apply to such constituent Redevelopment Project, except with respect to the limitation on the maximum Tax Increment Revenues and on maximum outstanding bonded indebtedness as described below, which was established through an amendment to each Redevelopment Plan.

The limitations imposed by the respective Redevelopment Plans are as follows:

Last Date to Collect Last Date to Project Area Plan Ex11iration Date Tax Increment Incur Debt (3>

Southeast Chico: Original Area (l )(2l October I, 2022 October I, 2032 NIA Amendment Area <1l< 2l November 15, 2025 November 15, 2035

Chico Municipal Airport (ll April 19, 2025 April 19, 2035 NIA

Central Chico July 16, 2026 July 16, 2036 NIA

Greater Chico Urban Area October 25. 2034 October 25, 2044 October 25, 2013

Pl The City Council has adopted an ordinance under the provisions of SB 1045 and SB 1096 to extend the plan expiration and last date to collect tax increment.

<2> The City Council has adopted an ordinance under the provisions of SB I 096 to extend the plan expiration and last date to collect tax increment.

(3> The City Council has adopted an ordinance under the provisions of SB 211 to eliminate the limitation on the

date to incur debt with respect to the Southeast Chico Redevelopment Project, the Chico Municipal Airport Redevelopment Project and the Central Chico Redevelopment Project.

The limitation on the maximum Tax Increment Revenues for the Project Area is $2,064,000,000. The maximum bonded indebtedness for the Project Arca is $490,000,000.

19

Low and Moderate Income Housing

In 1976, the Redevelopment Law was amended to require that for every redevelopment plan adopted after January 1, 1977, or any area which is added to a redevelopment project by an amendment to a redevelopment plan after January 1, 1977, not less than 20% of Tax Increment Revenues must be set­aside annually for the purpose of increasing and improving the community's snpply of low and moderate income housing available at affordable housing costs to persons and families of very low, low or moderate income households. In 1985, the Redevelopment Law was further amended to add substantially the same requirements with respect to plans adopted prior to January 1, 1977.

A portion of the proceeds of the 200 I Loan were used to refinance a prior loan from the Authority. A portion of such loan was allocable to amounts deposited into the Agency's Low and Moderate Income Housing Fund (the "Housing Fund"). The Agency pledged Tax Increment Revenues that are required to be deposited into the Housing Fund towards the repayment of an allocable portion of the 200 I Loan (the "Housing Amount"). The Housing Amount represents approximately 16.79% of the Loan Payments on the 2001 Loan. In addition, the Housing Amount is less than the total amount required to be set-aside for low and moderate income housing expenditures annually, and such excess is not pledged to the 2001 Loan; moreover, in the event that the Agency issues Parity Debt, amounts otherwise required to be set­aside in the Housing Fund will be pledged to the repayment of Parity Debt only to the extent debt service on such Parity Debt is attributable to proceeds of the Parity Debt deposited in the Housing Fund for use pursuant to Section 33334.2 of the Redevelopment Law.

THE PROJECT AREA The Project Area is comprised of the Agency's four constituent redevelopment projects: the Southeast Chico Redevelopment Project, the Chico Municipal Airport Redevelopment Project, the Central Chico Redevelopment Project and Greater Chico Urban Arca Redevelopment Project. The relative acreage from each of the constituent redevelopment projects comprising the Project Area is shown below:

Southeast Chico Chico Municipal Airport Central Chico Greater Chico Urban Area

1,846 Acres 1,670 Acres

385 Acres 6,500 Acres

10,401 Acres

Approximately 1,525 acres of the Project Area are zoned for public, quasi-public and open space uses.

The Southeast Chico Redevelopment Project

The Southeast Chico Redevelopment Project was formed in 1980 and expanded in 1983. It contains a total of 1,846 acres of which 240 arc zoned for public, quasi-public and open space use. Development in the Southeast Chico Redevelopment Project is a mix of residential, commercial and limited industrial.

The Southeast Chico Redevelopment Project consists of two non-contiguous areas. The larger of the areas, 1,420 acres, is bisected by the State Highway Route 99 freeway. This area has benefited from significant expansion of its existing retail base - most major retailers have a presence here - and residential development. The Chico Mall, located on East 2o•h Street east of the freeway interchange, first opened in 1988 and contains 525,000 square feet of commercial space, including three anchor stores: Sears, J.C. Penney, and Gottschalks. The Target Center and Pheasant Run shopping center are adjacent to the mall, and also have direct access and visibility from the freeway. The Target Center contains a 106,000 square foot Target store, and an additional I 04,000 square feet of retail space with Pier One and Toys R Us as the other anchor tenants. The 125,000 square foot Pheasant Run shopping center includes a Best Buy electronics store, an Old Navy clothing store, Linens-N-Tbings, shop lease space and several restaurants.

20

The Skypark Plaza (185,000 square feet) includes major tenants Ross Dress-for-Less, Jo-Ann Fabric and Crafts, and a Raley's grocery store. The surrounding commercial area, with approximately 375,000 total square feet of retail, includes Horne Depot ( I 05,000 square feet), Office Max, Lowe's Horne Improvement Warehouse (135,000 square feet), Austin's Furniture and numerous smaller stores.

The nearby Crossroads Center, west of the freeway al East 20'h Street, contains 260,000 square feet of retail space, with major tenants including Food Maxx, Barnes & Noble, Circuit City, PetCo and Office Depot. This retail space includes Ashley Furniture, Bed Bath and Beyond, and Cost Plus.

Other major stand-alone commercial developments include a I 04,000 square foot Wal Mart, open since 1994, Costco Wholesale (123,000 square feet) and Winco Foods. WalMart has plans to expand its facility by another 97,000. The Witlrncier Auto Center is also located in the Southeast Chico Redevelopment Project, with Chevrolet, Honda, Ford, Lincoln, Mercury and Isuzu dealerships.

The Sierra Nevada Brewing Company opened its operation as a micro brewery in Chico in 1981. Since that time production has increased to 560,000 barrels annually, and the facility has expanded to 180,000 square feet for the brewery, storage and restaurant on a 14.6 acre site. Including the value of the fixtures and specialty equipment required for the brewing process, this facility has the highest assessed value of any development in the Southeast Chico Project Area.

Office complexes and hotels arc also situated in the Southeast Chico Redevelopment Project. In 200 I, Oxford Suites, an all-suites hotel, completed an expansion from an original 120 room facility to its current 183 room facility. Residence Inn by Marriott and Courtyard by Marriott hotels, with a combined 168 guest suites, opened in 2005. The largest of the office developments, Uniprise (United Health Care) opened its 46, 100 square foot administration facility and call center in 2000 and expanded by adding another 53,600 square feet in late 200 I.

This area of the Southeast Chico Redevelopment Project also contains significant residential development with approximately 1,200 single family residences and 1,600 multi-family and condominium units. The largest of the multi-family complexes arc the Oak Meadows Apartments, containing 219 units built in 1992, Amanda Way Condominiums, containing 144 units built in 1991, and the 1661 Forest Avenue Apartments containing 224 units built in 1990.

The second of the two areas comprising the Southeast Chico Redevelopment Project, 426 acres, contains primarily residential development with approximately 700 single family residences and 475 multi-family and condominium units. The largest of the multi-family complexes arc the Lakeview Apartments, containing 154 units built in 1986, and the Parkview Apartments containing 84 units built in 1988. The Sierra Sunrise Lodge and Inn, a congregate care (76 units), skilled nursing (90 beds) and assisted living (24 units) facility, completed in 1994, provides care and housing for 225 residents.

Enloe Hospital, the major regional health care provider, operates a 44,000 square foot outpatient surgery, rehabilitation and walk in clinic facility within this portion of the project area. There are also minor commercial and office developments.

Recently completed development in the Southeast Chico Redevelopment Project not yet reflected on the 2005/06 tax roll includes 24 single family homes estimated to add $6,240,000 to the 2006/07 tax roll, an 88 unit apartment complex estimated to add $5,040,000 to the 2006/07 tax roll and 38,500 square feet of medical offices estimated to add $6,432,000 to the 2006/07 tax roll. An additional $6 million of value is expected to be added to the 2007/08 tax roll resulting from the completion of the 35,000 square foot Sunrise Sierra Terrace office complex.

Approximately 21 % of the residentially zoned property in the Southeast Chico Redevelopment Project, over 122 acres, remains to be developed. The Agency anticipates that another 350 single family residences will be constructed in the Southeast Chico Redevelopment Project over the next seven years, as well as 60 units of medium density residential and 90 units of high density residential units over the

21

next two to five years. In addition, approximately 19% of the commercially zoned property, also over 80 acres, remains to be developed. This is expected to be developed with over one million square feet of office and commercial uses over the next seven years.

Assessed values in the Southeast Chico Redevelopment Project have increased 46% in the last five years as shown below.

Secured (l}

Unsecured ( n

Total (21

Less: Base year OJ

lncrernental Increase

TABLE NO. I SOUTHEAST CHICO REDEVELOPMENT PROJECT

HISTORICAL ASSESSED VALUATIONS 2001/02 through 2005/06

2001102 2002/03 2003/04 2004/05

$ 661,794,962 $ 747,925,827 $ 791.513,223 $ 858,875,594

83.743 554 93 633 077 102 406 684 JOI 013 941

745.538,5 I 6 841,558,904 893,919,907 959,889,535

(45,022,063} i 45,022,063) (45,004,033) (45,004,033)

s 700.516,453 s 796,536,84 I $ 848,915,874 $ 914,885.502

Annual Change in Secured Value 13.0% 5.8°/o 8.5%

Annual Change in Total Value 12.9% 6.2°/o 7 .4°111

11)

(2)

Taxable Valuation at l 00% of Assessor's Market Value, as of August 20 equalized roll.

Butte County Auditor-Controller's Office.

2005/06

s 955,077, I 89

I 15 539 004

1.070,616,193

{45,004,033}

$1,025,612,160

11.2%

Jl.5%

(3) Base year assessed values n1ay vary from year to year based on changes in property ownership of agencies exempt from property tax.

Source: Butte County Auditor-Controller.

The Chico Municipal Airport Redevelopment Project

The Chico Municipal Airport Redevelopment Project was formed in 1983. It contains a total of 1,670 acres of which 1,285 are zoned for public, quasi-public and open space use including the operations of the Chico Municipal Airport. Development in the Chico Municipal Airport Redevelopment Project is primarily industrial. The property available for development in this component redevelopment project consisted of 225 acres to the cast of the airport and 130 acres to the west of the airport. Development is nearly complete on the east side of the airport, leaving the west side currently undeveloped. Prior to development of this portion of this property, certain environmental issues relating to wetlands must be addressed. The Agency is working on mitigation measures with the US Fish and Wildlife Service. An expansion of Cohasset Road, the major access to the Municipal Airport Redevelopment Project, from two lanes to four lanes is in the planning stage.

The Chico Municipal Airport Redevelopment Project was created to promote industrial development surrounding the City's municipal airport. The airport was dedicated in 1935, and is a modem integrated air facility. The airport is a primary, non-hub, commercial service airport that serves as home to 130 aircraft, 1,288 full and part-time jobs, and 65 businesses. The facility is capable of accommodating air carriers as well as both commercial and general aviation planes. The airport has one full service Fixed Base Operator to provide such services as refueling, plane servicing, and flight training.

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The Chico Municipal Airport is serviced by United Express which provides three daily departures to San Francisco International Airport, and 1,800 annual air cargo departures through Oakland and Sacramento airports by carriers feeding FedEx, Airborne Express, and United Parcel Service. Over 36,963 passengers and 3,200, 114 pounds of air cargo were processed at the Chico Municipal Airport in 2004.

The Chico Municipal Airport's main runway is 6, 722 feet long and incorporates the use of high intensity lighting GPS/VOR/ILS and Precision Approach Path Indicators in conjunction with other navigational aides to assist pilots. Adjoining the main runway is a second 3,000-foot runway suitable for light aircraft. The air traffic control tower is open from 7 a.m. until 7 p.m. seven days a week. The tower and all other navigational aides are maintained and operated by the Federal Aviation Administration. Public facilities at the airport which are operated and maintained by the City include the terminal buildings and surface parking lot, fire station and field operations building. The City of Chico completed a master plan which calls for continued growth in passenger traffic and air cargo activities for the next 20 years. Future expansion plans include opening the west side of the airport to industrial and aviation related development.

On the east side of the airport, development of the 225-acre Chico Municipal Airport Industrial Park is complete. The properties in the area arc protected by effective zoning and architectural controls to ensure land use consistency and compatibility. The industrial park uses are manufacturing, warehousing, and other production-related services, in addition to aviation oriented business. The CMA Industrial Park has proven to be a very strategic industrial location. It has all the amenities of underground utilities, on-site fire protection, and transportation. There is immediate access to air service, and the Industrial Park offers major trucking, courier service and vehicle access to State Highway 99. The CMA Industrial Park grew dramatically between 1995 and 2000, with over $17 million in new construction, including the development of the Chico Technology Center. Recent development includes the 35,650 square foot construction of an additional Aero Union hangar. A 9,000 square foot facility to be used as an on-line plumbing call center is currently under development. It is expected to add $1 million to the tax roll when complete.

Businesses operating in the CMA Industrial Park include the following:

Owner/Operator Koret of California

Transfer Flow Inc.

CHICO MUNICIPAL AIRPORT REDEVELOPMENT PROJECT INDUSTRIAL AND MANUFACTURING USES

Use Sportswear Distribution

Aero Union Corporation

Facility Sg. Ft. 600,000

48,900

144,590

Fuel Tank System Fabrication

l;-leavy Aircraft Maintenance,

Conversion and Refurbishment;

Air Cargo Handling Systems

Software Development Sun Gard Bi-Tech

Fleet Irvine

Lares Research

14,000

4,000

30,250

Historic Photo Printing

Dental Equipment Manufacture

The City owns several hundred acres of vacant land on the west side of the airport. Approximately 130 acres of such land arc proposed for further industrial park development to facilitate uses similar to those found in the existing CMA Industrial Park. The Agency is actively pursuing approvals for development of this portion of the redevelopment project, particularly those addressing environmental issues related to wetlands and endangered species through consultation with the US Fish and Wildlife Service and Army Corps of Engineers. Initial development of this portion of the project area is anticipated within five years.

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Assessed values in the Chico Municipal Airport Redevelopment Project have increased 7.6% in the last five years as shown below.

TABLEN0.2 CHICO MUNICIPAL AIRPORT REDEVELOPMENT PROJECT

HISTORICAL ASSESSED VALUATIONS 2001/02 through 2005/06

2001/02 2002/03 2003/04 2004/05

Secured Ol S 49.729,937 $ 52,019,659 $ 48,753,668 $ 51,274.852

Unsecured Ol 39 777 402 38 781.106 40.075 930 38781319

Total 121 89.507.339 90,800.765 88,829,598 90.056,171

Less: Base year Ol (27,275,977) {27,275,977) (27,275,977) {27,275,977)

Incremental Increase $ 62.231,362 $ 63,524,788 $ 61,553.621 $ 62,780, 194

Annual Change in Secured Value 4.6o/o (6.3)% 5.2°/o

Annual Change in Total Value l.4o/o (2.2)% I .4o/o

Source: Butte County Auditor-Controller. See footnotes following Table No. I.

The Central Chico Redevelopment Project

2005/06

S 56,144.156

40 221 755

96,365.911

(27,275,977)

$ 69.089,934

9.5°/o

7.0o/o

The Central Chico Redevelopment Project was formed in 1985 and covers much of the central portion of the City. It contains a total of 385 acres, including the central business district and the Chico Municipal Center. The campus of California State University, Chico, adjoins the northern boundary of the redevelopment project. The Central Chico Redevelopment Project also includes older commercial areas south of the downtown core and to the west. New development will be limited to in-fill, upgrades and removal of substandard buildings for new construction.

The downtown commercial area of the Central Chico Redevelopment Project is comprised of pedestrian­oriented shopping in an historic setting. The facades of the buildings in the area have been maintained or improved to provide a unified atmosphere to the downtown. This commercial area also benefits from its proximity to the Municipal Center and the campus. To meet the need for off-street parking for shopping in the central business district, a 276-spacc parking garage was constructed in 1994. Among the major goals of the redevelopment plan for the Central Chico Redevelopment Project are provision of public parking and open space, preservation of historic buildings and expansion of the community's supply of low and moderate income housing.

For example, the Hotel Diamond in the downtown business district had been vacant for 25 years, until recently when the property owner, with Agency assistance, completely renovated the building to include 43 hotel rooms and a first class restaurant. The construction closely replicates the original building style. The Hotel Diamond re-opened in the spring of 2005. In addition, a new four story building with retail, residential, and office uses recently was constructed in the downtown business district.

The Agency has completed various road improvement projects throughout the Central Chico Redevelopment Project, including street widening and landscaped medians. The Agency is also studying methods for funding an additional parking structure to serve the downtown commercial area.

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Assessed values in the Central Chico Redevelopment Project have increased 28% in the last five years as shown below.

TABLEN0.3 CENTRAL CHICO REDEVELOPMENT PROJECT

HISTORICAL ASSESSED VALUATIONS 2001102 through 2005106

2001/02 2002/03 2003/04 2004/05

Secured n) $145,605,694 S 151,278,412 S 160.274.127 $169,824,984

Unsecured rn 25237149 "700 MS 23,326,532 23 107 285

Total 121 170,842,843 174,998,316 183,600,659 192,932,269

Less: Base year (3l (97,321,600) (97,321,600) (96, 131,305) (96,131,305)

Incremental Increase S 73,521,243 S 77,676,716 S 87,469,354 $ 96,800,964

Annual Change in Secured Value 3.9~) 5.9o/o 6.0°10

Annual Change in Total Value 2.4~) 4.9o/o 5.1 O;(l

Source: Butte County Auditor-Controller. See footnotes following Table No. I.

Greater Chico Urban Area Redevelopment Project

2005/06

$194,349,959

24 100 077

218,450,036

196,131,305)

$122,318,731

14.4o/o

13.2%

The Greater Chico Urban Area Redevelopment Project was formed in 1993. The redevelopment project spans areas both within the City's incorporated limits and outside City limits but within the City's sphere of influence. The total acreage encompassed by the redevelopment project is approximately 6,500 acres, of which 3,046 arc within the City's borders.

Land use in the Greater Chico Urban Area Redevelopment Project is approximately 67% residential, 8% commercial, 9% manufacturing and warehousing and 14% other uses. The majority of the residential development was built between 1965 and 2000. The primary commercial developments arc neighborhood retail centers. Manufacturing and warehousing uses are located along the redevelopment project's southern boundary, with access to State Highway 99.

The Greater Chico Urban Area Redevelopment Project is a unique redevelopment project with a primary purpose of mitigating groundwater contamination that crosses both City and County jurisdictional boundaries. The redevelopment project is a checkered composite of unincorporated and incorporated areas that are inadequately served with public infrastructure appropriate to their densities. Much of the area's housing is on septic systems that are insufficiently sized for the intensity of residential use. These conditions have resulted in nitrate contamination in the groundwater, which led the California Regional Water Quality Control Board for the Central Valley Region to issue a prohibition order requiring the abandonment of septic systems and connection to the sanitary sewer system. No new septic system can be installed on parcels less than one acre in size. In response to the Water Quality Control Board's order, the County adopted a nitrate compliance program in 2000, which in part, requires that approximately 5, 726 dwelling units currently using septic tanks connect to the City's sewer system. In 2002, the City budgeted $2.8 million to connect all City-owned parcels within the nitrate areas to the sewer system. Within the nitrate areas, the City has also installed six major sewer trunk lines and bas plans to add an additional five lines in the next two years. As of June 2004, the total sewering costs for all 5, 726 dwelling units were estimated at $36. 9 million. To alleviate some of the financial burden for homeowners required to abandon their septic system and connect to the City's sewer system, the Agency and the County have entered into a Joint Powers Agreement to form a joint powers authority (the "Chico Urban Area Financing

25

Authority") and contemplate that the Chico Urban Arca Financing Authority will finance and facilitate the implementation and completion of the required sewering by borrowing funds from the Safe Drinking Water State Revolving Fund. The loan would be repaid from contributions of tax increment revenues of the Project Area, but on a basis subordinate to the Bonds, the Prior Loans and future parity debt. The repayment to the Safe Drinking Water State Revolving Fund would be limited to $1,900,000 annually.

The groundwater contamination is not currently an impediment to development. At least 125 homes have been built in the Greater Chico Urban Arca Redevelopment Project in the preceding two years, and single family home developments totaling over 380 units arc currently under construction. These new homes arc expected to add $95,000,000 to the tax rolls over the next three years.

Assessed values in the Greater Chico Urban Area Redevelopment Project have increased 44.9% in the last five years as shown helow.

TABLEN0.4 GREATER CHICO URBAN AREA REDEVELOPMENT PROJECT

HISTORICAL ASSESSED VALUATIO'.'<S

Secured {l)

Unsecured (l l

Total <2>

Less: Base year <3>

Incremental Increase

Annual Change in Secured Value

Annual Change in Total Value

2001/02 through 2005/06

2001102

$1.408,055,495

73 578 784

1.481.634.279

( 1, 162,977 ,395)

s 318,656,884

5. 7o/o

2002/03

S 1.520,566,315

77097314

1.597.663.629

(1,162,977,395)

$ 434.686,234

8.0o/o

7 .8o/o

2003/04

$1,644, 161,348

86 520 953

1,730,682,301

(], 162,977,395)

$ 567,704,906

8.1°/o

8.3°/o

Source: Butte County Auditor-Controller. See footnotes following Table No. I

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2004105

$ I.82 l.l 40,241

91 185 858

1.912.326,099

(I, 163,785,645)

$ 748.540.454

I 0.8o/o

I 0.5o/o

2005/06

$2,049,712,848

96 769 995

2.146,482,843

( 1, 163,785,645)

$ 982,697,198

12.6%

12.2%

Major Taxpayers

The ten largest property taxpayers represent 7 .6% of the 2005/06 assessed value of the Project Arca.

TABLEN0.5 MERGED PROJECT AREA

TEN LARGEST TAXPAYERS AS A PERCENT OF 2005/06 ASSESSED VALUE

0/o of 2005/06 Assessed

Taxpaver Assessed Value Value

Grossman Family Trust S 68. 708.386 1.9%

Chico Mall Limited Partnership 63.778.866 1.8

Pan Pacific Development LLC 24.002,189 0.7

Western Investment Real Estate Trust 19,262,765 0.5

Evergreen Orchard LLC 18,423.980 0.5

California Water Service Company 17.803.932 0.5

Lowes HIW Inc. 17,390,045 0.5

Wal Mart Real Estate Business Trust 14,672.137 0.4

Skyway Professional Investors LP 14.413,201 0.4

Gregory L. Webb 13.433 055 _M

$271.888,556 7.6%

Source: HdL Coren & Cone.

Assessment Appeals

Develo(!ment

Brewery Chico Mall

Crossroads Center Skypark Plaza

Pheasant Run Center Water Purveyor

Home Improvement

Discount Retail Office/Medical

Apartments

Constituent Redevelopment

Project

Southeast Chico Southeast Chico Southeast Chico Southeast Chico

Southeast Chico Greater Chico

Southeast Chico Southeast Chico Southeast Chico Southeast Chico

As of September l, 2005, the County Assessor reports that there are no appeals currently pending in the Project Arca for the largest 25 taxpayers in each of the constituent redevelopment projects. Other historical appeal information is as follows for the largest 25 taxpayers in each of the constituent redevelopment projects:

Southeast Chico. Pan Pacific Development LLC was granted a $1.9 million reduction of its value in 2002. The property owner had filed an additional appeal in 2004, however, the appeal was withdrawn. Home Depot, with a value of S l 1.5 million, appealed and subsequently withdrew its appeal of the value of its property in 2003. Winco Foods LLC appealed the $11.1 million value of its property in 2003. The appeal was resolved with no change in value. Target Corporation, with a $8.9 million value, appealed and was granted a S420,000 reduction in the value of its property in 2003. J.C. Penney, with a current assessed value of$7.6 million, was granted a $720,000 reduction in the value of its property in 2002.

Greater Chico Urban Area Redevelopment Project. Jefferson on 5'" Street LP has a 2005/06 assessed value of approximately $9.4 million. In 2003, they requested a S4.8 million reduction in value of their property, and were granted a $1,120,000 reduction against the 2003 value of$10,020,000.

Chico Municipal Airport Redevelopment Project. Kore! of California, Inc. filed an appeal in 2003 for a 50% reduction in the S4.2 million value of its property. The appeal has been withdrawn.

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The County Assessor reports that approximately 40% of all appeals filed in the last five years have been granted with some reduction in assessed value and approximately 33% of appeals filed were subsequently withdrawn. No reduction for appeals is reflected in "TABLE NO. IO - PROJECTED TAX REVE'.\IUES AND DEBT SERVICE COVERAGE."

Tax Collections

Under its current policies, the Butte County Auditor-Controller distributes I 00% of tax increment revenues allocated to each redevelopment agency without regard to delinquencies in the payment of property taxes. In addition, Butte County has adopted the "Teeter Plan" method of apportioning property taxes whereby local agencies receive from the County I 00% of their respective shares of the amount of secured ad valorem taxes levied, without regard to actual collections of taxes. Due to this allocation method, the cities in the County receive no adjustments for redemption payments on delinquent collections. The unsecured taxes arc allocated based on actual unsecured tax collections.

Outstanding Indebtedness of the Project Area

The Agency had the following obligations with respect to the Project Area as of June 30, 2005:

Original Amount Final Description Issue Outstanding Maturity

(l) l 996 Loan Agreement $29,285,000 $23,860,000 2025

(2) 2001 Loan Agreement 32,060,000 28.605,000 2024

(3) Owner Participation Agreements 272,411 88,294 2010

(I) In February 1996, the Authority issued 1996 Tax Allocation Revenue Bonds (Chico Merged Redevelopment Project Area) and loaned the proceeds to the Agency pursuant to a loan agreement (the "1996 Loan"). The pledge of Tax Revenues to repay the l 996 Loan is on a parity with the pledge of Tax Revenues to repay the Bonds.

(2) In July 2001, the Authority issued 2001 Tax Allocation Revenue Bonds (Chico Merged Redevelopment Project Area) and loaned the proceeds to the Agency pursuant to a loan agreement (the "2001 Loan"). The lien on Tax Revenues of the 2001 Loan is on a parity with the lien of the Bonds.

(3) The Agency entered into an Owner Participation Agreement with A&L of Chico, LLC on June 4, 200 I, as amended on June 18, 2002, for an amount not to exceed $272,411, for the construction and installation of public improvements on East 20'h Street in the Southeast Chico Redevelopment Project. This amount represents the maximum reimbursement for which the Agency is responsible. There is no lien on Tax Revenues.

Source: Agency Annual Financial Report.

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Projected Tax Revenues and Debt Service Coverage

Receipt of projected Tax Revenues in the amounts and at the times projected by the Agency depends on the realization of certain assumptions relating to the Tax Increment Revenues. The projections of Tax Increment Revenues and the corresponding Tax Revenues from the component areas of the Redevelopment Projects shown on the following table were based on the assumptions shown below. The Agency believes the assumptions upon which the projections arc based are reasonable; however, some assumptions may not materialize and unanticipated events and circumstances may occur (sec "BONDHOLDERS' R1SKS"). To the extent that the assumptions arc not actually realized, the Agency's ability to timely pay principal of and interest on the Bonds may be adversely affected.

Following is a discussion of assumptions used in the projection of Tax Revenues:

(a) The 2005/06 secured roll was assumed to increase 2% annually for inflation in future years through 2015116, with the exception of the secured roll in the Chico Municipal Airport Redevelopment Project, which is projected to increase 1 % annually for inflation in future years through 2015/16 (sec "FINANCIAL INFORMATION -Tax Increment Revenues- Manner in Which Property Valuations and Assessments are Determined (Article XIIIA)" herein).

(b) For the purposes of the projections, it was assumed that the following assessed value would be added to the tax rolls as a result of new construction:

Project Arca Greater Chico Urban Area Greater Chico Urban Arca Greater Chico Urban Arca Southeast Chico· Southeast Chico

Value S32,000,000

32,000,000 31,000,000 17,712,000 6,000,000

Year 2006/07 2007/08 2008/09 2006/07 2007/08

Sec "THE PROJECT AREA" above for a description of new development expected to occur in the Project Area.

( c) The values of unsecured personal property and state assessed utility property and the amount of unitary revenues have been maintained throughout the projections at their 2005/06 levels (see "FINANCIAL INFORMATION - Tax Increment Revenues - Unsecured and Secured Property" and "Unitary Property" herein).

( d) Projected Tax Increment Revenues do not reflect any potential decreases resulting from pending assesm1ent appeals or future Proposition 8 adjustments, if any ( see ''THE PROJECT AREA -Assessment Appeals"· and "FINANCIAL INFORMATION • Tax Increment Revenues - Proposition 8 Adjustments" herein).

(c) A tax rate of $1.00 per SIOO of assessed value applied to the taxable property in the component areas of the Redevelopment Projects was used to determine Tax Increment Revenues (see "FINANCIAL INFORMATION - Tax Increment Revenues - Property Tax Rate" herein).

(!) No deduction for payments due to ERAF has been reflected in the Projected Tax Increment Revenues (see "BONDHOLDERS' RlSKS - State of California Fiscal Issues" herein).

(g) Projected Tax Increment Revenues do not reflect delinquencies (see "FINANCIAL INFORMATION - Tax Increment Revenues" and "THE PROJECT AREA- Tax Collections" herein).

(h) Projected Tax Revenues include a deduction for administrative costs charged by Butte County (see "FINANCIAL INFORMATION - Tax Increment Revenues -Administrative Costs" herein).

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(i) Payments due under Section 33676 of the Redevelopment Law have been deducted in calculating Tax Increment Revenues (sec "FINANCIAL INFORMATION - Tax Increment Revenues - Tax Sharing Agreements" herein).

(i) Projected Tax Revenues include a deduction for payments due to taxing agencies under Tax Sharing Agreements or applicable Tax Sharing Statutes. to the extent not subordinated to the Bonds (see "FINA"ICIAL INFORMATION - Tax Increment Revenues - Tax Sharing Agreements" and "Tax Sharing Statutes" herein).

(k) Projected Tax Increment Revenues do not include supplemental property tax revenues which may be received by the Agency.

30

Assessed Value

2006 $1,070,616

2007 1,107,430

2008 1,133,268

2009 1,153,622

2010 I, 174,384

2011 1,195,561

2012 1,217,161

2013 1,239,194

2014 1,261,667

2015 1,284,589

2016 1,307,970

Assessed

Value

2006 $ 96,366 2007 97,489 2008 98,634 2009 99,802 2010 100,994 2011 102,209 2012 103,449 2013 104,714 2014 106,004 2015 107,319 2016 108,661

TABLE N0.6 SOUTHEAST CHICO REDEVELOPMENT PROJECT PROJECTED TAX REVE'.',ILES

(in 'OOO's)

Base Incremental Tax Unitary Inflation !\et Tax Tax Sharing

Value Value Increment Revenue Adjustment Increment Contractual $(45,004) $1,025,612 SI0,256 $111 - SI0,367 S(l,851)

(45,004) 1,062,426 10,624 1 ll - 10,735 (1,916) (45,004) 1,088,263 10,883 111 - 10,994 ( 1,962) (45,004) 1,108,618 11,086 111 - 11,197 (1,999) (45,004) 1,129,380 11,294 111 - 11,405 (2,036) (45,004) 1,150,557 ll ,506 111 - 11,616 (2,074) (45,004) 1,172,157 11,722 111 - I 1,832 (2,112) (45,004) 1,194,189 11,942 111 - 12,053 (2,151) (45,004) 1,216,663 12,167 111 - 12,278 (2,192) (45.004) 1,239,585 12,396 111 - 12,507 (2,232) (45,004) 1,262,966 12,630 111 - 12,741 (2,274)

TABLE NO. 7 CHICO MUNICIPAL AIRPORT REDEVELOPMENT PROJECT PROJECTED TAX REVENUES

(in 'OOO's)

Statutory $(263)

(318) (357) (387) (418) (449) (482) (514) (548) ( 611) (675)

Base Incremental Tax Unitary Inflation Net Tax Tax Sharin~ Value Value Increment Revenue Adjustment lncren1ent (~ontractual Statutory

5(27,276) $69,090 $691 515 - S705 $(127) $(11) (27,276) 70,213 702 15 - 717 (129) (13) (27,276) 71,358 714 15 - 728 (131) (15)

(27,276) 72,526 725 15 - 740 (133) (16)

(27,276) 73,718 737 15 - 752 (135) (18) (27,276) 74.933 749 15 - 764 (137) (20) (27,276) 76,173 762 15 - 776 (140) (22) (27,276) 77,438 774 15 789 (142) (24)

(27,276) 78,728 787 15 - 802 (144) (26) (27,276) 80,043 800 15 - 815 (147) (29) (27,276) 81.385 814 15 - 828 (149) (33)

31

Net Tax

Revenue $8,253

8,501 8.675 8.811 8,951

9.093 9,239 9,387 9,538 9,664 9,791

Net Tax Revenue

S567 575 582 590 598 606 615 623

632 639 646

Assessed

Value 2006 5218,450

2007 222,337

2008 226,302

2009 230,346

2010 234,471

2011 238,678

2012 242,970

2013 247,347

2014 251,812

2015 256,366

2016 261,012

Assessed

Value

2006 $2, 146,483

2007 2,219,477

2008 2,293,931

2009 2,368,874

2010 2,414,317

2011 2,460,667

2012 2,507,945

2013 2,556,169

2014 2,605,357

2015 2,655,529

2016 2,706,704

TABLE N0.8 CENTRAL CHICO REDEVELOPMENT PROJECT PROJECTED TAX REVENUES

(in 'OOO's)

Base Incremental Tax Unitary Inflation Net Tax Tax Sharin~ Value Value Increment Revenue Adiuslrnent Increment Contractual

S(96,131) $122,319 $1,223 $66 $(218) S 1,071 S(230) (96,131) 126,206 1,262 66 (231) 1,096 (237) (96,131) 130,170 1,302 66 (245) 1,123 (244) (96,131) 134,215 1,342 66 (259) 1,149 (251) (96,131) 138,339 1,383 66 (273) 1,176 (259) (96,131) 142,547 1,425 66 (288) 1,204 (266) (96,131) 146,838 1,468 66 (302) 1,232 (274) (96,131) 151,216 1,512 66 (317) 1,261 (282) (96,131) 155,681 1,557 66 (333) 1,290 (290) (96,131) 160,235 1,602 66 (348) 1,320 (298) (96,131) 164,880 1,649 66 (364) 1,350 (306)

TABLEN0.9 GREATER CHICO URBAN AREA REDEVELOPMENT PROJECT PROJECTED TAX REVENUES

(in 'OOO's)

Statulorv -

S (6)

(12)

( 18)

(24) (30)

(37) (43)

(50) (56) (63)

Base Incremental Tax Unitary Inflation Net Tax Tax Sharing Value Value Increment Revenue Adiustmenl Increment Contractual ( 1

l Statutorv S(l,163,786) $ 982,697 $ 9,827 $11 $(1,695) $ 8,143 - -

(1,163,786) 1,055,691 10,557 11 ( 1,855) 8,713 - -(1,163,786) l ,130,146 11,301 11 (2,019) 9,294 - -(1,163,786) l,205,089 12,051 11 (2, 185) 9,877 - -

(1,163,786) 1,250,531 12,505 11 (2,355) 10,161 -(l,163,786) 1,296,882 12,969 11 (2,529) 10,451 -(I, 163, 786) l,344,160 13,442 11 (2, 706) 10,747 - -(1,163,786) 1,392,383 13,924 11 (2,886) I l,049 - -(l,163,786) 1,441,571 14,416 11 (3,070) 11,356 - -(I, 163,786) 1,491,743 14,917 11 (3,258) 11,670 -(1,163,786) 1,542,918 15,429 11 (3,450) 11,991 - -

'" All contractual tax sharing is subordinate lo the lien of the Bonds.

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Net Tax Revenue

S84l 854 867

880

894 907

922 936

951 966 981

Net Tax Revenue $ 8,143

8,713 9,294

9,877 10.161

10,451 10,747 11,049

11,356 11,670

11,991

Net Tax Housing

Revenue Set-Aside OJ

2006 SI 7,804 $(4,057)

2007 18,642 (4,252)

2008 19,418 (4,428)

2009 20,158 (4,593)

2010 20,604 (4,699)

2011 21,058 (4,807)

2012 21,522 (4,918)

2013 21,995 (5,030)

2014 22,477 (5,145)

2015 22,939 (5,262)

2016 23,4 IO (5,382)

TABLE NO. IO PROJECTED TAX REVENUES AND DEBT SERVICE COVERAGE

(in 'OOO's)

County Pledged 1996 2001

Adm in 1'ax Revenues Loan Loan ai

$(555) $13,192 $2,017 $1,910

(584) 13,806 2,022 l.904

(610) 14,380 2,019 1,910

(635) 14,930 2,028 1,902

(653) 15,252 2,019 l,909

(671) 15,580 2,023 1.907

(690) 15,914 2,023 1.904

(709) 16,256 2,041 1,886

(728) 16,604 2.029 1,900

(748) 16,929 2,044 1,886

(768) 17,260 2,045 1,884

(l) 20% of Net Tax Increment shown in Table Nos. 6 through 9.

2005 Total Debt Coverage

Bonds Service Ratio

$1,205 $5.132 257%

3,403 7,329 188%

3.722 7,651 188%

4.000 7,930 l 88o/i,

4,078 8,006 191%

4,077 8,007 195°/o

4,077 8,004 199%

4,079 8,006 203%

4,074 8,003 207%

4,073 8,003 212%

4,075 8,004 216%

('l Less allocable share (16.79%) of loan payments payable from amounts deposited in the Low and Moderate Income Housing Fund. See "TIIE AGENCY -Low and Moderate Income Housing" above.

The projected Tax Revenues shown above are subject to several variables described herein (sec "FI~ANCIAL INFORMATION - Tax Increment Revenues" herein). The Agency provides no assurance that the projected Tax Revenues will be achieved (sec "BONDHOLDERS' RISKS" herein).

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FINANCIAL INFORMATION

Agency Budgetary Process and Administration

The Redevelopment Law requires redevelopment agencies to adopt an annual budget containing the following:

(I) The proposed expenditures of the agency.

(2) The proposed indebtedness to be incurred by the agency.

(3) The anticipated revenues of the agency.

( 4) The work program for the coming year, including goals.

(5) An examination of the previous years' achievements and a comparison of the achievements with the goals of the previous years' work program.

All expenditures and indebtedness of the Agency arc required to be in conformity with the adopted or amended budget.

The Executive Director of the Agency is responsible for preparing the proposed budget and submitting it to the Agency. After reviewing the proposed budget at a public meeting, the Agency adopts the budget prior to the start of each fiscal year. The Agency Treasurer is responsible for controlling expenditures within budgeted appropriations.

Agency Accounting Records and Financial Statements

Every redevelopment agency is required to present an annual report to its legislative body (being the city council) within six months of the end of each fiscal year. The annual report is required, among other things, to include an independent financial "audit report" and a fiscal statement for the previous fiscal year. The California Health and Safety Code defines "audit report" to mean an examination of and opinion on the financial statements of the agency which presents the results of the operations and financial position of the agency. The independent financial audit is required to be conducted in accordance with generally accepted auditing standards and the rules governing audit reports promulgated by the Governmental Accounting Standards Board. The independent financial audit report is also required to include an opinion of the agency's compliance with laws, regulations and administrative requirements governing activities of the agency. The Redevelopment Law requires the fiscal statement to contain the following information:

(])

(2)

(3)

(4)

(5)

(6)

The amount of outstanding indebtedness of the agency and each project area.

The amount of tax increment revenues generated in the agency and in each project area.

The amount of tax increment revenues paid to a taxing agency pursuant to a tax sharing agreement, other than school or community college district.

The financial transactions report required to be submitted to the State Controller.

The amount allotted to school or community college districts pursuant to the Redevelopment Law.

The amount of existing indebtedness and the total amount of payments required to be paid on existing indebtedness for that fiscal year.

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(7) Any other fiscal information which the agency believes is useful to describe its programs.

In addition, the annual report is required to include detailed infonnation regarding the Agency's housing program to assist low and moderate income households and deposits and expenditures from the Low and Moderate Income Housing Fund required pursuant to the Redevelopment Law.

The Indenture requires the Agency to keep, or cause to be kept, proper books and accounts separate from all other records and accounts of the Agency and the City in which complete and correct entries are made of all transactions relating to the Tax Revenues. The Indenture requires the Agency to file with the Trustee annually, within seven months after the close of each fiscal year, so long as any of the Bonds arc Outstanding, its audited financial statements showing the Tax Revenues and all disbursements from the Special Fund as of the end of such fiscal year. The Agency covenants under the Indenture to furnish a copy of such statements upon reasonable request to any Bondholder.

Basis of Accounting and Financial Statement Presentation. The government-wide financial statements arc reported using the accrual basis of accounting. Revenues arc 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 arc reported using the modified accrual basis of accounting. Revenues arc recognized as soon as they are both measurable and available. Revenues arc 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 arc 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 Agency implemented the provisions ofGASB 34 for the fiscal year ending June 30, 2003.

The Agency retained the firm of Macias, Gini & Company LLP, Certified Public Accountants, Sacramento, California, to examine the component unit financial statements of the Agency as of and for the fiscal year ended June 30, 2004, the most recent fiscal year for which audited financial statements have been prepared, which arc included as "APPENDIX C." The firm's examination was made in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Governmental Auditing Standards issued by the Comptroller General of the United States and the Guidelines for Compliance Audits of California Redevelopment Agencies issued by the State Controller and as interpreted in the Suggested Auditing Procedures for Accomplishing Compliance Audits of California Redevelopment Agencies issued by the Governmental Accounting and Auditing Committee of the California Society of Certified Public Accountants. The firm reported after their examination that the Agency's financial statements present fairly its financial position and results of operations in conformity with generally accepted accounting principles and that they noted no instances of non-compliance for the fiscal year ended June 30, 2004. The Agency's audited financial statements arc public documents and are included within this Official Statement without the prior approval of the auditor. Accordingly, the auditor has not performed any post-audit of the financial condition of the Agency.

35

Tax Increment Revenues

Procedure for the Allocation and Payment of Tax Increment Revenues. The portion of taxes required to be allocated to the Agency is allocated and paid to the Agency by the County Auditor pursuant to the following procedure:

Not later than the first day of October of each year, the Agency is required to file with the County Auditor a statement of indebtedness certified to by the chief fiscal officer of the Agency for each project area.

The statement of indebtedness is required to contain for each such project area:

(a) The date on which each loan, advance, or indebtedness was incurred or entered into;

(b) The principal amount, term, purpose, and interest rate, of each loan, advance or indebtedness; and

(c) The outstanding balance and amount due or to be paid by the Agency of each loan, advance or indebtedness.

At the same time or times as the payment of taxes into the funds of the respective taxing agencies of the County, the County Auditor-Controller is required to allocate and pay Tax Increment Revenues to the Agency in an amount not to exceed the amount of loans, advances and indebtedness as shown on the Agency's Statement of Indebtedness.

Manner in Which Property Valuations and Assessments are Determined (Article XIIIA). On June 6, 1978, California voters approved an amendment ( commonly known as both Proposition 13 and the Jarvis­Gann Initiative) to the State Constitution which imposes certain limitations on taxes that may be levied against real property. This amendment, which added Article XIIIA to the State Constitution, among other things, defines full cash value of property to mean "the county assessor's valuation of real property as shown on the 1975/76 tax bill under 'full cash value,' or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment." This full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or any reduction in the consumer price index or comparable local data, or any reduction in the event of declining property value caused by substantial damage, destruction or other factors. The amendment further limits the amount of any ad valorem tax on real property to 1 % of the full cash value of that property, except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July I, 1978 and on any bonded indebtedness for the acquisition or improvement of real property which is approved after July 1, 1978 by two-thirds of the votes cast by voters voting on such indebtedness. However, pursuant to an amendment to the California Constitution, redevelopment agencies are prohibited from receiving any of the tax increment revenue attributable to tax rates levied to finance bonds approved by the voters on or after January 1, I 989 ( see "Property Tax Rate" below).

In the general election held November 4, 1986, voters of the State of California approved two measures, Propositions 58 and 60, which further amend the terms "purchase" and "change of ownership," for purposes of determining full cash value of property under Article XIIIA, to not include the purchase or transfer of (I) real property between spouses and (2) the principal residence and the first $1,000,000 of other property between parents and children. Proposition 60 amends Article XIIIA to permit the Legislature to allow persons over age 55 who sell their residence and buy or build another of equal or lesser value within two years in the same county (or in certain cases, another county), to transfer the old residence's assessed value to the new residence.

36

For each fiscal year since Article XIIJA has become effective (the 1978/79 fiscal year), the annual increase for inflation has been at least 2% except in six fiscal years. For the 1981 /82 fiscal year, the annual increase for inflation was I%; for the 1994/95 fiscal year, the annual increase for inflation was LO 119%; for the 1995/96 fiscal year, the annual increase for inflation was l.19%; for the 1996/97 fiscal year, the annual increase for inflation was I. 11 %, for the 1998/99 fiscal year, the annual increase for inflation was 1.853% and for the 2004/05 fiscal year, the annual increase for inflation was 1.867%, reflecting the actual increase in the State Consumer Price Index, as reported by the State Department of Finance.

Proposition 8 Adjustments. Proposition 8, approved in 1978, provides for the assessment of real property at the lesser of its originally determined (base year) full cash value compounded annually by the inflation factor, or its full cash value as of the lien date, taking into account reductions in value due to damage, destruction, obsolescence or other factors causing a decline in market value. Reductions based on Proposition 8 do not establish new base year values, and the property may be reassessed as of the following lien date up to the lower of the then-current fair market value or the factored base year value. The State Board of Equalization has approved this reassessment formula and such formula has been used by county assessors statewide. However, in 2001 an Orange County Superior Court held that such reassessment formula violates the inflationary rate increase limitation of Article XIIIA of the California Constitution. The Court held that once the assessed value of a property is reduced pursuant to Proposition 8, any subsequent increase in assessed value may not exceed the inflationary rate limitation ( not to exceed 2%) of Article XlllA. On April 18, 2003, the Superior Court entered its final judgment. On June 12, 2003, the Orange County Assessor, together with the Tax Collector and the County of Orange filed notice of appeal of the Superior Court Judgment. The Appellate Court held a hearing on the matter on January 7, 2004, and issued its opinion on March 26. 2004, reversing the holding of the Orange County Superior Court. The Plaintiffs filed an appeal with the California State Supreme Court and on July 21, 2004, the California State Supreme Court by a 5-2 vote decided not to hear an appeal, ending this litigation.

Unsecured and Secured Property. In California, property which is subject to ad valorem taxes is classified as "secured" or "unsecured." The secured classification includes property on which any property tax levied by a county becomes a lien on that property. A tax levied on unsecured property does not become a lien against the taxed unsecured property, but may become a lien on certain other property owned by the taxpayer. Every tax which becomes a lien on secured property, arising pursuant to State law, has priority over all other liens on the secured property, regardless of the time of the creation of the other liens.

Property in the Project Area is assessed by the Butte County Assessor except for pubJic utility property which is assessed by the State Board of Equalization.

The valuation of secured property is determined as of January I each year for taxes owed with respect to the succeeding fiscal year. The tax rate is equalized during the following September of each year, at which time the tax rate is determined. Taxes are due in two equal installments. Installments of taxes levied upon secured property become delinquent on the following December 10 and April 10. Taxes on tmsccured property are due January I and become delinquent August 31, and such taxes are levied at the prior year's secured tax rate.

37

Secured and unsecured property is entered on separate parts of the assessment roll maintained by the county assessor. The method of collecting delinquent taxes is substantially different for the two classifications of property. The taxing agency has four ways of collecting unsecured property taxes: (I) a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the county recorder's office, in order to obtain a lien on certain property of the taxpayer: and (4) seizure and sale of personal property, improvements or posscssory interests belonging or assessed to the assessee. The exclusive means of enforcing the payment of delinquent taxes with respect to property on the secured roll is the sale of the property securing the taxes for the amount of taxes which arc delinquent.

Currently, a I 0% penalty is added to delinquent taxes which have been levied with respect to property on the secured roll. Property on the secured roll with respect to which taxes arc delinquent is sold to the State on or about June 30 of the fiscal year. Under State law, from time of the sale of the property lo the State for nonpayment of taxes, owners have five years to redeem, during which time legal title remains in the owners as taxpayers subject to a lien in favor of the County. The amount necessary to redeem the property is equal to the sum of the delinquent taxes, delinquency penalties and redemption penalties of I Y,% per month. Five years after the property is in default of taxes, the tax collector has the authority to sell property which has not been redeemed.

A 10% penalty also attaches to delinquent taxes with respect to property on the unsecured roll, and further, an additional penalty of 1 Y,% per month accrues with respect to such taxes beginning the first day of the third month following the delinquency date.

Supplemental Assessments. Legislation adopted in 1984 (Section 75, el seq. of the Revenue and Taxation Code of the State of California) provides for the supplemental assessment and taxation of property at its full cash value as of the date of a change of ownership or the date of completion of new construction (the "Supplemental Assessments"). To determine the amount of the Supplemental Assessment the County Auditor applies the current year's tax rate to the supplemental assessment roll and computes the amount of taxes that would be due for the full year. The taxes due are then adjusted by a proration factor to reflect the portion of the tax year remaining as determined by the date on which the change in ownership occurred or the new construction was completed. Supplemental Assessments become a lien against the real property on the date of the change of ownership or completion of new construction.

Unitary Property. Commencing in the 1988/89 fiscal year, the Revenue and Taxation Code of the State of California changed the method of allocating property tax revenues derived from state assessed utility properties. It provides for the distribution of state assessed values to tax rate areas by a county-wide mathematical formula rather than assignment of state assessed va,lue according to the location of those values in individual tax rate areas.

Commencing with the 1988/89 fiscal year, each county has established one county-wide tax rate area. The assessed value of all unitary property in the county has been assigned to this tax rate area and one tax rate is levied against all such property ("Unitary Revenues").

The property tax revenue derived from the assessed value assigned to the county-wide tax rate area shall be allocated as follows: (I) each jurisdiction will be allocated up to 2% of the increase in Unitary Revenues on a pro rata basis county-wide; and (2) any decrease in Unitary Revenues or increases less than 2%, or any increase in Unitary Revenues above 2% will be allocated among jurisdictions in the same proportion of each jurisdiction's Unitary Revenues received in the prior year to the total Unitary Revenues county-wide.

38

Property Tax Rate. There are numerous tax rate areas within the Project Arca. The differences between the $1.00 tax rate and those actually levied (referred to as the "tax override rate") represents the tax levied by overlapping entities to pay debt service on bonded indebtedness approved by the voters.

Tax override rates typically decline each year. A declining tax override rate is the result of several factors: an effective limit, established by Article XlllA of the California Constitution, on the amount of property taxes that can be levied; rising taxable values within the jurisdictions of taxing entities levying the approved override rate ( which reduces the tax rate needed to be levied by the taxing entity to meet debt service requirements); and the eventual retirement, over time, of the voter-approved debt.

For fiscal year 2004/05 the effective tax rate, including the effective tax override rate, for the majority of the property in the Project Area was approximately Sl.025 per $100 of taxable value. Future Tax Increment Revenues have been projected in "TABLE NO. 10 PROJECTED TAX REVENUES AND DEBT SERVICE COVERAGE" by applying only the general levy $1.00 per $100 of taxable value to incremental taxable values.

Administrative Costs. In 1990, the Legislature enacted SB 2557 (Chapter 466, Statutes of 1990) which allows counties to charge for the cost of assessing, collecting and allocating property tax revenues to local government jurisdictions on a prorated basis. Butte County charged administrative fees equal to approximately 2.5% of Tax Increment Revenues, or $394,072 in 2004/05.

Tax Sharing Agreements

Pursuant to prior Section 3340l(b) of the Redevelopment Law, a redevelopment agency could enter into an agreement to pay tax increment revenues to any taxing agency that has territory located within a redevelopment project to alleviate any financial burden or detriment caused by the redevelopment project. These a!,>Teements are commonly referred to as "tax sharing agreements" or "pass through agreements."

Agreements. The Agency entered into tax-sharing agreements with Butte County, the Chico Arca Recreation and Park District and the Butte Mosquito Abatement District ( collectively, the "Taxing Agencies") for the payment of certain Tax Increment Revenues from the Project Area. Currently, these Taxing Agencies' share of annual Tax Increment Revenues generated by the I% general tax levy is a combined 25.5%. The Agency has agreed to pass through 70% of the Taxing Agencies' share of the annual Tax Increment Revenues from each of the Southeast Chico Redevelopment Project, the Chico Municipal Airport Redevelopment Project and the Central Chico Redevelopment Project, or 17.85% of Tax Increment Revenues generated from the I o/o general tax levy with respect to these project areas, and has agreed to pass through 80% of the Taxing Agencies' share of the annual Tax Increment Revenues from the Greater Chico Urban Arca Redevelopment Project, or 20.4% of Tax Increment Revenues generated from the I% general tax levy with respect to these project areas.

The Agency also entered into tax-sharing agreements with the Butte County Superintendent of Schools ("Butte County Schools") and the Butte Community College District (the "College District") for the payment of certain Tax Increment Revenues from the Greater Chico Urban Area Redevelopment Project. The Agency has agreed to pass through the greater of (I) 25% of Butte County Schools' share of the annual Tax Increment Revenues, or 1.18% of Tax Increment Revenues generated from the 1% general tax levy with respect to the Greater Chico Urban Area Redevelopment Project or (2) Butte County Schools' share of revenue calculated pursuant to Section 33676 of the Redevelopment Law, described below. The Agency has also agreed to pass through 61% of the College District's share of the annual Tax Increment Revenues, or 4.58% of Tax Increment Revenues generated from the I% general tax levy with respect to the Greater Chico Urban Area Redevelopment Project for the first 20 years of the redevelopment project and 50% thereafter, or 3.75% of Tax Increment Revenues generated from the 1 % general tax levy with respect to the Greater Chico Urban Arca Redevelopment Project.

39

Pursuant to the terms of all such tax sharing agreements relating to tax increment revenue generated in the Greater Chico Urban Area Redevelopment Project. the payments to these taxing agencies ( exclusive of amounts payable under the Section 33676 election described below) arc subordinate to the payment of debt service on the Bonds.

Section 33676 Election. Pursuant to Section 33676 of the Redevelopment Law, for Redevelopment Plans adopted prior to January 1, 1994, any affected taxing agency that has not entered into a pass through agreement with the agency adopting the redevelopment plan could, prior to the adoption of a redevelopment plan, elect to receive the portion of tax increment revenues attributed to one or both of the following:

(I) Increases in the rate of tax imposed for the benefit of the taxing agency which levy occurs after the tax year in which the ordinance adopting the redevelopment plan becomes effective, and

(2) Increases in assessed value of taxable real property in the redevelopment project area, as the assessed value is established by the assessment roll last equalized prior to the effective date of the ordinance adopting the redevelopment plan for such project area, which arc, or otherwise would be, calculated annually pursuant to subdivision (f) of Section 110.1 of the Revenue and Taxation Code providing for increases in the full cash value of property based on an inflation factor. Increases calculated pursuant to this provision are sometimes referred to as the "2% growth factor."

The Chico Unified School District, Butte County Schools and Butte Community College District have adopted such resolutions with respect to the Central Chico Redevelopment Project. The Chico Unified School District and the City of Chico have adopted such resolutions with respect to the Greater Chico Urban Area Redevelopment Project. The County calculates growth in the base year at up to 2% per year and distributes the school's, college's and City's share of that growth directly to them.

Tax Sharing Statutes

Certain provisions were added to the Redevelopment Law by the adoption of AB 1290 in 1994. A discussion of these provisions as they relate to the Project Area follows. If new territory should be added to the Project Area, under Section 33607.5 of the Redevelopment Law, any affected taxing entity would share in the Tax Increment Revenues generated by such added area pursuant to a statutory formula ("Statutory Tax Sharing").

In addition, pursuant to Section 33333.6( e )(2) of the Redevelopment Law, if the Agency deletes the time limit to incur indebtedness in a project area or increases the total amount of Tax Increment Revenues to be allocated to the project area or increases the duration of the redevelopment plan for a project area and the period for receipt of Tax Increment Revenues, Statutory Tax Sharing will also be required under Section 33607. 7 of the Redevelopment Law with all affected taxing agencies not already a party to a tax sharing agreement, once the original limitations have been reached. In general, the amounts to be paid pursuant to Statutory Tax Sharing are as follows:

(a) commencing in the first fiscal year after the limitation has been reached, an amount equal to 25% of tax increment revenues generated by the incremental increase of the current year assessed valuation over the assessed valuation in the fiscal year that the limitation had been reached, after the amount required to be deposited in the Low and Moderate Income Housing Fund has been deducted;

40

(b) in addition to amounts payable as described in (a) above, commencing in the 11'' fiscal year after the limitation has been reached, an amonnt equal to 21 % of tax increment revenues generated by the incremental increase of the current year assessed valuation over the assessed valuation in the preceding ( I 011

') fiscal year that the limitation had been reached, after the amount required to be deposited in the Low and Moderate Income Housing Fund has been deducted; and

(c) in addition to amounts payable as described in (a) and (b) above, commencing in the 31" fiscal year after the limitation has been reached, an amount equal to 14 % of tax increment revenues generated by the incremental increase of the current year assessed valuation over the assessed valuation in the preceding (301

') fiscal year that the limitation had been reached, after the amount required to be deposited in the Low and Moderate Income Housing Fund has been deducted.

( d) The City may elect to receive a portion of the tax increment generated in (a) above, after the amount required to be deposited in the Low and Moderate Income Housing Fund has been deducted.

( e) The Agency may subordinate the amount required to be paid to an affected taxing entity to any indebtedness after receiving the consent of the taxing entity.

With respect to a taxing entity that is a party to a tax sharing agreement, tax sharing payments would continue pursuant to the Tax Sharing Agreement after the original limitations in the Redevelopment Plan were passed.

The Agency extended certain plan limits with respect to the Southeast Chico Redevelopment Project, Chico Municipal Airport Redevelopment Project and Central Chico Redevelopment Project in 2004. Statutory Tax Sharing is required for these redevelopment projects based on increases in assessed valuation above the 2003/04 tax roll value for the Southeast Chico Redevelopment Project and Chico Municipal Airport Redevelopment Project and based on increases in assessed valuation above the 2005/06 tax roll value for the Central Chico Redevelopment Project with affected taxing agencies not already a party to the Tax Sharing Agreements described above.

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BONDHOLDERS' RISKS The purchase of the Bonds involves investment risk. I{a riskfactor materializes to a sufficient degree, it could delay or prevent payment of principal of and/or interest on the Bond,. Such risk factors include, but are not limited to, the following matters and should be considered along with other information in this Official Statement, by potential investors.

Factors Which May Affect Tax Revenues

The ability of the Agency to pay principal of and interest on the Bonds depends on the timely receipt of Tax Revenues as projected herein (sec "THE PROJECT AREA Projected Tax Revenues and Debt Service Coverage" herein). Projections of Tax Revenues are based on the underlying assumptions relating to Tax Increment Revenues of each of the constituent redevelopment projects that comprise the Project Area. A number of factors which may affect Tax Increment Revenues, and consequently, Tax Revenues, are outlined below.

Reductions in Assessed Vaine. The projections of Tax Increment Revenues contained in this Otlicial Statement are based on current assessed valuations within the component areas of the Project Area, a tax rate equal to $1.00 per $100 of assessed value applied to the taxable property in the component areas of the Project Area and certain projected increases in property values due to inflation allowed under Article XIIIA of the California Constitution. The Agency believes that the projections of Tax Increment Revenues and the assumptions upon which the projections arc based arc reasonable. However, any future decrease in the assessed valuation of the component areas of the Project Area ( or any increase at a rate less than assumed), any general decline in the economic stability of the area, a relocation out of a component area of the Project Area by one or more major property owners, successful appeals by property owners for a reduction in a property's assessed value, or other events that permit reassessment of property at lower values, either on a case by case basis or as a blanket reduction due to a general decline in property values and any property tax refunds which may result therefrom, the destruction of property caused by natural disasters or any delinquencies in the payment of property taxes and any potential acquisition of property by the Agency will reduce the Tax Increment Revenues allocated to, or received by, the Agency and correspondingly may have an adverse impact on the Tax Revenues and ability of the Agency to pay principal and interest on the Bonds.

Article XIIIA. Pursuant to the California voter initiative process, on June 6, 1978, California voters approved Proposition 13 which added Article XIIIA to the California Constitution. This amendment imposed certain limitations on taxes that may be levied against real property to I% of the full cash value of the property, adjusted annually for inflation at a rate not exceeding 2% annually. Full cash value is determined as of the 1975176 assessment year, upon change in ownership (acquisition) or when newly constructed. Article XIIIA has subsequently been amended to permit reduction of the "full cash value" base in the event of declining property values caused by substantial damage, destruction or other factors, and to provide that there would be no increase in the "full cash value" base in the event of reconstruction of property damaged or destroyed in a disaster and in other special circumstances.

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Reduction in Inflationary Rate. The annual inflationary adjustment, while limited to 2%, is determined annually and may not exceed the percentage change in the California Consumer Price Index (CCPI). Since Article XJIIA was approved, the annual adjustment for inflation has fallen below the 2% limitation six times:

Fiscal Year CCPI 1981/82 1.000% 1994/95 1.0119% 1995/96 1.190% 1996/97 1.110% 1998/99 1.853% 2004/05 1.867%

Proposition 8 Ad,justments. Proposition 8, approved in 1978, provides for the assessment of real property at the lesser of its originally determined (base year) full cash value compounded annually by the inflation factor, or its full cash value as of the lien date, taking into account reductions in value due to damage, destruction, obsolescence or other factors causing a decline in market value. Reductions based on Proposition 8 do not establish new base year values, and the property may be reassessed as of the following lien date up to the lower of the then-current fair market value or the factored base year value. The State Board of Equalization has approved this reassessment formula and such formula has been used by county assessors statewide. However, in 200 I an Orange County Superior Court held that such reassessment formula violates the inflationary rate increase limitation of Article XIIIA of the California Constitution. The Court held that once the assessed value of a property is reduced pursuant to Proposition 8, any subsequent increase in assessed value may not exceed the inflationary rate limitation (not to exceed 2%) of Article XIIIA. On April 18, 2003, the Superior Court entered its final judgment. On June 12, 2003, the Orange County Assessor, together with the Tax Collector and the County of Orange filed notice of appeal of the Superior Court Judgment. The Appellate Court held a hearing on the matter on January 7, 2004, and issued its opinion on March 26, 2004, reversing the holding of the Orange County Superior Court. The Plaintiffs filed an appeal with the California State Supreme Court and on July 21, 2004, the California State Supreme Court by a 5-2 vote decided not to hear an appeal, ending this litigation.

The Agency's ability to generate sufficient Tax Revenues to pay debt service on the Bonds will be dependent on the economic strength of the component areas of the Project Area. Since Proposition 8 adjustments are closely tied to the economics of an area, and primarily real estate development, factors which adversely affect real estate development may adversely affect Tax Revenues. Such factors include general economic conditions, fluctuations in the real estate market, fluctuations in interest rates, unexpected increases in development costs and other factors. If further Proposition 8 adjustments are made by the County Assessor in future years because of declines in the fair market value of properties caused by the lack of real estate development in the area generally, Tax Revenues may be adversely affected and as a possible consequence its ability to repay the Bonds may be adversely affected.

Assessment Appeals. Assessment appeals may be filed by property owners seeking a reduction in the assessed value of their property. After the property owner files an appeal, the County's Appeals Board will hear the appeal and make a determination as to whether or not there should be a reduction in assessed value for a particular property and the amount of the reduction, if any. To the extent that any reductions arc made to the assessed valuation of such properties with appeals currently pending, or appeals subsequently filed, Tax Increment Revenues, and correspondingly, Tax Revenues will be reduced. Such reductions may have an adverse affect on the Agency's ability to pay debt service on the Bonds. As of June 2005, no appeals are pending for the 25 largest taxpayers in each of the constituent redevelopment projects (sec "THE PROJECT AREA-Assessment Appeals" herein).

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Earthquake, Fire and Other Risks. According to the Safety Element of the City's General Plan. the City is located in one of the least seismically active regions of the State (Seismic Zone 3). The closest active fault, the Cleveland Hills Fault is located 17 miles southeast of the City. Potentially active faults in the immediate area include the Monoclinc Fault and the Foothills Shear Zone. Seismic hazards such as surface rupture are considered very low, however. ground shaking can occur. Liquefaction potential is generally low east of Highway 99, moderate between Highway 99 and the Sacramento River and high along the Sacramento River. All of the Central Chico and approximately 120 acres of the Southeast Chico Project Areas arc west of Highway 99. Most of the remaining lands within the Project Area are to the cast of Highway 99.

Approximately 120 acres within the Central Chico Redevelopment Project arc identified as potentially subject to inundation (1-2 feet) by Federal Emergency Management Agency (FEMA) mapping of the I 00 year flood event. An estimated 70 acres, primarily open space, is similarly mapped in the Southeast Chico Redevelopment Project. The remainder of the properties within the Project Area are outside mapped flood areas.

The City of Chico Emergency Plan was adopted in January 2004. This plan includes a hazard analysis for earthquake, flood, landslide and fire risk and is required to comply with FEMA requirements for disaster relief funding.

Hazardous Substances. An additional environmental condition that may result in the reduction in the assessed value of parcels would be the discovery of a hazardous substance that would limit the beneficial use of a property within the Project Arca. In general, the owners and operators of a property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The owner (or operator) may be required to remedy a hazardous substance condition of property whether or not the owner ( or operator) has anything to do with creating or handling the hazardous substance, The effect, therefore, should any of the property within the Project Area be affected by a hazardous substance would be to reduce the marketability and value of the property, perhaps by an amount in excess of the costs of remedying the condition.

Certain Bankruptcy Risks. The enforceability of the rights and remedies of the Owners and the obligations of the Agency may become subject to the following: the federal bankruptcy code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors' rights generally, now or hereafter in effect; usual equitable principles which may limit the specific enforcement under state law of certain remedies; the exercise by the United States of America of the powers delegated to it by the federal Constitution; and the reasonable and necessary exercise, in certain exceptional situations, of the police power inherent in the sovereignty of the State of California and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or state government, if initiated, could subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise and consequently may entail risks of delay, limitation, or modification of their rights.

Limited Obligations. The Agency has no power to levy and collect property taxes, and any property tax limitation, legislative measure, voter initiative or provision of additional sources of income to taxing agencies having the effect of reducing the property tax rate must necessarily reduce the amount of Tax Increment Revenues, and consequently, Tax Revenues that would otherwise be available to pay the principal of, interest on the Bonds.

Voter Initiatives - State Constitutional Amendment. California's voter initiative process allows measures which qualify for the ballot to be approved or disapproved by voters in a State of California statewide election. Future voter initiatives could be enacted which adversely affect the Tax Increment Revenues and, therefore, the security for the Bonds.

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State of California Fiscal Issues

In connection with its approval of the budget for the 1992/93, 1993/94 and 1994/95 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"). Faced with a projected S23.6 billion budget gap for Fiscal Year 2002/03, the State Legislature adopted and the Governor signed AB 1768, requiring redevelopment agencies to pay into ERAF in Fiscal Year 2002/03 an aggregate amount of $75 million. AB 1768 required the payment into ERAF in Fiscal Year 2002/03 only.

In 2003, the State Legislature adopted SB I 045 which required redevelopment agencies to make ERAF transfers in Fiscal Year 2003/04, based on a statewide aggregate transfer by redevelopment agencies of Sl35 million. SB 1045 required the Agency to make this transfer payment by May 10, 2004. In enacting SB I 045, the State Legislature also amended Section 33333.6 of the Redevelopment Law. Section 33333.2(c) and Section 33333.6(c) now provide that the City Council may adopt an ordinance to extend the limits required by AB 1290 or AB 1342, as applicable, by one additional year (sec 'THE AGENCY -Plan Limitations" herein). The City Council has adopted an ordinance under the provisions of SB 1045.

The 2004/05 State Budget included a S 1.3 billion shift of local government property taxes to the ERAF. The 2004/05 State Budget apportioned the $1.3 billion among cities (S350 million), counties ($350 million), special districts ($350 million) and redevelopment agencies (S250 million) and limited the $1.3 billion ERAF transfer to the two fiscal years 2004/05 and 2005/06. The Agency's share of this additional shift of property taxes is estimated to be $929,000 in each of the two years. The Agency's ERAF payments arc subordinate to the payment of debt service on the Bonds. As a trailer bill to the 2004/05 State Budget, the State Legislature adopted SB !096, allowing redevelopment agencies to extend certain plan limitations if certain criteria arc met. The City Council has adopted an ordinance under the provisions of SB I 096 with respect to the Southeast Chico Redevelopment Project and the Chico Municipal Airport Project.

Future legislation could be enacted and Tax Revenues available for payment of the Bonds may be impaired.

Secondary Market

There can be no guarantee that there will be a secondary market for the Bonds or, if a secondary market exists, that such Bonds can be sold for any particular price. Occasionally, because of general market conditions or because of adverse history or economic prospects connected with a particular issue, secondary marketing practices in connection with a particular issue are suspended or terminated. Additionally, prices of issues for which a market is being made will depend upon then prevailing circumstances. Such prices could be substantially different from the original purchase price.

Loss of Tax Exemption

As discussed under the caption "LEGAL MATTERS - Tax Matters" herein, 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 future acts or omissions of the Agency in violation of its covenants contained in the Indenture. Should such an event of taxability occur, the Bonds are not subject to special redemption or any increase in interest rate and may remain outstanding until maturity.

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LEGAL MATTERS

Enforceability of Remedies

The remedies available to the Trustee and the Owners of the Bonds upon an event of default under the Indenture or any other document described herein are in many respects dependent upon regulatory and judicial actions which arc often subject to discretion and delay. Under existing law and judicial decisions, the remedies provided for under such documents may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified to the extent that the enforceability of certain legal rights related to the Indenture is subject to limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally and by equitable remedies and proceedings generally.

Approval of Legal Proceedings

Jones Hall, A Professional Law Corporation, San Francisco, California, as Bond Counsel, will render an opinion which states that the Indenture is a valid and binding obligation of the Agency and enforceable in accordance with its terms. The legal opinion of Bond Counsel will be subject to the effect of bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in accordance with general principles of equity. Sec "APPENDIX E" for the proposed form of Bond Counsel's opinion.

The Agency has no knowledge of any fact or other information which would indicate that the Indenture is not so enforceable against the Agency, except to the extent such enforcement is limited by principles of equity and by state and federal laws relating to bankruptcy, reorganization, moratorium or creditors' rights generally.

Certain legal matters will be passed on for the Agency by the City Attorney, acting as Agency General Counsel and by Jones Hall, San Francisco, California, as Disclosure Counsel. Fees payable to Bond Counsel and Disclosure Counsel are contingent upon the sale and delivery of the Bonds.

Tax Matters

In the opinion of Jones Hall, A Professional Law Corporation, San Francisco, California, Bond Counsel, subject, however, to the qualifications set forth below, under existing law, the interest on the Bonds is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. The opinion described in the preceding sentence is subject to the condition that the Agency comply with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Agency has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds.

In the further opinion of Bond Counsel, interest on the Bonds is exempt from California personal income taxes.

Owners of the Bonds should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may have federal or state tax consequences other than as described above. Bond Counsel expresses no opinion regarding any federal or state tax consequences arising with respect to the Bonds other than as expressly described above.

A copy of the proposed form of opinion of Bond Counsel is included as "APPENDIX E."

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Absence of Litigation

The Agency will furnish a certificate dated as of the Delivery Date that there is not now known to be pending or threatened any litigation restraining or enjoining the execution or delivery of the First Supplement or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Indenture was executed or the First Supplement is to be executed and delivered or the Bonds are to be issued or affecting the validity thereof.

CONCLUDING INFORMATION

Ratings on the Bonds

Standard & Poor's and Fitch have assigned their ratings of"AAA" and "AAA," respectively, to the Bonds with the understanding that a Financial Guaranty Insurance Policy insuring payment when due of the principal of and interest on the Bonds will be issued on the closing date by Ambac Assurance Corporation. In addition, Standard & Poor's and Fitch have assigned their underlying municipal bond ratings of"A" and "A" respectively to the Bonds, notwithstanding the delivery of the Financial Guaranty Insurance Policy. Such ratings reflect only the views of the rating agency and any desired explanation of the significance of such rating should be obtained from the rating agency. Generally, a rating agency bases its rating on the insurance and the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency, if in the j udgmcnt of such rating agency, circumstances so warrant. Any such downward rcvISion or withdrawal of such rating may have an adverse effect on the market price of the Bonds.

The Financial Advisor

The material contained in this Official Statement was prepared by the Agency with the assistance of Harrell & Company Advisors, LLC, Orange, California, an independent financial consulting firm, who advised the Agency as to the financial structure and certain other financial matters relating to the Bonds. The information set forth herein has been obtained by the Agency from sources which are believed to be reliable, but such information is not guaranteed by the Financial Advisor as to accuracy or completeness, nor has it been independently verified. Fees paid to the Financial Advisor are contingent upon the sale and delivery of the Bonds.

Continuing Disclosure

The Agency will covenant to provide annually certain financial infonnation and operating data relating to the Project Area by not later than March 31 each year commencing March 31, 2006, to provide the audited Financial Statements of the Agency for the fiscal year ending June 30, 2005 and for each subsequent fiscal year when they are available (together, the "Annual Report"), and to provide notices of the occurrence of certain other enumerated events. The Annual Report will be filed by the Trustee on behalf of the Agency with each Nationally Rccoi,'Ilized Municipal Securities Information Repository certified by the Securities and Exchange Commission (the "Repositories") and a State repository, if any. The notices of material events will be timely filed by the Agency with the Municipal Securities Rulemaking Board, the Repositories and a State repository, if any. The specific nature of the information to be contained in the Annual Report or the notices of material events and certain other terms of the continuing disclosure obligation are summarized in "APPENDIX D - FORM OF CONTINUING DISCLOSURE CERTIFICATE." The Agency has never failed to comply, in all material respects, with its undertaking, to provide continuing disclosure under the Federal Securities laws.

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Underwriting

J.P. Morgan Securities Inc. (the "Underwriter") purchased the Bonds at competitive sale and is otforing the Bonds at the yields set forth on the inside cover page hereof. The initial reoffering yields may be changed from time to time and concessions from the reoffering yields may be allowed to dealers, banks and others. The Underwriter has purchased the Bonds at a price equal to $69,201,364.65, which amount represents the principal amount of the Bonds ($68,500,000.00), plus a net original issue premium of $998,535.80, and less an Underwriter's discount of $297,171.15. The Underwriter will pay certain of its expenses relating to the offering.

Additional Information

The summaries and references contained herein with respect to the Indenture and the First Supplement, the Bonds, statutes and other documents, do not purport to be comprehensive or definitive and arc qualified by reference to each such document or statute and references to the Bonds are qualified in their entirety by reference to the form hereof included in the Indenture. Copies of the Indenture and the First Supplement are available for inspection during the period of initial offering on the Bonds at the offices of the Financial Advisor, Harrell & Company Advisors, LLC, 333 City Boulevard West, Suite 1430, Orange, California 92868, telephone (714) 939-1464. Copies of this document may be obtained atler delivery of the Bonds from the Agency at 41 l Main Street, P.O. Box 3420, Chico, California 95927.

References

All statements in this Official Statement involving matters of opinion, whether or not expressly so stated, arc intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Agency and the purchasers or Owners of any of the Bonds.

Execution

The execution and delivery of this Official Statement by the Executive Director has been duly authorized by the Chico Redevelopment Agency.

CHICO REDEVELOPMENT AGENCY

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By: Isl Thomas J. Lando

Executive Director

APPENDIX A

SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

The following is a brief summary of the provisions of the Indenture of Trust relating to the Bonds, which is not intended to be definitive. Reference is made to the actual document (a copy of which may be obtained from the Agency) for the complete terms thereof

Definitions

"Agency Debt" means, collectively, the Bonds, the Prior Loans and all Parity Debt.

"Annual Debt Service" means, with respect to any Bond Year, the amount of principal (including principal coming due and payable by operation of mandatory sinking fund redemption) and interest coming due with respect to all outstanding Agency Debt during such Bond Year. For purposes of such calculation, there shall be excluded a pro rata portion of each installment of principal of any Parity Debt, together with the interest to accrue thereon, in the event and to the extent that the proceeds of such Parity Debt are deposited in an escrow fund from which amounts may not be released to the Agency unless the Tax Revenues for the current Fiscal Year ( as evidenced in the written records of the County) meet the coverage test set forth for the issuance of Parity Debt.

"Bond Counsel" means (a) Jones Hall, A Professional Law Corporation, or (b) any other attorney or firm of attorneys appointed by or acceptable to the Agency 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 Tax Code.

"Bond Insurance Policy" means the municipal bond insurance policy issued by the Bond Insurer insuring the payment when due of the principal of and interest on the Bonds as provided therein.

"Bond Insurer" means Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation, its successors and assigns, as issuer of the Bond Insurance Policy.

"Bond Year" means any twelve-month period beginning on April 2 in any year and extending to the next succeeding April 1, both dates inclusive; except that the first Bond Year begins on the Closing Date and ends on April 1, 2006.

"Business Day" means a day of the year ( other than a Saturday or Sunday) on which banks in California are not required or permitted to be closed, and on which the New York Stock Exchange is open.

"City" means the City of Chico, a charter city and municipal corporation organized and existing under the Constitution and laws of the State of California.

"Closing Date" means the date on which the Bonds are originally issued by the Agency.

A-1

"Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the Agency relating to the authorization, issuance, sale and delivery of the Bonds, including but not limited to: printing expenses; rating agency fees; filing and recording fees; initial fees, expenses and charges of the Trustee and its counsel, including the Trustee's first annual administrative fee; Bond Insurance Policy premium, fees, charges and disbursements of attorneys, financial advisors, accounting firms, consultants and other professionals; fees and charges for preparation, execution and safekeeping of the Bonds; and any other cost, charge or fee in connection with the original issuance of the Bonds.

"County" means the County of Butte, a county duly organized and existing under the Constitution and laws of the State of California.

"Debt Service Fund" means the fund by that name established and held by the Trustee under the Indenture.

"Event of Default" means any of the events described as such in the Indenture.

"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), for which the full faith and credit of the United States of America are pledged; or (b) obligations of any agency, department or instrumentality of the United States of America, the timely payment of principal and interest on which are directly or indirectly secured or guaranteed by the full faith and credit of the United States of America.

"Fiscal Year" means any twelve-month period beginning on July 1 in any year and extending to the next succeeding June 30, both dates inclusive, or any other twelve­month period selected and designated by the Agency as its official fiscal year period.

"Independent Redevelopment Consultant" means any consultant or firm of such consultants appointed by or acceptable to the Agency and who, or each of whom: (a) is judged by the Agency to have experience in matters relating to the collection of Tax Revenues or otherwise with respect to the financing of redevelopment projects; (b) is in fact independent and not under domination of the Agency; (c) does not have any substantial interest, direct or indirect, with the Agency; and (d) is not connected with the Agency as an officer or employee of the Agency, but who may be regularly retained to make reports to the Agency.

"Interest Account" means the account by that name established and held by the Trustee as an account within the Debt Service Fund.

"Interest Payment Date" means April 1, 2006, and each April 1 and October 1 thereafter so long as any of the Bonds remain unpaid.

"Maximum Annual Debt Service" means the largest amount of Annual Debt Service coming due and payable on all Agency Debt during the current or any future Bond Year.

"Merged Redevelopment Fund" means the fund by that name previously established and held by the Agency for the receipt and deposit of Tax Revenues from

A-2

the Project Area, being the fund identified as the "Merged Redevelopment Fund" in the Prior Loan Agreements.

"Moody's" means Moody's Investors Service, its successors and assigns.

"1996 Bonds" means the $29,285,000 aggregate principal amount of Chico Public Financing Authority 1996 Tax Allocation Revenue Bonds (Chico Merged Redevelopment Project Area) issued by the Authority under the Indenture of Trust dated as of February 1, 1996, between the Authority and First Trust of California, National Association as trustee thereunder.

"Owner" means, with respect to any Bond, the person in whose name the ownership of such Bond is registered on the registration books of the Trustee.

"Permitted Investments" means any of the following which at the time of investment are legal investments under the laws of the State of California for the moneys proposed to be invested therein:

(a) Federal Securities;

(b) (i) obligations of any of the following federal agencies which obligations represent full faith and credit of the United States of America, including: Export-Import Bank, Farm Credit System Financial Assistance Corporation, Rural Economic Community Development Administration (formerly Farmers Home Administration), General Services Administration, U.S. Maritime Administration, Small Business Administration, Government National Mortgage Association, U.S. Department of Housing & Urban Development, Federal Housing Administration and Federal Financing Bank. and (ii) direct obligations for any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: senior debt obligations rated "Aaa" by Moody's and "AAA" by S&P issued by Fannie Mae or Federal Home Loan Mortgage Corporation (FHLMC); obligations of the Resolution Funding Corporation (REFCORP); senior debt obligations of the Federal Home Loan Bank System; and senior debt obligations of other Government Sponsored Agencies approved by the Bond Insurer;

(c) U.S. dollar denominated deposit accounts federal funds and banker's acceptances with domestic commercial banks, which may include the Trustee, its parent holding company, if any, and their affiliates, which have a rating on their short term certificates of deposit on the date of purchase of "P-1" by Moody's and "A-1" or "A-1 +" by S&P and maturing no more than 360 days after the date of purchase, provided that ratings on holding companies are not considered as the rating of the bank;

(d) commercial paper which is rated at the time of purchase in the single highest classification, "P-1" by Moody's and "A-1 +" by S&P, and which matures not more than 270 days after the date of purchase;

A-3

(e) investments in a money market fund, including those of an affiliate of the Trustee, rated "AAAm" or "AAAm-G" or better by S&P, including funds for which the Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Trustee or such holding company provide investment advisory or other management services;

(f) pre-refunded municipal obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obliger prior to maturity or as to which irrevocable instructions have been given by the obliger to call on the date specified in the notice; and (i) which are rated, based upon an irrevocable escrow account or fund, in the highest rating category of Moody's and S&P or any successors thereto; or (ii)(A) subject to the approval of S&P, which are fully secured as to principal and interest and prepayment premium, if any, by an escrow consisting only of Federal Securities, which escrow may be applied only to the payment of such principal of and interest and prepayment premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified prepayment date or dates pursuant to such irrevocable instructions, as appropriate, and (B) which escrow is sufficient. as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and prepayment premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates thereof or on the prepayment date or dates specified in the irrevocable instructions referred to above, as appropriate;

(g) investment agreements approved in writing by the Bond Insurer, supported by appropriate opinions of counsel;

(h) the Local Agency Investment Fund of the State of California, established under Section 16429.1 of the California Government Code, to the extent the Trustee is authorized to register such investment in its name; and

(i) other forms of investments (including repurchase agreements) approved in writing by the Bond Insurer.

"Plan Limitations" means the limitations contained or incorporated in the Redevelopment Plans on (a) the aggregate principal amount of indebtedness payable from tax increment revenues which may be outstanding at any time, (b) the aggregate amount of taxes which may be divided and allocated to the Agency under the Redevelopment Plans, ( c) the period of time for establishing or incurring indebtedness payable from tax increment revenues, and (d) the period of time for collection of tax increment revenues and repayment of Agency indebtedness from tax increment revenues.

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"Principal Account" means the account by that name established and held by the Trustee as an account within the Debt Service Fund.

"Prior Loan Agreements" means, collectively, (a) the Loan Agreement dated as of February 1, 1996, between the Agency and the Authority, as amended by the First Amendment to 1996 Loan Agreement dated of November 1, 2005, and (b) the Loan Agreement dated as of July 1, 2001, between the Agency and the Authority, as amended by the First Amendment to 2001 Loan Agreement dated of November 1, 2005; in each case as further amended from time to time in accordance with their respective terms.

"Prior Loans" means, collectively, the loans made to the Agency by the Authority under the Prior Loan Agreements.

"Project Area" means the project area described in the Redevelopment Plan.

"Qualified Reserve Account Credit Instrument" means an irrevocable standby or direct-pay letter of credit or surety bond issued by a commercial bank or insurance company and deposited with the Trustee, provided that all of the following requirements are met at the time of acceptance thereof by the Trustee:

(a) at the time of issuance the long-term credit rating of such bank or insurance company is AA or better from S&P or Aa or better from Moody's, or the claims paying ability of such insurance company is rated in the highest rating category by A.M. Best & Company;

(b) such letter of credit or surety bond has a term of at least 12 months;

(c) such letter of credit or surety bond has a stated amount at least equal to the portion of the Reserve Requirement with respect to which funds are proposed to be released; and

(d) the Trustee is authorized under the terms of such letter of credit or surety bond to draw thereunder an amount equal to any deficiencies which may exist from time to time in the Interest Account or the Principal Account for the purpose of making payments required under the Indenture.

"Redevelopment Law" means the Community Redevelopment Law of the State, constituting Part 1 of Division 24 of the Health and Safety Code of the State, as amended from time to time.

"Redevelopment Plans" means, collectively:

(a) the Redevelopment Plan for the Southeast Chico Redevelopment Project, approved by Ordinance No. 1408 adopted by the City Council of the City on October 14, 1980, as amended by Ordinance No. 1530 adopted by the City Council of the City on November 15, 1983, Ordinance No. 1900 adopted by the City Council of the City on May 5, 1992, Ordinance No. 2034 adopted by the City Council of the City on December 20, 1994, Ordinance No. 2278 adopted by the

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City Council of the City on December 16, 2003, Ordinance No. 2293 adopted by the City Council of the City on June 14, 2004, and Ordinance No. 2318 adopted by the City Council of the City on May 17, 2005, together with any additional amendments thereof at any time duly authorized under the Redevelopment Law;

(b) the Redevelopment Plan for the Chico Municipal Airport Redevelopment Project, approved by Ordinance No. 1498 adopted by the City Council of the City on April 19, 1983, as amended by Ordinance No. 1901 adopted by the City Council of the City on May 5, 1992, Ordinance No. 2034 adopted by the City Council of the City on December 20, 1994, Ordinance No. 2278 adopted by the City Council of the City on December 16, 2003, Ordinance No. 2292 adopted by the City Council of the City on June 14, 2004, and Ordinance No. 2319 adopted by the City Council of the City on May 17, 2005, together with any additional amendments thereof at any time duly authorized under the Redevelopment Law;

(c) the Redevelopment Plan for the Central Chico Redevelopment Project, approved by Ordinance No. 1613 adopted by the City Council of the City on July 16, 1985, as amended by Ordinance No. 1902 adopted by the City Council of the City on May 5, 1992, Ordinance No. 2034 adopted by the City Council of the City on December 20, 1994, Ordinance No. 2278 adopted by the City Council of the City on December 16, 2003, and Ordinance No. 2291 adopted by the City Council of the City on June 14, 2004, together with any additional amendments thereof at any time duly authorized under the Redevelopment Law, and

(d) the Redevelopment Plan for the Greater Chico Urban Area Redevelopment Project, approved by Ordinance No. 1968 adopted by the City Council of the City on October 25, 1993, as amended by Ordinance No. 2110 adopted by the City Council of the City on July 2, 1996, Ordinance No. 2034 adopted by the City Council of the City on December 20, 1994, Ordinance No. 2279 adopted by the City Council of the City on December 16, 2003, and Ordinance No. 2294 adopted by the City Council of the City on June 14, 2004, together with any additional amendments thereof at any time duly authorized under the Redevelopment Law.

"Redevelopment Project" means the undertaking of the Agency under the Redevelopment Plan and the Redevelopment Law for the redevelopment of the Project Area.

"Reserve Requirement" means, as of the Closing Date, the amount of $4,092,746.27. If the amounts held on deposit in the reserve accounts established for all outstanding issues of Agency Debt fall below the amount of Maximum Annual Debt Service on all outstanding Agency Debt, the Reserve Requirement shall be increased to cause such amounts to become equal to Maximum Annual Debt Service on all outstanding Agency Debt.

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"S&P" means Standard & Poor's Ratings Corporation, its successors and assigns.

"Tax Code" means the Internal Revenue Code of 1986 as in effect on the Closing Date or as it may be amended to apply to obligations issued on the Closing Date, together with applicable temporary and final regulations promulgated, and applicable official public guidance published, under said Code.

"Tax Revenues" means all taxes annually allocated to the Agency with respect to the Project Area following the Closing Date under Article 6 of Chapter 6 (commencing with Section 33670) of the Redevelopment Law and Section 16 of Article XVI of the Constitution of the State of California and as provided in the Redevelopment Plans, including all payments, subventions and reimbursements (if any) to the Agency specifically attributable to ad valorem taxes lost by reason of tax exemptions and tax rate limitations. "Tax Revenues" include the portion of such taxes which is required to be deposited into the Low and Moderate Income Housing Fund of the Agency in any Fiscal Year under Section 33334.3 of the Redevelopment Law, to the extent permitted to be used to repay Agency Debt under the Redevelopment Law. "Tax Revenues" do not include (a) amounts of such taxes which are payable to the County as a charge for collecting such taxes, and (b) amounts of such taxes which are required to be paid to other public agencies under the Tax Sharing Agreements or the Tax Sharing Statutes, unless subordinated to the payment of debt service on Agency Debt.

"Tax Sharing Agreements" means, collectively, each of the following agreements between the Agency and the following taxing agencies, as originally executed and as amended from time to time in accordance with the terms thereof:

(a) the Agreement for Cooperation Between the Chico Redevelopment Agency and the Butte Community College District dated November 10, 1993;

(b) the Agreement for Cooperation Between the Chico Redevelopment Agency and the Butte County Superintendent of Schools dated October 27, 1993;

(c) the Agreement for Cooperation Between the Chico Redevelopment Agency, the City of Chico, and the Chico Unified School District dated December 20, 1993;

(d) each of the following agreements between the Agency and the County - (i) the Settlement Agreement-Chico Municipal Airport dated September 20, 1983, (ii) the Local Agency Reimbursement Agreement Central Chico Redevelopment Project Area dated November 4, 1987, and (iii) the Local Agency Reimbursement Agreement Greater Chico Urban Area Redevelopment Project Area dated October 12, 1993;

(e) each of the following agreements between the Agency and the Butte County Mosquito Abatement District - (i) the Local Agency Reimbursement Agreement Southeast Chico Redevelopment Project Area dated January 4, 1984, (ii) the Local Agency Reimbursement Agreement Chico Municipal Airport Redevelopment

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Project Area dated January 4, 1984, (iii) the Local Agency Reimbursement Agreement Central Chico Redevelopment Project Area dated November 4, 1987, and (iv) the Local Agency Reimbursement Agreement Greater Chico Urban Area Redevelopment Project Area dated October 25, 1993; and

(f) each of the following agreements between the Agency and the Chico Area Recreation and Park District - (i) the Local Agency Reimbursement Agreement Southeast Chico Redevelopment Project Area dated January 24, 1984, (ii) the Local Agency Reimbursement Agreement Chico Municipal Airport Redevelopment Project Area dated January 24, 1984, and (iii) the Local Agency Reimbursement Agreement Greater Chico Urban Area Redevelopment Project Area dated August 26, 1993,

"Tax Sharing Statutes" means the provisions of the Redevelopment Law, including but not limited to Sections 33607.5, 33607.7 and 33676 thereof, under which a taxing entity is entitled to receive any portion of the Tax Revenues by operation of such statutory provision or by election of such taxing entity.

"Term Bonds" means the Bonds maturing on April 1 in each of the years 2027, 2030 and 2032.

"2001 Bonds" means the $32,060,000 aggregate principal amount of Chico Public Financing Authority 2001 Tax Allocation Revenue Bonds (Chico Merged Redevelopment Project Area) issued by the Authority under the Indenture of Trust dated as of July 1, 2001, between the Authority and Union Bank of California, N.A. as trustee thereunder.

Establishment of Funds; Flow of Funds

Costs of Issuance Fund. A portion of the proceeds of the Bonds will be deposited by the Trustee in the Costs of Issuance Fund on the Closing Date. Amounts in the Costs of Issuance Fund will be disbursed to pay the Costs of Issuance from time to time upon receipt of written requests of the Agency. On February 1, 2006, the Trustee shall transfer any amounts remaining in the Costs of Issuance Fund to the Agency for deposit in the Project Fund, and the Trustee shall thereupon close the Costs of Issuance Fund. ..

Project Fund. The Indenture establishes the Project Fund to be held by the Agency. Amounts in the Project Fund shall be used solely in the manner provided by the Redevelopment Law and the Redevelopment Plan to provide financing for the Redevelopment Project, subject to the limitations set forth in the Indenture. Upon the completion by the Agency of the purposes for which moneys the Project Fund are intended to be applied, the Agency shall transfer any remaining amounts to the Trustee for deposit into the Principal Account, to be applied to pay or redeem outstanding Bonds in such amounts and at such times as set forth in a written request of the Agency filed with the Trustee.

Merged Redevelopment Fund; Deposit of Tax Revenues. The Agency has previously established the Merged Redevelopment Fund for the receipt and deposit of

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Tax Revenues. The Agency shall continue to hold the Merged Redevelopment Fund so long as any of the Bonds remain outstanding. The Agency may establish one or more accounts within the Merged Redevelopment Fund for any purposes whatsoever, provided that all of such accounts must be accounted for as a part of the Merged Redevelopment Fund.

The Agency shall deposit all of the Tax Revenues received in any Bond Year in the Merged Redevelopment Fund promptly upon receipt thereof by the Agency. Once the amount on deposit in the Merged Redevelopment Fund in any Bond Year equals the sum of (a) the aggregate amounts required to be transferred to the Trustee in such Bond Year for deposit into the Interest Account and the Principal Account under the Indenture, (b) the aggregate amounts required to be transferred in such Bond Year for deposit into the funds and accounts established with respect to the Prior Loans as provided in the Prior Loan Agreements, and (c) the aggregate amounts required to be transferred in such Bond Year for deposit into the funds and accounts established with respect to any Parity Debt as provided in the documents authorizing the issuance of such Parity Debt, then the amount of additional Tax Revenues received during such Bond Year are released from the pledge, security interest and lien under the Indenture for the security of the Agency Debt and may be applied by the Agency for any lawful purposes. Notwithstanding the foregoing sentence, Tax Revenues may not be released from the pledge, security interest and lien under the Indenture unless the amount in the Reserve Account and the amount in all reserve accounts established for the Prior Loans and Parity Debt are then at their full required balances.

If the amounts on deposit in the Merged Redevelopment Fund are at any time insufficient to enable the Agency to make transfers as required under the Indenture to pay the principal of and interest on the all outstanding Agency Debt in full when due. or to replenish the Reserve Account, including any reserve accounts established therein for other Agency Debt, the Agency shall make such transfers on a pro rata basis with respect to each issue of Agency Debt, without preference or priority among the individual issues of Agency Debt.

Debt Service Fund. The Trustee will establish the Debt Service Fund as a special trust fund, which the Trustee will hold in trust. In addition to the transfers required to be made from the Merged Redevelopment Fund for the payment of principal of and interest and premium (if any) on the Prior Loans and any Parity Debt, the Agency will transfer amounts on deposit in the Merged Redevelopment Fund to the Trustee in the following amounts at the following times, for deposit by the Trustee in the following respective special accounts within the Debt Service Fund, which accounts are established with the Trustee, in the following order of priority:

(a) Interest Account. On or before the 5th Business Day preceding each date on which interest on the Bonds is due and payable, the Agency will withdraw from the Merged Redevelopment Fund and transfer to the Trustee for deposit in the Interest Account an amount which, when added to the amount then on deposit in the Interest Account, equals the aggregate amount of the interest coming due and payable on the outstanding Bonds on that date. The Trustee will apply amounts in the Interest Account solely for the purpose of paying the interest on the Bonds when due and payable.

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(b) Principal Account. On or before the 5th Business Day preceding each date on which principal of the Bonds is due and payable at maturity or upon mandatory sinking fund redemption, the Agency will withdraw from the Merged Redevelopment Fund and transfer to the Trustee for deposit in the Principal Account an amount which, when added to the amount then on deposit in the Principal Account, equals the amount of principal coming due and payable on that date on the outstanding Bonds, including the aggregate principal amount of the Term Bonds which are subject to mandatory sinking fund redemption on that date. The Trustee will apply amounts in the Principal Account solely for the purpose of paying the principal of the Bonds at the maturity thereof or upon mandatory sinking fund redemption.

Reserve Account

The Indenture establishes a special fund known as the "Reserve Account" which the Trustee will hold in trust for the mutual benefit of the owners of the 1996 Bonds, the 2001 Bonds, the Bonds and any Parity Debt, and which is deemed to be a part of the reserve fund established for the 1996 Bonds, the 2001 Bonds and any Parity Debt. The aggregate amounts held in the Reserve Account, in the reserve fund established for the 1996 Bonds, the reserve fund established for the 2001 Bonds and in all other reserve accounts or funds established for any Parity Debt are required to be at least equal to the amount of Maximum Annual Debt Service on all outstanding Agency Debt at all times.

If the amounts on deposit in the Reserve Account at any time fall below the Reserve Requirement, the Trustee will promptly notify the Agency of such fact. Promptly upon receipt of any such notice, the Agency will withdraw from the Merged Redevelopment Fund and transfer to the Trustee an amount sufficient to maintain the Reserve Requirement on deposit in the Reserve Account. Amounts in the Reserve Account will be used and withdrawn by the Trustee for the purpose of (a) making transfers to the Interest Account and the Principal Account, in such order of priority, on any date which the interest on or principal of the Bonds becomes due and payable, in the event of any deficiency at any time in any of such accounts, or at any time for the retirement of all the Bonds then Outstanding, and (b) making transfers to pay interest and principal, in such order of priority, on the 1996 Bonds, the 2001 Bonds and on any Parity Debt when due and payable in the event of any deficiency at any time in the accounts established for payment of such interest and principal; on a pro rata basis and without preference or priority as among the 1996 Bonds, the 2001 Bonds, the Bonds and any Parity Debt. So long as no Event of Default has occurred and is continuing, any amount in the Reserve Account in excess of the amount required to be on deposit therein on the 1•• Business Day of the month preceding any Interest Payment Date, to the extent available, shall be withdrawn from the Reserve Account by the Trustee and deposited in the Interest Account.

Deposit of Qualified Reserve Account Credit Instrument

With the prior written consent of the Bond Insurer, the Agency may cause the Trustee to transfer amounts in the Reserve Account to the Agency by filing with the Trustee (a) an opinion of Bond Counsel stating that such transfer will not cause interest

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on the Bonds to become includable in gross income for purposes of federal income taxation, and (b) a Qualified Reserve Account Credit Instrument. All amounts so transferred to the Agency from the Reserve Account shall be deposited by the Agency in the Project Fund and applied for the purposes thereof.

The Trustee shall comply with all documentation relating to a Qualified Reserve Account Credit Instrument as required to maintain such Qualified Reserve Account Credit Instrument in full force and effect and as required to receive payments thereunder if and to the extent required to make any payment when and as required under the Indenture. Upon the expiration of any Qualified Reserve Account Credit Instrument, the Agency shall either (i) to replace such Qualified Reserve Account Credit Instrument with a new Qualified Reserve Account Credit Instrument, or (ii) deposit or cause to be deposited with the Trustee an amount of funds equal to the Reserve Requirement, to be derived from the first available Tax Revenues.

Investment of Funds

Amounts held by the Trustee in the funds and accounts established under the Indenture will be invested by the Trustee in Permitted Investments specified in the Indenture and in the written request of the Agency. All moneys in the Merged Redevelopment Fund will be invested by the Agency in any investments in which the Agency is legally authorized to invest funds within its control. All interest or gain derived from the investment of amounts in any fund or account will be retained therein; provided, that all interest or gain from the investment of amounts in the Reserve Account will be deposited by the Trustee in the Interest Account to the extent not required to cause the balance in the Reserve Account to equal the Reserve Requirement.

Other Covenants of the Agency

Punctual Payment. The Agency agrees punctually to pay or cause to be paid the principal, premium (if any) and interest to become due in respect of all the Bonds in strict conformity with the terms of the Indenture.

Compliance with Prior Loans and Parity Debt Documents. The Agency will punctually pay or cause to be paid the principal, premium (if any) and interest to become due in respect of the Prior Loans and all Parity Debt, in strict conformity with the terms of the respective documents authorizing the issuance thereof. The Agency will faithfully observe and perform all of the conditions, covenants and requirements of the Prior Loan Agreements and the respective documents authorizing the issuance of Parity Debt.

Compliance with Plan Limitations. The Agency may not take any action, including but not limited to the issuance of its bonds, notes or other obligations, which causes or which, with the passage of time, would cause any of the Plan Limitations to be exceeded or violated. The Agency shall manage its fiscal affairs in a manner which ensures that it will have sufficient Tax Revenues available under the Plan Limitations in the amounts and at the times required to enable the Agency to pay the principal of and interest on all outstanding Agency Debt when due. The Agency will not accept any Tax Revenues which would cause any of the Plan Limitations to be exceeded.

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Books and Accounts. Financial Statements. The Agency will keep, or cause to be kept, proper books of record and accounts. separate from all other records and accounts of the Agency and the City. in which complete and correct entries shall be made of all transactions relating to the Redevelopment Project. the Tax Revenues, the Project Fund and the Merged Redevelopment Fund. Such books of record and accounts will at all times during business hours be subject. upon prior written request. to the reasonable inspection of the Trustee (who has no duty to inspect), the Bond Insurer and the Owners of not less than 10% in aggregate principal amount of the Bonds then outstanding, or their representatives authorized in writing.

The Agency will cause to be prepared annually, within 7 months after the close of each Fiscal Year so long as any of the Bonds are outstanding, complete audited financial statements with respect to such Fiscal Year showing the Tax Revenues. all disbursements from the Merged Redevelopment Fund and the Project Fund. and the financial condition of the Redevelopment Project, including the balances in all funds and accounts relating to the Redevelopment Project. as of the end of such Fiscal Year. The Agency will furnish a copy of such statements. upon reasonable request. to the Trustee. the Bond Insurer and any Bond Owner. The Trustee has no duty to review any such financial statement.

The Agency will provide the Bond Insurer with such additional information as it may reasonably request in writing to the Agency. In addition, the Agency will permit the Bond Insurer to discuss the affairs, finances and accounts of the Agency or any information the Bond Insurer may reasonably request regarding the security for the Bonds with appropriate officers of the Agency. The Agency will permit the Bond Insurer to have access to and make copies of all books and records relating to the Bonds at any reasonable time.

Protection of Security and Rights of Owners. The Agency will preserve and protect the security of the Bonds and the rights of the Bond Insurer and the Bond Owners. From and after the date of issuance of any Bonds. the Bonds will be incontestable by the Agency.

Payments of Taxes and Other Charges. The Agency will pay and discharge. or cause to be paid and discharged. all taxes. service charges. assessments and other governmental charges which may be lawfully imposed upon the Agency or the properties then owned by the Agency in the Project Area. when the same shall become due.

Maintenance of Tax Revenues. The Agency will comply with all requirements of the Redevelopment Law to insure the allocation and payment to it of the Tax Revenues. including without limitation the timely filing of any necessary statements of indebtedness with appropriate officials of the County and the State of California. The Agency may not enter into any amendment of the Tax Sharing Agreements. or any other agreement with the County or any other governmental unit, and will not amend the Redevelopment Plans if such action would have the effect of reducing the amount of Tax Revenues to be received in the current or any future Fiscal Year below the coverage test for the issuance of Parity Debt. The foregoing provisions do not apply to any amendment of any of the Tax Sharing Agreements, or any other agreement with the County or with any other governmental or private entity, which by its terms is subordinate to the pledge of, security interest in and lien on the Tax Revenues for the benefit of the Bond Owners or which does not obligate the Agency to pay any Tax Revenues except to the extent such Tax Revenues are released from the pledge under the Indenture.

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In addition, if the Agency amends the Redevelopment Plans in a manner which has the effect of obligating the Agency to make payments from Tax Revenues to other governmental entities, no such amendment shall be made which would have the effect of causing the amount of Tax Revenues to be received in the current or any future Fiscal Year to fall below the coverage test set forth for the issuance of Parity Debt.

Limitation on Disposition of Property. The Agency will not participate in the disposition of any land or real property in the Project Area to anyone which will result in such property becoming exempt from taxation because of public ownership or use or otherwise (except property dedicated for public right-of-way and except property planned for public ownership or use by the Redevelopment Plans in effect on the date of the Indenture) if such disposition would have the effect of reducing the amount of Tax Revenues to be received in the current or any future Fiscal Year below the coverage test set forth for the issuance of Parity Debt.

Amendment of Indenture

The Indenture may be amended at any time with the written consents of the Bond Insurer and the Owners of a majority in aggregate principal amount of the outstanding Bonds. No such amendment may (a) extend the maturity of or reduce the interest rate on any Bond or otherwise alter or impair the obligation of the Agency to pay the principal or interest at the time and place and at the rate and in the currency provided therein of any Bond without the express written consent of the Owner of such Bond, (b) reduce the percentage of Bonds required for the written consent to any such amendment, or (c) without its written consent thereto, modify any of the rights or obligations of the Trustee.

The Indenture may also be amended at any time with the prior written consent of the Bond Insurer but without the consent of any Bond Owners, but only for any one or more of the following purposes:

(i) to add to the covenants and agreements of the Agency contained in the Indenture, other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power therein reserved to or conferred upon the Agency;

(ii) to cure any ambiguity, or to cure, correct or supplement any defective provision contained in the lndimture, or in any other respect whatsoever as the Agency deems necessary or desirable, provided under any circumstances that such modifications or amendments do not materially adversely affect the interests of the Owners in the opinion of Bond Counsel filed with the Agency and the Trustee;

(iii) to provide for the issuance of Parity Debt, and to provide the terms and conditions under which such Parity Debt are issued, including but not limited to the establishment of special funds and accounts relating thereto and any other provisions relating solely thereto, subject to and in accordance with the provisions of the Indenture;

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(iv) to provide for the issuance of a Qualified Reserve Account Credit Instrument, including but not limited to provisions securing such Qualified Reserve Account Credit Instrument and providing for the repayment of any draws made thereunder; or

(v) to amend any provision thereof to assure the exclusion from gross income of interest on the Bonds for federal income tax purposes under the Tax Code, in the opinion of Bond Counsel filed with the Agency and the Trustee.

Events of Default and Remedies

Events of Default Defined. The following events constitute events of default under the Indenture:

(a) Failure to pay any installment of the principal of any Bonds when due, whether at maturity as therein expressed, by proceedings for redemption, by acceleration, or otherwise.

(b) Failure to pay any installment of interest on the Bonds when due.

(c) Failure by the Agency to observe and perform any of the other covenants, agreements or conditions on its part contained in the Indenture or in the Bonds, if such failure has continued for a period of 30 days after written notice thereof, specifying such failure and requiring the same to be remedied, has been given to the Agency by the Trustee or the Bond Insurer; provided, however, if in the reasonable opinion of the Agency the failure stated in the notice can be corrected, but not within such 30-day period, such failure shall not constitute an Event of Default if the Agency institutes corrective action within such 30-day period and thereafter diligently and in good faith cures the failure in a reasonable period of time.

(d) The Agency commences a voluntary case under Title 11 of the United States Code or any substitute or successor statute.

(e) Failure by the Agency to pay the principal of and interest on the Prior Loans or any Parity Debt when due, or the occurrence and continuation of an event of default under and as defined in the Prior Loan Agreements or the documents authorizing the issuance of Parity Debt.

For purposes of determining whether any event of default has occurred under and as described in the preceding clauses (a) or (b), no effect shall be given to payments made by the Bond Insurer under the Bond Insurance Policy.

Remedies. If an Event of Default occurs and is continuing, with the prior written consent of the Bond Insurer the Trustee may, and at the written direction of the Bond Insurer or (with the prior written consent of the Bond Insurer) at the written direction of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding the Trustee shall, take the following actions:

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(a) declare the principal of the Bonds, together with the accrued interest thereon, to be due and payable immediately, and upon any such declaration the same will become immediately due and payable, anything in the Indenture or in the Bonds to the contrary notwithstanding, and

(b) exercise any other remedies available to the Trustee and the Bond Owners in law or at equity to enforce the rights of the Bond Owners under the Indenture.

This provision, however, is subject to the condition that if, at any time after the principal of the Bonds has been so declared due and payable, and before any judgment or decree for the payment of the moneys due has been obtained or entered, the Agency deposits with the Trustee a sum sufficient to pay all principal on the Bonds matured prior to such declaration and all matured installments of interest (if any) upon all the Bonds, with interest on such overdue installments of principal and interest at an interest rate equal to the highest rate on the Outstanding Bonds, and the reasonable fees and expenses of the Trustee, including fees and expenses of its attorneys, and any and all other defaults known to the Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) has been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate has been made therefor, then, and in every such case, the Owners of at least a majority in aggregate principal amount of the Bonds then Outstanding, by written notice to the Agency and to the Trustee, may, on behalf of the Owners of all of the Bonds, but only with the prior written consent of the Bond Insurer, rescind and annul such declaration and its consequences. However, no such rescission and annulment will extend to or affect any subsequent default, or shall impair or exhaust any right or power consequent thereon.

Limitation on Bond Owners' Right to Sue. No Bond Owner has the right to institute any suit, action or proceeding at law or in equity, for any remedy under the Indenture, unless:

(a) such Owner has previously given to the Trustee written notice of the occurrence of an event of default;

(b) the Owners of a majority in aggregate principal amount of all the Bonds then outstanding have requested the Trustee in writing to exercise its powers under the Indenture;

(c) said Owners have tendered to the Trustee indemnity reasonably acceptable to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; and

(d) the Trustee has refused or failed to comply with such request for a period of 60 days after such written request has been received by the Trustee and said tender of indemnity is made to the Trustee.

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Defeasance of Bonds

The Agency may pay and discharge the indebtedness on any or all of the outstanding Bonds by irrevocably depositing with the Trustee or another fiduciary, in trust, Federal Securities in such amount as an independent accountant determines will, together with the interest to accrue thereon and available moneys then on deposit in any of the funds and accounts established under the Indenture, be fully sufficient to pay and discharge the indebtedness on such Bonds (including all principal, interest and redemption premium, if any) at or before maturity. Upon such deposit, the pledge of the Tax Revenues and other funds provided for in the Indenture, and all other obligations of the Agency under the Indenture, will cease and terminate, except only the obligation of the Agency to pay or cause to be paid to the Owners of such Bonds not so surrendered and paid all sums due thereon from amounts set aside for such purpose. Any funds thereafter held by the Trustee, which are not required for said purposes, will be paid over to the Agency.

Notwithstanding the foregoing, if the principal, interest and premium (if any) on the Bonds are paid by the Bond Insurer under the Bond Insurance Policy, the obligations of the Trustee and the Agency will continue in full force and effect and the Bond Insurer will be fully subrogated to the rights of all Owners of the Bonds so paid. In addition, the obligations of the Trustee and the Agency under the Indenture will continue in full force and effect, and will not be terminated, until such time as the Agency has paid all amounts (if any) as are due and owing to the Bond Insurer under the Bond Insurance Policy.

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APPENDIXB

CITY OF CHICO INFORMATION STATEMENT

The following information concerning the City of Chico is presented as general background data. The Bonds arc payable solely from Tax Revenues as described in the Official Statement. The Bonds arc not an obligation of the City, and the taxing power of the City is not pledged to the paymclll of the Bonds.

General Information

The City of Chico is located in the northern Sacramento Valley, 90 miles north of Sacramento and 174 miles northeast of San Francisco. Situated along State Highway 99, it is the major retail trade, recreational, educational, financial and commerce center for Butte County and the surrounding area. Chico was established in the mid-l 800's by settlers attracted to the area by gold mining and fertile farm lands. The City of Chico was incorporated on January 8, 1872. Education services, agricultural and light industry have characterized the City throughout much of its history. Chico covers an area of approximately 28.4 square miles.

Governmental Services

The City of Chico operates under the Council/Manager form of government. The City is governed by a seven-member council elected at large for four-year alternating terms, with the Mayor being selected by the Council from among its members. The offices of City Manager and City Attorney arc filled by appointments of the Council.

The City Manager supervises all City operating departments, except the City Attorney's office, including police, fire, general services, community services, information services and administration. Administrative offices include the city clerk, finance, risk management, redevelopment and human resources. The City of Chico employs 411 permanent staff members and 13 hourly workers. City employees are represented by five recognized labor relations bargaining units and three non-recognized groups. The City has never been subjected to a strike or work stoppage and considers its labor relations to be satisfactory.

Transportation

State Highway 99, a north-south corridor, passes through the City. North of Chico, Highway 99 connects with Interstate 5, a major northwest-southeast corridor providing access to all major destination points and business centers in north~rn California.

Air cargo and passenger flight services are provided at Sacramento International Airport, 90 miles south, which is served by all major airlines. Chico Municipal Airport provides freight services as well as commuter services to San Francisco International Airport with three daily roundtrip flights operated by United Express.

Rail freight service is available from Union Pacific railroad. In addition, truck freight service is available from both local and national trucking companies. AMTRAK provides daily passenger rail service.

Bus service is provided by Butte Regional Transit (B-Line) which operates ten routes throughout the City and provides service between Chico, Paradise, Oroville, Gridley and Biggs.

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Community Facilities and Services

Educational services are provided by the Chico Unified School District. The District operates 14 elementary schools, two high schools, a continuation high school and three junior high schools in the City. Total enrollment is 13,500 students. Higher education facilities are provided by Butte Community College and California State University, Chico. California State University, Chico enrolls more than 15,000 students.

Health care service within the City is provided by the Enloe Medical Center. It is a community-based non-profit hospital which provides Chico and the north Sacramento Valley with emergency medical services and full-service hospital and outpatient care. Enloe is home to Chico Trauma Center, the area's designated Level II trauma center serving six counties. In addition to inpatient services, Enloe physicians and staff also provide occupational health and outpatient surgery through the Enloe Outpatient Center. The 391 bed medical center has major treatment center for cancer therapy, cardiac care, rehabilitation, behavioral health, orthopedic, neuroscience, and maternity. The only specialty programs not offered arc burns and transplantation. With a staff of 277 physicians and dentists representing thirty-five specialties, Enloe provides educational facilities and clinical training for many institutions.

The Enloe Rehabilitation Center is the largest freestanding rehabilitation hospital in the North State. The 60 bed facility (42 rehabilitations and 18 extended care) with 122 physicians. provides rehabilitation services to those suffering disabilities from stroke, spinal cord injury, head trauma, amputation, orthopedic surgery, and neurological disorders.

Chico has four community parks, including the 3,530 acre Bidwell Park. and a number of neighborhood parks. Two libraries, one daily and several weekly newspapers, seven radio stations, five television stations, cable television access and 61 churches serve the community.

B-2

Population

The following chart provides a comparison of population growth for Chico. neighboring cities and Butte County between 200 I and 2005.

TABLE NO. B-1 CHANGE IN POPULATION

CHICO, NEIGHBORING CITIES AND BUTTE COUl'oTY 2001 -2005

CHICO NEIGHBORING CITIES BUTTE COUNTY

Percentage Percentage Percentage

Year Population Change Population Change Population Change

2001 65,061 44,997 205,028

2002 66,920 2.9% 45,302 0.7% 207,492 1.2%

2003 68,478 2.3°/o 45,662 0.8% 210,022 1.2%

2004 71,154 3.9% 45,728 0.1% 212,237 1.1%

2005 73,558 3.4% 45,571 (0.3)% 214,119 0.9%

o/o lncrease Between

2001 - 2005 · 13.1% 1.3% 4.4%

Neighboring cities include Paradise, Oroville and Gridley.

Source: State of California Department of Finance, Population Research Unit, "Population Estimates.for California Cities and Counties. "

B-3

Employment and Industry

The City is located in the Chico Metropolitan Statistical Arca ("MSA"). The Chico MSA includes all of Butte County and five incorporated cities therein. Six major job categories constitute approximately 76.5% of the work force. They arc government (22.1%), educational and health services (16.6%), service producing (15.8%), leisure and hospitality (9.0%), professional and business services (7.3%), and financial activities (5.7%). The May, 2005 unemployment rate in the Chico MSA was 6.0%. The State of California May, 2005 unemployment rate (unadjusted) was 5.0%.

TABLE NO. B-2 CHICOMSA

WAGE AND SALARY WORKERS BY INDUSTRY(IJ IN THOUSANDS

Industry 2001 2002 2003

Government 17.2 17.5 17.9

Other Services 3.9 3.7 3.9

Leisure and Hospitality 7.3 7.2 7.1

Educational and Health Services 11.4 11.6 12.2

Professional and Business Services 6.1 6.3 5.8

Financial Activities 3.8 4.3 4.4

Information 1.4 1.3 1.4

Transportation, Warehousing and Utilities 2.0 2.2 2.2

Service Producing

Retail Trade 9.6 10.3 JO.I

Wholesale Trade 1.6 1.6 1.8

Manufacturing Nondurable Goods 1.7 1.6 I. 7

Durable Goods 2.8 2.1 2.2

Goods Producing Natural Resources, Mining and Construction 2.9

Total Nonfarm 71.7 72.8 74.1

Farm . 2.9 2.5 2.5

Total (all industries) .. 746 liJ. 1fdJ.

(I) Annually. as of May.

2004 2005

17.0 16.7

3.6 4.0

7.2 6.8

12.2 12.5

5.5 5.5

4.0 4.3

1.4 1.5

1.8 1.8

10.0 IO.I

2.0 1.8

1.6 1.7

2.2 2.1

4.0

72.3 72.8

2.7

liQ 75.5

Source: Stale of California Employment Development Department, "Annual Planning Information" and "California Labor Market Bulletin. "

B-4

The largest manufacturing employers operating within the Chico urban area and their respective number of employees in 2004 arc as follows:

Name of Company Number of Emplovces Product/Service

Lifctouch National School Studios 500 School Photography

Sierra Nevada Brewing Company 325 Specialty Beer

Aero Union Corporation 200 Aircraft Components

Bi-Tech Software, Inc. 200 Computer Software

Smucker Quality Beverages 130 Fruit Juice Manufacturers

Lundberg Family Farms 110 Rice Cakes and Rice Products

Norficld Industries 100 Wood Machinery and Tools

J.G Bratton CO 100 Buyers for Del Monte

Sunset Molding-Chico Division 95 Doors, Windows and Moldings

WREX Products 90 Custom Plastics

The largest non-manufacturing employers operating within the Chico urban area and their respective number of employees in 2004 are as follows:

Name of Company

California State University, Chico

Enloe Medical Center

Chico Unified School District

Butte Community College

Tri Counties Bank

United Health Care/Uniprise

City of Chico

Wal mart

Blue Shield

Koret of California

Safeway Stores

Source: Chico Chamber of Commerce.

Number of Employees

2,255

2,200

1,506

1,400

616

425

424

340

330

300

270

B-5

Product/Service

Education

Health Care

Education

Education

Bank

Health/Insurance/Claims Processing

Government

Retail Merchandise

Insurance

Clothing Distribution Center

Groceries

Personal Income

Personal income information for the City of Chico, Butte County. the State of California and the United States arc summarized in the following chart.

TABLE NO. B-3 EFFECTIVE BUYING INCOME

CITY OF CHICO, BUTTE COUNTY, CALIFORNIA AND UNITED STATES 2000-2004

Year Chico Butte County State of California United States

2000

2001

2002

2003

2004

$27,091

28.726

28,838

28,672

29,889

$28.181

29,570

30,388

30,755

31,975

Source: Sales and Marketing Management, "Survey o.lBuying Power."

Commercial Activity

$44.464 $39.129

43,532 38,365

42.484 38,035

42,924 38.201

43,915 39.324

The following chart summarizes the volume of retail sales and taxable transactions for the City of Chico for 1999 through 2003.

TABLE NO. B-4 CITY OF CHICO

TOTAL TAXABLE TRANSACTIONS (in Thousands)

1999 - 2003

Total Taxable

Retail Sales Retail Sales Transactions Issued Sales

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

1999 $ 888,715 997 $1,024,205 2,080

2000 980,917 10.4%, 1,028 1,130,695 10.4% 2,081

2001 1.067,889 8.9% 1,048 1,232,238 9.0% 2,146

2002 1,120,786 5.0% 1,127 1,285,185 4.3% 2,292

2003 1,200,300 7.1% 1.217 1,363,433 6.1% 2,432

Source: State Board of Equalization, "Taxable Sales in California. "

B-6

Taxable transactions by type of business for the City of Chico for 1999 through 2003 arc summarized in Table No. B-5.

TABLE NO. B-5 CITY OF CHICO

TAXABLE TRANSACTIONS BY TYPE OF BlJSINESS (in thousands)

1999 - 2003

1999 2000 2001 2002

Retail Stores

Apparel Stores s 30.586 $ 34,81 I s 40,679 s 49,697

General Merchandise Stores 228,797 242.656 250,006 248,719

Food Stores 59.919 65.242 67,330 71,654

Eating/Drinking Places 91,860 99,046 109,809 116,709

Home Furnishings and

Appliances 49,832 51,194 53,549 58.241

Building Materials and

Farm Implements 107,784 112,840 121,622 130,256

Auto Dealers/Suppliers 122,046 151,504 188,208 197.186

Service Stations 46,999 65,807 65,617 55,737

Other retail stores 150 892 157817 171 069 192.587

Total Retail Stores 888,715 980,917 1,067,889 1,120,786

A II Other Outlets 135 490 149 778 164 349 164.399

Total All Outlets $).024 205 $).130.695 $).232.238 $) 285 )85

Source: State Board of Equalization, "Taxable Sales in California."

B-7

2003

s 51,674

252,973

71,461

121,358

62,796

156,748

212,979

69.718

200 593

1,200,300

163.133

$).363.433

Building Activity

The following charts summarize building activity valuations for the City of Chico for the five-year period from 2000101 to 2004105.

TABLE NO. B-6 CITY OF CHICO

BUILDING ACTIVITY AND VALUATION 2000/01 to 2004/05

2000/01 2001/02 2002/03 2003/04 2004/05

Residential:

New Single-FamHy $ 49,309,129 $ 66,411,553 $ 81.625,563 $ 80.977,274 $ 73,490.209

New Multi-Family 20,458,876 686,339 6,925,230 42,773,660 10,904,034

Additions, alterations 2 834 933 2.719467 3 038.590 3 845 700 4 491 910

Total Residential $ 72,602,938 S 69,817,359 $ 91,589,383 $127,596,634 $ 88,886,153

Commercial:

New Commercial/

New Industrial $ 34,923,616 S 21,439,292 $ 18,391,194 $ 25,578,769 S 22,767,114

Additions. alterations 9 227 674 10,676,922 II 120017 II 337 616 24 006.009

Total Nonresidential $ 44,151,290 $ 32,116,214 $ 29,511,211 $ 36,916,385 $ 46, 773, 123

Other s 5 571 985 s 8.115 625 s 6,386,311 $ 9 312 772 s 7 713 492

Total Valuation $122,326,213 $110,049,198 $127,486,905 $173,825,791 $143,372,768

No. of New Dwelling Units:

Single-Dwelling 347 509 642 517 483

Multi-Dwelling 222 _l_Q .Jili 141

Total New Units 569 519 710 1,068 624

Source: City of Chico

B-8

APPENDIXC

AGENCY AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING JUNE 30, 2004

C-1

[THIS PAGE INTENTIONALLY LEFT BLANK]

MACIAS GINI & COMPANYLLP

3000 S Street. Ste. 300 Sacramento, Californb 95-816

916.92!.4600 l'l'IONE

916.928.2755 FAX

Board of Directors Chico Redevelopment Agency

Chico, California

INDEPENDENT AUDITOR'S REPORT

We have audited the accompanying financial statements of the governmental activities and each major fund of the Chico Redevelopmelll Agency (Agency). a component unit of the City of Chico. California. as of and for the year ended June 30. 2004. which collectively comprise the Agcncy"s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the Agency's management. Our responsibility is to express opinions on these financial statements based on

our audit.

We conducted our audit in accordance with auditing standards gcn~rally accepted in the United States of America and the standards app]icab)e to financl,d aulHls containeJ in Goven1111en1 Atulili11g 5'1antlt1r£ls. issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance ahout ,vhether the financial staternents are free of n1aterial 1nisstatement. An audit includes cxa1nining. on a test basis. evidence supporting the an1ounts and disclosures in the fin:mcial statements. An audit also includes assessing the accounting principles used and significant esti1n:itcs n1adc hy manag:en1ent. ~is \\·ell as evaluating the ovt.::r:.ill fina1H.:ial st~~tcn1cnt presentation. We believe that our audit provides a reasonable basis for our opinions.

ln our opinion, the financial staten1ents referred to nhove present fair!y. in all 111:Herinl respects. the respective financial position of the govcrnrnental activities and each ,najor fund of the Agency as of June 30. 2004~ and the respective changes in financial position thereof for the year then ended in confOnnity with accounting principles generally accepted in the United States of America.

In accordance with Govcm111u11 Amliting Standards, we have also issued our report dated October 7. 2004 on our consideration of the Agcncy·s internal control over fin:incial reporting and on our tests 0f its con1pliance ,vith ccrt::iln provisions of la,vs, regulations, contracts. and grant agree1nents and other mailers. The purpose of that report is to describe the scope of our testing of imernal 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 Goi-emment A 11diting Standards and should be considered in assessing the results of our audit.

www.maciaszini.com CCRTlF'IED PUBLIC ACCOUNlAN1"S I. MANAGCMCN1 CON:..ULTANTS

The accornpanying 1nnnagen1en1's discussion and analysis on pages 3 1hrnugh 7 is 1101 n required par1 of 1he basic financial staten1ents hul is supplcn1ent~1ry infor111a1ion required hy .iccoun1ing principles generally accep1ed in 1he Uni1ed Slates of America. We have applied ce11ain limited procedures, which consis1ed principally of inquiries of m:magernem regarding the me1hods of measurerne111 and presentation of the re<Juired supplementary information. However, we did not audit the information and express no opinion on it.

Certified Public Accountants

Sacramento. California October 7. 2004

2

CHICO REllEVELOPl\lENT AGENCY

(A Component Unit of the City of Chico, California)

MANAGE1\IENT'S DISCUSSION AND ANALYSIS

.I une 30, 200.J

The following discussion provides a narrative overview and analysis of the financial activities of the Chico Redevelopment Agency (Agency) for the fiscal vear ended June 30, 2004. Readers are encouraged to consider the inforrn:,tion presented here in conjunction with the Agency's financial statements, which begin on page 9.

FINANCIAL HH;IILlf:IITS

• The liabilities of the Agency exceeded its assets at the close of the most recent fiscal year hy $20.l 73.125.

• The Agency's net :1ssets decreased by $501.294. • As of the close of the cunent fiscal yc:ir, the Agency's governmental funds reported an ending fund

balance of$33,555,176 a decrease of$1543,068 in comparison with the prior year. The Agency had a positive unreserved fund balance of $20,238.230.

• The Agency had general revenues of$ l 3, 199,431 and program expenses of $13,700,725 for the year ended June 30, 2004.

• The Agency issued no long-term debt during the year.

OVERVIEW OF Tl IE FINANCIAL STATEMENTS

The discussion and analysis is intended to serve as au introduction to the Agency's basic financial statcn1ents. The Agency's basic financial statc1nents con1prise three con1ponents: I; govemmentM\\'ide financial statemems. 2) fund financial statements, and 3) notes to the financial statements.

(;o,'ernnient~,,·idl' fti11nnch1l Staten1l'nts

The government-wide financial statements :ire designed to provide readers with a hro:id overview of the Agency's finances. in a 111anner silnilar lo a private·scctor business.

The s1atemc111 of 11c1 asse/s presents information on all of the Agency's assets and liabilities, with the difference between the two reponcd as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Agency is in1proving or deteriorating.

The s/atemcnl of ac1iviti,:,1· 1>resents infonn,ition showing how the Agency· 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 Oows. Thus. revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods.

The government-wide financial statements report on the function of the Agency, which is to improve, rehabilitate and develop certain areas within the City by eliminating blight aml encouraging priviite investment. These :ictivitics are primarily funded with increment:il propeny tax revenue (iax increment,)

The government-wide financial statements can be found on pages 8 and 9 of this report.

3

Fund Financial Statements

A fimd is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Agency, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements.

Governmental Funds - The capital projects and debt service funds are governmental funds used to account for essemially the same function reponed as gm·emmenral activities in the government wide financial statements. However. unlike the government-wide financial statements. governmental fund financial s1aten1ents focus on near~;e1111 inflou·s and ou~flo\VS of s1,enrlnble resources. as \vcll a:; 011 /,a/ances of spendable resource.,· available m the end of the fiscal year. Such information may be useful in evaluating a government's near-term financing requirements.

The Agency repons the following major capital projects funds: Chico Merged Redevelopment Project Area (RPA), Greater Chico Urhan Area Redevelopment Project Arca. Chico Mergc<l RPA Low an<l Moderate lncorne Housing. (ireatcr Chico Urban Area RPA Low an<l Moderate lncornc Housing. Chico Merged RPA Fine Ans and Greater Chico Urban Area RPA Fine Ans. The Agency reports the following major debt service funds: 199(, Tax Allocation Bonds, 2001 Tax Allocation Bonus. Chico Merged RPA Low and Mcxlcrate Income Housing and Chico Merged RPA Reserves.

Because the focus of the governmental funds is narrower than that of the government-wide financi:il state1nents. it is useful to co1npare the infonnation presentcU in the govern1nental funds with si1nilar information presented for gol'emme111a/ activities in the government-wide financial statements. By doing so. readers n1ay better understand the long·ter111 i1npact of the governtnent's near-term financial decisions. Both the governn1ental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between 1he govcrn1ncntal runds and gover11,nental activities. ~fhe basic govern1nen1al fund financial statements

can be found 011 pages 10-14 of this report.

!\oles to the Financi:11 St>itemcnts

The notes provide additional inJ'urmation that is essential to a full understanding of the data provided in the govern1nent-\vic.Je and ruud fin:u1t:ial state1nt!11ts. The noti.;s to the f1n:1ncial staten1cnts can be found

on pages 15-25 of this report.

4

c;ov1mNMENT-\HDE FINAN( 'IA LANA LY.SIS

Assets: Current and other

Total assets

Liabilities: Long·tenn liabilities outstanding Other liabilities

Total liabilities

Net :1ssets: Unrcs1ric1ed

Total net assets (dclicit)

Statcml'nt of Net Assets (;ovcrn1nental ,\ctivitics

.I une 30. 2004

21111~ 211113

$ 38.056.089 $ 39,693,606 38.056,089 39,693,606

54,131,583 55,508,210 4,097,631 3,857,227

58.229.214 59,365,437

(20,173,125) (19.671.831) $ (20,173.125) $ (19,671,831)

Total l)ullar Chanoe

$ (1,637 .517) (1.637,517)

1.376,627 (240.404)

1.136,223

(501,294) $ (501.294)

As noted earlier, net assets 1nay serve over 1i1ne as a useful indicator of a govern1nenr's financial position. Jn the case of the Agency, liabilities exceeded assets hy $20. 173.125 at 1he close of the most recent fiscal year. creating a negative net asset balance. The capital assets construc1ed or acquired through the debt financing of the Agency are owned by the City and reported on the City's financial staten1ents.

Stal~mcnt of Ac·tivities Gonrnmcnlal Activities

For th,• Yl'ar Fnclecl .lune 30. 2004

Tola I Dollar

20114 200., Change Rt-Yt'IHICS:

General revenues: Property tax. increment $ 12.636.105 $ 10.758.412 $ 1.877.693

lnvestn1cnt earnings. 5,19,295 847,128 (297 ,833)

Miscellaneous 14.031 77.-155 (63.424)

T0tal revenues 13,199.431 I 1.682 .9<J< 1.516,4:16

ExprnSl'S! Com,nunity development and ad1ninistration 5,921.915 4.535,5~ (l ,386.411)

Redevelopment 5.006,401 3.229.~9 (l,777,352)

1nterest and fiscal charges 2,772.409 2.830.449 58,040

Tot.ii expenses 13.700,725 I 0.595,002 (J.105.723)

Change in net assets (501.294) 1,087,993 ( t .589.287)

Nel assets (delicil), heginning or year (19,671,831) (20.759,824) 1,087,993

Net assets (deficit). end of year $ (20, 173,125) $ (19,671.831) $ (501,294)

5

The nel assets of 1hc Ai;cm:y decreased by 5501.294 during !he currcnl r,scal year. While revenues incrc.tsed $1.51 (1.4:\(1 over the prior ye,1r due 10 addi1ional lax incremenl, cxpcmli1ures also increased . . J\gcncy agrcc1ncnts. lhc p:1ss though pay1r1en1s of tax incren1cnt. inGreased approxi1nately $5()0.000 due to the increased revenue. Fund balance fro111 prior years \vas used to rund n1ajor infrastr11cture projects that are shown as Redevclop111rn1 expenses. The Agency contribu1ed funds for major infras1ruc1ure projects that arc shown as Redcvelopinenl expenses. The rela1ed capital assets are recorded 011 lhc Ci1y's S1a1emen1 of Net Asscls.

FUND FINA!\CIAL ANALYSIS

As no1ed earlier, 1he Agency uses fund accounling to ensure and demonstrate compliance with linance­related legal rcquircmems. The Agency's governmental funds are discussed below:

Governmental Funds

The focus of the Agency· s govcnzme111al fimds is to provide information on near-lerm inflows, outflows. and balances of spendable resources. Such information is useful in assessing 1hc Agency's financing requiremenls. In particul:ir,jimd balance may serve as a useful measure of a government's net resources aYailable for spending for program purposes at 1he end of the fiscal year.

As of the end of lhc currenl fiscal year, 1hc Agency's goYernmental funds reponetl an ending fund balance of $33.555.176. The fun<..1 balance pri1n:.irily represents the accunn1lation of incre1ncntal property tax revenue, bond proceeds. :ind imerest income in excess of expendilures. A ponion of fund balance is reserved for cncu1nhranccs. dehl service and loans receivable. The ren1aining fund h:dance is unreserved and umlcsiguatcd.

Total Toial Dollar Pcrcenlage

2004 2003 C:h,Hl!.!C Chan~e ){C'Vl"TlllcS:

Tax Incrc111cnl $ l 2 .t>36. l 05 s t0.758.412 $ 1.877.693 17.4% lntcrcsl 899.295 1.084.939 f 185.644) (17.1)% ()!her revenues 14.03! 77.455 (63.424) (8 !.8)%

'fotal rt:rcn11cs 13.549.431 I l.920,806 l.628.625 13.?o/ti

Expenditures: Administrative 1,133.783 1.058.761 (75,022) (7.1)% Agency Ag.rce1nents 3.020.488 2.521,819 (498,699) (19.7)% Community de.vc1op1ncn1 1.734.271 969,183 (765.088) (78.9)% Rec.lcvelopn1en1 5.006.401 3.229.049 ( I. 777 ,352) (55.0)% Dcht service 4.197.556 4.194.755 (~.ROI) (0.0)%

·rotal expenditures 15,092.499 l 1.973,567 (3.118,932 l (26.0)'7,

Incrt':tSl' (dC'rrrast•) in f11ud hal.111<.:t' $ ( 1543,068) $ \52,761) $ ( 1.490,307) (2924.6)%

The increase in l.:1x incrc1ncnt revenues is aurihutahlc to an increase in assessed valuation resulting fron1 co111n1crcial and residcnti~1I develop1ncnt as well as res,tles.

Community development expenditures increased over the prior year due 10 $ I ,4X4,000 in granl disbursemenls for dcvelopmelll of a 60-unit transitional housing facility and Jayc:1rc center.

6

The rcdewlopment expenditures line item rcpons the Agency's capital impro"ement project costs incurred during 1he current year. Most of the budgeted projects arc road projects. and costs for these projects n1ay span 111ore than one fiscal year. /\.nnu..il expen<litures vary hasetl on actual construction i;;osls incurred and arc 1101 indicali\'C of a trend.

LONG-TEIV.J llEBT Alll\llNISTR-\TION

The Agency's outslanding Jong-tcm1 deb! on its reYenuc bonds decreasc<l $1.410,000 during the year in accordance with scheduled <leht senicc payments. For additional inrormation on the Agency's outstanding debt, see Note Fin 1J1c notes In the basic financial statements.

ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS

The following factors were considered in preparing the Agency° s budget for the 2005 liscal year:

• Tax increment (net or pass through, to local agencies of $3,80.J,796) from the newly formed Redevelopment Project Area (described below in Future Evems That Will Financially Impact the Agency) is projected to increase from $9.615,617 to $14.667.325 (a growth of 52.5%). The pl:m amendment eliminated the annual limit on tax increment collection in the Southeast Chico Redevelopment Project Arca. and approximately $3.4 million of !he projected increase is allributable w 1he removal of this cap. Projected growth would Juve been approximately 17.5% wi11l 1he removal of the cap. The total Agency budget is $ I lJ,230.396, which includes infrastructure projects, the cost of which may span more than one fiscal year.

• The increase in tax incren1ent is primarily due to ne,v construction and resales.

FUTURE EVENTS THAT WILL FINANCIALLY IMPACT THE A<a•:NCY

On June 14. 2004. the Chico City Council approved amendments to the Redevelopment Plans for the Chico l\lergcd and Greater Chico Urban Arca Rcde"elopmcnt Project Areas to fiscally merge the two projects. In addition to merging the project areas. the plan amendments also eliminated the :mnual limit on tax incre111cnr collection in 1hc Southeast Chico and C'hico ivtunicip:il ,\irport con1poncnts. con1binctl the tax increment collection anti bonded indebtedness limits fnr all projects areas, and extended the .lime limit for tax increment collection in the Central Chico component to 2036. The Agency·s tax increment r1..:venue is estirnatcd to incre~1sc by approxirnatcly $'2.75 rnillion in 200...J.-{)5 as a result of clin1inating the :innual limit on tax increment collection. Under current redevelopment Jaw. the Agency will incur additional pass through co1Tu11i1n1cnts <lue 10 the change in li1nits.

During the process of adopting the 2004-05 State budget. the C'nlifomia legislature passed Senate Rill (SB) 1096 which requires the Chico Redevelopment Agency to make payments of S928.9 I 7 for the next two years to Butte County's Educational Revenue A11gment:ition Fund <ERAF). To offset the loss in tax increment revenue resulting from the requirc<l ERAF payments, SB I096 allows agencies to amend by ordinance their rcJevelopmenl plans to cxtcml the time limit or the effectiveness uf the redevelopment plans and the time limit 10 repay indelitedness by one year for each payment.

REQUESTS FOR I~FORl\lATION

This financial report is designcu 10 provide a general overview of the Agency"s finances for all those with an interest. Questions concerning any of the information provided in this report or requests for additional financial information should he addressed to Agency Treasurer. Chico Redevelopment Agency. P. 0. Box 3-120, Chico, California 95927.

7

CHICO RF.DEVELOPMENT AGENCY STATEMENT OF NET ASSETS - GOVERNMENTAL ACTIVITIES

.IUN F. 311, 211M

Assets Cash and investments s Receivables

Total assets

Liabilities Payables Long-tenn liahilities:

Due within one year Due in more than one year

Total liabilities

Net Assets (Deficit) Unrestricted $

See acco,npanying notes 10 the basic financial state1nents.

30.467,388 7.588.701

38.056.089

4.097 .631

1.595.000 52.536.583

58.229.::! 14

(20.173.125)

CIIICO REDEVELOPMENT AGENCY STATDlENT or ACTIVITIES - GOVf.RN,lENTAL ACTl\'ITIES

Yf.AR ENDf.D .IU:\E 311. 2110-l

l{cdevclopn1ent Agt•nc:y Progran1 Expt'nscs Community development and administration Redevelopment Interest 011 long-tcrn1 debt

Total program expenses

General Revenues Taxes:

Property tax incremenl Investment ean1ings Miscellaneous

Total general revenues

Change in nel assets Net assets (deficit). beginning of year

Net assets (deficit). end of year

Sec acco1npanying notes to the basic financial statements.

9

$

$

5.921.915 5.006.401 2. 772.409

13.700.725

12.636.105 549.295

14.031

13.199.431

( 501.294) (19.671.831)

(20. I 73. I 2 5 l

('JJl('O RFl>l,:\'El,()P!\IEN'f AGENCY

H:\L.\KCESIIErT r;o\'EU~'J\lE:"t'TAL Ftli'\l}S

.It lSE 311, 20~

Ca iial l'1011.'c1s. Ft1nds Chico Greater Chico

Chaco Grc:iler Chico ~,,'1erged RP A lhb:in Arca Rl'A Nk1gt:c..l U1h:in Are:.i Low and Low an<l

Redevelopment Kcc..le\•.:lopn1ent fvlrnkrme f•:lod1;;ra1c Chico Gu.:ate1 Cl11co

!'iojcct l'rujcc1 lucomc lnco1nc Mt:rg.cd Rl'A Urban A1c:1 RP . .\

Area Arca Hou sin!!'. Hou:;ing Fine Ans Fine Ans

Asscb Cash am.I investmcu1s $ l6.9(i3.743 i $ 5,112,250 l, 3.669.815 $ 1,11,208 $ 78505

Restricted cash :iml invcs1mcm5

Receivables: ln1crcst I.OSL I{)..; 1511

Ta,es 1 t.9SI 180,687

I n1crgovcrnmc111.il 1,000

Loans 29-l,376 5,982,349 3-l,66J

Due from other funds 741.627

Total assc1s s 18.011.697 $ 180,687 $ 12,176.703 $ 3.707.0-19 s 1-J 1.208 $ 1l>505

Liahili!il's :ind Fu111I lt11h1nccs Liahilitics:

Accounts payable $ 892,601 s 204.137 s 51.153 s s s Accrued ,vages and benefits 14.888 2.385 5.560

lmcr~ovemmcnl:tl pay::1hle 1.302.201 941.103 J.~10

Due to other funds 666.910

[)efe1Ted revenues 1.081.IQ.I Z.571

To1al li:1bilitics 2,209.690 1.814.535 1.141.027 ::!.571

Fund B:11.inccs (Ocficiti-\: RcseJvl·d For:

Encumbrance!- 2,403 .... 96 166.524 3,243 5.1'15

Debt ser\"i.:e Loans re<.:elv:ihle 29-1.376 5,982.3-11) ;\J.6<13

Unics.erved: lJ1ulesigm11cd 13.104.135 (1,800.372) 5.050.084 3,669.8 l.1 l)h,06'.' 78.505

Total fund halanct!t (deficits) 15.802.007 fl.633.848) 11,035.676 3.704.J78 l.l 1.208 78505

Tot3l liabilitics and fund balances s 18.011.697 s 180.687 s 12.176.703 s 3.707.049 s 141.208 $ 78505

Sec aC"companyi11g nolcs 10 the basic financial sl<lJcmenls.

10

Asst ls Cash and investments Restricted cash and invest111cn1s

Receivables: ln1eres1 Taxes ln1ergovemmental

Lo,rns Due fron1 other funds

To1al assets

Linbilities and Fund Balances Liabilnics:

Accounts pay:1b!e

Accrued wages and benefi1s Intergovernmental payable

Due to 01her funds Ot:ferred revenues

Tot.ll Jiahili1ies

Fund Balances ( Deficits):

Reserved For: Encumbrances

Dehl service Loans rcccivahle

Unreserved:

U1u.lesignated

Total fund h:1l:1nces (deficit!'.)

Total liabilities .ind fund hal3nccs

c111cn HEDF\'ELOPfvlENT AGENCY ){ .. \LANCE SllEET

GOVERNJ\IENTAL FUNDS Jt IJ\"E ):O, !Oo.J

n~b1 Service Funds Chico

Mer&eU RPA

19% Tox 2001 Tax Low .lnd

Alloca1ion Allocu1ion ~lodermc Chico

Revenue Revenue lncon1e Merged RP A

Bonds Bond llousin" Reserves

$ $ s $

460 1.,.16·1 4,497,943

460 $ 3,464 $ $ 4,497,9-13

s s $ $

74,717

74.717

-160 3,..t64 4,42j.226

460 3,46..t -l.413.226

460 s J.4(1.;I $ $ 4.-197,943

( 'erwin long·1e11n assets nre not :1v.nlable lo pny for cunen1·perit1d expendilures and. therefore. :ire deferred in lhe governmental funds.

s

$

$

Some liabilities are not due and payable in the current period and, therefore,

a11.: nut repurtl!d in the fund!.. Lon,;;-tern1 Jeb1 Accrued intcn.:sl Compcnsa1ed ;1bscnces

To1:1l

25,965521 4.501.867

1.083.675

192.638 1,000

6,311,388 7--11.C,27

38,797,716

1.147,891

22.833 2.246514

741.627

1.083.675

5.242540

2578.408 ,iA27.l50 ri.:i 11 •• ;ss

20.238..230

:;:~5~'.116

1.083,675

(54.060,000) (680,39))

(71583)

Net assets (deficit) or govemnien1al ::ictivities $ (20.173,12'\)

See accompanying notes 10 lhe basic financi:::it s1:ncmcnts.

II

CHICO RFHE\T:l .. OPl\lENT 1\(;ENC'Y ST,\Th\lE!'tf OF RE\'ENtlES. EXl'FNIHTlCRES, ANll CH.-\NGES IN Ft:~D ll,-\LANCES

{;O\'ERNi\lE?>.'TAL Fl lNJ)S YF-\R ENl)FO.flfl',.""f: Jn, 2no-1

Ca ital Prt\·ccts Funds

Chico Greater Chico Ch Ko Grc;11cr Chico lvlcrgi:<l RPA Urban Arca Rl'A

~h:1gi:J U1lian Arc.1 l.ov. and Low am.I ReUcvclnpnu:nt Rcllevcloprnc:nl ~lode rate l\lodermc

f'rt•JCCt Project Income Income An::;1 Area Housint; Housin,•

Rt!\"t'llUCS:

T;1x incrt'ment $ 7.IJl.413 $ 5,.50.J,692 $ $ Investment co.rnin&s .i7-l,:2~2 (23,7::!4) 336,101 48.634

Other ievenues 12.031 2,000

To1al revenues 7.505.635 5.,192.999 338.101 48.6)4

Ex.pe111.ii111rcs: Currcni:

Adminisirative s.i::,150 217.14; i3.38S Agency agreemcms 1.2()6,9% l,723.492 Conununily development 4.S.610 100,627 1.588.034

Redcvelopmenl 3.630,)tJ) 1,132,924 43,526 152.-17()

Deb! service:

l'nncipal rctiicmcm

l11tc1cs1 and fisc,11 charges

Total expc11tli1urcs 5,Sl6,-I..J9 3,17.J.168 1,70-t.948 152,47(1

Excess (deficiency) of rc,•cnucs over

(um,h:r) cxpcnllitures 1.689.186 2.318,811 (I ,]66.847 l (103.8421

Othc1 finanl'ing source:- (\tst:"sl:

Transfers in 1.493.416 1.132.776

Transfers ou! {5.199.826) C 1.158507) (366.619)

Total other fin:incin;; sources 1uscsJ (),1()9.826) (1.158.507) 1.126.797 1,132.776

Excess {deficiency) of rcvenu~'.'- and other

financin;; sources ovci (under) expci1U11urcs

and 01her financin~ uses ().:110.6401 1.160.304 (240.050) 1,028.93,J

Fund hnkmces (<kficits), July 1. ~003 19,312,6-17 (~.7()1, I 5':) t J,275,726 ?.(,7).).1.\

Fund bal;1m:cs ( deficits). hine JO. 2004 s 15,802,007 s ( 1.6,3.848) s 11.035.676 $ Y.704,-478

Sec accompanying notes to the basic fimuKial statements.

1::

Chico Greaier Chico

t-.ler:ed RPA Urb:in Arca RPA Fine Arts Fine Arts

s $ 2.21-1 ?44

2.214 944

4(1,882

46,R82

!4-4.668) 944

-44,674 15.731

-44.(,7-4 25.731

6 26.675

I ·l J.202 51.SJO

s 141.208 s 78505

('IIICO HEllEVFL(ll'\'\IENT ,'\(;EN('Y STATF.f\lENT OF REVENUES, EXPFNl>ITlHtES, ANl> CHANt;1-:s IN FllND HA LANCES

<_;(JVERNl\lEi\TAL FONUS YE:\ R E,l>F:O Jt il'o1~ :\11, 200-1

Pehl Service Funds Chico

~leq;cd RPA 1996 Tax 2001 Tax Low and Alloc::11ion Allocalion 11oderate Chico lh:vcnuc Revenue lncon1c rvtc:rg.ed RPA Bonds Bon tis llousin" Reserves

Revenues; T.tx increment $ $ s $

lnves1mcnt earnings 887 332 159.685

(l1hcr revenues

Total revenues 887 332 159,685

E1tpcndi1ures: Cuncnt:

Adn1inis1rativc.· Agency agrec1nents (:ommuni1y development Rcdcvc!opn1cn1

Ddll sc.•rvicc: l'rincipal re1i1cn1en1 670.000 01s.1;..i 124.246

ln1e1cs1 and fiscal char~es J,J..J.t002 1.201,181 242.373

To1al expcndi1ures 2.014.002 1,816.935 :\()6,619

Excess (deficiency) ul revenues O\'Cr (undc1, cxpentJi1un.:s (2.0l?.l 15l Cl.816.603) (366.619) 159,685

01hcr fin:incinc soun.:cs l1.1ses1: Transfers in 2.012.955 I.809,350 366,619 1.143

Translers ou1 11.IJJ) (160569)

Tota.I other r1nancing snurccs (uses) 2,012/J)5 I.808.207 366.619 1159,42(,)

E,cess r deficiency) of revenue,;; :ind 01her rinancing :,uurces 11vcr tundcr} expenditures and 01her financiu~ uses I I 601 (6.396) 259

Funcl babnce-s (deficits). Ju!J" I. ~003 6;'0 ! I.860 -tA2~.967

Fund lmlances {dcfii:i1s), Junt' '.\O, 2004 s .16() < 3.,1(14 $ s ,1,.123.22<,

Sec accomp;:1nying no1esa 10 the basic fmanci:il statements.

13

Towl

s l:!.636,105 899.295

14,031

IJ.5J9,J3 I

1,133.783 3,020,488

1.734.271 5,006,401

1.410.000 2.787.556

15,092.·199

(1.543,068)

6,886,664 (6.886,664)

( I ,5J3,068)

35,098.24.l

s 33,555.17<,

CII ICO REDEVELOl'i\lENT AG E'i(T RECONCILIATIO'i OF TIIE STATEMENT OF REVEI\IIES, EXl'ENDITl'RES.

AND CIIANGES IN FllNll BALA'-CES OF GO\'ERN\IENTAL fl'NllS TO TIIESTATHIENTOF ACTIVITIES

\'EAR ENDED RINE .\0, 200~

Amounts rcponcd for governn1ental activities in the statement of activities arc different because:

Net change in fund balances - total governmental funds (Page 13)

Revenues in the statement of activities that do 1101 provide current financial

resources are not reported as rcvt.:nues in 1hc funds.

·111e rcpayinent ofprincipnl oflung-tenn debt consumes the current financial resources of governmental funds. ho\vever. has no effect on net assets.

Sornc expenses reported in the statcn1ent of activities do not require the use

of current financial resources and therefore are not reponed as expenditures in govemn1ental funds. Change in con,pensated absences Change in accrued interest

Change in net assets of goven,mcntal aclivi1ies (Page 9)

Sec accornpanying notes to the basic financiul sta1cments. 14

s

$

( 1.543,068)

(350,000)

1,4 I 0,000

(33,373) 15.147

(501 .2()4)

CI-IICO RF:DFVF.LOl'MENT AGENCY NOTES TO B.-\SI(' Fl"iANCIAL STATEiVIE"ITS

FOR TIIE YEAR E"lflEll .11:'.'IE 30. 2004

NOTE A- Sl'l\lMARY OF SH;NIFICA'.'IIT ACCOlJNTING POLICIES

Description of Reporting E111ily

The Chico Redevelopment Agency is a community redevelopment agency formed. organized and existing pursua111 to the provisions of the Community Redevelopment Law of the State of California (California Health and Safety Code, Section 33lK)(J ct seq.), and in accordance with said Jaw. the Agency is vested with the responsibility of carrying out a duly adopted redevelopment plan. The Agency originally consisted of the Smnheast Chico. Chico Municipal Airport and Central Chico Redevelopment Project Areas. On June 4. 199'.!. the three project areas were merged into one, thereby forming the Chico Merged Redevelopmenl Project Area (Ordinance Numhers 1900, 1901 and 1902. adopted May 5, 1992). The Greater Chico Urban Arca Redevelopment Project Area was established on Octohcr 25, 1993.

On July 14, 2004. the two-project areas were fiscally merged into one thereby forming the Chico Amended and Merged Redevelopment Project Area (Ordinance Numhers 2292, 2293 and 2294, adopted June 14. 2004). The Agency is :, component unit of the City of Chico. as the Agency's Board of Directors is comprised of the same seven members of the Chico City Council. and as such, is included in the basic financial statements or the Cit\'.

In order to facilitate the financing ol' puhlic improvemeuts, as well as other facilities and improvemems which can be funded through the issuance or tax exempt bonds, the City Council and the governing board of the Chico Redevelopment Agency established a joint powers agency, known as the Chico Public Financing Authority (CPFA). pursuant to the pro\'iSions of the joim powers Jaws of the State of California, as se1 forth in Chap1cr 5. Division 7, Title I. of the California Government Code (commencing with Ciovcrnment Code Section 6500). The CPFA is authorized, among other things, to issue bonds pursuant to the provisions of the l\farks-Roos Local Bond Pooling Act of l 985. as set forth in Anicle .J, Chapter 5. Division 7. Title I. of the California Government Code (commencing with Government Code Section 6584) for the purpose of financing focilitics :md improvements. The financing activity of the ,-\uthority is incluc.lL:d i11 the Agency's financial statcnu.:11ls in the Oehl service funds.

Government-wide and Fund Financi;il Statements

The gnvernmcm-wide financial statements (i.e .. the statement ol' net assets and the statement of activities) report information on all of the activities of the Agency. Governmental activities normally are supported by taxes and intergovernmental revenues.

The statement of activities demonstrates the degree to which the direct expenses are offset hy program revenues. Direct expenses are those that are clearly identifiable with the com1111mity developmem and redevelopmenl functions. J>rogr..1111 revenues include grains an<l contributions that are restricted 10 meeting the operational requirements of the community development and redevelopment functions. Tax increments, investmctll earnings. :rnd otlicr items, which are nol properly included among program revenues, are reported instead as general revenues. For the year ended June 30, 2004. the Agency reported no program revenue.

15

CHICO REllEVELOP!Vll::NT AGENCY NOTES TO HASIC FINANCIAL STATE!VIENTS (CONTINUElll

FOR THE YEAR ENDED ,lllNE 30. 200-t

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTIN(; POLICIES (Continued)

Separate financial statements are provided for governmental funds. Major individual governmental funds are reponed as separate columns in the fund financial statcmems.

Basis of Presentation. Basis of Account in~ and Measurement Focus

The government-wide financial statements arc reported using the economic resources mcasun.:rnent focus and 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. Tax increments arc recognized as revenues in the year for which they are levied. Grams and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.

Governmental fund financial statements arc rcponed using the CtttTent financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurahle and available. Revenues are considered 10 be available when collectible within the current period or soon enough thereafter to pay liabilities of 1hc current period. For this purpose, 1he Agency considers revenues to be available if !hey arc collected within (,() days of the end of the current fiscal period. Expendiwres generally are recorded when a liahili1y is incurred. as under accrual accounting. However, principal and interest expenditures arc recorded as fond liabilities when due or when amounts have been accumulated in the debt service funds for payments to be made early in the following year.

Substantially all taxes and interest. includin!! the nel increase (decrease) in !he fair v;ilue or investmems. arc all considered 10 be susceptible to accrual and so have heen recogni,.cd as revenues or 1he ctttTent fiscal period. Other revenues are considered 10 be measurable and available only when cash is received by the Agency.

The Agency reports the following major gowrnmental funds:

Capital Project<;_ Funds:

• rhico Merged Redevelopment Project Area (Chien Merged RPA) Accounts for tax increment revenue, bond proceeds and expenditures for eligible redevelopment projects and progra111 adminis1ration within 1hc project area.

• Greater Chico Urban Area Redevelopment Project Area (Greater Chico Urban Area RPA) -Accounts for tax increment revenue and expendi1ures for eligihle redevelopment projects and program :.dministratiott within the project area.

• Chico Merged RPA Low and Moderate lncorne Housing - Accounts for the twenty percent housing sel·aside monies and expenditures for improvements to the low and mmlerate income housing stock and related activities within the project area.

16

CHICO REDEVELOPMENT .\f;ENCY NOTES TO l\ASIC FINANCIAL STATEI\IENTS (CONTINUE!))

FOR TIIE YEAR ENDED .Jl:NE 30. :!Ofl-1

NOTE A-SUI\IMARY OF SIGNIFICANT ACCOllNTIN(; l'OLICIES (Continued)

Basis of Presentation. Basis of Accounting and Measurement Focus (Continued)

• Greater Chico Urban Area RPA Low and Moderate Income Housing - Accounts for the twenty perccnc hPusing set-aside rnonies :ind exp~nditurcs for i1nprove1nents to the IO\V and n1otlerate income housing s1ock and related activities within the projcc1 area.

• Chico Merged RPA Fine Arts - Accounts for the tax increment set-aside pursuant to Council policy for funding of public arts projects within the project area.

• Greater Chico Urban Area RPA Fine Arts - Accounts for the tax increment set-aside pursuant 10

Council policy for funding of public arts projects within the project area.

Debt Service Funds:

• 1996 Tax Allocation Revenue Bonds (1996 TARBS) - Accounts for the accumulation of resources for the payment of debt service on the related bonds.

• 2001 Tax Allocation Revenue Bonds (2001 TARBS) - Accounts for the accumulation of resources for the payment of debt service on the related bonds.

• Chico Merged RPA Low and Moderate Income Housing Funds - Accounts for the accumulation of resources for the payment of dehl service on the related bonds.

• Chico Merged RPA Reserves - Accounts for reserves as required by the Indentures of Trust for the 1996 and 2001 Tax Allocation Revenue Bonds.

lntcrfund Activity

As a general rule. the effect of interfond activity has been eliminated from the government-wide financial statements.

Use of Resource~

When both restricted and unrestricted resources are available for use, ii 1s the City's policy to use restricted resources first. then unrestriclcd resources as they are needed.

Management's Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in ihe financial statements and the :iccompanying notes. Actual results could differ from those estimates.

17

CIIICO REOEVELOPMENT AGENCY NOTES TO IIASIC FINANCIAL STATEl\lE:"\TS (CONTINUED)

FOR THE YEAR EJ\.UED JUNE 30, 2004

NOTE A-SllMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Bud2etarv Data

The operating budget of the Agency is adopted by the Board of Directors (Chico City Counci I) during the first meeting in July each year on a basis consistent with generally accepted accounting principles. The appropriated budget is prepared by fund. function. and activity. The Agency Executive Director is authorized to transfer budget amounts between departments within any fund: however, any revisions that alter the total expenditures of any fund require approval by the Board of Directors. The legal level of budgetary control is the fund level.

Budget information is adopted on an annual basis for the debt service funds aml on a project length basis for capital projects funds. Original appropriations are adjusted for supplemental appropriations and budget modifications made during the year. The actual results of revenues and expenditures are estimated for the current fiscal year. These estimates are adopted as the final budget for the current fiscal year with the adoption by the Board of Directors of the budget for the upcoming fiscal yc:ir.

Portions of fund equity are recorded as reserves when segregation for future use is necessary and the funds are, therefore, not available for future apportionment or expenditure.

Encumbrances

Encun1brance accounting, under \vhich purchase orders. contracts. and other co1n1ni11nents for the expenditure of funds are recorded in order to reserve that portion of the applicable appropriation. is employed in the governmental funds. Encumbrances are reported as reservations of fund balances because they represent commitments only and do 1101 constitute expenditures or liabilities. Appropriations lapse at year-end and must be rcappropriatcd in the subsequent fiscal year.

Receivables and Pavables

Balances representing lending/borrowing transactions between funds outstanding at the end of the fiscal year are reported as "due from/to other funds."

All property taxes are collected and allocated hy the County of Butte to the various taxing entities. Property taxes are determined annually as of March I anti anach as an enforceable lien on real property as of January l. Taxes arc due November I and February I and are delinquent if not paid by December JO and April 10. respectively. The City participates in the County "Teeter Plan" method of property tax distribution. Under the Teeter Plan, the County remits property taxes to the City based on assessments, not on collec1ions. Property tax is recognized when it is available and measurable.

Restricted Assets

Restricted asse1s represent cash and investments held by fiscal agents which are restricted for deb1 service.

18

CHICO REllEVELOPi\lENT AGENCY NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED .JUNE .~O, 2004

NOTE A- Sli!\1MARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fund Elliill.)'

In lhe fund financial statements. governmental funds report reservations or fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change.

The Greater Chico Urban Arca RPA Capital Projects Fund reported a deficit fund balance of $1,633,848 al ltme 30. 2004. This deficit will he elimina1cd through fulure tax increment revenues.

NOTE B - CASH AND INVESTMENTS

The cash and investments as of June 30. 2004, are displayed on the governmental funds balance sheet as follows:

Cash and investments Restricted cash and investments

Total

$ 25,965,521 4,501.867

$ 30,46 7 .388

The Agency's investments :ire included wilhin the City of Chico's cash and investment pool. which is described in the City's Comprehensive Annual Financial Report. Guaranteed investment contrac1s are reported al cost. All other investmenls are reported at fair value. The value of all securi1ies in the Ci1y's investment pool is based on quoted market prices or fair values provided by !he investment trustee. The value of pool shares which 111.iy he withdrawn is hased on amot1ized cost. This method differs from the fair value melhod used lo value investments in these financial statemenls. hecause the a111ortized cost method is not designed to distribute to participants all unrealized gains and losses in the fair values of the pool's investmcms. Investment income is recorded as revenue in the individual funds based on each rund's average daily cash balance. The City Council has oversight responsibility of the City's investment pool. Investments with fiscal agent represents monies held hy fiscal agents for the poymenl of Agency debt.

The Agency's investments are summarized in the following table:

Investments in City Treasurer's Pool Investments with fiscal agent:

Guaranteed investment contract Money market mutual funds

To!al inveslments with fiscal agent

Total investm.::nts

19

Fair Value

$ 25,965.521

2,738,025 1,763,842 4,501.867

$ 30,467,388

CJ IJCO REllE\'ELOPMENT AGE"IC'Y NOTES TO BASIC FINANCIAL STATEMENTS (CONTINUED\

FOR THE YEAR ENDED ,JU-IE 30. 200-1

NOTE C -RECEIYABLES

Receivables at June 30. 2004. consist of the following:

Receivables: Interest Taxes Intergovernmental Loans

Total recein1blcs

Capiial Projects Funds

$

$

1.083,675 192.638

1.000 6.311.388

7.588.70 I

Tilt:: ,-\gency does not record an allo\vance for doubtful accounts as managcrnent considers all receivables to be collectible.

Loans receivable or $6,3'11,388 consist of loans made for down payment assistance to low-income first· time homcbuycrs and for bllilding and rehabilitating affordable housing. The loans arc collateralized by second deeds of trust and land covenant~. For deferred loans. payments are deferred until one of the following occurs: I) the borrower ceases to occupy the property as the principal place of residence, 2) the property is sold or transforred without the consent of the Agency or 3) the borrower defaults on any of 1h~ cuvenanls or conditions of the loi.111 agrec:,nent or cJ~ed of trust. f\1nortize<l loans arc repaid in monthly installments. Of the receivables at .lu11e 30. 2004, $7,395.063 is not expected to be received v:ithin one year.

NOTED- PAYABLES

Payables al Juhc 30, 200-1, crn1sist of the fullowiug:

Payables: Accounts payable Accrued wages and benefits Intergovernmental payable Interest payable

Total payables

$

$

20

1,147,891 '.!'.!,833

2,246,514 680,393

4.097 ,631

Cl llCO REllEVELOP1\IENT M;ENCV NOTES TO BASIC FINANCIAL STATEI\IENTS (CONTINUED)

FOR THE YEAR ENDED .Jl!NE .W • . :!OO.J

NOTE E - I '\'TERFIJNI> TRANSACTIONS

lnieti'cmd balances. which represent borrowings 10 cover cash deficits as of June 30. 2004. consist of the follo\ving:

Receivable Fund Chico Merged RPA

Capital Projects hmd

Payable Fund Greater Chico Urban RPA

Capital Projects Fund

Chico Merged RPA Reserves

Amount $ (,(,6.9 IO

74.717

$ 741.627

For the year ended June 30, 2004. transfers in and out were comprised of the following:

Transfers Fron1 CaeitaJ Proiccts Funds Chico Mcrpc<l RP,\ Low

Greater Chien Urhnn and Moderate lncorne 'l"ran<;fC'rS T(l C'hico tv1cr!!cd RPA r\rea RPA l ln11,;in~

Chico t>.1crg.cU RI'/\ Lo\v :uul f\·1odernlc lncotnc Housing Capi1al Projcc1s Fund $ 1,493,416 $ $

Gre;.1tcr Chico Urban Arca RPA Lo\V :uul lvloderatc lnc<11ne I lousinp. c~1pital Projc.:ts 1.132.77& Fund Chico rvlert::cd Rl'A Finl! Arts .14.67.1 Greater Chico Urban Arcu RPr\ Fine Arts ~5.7J I

19% TAR HS 1.862.SS& 2001 TARBS 1.798.850 Chico Merged RPA Lo\v :snd Modcr;11e Jncon1e Housing l)cbt Service 1:unc.J 366.619

Totals $ 5,199.826 $ 1.158.507 $ 366,619

Tr-:tnsfers From 0':."hl Service Funds

Chico ~krged RPA Transfers To 2001 TARES Reserves Totals

Chico ?\1cr~c(I RP I\ I Jl\\' and \.1ndcr:i.tc lncorne l-l~usinJ:? Ca1lital Pn1jcc1s Fund $ $ $ 1.493.416

Greater Chico Urhan . ..\rc;,1 RPr\ LO\\' and t-.1oderale lncon1c Housing 1.132.776

Chico l\1erged RP A fine 1\ns 44.674

Grea1er Chico Urb.:in Arca RP/\ Fine Ans 25.731

19% TARI\S 150.069 2.012.955

2001 TARllS 10500 l.8(~).350

Chit:<1 J'v1crged RI':\ LP\\' !ind !\1odcratc lnco111c 1 lousinµ Dehl Service 1:und 36(1.619

Chico tvlcrged RPA Reserve;; 1.13 1.143

To1als $ 1.143 $ 160,56'> $ (1.R8f•.h(1.f

Transfers bcl\VCcn fu11Js were 1nade prin1aril~,' to set aside resources for lo\v ::ind 1110tlcrate inco1ne

housing as required by law a11d for the payment of debt service on !he outstanding tax alloc:ition revenue

bonds.

21

l 'HICO REDE\'ELOPI\IENT ACENCY N< lTJ.:S TO BASIC Fl NA NCI AL STA TE!\ IENTS ( CONTI Nl i Ell)

FOR TIIE YEAR ENDED .JllNE 30, 2004

NOTE JO- LO',l(;.TER!\I LIABILITIES

2(ttl I Tax Allocation Revenue Bonds

In July 2rnll. the C'hico Public Financing Alllhority (Authority) issued $32.060.000 of 2001 Tax Allocation Revenue Bonds (2001 T ARBS.) The proceeds of the 200 I TAR BS were loaned 10 the Agency to finance redevelopment projects in the Chico Merged Redevelopment Project Area and to repay the Agency's prior loans to the Amhority relating to the Authority's 1991 Revenue Bonds. Series A. Interest rates for the remaining term of the 2001 TARES range from 4.00%-5.25%, and payments are due in semi-annual installments on October I and April I. through April I. 2019. Addi1ionally, payments of $5.255.000 and $3.890.000 are due April I, 2021 and 2024. respect ivcly. in connec1ion with the relating term bonds becoming due.

1996 Tax Allocation Revenue llonds

In Fehruary 1996, the i\uthori1y issued $29.285.000 of 1996 Tax Allocation Revenue Bonds ( 1996 TARES.) The proceeds of 1hc 19% TARES were loaned 10 the Agency 10 fi11,111ce redevelopment projects in the Chico Merged Redevelopment Proiect Area and to repay 1hc Agency's prior loans to the Authority relating to the Authori1y·s 1986 Tax Allocation Bonds and 1991 Revenue Bonds, Series I3. Interest rates for the rc,mining lenn or the 1996 T ARBS range from 4.63%--5.50%. and payments arc due in semi-annual i11stalh11cn1s 011 October I and April I. through April I. 2025.

Co,npcnsa1ed ;-\ hscnc_cJi

Compensated absences arc absences for which employees will he paid, such as vacation. sick leave. and compensatory time. A liability for compensated absences that are a11ributable to services already rendered and that arc not cnmingent on a specific event that is outside the control of the government and its employees is accrued :is employees earn the rights to the benefits. Compensated absences that relate to future services or that arc contingem on a specific event that is outside the control of the government and its employees arc accounted for in the period in which such services are rendered or such events take place.

Changes in the Agcncv's long-term liabilities during the year ended June 30. 2004. were as follows,

Due \Vlthin July I, 2003 ,\dditions Delctit1ns June 30. c004 one year

'.!00 I T ARBS $ 30.240,000 $ $ (740.000) $ 29 .500.000 $ 895.000 1'>%TARBS 25.230.000 (670.!Xl(l) 2 4 .5 60. (l(l(l 700,000

Subtoi-.,1 55,-170,000 (1,.110,00()) 54,0(,(),000 1.595,000

Compensaletl a1Jscncc$ 38.210 71.583

Tot:11 long-1crm li:ihilitic:- $ 55,508,210 $ 33,773 $ (IA I 0.000) $ 54.131.SS.i :;; 1.595,000

22

CIIICO HEDE\'ELOPMENT !\C;ENCY NOTES TO BASIC FIN\NCIAL STATE~IENTS (CO'.'iTINliEI))

FOR TIIE YEAR E!\'DED .lllNE .W, 2004

NOTE F- L01';(;-TER:'\l LIABILITIES !Continued)

Future annual debt service requirements ror 1he 2001 Tt\.RBS loans arc as follows:

Year entl ing J unc 30, Princieal Interest 2005 $ 895,000 $ 1,-110.974 $

2006 ()20,000 1,375,174 2007 ')50.000 1,338.374 2008 995.000 1.300.374 2009 1.025,000 1.260,574

2010-2014 5.830.000 5.593.881 2015-2019 9.7-Hl.OOO 3.949,314 2020-2024 9.145.000 1.211.038

$ 29 500.000 $ 17,439.703 s

Future annual debt service requirements for the 1996 TARBS loans arc as follows:

l' ear cnding.l.!!Oe 30. l'rincieal Interest ..

2005 $ 700,000 $ 1,310,600 $ 2()0(, 7.J0,000 1.277.350 2007 780.000 1.241.830 2008 815.000 1.203.805 2009 865.000 ] , I 63.055

2010-2014 5.035.000 5.100.290 2015-201{) 4.490.000 3.706,230

2020-2024 S.540.000 2.394.425 :?.025 2.595.000 1-t2,7'25

$ 24560.000 $ 17 ,5.J0.3 JO $

NOTE G - AGENCY ACREE:\IE',TS

Tot:il 2,305,974 2.295.17·1 2.288,374 2.295,374 2.285,574

11.423.881 13.689,314 I 0.356,038

46,939,703

Total 2,010,600 2.D 17 ,350 2.021,830 2.018.805 2.028.055

I0.135.290 8.196.230

I0,934,425 '2.7]7.725

42.100.310

Beginning \\'ilh lh1.: J 983-84 Lax i11cn..:1ncnt!), tlic Chico RcJcvcloptni.:nt Agency L:t1tercJ intu ;,1grcc,11c111s for the Chico Mc,gecl RPA with 1he County or Bulle, Dulle Count) Mo~quito Ahatt:rncut Dis1rict, .wcl 11,e Chico Area Recreation District to pay to them 70% of the property tax increment revenues allocaled to the Agency which would have !,cen received by these three !axing entities if the Agency had not been formed.

Ileginning \vith the 1994-95 tax incren1cnts. the (:hico Rcdcvclopn1ent Age11cy entcn..:d into agreen1cn1s for the Greater Chico Urhan Area RPA with the County of Bune. Butte County Mosquito Abatement District. the Chico Area Recreation District, the Chico Unified School District, the Butte Community College District, anti the Bu1tc Coun1y Superintendent nf Schools. The agreements call for payments to 1he entities for varying amounts.

CIIICO REDEVELOl'J\IENT AGENCY NOTES TO BASIC FINANCIAL STATE\lE'iTS (CONTl?\IIElll

FOR THE YEAR ENUEll .JUNE ]II, 2004

NOTE II RISK I\IANAC EM ENT

The Agency is exposed to various risks of loss related to torts; thel1 of, damage 10. :mu des1ruction of assets; errors and omissions: injuries to employees: and natural disasters. The Agency is a pan of the City's general liability and workers' compensation liability self-insurance programs that finance its uninsured risks of loss. The general liability program provides coverage up to a maximum of $500.000 for each general liability claim. and the workers· compensation program provides coverage for up tu a maximum of $750,(JOO for each workers' compensation claim. The City's self-insured retention for worker"s compensation claims increased from £500.000 to $750,000 per claim over the prior year. Settled claims resulting from these programs have not exceeded insurance coverage in each of the past three fiscal years and there has not heen any significant reduction in insurance coverage from the prior year.

The City is also a member of the California Joint Powers Risk Management Authority (Jl'A)) for liability insurance purposes. l'hc J]->A is co111prised of California 1nen1ber cities and spcci,tl districts organized under a joint powers agreement pursuant to the California Government Code. The purpose of the JPA is to arrange and adlllinister programs of insurance for the pooling of sci !"-insured losses :ind 10 purchase excess liability coverage. "J'hc lloard of l)irectors consists of represcnta1ivcs fron1 each 1nen1hcr entity~ with an Executive Committee elcc1ed hy the Directors every two years. Annual deposits :ire paid hy member entities and may be adjusted retrospectively to cover costs. The City self-insures the first $500,000 of each loss. Particip:iling enti1ies share in loss occurrences in excess of $'>00,000 up to $10.000.000. and purd1asc insurnncc tu provide additional coverage up to $25,000.000. The auto/general liability program of the .ll'A provides coverage for comprehensive general liability. personal injury. employment practices liahility ($2.000.000 suhlimit). contractual liability. errors and omissions. and auto liability. The City also participates in the JPA"s auto physical damage program which provides propeny damage coverage for vehicles valued in excess of 525.000.

NOTE I - CONDUIT DEBT

In February 1991. the Agency issued $15.000.000 of Cenificates of Panicipation secured hy an Installment Sale Agreement with Walker Senior Housing Corporation (Corporation). The proceeds were used to provide financing for congregate care facilities. The honds are payahlc in annual installments. beginning February 1994 and ending Februarv 2021. with interest ranging from 5.25% to 6.80%. This indebtedness does nc,t represent an obligation of the Agency. and is payable solely from the installment payments 10 be made by the Corporation to 1hc Agency. The Agency's obligation to make payments is insured by the office of Statewide Heal!h l'la1111ing JIIU Development of the Stale of California.

The Certificates of Participation du not cU1mi1u1e or c;reate a debt or pledge of the general c;redit or taxin!! power of the Ci1y or Chico, the Chico Redevelopment Agency or the Stat" of California. Since 1he Certificates of Participation did not create 3 debt of the Agency. 111anagc111cnt did not record the transaction in the acco111panying financial state1nents.

ClllCO REl>EVELOPI\IENT AC:Ef',;C'\' NOTES TO BASIC FINANCIAL STATEMENTS (CONTINIJEI>)

FOR THE YEAR ENDED ,JUNE 30, 200.J

NOTE J CONTINGENCIES

The Agency is a party or likely to become involved in three administrative actions and/or lawsuits arising out of the contamination of real property with hazardous materials which could result in substamial liabilities for remedimion costs and/or hazardous waste investigation and characterization costs. The Agency may assume some financial responsibility for resolving the toxic comarnination at one of the comamination sites. The cost of remediation at this site is estimated to he approximately $8,000,000. At the present time it is unclear what. if any, responsibility the Agency has for remediation of the other two contamination sites. The remediation costs for these two sites is estimated to be between $10.000.000 and $15,000,000.

NOTE K- SUBSEQUENT EVENT

On August 5. 2004, SB 1096 was signed into Jaw requiring redevelopment agencies statewide to shift approximately $250 million of property tax increment revenues to the Educational Revenue Augmentation Fund (ERAF) for each of the next two years as a way to mitigate the State's budget deficit. The Agency expects to transfer $928,917 of tax increment revenues in 2004-05 and 2005-06 as a result of this legislation.

25

MACIAS GINI & COMPANYLLP

)000 S Street. Sm. 300 Slcr~mento. California 95816

C/16,928.4600 PHON( 'JJ6.'>28 2755 fAX

Board of Directors Chico Redevelopment Agency City of Chico, California

INDEPENnENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MA TIERS (INCLUDING THE PROVISIONS CONTAINED IN THE GUIDELINES FOR

COMPLIANCE AUDITS OF REDEVELOPl\·IENT AGENCIES) llASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE

WITH GOVERNMENT AUDITING S1'.4NDARDS

We have audited the financial statements of the governmental activities and each major fund of the Chico Redevelopment Agency (Agency), a component unit of the City of Chico, California. as of and for the year ended June 30. 2004. "hich collectively comprise the City's basic financial statements and have issued our report thereon dated October 7, 2004. 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 Govemme111 Auditing Standards, issued by the Comptroller General of the United States.

Internal Control Over Financial Reporting

In planning :1n<l perfonning our audit. ,ve con~idered lhe .Ai.gency·s internal control over financial reporting in order to de1em1ine our auditing procedures. for the purpose of expressing our opinions on the financial statements an<l not to provide an opinion on the internal control over financial reporting. Our consideration of the inlcrnJI cuntrol \VOuld not necessarily disclose all 1natters in the internal control over financial reporting that 111ifht be n1ntcrial ,veakncsses. 1\ tnatt..:.rial weakness is a rcportablt: con<lition in which the design or operation of one or more of the internal control components does not reduce 10 a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not cc detected "'ithin a timely period by employees in the normal course of pcrfo1ming their assigned functions. We noted no mallers involving the internal control over financial reporting and its operation that \Ye consiJer lO be material \veak.nesses.

26

www.maciasglni.com C:ERTlru::o PUBLIC .... ccOU>ITANTS £ MANAOEME:NT CON$U1,.T.t.NT$

Compliam·c ancl Other Matt,•rs

As part of obtaining reasonable assurance about whether the Agency's financial statements are free of n1a1crial 111i.sslalc1nent. \VC pcrforn1cd 1ests of i1s con1pll:1nce \.Vilh ccr1ain prnvisions of laws, regulations. contracts and grant agreements. noncompliance with which could have a direct and material effect on the determination of fin:mcial statement amounts. Such provisions include those provisions of laws and regulations identified in the G11irleli11es for Co111plia11ce ,\rulits of Cal({omia l<i:developmenr J\ge11cics issued by the State Controller's Office. Division of Accounting and Reporting. However, providing an opinion on compliance with those provisions was not an objective of our audit. and accmdingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are rcquircu to he reported under Govemmc:111 Auditing Sumdards.

This repon is intended solely for the infonnation and use of the management, the Agency's Board, and the State Controller's Office, Division of Accounting and Reporting and is not intended to be and should not be used by anyone other than these specified parties.

Certified Public Accountants

Sacramento, California October 7. 2004

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APPENDIX D

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (this "Disclosure Certificate") is executed and delivered by the Chico Redevelopment Agency (the "Agency") in connection with the issuance of its $68,500,000 Chico Redevelopment Agency Chico Amended and Merged Redevelopment Project 2005 Tax Allocation Bonds (the "Bonds"). The Bonds are being issued under an Indenture of Trust (the "Indenture"), dated as of November 1, 2005 (the "Indenture"), between the Agency and Union Bank of California, N.A., as trustee (the "Trustee"). The Agency covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Agency for the benefit of the holders and beneficial owners of the Bonds and in order to assist the Participating Underwriters 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, the following capitalized terms shall have the following meanings:

"Annual Reporf' means any Annual Report provided by the Agency under and as described in Sections 3 and 4 of this Disclosure Certificate.

"Dissemination Agenf' means any Dissemination Agent (which may include the Trustee) designated in writing by the Agency and which has filed with the Agency and the Trustee a written acceptance of such designation. As of the date of execution of this Disclosure Certificate, no Dissemination Agent has been appointed.

"Listed Events" means any of the events listed in Section 5(a) of this Disclosure Certificate.

"National Repository" means any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. As of the date of this Disclosure Certificate, the following is a complete list of all the National Repositories:

Bloomberg Municipal Repository 100 Business Park Drive

Skillman. New Jersey 08558 Phone: (609) 279-3225

Fax: (609) 279-5962 http://www.bloomberg.com/markets/rateslmunlcontacts.html

Email: Munis@Bloomberg.com

FT Interactive Data Attn: NRMSIR

100 William Street, 15" Floor New York, New York 10038

Phone: (212) 771-6999; (800)-689-8466 Fax: (212) 771-7390 http://www.ftid.com

Email: NRMSIR@interactivedata.com

DPC Data Inc. One Executive Drive Fort Lee, NJ 07024

Phone: (201) 346-0701 Fax: (201) 947-0107

http://www.dpcdata.com Email: nrmsir@dpcdata.com

Standard & Poor's Securities Evaluations, Inc. 55 Water Street, 45th Floor

New York, NY 10041 Phone: (212) 438-4595

Fax: (212) 438-3975 http://www.jjkenny.com/likenny/pser_ descrip _ data_rep.html

Email: nrmsir_repository@sandp.com

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"Official Statemenf' means the Official Statement, dated as of October 26, 2005, relating to the Bonds.

"Parlicipating Underwriter' means any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds.

"Repository'' means each National Repository and each State Repository.

"Rule" means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State Repository'' means any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Certificate, there is no State Repository.

Section 3. Provision of Annual Reports.

(a) The Agency shall, or shall cause the Dissemination Agent to, not later than March 1 in each year, commencing March 1, 2006, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. Not later than 15 Business Days prior to said date, the Agency shall provide the Annual Report to the Dissemination Agent (if other than the Agency). The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the Agency may be submitted separately from the balance of the Annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the Agency's fiscal year changes, the Agency will give notice of such change in the same manner as for a Listed Event under Section 5(c).

(b) If the Agency is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the Agency will send a notice to the Municipal Securities Rulemaking Board and the appropriate State Repository, if any, in substantially the form attached as Exhibit A.

(c) The Dissemination Agent will:

(i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any; and

(ii) if the Dissemination Agent is other than the Agency, to the extent it can confirm such filing of the Annual Report, file a report with the Agency certifying that the Annual Report has been provided under this Disclosure Certificate, stating the date it was provided and listing all the Repositories to which it was provided.

D-2

Section 4. Content of Annual Reports. The Agency's Annual Report shall contain or incorporate by reference the following:

(a) Audited Financial Statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the Agency's audited financial statements are not available by the time the Annual Report is required to be filed under Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.

(b) To the extent not contained in the audited financial statements filed under the preceding clause (a), the Annual Report shall contain information describing:

(i) the total amount of assessed valuations of properties within the Chico Amended and Merged Redevelopment Project for the most recent completed Fiscal Year, showing the total secured value and the total unsecured value;

(ii) the total Tax Revenues allocated to the Agency from the Chico Amended and Merged Redevelopment Project for the most recent completed Fiscal Year, including gross tax increment revenues and appropriate deductions for payments under the Tax Sharing Agreements, deposits into the Agency's low and moderate income housing fund, and any other deductions required to be made to compute Tax Revenues;

(iii) the 10 largest assessees of taxable property within the Chico Amended and Merged Redevelopment Project; and

(iv) the percent by which annual Tax Revenues have provided coverage for debt service on Agency Debt (including the Bonds) for each of the 5 most current completed Fiscal Years.

(c) In addition to any of the information expressly required to be provided under paragraphs (a) and (b) of this Section, the Agency shall provide such further information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading.

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Agency or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The Agency shall clearly identify each such other document so included by reference.

D-3

Section 5. Reporting of Significant Events.

(a) Under the provisions of this Section 5, the Agency shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material:

(1) Principal and interest payment delinquencies.

(2) Non-payment related defaults.

(3) Unscheduled draws on debt service reserves reflecting financial difficulties.

(4) Unscheduled draws on credit enhancements reflecting financial difficulties.

(5) Substitution of credit or liquidity providers, or their failure to perform.

(6) Adverse tax opinions or events affecting the tax-exempt status of the security.

(7) Modifications to rights of security holders.

(8) Contingent or unscheduled bond calls.

(9) Defeasances.

(10) Release, substitution, or sale of property securing repayment · of the securities.

( 11) Rating changes.

(b) Whenever the Agency obtains knowledge of the occurrence of a Listed Event, the Agency shall as soon as possible determine if such event would be material under applicable Federal securities law.

(c) If the Agency determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the Agency shall promptly file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and .. (9) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Bonds under the Indenture.

Section 6. Termination of Reporting Obligation. The Agency's obligations under this Disclosure Certificate shall terminate upon the legal 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 Agency shall give notice of such termination in the same manner as for a Listed Event under Section 5(c).

Section 7. Alternative Method of Filing. In lieu of filing an Annual Report with each Repository in accordance with Section 3 or a notice of a Listed Event under Section 5, the Agency or the Dissemination Agent may make such filing through the internet filing system which is maintained at DisclosureUSA.com (or such other central filing system as is approved by the Securities and Exchange Commission), in which

D-4

event such filing need not also be made by the Agency or the Dissemination Agent directly with any Repository.

Section 8. Dissemination Agent. The Agency 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.

Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Agency may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) the proposed amendment or waiver either (i) is approved by holders of the Bonds in the manner provided in the Indenture for amendments to the Indenture with the consent of the Bond holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds.

If the annual financial information or operating data to be provided in the Annual Report is amended under the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.

If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the Agency to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles

D-5

shall be sent to the Repositories in the same manner as for a Listed Event under Section 5(c).

Section 10. Additional Information. Nothing in this Disclosure Certificate prevents the Agency 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 Agency 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 Agency 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 Agency to comply with any provision of this Disclosure Certificate, any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Agency to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an event of default with respect to the Bonds or otherwise under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the Agency 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 Agency agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the Agency under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

D-6

Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the Agency, 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: November 17, 2005 CHICO REDEVELOPMENT AGENCY

By: /s/

D-7

Thomas J. Lando Executive Director

EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Name of issuer: Chico Redevelopment Agency

Name of Bond Issue: $68,500,000 Chico Redevelopment Agency

Date of Issuance:

Chico Amended and Merged Redevelopment Project 2005 Tax Allocation Bonds

November 17, 2005

NOTICE IS HEREBY GIVEN that the Agency has not provided an Annual Report with respect to the above-named Bonds as required by Section 5.12 of the Indenture of Trust, dated as of November 1, 2005, between the Agency and Union Bank of California, N.A., as trustee. The Agency anticipates that the Annual Report will be filed by

Dated: ----------

CHICO REDEVELOPMENT AGENCY

By:--~----·-----------------·-

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Name Title

APPENDIX E

FORM OF BOND COUNSEL OPINION

Chico Redevelopment Agency 411 Main Street Chico, California 95928

November 17, 2005

OPINION: $68,500,000 Chico Redevelopment Agency Chico Amended and Merged Redevelopment Project 2005 Tax Allocation Bonds

Members of the Agency:

We have acted as bond counsel to the Chico Redevelopment Agency (the "Agency") in connection with the issuance by the Agency of its $68,500,000 aggregate principal amount of Chico Redevelopment Agency Chico Amended and Merged Redevelopment Project 2005 Tax Allocation Bonds (the "Bonds"), under the provisions of Part 1 of Division 24 of the Health and Safety Code of the State of California (the "Bond Law"), and under an Indenture of Trust dated as of November 1, 2005 (the "Indenture"), between the Agency and Union Bank of California, N.A., as trustee. 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 Agency contained in the Indenture and in the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verify the same by independent investigation.

Based upon the foregoing, we are of the opinion, under existing law, as follows:

1. The Agency is a public body corporate and politic duly organized and validly existing under the laws of the State of California, with the full power to enter into the Indenture, perform the agreements on its part contained therein and issue the Bonds.

2. The Indenture has been duly approved by the Agency and constitutes a valid and binding obligation of the Agency enforceable against the Agency in accordance with its terms.

E-1

Chico Redevelopment Agency Chico Amended and Merged Redevelopment Project 2005 Tax Allocation Bonds November 17, 2005 Page2

3. Under the Bond Law, the Indenture establishes a valid lien on the funds pledged by the Indenture for the security of the Bonds.

4. The Bonds have been duly authorized, executed and delivered by the Agency and are valid and binding special obligations of the Agency, payable solely from the sources provided therefor in the Indenture.

5. The interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; it should be noted, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings. The opinions set forth in this paragraph are subject to the condition that the Agency comply with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Agency has covenanted in the Indenture to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. We express no opinion regarding other federal tax consequences arising with respect to the Bonds.

6. Interest on the Bonds is exempt from personal income taxation imposed by the State of California.

The rights of the owners of the Bonds and the enforceability of the Bonds may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases.

Respectfully .submitted,

A Professional Law Corporation

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APPENDIXF

SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY

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Ambac Financial Guaranty Insurance Policy

Oiiligor:

Obligations:

A111bac Assuranr.c Corporation One Staie Street Plaza, 15th Floor New York, New York 10004 Telephone: (212) 668-0340

Policy Nun1ber:

Prerniurn:

A1nl>ac Assurance Corporation (Ambac), a Wisconsin stock insurance corporation, in consideration of the P,C1nent of the premiurn and subject to the rerrns nf this Policy, hereby agrees to pay to The Bank nf Ne\A' York, as trustee, or its\\u'aressnr (the "Insurance Trustee~), for the benefit of the Holders, that portion of the principal of and interest on the ahove-describe?i,ob.ligations (the "Obligations~) which shall become Due for Payn1ent but shall be unpaid by reason of Nonpayment lJ~,t~bligtl\ \,,

A1ubac will n1ake such payrncnls to the Insurance Trustee vvithin one {1) business day folkJ\ving Wf~\en ~t~ti'iltN.Q__A~~-f of Nonpayrnent. Upon a Holder's presentation and surrender to the Insurance Trustee of such unp,iijJ.{)pFtga·t·~s 'tt~MsteJ_icbSjJUIJs, uncanceled and in bearer fonn and free of any adverse rlsirn. the Insurance Trustee will d~$11ursef"to the Hold~ the ~f principal and interest which is then Due for Payn1ent but_ is unpaid. Upon such disburse~fl:rAnibac~ll beb(:nh( the owner of the surrendered Obligations and/or coupons and shall be fully suhrogated to all of th Ho~?r\_rigt~~ayn1ent\\~;eon.

In cases where the Obligations are issued in regbtered JOnn, the Insurance Trustee },,lishil{_s¥~flcipal to_~ol~r only upon presentation and surrender to the Insurance Truslee of the unpaid Obligation, unca e~rnd \.e~f any)Kf:Z:s~e claim, together with an instrurnent of assignrnent, in fonn satisfactory lo Arnbac and tt nsurann. ,duly,_ex\~d,Jfy the I lolder or such Holder's duly authorized representative, so as to penni1 ownership ofs h ation\< b n;~iste?t_difv(he name of Anibac or its noniinee. The Insurance Trustee shall disburse interest lo a H~er o a 1. ;red\ bli~(ilJ\:n o¥v upon pre,sentation t.o the Insurance ~rustee of proof that the cla_irnant is the person en.title(~'t:o'\!'ie p~r r~· ' rvs_t o·f\_µ'}e Obligation and delivery to the Insurance lrustee of an .instrument of assigrunent, in fonn Sf:.~.isfact~_r)'l{o A~b~ ar'M. U1c lnsurance Trust(•e, duly executed by the Holder or such Holders duly authorized represen!a~-· ;.,.lt:<Jll~~rrink t~Arn~~· 11 ri Sunder such Obligation to r,eceive the inreresl in respect of which t~ie insurance disburs~·i~t was"'tnade. ,i\:nbac sh 1 e subrogated to all of the Holders rights to payrnent on registered Obligations to tile extent of apy insurance, disbu~1~nt.s nu1de.

In the event that a trustee or paying agnft':,for 1\1c\Ob1igations a no;Mhat any pay1nent of principal of or interest on an Obligation which has becorne Due ry.vi'__ ~ent an~ wt)ich is 1~1ad t a Holder by or on behalf of the o_ bligor has been deerned a prefcrt'ntial transfer and theretof~~Vcred f:>;m t~ NQ1c1er J s nt to the United States Bankruptcy Code in accordance with a final, nnnappealable order of a c uf\ of cornpeft,~ juri~tiOJl, h Holder will be entitled to payment fro1n Arnbac to the extent of such recovery if sufficie nds re~t~wist' availablc.

/ As used herein, the n " _le " n1 n¥ny pe,rs o er than (i) the Obligor or (ii) any person whose obligations constitute the underlying secur· source o p yn1e , fb( t gations who, at the time of Nonpayrnent, is the owner of an Obligation or of a coupon relating "1 Obli tin. As\st'r(j. ein, "Due for Payrnent", when referring to the principal of Obligations, is when the sche ·1_ c e nrnndator de1nption date for the application of a required sinking fund installrncnl has been reach any earlier date on which payn1ent is due by reason of call for redemption (other than by application

stallrncnts), acceleration or othf'r advance1nent of maturity; and, wtwn referring to interest on the Obl g I.ions 1e h uled dat(' for payment of interest has been reached. As used herein, ~Nonpayment" rneans the failure of ttf\l Ofill~ve pro · .d sufl1cienl funds to the trustee or paying agent for payment in full of all principal of and interest on thelJoligat.ions J·h ch arf' Due for Payn1ent.

~C;:~:'.'.:::Jl~celable. The prerniurn on this Pol icy is not refundable for any reason, including payrnent of the Obligations prior to r~ This Policy does not insure against loss of any prepay1nenl or other acceleration payrnent which at any titne 1nay becorne due in respect of any Obligation, other than at the sole option of Ainbac, nor against any risk other than NonpayrnenL

In witness \vhereof, Ambac has caused this Policy to be affixed with a facsirnile of ils corporate seal and to be signed by its duly authorized officers in facsirnilc to become effective as its original seal and signatures and binding upon A1nbac by virtue of the countersignature of its duly authorized representative.

fd/4 President

Effective Date:

THE BANK OF NEW YORK acknowledges that it has agreed to perforrn the duties of lnsuranct' Trustee unde1 this Policy.

Form No.: 28-0012 (1/01) A-

Secretary

Authorized Representative

Authorized Officer of Insurance Trustee

Ambac

Endorsement

Policy for:

In the event that Ambac Assurance (;orpora.tion were under the Policy would be excluded from covera by H Association, established pursuant to the laws oft

Ambac Assurance Corporation On(' State Street Plaza, New York, New York 1000·1 Telephone: {212) 668-0_')40

Atta(·hed to and fonning part of Policy ~o. ·

r • tcr, waive or extend any of the terms. ,·onditions, provisions. agreements

,..,.-","- Ambac has caused this Endorsement to be affixed with a facsitnilc of its c.-orporatc seal and to

. .,.,,,.=,...,--..., izcd officers in facsimilt.: to become effective as its original seal and signatures and binding

c countersignature of its duly authorized representative.

President Secretary

Authorized Representative

Forn1 J\;(L 21~0004 (7/97)

APPENDIXG

BOOK-ENTRY-ONLY SYSTEM

The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world's largest depository, is a limited-purpuse trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a '"clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues. and money market 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 sale and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC").DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants arc 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 arc, 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 Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 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.

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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 wi II be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity arc being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.

Neither OTC nor Cede & Co. (nor such other OTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's procedures. Under its usual procedures, OTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date ( identified in a listing attached to the Omnibus Proxy).

Principal, redemption price and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of OTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of fonds and corresponding detail information from the Agency or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC (nor its nominee), the Agency or the Trustee, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption price and interest to Cede & Co. ( or such other nominee as may be requested by an authorized representative of OTC) is the responsibility of the Agency or the Trustee, disbursement of such payments to Direct Participants is the responsibility of OTC, and disbursement of sueh payments to Beneficial Owners is the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Agency or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds arc required to be printed and delivered.

The Agency may decide to discontinue use of the system of book-entry-only-transfers through DTC (or a successor securities depository). In that event, the Bonds will be printed and delivered to OTC.

The information in this section concerning OTC and DTC's book-entry system has been obtained from sources that the Agency believes to be reliable, but neither the Agency nor the Financial Advisor take responsibility for the accuracy thereof.

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