cdiacdocs.sto.ca.govcdiacdocs.sto.ca.gov/2016-1534.pdf · i) interest on the 2016A Bonds is not treated as a preference item in calculating the alternative minimum tax imposed on

NEW ISSUE—BOOK-ENTRY S&P Insured Rating: “AA”

S&P Underlying Rating: “A”

See “Ratings” herein.

In the opinion of Hawkins Delafield & Wood LLP, Bond Counsel to the Agency, under existing statutes and court decisions and

assuming continuing compliance with certain tax covenants described herein, (i) interest on the 2016A Bonds is excluded from gross income

for Federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) interest on

the 2016A Bonds is not treated as a preference item in calculating the alternative minimum tax imposed on individuals and corporations under

the Code; such interest, however, is included in the adjusted current earnings of certain corporations for purposes of calculating the alternative

minimum tax imposed on such corporations. Interest on the 2016B Bonds is included in gross income for Federal income tax purposes pursuant

to the Code. In addition, in the opinion of Bond Counsel to the Agency, under existing statutes, interest on the 2016 Bonds is exempt from

personal income taxes imposed by the State of California. See “TAX MATTERS – 2016A BONDS” and “TAX MATTERS – 2016B BONDS”

herein.

$11,790,000

Successor Agency to the Redevelopment Agency

of the City of Watsonville

2016 Tax Allocation Refunding Bonds

Series A

$2,420,000

Successor Agency to the Redevelopment Agency

of the City of Watsonville

2016 Tax Allocation Refunding Bonds

Taxable Series B

Dated: Delivery Date Due: August 1, as shown on the inside cover

The $11,790,000 aggregate principal amount of Successor Agency to the Redevelopment Agency of the City of Watsonville 2016

Tax Allocation Refunding Bonds, Series A (the “2016A Bonds”) and $2,420,000 aggregate principal amount of Successor Agency to the

Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Taxable Series B (the “2016B Bonds” and, together

with the 2016A Bonds, the “2016 Bonds”) are being issued by the Successor Agency to the Redevelopment Agency of the City of Watsonville

(the “Successor Agency”) pursuant to an Indenture of Trust, dated as of May 1, 2016 (the “Indenture”), by and between the Successor Agency

and U.S. Bank National Association, as trustee (the “Trustee”).

The 2016 Bonds are being issued to (i) redeem and defease certain tax allocation bonds of the Successor Agency, as described herein;

(ii) purchase a surety bond for the Reserve Account for the 2016 Bonds, (iii) purchase municipal bond insurance policies for each Series of the

2016 Bonds, and (iv) pay costs of issuance of the 2016 Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS” and “PLAN OF

REFUNDING” herein.

The 2016 Bonds will be delivered as fully registered bonds, registered in the name of Cede & Co. as nominee of The Depository

Trust Company, New York, New York (“DTC”), and will be available to ultimate purchasers (“Beneficial Owners”) in the denomination of

$5,000 or any integral multiple thereof, under the book-entry system maintained by DTC. Beneficial Owners will not be entitled to receive

delivery of bonds representing their ownership interest in the 2016 Bonds. Principal on the 2016 Bonds is due annually on August 1 of each

year, commencing August 1, 2016, and interest on the 2016 Bonds is due semiannually on February 1 and August 1 of each year, commencing

August 1, 2016, payable by the Trustee, to DTC for subsequent disbursement to DTC participants, so long as DTC or its nominee remains the

registered owner of the 2016 Bonds. See “THE 2016 BONDS” herein.

The 2016 Bonds are subject to redemption prior to maturity as described herein. See “THE 2016 BONDS - Redemption” herein.

The 2016 Bonds are special obligations of the Successor Agency, secured by a pledge of, and are payable as to principal,

interest and premium, if any, from Tax Revenues (as defined herein), and other funds as provided in the Indenture. The 2016 Bonds

are not a debt of the City of Watsonville (the “City”), the County of Santa Cruz (the “County”), the State of California (the “State”)

or any of its political subdivisions (except the Successor Agency), and none of the City, the County, the State or any of its political

subdivisions (except the Successor Agency) is liable thereon. The 2016 Bonds do not constitute an indebtedness within the meaning of

any constitutional or statutory debt limitation or restriction.

The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under municipal bond insurance

policies to be issued concurrently with the issuance of the Bonds of each Series by BUILD AMERICA MUTUAL ASSURANCE

COMPANY. See “BOND INSURANCE” herein.

This cover page contains certain information for general reference only. It is not a summary of the security or terms of this

issue. Investors must read this entire Official Statement to obtain information essential to making an informed investment decision

with respect to the 2016 Bonds.

The 2016 Bonds are offered, when, as and if issued and accepted by the Underwriter, subject to the approval of validity by Hawkins

Delafield & Wood LLP, San Francisco, California, Bond Counsel to the Successor Agency. Certain legal matters will be passed on for the

Successor Agency by Norton Rose Fulbright US LLP, Los Angeles, California, as Disclosure Counsel. Certain legal matters will be passed on

for the Underwriter by Jones Hall, A Professional Law Corporation, San Francisco, California, as Underwriter’s Counsel. It is anticipated

that the 2016 Bonds will be available for delivery through the book-entry facilities of DTC in New York, New York, on or about May 10, 2016.

HilltopSecurities

Dated: April 26, 2016

2016-1533 AND 2016-1534

2016-1533 2016-1534

MATURITY SCHEDULES

$11,790,000 SUCCESSOR AGENCY TO THE REDEVELOPMENT AGENCY

OF THE CITY OF WATSONVILLE 2016 TAX ALLOCATION REFUNDING BONDS

SERIES A

Maturity Date (August 1)

Principal Amount

Interest Rate Yield Price

CUSIP† (Base 94274A)

2016 $ 350,000 2.00% 0.50% 100.336% AA7 2017 365,000 2.00 0.79 101.471 AB52018 375,000 3.00 0.89 104.637 AC32019 1,225,000 3.00 1.06 106.133 AD12020 1,265,000 5.00 1.22 115.517 AE92021 1,325,000 5.00 1.42 117.964 AF62022 1,390,000 5.00 1.61 120.000 AG42023 1,465,000 5.00 1.78 121.737 AH22024 945,000 5.00 1.89 123.584 AJ82025 295,000 5.00 2.00 125.154 AK52026 305,000 5.00 2.12 126.346 AL32027 325,000 2.25 2.44 98.142 AM12028 330,000 2.375 2.58 97.860 AN92029 340,000 4.00 2.72c 111.355 AP42030 350,000 4.00 2.79c 110.696 AQ2

$1,140,000 3.00% Term Bonds due August 1, 2033 Yield: 3.10%; Price: 98.670% CUSIP No. †: 94274AAR0

c Yield to the first optional redemption date of August 1, 2026. † CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor’s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. CUSIP numbers have been assigned by an independent company not affiliated with the Successor Agency and are included solely for the convenience of investors. None of the Successor Agency, the Underwriter, the Redevelopment Consultant or the Financial Advisor, is responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the 2016A Bonds or as included herein. The CUSIP number for a specific maturity is subject to being changed after the issuance of the 2016A Bonds as a result of various subsequent actions including, but not limited to, refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the 2016A Bonds.

$2,420,000 SUCCESSOR AGENCY TO THE REDEVELOPMENT AGENCY

OF THE CITY OF WATSONVILLE 2016 TAX ALLOCATION REFUNDING BONDS

TAXABLE SERIES B

Maturity Date (August 1)

Principal Amount

Interest Rate Yield Price

CUSIP† (Base 94274A)

2016 $795,000 1.00% 1.08% 99.981% AS8 2017 805,000 2.00 1.72 100.336 AT62018 820,000 2.00 1.90 100.215 AU3

† CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor’s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. CUSIP numbers have been assigned by an independent company not affiliated with the Successor Agency and are included solely for the convenience of investors. None of the Successor Agency, the Underwriter, the Redevelopment Consultant or the Financial Advisor, is responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the 2016B Bonds or as included herein. The CUSIP number for a specific maturity is subject to being changed after the issuance of the 2016B Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the 2016B Bonds.

SUCCESSOR AGENCY TO THE REDEVELOPMENT AGENCY OF THE CITY OF WATSONVILLE

BOARD OF DIRECTORS

Felipe Hernandez, Chairman Karina Cervantez Alejo, Vice-Chairman

Lowell Hurst, Member Jimmy Dutra, Member

Rebecca J. Garcia, Member Trina Coffman-Gomez, Member Dr. Nancy A. Bilicich, Member

SUCCESSOR AGENCY STAFF

Charles A. Montoya, City Manager Ezequiel Vega, Administrative Services Director

Beatriz Vázquez Flores, City Clerk Alan J. Smith, City Attorney

SPECIAL SERVICES

Financial Advisor

Steven Gortler San Francisco, California

Bond Counsel

Hawkins Delafield & Wood LLP San Francisco, California

Disclosure Counsel

Norton Rose Fulbright US LLP Los Angeles, California

Redevelopment Consultant

DHA Consulting, LLC Long Beach, California

Trustee

U.S. Bank National Association San Francisco, California

Verification Agent

Causey Demgen & Moore P.C. Denver, Colorado

TABLE OF CONTENTS

Page

i

INTRODUCTION ............................................................................................................................................... 1

General ................................................................................................................................................... 1 Authority for Issuance ............................................................................................................................ 1 Purpose and Application of Proceeds ..................................................................................................... 1 The City and the Successor Agency ....................................................................................................... 2 The Merged Project Area ....................................................................................................................... 2 The 2016 Bonds ...................................................................................................................................... 2 Security for the 2016 Bonds ................................................................................................................... 3 Special Obligations ................................................................................................................................. 3 Reserve Account ..................................................................................................................................... 3 Statutory Pass-Through Payments .......................................................................................................... 3 Pass-Through Agreements ...................................................................................................................... 4 Further Information ................................................................................................................................ 4

PLAN OF REFUNDING ..................................................................................................................................... 4

General ................................................................................................................................................... 4 Verification ............................................................................................................................................. 4

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

DEBT SERVICE SCHEDULE ........................................................................................................................... 6

THE 2016 BONDS .............................................................................................................................................. 7

Authority for Issuance ............................................................................................................................ 7 Description of the 2016 Bonds ............................................................................................................... 7 Redemption ............................................................................................................................................. 7 Limitation on Additional Indebtedness; Against Encumbrances ........................................................... 9

BOND INSURANCE .......................................................................................................................................... 9

The Policies ............................................................................................................................................ 9 Build America Mutual Assurance Company .......................................................................................... 9

THE DISSOLUTION ACT ............................................................................................................................... 11

SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS ........................................................ 12

Background ........................................................................................................................................... 12 The Dissolution Act .............................................................................................................................. 12 Recognized Obligation Payment Schedules ......................................................................................... 13 Elimination of Housing Set-Aside ........................................................................................................ 14 Santa Cruz County Auditor-Controller ................................................................................................. 15 Sources of Payment for the 2016 Bonds .............................................................................................. 15 Special Obligations ............................................................................................................................... 16 Flow of Funds ....................................................................................................................................... 16 Statutory Pass-Through Payments ........................................................................................................ 17 Pass-Through Agreements .................................................................................................................... 17 Certain Covenants of the Successor Agency ........................................................................................ 18

TABLE OF CONTENTS (continued)

Page

ii

SUCCESSOR AGENCY TO THE REDEVELOPMENT AGENCY OF THE CITY OF WATSONVILLE .............................................................................................................................. 19

Members and Officers .......................................................................................................................... 20 Successor Agency Powers .................................................................................................................... 20

THE MERGED PROJECT AREA .................................................................................................................... 21

Merged Project Area Components ....................................................................................................... 21 The Redevelopment Plan ...................................................................................................................... 24 No Redevelopment Plan Limitations .................................................................................................... 23 Land Use ............................................................................................................................................... 24 Largest Taxpayers ................................................................................................................................ 26 Assessed Values and the Real Estate Market ....................................................................................... 26 Tax Rates .............................................................................................................................................. 27 Appeals; Proposition 8 Reductions ....................................................................................................... 28 Historical Taxable Values for the Merged Project Area....................................................................... 29 Historical Redevelopment Property Tax Trust Fund Revenues ........................................................... 31 Projected Taxable Valuation and Tax Revenues .................................................................................. 32 County Administration Fees ................................................................................................................. 33

RISK FACTORS ............................................................................................................................................... 33

Reduction in Taxable Value ................................................................................................................. 33 Risks to Real Estate Market .................................................................................................................. 34 Reduction in Inflationary Rate ............................................................................................................. 34 Levy and Collection of Taxes ............................................................................................................... 34 Estimated Revenues .............................................................................................................................. 34 Recognized Obligation Payment Schedules ......................................................................................... 35 Future Implementation of Dissolution Act ........................................................................................... 36 Bankruptcy and Foreclosure ................................................................................................................. 37 Bond Insurance Risk Factors ................................................................................................................ 37 No Validation Proceeding Undertaken ................................................................................................. 38 Hazardous Substances .......................................................................................................................... 39 Natural Disasters .................................................................................................................................. 39 Changes in Law .................................................................................................................................... 39 Secondary Market ................................................................................................................................. 39

PROPERTY TAXATION IN CALIFORNIA ................................................................................................... 40

Property Tax Collection Procedures ..................................................................................................... 40 County Tax Loss Reserve Fund (Teeter Plan) ...................................................................................... 42 Unitary Property ................................................................................................................................... 42 Article XIIIA of the State Constitution ................................................................................................ 42 Appropriations Limitation – Article XIIIB........................................................................................... 43 Articles XIIIC and XIIID of the State Constitution .............................................................................. 43 Proposition 87 ....................................................................................................................................... 44 Appeals of Assessed Values ................................................................................................................. 44 Proposition 8 ......................................................................................................................................... 44 Propositions 218 and 26 ....................................................................................................................... 45 Future Initiatives ................................................................................................................................... 45

TABLE OF CONTENTS (continued)

Page

iii

TAX MATTERS ............................................................................................................................................... 45

Tax Matters – 2016A Bonds ................................................................................................................. 45 Tax Matters – 2016B Bonds ................................................................................................................. 48

UNDERWRITING ............................................................................................................................................ 50

FINANCIAL ADVISOR ................................................................................................................................... 51

VERIFICATION OF MATHEMATICAL ACCURACY ................................................................................. 51

LITIGATION .................................................................................................................................................... 51

LEGALITY FOR INVESTMENT IN CALIFORNIA ...................................................................................... 51

RATINGS .......................................................................................................................................................... 51

CONTINUING DISCLOSURE ........................................................................................................................ 52

APPROVAL OF LEGAL PROCEEDINGS ..................................................................................................... 52

EXECUTION AND DELIVERY ...................................................................................................................... 53

APPENDIX A – SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE ................................. A-1 APPENDIX B – FORM OF BOND COUNSEL OPINION ........................................................................... B-1 APPENDIX C – BOOK-ENTRY SYSTEM ................................................................................................... C-1 APPENDIX D – FORM OF CONTINUING DISCLOSURE CERTIFICATE .............................................. D-1 APPENDIX E – FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2015 ......... E-1 APPENDIX F – STATE DEPARTMENT OF FINANCE APPROVAL LETTER ........................................ F-1 APPENDIX G – SUPPLEMENTAL INFORMATION – CITY OF WATSONVILLE ................................. G-1 APPENDIX H – SPECIMEN MUNICIPAL BOND INSURANCE POLICY ............................................... H-1 APPENDIX I – SPECIMEN MUNICIPAL BOND DEBT SERVICE INSURANCE POLICY ..................... I-1

[THIS PAGE INTENTIONALLY LEFT BLANK]

Monterey Bay

SanFrancisco

Bay

Oakland

Stockton

San Jose

Monterey

Santa CruzWatsonville

San Francisco

¹1 in = 19 miles

MAIN ST

LEE RD

FREEDOM BL

AIRPORT BL

LAKEVIE

W R

D

EAST LAKE AV

HOLOHAN RD

HAR KINS SLOUGH RD

BUENA VISTA DR

WEST BEACH ST

WEST RIVERSIDE DR

LARKIN VALLEY R

D

SOUT

H G

REEN

VAL

LEY

RD

EAST BEACH ST

RIVERSIDE DR

GREEN

VALL

EY

RD

LOMA PRIETA AV

WEST BEACH RD

WEST LAKE AV

WALKER ST

RDA ProjectArea History

City of WatsonvilleMotto: “Opportunity Through Diversity; Unity Through Cooperation.

Legend2000 Added Area

Central Downtown Added Area (1992)

Westside Industrial Added Area (1992)

1973 Added Area

Watsonville City Limit

Prepared by Watsonville GIS Center 10/14/2009.

This Document is a graphic representation only of best available sources.The City of Watsonville assumes no responsibility for any errors.

1 inch = 4,500 feet

/0 1,300 2,600 3,900 5,200650

Feet

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

The information set forth herein has been obtained from the Successor Agency and other sources believed to be reliable. This Official Statement is not to be construed as a contract with the purchasers of the 2016 Bonds. Estimates and opinions are included and should not be interpreted as statements of fact. Summaries of documents do not purport to be complete statements of their provisions. No dealer, broker, salesperson or any other person has been authorized by the Successor Agency, the Financial Advisor or the Underwriter to give any information or to make any representations other than those contained in this Official Statement in connection with the offering contained herein and, if given or made, such information or representations must not be relied upon as having been authorized by the Successor Agency or the Underwriter.

This Official Statement does not constitute an offer to sell or solicitation of an offer to buy, nor shall there be any offer or solicitation of such offer or any sale of the 2016 Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information and expressions of opinion herein are subject to change without notice, and neither delivery of this Official Statement nor any sale of the 2016 Bonds made thereafter shall under any circumstances create any implication that there has been no change in the affairs of the Successor Agency or in any other information contained herein, since the date hereof.

The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

Build America Mutual Assurance Company (“BAM”) makes no representation regarding the 2016 Bonds or the advisability of investing in the 2016 Bonds. In addition, BAM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding BAM, supplied by BAM and presented under the heading “BOND INSURANCE” herein and APPENDIX H – “SPECIMEN MUNICIPAL BOND INSURANCE POLICY.”

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE 2016 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 2016 BONDS TO CERTAIN DEALERS, INSTITUTIONAL INVESTORS AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE INSIDE COVER PAGES, AND SUCH PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

This Official Statement, including any supplement or amendment hereto, is intended to be deposited with the Municipal Securities Rulemaking Board through the Electronic Municipal Market Access (“EMMA”) website.

The City of Watsonville maintains a website with information pertaining to the Successor Agency. However, the information presented therein is not incorporated into this Official Statement and should not be relied upon in making investment decisions with respect to the 2016 Bonds.

FORWARD-LOOKING STATEMENTS Certain statements included or incorporated by reference in this Official Statement constitute

“forward-looking statements.” Such statements are generally identifiable by the terminology used, such as “plan,” “project,” “expect,” “anticipate,” “intend,” “believe,” “estimate,” “budget” or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Successor Agency does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

1

OFFICIAL STATEMENT $11,790,000

Successor Agency to the Redevelopment Agency of the City of Watsonville

2016 Tax Allocation Refunding Bonds Series A

$2,420,000 Successor Agency to the Redevelopment Agency

of the City of Watsonville 2016 Tax Allocation Refunding Bonds

Taxable Series B

INTRODUCTION

General

This Official Statement, including the cover page and appendices hereto, sets forth certain information in connection with the sale of $11,790,000 aggregate principal amount of Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Series A (the “2016A Bonds”) and $2,420,000 aggregate principal amount of Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Taxable Series B (the “2016B Bonds” and, together with the 2016A Bonds, the “2016 Bonds”) that are being issued by the Successor Agency to the Redevelopment Agency of the City of Watsonville, California (the “Successor Agency”).

Authority for Issuance

The 2016 Bonds are being issued pursuant to the Constitution and laws of the State of California (the “State”), including Article 11 (commencing with Section 53580) of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California (the “Refunding Law”) and the Community Redevelopment Law, Part 1 of Division 24 (commencing with Section 33000) of the Health and Safety Code of the State of California (the “Redevelopment Law”). The 2016 Bonds are also being issued pursuant to an Indenture of Trust, dated as of May 1, 2016 (the “Indenture”), by and between the Successor Agency and U.S. Bank National Association, as trustee (the “Trustee”). All capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in APPENDIX A – “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE” or, if not defined therein, shall have the meanings assigned to such terms in the Indenture.

Purpose and Application of Proceeds

The 2016 Bonds are being issued to (i) redeem and defease (a) $19,000,000 original principal amount of Redevelopment Agency of the City of Watsonville 2004 Tax Allocation Bonds, Series A, currently outstanding in the aggregate principal amount of $12,900,000; (b) $2,310,000 original principal amount of Redevelopment Agency of the City of Watsonville 2004 Housing Tax Allocation Bonds, Series B-1, currently outstanding in the aggregate principal amount of $1,290,000; and (c) $4,635,000 original principal amount of Redevelopment Agency of the City of Watsonville Project 2004 Housing Taxable Tax Allocation Bonds, Series B-2, currently outstanding in the aggregate principal amount of $2,720,000 (collectively, the “Prior Bonds”); (ii) purchase a surety bond for the Reserve Account for the 2016 Bonds, (iii) purchase municipal bond insurance policies for each Series of the 2016 Bonds, and (iv) pay costs of issuance of the 2016 Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS” and “PLAN OF REFUNDING” herein.

The City and the Successor Agency

The City of Watsonville, California (the “City”) is a charter city operating under the City Council-City Manager form of government and was incorporated in 1868 under the laws of the State. The City is located in the County of Santa Cruz, California (the “County”), approximately 95 miles south

2

of the City and County of San Francisco and 47 miles southwest of the City of San Jose. The City has a population greater than 51,000 people.

The Former Agency was activated by the City Council of the City of Watsonville in 1972 pursuant to City Ordinance No. 280-72. At the same time, the City Council declared itself to be the members of the Former Agency and appointed the City Manager to be the Executive Director of the Former Agency. On June 29, 2011, Assembly Bill No. 26 (“AB x1 26”) was enacted as Chapter 5, Statutes of 2011, together with a companion bill, Assembly Bill No. 27 (“AB x1 27”). The provisions of AB x1 26 provided for the dissolution of all redevelopment agencies in the State. The provisions of AB x1 27 permitted redevelopment agencies to avoid dissolution by the payment of certain amounts. A lawsuit was brought in the California Supreme Court, California Redevelopment Association, et al., v. Matosantos, et al., 53 Cal. 4th 231 (Cal. Dec. 29, 2011), challenging the constitutionality of AB x1 26 and AB x1 27. The California Supreme Court largely upheld AB x1 26, invalidated AB x1 27, and held that AB x1 26 may be severed from AB x1 27 and enforced independently. As a result of AB x1 26 and the decision of the California Supreme Court in the California Redevelopment Association case, as of February 1, 2012, all redevelopment agencies in the State were dissolved, including the Former Agency, and successor agencies were designated as successor entities to the former redevelopment agencies to expeditiously wind down the affairs of the former redevelopment agencies. The primary provisions of AB X1 26 relating to the dissolution and winding down of former redevelopment agency affairs are Parts 1.8 (commencing with Section 34161) and 1.85 (commencing with Section 34170) of Division 24 of the Health & Safety Code of the State, as amended on June 27, 2012 by Assembly Bill No. 1484 (“AB 1484”), enacted as Chapter 26, Statutes of 2012 and as further amended on September 22, 2015 by Senate Bill 107 (“SB 107”), enacted as Chapter 325, Statutes of 2015 (collectively, as amended from time to time, the “Dissolution Act”).

The City Council, pursuant to Resolution No. 4-12 (CM), adopted on January 10, 2012, elected to serve as the Successor Agency to the Former Agency. Subdivision (g) of Section 34173 of the Health and Safety Code of the State of California (the “Health and Safety Code”), added by AB 1484, expressly affirms that the Successor Agency is a separate public entity from the City, that the two entities shall not merge, and that the liabilities of the Successor Agency will not be transferred to the City nor will the assets of the Successor Agency become assets of the City.

The Merged Project Area

The redevelopment project area is a single merged project area, known as the Watsonville 2000 Redevelopment Project (the “Merged Project Area”), and contains 1,830 acres. The Merged Project Area contains a diverse mix of residential, commercial, industrial and manufacturing activities. For a description of the Merged Project Area, see “THE MERGED PROJECT AREA” herein.

The 2016 Bonds

The 2016 Bonds will be delivered as fully registered bonds, registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York (“DTC”), and will be available to ultimate purchasers (“Beneficial Owners”) in the denomination of $5,000 or any integral multiple thereof, under the book-entry system maintained by DTC. Beneficial Owners will not be entitled to receive delivery of bonds representing their ownership interest in the 2016 Bonds. Principal on the 2016 Bonds is due annually on August 1 of each year, commencing August 1, 2016, and interest on the 2016 Bonds is due semiannually on February 1 and August 1 of each year, commencing August 1, 2016, payable by the Trustee, to DTC for subsequent disbursement to DTC participants, so long as DTC or its nominee remains the registered owner of the 2016 Bonds. See “THE 2016 BONDS” herein.

3

Security for the 2016 Bonds

The Dissolution Act requires the Santa Cruz County Auditor-Controller (the “County Auditor-Controller”) to determine the amount of property taxes that would have been allocated to the Former Agency had the Former Agency not been dissolved pursuant to the operation of AB X1 26, using current assessed values on the last equalized roll on August 20, and to deposit that amount in the Redevelopment Property Tax Trust Fund for the Successor Agency established and held by the County Auditor-Controller (the “Redevelopment Property Tax Trust Fund”).

The 2016 Bonds will be secured by a pledge of and lien on Tax Revenues pursuant to the Indenture, the Reserve Account and by a lien created pursuant to Section 34177.5(g) of the Health and Safety Code (added by the Dissolution Act) on monies deposited from time to time in the Redevelopment Property Tax Trust Fund. “Tax Revenues” means all moneys deposited from time to time in the Redevelopment Property Tax Trust Fund, as provided in paragraph (2) of subdivision (a) of Section 34183 of the Redevelopment Law, excluding amounts if any, payable by the Successor Agency pursuant to Sections 33676, 33401, 33607.5 and 33607.7 of the Redevelopment Law and Section 34183(a)(1) of the Dissolution Act, except to the extent such amounts are payable on a basis subordinate to the payment of Annual Debt Service on the 2016 Bonds or any Parity Debt pursuant to Section 33607.5(e) of the Redevelopment Law and 34177.5(c) of the Dissolution Act. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS” herein. The Successor Agency currently has no Parity Debt outstanding.

Special Obligations

The 2016 Bonds will be special obligations of the Successor Agency, secured by a pledge of, and are payable as to principal, interest and premium, if any, from Tax Revenues and other funds as provided in the Indenture. The 2016 Bonds are not a debt of the City, the County, the State or any of its political subdivisions (except the Successor Agency), and none of the City, the County, the State or any of its political subdivisions (except the Successor Agency) is liable thereon. The 2016 Bonds do not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction.

Reserve Account

To secure the payment of the principal of and interest on the 2016 Bonds, a Reserve Account will be established under the Indenture and funded in an amount equal to the Reserve Requirement. “Reserve Requirement” means, with respect to the 2016 Bonds, Maximum Annual Debt Service with respect to the 2016 Bonds. The Successor Agency will satisfy the Reserve Requirement by depositing the 2016 Reserve Policy in the Reserve Account in accordance with the Indenture. “2016 Reserve Policy” means the Municipal Bond Debt Service Reserve Insurance Policy relating to the 2016 Bonds issued by the 2016 Bond Insurer.

Statutory Pass-Through Payments

Sections 33607.5 and 33607.7 of the Redevelopment Law require that a portion of the tax increment revenues from within the redevelopment project areas be distributed to the taxing agencies whose territory is located within a project area to alleviate the financial burden or detriment caused by the redevelopment project (“Statutory Pass-Through Payments”). The largest Statutory Pass-Through Payment, in terms of dollars payable, is the requirement to pass through about 24 percent of revenues for the 2000 Amendment Sub-Area Area (as defined herein), or $1.1 million for 2015-16. The remaining payments are minor and are payable from tax revenues generated by the Central and Westside Sub-Area Areas. Statutory Pass-Through Payments are senior to the Successor Agency’s obligation to pay debt service on the 2016 Bonds. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS – Statutory Pass-Through Payments” herein.

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Pass-Through Agreements

The Former Agency entered into pass-through agreements (the “Pass-Through Agreements”) with certain taxing agencies that provide for payments from tax revenue allocated to the Merged Project Area to such taxing agencies. The Successor Agency’s obligations under the Pass-Through Agreements are senior to the Successor Agency’s obligation to make payments on the Bonds. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS – Pass-Through Agreements” herein.

Further Information

Descriptions of the Redevelopment Law, the Refunding Law, the Dissolution Act, the 2016 Bonds, the Indenture, the Successor Agency, the Former Agency, the City, the County Auditor-Controller and the State of California Department of Finance (the “Department of Finance”) are included in this Official Statement. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to the Redevelopment Law, the Refunding Law, the Dissolution Act, the 2016 Bonds, the Indenture, and the laws of the State or the proceedings of the Former Agency, the Successor Agency, the City, the County Auditor-Controller and the Department of Finance are qualified in their entirety by reference to such documents and laws. References herein to the 2016 Bonds are qualified in their entirety by the form thereof included in the Indenture and the information with respect thereto included herein, copies of which are all available for inspection at the offices of the Successor Agency.

PLAN OF REFUNDING

General

Proceeds of the 2016 Bonds, together with certain funds made available through the refunding of the Prior Bonds, will be deposited into the 2004 Bonds Refunding Fund established under the Indenture and thereafter transferred to U.S. Bank National Association, as trustee for the Prior Bonds, and applied to redeem and defease the Prior Bonds pursuant to the Irrevocable Refunding Instructions, dated the Delivery Date (the “Refunding Instructions”), given by the Successor Agency to U.S. Bank National Association, as Trustee and trustee for the Prior Bonds (“U.S. Bank”). Amounts so deposited will be invested in State and Local Government Series securities or held uninvested in cash by U.S. Bank and will be sufficient to pay the outstanding principal amount of the Prior Bonds to be redeemed, together with accrued and unpaid interest thereon to June 10, 2016 (the “Redemption Date”), without premium.

Verification

Causey Demgen & Moore P.C., as verification agent (the “Verification Agent”), upon delivery of the 2016 Bonds, will deliver a report on the mathematical accuracy of certain computations, contained in schedules provided to it by the Successor Agency, relating to the sufficiency of moneys deposited into the 2004 Bonds Refunding Fund to provide for the redemption and defeasance of the Prior Bonds. The report of the Verification Agent will include a statement to the effect that the scope of its engagement is limited to verifying the mathematical accuracy of the computations contained in such schedules provided to it, and that it has no obligation to update its report because of events occurring, or date or information coming to its attention, subsequent to the date of its report.

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ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of funds are summarized as follows.

2016A Bonds 2016B Bonds Total Sources:

Principal Amount $11,790,000.00 $2,420,000.00 $14,210,000.00 Net Premium 1,555,032.15 4,316.75 1,559,348.90 Other Available Funds 1,410,740.84 406,260.73 1,817,001.57 Total Sources $14,755,772.99 $2,830,577.48 $17,586,350.47

Uses:

2004 Bonds Refunding Fund $14,376,017.12 $2,766,041.88 $17,142,059.00 Costs of Issuance Fund (1) 379,755.87 64,535.60 444,291.47 Total Uses $14,755,772.99 $2,830,577.48 $17,586,350.47

____________________ (1) Costs of Issuance include Underwriter’s discount, fees and expenses for Bond Counsel, Disclosure Counsel,

Financial Advisor, Redevelopment Consultant, Verification Agent, and Trustee, premiums for the surety bondand municipal bond insurance policies, printing expenses, rating fee and other costs related to the issuance of the2016 Bonds.

[Remainder of page intentionally left blank.]

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DEBT SERVICE SCHEDULE

The following table shows the annual debt service requirements on the 2016 Bonds, assuming no optional redemptions.

Bond Year Ending

(August 1)

2016A Bonds 2016B Bonds Grand Total Principal Interest Total Principal Interest Total

2016 $ 350,000.00 $ 109,968.75 $ 459,968.75 $ 795,000.00 $ 9,101.25 $ 804,101.25 $ 1,264,070.00 2017 365,000.00 481,750.00 846,750.00 805,000.00 32,500.00 837,500.00 1,684,250.00 2018 375,000.00 474,450.00 849,450.00 820,000.00 16,400.00 836,400.00 1,685,850.00 2019 1,225,000.00 463,200.00 1,688,200.00 - - - 1,688,200.00 2020 1,265,000.00 426,450.00 1,691,450.00 - - - 1,691,450.00 2021 1,325,000.00 363,200.00 1,688,200.00 - - - 1,688,200.00 2022 1,390,000.00 296,950.00 1,686,950.00 - - - 1,686,950.00 2023 1,465,000.00 227,450.00 1,692,450.00 - - - 1,692,450.00 2024 945,000.00 154,200.00 1,099,200.00 - - - 1,099,200.00 2025 295,000.00 106,950.00 401,950.00 - - - 401,950.00 2026 305,000.00 92,200.00 397,200.00 - - - 397,200.00 2027 325,000.00 76,950.00 401,950.00 - - - 401,950.00 2028 330,000.00 69,637.50 399,637.50 - - - 399,637.50 2029 340,000.00 61,800.00 401,800.00 - - - 401,800.00 2030 350,000.00 48,200.00 398,200.00 - - - 398,200.00 2031 370,000.00 34,200.00 404,200.00 - - - 404,200.00 2032 380,000.00 23,100.00 403,100.00 - - - 403,100.00 2033 390,000.00 11,700.00 401,700.00 - - - 401,700.00

TOTAL $11,790,000.00 $3,522,356.25 $15,312,356.25 $2,420,000.00 $58,001.25 $2,478,001.25 $17,790,357.50

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THE 2016 BONDS

Authority for Issuance

The 2016 Bonds were authorized for issuance pursuant to the Indenture, the Redevelopment Law and the Refunding Law. The issuance of the 2016 Bonds and the Indenture were authorized by the Successor Agency pursuant to Resolution No. 1-16 adopted on March 8, 2016 (the “Resolution”) and by the Oversight Board for the Successor Agency pursuant to Resolution No. 2-16 adopted on March 9, 2016 (the “Oversight Board Resolution”).

Written notice of the Oversight Board Resolution was provided to the Department of Finance, pursuant to the Dissolution Act, on March 9, 2016. On April 7, 2016, the Department of Finance provided a letter to the Successor Agency stating that based on the Department of Finance’s review and application of the law, the Oversight Board Resolution approving the 2016 Bonds was approved by the Department of Finance. See APPENDIX F – “STATE DEPARTMENT OF FINANCE APPROVAL LETTER.”

Description of the 2016 Bonds

The 2016 Bonds of each Series will be issued and delivered as one fully-registered 2016 Bond in the denomination of $5,000 or any integral multiple thereof (each an “Authorized Denomination”) for each maturity of that Series of 2016 Bonds, initially in the name of Cede & Co., as nominee for DTC, as registered owner. One fully-registered certificate will be issued for each series and maturity of the 2016 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. See APPENDIX C – “BOOK-ENTRY SYSTEM.”

The 2016 Bonds will be dated the date of their delivery (the “Delivery Date”) and mature on August 1 in the years and in the amounts shown on the inside cover pages of this Official Statement. Interest on the 2016 Bonds will be payable on each February 1 and August 1, commencing August 1, 2016 (each an “Interest Payment Date”) to the person whose name appears on the Registration Books as the Owner thereof as of the Record Date immediately preceding each such Interest Payment Date, such interest to be paid by check of the Trustee mailed by first class mail, postage prepaid, on the Interest Payment Date, to such Owner at the address of such Owner as it appears on the Registration Books as of such Record Date; provided however, that payment of interest may be by wire transfer to an account in the United States of America to any registered owner of 2016 Bonds in the aggregate principal amount of $1,000,000 or more who shall furnish written wire instructions to the Trustee prior to the applicable Record Date. “Record Date” means, with respect to any Interest Payment Date, the close of business on the fifteenth (15th) calendar day of the month preceding such Interest Payment Date, whether or not such fifteenth (15th) calendar day is a Business Day. Principal of and redemption premium (if any) on any 2016 Bond shall be paid upon presentation and surrender thereof, at maturity, at the Principal Corporate Trust Office of the Trustee. Both the principal of and interest and premium (if any) on the 2016 Bonds shall be payable in lawful money of the United States of America. Interest shall be calculated based upon a 360-day year of twelve 30-day months.

Redemption

Optional Redemption of 2016A Bonds. The 2016A Bonds maturing on or before August 1, 2026 are not subject to optional redemption prior to maturity. The 2016A Bonds maturing on and after August 1, 2027, are subject to redemption, at the option of the Successor Agency on any date on or after August 1, 2026, as a whole or in part, by such maturities as shall be determined by the Successor Agency, and by lot within a maturity, from any available source of funds, at a redemption price equal to the principal amount of the 2016A Bonds to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium.

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No Optional Redemption of 2016B Bonds. The 2016B Bonds are not subject to optional redemption prior to their maturity.

Mandatory Redemption. The 2016A Bonds maturing on August 1, 2033 are subject to redemption in part by lot on August 1, 2031 and on August 1 in each year shown below until maturity, from sinking account payments made by the Successor Agency, at a redemption price equal to the principal amount thereof to be redeemed together with accrued interest thereon to the redemption date, without premium, in the aggregate respective principal amounts and on the respective dates as set forth in the following table; provided, however, that if some but not all of the 2016A Bonds have been redeemed, the total amount of all future sinking account payments will be reduced by an amount corresponding to the aggregate principal amount of 2016A Bonds so redeemed, to be allocated among such sinking account payments on a pro rata basis in integral multiples of $5,000 as determined by the Successor Agency (notice of which determination will be given by the Successor Agency to the Trustee):

Sinking Account Redemption Date

(August 1)

Payment Amount

2031 $370,0002032 380,0002033* 390,000

________ * Maturity.

Notice of Redemption. The Trustee on behalf and at the expense of the Successor Agency shall mail (by first class mail, postage prepaid) notice of any redemption at least twenty (20) but not more than sixty (60) days prior to the redemption date, to (i) to the Owners of any 2016 Bonds designated for redemption at their respective addresses appearing on the Registration Books, and (ii) the Securities Depositories and to the Information Services; but such mailing shall not be a condition precedent to such redemption and neither failure to receive any such notice nor any defect therein shall affect the validity of the proceedings for the redemption of such 2016 Bonds or the cessation of the accrual of interest thereon. Such notice shall state the redemption date and the redemption price, shall state that optional redemption is conditioned upon the timely delivery of the redemption price by the Successor Agency to the Trustee for deposit in the Redemption Account, shall designate the CUSIP number of the 2016 Bonds to be redeemed, shall state the individual number of each 2016 Bond to be redeemed or shall state that all 2016 Bonds between two stated numbers (both inclusive) or all of the 2016 Bonds Outstanding are to be redeemed, and shall require that such 2016 Bonds be then surrendered at the Principal Corporate Trust Office of the Trustee for redemption at the redemption price, giving notice also that further interest on such 2016 Bonds will not accrue from and after the redemption date.

Right to Rescind Notice. The Successor Agency has the right to rescind any notice of optional redemption of the 2016 Bonds 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 2016 Bonds then called for redemption, and such cancellation shall not constitute an Event of Default under the Indenture. The Successor 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.

Partial Redemption of 2016 Bonds. In the event only a portion of any 2016 Bond is called for redemption, then upon surrender of such 2016 Bond the Successor Agency shall execute and the Trustee shall authenticate and deliver to the Owner thereof, at the expense of the Successor Agency, a new 2016 Bond or 2016 Bonds of the same interest rate and maturity, of authorized denominations, in aggregate principal amount equal to the unredeemed portion of the 2016 Bond to be redeemed.

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Effect of Redemption. From and after the date fixed for redemption, if funds available for the payment of the redemption price of and interest on the 2016 Bonds so called for redemption shall have been duly deposited with the Trustee, such 2016 Bonds so called shall cease to be entitled to any benefit under the Indenture other than the right to receive payment of the redemption price and accrued interest to the redemption date, and no interest shall accrue thereon from and after the redemption date specified in such notice.

Manner of Redemption. Whenever any 2016 Bonds or portions thereof are to be selected for redemption by lot within a maturity, the Trustee shall make such selection, in such manner as the Trustee shall deem appropriate.

Limitation on Additional Indebtedness; Against Encumbrances

The Successor Agency covenants in the Indenture that it will not issue any bonds, notes, or other obligations that are payable from or secured by a lien on Tax Revenues that is superior to the lien under the Indenture. The Successor Agency may issue bonds or other obligations to refund all of its Outstanding Bonds provided that all of such Outstanding Bonds are defeased in accordance with the Indenture. The Successor Agency may issue Parity Debt to refund a portion of the Outstanding Bonds provided that with respect to any such refunding (i) annual debt service on such Parity Debt, as applicable, is lower than annual debt service on the obligations being refunded during every year the obligations would otherwise be outstanding (ii) the final maturity of any such Parity Debt does not exceed the final maturity of the obligations being refunded, (iii) the interest rate on the Parity Debt shall be fixed on the date of issuance of the Parity Debt, and (iv) principal payments shall be on August 1 and interest payments on August 1 and February 1. “Parity Debt” means any bonds, notes or other obligations that are payable from and secured by a lien on Tax Revenues that is on parity with the lien under the Indenture. The Successor Agency currently has no Parity Debt outstanding. Nothing in the Indenture prevents the Successor Agency from issuing Subordinate Debt.

BOND INSURANCE

The Policies

Concurrently with the issuance of the 2016 Bonds, Build America Mutual Assurance Company (“BAM” or the “2016 Bond Insurer”) will issue its Municipal Bond Insurance Policy for the 2016A Bonds (the “2016A Policy”), and its Municipal Bond Insurance Policy for the 2016B Bonds (the “2016B Policy” and, together with the 2016A Policy, the “Policies”). The Policies each guarantee the scheduled payment of principal of and interest on the 2016A Bonds and the 2016B Bonds, respectively, in the form of the policy included as APPENDIX H – “SPECIMEN MUNICIPAL BOND INSURANCE POLICY.”

The Policies are not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law.

Build America Mutual Assurance Company

BAM is a New York domiciled mutual insurance corporation. BAM provides credit enhancement products solely to issuers in the U.S. public finance markets. BAM will only insure obligations of states, political subdivisions, integral parts of states or political subdivisions or entities otherwise eligible for the exclusion of income under section 115 of the U.S. Internal Revenue Code of 1986, as amended. No member of BAM is liable for the obligations of BAM.

The address of the principal executive offices of BAM is: 1 World Financial Center, 27th Floor, 200 Liberty Street, New York, New York 10281, its telephone number is: 212-235-2500, and its website is located at: www.buildamerica.com.

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BAM is licensed and subject to regulation as a financial guaranty insurance corporation under the laws of the State of New York and in particular Articles 41 and 69 of the New York Insurance Law.

BAM’s financial strength is rated “AA/Stable” by Standard and Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business (“S&P”). An explanation of the significance of the rating and current reports may be obtained from S&P at www.standardandpoors.com. The rating of BAM should be evaluated independently. The rating reflects the S&P’s current assessment of the creditworthiness of BAM and its ability to pay claims on its policies of insurance. The above rating is not a recommendation to buy, sell or hold the Bonds, and such rating is subject to revision or withdrawal at any time by S&P, including withdrawal initiated at the request of BAM in its sole discretion. Any downward revision or withdrawal of the above rating may have an adverse effect on the market price of the Bonds. BAM only guarantees scheduled principal and scheduled interest payments payable by the issuer of the Bonds on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the Policy), and BAM does not guarantee the market price or liquidity of the Bonds, nor does it guarantee that the rating on the Bonds will not be revised or withdrawn.

Capitalization of BAM

BAM’s total admitted assets, total liabilities, and total capital and surplus, as of December 31, 2015 and as prepared in accordance with statutory accounting practices prescribed or permitted by the New York State Department of Financial Services were $479.6 million, $42.3 million and $437.3 million, respectively.

BAM is party to a first loss reinsurance treaty that provides first loss protection up to a maximum of 15% of the par amount outstanding for each policy issued by BAM, subject to certain limitations and restrictions.

BAM’s most recent Statutory Annual Statement, which has been filed with the New York State Insurance Department and posted on BAM’s website at www.buildamerica.com, is incorporated herein by reference and may be obtained, without charge, upon request to BAM at its address provided above (Attention: Finance Department). Future financial statements will similarly be made available when published.

BAM makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, BAM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding BAM, supplied by BAM and presented under the heading “BOND INSURANCE.”

Additional Information Available from BAM

Credit Insights Videos. For certain BAM-insured issues, BAM produces and posts a brief Credit Insights video that provides a discussion of the obligor and some of the key factors BAM’s analysts and credit committee considered when approving the credit for insurance. The Credit Insights videos are easily accessible on BAM’s website at buildamerica.com/creditinsights/. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.)

Credit Profiles. Prior to the pricing of bonds that BAM has been selected to insure, BAM may prepare a pre-sale Credit Profile for those bonds. These pre-sale Credit Profiles provide information about the sector designation (e.g. general obligation, sales tax); a preliminary summary of financial information and key ratios; and demographic and economic data relevant to the obligor, if available. Subsequent to

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closing, for any offering that includes bonds insured by BAM, any pre-sale Credit Profile will be updated and superseded by a final Credit Profile to include information about the gross par insured by CUSIP, maturity and coupon. BAM pre-sale and final Credit Profiles are easily accessible on BAM's website at buildamerica.com/obligor/. BAM will produce a Credit Profile for all bonds insured by BAM, whether or not a pre-sale Credit Profile has been prepared for such bonds. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.

Disclaimers. The Credit Profiles and the Credit Insights videos and the information contained therein are not recommendations to purchase, hold or sell securities or to make any investment decisions. Credit-related and other analyses and statements in the Credit Profiles and the Credit Insights videos are statements of opinion as of the date expressed, and BAM assumes no responsibility to update the content of such material. The Credit Profiles and Credit Insight videos are prepared by BAM; they have not been reviewed or approved by the issuer of or the underwriter for the Bonds, and the issuer and underwriter assume no responsibility for their content.

BAM receives compensation (an insurance premium) for the insurance that it is providing with respect to the Bonds. Neither BAM nor any affiliate of BAM has purchased, or committed to purchase, any of the Bonds, whether at the initial offering or otherwise.

THE DISSOLUTION ACT

The Dissolution Act requires the County Auditor-Controller to determine the amount of property taxes that would have been allocated to the Former Agency (pursuant to subdivision (b) of Section 16 of Article XVI of the State Constitution) had the Former Agency not been dissolved pursuant to the operation of AB x1 26, using current assessed values on the last equalized roll on August 20, and to deposit that amount in the Redevelopment Property Tax Trust Fund for the Successor Agency established and held by the County Auditor-Controller pursuant to the Dissolution Act. The Dissolution Act provides that any bonds authorized thereunder to be issued by the Successor Agency will be considered indebtedness incurred by the dissolved Former Agency, with the same legal effect as if the bonds had been issued prior to effective date of AB x1 26, in full conformity with the applicable provision of the Redevelopment Law that existed prior to that date, and will be included in the Successor Agency’s Recognized Obligation Payment Schedules.

The Dissolution Act further provides that bonds authorized thereunder to be issued by the Successor Agency will be secured by a pledge of, and lien on, and will be repaid from moneys deposited from time to time in the Redevelopment Property Tax Trust Fund, and that property tax revenues pledged to any bonds authorized to be issued by the Successor Agency under the Dissolution Act, including the 2016 Bonds, are taxes allocated to the Successor Agency pursuant to subdivision (b) of Section 33670 of the Redevelopment Law and Section 16 of Article XVI of the State Constitution.

Pursuant to subdivision (b) of Section 33670 of the Redevelopment Law and Section 16 of Article XVI of the State Constitution and as provided in a Redevelopment Plan, taxes levied upon taxable property in the Merged Project Area each year by or for the benefit of the State, any city, county, city and county, district, or other public corporation (herein sometimes collectively called “taxing agencies”) after the effective date of the ordinance approving such Redevelopment Plan, or the respective effective dates of ordinances approving amendments to the Redevelopment Plan that added territory to the Merged Project Area are to be divided as follows:

(a) To Taxing Agencies: That portion of the taxes which would be produced by therate upon which the tax is levied each year by or for each of the taxing agencies upon thetotal sum of the assessed value of the taxable property in the applicable project area asshown upon the assessment roll used in connection with the taxation of such property by

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such taxing agency last equalized prior to the effective date of the ordinance adopting the applicable Redevelopment Plan, or the respective effective dates of ordinances approving amendments to the Redevelopment Plan that added territory to the applicable project area (each, a “base year valuation”), will be allocated to, and when collected will be paid into, the funds of the respective taxing agencies as taxes by or for the taxing agencies on all other property are paid; and

(b) To the Former Agency/Successor Agency: Except for that portion of the taxes inexcess of the amount identified in (a) above that is attributable to a tax rate levied by ataxing agency for the purpose of producing revenues in an amount sufficient to makeannual repayments of the principal of, and the interest on, any bonded indebtednessapproved by the voters of the taxing agency on or after January 1, 1989 for theacquisition or improvement of real property, which portion shall be allocated to, andwhen collected shall be paid into, the fund of that taxing agency, that portion of the leviedtaxes each year following the Delivery Date, when collected will be paid into a specialfund of the Successor Agency. Section 34172 of the Dissolution Act provides that, forpurposes of Section 16 of Article XVI of the State Constitution, the RedevelopmentProperty Tax Trust Fund shall be deemed to be a special fund of the Successor Agency topay the debt service on indebtedness incurred by the Former Agency or the SuccessorAgency to finance or refinance the redevelopment projects of the Former Agency.

That portion of the levied taxes described in paragraph (b) above, less amounts deducted pursuant to Section 34183(a) of the Dissolution Act for permitted administrative costs of the County Auditor-Controller and required pass-through payments, constitutes the amount required under the Dissolution Act to be deposited by the County Auditor-Controller into the Redevelopment Property Tax Trust Fund. In addition, Section 34183 of the Dissolution Act effectively eliminates the January 1, 1989 date from paragraph (b) above.

SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS

Background

Prior to the enactment of the Dissolution Act, the Redevelopment Law authorized the financing of redevelopment projects through the use of tax increment revenues. This method provided that the taxable valuation of the property within a redevelopment project area on the property tax roll last equalized prior to the effective date of the ordinance which adopts the redevelopment plan becomes the base year valuation. Assuming the taxable valuation never dropped below the base year level, the taxing agencies receiving property taxes thereafter would receive only that portion of the taxes produced by applying then current tax rates to the base year valuation; the redevelopment agency was allocated the remaining portion of property taxes (i.e., the portion measured by applying then current tax rates to the increase in valuation over the base year valuation). Such “incremental tax revenues” allocated to a redevelopment agency were authorized to be pledged to the payment of redevelopment agency obligations, including the Prior Bonds.

The Dissolution Act

The Dissolution Act requires the County Auditor-Controller to determine the amount of property taxes that would have been allocated to the Former Agency (pursuant to subdivision (b) of Section 16 of Article XVI of the State Constitution) had the Former Agency not been dissolved pursuant to the operation of AB x1 26, using current assessed values on the last equalized roll on August 20, and to deposit that amount in the Redevelopment Property Tax Trust Fund for the Successor Agency established and held by the County Auditor-Controller pursuant to the Dissolution Act. The Dissolution Act provides that any bonds authorized thereunder to be issued by the Successor Agency will be considered

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indebtedness incurred by the dissolved Former Agency, with the same legal effect as if the bonds had been issued prior to effective date of AB x1 26, in full conformity with the applicable provision of the Redevelopment Law that existed prior to that date, and will be included in the Successor Agency’s Recognized Obligation Payment Schedules, as defined and described below.

The Dissolution Act further provides that bonds authorized thereunder to be issued by the Successor Agency will be secured by a pledge of, and lien on, and will be repaid from moneys deposited from time to time in the Redevelopment Property Tax Trust Fund, and that tax revenues pledged to any bonds authorized to be issued by the Successor Agency under the Dissolution Act, including the 2016 Bonds, are taxes allocated to the Successor Agency pursuant to subdivision (b) of Section 33670 of the Redevelopment Law and Section 16 of Article XVI of the State Constitution.

Recognized Obligation Payment Schedules

By February 1st of each year, the Dissolution Act requires successor agencies to prepare, and submit to the successor agency’s oversight board and the Department of Finance for approval, a Recognized Obligation Payment Schedule (the “Recognized Obligation Payment Schedule”) pursuant to which enforceable obligations (as defined in the Dissolution Act) of the successor agency are listed, together with the source of funds to be used to pay for each enforceable obligation. As defined in the Dissolution Act, “enforceable obligation” includes bonds, including the required debt service, reserve set-asides, and any other payments required under the indenture or similar documents governing the issuance of the outstanding bonds of the Former Agency, as well as other obligations such as loans, judgments or settlements against the former redevelopment agency, any legally binding and enforceable agreement that is not otherwise void as violating the debt limit or public policy, contracts necessary for the administration or operation of the successor agency, and amounts borrowed from a low and moderate income housing fund.

Under the Dissolution Act, the categories of sources of payments for enforceable obligations listed on a Recognized Obligation Payment Schedule are the following: (i) bond proceeds, (ii) reserve balances, (iii) administrative cost allowance, (iv) the Redevelopment Property Tax Trust Fund (but only to the extent no other funding source is available or when payment from property tax revenues is required by an enforceable obligation or otherwise required under the Dissolution Act), or (v) other revenue sources (including rents, concessions, asset sale proceeds, interest earnings, and any other revenues derived from the Former Agency, as approved by the Oversight Board). A reserve may be included on the Recognized Obligation Payment Schedule and held by the successor agency when required by the bond indenture or when the next property tax allocation will be insufficient to pay all obligations due under the provisions of the bond for the next payment due in the following six-month period.

The Dissolution Act provides that only those payments listed in the Recognized Obligation Payment Schedule may be made by the Successor Agency from the funds specified in the Recognized Obligation Payment Schedule. Each annual Recognized Obligation Payment Schedule may be amended once, provided that (i) the Agency submits the amendment to the Department of Finance no later than October 1, (ii) the Oversight Board makes a finding that the amendment is necessary for the payment of approved enforceable obligations during the second half of the Recognized Obligation Payment Schedule period (from January 1 to June 30, inclusive), and (iii) the Successor Agency may only amend the amount requested for payment of approved enforceable obligations. The Department of Finance is required to notify the Agency and the County Auditor-Controller as to whether the Successor Agency’s requested amendment is approved at least 15 days before the January 2 property tax distribution.

With respect to each Recognized Obligation Payment Schedule submitted by the Successor Agency, the Dissolution Act requires the Department of Finance to make a determination of the enforceable obligations and the amounts and funding sources available to pay approved enforceable obligations no later than April 15. Within five business days of the determination by the Department of

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Finance, the Successor Agency may request additional review by the Department of Finance and an opportunity to meet and confer on disputed items, if any. The Department of Finance will notify the Agency and the County Auditor-Controller as to the outcome of its review at least 15 days before the June 1 property tax distribution date preceding the applicable Recognized Obligation Payment Schedule period. Additionally, the County Auditor-Controller may review a submitted Recognized Obligation Payment Schedule and object to the inclusion of any items that are not demonstrated to be enforceable obligations and may object to the funding source proposed for any items, provided that the County Auditor-Controller must provide notice of any such objections to the Successor Agency, the Oversight Board and the Department of Finance at least 60 days prior to the next June 1 property tax distribution date.

The Successor Agency covenants that it will duly and punctually pay or cause to be paid the principal of and interest on the 2016 Bonds on the date, at the place and in the manner provided in the 2016 Bonds, and that it will take all actions required under the Health and Safety Code to include debt service on the 2016 Bonds on the applicable Recognized Obligation Payment Schedule.

The following table shows the Recognized Obligation Payment Schedule submission history for the Successor Agency.

Elimination of Housing Set-Aside

Pursuant to Sections 33334.2 and 33334.3 of the Redevelopment Law, redevelopment agencies were required to set aside not less than twenty percent of all tax increment revenues allocated to redevelopment agencies from redevelopment project areas adopted after December 31, 1976, in a low- and moderate-income housing fund to be expended for authorized housing purposes. Amounts on deposit in the low- and moderate-income housing fund could be applied to pay debt service on bonds, loans, or advances of redevelopment agencies to finance low- and moderate-income housing projects.

The Dissolution Act eliminated the requirement that twenty percent of tax increment revenue be set aside and used exclusively for purposes of providing low and moderate income housing. The 2016 Bonds are payable from amounts of tax increment revenue that prior to the Dissolution Act were required to be set aside for low and moderate income housing.

Table 1 Successor Agency to the Redevelopment Agency of the City of Watsonville

Merged Project Area Recognized Obligation Payment Schedule Submission History

ROPS Funding Period

Date on which ROPS was Approved

by Oversight Board

Date on which Approved ROPS was Submitted

to DOF

Deadline to Submit

ROPS to DOF

ROPS Submitted to

DOF On Time

ROPS I Jan-Jun 2012 Apr. 11, 2012 Apr. 11, 2012 Apr. 15, 2012 yes ROPS II Jul-Dec 2012 Apr. 24, 2012 Apr. 26, 2012 Apr. 15, 2012 no ROPS III Jan-Jun 2013 Aug. 15, 2012 Aug. 20, 2012 Sep. 01, 2012 yes ROPS 2013-14A Jul-Dec 2013 Feb. 26, 2013 Feb. 28, 2013 Mar. 01, 2013 yes ROPS 2013-14B Jan-Jun 2014 Sep. 09, 2013 Sep. 16, 2013 Oct. 01, 2013 yes ROPS 2014-15A Jul-Dec 2014 Feb. 19, 2014 Feb. 26, 2014 Mar. 01, 2014 yes ROPS 2014-15B Jan-Jun 2015 Sep. 17, 2014 Oct. 01, 2014 Oct. 01, 2014 yes ROPS 2015-16A Jul-Dec 2015 Feb. 25, 2015 Feb. 26, 2015 Mar. 01, 2015 yes ROPS 2015-16B Jan-Jun 2016 Sep. 16, 2015 Sep. 18, 2015 Oct. 01, 2015 yes ROPS 2016-17 Jul-Jun 2017 Jan. 20, 2016 Jan. 22, 2016 Feb. 1, 2016 yes

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Santa Cruz County Auditor-Controller

The County Auditor-Controller is responsible for accounting, auditing, accounts payable, payroll and property tax services for all governments, individuals and businesses she serves, including the County. The Dissolution Act assigns county auditors numerous responsibilities, including the responsibility to deposit tax increment revenues attributable to each successor agency into a Redevelopment Property Tax Trust Fund held in the county treasury in the name of each successor agency. Pursuant to the Dissolution Act, county auditors disburse funds from each Redevelopment Property Tax Trust Fund twice annually, on January 2 and June 1. Such amounts include pass-through payments to affected taxing entities, payments that are required to be paid from tax increment as approved on a Recognized Obligation Payment Schedule, and various administrative fees and allowances. Remaining Redevelopment Property Tax Trust Fund balances are distributed to affected taxing entities under a prescribed method that accounts for pass-through payments. County auditors are also responsible for distributing other moneys received from successor agencies (from sale of assets etc.) to the affected taxing entities.

The County calculates tax increment revenues by subtracting the base year tax revenues from current year revenues. The resulting amount of estimated revenue is then converted to a percentage of revenue to be received County-wide. The revenues actually available for distribution to the Successor Agency and other taxing entities are based on these County-wide ratios. It is the County’s practice to allocate 100 percent of secured revenues without deductions for tax delinquencies. Unsecured taxes are allocated based on actual collections. All taxes payable to the Successor Agency in a given fiscal year are affected by changes to taxable values or tax refunds, but such changes are allocated on a County-wide basis.

Before the County of Santa Cruz converts the Successor Agency’s increment to a countywide ratio, it computes and then deducts the amounts it calculates for the pass-through payments. It is the County’s practice to allocate actual tax increment payments on a net tax increment basis (tax increment after tax sharing obligations are deducted). The County then extrapolates the amount of gross tax revenue allocated and reports that amount to the State Department of Finance and the Successor Agency.

Sources of Payment for the 2016 Bonds

The Successor Agency has established and holds the Redevelopment Obligation Retirement Fund pursuant to Section 34170.5(a) of the Redevelopment Law. Except as provided in the Indenture with respect to indemnification of the Trustee, the 2016 Bonds and any Parity Debt will be equally secured by a pledge of, security interest in and lien on all of the Tax Revenues, including all of the Tax Revenues in the Redevelopment Obligation Retirement Fund and a first and exclusive pledge of, security interest in and lien upon all of the moneys in the Debt Service Fund, the Interest Account, the Principal Account, and the Redemption Account, without preference or priority for series, issue, number, dated date, sale date, date of execution or date of delivery.

The 2016 Bonds shall be additionally secured by a first and exclusive pledge of, security interest in and lien upon all of the moneys in the Reserve Account established under the Indenture. The 2016 Bonds shall be also equally secured by the pledge and lien created with respect to the 2016 Bonds by Section 34177.5(g) of the Redevelopment Law on the Tax Revenues deposited from time to time in the Redevelopment Property Tax Trust Fund. Except for the Tax Revenues and such moneys, no funds or properties of the Successor Agency shall be pledged to, or otherwise liable for, the payment of principal of or interest on the 2016 Bonds.

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Special Obligations

The 2016 Bonds are special obligations of the Successor Agency, secured by a pledge of, and are payable as to principal, interest and premium, if any, from Tax Revenues and other funds as provided in the Indenture. The 2016 Bonds are not a debt of the City, the County, the State or any of its political subdivisions (except the Successor Agency), and none of the City, the County, the State or any of its political subdivisions (except the Successor Agency) is liable thereon. The 2016 Bonds do not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction.

Flow of Funds

The Successor Agency has heretofore established the Redevelopment Obligation Retirement Fund pursuant to Section 34170.5(a) of the Redevelopment Law which the Successor Agency shall continue to hold and maintain so long as any of the 2016 Bonds are Outstanding. Promptly upon receipt of Tax Revenues, the Successor Agency shall deposit all Tax Revenues into the Redevelopment Obligation Retirement Fund.

Tax Revenues received during each Bond Year (on January 2 and June 1 or any other dates during the Bond Year) shall be promptly transferred by the Successor Agency to the Trustee in an amount equal to the principal of and interest on the 2016 Bonds due during such Bond Year (i.e. February 1 and August 1) plus any amounts due in such Bond Year, as described in the Indenture. After the full amount required to be transferred to the Trustee for each Bond Year has been received by the Trustee, Tax Revenues received by the Successor Agency in such Bond Year shall be released from the pledge and lien hereunder and shall be applied in accordance with the Redevelopment Law, including but not limited to the payment of debt service on any Subordinate Debt. Prior to the payment in full of the principal of and interest and redemption premium (if any) on the 2016 Bonds and the payment in full of all other amounts payable hereunder and under any Supplemental Indentures, the Successor Agency shall not have any beneficial right or interest in the moneys on deposit in the Redevelopment Obligation Retirement Fund, except as may be provided in the Indenture and in any Supplemental Indenture.

There is established under the Indenture a trust fund to be known as the “Debt Service Fund,” which shall be held by the Trustee under the Indenture in trust. The Trustee shall deposit Tax Revenues received from the Successor Agency in the Debt Service Fund. Amounts in the Debt Service Fund shall be transferred by the Trustee in the following amounts, in the following order of priority, at the following times, into the following respective special accounts, which are hereby established in the Debt Service Fund:

Interest Account. On or before the fifth (5th) Business Day preceding each Interest Payment Date, the Trustee shall transfer and deposit in the Interest Account an amount which, when added to the amount contained in the Interest Account on that date, will be equal to the aggregate amount of the interest becoming due and payable on the Outstanding 2016 Bonds on such Interest Payment Date. No such deposit need be made to the Interest Account if the amount contained therein is at least equal to the interest to become due on the next succeeding Interest Payment Date upon all of the Outstanding 2016 Bonds. All moneys in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the 2016 Bonds as it shall become due and payable.

Principal Account. On or before the fifth (5th) Business Day preceding each August 1 on which the principal of the 2016 Bonds becomes due and payable, and at maturity, the Trustee shall transfer and deposit in the Principal Account an amount which, when added to the amount then on deposit in the Principal Account, will be equal to the amount of principal coming due and payable on such date on the 2016 Bonds. No such deposit need be made to the Principal Account if the amount contained therein is at least equal to the principal to become due on the next August 1 on all of the Outstanding 2016 Bonds and any Parity Debt. All moneys in the Principal Account shall be used and withdrawn by the Trustee solely

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for the purpose of paying the principal of the 2016 Bonds and any Parity Debt as it shall become due and payable.

Reserve Account. There is established in the Debt Service Fund a separate account known as the “Reserve Account” solely as security for payments payable by the Successor Agency pursuant to the Indenture, which shall be held by the Trustee in trust for the benefit of the Owners of the 2016 Bonds. The Reserve Requirement for the 2016 Bonds will be satisfied by the delivery of the 2016 Reserve Policy by the 2016 Bond Insurer on the date of delivery of the 2016 Bonds. The Successor Agency will have no obligation to replace the 2016 Reserve Policy or to fund the Reserve Account with cash if amounts are not available under the 2016 Reserve Policy or if any rating with respect to the 2016 Bond Insurer is downgraded or revoked. The 2016 Reserve Policy is a Qualified Reserve Account Credit Instrument under the Indenture.

All money in the Reserve Account from draws on the 2016 Reserve Policy shall be used and withdrawn by the Trustee solely for the purpose of making transfers to the Interest Account and the Principal Account, in the event of any deficiency at any time in any of such accounts.

Redemption Account. On or before the Business Day preceding any date on which 2016 Bonds are to be redeemed, the Trustee shall withdraw from the Debt Service Fund any amount transferred by the Successor Agency pursuant to the optional redemption provisions of the Indenture for deposit in the Redemption Account, such amount being the amount required to pay the principal of and premium, if any, on the 2016 Bonds to be redeemed on the applicable redemption date. All moneys in the Redemption Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of and premium, if any, on the 2016 Bonds to be optionally redeemed on the date set for such redemption. Interest due on 2016 Bonds to be redeemed on the date set for redemption shall, if applicable, be paid from funds available therefor in the Interest Account.

Statutory Pass-Through Payments

Sections 33607.5, 33607.7 and 33676 of the Redevelopment Law require that a portion of the tax increment revenues in redevelopment project areas be distributed to the taxing agencies whose territory is located within a project area to alleviate the financial burden or detriment caused by the redevelopment project (“Statutory Pass-Through Payments”). The major Statutory Pass-Through Payment, in terms of dollars payable, is the requirement to pass through about 24 percent of revenues for the 2000 Amendment Sub-Area Area, or $1.1 million for Fiscal Year 2015-16. The remaining payments are relatively small and are payable from tax revenues generated by the Central and Westside Sub-Area Areas. All Statutory Pass-Through Payments are senior to the Successor Agency’s obligation to pay debt service on the 2016 Bonds and total approximately $1.28 million for Fiscal Year 2015-16.

Pass-Through Agreements

The Former Agency entered into agreements in May 1992 with the County (the “County Agreement”) and the Pajaro Storm Drain Maintenance District (the “Pajaro District Agreement”) pursuant to former Section 33401 of the Health and Safety Code (together, the “Pass-Through Agreements”). Under the Pass-Through Agreements, the Successor Agency agrees to pay to the County and to the Pajaro District 100 percent of their respective share of tax revenues from the Central and Westside Sub-Area Areas. Together, the Agreements require that the Agency pass through approximately 25.8% of gross tax revenue generated from within the two Project Areas. For Fiscal Year 2015-16, the amount is estimated to equal $894,000. While not specifically defined in the County Agreement, the County is retaining the reimbursement revenues for all taxing entities governed by the Board of Supervisors of the County. Those taxing entities include the County General Fund and the Santa Cruz County Flood Control District. The Successor Agency’s obligations under the Pass-Through Agreements are senior to the Successor Agency’s obligation to pay debt service on the 2016 Bonds.

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Certain Covenants of the Successor Agency

The Indenture contains the following specific covenants of the Successor Agency, among others:

Punctual Payment. The Successor Agency will punctually pay or cause to be paid the principal and interest to become due in respect of all the 2016 Bonds together with the premium thereon, if any, in strict conformity with the terms of the 2016 Bonds and of the Indenture. The Successor Agency shall faithfully observe and perform all of the conditions, covenants and requirements of the Indenture and all Supplemental Indentures and the 2016 Bonds. Nothing in the Indenture will prevent the Successor Agency from making advances of its own moneys howsoever derived to any of the uses or purposes referred to in the Indenture. Compliance with the Redevelopment Law; Recognized Obligation Payment Schedules. (a) The Successor Agency shall comply with all of the requirements of the Redevelopment Law. Pursuant to Section 34177 of the Redevelopment Law, not later than each date a Recognized Obligation Payment Schedule is due, the Successor Agency shall submit to the Oversight Board and the Department of Finance, a Recognized Obligation Payment Schedule. The Successor Agency shall take all actions required under the Redevelopment Law to include in the Recognized Obligation Payment Schedule for each Bond Year (i) Annual Debt Service on the 2016 Bonds and any Parity Debt (ii) all amounts (if any) required to cure any deficiency in the Reserve Account and (iii) all amounts due and owing to the 2016 Bond Insurer hereunder, so as to enable the County Auditor-Controller to distribute such amounts from the Redevelopment Property Tax Trust Fund for deposit in the Redevelopment Obligation Retirement Fund on each January 2 and June 1, as applicable. “Bond Year” means, any twelve-month period beginning on August 2 in any year and ending on the next succeeding August 1, both dates inclusive, except that the first Bond Year will begin on the Delivery Date, and end on August 1, 2016. (b) Prior to October 1, 2016, the Successor Agency shall cause the Recognized Obligation Payment Schedule for Fiscal Year 2016-17 to be amended to provide that Tax Revenues to be received by the Successor Agency on January 2, 2017 will be sufficient to pay principal of and interest on the 2016 Bonds due on February 1, 2017 and August 1, 2017. (c) To ensure that amounts are available for the Trustee to pay Annual Debt Service on all Outstanding 2016 Bonds and all amounts due and owing to the 2016 Bond Insurer hereunder on a timely basis, not later than February 1 of each year (or such other time as may be required by the Dissolution Act), commencing February 1, 2017 for the Bond Year beginning on August 2, 2017, the Successor Agency shall submit an Oversight Board-approved Recognized Obligation Payment Schedule to the Department of Finance and to the County Auditor-Controller that shall include:

(i) all of the debt service due on all Outstanding 2016 Bonds on February 1 and August 1 of the Bond Year ending on August 1 of the next calendar year, which amount shall be distributed in full to the Successor Agency on January 2 of such year, and (ii) any amount required to cure any deficiency in the Reserve Account pursuant to the Indenture (including any amounts required due to a draw on the Qualified Reserve Account Credit Instrument as well as all amounts due and owing to the 2016 Bond Insurer under the Indenture).

In addition to the amounts described in clauses (i) and (ii) of the previous paragraph, if the amount of Tax Revenues distributed to the Successor Agency on January 2 in any year is less than the sum of the amounts specified in clauses (i) and (ii) of the previous paragraph, then not later than February 1 of such year (or on such other date as may be required by the Dissolution Act), the Successor Agency

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shall submit an Oversight Board-approved Recognized Obligation Payment Schedule to the Department of Finance and to the Santa Cruz County Auditor-Controller that shall include the balance due to the Successor Agency, which amount shall be distributed in full to the Successor Agency on June 1 of such year.

(c) If the provisions set forth in the Dissolution Act as of the Delivery Date of the 2016Bonds that relate to the filing of Recognized Obligation Payment Schedules are amended or modified in any manner, the Successor Agency covenants that it shall use commercially reasonable efforts to take all actions necessary to ensure the Agency receives on January 2 of each year from moneys deposited into the Redevelopment Property Tax Trust Fund, sufficient Tax Revenues to pay all Annual Debt Service due on all Outstanding 2016 Bonds during such Bond Year.

(d) If any amounts then due and payable to the 2016 Bond Insurer under the Indenture arenot included on any current Recognized Obligation Payment Schedule and the Successor Agency is then legally permitted to amend such Recognized Obligation Payment Schedule, the Successor Agency will submit to the Oversight Board and the Department of Finance a request to amend such Recognized Obligation Payment Schedule to include such amounts then due and payable to the 2016 Bond Insurer.

(e) The Successor Agency will not submit to the Oversight Board and the Department ofFinance a request for the final amendment permitted for its Last and Final Recognized Obligation Payment Schedule pursuant to Section 34191.6 without the prior written consent of the 2016 Bond Insurer, unless all amounts that could become due and payable to the 2016 Bond Insurer under the Indenture would be included as a line item on the Last and Final Recognized Obligation Payment Schedule following approval of the requested amendment.

Dissolution Act Invalid; Maintenance of Tax Revenues. If the applicable property tax revenues provisions of the Dissolution Act are determined by a court in a final judicial decision to be invalid and, in place of the invalid provisions, provisions of the Redevelopment Law or the equivalent become applicable to the 2016 Bonds, the Successor Agency shall comply with all requirements of the Redevelopment Law or the equivalent to ensure 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, in the case of amounts payable by the State, appropriate officials of the State.

See APPENDIX A – “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE.”


The Successor Agency is a public body, corporate and politic, existing under and by virtue of the Redevelopment Law and is governed by a seven-member board (the “Board”) which consists of all members of the City Council. The Former Agency was activated in 1972.

On June 29, 2011, AB X1 26 was enacted as Chapter 5, Statutes of 2011, together with a companion bill, AB X1 27. AB X1 26 provided for the dissolution of all redevelopment agencies, but also permitted redevelopment agencies to avoid such dissolution by the payment of certain amounts. A lawsuit was brought in the California Supreme Court, California Redevelopment Association, et al., v. Matosantos, et al., 53 Cal. 4th 231 (Cal. 2011), challenging the constitutionality of AB X1 26 and AB X1 27. In its December 29, 2011 decision, the California Supreme Court largely upheld AB X1 26, invalidated AB X1 27, and held that AB X1 26 may be severed from AB X1 27 and enforced independently. As a result of AB X1 26 and the decision of the California Supreme Court in the California Redevelopment Association case, as of February 1, 2012, all redevelopment agencies in the State were dissolved, including the Former Agency, and successor agencies were designated as successor

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entities to the former redevelopment agencies to expeditiously wind down the affairs of the former redevelopment agencies. The Department of Finance conducted a review of the Successor Agency’s documentation and issued its Finding of Completion on February 21, 2014.

The City Council, pursuant to Resolution No. 4-12 (CM), adopted on January 10, 2012, elected to serve as the Successor Agency to the Former Agency. Subdivision (g) of Section 34173 of the Dissolution Act, added by AB 1484, expressly affirms that the Successor Agency is a separate public entity from the City, that the two entities shall not merge, and that the liabilities of the Former Agency will not be transferred to the City nor will the assets of the Former Agency become assets of the City.

Members and Officers

The members of the Successor Agency Board (the “Board”) and the expiration dates of their terms are as follows:

Name and Office Expiration of Term

Felipe Hernandez, Chairman November 2016 Karina Cervantez Alejo, Vice-Chairman November 2016

Lowell Hurst, Member November 2018 Jimmy Dutra, Member November 2018

Rebecca J. Garcia, Member November 2018 Trina Coffman-Gomez, Member November 2016 Dr. Nancy A. Bilicich, Member November 2018

Successor Agency Powers

All powers of the Successor Agency are vested in the Board. Pursuant to the Dissolution Act, the Successor Agency is a separate public body from the City and succeeds to the organizational status of the Former Agency but without any legal authority to participate in redevelopment activities, except to complete any work related to an approved enforceable obligation. The Successor Agency is tasked with expeditiously winding down the affairs of the Former Agency, pursuant to the procedures and provisions of the Dissolution Act. Under the Dissolution Act, many Successor Agency actions are subject to approval by the Oversight Board, as well as review by the Department of Finance. The State has strict laws regarding public meetings (known as the Ralph M. Brown Act) which generally make all Successor Agency and Oversight Board meetings open to the public in similar manner as City Council meetings.

Previously, Section 33675 of the Redevelopment Law required the Former Agency to file not later than the first day of October of each year with the County Auditor-Controller a statement of indebtedness certified by the chief fiscal officer of the Former Agency for each redevelopment plan which provides for the allocation of taxes (i.e., the Redevelopment Plans). The statement of indebtedness was required to contain the date on which the bonds were delivered, the principal amount, term, purposes and interest rate of the bonds and the outstanding balance and amount due on the bonds. Similar information was required to be given for each loan, advance or indebtedness that the Former Agency had incurred or entered into which is payable from tax increment. Section 33675 also provided that payments of tax increment revenues from the County Auditor-Controller to the Former Agency could not exceed the amounts shown on the Former Agency’s statement of indebtedness. The Dissolution Act eliminated this requirement and provides that, commencing on the date the first Recognized Obligation Payment Schedule is valid thereunder, the Recognized Obligation Payment Schedule supersedes the statement of indebtedness previously required under the Redevelopment Law, and commencing from such date, the statement of indebtedness will no longer be prepared nor have any effect under the Redevelopment Law. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS – Recognized Obligation Payment Schedule.”

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THE MERGED PROJECT AREA

Merged Project Area Components

The Merged Project Area encompasses 1,830 non-contiguous acres representing 44% of the City’s total land area. Total Fiscal Year 2015-16 taxable assessed value within the Merged Project Area equals $1,308,696,878. Primary land uses within the Merged Project Area are diversified among residential (31.4%), commercial (28.4%) and industrial (24.9%). The ten largest taxpayers within the Merged Project Area comprise 15.1% of total assessed value and the leading taxpayers include food processing plants and warehousing facilities. From Fiscal Year 2005-06 through Fiscal Year 2015-16, the rate of growth in Merged Project Area total assessed value has averaged 2.04% per year.

The Merged Project Area consists of three formerly independent subareas: the Central Downtown Redevelopment Project subarea (the “Central Sub-Area”), the Westside Industrial Redevelopment Project subarea (the “Westside Sub-Area”) and the 2000 Amendment Sub-Area.

History of the Three Subareas. Both the Central Sub-Area and the Westside Sub-Area were originally formed pursuant to redevelopment plans adopted by the City Council of the City on July 10, 1973. Then on May 12, 1992, the Central Sub-Area and the Westside Sub-Area were combined pursuant to Ordinances Nos. 893-92 and 892-92, respectively (together, the “1992 Amendment”). In addition to combining the Central and Westside subareas, the 1992 Amendment added the Downtown Added Area (5.4 acres) and the Westside Added Area (10.7 acres).

On July 27, 2000, the combined Central and Westside subareas, together with the Downtown and Westside Added Areas, were further expanded the include the 2000 Amendment Sub-Area pursuant to Ordinance No. 1092-00 of the City to form what is now called the Merged Project Area.

The following table sets forth the assessed values and incremental value for the Central Sub-Area, Westside Sub-Area and 2000 Amendment Sub-Area components of the Merged Project Area.


Sub-Areas of the Merged Project Area Fiscal Year 2015-16 Assessed Values and Incremental Values

Description

2000 Amendment

Sub-Area Central(1) Sub-Area

Westside(2) Sub-Area

Merged Project Area

Assessed Value

Secured Total $773,075,954 $137,809,034 $238,517,784 $1,149,402,772

Unsecured Total 117,508,230 8,702,744 33,083,132 159,294,106

Total Assessed Value 890,584,184 146,511,778 271,600,916 1,308,696,878

Less: Base Year 425,484,116 23,473,678 47,469,975 496,427,769

Incremental Value $465,100,068 $123,038,100 $224,130,941 $ 812,269,109 _________________ Source: DHA Consulting, LLC. (1) Includes the Central Sub-Area and the Downtown Added Area.(2) Includes the Westside Sub-Area and the Westside Added Area.

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2000 Amendment Sub-Area. The 2000 Amendment Sub-Area is the largest sub-area, accounting for 1,280 acres or 70% of the entire land area within the Merged Project Area, and 68.1% of Merged Project Area Fiscal Year 2015-16 total assessed value. The 2000 Amendment Sub-Area area contains a mix of uses, including commercial, residential, industrial, and the City-owned Watsonville Municipal Airport (the “Airport”). Primary land uses in the 2000 Amendment Sub-Area include commercial/office (37.25% of assessed value), industrial (11.51% of assessed value) and residential (47.18% of assessed value). From Fiscal Year 2005-06 through Fiscal Year 2015-16, the rate of growth in 2000 Amendment Sub-Area total assessed value averaged 2.52% per year. The largest 2015-16 local secured taxpayers in the 2000 Amendment Sub-Area include HD Development of Maryland Inc., which is a subsidiary of Home Depot, and a shopping center owned by Richard H. Allen. Home Depot is located near the Airport at the corner of Loma Prieta Ave. and S. Green Valley Road and provides building materials, home improvement supplies, appliances and lawn and garden products.

Watsonville Municipal Airport The Airport is located on the northwest side of the City in the 2000 Amendment Sub-Area and accounts for approximately 40 percent of all general aviation activities in the Monterey Bay area. The City owns and operates the Airport. The Airport principally serves a general aviation fleet ranging from jet aircraft and turboprop aircraft to twin-engine and single-engine non-jet aircraft varying in size. A terminal/administration building occupies approximately 4,500 square feet and the Airport hosts more than 330 aircraft in 230 hangars and 80 tie down spots. There is also a significant helicopter operation at the airport including a helicopter flight school and sightseeing charter flights. The Airport also hosts a substantial skydiving operation, which accounts for approximately 3,000 aircraft operations per year. In addition, Coast Guard helicopter and military helicopter operations occur throughout the year at the Airport. While the Airport itself does not directly contribute to the secured assessed value in the Merged Project Area, aircraft are included in the unsecured values disclosed in this Official Statement. The Airport contributes to the general economy of the Merged Project Area.

Central Sub-Area. The Central Sub-Area accounts for 11.2% of Merged Project Area 2015-16 total assessed value, and primary land uses include commercial/office (63.46% assessed value) and residential (32.91% assessed value). From 2005-06 through 2015-16, the rate of growth in Central Sub-Area total assessed value has averaged 1.95% per year.

The Central Sub-Area, including the Downtown Added Area, consists primarily of commercial development in the old town center of the City. In the Central Sub-Area, current development activity primarily consists of redeveloping under-utilized parcels. For example, McDonald’s assembled three parcels in 2015 on Main Street and opened a new 4,278 square feet restaurant with 36 parking spaces and a drive-through facility. The restaurant replaced existing structures that were abandoned. Among the largest 2015-16 local secured taxpayers in the Central Sub-Area are Ramiro and Stella Romo, who own a restaurant and other properties with shops and offices, and Pajaro Wall Street Inn LLC, which operates apartment buildings.

Westside Sub-Area. The Westside Sub-Area accounts for 20.8% of Merged Project Area 2015-16 total assessed value, and primary land uses include industrial (84.53% assessed value), commercial/office (9.98% assessed value) and residential (2.84% assessed value). From 2005-06 through 2015-16, the rate of growth in Westside Sub-Area total assessed value has averaged 0.64% per year.

The Westside Sub-Area consists primarily of food processing industrial uses, clustered along West Beach Street in the City. Among the largest 2015-16 local secured taxpayers in the Westside Sub-Area are Terminal Freezers LLC, which provides public refrigerated warehousing and a range of storage and distribution services, Granite Construction Company and S. Martinelli & Company. Granite Construction Company provides construction services in mining, earthwork, water/sewer, power, tunneling, rail, highway and bridge construction. The company also produces construction materials - sand, gravel, ready-mix, recycled asphalt product and asphalt concrete. S. Martinelli & Company is a food processing company that produces apple juice and cider. S. Martinelli & Company has two production

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facilities in the City, totaling over 450,000 square feet on twenty acres. According to the company, approximately 200 people are employed from the local community.

Adjacent to the Westside Sub-Area, but not included in the Merged Project Area, is the planned development of a new Federal Express package distribution facility, that may indirectly benefit the Westside Sub-Area. Federal Express has proposed a 195,000-square-feet facility on 25.8 acres between Highway 1, the Seaview Ranch housing complex and Ohlone Parkway. The new facility will be built on a 25 acre site and will replace Federal Expresses’ existing facility located at 165 Technology Drive. The new facility is expected to provide 300 to 600 jobs and to spur the development of an additional 70 acres of real property as a result of improved infrastructure.

Recent and Planned Development in the Merged Project Area. In the past year, development in the Merged Project Area has consisted of beneficial infill development, including the following projects:

a new McDonalds restaurant, described above;

an AutoZone, located at 33 West Lake Avenue;

a 19,0000 square feet tractor supply company, located at 580 Auto Center Drive;

a non-profit health clinic, located at 204 East Beach;

a 40,000 square feet medical office building, located at 498 Technology Drive; and

a new large jewelry store.

In addition, there are approximately 130 new housing units in the Merged Project Area that were completed in the past year or that are currently under construction, including approximately 70 units designated for low or very low income housing. A 50-unit apartment complex is expected to be completed downtown in mid-2017.

The Successor Agency expects at least three new nationally flagged hotels to be constructed in the Merged Project Area sometime in the next few years. Two of the hotels would be located at the corner of Leigh and Beach on a former aluminum factory site of approximately 7.5 acres. Approximately $4 million has been spent to complete environmental remediation for the site. In addition to the hotels on the property, 20,000 square feet of retail space is planned, together with a 5-pump gas station. Another hotel, with approximately 90 rooms is planned on a greenfield site in the City at 375 Technology Drive. A fourth hotel, with approximately 75 rooms is also possible, provided that necessary rezoning is completed to accommodate the project.

The Successor Agency also anticipates the repurposing of a bus depot at 25 Sakata Lane for the consolidation of Lakeside Organic Foods cooler and office operations in a 112,000 square feet facility.

The Redevelopment Plan

The Redevelopment Plan for the Merged Project Area, adopted pursuant to the Redevelopment Law (Section 33000 of the Health and Safety Code) and approved by the City Council of the City by Ordinance No. 1092-00, effective July 27, 2000 (the “Redevelopment Plan”), amended and restated the existing redevelopment plans. 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 Redevelopment Plan for the Merged Project Area provides, among other things, the following major goals:

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A. The elimination of blighting influences and the correction of environmental deficiencies in the Merged Project Area, including, among others, small and irregular lots, obsolete and aged building types, depreciated property values and impaired investments, incompatible and uneconomic land uses, and inadequate or deteriorated public improvements, facilities and utilities.

B. The assembly of land into parcels suitable for modern, integrated development with improved pedestrian and vehicular circulation in the Merged Project Area.

C. The replanning, redesign and development of undeveloped or underdeveloped areas which are stagnant or improperly utilized.

D. The providing of opportunities for participation by owners and tenants in the revitalization of their properties.

E. The strengthening of retail and other commercial functions in the Merged Project Area.

F. The strengthening of the economic base of the Merged Project Area and the community by the installation of needed site improvements to stimulate new commercial and industrial expansion, employment and economic growth.

G. The provision of adequate land for parking and open spaces.

H. The establishment and implementation of performance criteria to assure high site design standards and environmental quality and other design elements which provide unity and integrity to the entire Merged Project Area.

I. The expansion, improvement, and preservation of the community's supply of low- and moderate-income housing.

J. The encouragement of active and continuous participation of Merged Project Area occupants in the formation, refinement, and implementation of the Redevelopment Plan, in order to ensure that Redevelopment Plan proposals are beneficial to the people who live and work within the Merged Project Area, as well as the community in general.

Pursuant to the Redevelopment Plan, the Former Agency undertook redevelopment activities in the Merged Project Area.

No Redevelopment Plan Limitations

The Redevelopment Plan sets forth various limitations that are no longer operative with the passage of SB 107. SB 107, which became effective September 22, 2015, amended the Dissolution Act to provide that the time limits for receiving property tax revenues and the limitation on the amount of property tax revenues that may be received by the Former Agency and the Successor Agency set forth in the Redevelopment Plan are not effective for purposes of paying the Successor Agency’s enforceable obligations. Accordingly, the projections set forth in this Official Statement were prepared without regard to the time and financial limitations set forth in the Redevelopment Plan for the Merged Project Area.

Land Use

There are various land uses within the Merged Project Area. The Central Sub-Area consists primarily of commercial development in the old town center of the City within the Merged Project Area. This development contains dense strip commercial uses along Main Street, with some residential uses along the commercial fringe. In the Central Sub-Area, current development is primarily redevelopment of

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under-used parcels that are largely already developed. The Westside Sub-Area consists primarily of food processing industrial uses, clustered along West Beach Street within the Merged Project Area. There are many opportunities for development in this area of under-used parcels that are already developed. In particular, there are opportunities for reuse of packing sheds and food processing facilities. The area added by the 2000 Amendment Sub-Area contains a mix of uses, including commercial, residential, industrial and the Airport. For a discussion of the Airport, see “– Merged Project Area Components – 2000 Amendment Sub-Area – Watsonville Municipal Airport” above.

The following table shows the assessed valuation for different categories of land uses within the Merged Project Area:


Merged Project Area Assessed Values by Land Use

Fiscal Year 2015-16

Category Number of

Assessments(1) % of Total

Assessments Total Value

% of Total Value

Residential 1,538 38.7% $ 410,327,099 31.4% Commercial 453 11.4% 371,201,541 28.4%Industrial 189 4.8% 325,806,129 24.9%Recreational 9 0.2% 3,692,870 0.3%Institutional 25 0.6% 9,252,850 0.7% Vacant Land 141 3.5% 27,665,330 2.1%Unsecured 1,577 39.7% 159,294,106 12.2% Cross Reference(2) 4 0.1% 231,902 0.0%Other 37 0.9% 1,193,931 0.1% Total 3,975 100.0% $1,308,727,998 100.0%

_________________ Source: DHA Consulting, LLC, Santa Cruz County Assessor’s Records. (1) Includes the number of secured and unsecured assessments, which totals more than the number of parcels in theMerged Project Area.(2) May include escaped assessments, possessory interest and other assessments that are cross-referenced to securedparcel numbers.

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Largest Taxpayers

The following table shows the ten largest taxpayers in the Merged Project Area based on the assessment roll for the 2015-16 tax year:


Merged Project Area Major Assessees - Secured and Unsecured

No. Assessee UseNo. of

Assmts. 2015-16

Assessed Value

Percentage of Total Assessed

Value

Percentage of Total

Increment

1 Martinelli and Company (1) Food Processing Plant 7 $ 40,014,620 3.06% 4.93%

2 Harvest Drive Properties LLC Warehousing and Processing 2 20,112,475 1.54% 2.48%

3 HD Development of Maryland (Home Depot) Retail Home Improvement 2 18,990,184 1.45% 2.34%

4 Freedom Associates Light Industrial 17 18,476,039 1.41% 2.27%

5 WRI Freedom Center LP Shopping Center 2 18,227,170 1.39% 2.24%

6 Terminal Freezers Industrial 5 18,006,246 1.38% 2.22%

7 Fox Factory Inc. Unsecured 1 16,147,338 1.23% 1.99%

8 Richard H. Allen Successor Trustee Commercial Retail 3 16,002,840 1.22% 1.97%

9 Del Mar Food Products Processing Plant; Automotive 2 15,996,330 1.22% 1.97%

10 Granite Construction Company Office/Industrial 11 15,257,242 1.17% 1.88%

52 $ 197,230,484 15.07% 24.28%

Total Project Assessed Value $1,308,696,878

Total Incremental Assessed Value $ 812,269,109

_________________ Source: DHA Consulting, LLC, Santa Cruz County Assessor’s Records. (1) Includes Martinelli Company Products, LLC and S. Martinelli and Company, Inc. Assessed Values and the Real Estate Market

Assessed values are impacted, at least indirectly, by the general economy and real estate market conditions. Because of the peculiarities of property tax assessment in the State, only properties that change ownership or undergo new construction are subject to an increased assessment beyond the 2 percent increase allowed under Proposition 13 for property tax purposes. The real estate market in California experienced unprecedented declines in the values for residential, commercial and other types of property beginning in 2007. By 2011, the median sales prices for single family homes in the County had declined by 58 percent from the sales prices in 2006. The assessed values for a number of properties in the City were reduced by the County Assessor commencing in Fiscal Year 2008-09 to reflect reduced market values for real estate. These reductions were offset, at least in part, by increases in other types of property transactions. The impacts of these reductions by the County were greatest for residential properties, but commercial and industrial properties also experienced market declines and assessed value reductions.

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Since 2011, real estate prices for single family homes have been increasing each year with the median sales prices in 2015 representing a 61 percent increase above 2011 levels. The 2015 median price of $420,000 is still below the 2006 median price of $623,000. No forecast of future economic or real estate conditions within the Merged Project Area has been conducted. However, widespread valuation reductions for residential properties are not anticipated by the Redevelopment Consultant in the foreseeable future. The following table shows historical housing median sales prices for the past ten years.


Merged Project Area Historical Housing Sales Prices

Calendar Year

Number Units Sold

Median Sales Prices % Change in Price Current Year Prior Year

2006 866 $623,250 $620,000 0.5%2007 400 560,000 623,250 -10.12008 576 345,000 560,000 -38.42009 703 261,500 345,000 -24.22010 522 275,000 261,500 5.22011 525 260,000 275,000 -5.52012 584 279,000 260,000 7.32013 502 333,000 279,000 19.42014 442 410,000 333,000 23.12015 505 420,000 410,000 2.4

_________________ Source: CoreLogic; Provided by DQNews.

Tax Rates

In 1978 when Proposition 13 was passed, special provisions were made for cities levying taxes for a pension levy. These cities were allowed to treat their pension levies as voter approved debts that were converted to override rates (rates in excess of 1.0 percent) in the implementation of Proposition 13: Watsonville was one of these cities. The difference between a typical voter approved debt and pension levies is that debt issues have fixed payment schedules that eventually mature, and pension levies do not. As a result, the City of Watsonville can continue to levy its override rate as long as it has pension obligations to fund. Historically, the pension levy in Watsonville has ranged from a high of 0.1440% to the Fiscal Year 2014-15 rate of about 0.077%. In Fiscal Year 2007-08 through Fiscal Year 2014-15 the tax rate for the Merged Project Area was 1.077%, which included the 1.0% rate, the pension levy at 0.77% and no other eligible debt service rates.

Starting with Fiscal Year 2015-16, the County is depositing property tax revenues for the Successor Agency into the Redevelopment Property Tax Trust Fund based a 1.0% tax rate, in accordance with SB 107, which was enacted in 2015. SB 107, among other things, amended Section 34183(a)(1)(B) to provide that “[n]otwithstanding subdivision (b) of Section 33670, that portion of the taxes in excess of the identified in subdivision (a) of Section 33670, which are attributable to a property tax approved by the voters of a city . . . to make payments in support of pension programs or . . . , and levied in addition to the property tax rate limited by [Proposition 13] shall be allocated to and when collected shall be paid into the fund of that taxing entity, unless the amounts in question are pledged as security for the payment of any indebtedness obligation, as defined in subdivision (e) of Section 34171, and needed for payment thereof.”

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Appeals; Proposition 8 Reductions

In California, taxpayers may appeal their property tax assessments. There are two basic types of appeals: a Proposition 8 appeal and a base year appeal. A Proposition 8 appeal is based on Section 51 of the Revenue and Taxation Code of the State and allows for temporary reductions in the taxes paid on properties because the assessed value of a property somehow becomes higher than its actual market value. This can be the result of the damage or removal of property, or general reduction in real estate values. Once the property damage is restored, or the real estate market improves, an assessment subject to Proposition 8 reduction can be returned to its pre-appeal value. The second type of appeal is a base year assessment appeal where owners challenge the original or base year valuation assigned by the Assessor. Any reduction resulting from a base year assessment appeal is permanent and can only increase above the allowable inflationary adjustment if the property is sold or experiences new construction.

There are also two primary methods for achieving a reduction in the valuation of property. One way is for the applicant to file a formal or informal assessment appeal application; the other way is for the Assessor’s office to process an “automatic” assessment reduction. Any automatic reduction would almost always be a Proposition 8 appeal, although filed appeals can be either Proposition 8 or base year appeals.

Automatic Assessment Appeals. Starting in Fiscal Year 2008-09, the County, like many other counties throughout California, began processing temporary assessed value reductions for certain properties (Proposition 8 reductions in response to declining residential real estate values). These reductions were made on properties where the assessed values exceeded the current market value of properties as of the tax lien date (January 1) without prompting from individual taxpayers. The County reviewed residential properties of up to 3 units which transferred ownership starting in January 1, 2000 and made reductions to residential properties judged to be above the then market value in each year from 2008-09 through 2012-13. County-wide approximately 25,000 automatic reductions were made to residential properties. Proposition 8 reversals (i.e., assessed value increases to previously reduced properties) which occurred in Fiscal Year 2013-14 through Fiscal Year 2015-16 has reduced that number to about 12,000. The County, however, does not report the number of properties that received automatic reductions in the Merged Project Area or the amount of such reductions. As such, an estimate of the number of properties that received automatic reductions in Merged Project Area that have yet to be fully restored to their prior year values was prepared. The 2015-16 assessed values are estimated to be $22.5 million less than the peak value for these properties. The following table shows the potential future recapture of Proposition 8 assessment appeals.


Merged Project Area Proposition 8 Potential Recapture

Description 2015-16 Inflation Adjusted Peak Assessed Value $88,056,555 2015-16 Reduced Proposition Assessed Value 65,557,035 Future Proposition 8 Recapture Potential $22,499,520 Number of Properties 177

_________________ Source: DHA Consulting, LLC, Santa Cruz County Assessor’s Records.

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The 2015-16 assessed values increases for the Merged Project Area are, in part, a reflection of the restoration of a portion of the reduced values for the automatic reductions performed by the County Assessor. As the market values for the reduced properties increase, the law allows the County to restore the assessment up to its prior level, plus inflation of up to 2.0 percent per year. As residential values have been increasing significantly in the Watsonville area, additional value reductions from automatic reductions have not been assumed in the estimates of future tax increment revenues.

Filed Assessment Appeals. When a taxpayer believes that the assessed value of his or her property is in excess of market value, he or she may informally request that the County Assessor’s office review the value of such property. If the County Assessor’s office believes the taxpayer is correct, it can reduce the value without the taxpayer needing to file a formal appeal. If however, the County Assessor’s office believes that the assessed value assigned to the property is not above market value, a formal appeal application must be filed and the dispute is heard before an assessment appeals board, which board determines the appropriate value for a property. Depending on the outcome of the appeal, taxes paid in the current year may be either higher or lower than the initial assessment. When an appeal results in a reduced tax liability after the disputed taxes have already been paid, a refund is subsequently issued to the taxpayer by the County, together with interest, as appropriate. Future allocations of taxes to the taxing entities, including the Successor Agency, are then reduced by the County to reflect the refund and interest paid, but only on a countywide basis. The Successor Agency does not feel the direct impact from successful appeals until the following fiscal year when assessed values and related taxes are reduced within the project area.

The County compiled appeals information for the Merged Project Area for each year since 2013-14. No appeals remain outstanding in the Merged Project Area for 2013-14 or prior fiscal years. Appeals which have been resolved to date for Fiscal Year 2013-14 and Fiscal Year 2014-15 have not had a significant impact on Merged Project Area assessed values and revenues. Thirty-eight appeals were resolved for Fiscal Year 2013-14 and 17 were resolved for Fiscal Year 2014-15. These resolved appeals resulted in reductions to assessed values 47 percent of the time. The assessed value for all 55 resolved appeals was reduced from $225.5 million to 205.5 million, a reduction of $19.9 million or 8.0 percent.

For Fiscal Year 2014-15, only 2 appeals remain outstanding while 19 appeals for Fiscal Year 2015-16 fiscal year are still outstanding. There are 21 total appeals outstanding with a value of $94.4 million which could affect future Merged Project Area values and revenues in future fiscal years. If these appeals are resolved at a rate consistent with that of the resolved appeals for Fiscal Year 2013-14 and Fiscal Year 2014-15, they will not have a significant impact on Tax Revenues.

Historical Taxable Values for the Merged Project Area

The following table provides a summary of the historical taxable valuation and resulting incremental value over the base year in the Merged Project Area for the past fourteen fiscal years. This summary is not intended to aid in the prediction of future Tax Revenues.

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Merged Project Area Historical Taxable Values

Year Ending June 30(1)

Secured Value

Unsecured Value(2)

State Assessed

Total Assessed Value

Percentage Change

Base Year Value

Incremental Value Over Base Year

Percentage Change

2003 $ 716,288,107 $132,621,188 $347,637 $ 849,256,932 4.3% $481,169,249 $368,087,683 4.3% 2004 744,320,632 137,703,351 171,581 882,195,564 3.9% 497,216,509 384,979,055 4.6% 2005 806,043,983 137,553,037 306,567 943,903,587 7.0% 496,427,769 447,475,818 16.2% 2006 912,745,106 156,696,124 300,376 1,069,741,606 13.3% 496,427,769 573,313,837 28.1% 2007 994,460,590 163,985,791 285,103 1,158,731,484 8.3% 496,427,769 662,303,715 15.5% 2008 1,073,828,460 169,679,857 214,488 1,243,722,805 7.3% 496,427,769 747,295,036 12.8% 2009 1,094,038,709 183,751,011 214,488 1,278,004,208 2.8% 496,427,769 781,576,439 4.6% 2010 1,049,977,088 168,591,270 268,110 1,218,836,468 -4.6% 496,427,769 722,408,699 -7.6%2011 1,022,543,607 158,052,463 41,405 1,180,637,475 -3.1% 496,427,769 684,209,706 -5.3%2012 1,024,955,141 148,795,256 41,405 1,173,791,802 -0.6% 496,427,769 677,364,033 -1.0%2013 1,014,540,829 154,017,506 70,325 1,168,628,660 -0.4% 496,427,769 672,200,891 -0.8%2014 1,044,520,747 154,481,278 31,120 1,199,033,145 2.6% 496,427,769 702,605,376 4.5%2015 1,095,416,565 165,676,124 31,120 1,261,123,809 5.2% 496,427,769 764,696,040 8.8%2016 1,149,371,652 159,294,106 31,120 1,308,696,878 3.8% 496,427,769 812,269,109 6.2%

_________________ Source: DHA Consulting, LLC and Office of the Santa Cruz County Auditor-Controller. (1) Incremental assessed values form the basis of tax increment revenues eligible for allocation to the Successor Agency in a given fiscal year. Tax Revenues receivedon a fiscal year basis are used to pay debt service on a Bond Year basis.(2) Includes the unsecured value associated with aircraft based at the Airport, which is located in the 2000 Amendment Sub-Area. The 2016 value for the aircraft basedat the Airport is $26.1 million.

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Historical Redevelopment Property Tax Trust Fund Revenues

The following table provides a summary of the actual receipts in the Redevelopment Property Tax Trust Fund for the Fiscal Years shown.


Merged Project Area Historical Redevelopment Property Tax Trust Fund Revenues

Fiscal Year Ending June 30(1) 2012 2013 2014 2015

Actual Receipts in the RPTTF(2)

Tax Increment Revenue(3) $6,975,646 $7,358,685 $7,666,949 $8,254,001Supplemental and Other Revenues 72,859 (36,528) 17,288 437,368

Total RPTTF Deposits $7,048,505 $7,322,157 $7,684,237 $8,691,369

Actual Adjustments County Administrative Fees $ 102,958 $ 88,708 $ 86,368 $ 102,686 Pass Through Payments 1,631,414 1,755,875 1,870,992 2,283,726 Prior Year Tax Overpayments(4) 45,743 47,115 48,529 49,985

Tax Revenue $5,241,274 $5,514,102 $5,709,589 $5,867,589 _________________ Source: The County and DHA Consulting, LLC. (1) Tax Revenues received on a Fiscal Year basis are used to pay debt service on a Bond Year basis.(2) Not all Tax Revenues deposited in the Redevelopment Property Tax Trust Fund are distributed to the SuccessorAgency. Only amounts required to pay approved enforceable obligations, such as the 2016 Bonds, are distributed tothe Successor Agency.(3) Commencing with Fiscal Year 2015-16, the property tax revenues available to the Successor Agency to payenforceable obligations is based on a tax rate of 1.0%. In prior years the tax rate for the Merged Project Area wasgreater than 1.0, most recently 1.077 percent. This change resulted from the enactment of SB 107.(4) Repayment of prior fiscal year’s tax allocation errors by the County. When identified in 2009, a 10-yearrepayment term was negotiated with the final payment of $56,260 due on August 1, 2018.

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Projected Taxable Valuation and Tax Revenues

The following table shows projected Tax Revenues and debt service coverage on the 2016 Bonds for the Bond Years set forth therein.


Merged Project Area Projected Tax Revenues and Debt Service Coverage Assuming No Growth in Assessed Value

Bond Year Ending

August 1 Total Assessed

Value Base Value Incremental

Value Gross Tax Revenue(1)

Admin. Charge(2)

Tax Sharing Obligations(3) Other(4)

Tax Revenues

Estimated Debt

Service(5)

Debt Service

Coverage

2016 $1,308,696,878 $496,427,769 $812,269,109 $8,246,511 $123,698 $2,174,066 $49,985 $5,898,763 $1,689,768 3.49

2017 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 54,528 5,891,657 1,684,250 3.50

2018 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 54,619 5,891,566 1,685,850 3.49

2019 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 56,260 5,889,925 1,688,200 3.49

2020 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 1,691,450 3.52

2021 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 1,688,200 3.52

2022 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 1,686,950 3.52

2023 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 1,692,450 3.51

2024 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 1,099,200 5.41

2025 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 401,950 14.79

2026 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 397,200 14.97

2027 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 401,950 14.79

2028 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 399,638 14.88

2029 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 401,800 14.80

2030 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 398,200 14.93

2031 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 404,200 14.71

2032 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 403,100 14.75

2033 1,308,696,878 496,427,769 812,269,109 8,246,511 123,698 2,176,628 - 5,946,185 401,700 14.80 ___________________ Source: DHA Consulting, LLC, Underwriter for bond debt service. (1) Estimated based on a 1.0% tax rate and unitary revenue of $123,820. In years prior to 2015-16, revenues allocated to the Merged Project Area included a tax rate in excess of1.0%.(2) Administrative charges retained by the County are estimated at 1.5% of gross tax revenue.(3) Portions of the tax revenues generated in the Merged Project Area are required to be shared with the base year taxing entities.(4) Repayment of prior year tax allocation errors on the part of the County. When identified in 2009, a 10-year repayment term was negotiated with the final payment of $56,260 dueon August 1, 2018.(5) Debt service amounts shown for the Bond Year ending 2016 include interest on the 2004 Bonds due on March 1, 2016, plus principal and interest on the 2016 Bonds due on August1, 2016.

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County Administration Fees

The County Auditor-Controller deducts administration charges from the tax increment distributed to the Successor Agency’s Redevelopment Property Tax Trust Fund for the Merged Project Area. For the purposes of projecting Tax Revenue, the administration charge is assumed to be 1.5% of gross tax revenue. The administrative charge is assumed to continue to be collected by the County Auditor Controller and to increase proportionally with the increases in revenues. County collection fees have been deducted from the projected tax increment revenues.

RISK FACTORS

The following information should be considered by prospective investors in evaluating the 2016 Bonds. However, the following does not purport to be an exhaustive listing of risks and other considerations which may be relevant to investing in the 2016 Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks.

The various legal opinions to be delivered concurrently with the issuance of the 2016 Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by State and federal laws, rulings and decisions affecting remedies, and by bankruptcy, reorganization or other laws of general application affecting the enforcement of creditors’ rights, including equitable principles.

Reduction in Taxable Value

Tax Revenues available to pay principal and interest on the 2016 Bonds are determined by the amount of incremental taxable value in the Merged Project Area and the current rate or rates at which property in the Merged Project Area is taxed. The reduction of taxable values of property in the Merged Project Area caused by economic factors beyond the Successor Agency’s control, such as relocation out of the Merged Project Area by one or more major property owners, sale of property to a non-profit corporation exempt from property taxation, or the complete or partial destruction of such property caused by, among other eventualities, earthquake or other natural disaster, could cause a reduction in the Tax Revenues that provide for the repayment of and security for the 2016 Bonds. Such reduction of Tax Revenues could have an adverse effect on the Successor Agency’s ability to make timely payments of principal of and interest on the 2016 Bonds.

As described in greater detail under the heading “PROPERTY TAXATION IN CALIFORNIA – Article XIIIA of the State Constitution,” Article XIIIA provides that the full cash value base of real property used in determining taxable value may be adjusted from year to year to reflect the inflation rate, not to exceed a two percent increase for any given year, or may be reduced to reflect a reduction in the consumer price index, comparable local data or any reduction in the event of declining property value caused by damage, destruction or other factors (as described above). Such measure is computed on a calendar year basis. Any resulting reduction in the full cash value base over the term of the 2016 Bonds could reduce Tax Revenues available to pay principal and interest on the 2016 Bonds.

In addition to the other limitations on, and required application under the Dissolution Act of Tax Revenues on deposit in the Redevelopment Property Tax Trust Fund, described herein under the heading “RISK FACTORS,” the State electorate or Legislature could adopt a constitutional or legislative property tax reduction with the effect of reducing Tax Revenues allocated to the Redevelopment Property Tax Trust Fund and available to the Successor Agency. Although the federal and State Constitutions include clauses generally prohibiting the Legislature’s impairment of contracts, there are also recognized exceptions to these prohibitions. There is no assurance that the State electorate or Legislature will not at

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some future time approve additional limitations that could reduce the Tax Revenues and adversely affect the source of repayment and security of the 2016 Bonds.

Risks to Real Estate Market

The Successor Agency’s ability to make payments on the 2016 Bonds will be dependent upon the economic strength of the Merged Project Area. The general economy of the Merged Project Area will be subject to all of the risks generally associated with urban real estate markets. Real estate prices and development may be adversely affected by changes in general economic conditions, fluctuations in the real estate market and interest rates, unexpected increases in development costs and by other similar factors. Further, real estate development within the Merged Project Area could be adversely affected by limitations of infrastructure or future governmental policies, including governmental policies to restrict or control development. In addition, if there is a decline in the general economy of the Merged Project Area, the owners of property within such Merged Project Area may be less able or less willing to make timely payments of property taxes or may petition for reduced assessed valuation causing a delay or interruption in the receipt of Tax Revenues by the Successor Agency from the Merged Project Area. In addition, the insolvency or bankruptcy of one or more large owners of property within the Merged Project Area could delay or impair the receipt of Tax Revenues by the Successor Agency.

Reduction in Inflationary Rate

As described in greater detail below, Article XIIIA of the State Constitution provides that the full cash value of real property used in determining taxable value may be adjusted from year to year to reflect the inflationary rate, not to exceed a 2% increase for any given year, or may be reduced to reflect a reduction in the consumer price index or comparable local data. Such measure is computed on a calendar year basis. Because Article XIIIA limits inflationary assessed value adjustments to the lesser of the actual inflationary rate or 2%, there have been years in which the assessed values were adjusted by actual inflationary rates, which were less than 2%. The Successor Agency is unable to predict if any adjustments to the full cash value of real property within the Merged Project Area, whether an increase or a reduction, will be realized in the future.

Levy and Collection of Taxes

The Successor Agency has no independent power to levy or collect property taxes. Any reduction in the tax rate or the implementation of any constitutional or legislative property tax decrease could reduce the Tax Revenues, and accordingly, could have an adverse impact on the security for and the ability of the Successor Agency to repay the 2016 Bonds.

Likewise, delinquencies in the payment of property taxes by the owners of land in the Merged Project Area, and the impact of bankruptcy proceedings on the ability of taxing agencies to collect property taxes, could have an adverse effect on the Successor Agency’s ability to make timely payments on the 2016 Bonds. Any reduction in Tax Revenues, whether for any of these reasons or any other reasons, could have an adverse effect on the Successor Agency’s ability to pay the principal of and interest on the 2016 Bonds.

Estimated Revenues

In estimating that Tax Revenues will be sufficient to pay debt service on the 2016 Bonds, the Successor Agency has made certain assumptions with regard to present and future assessed valuation in the Merged Project Area, future tax rates and percentage of taxes collected. The Successor Agency believes these assumptions to be reasonable, but there is no assurance these assumptions will be realized

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and to the extent that the assessed valuation and the tax rates are less than expected, the Tax Revenues available to pay debt service on the 2016 Bonds will be less than those projected and such reduced Tax Revenues may be insufficient to provide for the payment of principal of, premium (if any) and interest on the 2016 Bonds.

Recognized Obligation Payment Schedules

The Dissolution Act provides that, commencing on the date that the first Recognized Obligation Payment Schedule is valid thereunder, only those obligations listed in the Recognized Obligation Payment Schedule may be paid by the Successor Agency from the funds specified in the Recognized Obligation Payment Schedule. By February 1st of each year, the Dissolution Act requires successor agencies to prepare, and submit to the successor agency’s oversight board and the Department of Finance for approval, a Recognized Obligation Payment Schedule pursuant to which enforceable obligations of the successor agency are listed, together with the source of funds to be used to pay for each enforceable obligation. Tax Revenues will not be distributed from the Redevelopment Property Tax Trust Fund by the County Auditor-Controller to the Agency’s Redevelopment Obligation Retirement Fund without a duly approved and effective Recognized Obligation Payment Schedule. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS – Recognized Obligation Payment Schedule” and “PROPERTY TAXATION IN CALIFORNIA – Property Tax Collection Procedures – Recognized Obligation Payment Schedule.” If the Successor Agency was to fail to file a Recognized Obligation Payment Schedule with respect to a period, the availability of Tax Revenues to the Successor Agency could be adversely affected for such period.

If a successor agency fails to submit to the Department of Finance an oversight board-approved Recognized Obligation Payment Schedule complying with the provisions of the Dissolution Act within five business days of the date upon which the Recognized Obligation Payment Schedule is to be used to determine the amount of property tax allocations, the Department of Finance may determine if any amount should be withheld by the applicable county auditor-controller for payments for enforceable obligations from distribution to taxing entities pursuant to clause (iv) in the following paragraph, pending approval of a Recognized Obligation Payment Schedule. Upon notice provided by the Department of Finance to the county auditor-controller of an amount to be withheld from allocations to taxing entities, the county auditor-controller must distribute to taxing entities any monies in the Redevelopment Property Tax Trust Fund in excess of the withholding amount set forth in the notice, and the county auditor-controller must distribute withheld funds to the successor agency only in accordance with a Recognized Obligation Payment Schedule when and as approved by the Department of Finance.

Typically, under the Redevelopment Property Tax Trust Fund distribution provisions of the Dissolution Act, the county auditor-controller is to distribute funds for each six-month period in the following order specified in Section 34183 of the Dissolution Act: (i) first, subject to certain adjustments for subordinations to the extent permitted under the Dissolution Act and no later than each January 2 and June 1, to each local Successor Agency and school entity, to the extent applicable, amounts required for pass-through payments such entity would have received under provisions of the Redevelopment Law, as those provisions read on January 1, 2011, including pursuant to the Pass-Through Agreements and Statutory Pass-Through Amounts; (ii) second, on each January 2 and June 1, to the Successor Agency for payments listed in its Recognized Obligation Payment Schedule, with debt service payments scheduled to be made for tax allocation bonds having the highest priority over payments scheduled for other debts and obligations listed on the Recognized Obligation Payment Schedule; (iii) third, on each January 2 and June 1, to the Successor Agency for the administrative cost allowance, as defined in the Dissolution Act; and (iv) fourth, on each January 2 and June 1, to taxing entities any moneys remaining in the RedevelopmentProperty Tax Trust Fund after the payments and transfers authorized by clauses (i) through (iii), in anamount proportionate to such taxing entity’s share of property tax revenues in the tax rate area in that

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fiscal year (without giving effect to any pass-through obligations that were established under the Redevelopment Law).

If the successor agency does not submit an Oversight Board-approved Recognized Obligation Payment Schedule within five business days of the date upon which the Recognized Obligation Payment Schedule is to be used to determine the amount of property tax allocations and the Department of Finance does not provide a notice to the county auditor-controller to withhold funds from distribution to taxing entities, amounts in the Redevelopment Property Tax Trust Fund for such six-month period would be distributed to taxing entities pursuant to clause (iv) above.

AB 1484 also added new provisions to the Dissolution Act implementing certain penalties in the event that the Successor Agency does not timely submit a Recognized Obligation Payment Schedule by the deadline specified in the Dissolution Act. Specifically, a Recognized Obligation Payment Schedule must be submitted by the Successor Agency, after approval by the Oversight Board, to the County Administrative Officer, the County Auditor-Controller, the Department of Finance and the State Controller no later than each February 1, commencing February 1, 2017 with respect to each subsequent fiscal year. If the Successor Agency does not submit an Oversight Board approved Recognized Obligation Payment Schedule by such deadline, the City will be subject to a civil penalty equal to $10,000 per day for every day the schedule is not submitted to the Department of Finance. Additionally, the Successor Agency’s administrative cost allowance is reduced by 25% for any fiscal year for which the Successor Agency does not submit an Oversight Board approved Recognized Obligation Payment Schedule within 10 days of the February 1 deadline. If the Successor Agency fails to submit a Recognized Obligation Payment Schedule by the February 1 deadline, any creditor of the successor agency or the department or any affected taxing entity shall have standing to, and may request a writ of mandate to, require the Successor Agency to immediately perform this duty. For additional information regarding procedures under the Dissolution Act relating to late Recognized Obligation Payment Schedules and implications thereof on the 2016 Bonds.

Future Implementation of Dissolution Act

Several successor agencies, cities and other entities have filed judicial actions challenging the legality of various provisions of the Dissolution Act. One such challenge is an action filed on August 1, 2012, by Syncora Guarantee Inc. and Syncora Capital Assurance Inc. (collectively, “Syncora”) against the State, the State Controller, the State Director of Finance, and the Auditor-Controller of San Bernardino County on his own behalf and as the representative of all other County Auditors in the State (Superior Court of the State of California, County of Sacramento, Case No. 34-2012-80001215). Syncora are monoline financial guaranty insurers domiciled in the State of New York, and as such, provide credit enhancement on bonds issued by state and local governments and do not sell other kinds of insurance such as life, health, or property insurance. Syncora provided bond insurance and other related insurance policies for bonds issued by former California redevelopment agencies.

The complaint alleged that the Dissolution Act, and specifically the “Redistribution Provisions” thereof (i.e., California Health and Safety Code Sections 34172(d), 34174, 34177(d), 34183(a)(4), and 34188) violate the “contract clauses” of the United States and California Constitutions (U.S. Const. art. 1, § 10, cl.1; Cal. Const. art. 1, § 9) because they unconstitutionally impair the contracts among the formerredevelopment agencies, bondholders and Syncora. The complaint also alleged that the RedistributionProvisions violate the “Takings Clauses” of the United States and California Constitutions (U.S. Const.amend. V; Cal Const. art. 1 § 19) because they unconstitutionally take and appropriate bondholders’ andSyncora’s contractual right to critical security mechanisms without just compensation.

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After hearing by the Sacramento County Superior Court on May 3, 2013, the Superior Court ruled that Syncora’s constitutional claims based on contractual impairment were premature. The Superior Court also held that Syncora’s takings claims, to the extent based on the same arguments, were also premature. Pursuant to a Judgment stipulated to by the parties, the Superior Court on October 3, 2013, entered its order dismissing the action. The Judgment, however, provides that Syncora preserves its rights to reassert its challenges to the Dissolution Act in the future. The Successor Agency does not guarantee that any reassertion of challenges by Syncora or that the final results of any of the judicial actions brought by others challenging the Dissolution Act will not result in an outcome that may have a material adverse effect on the Successor Agency’s ability to timely pay debt service on the 2016 Bonds.

Bankruptcy and Foreclosure

The payment of the property taxes from Tax Revenues are derived and the ability of the County to foreclose the lien of a delinquent unpaid tax may be limited by bankruptcy, insolvency, or other laws generally affecting creditors’ rights or by the laws of the State relating to judicial foreclosure. The various legal opinions to be delivered concurrently with the delivery of the 2016 Bonds (including Bond Counsel’s approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors’ rights, by the application of equitable principles and by the exercise of judicial discretion in appropriate cases.

Although bankruptcy proceedings would not cause the liens to become extinguished, bankruptcy of a property owner could result in a delay in prosecuting superior court foreclosure proceedings. Such delay would increase the possibility of delinquent tax installments not being paid in full and thereby increase the likelihood of a delay or default in payment of the principal of and interest on the 2016 Bonds.

Bond Insurance Risk Factors

In the event of default of the payment of principal or interest with respect to the 2016 Bonds when all or some becomes due, any Owner of the 2016 Bonds shall have a claim under the applicable Policy for such payments. However, in the event of any acceleration of the due date of such principal by reason of optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments are to be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. The Policies do not insure against redemption premium, if any. The payment of principal and interest in connection with mandatory or optional redemption of the 2016 Bonds by the Successor Agency that is recovered by the Successor Agency from the bond owner as a voidable preference under applicable bankruptcy law is covered by each Policy, however, such payments will be made by the 2016 Bond Insurer at such time and in such amounts as would have been due absence such prepayment by the Successor Agency unless 2016 Bond Insurer chooses to pay such amounts at an earlier date.

Under most circumstances, default of payment of principal and interest does not obligate acceleration of the obligations of the 2016 Bond Insurer without appropriate consent. The 2016 Bond Insurer may direct and must consent to any remedies and the 2016 Bond Insurer’s consent may be required in connection with amendments to any applicable bond documents.

If the 2016 Bond Insurer is unable to make payment of principal and interest as such payments become due under the Policies, the 2016 Bonds are payable solely from the moneys received pursuant to the applicable bond documents. If the 2016 Bond Insurer becomes obligated to make payments with respect to the 2016 Bonds, no assurance is given that such event will not adversely affect the market price of the 2016 Bonds or the marketability (liquidity) for the 2016 Bonds.

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The long-term ratings on the 2016 Bonds are dependent in part on the financial strength of the 2016 Bond Insurer and its claim paying ability. The 2016 Bond Insurer’s financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance is given that the long-term ratings of the 2016 Bond Insurer and of the ratings on the 2016 Bonds insured by the 2016 Bond Insurer will not be subject to downgrade and such event could adversely affect the market price of the 2016 Bonds or the marketability (liquidity) for the 2016 Bonds.

The obligations of the 2016 Bond Insurer are contractual obligations and in an event of default by the 2016 Bond Insurer, the remedies available may be limited by applicable bankruptcy law or state law related to insolvency of insurance companies.

Neither the Successor Agency nor the Underwriter has made independent investigation into the claims paying ability of the 2016 Bond Insurer and no assurance or representation regarding the financial strength or projected financial strength of the 2016 Bond Insurer is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the Successor Agency to pay principal and interest on the 2016 Bonds and the claims paying ability of the 2016 Bond Insurer, particularly over the life of the investment. See “BOND INSURANCE” herein for further information provided by the 2016 Bond Insurer and the Policies, which includes further instructions for obtaining current financial information concerning the 2016 Bond Insurer.

No Validation Proceeding Undertaken

Code of Civil Procedure Section 860 authorizes public agencies to institute a process, otherwise known as a “validation proceeding,” for purposes of determining the validity of a resolution or any action taken pursuant thereto. Section 860 authorizes a public agency to institute validation proceedings in cases where another statute authorizes its use. Relevant to the 2016 Bonds, Government Code Section 53511 authorizes a local agency to “bring an action to determine the validity of its bonds, warrants, contracts, obligations or evidences of indebtedness.” Pursuant to Code of Civil Procedure Section 870, a final favorable judgment issued in a validation proceeding shall, notwithstanding any other provision of law, be forever binding and conclusive, as to all matters therein adjudicated or which could have been adjudicated, against all persons: “The judgment shall permanently enjoin the institution by any person of any action or proceeding raising any issue as to which the judgment is binding and conclusive.”

The Successor Agency has not undertaken or endeavored to undertake any validation proceeding in connection with the issuance of the 2016 Bonds. The Successor Agency and Bond Counsel have relied on the provisions of AB 1484 authorizing the issuance of the 2016 Bonds and specifying the related deadline for any challenge to the 2016 Bonds to be brought. Specifically, Section 34177.5(e) of the Dissolution Act provides that notwithstanding any other law, an action to challenge the issuance of bonds (such as the 2016 Bonds), the incurrence of indebtedness, the amendment of an enforceable obligation, or the execution of a financing agreement authorized under Section 34177.5, must be brought within 30 days after the date on which the oversight board approves the resolution of the successor agency approving such financing.

It is possible that the definition of Tax Revenues could be affected by changes in law or judicial decisions relating to the dissolution of redevelopment agencies. Any action by a court to invalidate provisions of the Dissolution Act required for the timely payment of principal of, and interest on, the 2016 Bonds could be subject to issues regarding unconstitutional impairment of contracts and unconstitutional taking without just compensation. The Successor Agency believes that the aforementioned considerations would provide some protections against the adverse consequences upon the Successor Agency and the availability of Tax Revenues for the payment of debt service on the 2016 Bonds in the event of successful challenges to the Dissolution Act or portions thereof. However, the

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Successor Agency provides no assurance that any other lawsuit challenging the Dissolution Act or portions thereof will not result in an outcome that may have a detrimental effect on the Successor Agency’s ability to timely pay debt service on the 2016 Bonds.

Hazardous Substances

An additional environmental condition that may result in the reduction in the assessed value of property would be the discovery of a hazardous substance that would limit the beneficial use of taxable property within the Merged Project Area. In general, the owners and operators of 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 Merged Project Area be affected by a hazardous substance, could be to reduce the marketability and value of the property by the costs of remedying the condition.

Natural Disasters

The value of the property in the Merged Project Area in the future can be adversely affected by a variety of additional factors, particularly those which may affect infrastructure and other public improvements and private improvements on property and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions such as earthquakes, topographic conditions such as earth movements, landslides and floods and climatic conditions such as droughts. The Merged Project Area commonly experiences flooding due to local waterways and its downstream location from the Pajaro Valley Watershed. If one or more of such conditions occur, such occurrence could cause damages of varying seriousness to the land and improvements and the value of property in the Merged Project Area could be diminished in the aftermath of such events. A substantial reduction of the value of such properties and could affect the ability or willingness of the property owners to pay the property taxes.

The Merged Project Area is located in a seismically active region of the State and faults are located near the Merged Project Area. The greatest amount of damage was due to the 1989 Loma Prieta earthquake, which was centered close to the City. In the event of property damage caused by an earthquake, the assessed valuation of affected property could be reduced. Such a reduction of assessed valuations could result in a reduction of the Tax Revenues that secure the 2016 Bonds, which in turn could impair the ability of the Successor Agency to make payments of principal of and interest on the 2016 Bonds when due.

Changes in Law

There can be no assurance that the State electorate will not at some future time adopt initiatives or that the State Legislature will not enact legislation that will amend the Dissolution Act, the Redevelopment Law or other laws or the State Constitution resulting in a reduction of Tax Revenues, which could have an adverse effect on the Successor Agency’s ability to pay debt service on the 2016 Bonds and such an effect could be material.

Secondary Market

There can be no guarantee that there will be a secondary market for the 2016 Bonds, or, if a secondary market exists, that the 2016 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

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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 the then prevailing circumstances.

PROPERTY TAXATION IN CALIFORNIA

Property Tax Collection Procedures

Classification. In the State, property which is subject to ad valorem taxes is classified as “secured” or “unsecured.” Secured and unsecured properties are entered on separate parts of the assessment roll maintained by the County assessor. 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 has priority over all other liens on the secured property arising pursuant to State law, regardless of the time of the creation of other liens.

Generally, ad valorem taxes are collected by a county (the “Taxing Authority”) for the benefit of the various entities (cities, schools and special districts) that share in the ad valorem tax (each a taxing entity) and successor agencies eligible to receive distributions from the respective Redevelopment Property Tax Trust Fund.

Collections. Secured and unsecured property are entered separately on 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 authority has four ways of collecting unsecured personal property taxes: (i) initiating a civil action against the taxpayer, (ii) 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, (iii) filing a certificate of delinquency for record in the county recorder’s office to obtain a lien on certain property of the taxpayer, and (iv) seizing and selling personal property, improvements or possessory 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 to the State for the amount of taxes which are delinquent.

Penalty. A 10% penalty is added to delinquent taxes which have been levied with respect to property on the secured roll. In addition, property on the secured roll on which taxes are delinquent is declared in default by operation of law and declaration of the tax collector on or about June 30 of each fiscal year. Such property may thereafter be redeemed by payment of the delinquent taxes and a delinquency penalty, plus a redemption penalty of 1.5% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by the county tax collector. A 10% penalty also applies to delinquent taxes with respect to property on the unsecured roll, and further, an additional penalty of 1.5% per month accrues with respect to such taxes beginning on varying dates related to the tax bill mailing date.

Delinquencies. The valuation of property is determined as of the January 1 lien date as equalized in August of each year and equal installments of taxes levied upon secured property become delinquent on the following December 10 and April 10. Taxes on unsecured property are due January 1 and become delinquent August 31.

Supplemental Assessments. California Revenue and Taxation Code Section 75.70 provides for the supplemental assessment and taxation of property as of the occurrence of a change of ownership or completion of new construction. Prior to the enactment of this law, the assessment of such changes was

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permitted only as of the next tax lien date following the change, and this delayed the realization of increased property taxes from the new assessments for up to 14 months. This statute provides increased revenue to the Redevelopment Property Tax Trust Fund to the extent that supplemental assessments of new construction or changes of ownership occur within the boundaries of redevelopment projects subsequent to the January 1 lien date. To the extent such supplemental assessments occur within the Merged Project Area, Tax Revenues may increase.

Property Tax 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 in proportion to the tax-derived revenues allocated to each. SB 1559 (Chapter 697, Statutes of 1992) explicitly includes redevelopment agencies among the jurisdictions which are subject to such charges. In addition, Sections 34182(e) and 34183(a) of the Dissolution Act allow administrative costs of the County Auditor-Controller for the cost of administering the provisions of the Dissolution Act, as well as the foregoing SB 1559 amounts, to be deducted from property tax revenues before monies are deposited into the Redevelopment Property Tax Trust Fund. For fiscal year 2013-14, the County’s administrative charge to the Former Agency and Successor Agency, together with certain charges relating to the dissolution of the Former Agency, was $394,594, and for fiscal year 2014-15 and future years, the County’s administrative charge to the Successor Agency is estimated to be 1.23% of gross revenues.

In addition to the amounts charged by the County for administration of property taxes under SB 2557, pursuant to ABx1 26, the County may charge an administrative fee for administration of the Redevelopment Property Tax Trust Fund. The amount charged to the Successor Agency for the January 2, 2014 Redevelopment Property Tax Trust Fund allocation was $27,544. This nominal amount has not been factored into the projections.

Statutory Pass-Through Payments. The payment of Statutory Pass-Through Payments results from (i) plan amendments which add territory in existing project areas on or after January 1, 1994 and (ii) from plan amendments which eliminates one or more limitations within a redevelopment plan (such as the removal of the time limit on the establishment of loans, advances and indebtedness). The calculation of the amount due affected taxing entities is described in Sections 33607.5 and 33607.7 of the Redevelopment Law. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS – Statutory Pass-Through Payments” for further information regarding the applicability of the statutory pass-through provisions of the Redevelopment Law and the Dissolution Act to the Merged Project Area.

Recognized Obligation Payment Schedule. The Dissolution Act provides that, commencing on the date the first Recognized Obligation Payment Schedule is valid thereunder, only those payments listed in the Recognized Obligation Payment Schedule may be made by the Successor Agency from the funds specified in the Recognized Obligation Payment Schedule. The Dissolution Act requires successor agencies annually to prepare and approve, and submit to the Successor Agency’s oversight board and the Department of Finance for approval, a Recognized Obligation Payment Schedule pursuant to which enforceable obligations (as defined in the Dissolution Act) of the Successor Agency are listed, together with the source of funds to be used to pay for each enforceable obligation. Tax Revenues will not be distributed from the Redevelopment Property Tax Trust Fund by the County Auditor-Controller to the Successor Agency’s Redevelopment Obligation Retirement Fund without a duly approved and effective Recognized Obligation Payment Schedule obtained in sufficient time prior to the January 2 or June 1 distribution dates, as applicable.

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County Tax Loss Reserve Fund (Teeter Plan)

Property taxes are collected for all taxing entities and redevelopment agencies by the County. The County operates under Section 4701-4717 of the California Revenue and Taxation Code (the “Teeter Plan”). Under the Teeter Plan, the County will maintain a County Tax Loss Reserve Fund for the purpose of paying each taxing entity 100% of the amounts of secured taxes levied (including tax increments) on the tax bill irrespective of any delinquent taxes. The County’s present policy is to disburse Tax Increment to the Successor Agency based upon 95% of the calculated secured Tax Increment based upon the tax levy notwithstanding delinquencies or other changes to the levy amount. The remaining 5%, adjusted for taxable value changes and refunds for successful assessment appeals, is allocated by the County to the taxing entities, including the Successor Agency, on a countywide basis at the end of the fiscal year (True-up Allocation). Because the June 1 payment to the Successor Agency comes before the True-up Allocation is made, the Successor Agency is allocated the true-up payment in January of the following fiscal year. The County has the power to unilaterally discontinue this practice of paying the tax levy to the Successor Agency. The Teeter Plan may also be discontinued by petition of two-thirds (2/3) of the participant taxing agencies.

Unitary Property

Assembly Bill (“AB”) 2890 (Statutes of 1986, Chapter 1457) provides that, commencing with fiscal year 1988-89, assessed value derived from State-assessed unitary property (consisting mostly of operational property owned by utility companies) is to be allocated county-wide as follows: (i) each tax rate area will receive that same amount from each assessed utility received in the previous fiscal year unless the applicable county-wide values are insufficient to do so, in which case values will be allocated to each tax rate area on a pro-rata basis; and (ii) if values to be allocated are greater than in the previous fiscal year, each tax rate area will receive a pro-rata share of the increase from each assessed utility according to a specified formula. Additionally, the lien date on State-assessed property is changed from March 1 to January 1.

AB 454 (Statutes of 1987, Chapter 921) further modifies chapter 1457 regarding the distribution of tax revenues derived from property assessed by the State Board of Equalization. Chapter 921 provides for the consolidation of all State-assessed property, except for regulated railroad property, into a single tax rate area in each county. Chapter 921 further provides for a new method of establishing tax rates on State-assessed property and distribution of property tax revenue derived from State-assessed property to taxing jurisdictions within each county in accordance with a new formula. Railroads will continue to be assessed and revenues allocated to all tax rate areas where railroad property is sited.

Article XIIIA of the State Constitution

Article XIIIA limits the amount of ad valorem taxes on real property to 1% of “full cash value” of such property, as determined by the county assessor. Article XIIIA defines “full cash value” to mean “the County Assessor’s valuation of real property as shown on the 1975-76 tax bill under ‘full cash value,’ or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.” Furthermore, the “full cash value” of all real property may be increased to reflect the rate of inflation, as shown by the consumer price index, not to exceed 2% per year, or may be reduced.

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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Article XIIIA (i) exempts from the 1% tax limitation taxes to pay debt service on (a) indebtedness approved by the voters prior to July 1, 1978 or (b) bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast by the voters voting on the proposition; (ii) requires a vote of two-thirds of the qualified electorate to impose special taxes, or certain additional ad valorem taxes; and (iii) requires the approval of two-thirds of all members of the State Legislature to change any State tax laws resulting in increased tax revenues.

The validity of Article XIIIA has been upheld by both the California Supreme Court and the United States Supreme Court.

In the general election held November 4, 1986, voters of the State approved two measures, Propositions 58 and 60, which further amended Article XIIIA. Proposition 58 amended Article XIIIA to provide that the terms “purchase” and “change of ownership,” for the purposes of determining full cash value of property under Article XIIIA, do not include the purchase or transfer of (1) real property between spouses and (2) the principal residence and the first $1,000,000 of other property between parents and children. This amendment to Article XIIIA may reduce the rate of growth of local property tax revenues.

Proposition 60 amended Article XIIIA to permit the Legislature to allow persons over the age of 55 who sell their residence and buy or build another of equal or lesser value within two years in the same county, to transfer the old residence assessed value to the new residence. As a result of the Legislature’s action, the growth of property tax revenues may decline.

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

Appropriations Limitation – Article XIIIB

Article XIIIB limits the annual appropriations of the State and its political subdivisions to the level of appropriations for the prior fiscal year, as adjusted for changes in the cost of living, population and services rendered by the government entity. The “base year” for establishing such appropriations limit is the 1978-79 fiscal year, and the limit is to be adjusted annually to reflect changes in population, consumer prices and certain increases in the cost of services provided by these public agencies.

Section 33678 of the Redevelopment Law provides that the allocation of taxes to a redevelopment Successor Agency for the purpose of paying principal of, or interest on, loans, advances, or indebtedness shall not be deemed the receipt by an Successor Agency of proceeds of taxes levied by or on behalf of an Successor Agency within the meaning of Article XIIIB, nor shall such portion of taxes be deemed receipt of proceeds of taxes by, or an appropriation subject to the limitation of, any other public body within the meaning or for the purpose of the Constitution and laws of the State, including Section 33678 of the Redevelopment Law. The constitutionality of Section 33678 has been upheld in two California appellate court decisions. On the basis of these decisions, the Successor Agency has not adopted an appropriations limit.

Articles XIIIC and XIIID of the State Constitution

At the election held on November 5, 1996, Proposition 218 was passed by the voters of California. The initiative added Articles XIIIC and XIIID to the State Constitution. Provisions in the two articles affect the ability of local government to raise revenues. The 2016 Bonds will be secured by

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sources of revenues that are not subject to limitation by Proposition 218. See also “– Propositions 218 and 26” below.

Proposition 87

On November 8, 1988, the voters of the State approved Proposition 87, which amended Article XVI, Section 16 of the State Constitution to provide that property tax revenue attributable to the imposition of taxes on property within a redevelopment project area for the purpose of paying debt service on certain bonded indebtedness issued by a taxing entity (not the Former Agency or the Successor Agency) and approved by the voters of the taxing entity after January 1, 1989 will be allocated solely to the payment of such indebtedness and not to redevelopment agencies.

Appeals of Assessed Values

Pursuant to California law, a property owner may apply for a reduction of the property tax assessment for such owner’s property by filing a written application, in a form prescribed by the State Board of Equalization, with the appropriate county board of equalization or assessment appeals board.

In the County, a property owner desiring to reduce the assessed value of such owner’s property in any one year must submit an application to the County Assessment Appeals Board (the “Appeals Board”). Applications for any tax year must be submitted by September 15 of such tax year. Following a review of each application by the staff of the County Assessor’s Office, the staff makes a recommendation to the Appeals Board on each application which has not been rejected for incompleteness or untimeliness or withdrawn. The Appeals Board holds a hearing and either reduces the assessment or confirms the assessment. The Appeals Board generally is required to determine the outcome of appeals within two years of each appeal’s filing date. Any reduction in the assessment ultimately granted applies only to the year for which application is made and during which the written application is filed. The assessed value increases to its pre-reduction level for fiscal years following the year for which the reduction application is filed. However, if the taxpayer establishes through proof of comparable values that the property continues to be overvalued (known as “ongoing hardship”), the Assessor has the power to grant a reduction not only for the year for which application was originally made, but also for the then current year as well. Appeals for reduction in the “base year” value of an assessment, which generally must be made within three years of the date of change in ownership or completion of new construction that determined the base year, if successful, reduce the assessment for the year in which the appeal is taken and prospectively thereafter. Moreover, in the case of any reduction in any one year of assessed value granted for “ongoing hardship” in the then current year, and also in any cases involving stipulated appeals for prior years relating to base year and personal property assessments, the property tax revenues from which Tax Revenues are derived attributable to such properties will be reduced in the then current year. In practice, such a reduced assessment may remain in effect beyond the year in which it is granted. See “THE MERGED PROJECT AREA” for information regarding the assessed valuations of the largest taxpayers within the Merged Project Area.

Proposition 8

Proposition 8, approved in 1978 (California Revenue and Taxation Code Section 51(b)), 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 under this code section may be initiated by the County Assessor or requested by the property owner.

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After a roll reduction is granted under this code section, the property is reviewed on an annual basis to determine its full cash value and the valuation is adjusted accordingly. This may result in further reductions or in value increases. Such increases must be in accordance with the full cash value of the property and may exceed the maximum annual inflationary growth rate allowed on other properties under Article XIIIA of the State Constitution. Once the property has regained its prior value, adjusted for inflation, it once again is subject to the annual inflationary factor growth rate allowed under Article XIIIA.

The Successor Agency cannot guarantee that reductions undertaken by the County Assessor or requested by a property owner pursuant to Proposition 8 will not in the future reduce the assessed valuation of property in the Merged Project Area and, therefore, Tax Revenues that secure the 2016 Bonds.

Propositions 218 and 26

On November 5, 1996, California voters approved Proposition 218—Voter Approval for Local Government Taxes—Limitation on Fees, Assessments, and Charges—Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the State Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. On November 2, 2010, California voters approved Proposition 26, the “Supermajority Vote to Pass New Taxes and Fees Act.” Proposition 26 amended Article XIIIC of the California Constitution by adding an expansive definition for the term “tax,” which previously was not defined under the California Constitution. Tax Revenues securing the 2016 Bonds are derived from property taxes which are outside the scope of taxes, assessments and property-related fees and charges which are limited by Proposition 218 and outside of the scope of taxes which are limited by Proposition 26.

Future Initiatives

Article XIIIA, Article XIIIB, Article XIIIC and Article XIIID and certain other propositions affecting property tax levies were each adopted as measures which qualified for the ballot pursuant to State’s initiative process. From time to time other initiative measures could be adopted, further affecting Tax Revenues.

TAX MATTERS

Tax Matters – 2016A Bonds

Opinion of Bond Counsel

In the opinion of Hawkins Delafield & Wood LLP, Bond Counsel to the Successor Agency, under existing statutes and court decisions and assuming continuing compliance with certain tax covenants described herein, (i) interest on the 2016A Bonds is excluded from gross income for Federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) interest on the 2016A Bonds is not treated as a preference item in calculating the alternative minimum tax imposed on individuals and corporations under the Code; such interest, however, is included in the adjusted current earnings of certain corporations for purposes of calculating the alternative minimum tax imposed on such corporations. In rendering its opinion, Bond Counsel has relied on certain representations, certifications of fact, and statements of reasonable expectations made by the Successor Agency in connection with the 2016A Bonds, and Bond Counsel has assumed compliance by the Successor Agency with certain ongoing covenants to comply with applicable requirements of the

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Code to assure the exclusion of interest on the 2016A Bonds from gross income under Section 103 of the Code.

In addition, in the opinion of Bond Counsel to the Successor Agency, under existing statutes, interest on the 2016A Bonds is exempt from State personal income tax.

Bond Counsel expresses no opinion regarding any other Federal or state tax consequences with respect to the 2016A Bonds. Bond Counsel renders its opinion under existing statutes and court decisions as of the issue date, and assumes no obligation to update, revise or supplement its opinion to reflect any action hereafter taken or not taken, or any facts or circumstances that may hereafter come to its attention, or changes in law or in interpretations thereof that may hereafter occur, or for any other reason. Bond Counsel expresses no opinion on the effect of any action hereafter taken or not taken in reliance upon an opinion of other counsel on the exclusion from gross income for Federal income tax purposes of interest on the 2016A Bonds, or under state and local tax law.

Certain Ongoing Federal Tax Requirements and Covenants

The Code establishes certain ongoing requirements that must be met subsequent to the issuance and delivery of the 2016A Bonds in order that interest on the 2016A Bonds be and remain excluded from gross income under Section 103 of the Code. These requirements include, but are not limited to, requirements relating to use and expenditure of gross proceeds of the 2016A Bonds, yield and other restrictions on investments of gross proceeds, and the arbitrage rebate requirement that certain excess earnings on gross proceeds be rebated to the Federal government. Noncompliance with such requirements may cause interest on the 2016A Bonds to become included in gross income for Federal income tax purposes retroactive to their issue date, irrespective of the date on which such noncompliance occurs or is discovered. The Successor Agency has covenanted to comply with certain applicable requirements of the Code to assure the exclusion of interest on the 2016A Bonds from gross income under Section 103 of the Code.

Certain Collateral Federal Tax Consequences

The following is a brief discussion of certain collateral Federal income tax matters with respect to the 2016A Bonds. It does not purport to address all aspects of Federal taxation that may be relevant to a particular owner of a 2016A Bond. Prospective investors, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the Federal tax consequences of owning and disposing of the 2016A Bonds.

Prospective owners of the 2016A Bonds should be aware that the ownership of such obligations may result in collateral Federal income tax consequences to various categories of persons, such as corporations (including S corporations and foreign corporations), financial institutions, property and casualty and life insurance companies, individual recipients of Social Security and railroad retirement benefits, individuals otherwise eligible for the earned income tax credit, and taxpayers deemed to have incurred or continued indebtedness to purchase or carry obligations the interest on which is excluded from gross income for Federal income tax purposes. Interest on the 2016A Bonds may be taken into account in determining the tax liability of foreign corporations subject to the branch profits tax imposed by Section 884 of the Code.

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Original Issue Discount

“Original issue discount” (“OID”) is the excess of the sum of all amounts payable at the stated maturity of a 2016A Bond (excluding certain “qualified stated interest” that is unconditionally payable at least annually at prescribed rates) over the issue price of that maturity. In general, the “issue price” of a maturity means the first price at which a substantial amount of the 2016A Bonds of that maturity was sold (excluding sales to bond houses, brokers, or similar persons acting in the capacity as underwriters, placement agents, or wholesalers). In general, the issue price for each maturity of 2016A Bonds is expected to be the initial public offering price set forth on the cover page of the Official Statement. Bond Counsel further is of the opinion that, for any 2016A Bonds having OID (a “Tax-Exempt Discount Bond”), OID that has accrued and is properly allocable to the owners of the Tax-Exempt Discount Bonds under Section 1288 of the Code is excludable from gross income for Federal income tax purposes to the same extent as other interest on the 2016A Bonds.

In general, under Section 1288 of the Code, OID on a Tax-Exempt Discount Bond accrues under a constant yield method, based on periodic compounding of interest over prescribed accrual periods using a compounding rate determined by reference to the yield on that Tax-Exempt Discount Bond. An owner’s adjusted basis in a Tax-Exempt Discount Bond is increased by accrued OID for purposes of determining gain or loss on sale, exchange, or other disposition of such 2016A Bond. Accrued OID may be taken into account as an increase in the amount of tax-exempt income received or deemed to have been received for purposes of determining various other tax consequences of owning a Tax-Exempt Discount Bond even though there will not be a corresponding cash payment.

Owners of Tax-Exempt Discount Bonds should consult their own tax advisors with respect to the treatment of original issue discount for Federal income tax purposes, including various special rules relating thereto, and the state and local tax consequences of acquiring, holding, and disposing of Tax-Exempt Discount Bonds.

Bond Premium

In general, if an owner acquires a 2016A Bond for a purchase price (excluding accrued interest) or otherwise at a tax basis that reflects a premium over the sum of all amounts payable on the 2016A Bond after the acquisition date (excluding certain “qualified stated interest” that is unconditionally payable at least annually at prescribed rates), that premium constitutes “bond premium” on that 2016A Bond (a “Tax-Exempt Premium Bond”). In general, under Section 171 of the Code, an owner of a Tax-Exempt Premium Bond must amortize the bond premium over the remaining term of the Tax-Exempt Premium Bond, based on the owner’s yield over the remaining term of the Tax-Exempt Premium Bond determined based on constant yield principles (in certain cases involving a Tax-Exempt Premium Bond callable prior to its stated maturity date, the amortization period and yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on such bond). An owner of a Tax-Exempt Premium Bond must amortize the bond premium by offsetting the qualified stated interest allocable to each interest accrual period under the owner’s regular method of accounting against the bond premium allocable to that period. In the case of a Tax-Exempt Premium Bond, if the bond premium allocable to an accrual period exceeds the qualified stated interest allocable to that accrual period, the excess is a nondeductible loss. Under certain circumstances, the owner of a Tax-Exempt Premium Bond may realize a taxable gain upon disposition of the Tax-Exempt Premium Bond even though it is sold or redeemed for an amount less than or equal to the owner’s original acquisition cost. Owners of any Tax-Exempt Premium Bonds should consult their own tax advisors regarding the treatment of bond premium for Federal income tax purposes, including various special rules relating thereto, and state and local tax consequences, in connection with the acquisition, ownership, amortization of bond premium on, sale, exchange, or other disposition of Tax-Exempt Premium Bonds.

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Information Reporting and Backup Withholding

Information reporting requirements apply to interest paid on tax-exempt obligations, including the 2016A Bonds. In general, such requirements are satisfied if the interest recipient completes, and provides the payor with, a Form W-9, “Request for Taxpayer Identification Number and Certification,” or if the recipient is one of a limited class of exempt recipients. A recipient not otherwise exempt from information reporting who fails to satisfy the information reporting requirements will be subject to “backup withholding,” which means that the payor is required to deduct and withhold a tax from the interest payment, calculated in the manner set forth in the Code. For the foregoing purpose, a “payor” generally refers to the person or entity from whom a recipient receives its payments of interest or who collects such payments on behalf of the recipient.

If an owner purchasing a 2016A Bond through a brokerage account has executed a Form W-9 in connection with the establishment of such account, as generally can be expected, no backup withholding should occur. In any event, backup withholding does not affect the excludability of the interest on the 2016A Bonds from gross income for Federal income tax purposes. Any amounts withheld pursuant to backup withholding would be allowed as a refund or a credit against the owner’s Federal income tax once the required information is furnished to the Internal Revenue Service.

Miscellaneous

Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the 2016A Bonds under Federal or state law or otherwise prevent beneficial owners of the 2016A Bonds from realizing the full current benefit of the tax status of such interest. In addition, such legislation or actions (whether currently proposed, proposed in the future, or enacted) and such decisions could affect the market price or marketability of the 2016A Bonds. For example, the Fiscal Year 2017 Budget proposed by the Obama Administration recommends a 28% limitation on “all itemized deductions, as well as other tax benefits” including “tax-exempt interest.” The net effect of such a proposal, if enacted into law, would be that an owner of a tax-exempt bond with a marginal tax rate in excess of 28% would pay some amount of Federal income tax with respect to the interest on such tax-exempt bond, regardless of issue date.

Prospective purchasers of the 2016A Bonds should consult their own tax advisors regarding the foregoing matters.

Tax Matters – 2016B Bonds

In the opinion of Bond Counsel to the Successor Agency, interest on the 2016B Bonds (the “Taxable Bonds”) (i) is included in gross income for Federal income tax purposes, and (ii) is exempt, under existing statutes, from State personal income tax.

The following discussion is a brief summary of the principal United States Federal income tax consequences of the acquisition, ownership and disposition of Taxable Bonds by original purchasers of the Taxable Bonds who are “U.S. Holders”, as defined herein. This summary (i) is based on the Code, Treasury Regulations, revenue rulings and court decisions, all as currently in effect and all subject to change at any time, possibly with retroactive effect; (ii) assumes that the Taxable Bonds will be held as “capital assets”; and (iii) does not discuss all of the United States Federal income tax consequences that may be relevant to a holder in light of its particular circumstances or to holders subject to special rules, such as insurance companies, financial institutions, tax-exempt organizations, dealers in securities or foreign currencies, persons holding the Taxable Bonds as a position in a “hedge” or “straddle”, holders whose functional currency (as defined in Section 985 of the Code) is not the United States dollar, holders

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who acquire Taxable Bonds in the secondary market, or individuals, estates and trusts subject to the tax on unearned income imposed by Section 1411 of the Code.

Holders of Taxable Bonds should consult with their own tax advisors concerning the United States Federal income tax and other consequences with respect to the acquisition, ownership and disposition of the Taxable Bonds as well as any tax consequences that may arise under the laws of any state, local or foreign tax jurisdiction.

Original Issue Discount

In general, if Original Issue Discount (“OID”) is greater than a statutorily defined de minimis amount, a holder of a Taxable Bond must include in Federal gross income (for each day of the taxable year, or portion of the taxable year, in which such holder holds such Taxable Bond) the daily portion of OID, as it accrues (generally on a constant yield method) and regardless of the holder’s method of accounting. “OID” is the excess of (i) the “stated redemption price at maturity” over (ii) the “issue price”. For purposes of the foregoing: “issue price” means the first price at which a substantial amount of the Taxable Bond is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers); “stated redemption price at maturity” means the sum of all payments, other than “qualified stated interest”, provided by such Taxable Bond; “qualified stated interest” is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate; and “de minimis amount” is an amount equal to 0.25 percent of the Taxable Bond’s stated redemption price at maturity multiplied by the number of complete years to its maturity. A holder may irrevocably elect to include in gross income all interest that accrues on a Taxable Bond using the constant-yield method, subject to certain modifications.

Bond Premium

In general, if a Taxable Bond is originally issued for an issue price (excluding accrued interest) that reflects a premium over the sum of all amounts payable on the Taxable Bond other than “qualified stated interest” (a “Taxable Premium Bond”), that Taxable Premium Bond will be subject to Section 171 of the Code, relating to bond premium. In general, if the holder of a Taxable Premium Bond elects to amortize the premium as “amortizable bond premium” over the remaining term of the Taxable Premium Bond, determined based on constant yield principles (in certain cases involving a Taxable Premium Bond callable prior to its stated maturity date, the amortization period and yield may be required to be determined on the basis of an earlier call date that results in the highest yield on such bond), the amortizable premium is treated as an offset to interest income; the holder will make a corresponding adjustment to the holder’s basis in the Taxable Premium Bond. Any such election is generally irrevocable and applies to all debt instruments of the holder (other than tax-exempt bonds) held at the beginning of the first taxable year to which the election applies and to all such debt instruments thereafter acquired. Under certain circumstances, the holder of a Taxable Premium Bond may realize a taxable gain upon disposition of the Taxable Premium Bond even though it is sold or redeemed for an amount less than or equal to the holder's original acquisition cost.

Disposition and Defeasance

Generally, upon the sale, exchange, redemption, or other disposition (which would include a legal defeasance) of a Taxable Bond, a holder generally will recognize taxable gain or loss in an amount equal to the difference between the amount realized (other than amounts attributable to accrued interest not previously includable in income) and such holder’s adjusted tax basis in the Taxable Bond.

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The Successor Agency may cause the deposit of moneys or securities in escrow in such amount and manner as to cause the Taxable Bonds to be deemed to be no longer outstanding under the of the Indenture Taxable Bonds (a “defeasance”). See APPENDIX A – “SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE.” For Federal income tax purposes, such defeasance could result in a deemed exchange under Section 1001 of the Code and a recognition by such owner of taxable income or loss, without any corresponding receipt of moneys. In addition, the character and timing of receipt of payments on the Taxable Bonds subsequent to any such defeasance could also be affected.

Information Reporting and Backup Withholding

In general, information reporting requirements will apply to non-corporate holders of the Taxable Bonds with respect to payments of principal, payments of interest, and the accrual of OID on a Taxable Bond and the proceeds of the sale of a Taxable Bond before maturity within the United States. Backup withholding may apply to holders of Taxable Bonds under Section 3406 of the Code. Any amounts withheld under the backup withholding rules from a payment to a beneficial owner, and which constitutes over-withholding, would be allowed as a refund or a credit against such beneficial owner’s United States Federal income tax provided the required information is furnished to the Internal Revenue Service.

U.S. Holders

The term “U.S. Holder” means a beneficial owner of a Taxable Bond that is: (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate the income of which is subject to United States Federal income taxation regardless of its source or (iv) a trust whose administration is subject to the primary jurisdiction of a United States court and which has one or more United States fiduciaries who have the authority to control all substantial decisions of the trust.

Miscellaneous

Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, could affect the market price or marketability of the Taxable Bonds.

Prospective purchasers of the Taxable Bonds should consult their own tax advisors regarding the foregoing matters.

UNDERWRITING

The 2016A Bonds are being purchased by Hilltop Securities Inc. (the “Underwriter”). The Underwriter has agreed to purchase the 2016A Bonds at a price of $13,290,744.29 (being the principal amount of the 2016A Bonds of $11,790,000, plus a net original issue premium of $1,555,032.15 and less an underwriter’s discount of $54,287.86). The 2016B Bonds are being purchased by the Underwriter. The Underwriter has agreed to purchase the 2016B Bonds at a price of $2,418,975.81 (being the principal amount of the 2016B Bonds of $2,420,000, plus a net original issue premium of $4,316.75 and less an underwriter’s discount of $5,340.94). The purchase contract for the 2016 Bonds provides that the Underwriter will purchase all of the 2016 Bonds, if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in such purchase contract, the approval of certain legal matters by counsel and certain other conditions.

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FINANCIAL ADVISOR

The Successor Agency has retained the Financial Advisor in connection with the authorization, issuance, sale and delivery of the 2016 Bonds. The Financial Advisor is a registered municipal advisor. The Financial Advisor will receive compensation contingent upon the sale and delivery of the 2016 Bonds.

VERIFICATION OF MATHEMATICAL ACCURACY

Upon delivery of the 2016 Bonds, the Verification Agent will deliver a report on the mathematical accuracy of certain computations, contained in schedules provided to them that were prepared by the Successor Agency, relating to the sufficiency of monies to pay, when due, the principal, whether at maturity or upon prior redemption, interest and redemption premium requirements with respect to the Prior Bonds. The report of the Verification Agent will include the statement to the effect that the scope of its engagement is limited to verifying the mathematical accuracy of the computations contained in such schedules provided to it, and that it has no obligation to update its report because of events occurring, or date or information coming to its attention, subsequent to the date of its report.

LITIGATION

There is no action, suit or proceeding known to the Successor Agency to be pending and notice of which has been served upon and received by the Successor Agency, or threatened, restraining or enjoining the execution or delivery of the 2016 Bonds or the Indenture or in any way contesting or affecting the validity of the foregoing or any proceedings of the Successor Agency taken with respect to any of the foregoing.

LEGALITY FOR INVESTMENT IN CALIFORNIA

The Redevelopment Law provides that obligations authorized and issued under the Redevelopment Law will be legal investments for all banks, trust companies and savings banks, insurance companies, and various other financial institutions, as well as for trust funds. The 2016 Bonds are also authorized security for public deposits under the Redevelopment Law.

RATINGS

Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business (“S&P”), is expected to assign a rating of “AA” (stable outlook) to the Bonds with the understanding that upon delivery of the Bonds, the Policies guarantying the payment of principal of and interest on each Series of the Bonds when due will be issued by the 2016 Bond Insurer. See “BOND INSURANCE.” In addition, S&P has assigned its underlying rating of “A” to the 2016 Bonds.

Such ratings reflect only the views of S&P and any desired explanation of the significance of such ratings should be obtained from S&P. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by S&P, if in the judgment of S&P, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the 2016 Bonds. Investors should not make an investment decision based solely on the ratings of S&P. Investors must read this entire Official Statement to obtain information essential to making an informed investment decision with respect to the 2016 Bonds.

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CONTINUING DISCLOSURE

The Successor Agency has covenanted for the benefit of the holders and beneficial owners of the 2016 Bonds pursuant to a Continuing Disclosure Certificate, dated the date of issuance of the 2016 Bonds (the “Continuing Disclosure Certificate”), to provide certain financial information and operating data relating to the Successor Agency (the “Annual Report”) no later than March 1 following the end of each fiscal year, commencing with the report for Fiscal Year 2015-16, and to provide notices of the occurrence of certain enumerated events through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System for Municipal Securities disclosures, maintained on the internet at http://emma.msrb.org. The specific nature of the information to be contained in the Annual Report and the enumerated events is set forth in APPENDIX D – “FORM OF CONTINUING DISCLOSURE CERTIFICATE.” These covenants have been made in order to assist the Underwriter in complying with Rule 15c2-12, as amended (the “Rule”) promulgated by the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

Pursuant to the continuing disclosure certificate for the Prior Bonds, the Successor Agency timely filed audited financial statements for each of the past five years. However, the annual filings did not include certain required information, including taxable assessed values for the most recent fiscal year, tax increment revenues and housing tax increment revenues for the most recent fiscal year, the ten largest providers of tax increment revenues and certain tax levy and collections information. In addition, the Successor Agency did not file notices of its failure to file such information or notices of certain rating changes with respect to the Prior Bonds.

As of the date of this Official Statement, the Successor Agency has taken remedial actions to provide through the EMMA System, all of the items listed in the preceding paragraph that were supposed to be filed but were not.

Furthermore, to help ensure full and timely future compliance with its obligations under the Continuing Disclosure Certificate, the staff of the Successor Agency has instituted written Continuing Disclosure Compliance Procedures and has retained Willdan Financial Services to serve as Dissemination Agent.

APPROVAL OF LEGAL PROCEEDINGS

The validity of the 2016 Bonds and certain legal matters are subject to the approving opinion of Hawkins Delafield & Wood LLP, Bond Counsel to the Successor Agency. A complete copy of the proposed form of Bond Counsel’s opinion is attached as APPENDIX B. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

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EXECUTION AND DELIVERY

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


By: /s/ Charles A. Montoya Executive Director


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APPENDIX A

SUMMARY OF CERTAIN PROVISION OF THE INDENTURE

The following is a summary of certain provisions of the Indenture which are not described elsewhere. This summary does not purport to be comprehensive and reference should be made to the respective agreement for a full and complete statement of the provisions thereof.

DEFINITIONS

The following are summaries of certain of the definitions in the Indenture. This summary is not intended to be comprehensive or definitive, and reference is made to the actual documents for the complete terms thereof.

“Annual Debt Service” means, for each Bond Year, the sum of (a) the interest payable on the Outstanding Bonds in such Bond Year, assuming that the Outstanding Serial Bonds are retired as scheduled and that the Outstanding Term Bonds are redeemed from mandatory sinking account payments as scheduled, (b) the principal amount of the Outstanding Serial Bonds payable by their terms in such Bond Year, and (c) the principal amount of the Outstanding Term Bonds scheduled to be paid or redeemed from mandatory sinking account payments in such Bond Year.

“Authorized Denominations” means $5,000 or any integral multiple thereof.

“Bond” or “Bonds” means the 2016 Bonds and, if the context requires, any additional Parity Debt issued pursuant to a Supplemental Indenture or Parity Debt Instrument.

“Bond Counsel” means (a) Hawkins Delafield & Wood LLP, or (b) any other attorney or firm of attorneys appointed by or acceptable to the Successor Agency, of nationally-recognized experience in the issuance of municipal obligations and obligations the interest on which is excludable from gross income for federal income tax purposes under the Code.

“Bond Proceeds Fund” means the fund by that name established and held by the Trustee.

“Bond Year” means, any twelve-month period beginning on August 2 in any year and ending on the next succeeding August 1, both dates inclusive, except that the first Bond Year shall begin on the Closing Date, and end on August 1, 2016.

“Business Day” means a day of the year on which banks in San Francisco, California, or the city where the Principal Corporate Trust Office is located are not required or permitted to be closed and on which the New York Stock Exchange is not closed.

“City” means the City of Watsonville, a charter city duly organized and existing under the laws of the State of California.

“Closing Date” means, with respect to the 2016 Bonds, the date on which the 2016 Bonds are delivered by the Trustee to the original purchaser thereof.

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“Code” means the Internal Revenue Code of 1986 as in effect on the date of issuance of the Bonds or (except as otherwise referenced herein) as it may be amended to apply to obligations issued on the date of issuance of the Bonds, together with applicable temporary and final regulations promulgated, and applicable official public guidance published, under the Code.

“Community Redevelopment Law” means the Community Redevelopment Law, constituting Part 1 of Division 24 of the California Health and Safety Code.

“Continuing Disclosure Certificate” means the Continuing Disclosure Certificate executed by the Successor Agency dated as of the Closing Date, as originally executed and as it may be amended from time to time in accordance with the terms thereof.

“Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursable to the Successor Agency relating to the authorization, issuance, sale and delivery of the Bonds, including but not limited to County and Successor Agency administrative staff costs, printing expenses, bond insurance and surety bond premiums, transferred proceeds penalties due the United States of America, underwriting fees, rating agency fees, filing and recording fees, initial fees and charges and first annual administrative fee of the Trustee and fees and expenses of its counsel, 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.

“Costs of Issuance Account” means the account by that name within the Bond Proceeds Fund established and held by the Trustee.

“County” means the County of Santa Cruz, a county duly organized and existing under the Constitution and laws of the State.

“Debt Service Fund” means the fund by that name established and held by the Trustee.

“Defeasance Obligations” means (i) cash and (ii) Federal Securities.

“Depository” means (a) initially, DTC, and (b) any other Securities Depository acting as Depository pursuant to the Indenture.

“Depository System Participant” means any participant in the Depository's book-entry system.

“Dissolution Act” means Part 1.85 (commencing with Section 34170) of Division 24 of the California Health and Safety Code.

“DTC” means The Depository Trust Company, New York, New York, and its successors and assigns.

“Event of Default” means any of the events of default described in the Indenture.

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“Fair Market Value” means the price at which a willing buyer would purchase the investment from a willing seller in a bona fide, arm's length transaction (determined as of the date the contract to purchase or sell the investment becomes binding) if the investment is traded on an established securities market (within the meaning of section 1273 of the Code) and, otherwise, the term “Fair Market Value” means the acquisition price in a bona fide arm's length transaction (as referenced above) if (i) the investment is a certificate of deposit that is acquired in accordance with applicable regulations under the Code, (ii) the investment is an agreement with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate (for example, a guaranteed investment contract, a forward supply contract or other investment agreement) that is acquired in accordance with applicable regulations under the Code, (iii) the investment is a United States Treasury Security--State and Local Government Series thatis acquired in accordance with applicable regulations of the United States Bureau of Public Debt,(iv) any commingled investment fund in which the Agency and related parties do not own morethan a ten percent (10%) beneficial interest therein if the return paid by the fund is withoutregard to the source of the investment, or (v) the investment is the Local Agency InvestmentFund of the State of California but only if at all times during which the investment is held itsyield is reasonably expected to be equal to or greater than the yield on a reasonably comparabledirect obligation of the United States, as certified in writing by the Agency to the Trustee.

“Federal Securities” means any direct, noncallable 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 and CATS and TGRS), or obligations the payment of principal of and interest on which are unconditionally guaranteed by 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 twelve month period selected and designated by the Successor Agency to the Trustee in writing as its official fiscal year period.

“Former Agency” means the former Redevelopment Agency of the City of Watsonville, a public body corporate and politic duly organized and existing under the Community Redevelopment Law and dissolved in accordance with the Dissolution Act.

“Indenture” means this Indenture of Trust by and between the Successor Agency and the Trustee, as originally entered into or as it may be amended or supplemented by any Supplemental Indenture entered into pursuant to the provisions hereof.

“Independent Accountant” means any accountant or firm of such accountants duly licensed or registered or entitled to practice as such under the laws of the State, appointed by the Successor Agency, and who, or each of whom:

(a) is in fact independent and not under domination of the Successor Agency;

(b) does not have any substantial interest, direct or indirect, with theSuccessor Agency; and

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(c) is not connected with the Successor Agency as an officer or employee of the Successor Agency, but who may be regularly retained to make reports to the Successor Agency.

“Independent Redevelopment Consultant” means any consultant or firm of such consultants appointed by the Successor Agency, and who, or each of whom:

(a) is judged by the Successor Agency to have experience in matters relating to the issuance of tax allocation refunding bonds or otherwise with respect to the financing of redevelopment projects;

(b) is in fact independent and not under domination of the Successor Agency;

(c) does not have any substantial interest, direct or indirect, with the Successor Agency; and

(d) is not connected with the Successor Agency as an officer or employee of the Successor Agency, but who may be regularly retained to make reports to the Successor Agency.

“Information Services” means “EMMA” or the “Electronic Municipal Market Access” system of the Municipal Securities Rulemaking Board; or, in accordance with then-current guidelines of the Securities and Exchange Commission, such other services providing information with respect to called bonds as the Successor Agency may designate in a Written Certificate of the Successor Agency delivered to the Trustee.

“Interest Account” means the account by that name established and held by the Trustee.

“Interest Payment Date” means February 1 and August 1 of each year, commencing August 1, 2016, so long as any of the Bonds remain Outstanding hereunder.

“Insured 2016 Bonds” means all of the 2016 Bonds.

“Law” means the Community Redevelopment Law, constituting Part 1 of Division 24 of the California Health and Safety Code, together with the Dissolution Act, and the acts amendatory thereof and supplemental thereto.

“Maximum Annual Debt Service” means, as of the date of calculation, the largest Annual Debt Service for the current or any future Bond Year, as certified in writing by the Successor Agency to the Trustee.

“Nominee” means (a) initially, Cede & Co., as nominee of DTC, and (b) any other nominee of the Depository designated by the Successor Agency.

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“Outstanding” when used as of any particular time with reference to Bonds, means (subject to the provisions of Indenture) all Bonds except:

(a) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation;

(b) Bonds paid or deemed to have been paid within the meaning of the Indenture; and

(c) Bonds in lieu of or in substitution for which other Bonds shall have been authorized, executed, issued and delivered by the Successor Agency pursuant hereto.

“Oversight Board” means the Oversight Board for the Successor Agency, duly constituted from time to time pursuant to Section 34179 of the California Health and Safety Code.

“Owner” or “Bondowner” means, with respect to any Bond, the person in whose name the ownership of such Bond shall be registered on the Registration Books.

“Parity Debt” means any bonds, notes or other obligations that are payable from and secured by a lien on Tax Revenues that is on parity with the lien under this Indenture.

“Parity Debt Instrument” means any resolution, indenture of trust, loan agreement, trust agreement or other instrument authorizing the issuance of any Parity Debt, including, without limitation, a Supplemental Indenture authorized by the Indenture.

“Participating Underwriter” has the meaning ascribed thereto in the Continuing Disclosure Certificate.

“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 (provided that the Trustee shall be entitled to rely upon any investment direction from the Agency as conclusive certification to the Trustee that the investments described therein are so authorized under the laws of the State), but only to the extent that the same comply with the Successor Agency's investment policies at the time such Permitted Investment is acquired, provided that the Trustee shall be entitled to rely upon any investment directions from the Agency as conclusive certification to the Trustee that investments described therein are in compliance with the Successor Agency's investment policy then in effect:

(a) Cash;

(b) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America;

(c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America;

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(d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated;

(e) Federal Housing Administration debentures;

(f) the following listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America:

(i) Federal Home Loan Mortgage Corporation (FHLMC) senior debt obligations and Participation certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts);

(ii) Farm Credit System (formerly Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) consolidated system-wide bonds and notes;

(iii) Federal Home Loan Banks (FHL Banks) consolidated debt obligations; and

(iv) Federal National Mortgage Association (FNMA) senior debt obligations and mortgage-backed securities (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts);

(g) unsecured certificates of deposit, time deposits, and bankers' acceptances or other similar bank deposit products (having maturities of not more than 365 days) of any bank (which may include the Trustee and its affiliates) the short-term obligations of which are rated “A-1+” or better by S&P and “Prime-1” by Moody's;

(h) deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation, in banks which have capital and surplus of at least $15 million;

(i) commercial paper (having original maturities of not more than 270 days) rated at the time of purchase “A-1+” by S&P and “Prime-1” by Moody's;

(j) money market funds (including funds for which the Trustee or an affiliate receives and retains a fee for services provided to the fund, whether as a custodian, transfer agent, investment advisor or otherwise) rated “Aam” or “AAm-G” by S&P, or better and if rated by Moody's rated “Aa2” or better;

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(k) “State Obligations”, which means:

(i) direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of such state, subdivision or agency and which is rated at least “Aa” by Moody's and at least “AA” by S&P;

(ii) direct general short-term obligations of any state agency or subdivision or agency thereof described in (a) above and rated “A-1+” by S&P and “MIG-1” by Moody's; and

(iii) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state or state agency described in (b) above and rated “AA-” or better by S&P and “Aa3” or better by Moody's;

(l) pre-refunded municipal obligations rated “AAA” by S&P and “Aaa” by Moody's meeting the following requirements:

(i) the municipal obligations are (1) not subject to redemption prior to maturity or (2) the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions;

(ii) the municipal obligations are secured by cash or U.S. Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations;

(iii) the principal of and interest on the U.S. Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations (“Verification Report”);

(iv) the cash or U.S. Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations;

(v) no substitution of a U.S. Treasury Obligation shall be permitted except with another U.S. Treasury Obligation and upon delivery of a new Verification Report; and

(vi) the cash or U.S. Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent;

(m) repurchase agreements with (1) any domestic bank, or domestic branch of a foreign bank, the long term debt of which is rated at least “AA-” by S&P and “Aa3” Moody's; or (2) any broker-dealer with “retail customers” or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least “AA-” by S&P and “Aa3” by Moody's, which broker-dealer falls under the jurisdiction of

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the Securities Investors Protection Corporation; or (3) any other entity rated at least “AA-” by S&P and “Aa3” Moody's and acceptable to the 2016 Bond Insurer, the form and substance of which repurchase agreement shall be in form and substance acceptable to the 2016 Bond Insurer;

(n) investment agreements with a domestic or foreign bank or corporation the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least “AA” by S&P and “Aa” by Moody's, and acceptable to the 2016 Bond Insurer, the form and substance of which investment agreement shall be in form and substance acceptable to the 2016 Bond Insurer;

(o) the Local Agency Investment Fund which is administered by the California Treasurer for the investment of funds belonging to local agencies within the State of California, provided that for investment of funds held by the Trustee, the Trustee is entitled to make investments and withdrawals in its own name as Trustee; and

(p) any other investment approved in writing by the 2016 Bond Insurer in its sole discretion.

“Principal Account” means the account by that name established and held by the Trustee.

“Principal Corporate Trust Office” means the principal corporate trust office of the Trustee located in San Francisco, California, or such other office that the Trustee may designate in writing to the Successor Agency from time to time as the corporate trust office for purposes of this Indenture; provided, however, that for purposes of the transfer, registration, exchange, payment and surrender of Bonds, the term “Principal Corporate Trust Office” means the corporate trust office of the Trustee at which it conducts its corporate agency business, initially such office in St. Paul, Minnesota.

“Project Area” means the Watsonville 2000 Development Project, as described in the Redevelopment Plan.

“Qualified Reserve Account Credit Instrument” means (i) the 2016 Reserve Policy and (ii) an irrevocable standby or direct-pay letter of credit, insurance policy, 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 of the letter of credit, insurance policy or surety bond, S&P or Moody's have assigned a long-term credit rating to such bank or insurance company or the instrument, as applicable, of at least “AA” or “Aa”; (b) such letter of credit, insurance policy or surety bond has a term of at least 12 months; (c) such letter of credit, insurance policy or surety bond has a stated amount at least equal to the Reserve Requirement or, if such letter of credit, insurance policy or surety bond is being provided with respect to only a portion of the Reserve Requirement, such letter of credit, insurance policy or surety bond has a stated amount at least equal to that portion of the Reserve Requirement with respect to which funds are proposed to be released; and (d) the Trustee is authorized pursuant to the terms of such letter of credit, insurance policy or surety bond to draw thereunder an amount equal to any deficiencies which may exist from time to time

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in the Interest Account or the Principal Account for the purpose of making payments required pursuant to the Indenture.

“Recognized Obligation Payment Schedule” means the schedule by that name prepared in accordance with the requirements of Section 34177(l) of the California Health and Safety Code.

“Record Date” means, with respect to any Interest Payment Date, the close of business on the fifteenth (15th) calendar day of the month preceding such Interest Payment Date, whether or not such fifteenth (15th) calendar day is a Business Day.

“Redemption Account” means the account by that name established and held by the Trustee pursuant to the Indenture.

“Redevelopment Obligation Retirement Fund” means the fund established and held by the Successor Agency pursuant to Section 34170.5(a) of the California Health and Safety Code.

“Redevelopment Plan” means the Redevelopment Plan for the Project Area, approved by Ordinance No. 1092-00 enacted by the City Council of the City on July 27, 2000, together with any amendments thereof heretofore or hereafter duly enacted pursuant to the Community Redevelopment Law.

“Redevelopment Property Tax Trust Fund” means the fund established pursuant to Section 34170.5(b) of the California Health and Safety Code and administered by the City of Watsonville.

“Registration Books” means the records maintained by the Trustee for the registration and transfer of ownership of the Bonds.

“Refunding Law” means Article 11 (commencing with Section 53580) of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State, and the acts amendatory thereof and supplemented thereto.

“Report” means a document in writing signed by an Independent Redevelopment Consultant and including:

(a) a statement that the person or firm making or giving such Report has read the pertinent provisions of this Indenture to which such Report relates;

(b) a brief statement as to the nature and scope of the examination or investigation upon which the Report is based; and

(c) a statement that, in the opinion of such person or firm, sufficient examination or investigation was made as is necessary to enable said consultant to express an informed opinion with respect to the subject matter referred to in the Report.

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“Reserve Account” means the account by that name established and held by the Trustee.

“Reserve Requirement” means, with respect to the 2016 Bonds, Maximum Annual Debt Service with respect to the 2016 Bonds. The Successor Agency will meet the Reserve Requirement in connection with the issuance of the 2016 Bonds by depositing the 2016 Reserve Policy in the Reserve Account in accordance with the Indenture.

“S&P” means Standard & Poor's Ratings Services and its successors.

“Securities Depositories” means DTC and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the Successor Agency may designate in a Written Request of the Successor Agency delivered to the Trustee.

“Semiannual Period” means (a) each six-month period beginning on January 1 of any calendar year and ending on June 30 of such calendar year, and (b) each six-month period beginning on July 1 of any calendar year and ending on December 31 of such calendar year.

“Serial Bonds” means all Bonds other than Term Bonds.

“Sinking Account” means the account by that name established and held by the Trustee.

“State” means the State of California.

“Subordinate Debt” means any loan, advances or indebtedness issued or incurred by the Successor Agency, which are payable from or secured by Tax Revenues on a subordinate basis to the pledge of and lien upon the Tax Revenues hereunder for the security of the Bonds.

“Successor Agency” means the Successor Agency for the Redevelopment Agency of the City of Watsonville, a public entity duly organized and existing under the Law.

“Supplemental Indenture” means any resolution, agreement or other instrument that has been duly adopted or entered into by the Successor Agency, but only if and to the extent that such Supplemental Indenture is specifically authorized hereunder.

“Tax Revenues” means all moneys deposited from time to time in the Redevelopment Property Tax Trust Fund, as provided in paragraph (2) of subdivision (a) of Section 34183 of the Law, excluding amounts if any, payable by the Successor Agency pursuant to Sections 33676, 33607.5, 33401 and 33607.7 of the Law and Section 34183(a)(1) of the Dissolution Act, except to the extent such amounts are payable on a basis subordinate to the payment of Annual Debt Service on the 2016 Bonds or any Parity Debt pursuant to Section 33607.5(e) of the Law and 34177.5(c) of the Dissolution Act.

“Term Bonds” means the 2016 Bond maturing on August 1, 2033 and any Parity Debt issued pursuant to a Supplemental Indenture and payable from amounts in the Sinking Account established under the Indenture.

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“Trustee” means U.S. Bank National Association, as trustee hereunder, or any successor thereto appointed as trustee hereunder in accordance with the provisions of Article VI.

“2004 Bonds” means (i) $19,000,000 Redevelopment Agency of the City of Watsonville Watsonville 2000 Redevelopment Project 2004 Tax Allocation Bonds, Series A; (ii) $2,310,000 Redevelopment Agency of the City of Watsonville Watsonville 2000 Redevelopment Project 2004 Housing Tax Allocation Bonds, Series B-1; and (iii) $4,635,000 Redevelopment Agency of the City of Watsonville Watsonville 2000 Redevelopment Project 2004 Housing Taxable Tax Allocation Bonds, Series B-2.

“2004 Bonds Refunding Fund” means the fund by that name established in Section 3.04 hereof.

“2004 Bonds Refunding Instructions” means those Irrevocable Refunding Instructions dated the date of issuance and delivery of the 2016 Bonds relating to the defeasance and refunding of the 2004 Bonds, executed by the Successor Agency and delivered to U.S. Bank National Association, as trustee of the 2004 Bonds.

“2016 Bonds” means the Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Series A and Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Taxable Series B.

“2016 Series A Bonds” means the Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Series A.

“2016 Series B Bonds” means the Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Taxable Series B.

“2016 Insurance Policy” means the insurance policy issued by the 2016 Bond Insurer guaranteeing the scheduled payment of principal of and interest on the 2016 Bonds when due.

“2016 Bond Insurer” means Build America Mutual Assurance Company, or any successor thereto or assignee thereof, as issuer of the 2016 Insurance Policy and the 2016 Reserve Policy.

“2016 Reserve Policy” means the municipal bond debt service reserve insurance policy relating to the 2016 Bonds issued by the 2016 Bond Insurer.

“Tax-Exempt Bonds” means, collectively, the 2016 Series A Bonds and any Parity Debt the interest on which is not included in gross income for federal income tax purposes.

“Written Request of the Successor Agency” or “Written Certificate of the Successor Agency” means a request or certificate, in writing signed by the City Manager of the City of Watsonville or his or her designee, or by any other officer of the Successor Agency duly authorized by the Governing Board of the Successor Agency for that purpose.

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CERTAIN PROVISIONS OF THE INDENTURE

Certain Covenants of the Successor Agency

Punctual Payment. The Successor Agency shall punctually pay or cause to be paid the principal and interest to become due in respect of all the Bonds together with the premium thereon, if any, in strict conformity with the terms of the Bonds and of this Indenture. The Successor Agency shall faithfully observe and perform all of the conditions, covenants and requirements of this Indenture and all Supplemental Indentures and the Bonds. Nothing herein contained shall prevent the Successor Agency from making advances of its own moneys howsoever derived to any of the uses or purposes referred to herein.

Limitation on Additional Indebtedness; Against Encumbrances. The Successor Agency covenants that it will not issue any bonds, notes, or other obligations that are payable from or secured by a lien on Tax Revenues that is superior to the lien under this Indenture. The Successor Agency may issue bonds or other obligations to refund all of its Outstanding Bonds provided that all of such Outstanding Bonds are defeased in accordance with Section 9.03 hereof. The Successor Agency may issue Parity Debt to refund a portion of the Outstanding Bonds provided that with respect to any such refunding (i) annual debt service on such Parity Debt, as applicable, is lower than annual debt service on the obligations being refunded during every year the obligations would otherwise be outstanding (ii) the final maturity of any such Parity Debt does not exceed the final maturity of the obligations being refunded, (iii) the interest rate on the Parity Debt shall be fixed on the date of issuance of the Parity Debt, and (iv) principal payments shall be on August 1 and interest payments on August 1 and February 1. Nothing herein shall prevent the Successor Agency from issuing Subordinate Debt.

Extension of Payment. The Successor Agency will not, directly or indirectly, extend or consent to the extension of the time for the payment of any Bond or claim for interest on any of the Bonds and will not, directly or indirectly, be a party to or approve any such arrangement by purchasing or funding the Bonds or claims for interest in any other manner. In case the maturity of any such Bond or claim for interest shall be extended or funded, whether or not with the consent of the Successor Agency, such Bond or claim for interest so extended or funded shall not be entitled, in case of default hereunder, to the benefits of this Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest which shall not have been so extended or funded.

Payment of Claims. The Successor Agency shall promptly pay and discharge, or cause to be paid and discharged, any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the properties owned by the Successor Agency or upon the Tax Revenues or other amounts pledged to the payment of the Bonds, or any part thereof, or upon any funds in the hands of the Trustee, or which might impair the security of the Bonds. Nothing herein contained shall require the Successor Agency to make any such payment so long as the Successor Agency in good faith shall contest the validity of said claims.

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Books and Accounts; Financial Statements. The Successor Agency shall at all times keep, or cause to be kept, proper and current books and accounts in which accurate entries are made of the financial transactions and records of the Successor Agency. Within eight (8) months after the close of each Fiscal Year an Independent Certified Public Accountant shall prepare an audit of the financial transactions and records of the Successor Agency for such Fiscal Year. To the extent permitted by law, such audit may be included within the annual audited financial statements of the City. The Successor Agency shall furnish a copy of such financial statements to any Owner upon reasonable request of such Owner and at the expense of such Owner. The Trustee shall have no duty to review such audits.

Protection of Security and Rights of Owners. The Successor Agency will preserve and protect the security of the Bonds and the rights of the Owners. From and after the Closing Date with respect to the 2016 Bonds, the 2016 Bonds shall be incontestable by the Successor Agency.

Payments of Taxes and Other Charges. Except as otherwise provided herein, the Successor Agency will pay and discharge, or cause to be paid and discharged, all taxes, service charges, assessments and other governmental charges which may hereafter be lawfully imposed upon the Successor Agency or the properties then owned by the Successor Agency in the Project Area, or upon the revenues therefrom when the same shall become due. Nothing herein contained shall require the Successor Agency to make any such payment so long as the Successor Agency in good faith shall contest the validity of said taxes, assessments or charges. The Successor Agency will duly observe and conform with all valid requirements of any governmental authority relative to the Project Area or any part thereof.

Compliance with the Law; Recognized Obligation Payment Schedules.

The Successor Agency shall comply with all of the requirements of the Law. Pursuant to Section 34177 of the Law, not later than each date a Recognized Obligation Payment Schedule is due, the Successor Agency shall submit to the Oversight Board and the State Department of Finance, a Recognized Obligation Payment Schedule. The Successor Agency shall take all actions required under the Law to include in the Recognized Obligation Payment Schedule for each Bond Year (i) Annual Debt Service on the Bonds (ii) all amounts (if any) required to cure any deficiency in the Reserve Account and (iii) all amounts due and owing to the 2016 Bond Insurer hereunder, so as to enable the Santa Cruz County Auditor-Controller to distribute such amounts from the Redevelopment Property Tax Trust Fund for deposit in the Redevelopment Obligation Retirement Fund on each January 2 and June 1, as applicable.

Within 15 days following the Closing Date or in any event prior to October 1, 2016, the Successor Agency shall cause the Recognized Obligation Payment Schedule for Fiscal Year 2016-17 to be amended to provide that Tax Revenues to be received by the Successor Agency on January 2, 2017 will be sufficient to pay principal of and interest on the 2016 Bonds due on February 1, 2017 and August 1, 2017.

In order to ensure that amounts are available for the Trustee to pay Annual Debt Service on all Outstanding Bonds and all amounts due and owing to the 2016 Bond Insurer hereunder on a timely basis, not later than February 1 of each year (or such other time as may be required by the Dissolution Act), commencing February 1, 2017 for the Bond Year beginning on August 2,

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2017, the Successor Agency shall submit an Oversight Board-approved Recognized Obligation Payment Schedule to the State Department of Finance and to the Santa Cruz County Auditor-Controller that shall include:

(i) all of the debt service due on all Outstanding Bonds on February 1 and August 1 of the Bond Year ending on August 1 of the following calendar year, which amount shall be distributed in full to the Successor Agency on January 2 of such year, and

(ii) any amount required to cure any deficiency in the Reserve Account pursuant to this Indenture (including any amounts required due to a draw on the Qualified Reserve Account Credit Instrument as well as all amounts due and owing to the 2016 Bond Insurer hereunder).

In addition to the amounts described in clauses (i) and (ii) of the previous paragraph, if the amount of Tax Revenues distributed to the Successor Agency on January 2 in any year is less than the sum of the amounts specified in clauses (i) and (ii) of the previous paragraph, then not later than February 1 of such year (or on such other date as may be required by the Dissolution Act), the Successor Agency shall submit an Oversight Board-approved Recognized Obligation Payment Schedule to the State Department of Finance and to the Santa Cruz County Auditor-Controller that shall include the balance due to the Successor Agency, which amount shall be distributed in full to the Successor Agency on June 1 of such year.

In the event the provisions set forth in the Dissolution Act as of the Closing Date of the 2016 Bonds that relate to the filing of Recognized Obligation Payment Schedules are amended or modified in any manner, the Successor Agency covenants that it shall use commercially reasonable efforts to take all actions necessary to ensure the Agency receives on January 2 of each year from moneys deposited into the Redevelopment Property Tax Trust Fund, sufficient Tax Revenues to pay all Annual Debt Service due on all Outstanding Bonds during such Bond Year.

If any amounts then due and payable to the 2016 Bond Insurer under this Indenture are not included on any current Recognized Obligation Payment Schedule and the Successor Agency is then legally permitted to amend such Recognized Obligation Payment Schedule, the Successor Agency will submit to the Oversight Board and the State Department of Finance a request to amend such Recognized Obligation Payment Schedule to include such amounts then due and payable to the 2016 Bond Insurer.

The Successor Agency will not submit to the Oversight Board and the State Department of Finance a request for the final amendment permitted for its Last and Final Recognized Obligation Payment Schedule pursuant to Section 34191.6 without the prior written consent of the 2016 Bond Insurer, unless all amounts that could become due and payable to the 2016 Bond Insurer under this Indenture would be included as a line item on the Last and Final Recognized Obligation Payment Schedule following approval of the requested amendment.

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Dissolution Act Invalid; Maintenance of Tax Revenues. In the event that the applicable property tax revenues provisions of the Dissolution Act are determined by a court in a final judicial decision to be invalid and, in place of the invalid provisions, provisions of the Law or the equivalent become applicable to the Bonds, the Successor Agency shall comply with all requirements of the Law or the equivalent to ensure 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, in the case of amounts payable by the State, appropriate officials of the State.

Continuing Disclosure. The Successor Agency hereby covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate, and it will engage a consultant to assist in preparing and filing the reports and notices required by the Continuing Disclosure Certificate. Notwithstanding any other provision of this Indenture, failure of the Successor Agency to comply with the Continuing Disclosure Certificate shall not be an Event of Default hereunder. However, any Participating Underwriter or any holder or beneficial owner of the 2016 Bonds may take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Successor Agency to comply with its obligations under this Section.

Amendment With And Without Consent of Owners.

This Indenture and the rights and obligations of the Successor Agency and of the Owners may be modified or amended at any time by a Supplemental Indenture which shall become binding upon adoption and without the consent of any Owners, to the extent permitted by law and only for any one or more of the following purposes:

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

(2) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in this Indenture, or in any other respect whatsoever as the Successor Agency may deem necessary or desirable, provided under any circumstances that such modifications or amendments shall not, in the reasonable determination of the Successor Agency, materially adversely affect the interests of the Owners; or

(3) to amend any provision hereof relating to the requirements of or compliance with the Code, to any extent whatsoever but only if and to the extent such amendment will not adversely affect the exemption from federal income taxation of interest on any of the Bonds, in the opinion of Bond Counsel; or

(4) to provide for the issuance of Parity Debt pursuant to a Supplemental Indenture, as such issuance is authorized by the Indenture.

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Except as set forth in the preceding paragraph, this Indenture and the rights and obligations of the Successor Agency and of the Owners may be modified or amended at any time by a Supplemental Indenture which shall become binding with the consent of the Owners of a majority in aggregate principal amount of the Bonds then Outstanding are filed with the Trustee; provided that so long as the 2016 Insurance Policy is in effect with respect to Bonds, the 2016 Bond Insurer may give consent to amendments in place of the Owners of such Bonds. No such modification or amendment shall (a) extend the maturity of or reduce the interest rate on any Bond or otherwise alter or impair the obligation of the Successor Agency to pay the principal, interest or redemption premium, (if any) 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, or (b) reduce the percentage of Bonds required for the written consent to any such amendment or modification. In no event shall any Supplemental Indenture modify any of the rights or obligations of the Trustee without its prior written consent. In addition, the Trustee shall be entitled to an opinion of counsel concerning the Supplemental Indenture's lack of any material adverse effect on the Owners.

Amendment by Mutual Consent. The provisions of this Article VII shall not prevent any Owner from accepting any amendment as to the particular Bond held by such Owner, provided that due notation thereof is made on such Bond.

Events of Default and Acceleration of Maturities.

Events of Default. The following events shall constitute Events of Default hereunder:

(a) if default shall be made by the Successor Agency in the due and punctual payment of the principal of or interest on any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by declaration or otherwise;

(b) if default shall be made by the Successor Agency in the observance of any of the covenants, agreements or conditions on its part in this Indenture or in the Bonds or any Parity Debt Instrument contained, other than a default described in the preceding clause (a), and such default shall have continued for a period of sixty (60) days following receipt by the Successor Agency of written notice from the Trustee or any Owner of the occurrence of such default, provided that if in the reasonable opinion of the Successor Agency the failure stated in the notice can be corrected, but not within such 60 day period, such failure will not constitute an event of default if corrective action is instituted by the Successor Agency within such 60 day period and the Successor Agency thereafter diligently and in good faith cures such failure in a reasonable period of time; or

(c) If the Successor Agency files a petition seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law of the United States of America, or if a court of competent jurisdiction will approve a petition seeking reorganization under the federal bankruptcy laws or any other applicable law of the United States of America, or, if under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction will approve a petition, seeking reorganization under the federal bankruptcy laws or any other applicable law of the United States of America, or, if under the provisions of any other

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law for the relief or aid of debtors, any court of competent jurisdiction will assume custody or control of the Successor Agency or of the whole or any substantial part of its property.

If an Event of Default pursuant to (a) or (c) above has occurred and is continuing, the Trustee may, or, if requested in writing by the Owners of a majority in aggregate principal amount of the Bonds then Outstanding the Trustee shall, (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 shall become immediately due and payable, anything in this Indenture or in the Bonds to the contrary notwithstanding, and (b) the Trustee shall, subject to the provisions of the Indenture, exercise any other remedies available to the Trustee and the Bond Owners in law or at equity.

Upon receiving notice or actual knowledge of the occurrence of an Event of Default, the Trustee shall give notice of such Event of Default to the Successor Agency by telephone promptly confirmed in writing. Such notice shall also state whether the principal of the Bonds shall have been declared to be or have immediately become due and payable. With respect to any Event of Default described in clauses (a) or (c) above the Trustee shall, and with respect to any Event of Default described in clause (b) above the Trustee in its sole discretion may, also give such notice to the Owners by mail, which shall include the statement that interest on the Bonds shall cease to accrue from and after the date, if any, on which the Trustee shall have declared the Bonds to become due and payable pursuant to the preceding paragraph (but only to the extent that principal and any accrued, but unpaid, interest on the Bonds is actually paid on such date).

This provision, however, is subject to the condition that if, at any time after the principal of the Bonds shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, the Successor Agency shall deposit 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 (to the extent permitted by law), and the reasonable fees and expenses of the Trustee, (including the allocated costs and disbursements of its in-house counsel to the extent such services are not redundant with those provided by outside counsel) 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) shall have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, the Trustee shall promptly give written notice of the foregoing to the Owners of all Bonds then Outstanding, and the Owners of at least a majority in aggregate principal amount of the Bonds then Outstanding, by written notice to the Successor Agency and to the Trustee, may, on behalf of the Owners of all of the Bonds, rescind and annul such declaration and its consequences. However, no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon.

Application of Funds Upon Acceleration. All of the Tax Revenues and all sums in the funds and accounts established and held by the Trustee hereunder upon the date of the declaration of acceleration as provided in the Indenture, and all sums thereafter received by the Trustee hereunder, shall be applied by the Trustee in the following order upon presentation of the

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several Bonds, and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid:

First, to the payment of the fees, costs and expenses of the Trustee in declaring such Event of Default and in exercising the rights and remedies set forth in the Indenture, including reasonable compensation to its agents, attorneys (including the allocated costs and disbursements of its in-house counsel to the extent such services are not redundant with those provided by outside counsel) and advisors and any outstanding fees, expenses of the Trustee; and

Second, to the payment of the whole amount then owing and unpaid upon the Bonds for principal and interest, with interest on the overdue principal and installments of interest at the net effective rate then borne by the Outstanding Bonds (to the extent that such interest on overdue installments of principal and interest shall have been collected), and in case such moneys shall be insufficient to pay in full the whole amount so owing and unpaid upon the Bonds, then to the payment of such principal and interest without preference or priority of principal over interest, or interest over principal, or of any installment of interest over any other installment of interest, ratably to the aggregate of such principal and interest; and

Third, to the payment of all amounts due and owing to the 2016 Bond Insurer hereunder.

Power of Trustee to Control Proceedings. In the event that the Trustee, upon the happening of an Event of Default, shall have taken any action, by judicial proceedings or otherwise, pursuant to its duties hereunder, whether upon its own discretion or upon the request of the Owners of a majority in principal amount of the Bonds then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Bonds, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee shall not, unless there no longer continues an Event of Default, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed with it a written request signed by the Owners of a majority in principal amount of the Outstanding Bonds hereunder opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation.

Limitation on Owner's Right to Sue. No Owner of any Bond issued hereunder shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon this Indenture, unless (a) such Owner shall have 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 shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name; (c) said Owners shall 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 shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee.

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Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of any remedy hereunder; it being understood and intended that no one or more Owners shall have any right in any manner whatever by his or their action to enforce any right under this Indenture, except in the manner herein provided, and that all proceedings at law or in equity to enforce any provision of this Indenture shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all Owners of the Outstanding Bonds.

The right of any Owner of any Bond to receive payment of the principal of and interest on such Bond as herein provided, shall not be impaired or affected without the written consent of such Owner, notwithstanding the foregoing provisions of this Section or any other provision of this Indenture.

Non-Waiver. Nothing in this Article VIII or in any other provision of this Indenture or in the Bonds, shall affect or impair the obligation of the Successor Agency, which is absolute and unconditional, to pay from the Tax Revenues and other amounts pledged hereunder, the principal of and interest on the Bonds to the respective Owners on the respective Interest Payment Dates, as herein provided, or affect or impair the right of action, which is also absolute and unconditional, of the Owners or the Trustee to institute suit to enforce such payment by virtue of the contract embodied in the Bonds.

A waiver of any default by any Owner or the Trustee shall not affect any subsequent default or impair any rights or remedies on the subsequent default. No delay or omission of any Owner to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein, and every power and remedy conferred upon the Owners and the Trustee by the Law or by this the Indenture may be enforced and exercised from time to time and as often as shall be deemed expedient by the Owners and the Trustee.

If a suit, action or proceeding to enforce any right or exercise any remedy shall be abandoned or determined adversely to the Owners or the Trustee, the Successor Agency, the Trustee and the Owners shall be restored to their former positions, rights and remedies as if such suit, action or proceeding had not been brought or taken.

Actions by Trustee as Attorney-in-Fact. Any suit, action or proceeding which any Owner shall have the right to bring to enforce any right or remedy hereunder may be brought by the Trustee for the equal benefit and protection of all Owners similarly situated and the Trustee is hereby appointed (and the successive respective Owners by taking and holding the Bonds shall be conclusively deemed so to have appointed it) the true and lawful attorney-in-fact of the respective Owners for the purpose of bringing any such suit, action or proceeding and to do and perform any and all acts and things for and on behalf of the respective Owners as a class or classes, as may be necessary or advisable in the opinion of the Trustee as such attorney-in-fact, provided, however, the Trustee shall have no duty or obligation to exercise any such right or remedy unless it has been indemnified to its satisfaction from any loss, liability or expense (including fees and expenses of its outside counsel and the allocated costs and disbursements of its in-house counsel to the extent such services are not redundant with those provided by outside counsel).

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Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Owners is intended to be exclusive of any other remedy. Every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing, at law or in equity or by statute or otherwise, and may be exercised without exhausting and without regard to any other remedy conferred by the Law or any other law.

Defeasance of Bonds.

If the Successor Agency shall pay and discharge the entire indebtedness on all Bonds or any portion thereof in any one or more of the following ways:

(1) by well and truly paying or causing to be paid the principal of and interest on all or the applicable portion of Outstanding Bonds, as and when the same become due and payable; or

(2) by irrevocably depositing with the Trustee in trust or an escrow holder, in escrow, at or before maturity, money which, together with the available amounts then on deposit in the funds and accounts established pursuant to this Indenture, is fully sufficient to pay all or a portion of Outstanding Bonds, including all principal and interest, or;

(3) by irrevocably depositing with the Trustee in trust or an escrow holder, in escrow, Defeasance Obligations in such amount as an Independent Accountant shall determine will, together with the interest to accrue thereon and available moneys then on deposit in the funds and accounts established pursuant to this Indenture, be fully sufficient to pay and discharge the indebtedness on all Bonds or a portion thereof (including all principal and interest) at or before maturity; or

(4) by purchasing such Bonds prior to maturity and tendering such Bonds to the Trustee for cancellation;

then, at the election of the Successor Agency, and notwithstanding that any Bonds shall not have been surrendered for payment, the pledge of the Tax Revenues and other funds provided for in this Indenture and all other obligations of the Trustee and the Successor Agency under this Indenture shall cease and terminate with respect to all Outstanding Bonds or, if applicable, with respect to that portion of the Bonds which has been paid and discharged, except only (a) the covenants of the Successor Agency hereunder with respect to the Code, (b) the obligation of the Trustee to transfer and exchange Bonds hereunder, (c) the obligations of the Successor Agency under Section 6.06 hereof, and (d) the obligation of the Successor Agency to pay or cause to be paid to the Owners, from the amounts so deposited with the Trustee, all sums due thereon and to pay the Trustee all fees, expenses and costs of the Trustee. In the event the Successor Agency shall, pursuant to the foregoing provision, pay and discharge any portion or all of the Bonds then Outstanding, the Trustee shall be authorized to take such actions and execute and deliver to the Successor Agency all such instruments as may be necessary or desirable to evidence such discharge, including, without limitation, selection by lot of Bonds of any maturity of the Bonds that the Successor Agency has determined to pay and discharge in part.

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In the case of a defeasance or payment of all of the Bonds Outstanding, any funds thereafter held by the Trustee which are not required for said purpose or for payment of amounts due the Trustee pursuant to the Indenture shall be paid over to the Successor Agency for deposit in the Redevelopment Obligation Retirement Fund.

Provisions Relating to 2016 Bond Insurer.

Provisions Govern. The provisions of this heading shall govern the Insured Bonds, notwithstanding anything to the contrary set forth in the Indenture. Under the Indenture, the Successor Agency has agreed to the provisions in this heading.

Notice and Other Information to be given to 2016 Bond Insurer. The Successor Agency will provide 2016 Bond Insurer with all notices and other information it is obligated to provide (i) under its Continuing Disclosure Certificate and (ii) to the holders of Bonds or the Trustee under the Indenture.

Meet and Confer; ROPS Denial. The Successor Agency shall provide 2016 Bond Insurer with copies of all Recognized Obligation Payment Schedules (“ROPS”) submitted and any and all correspondence received from the State of California, Department of Finance (“DOF”) upon receipt. Documents posted by under their existing procedures on the DOF website shall meet this requirement. In the event that the Successor Agency is a party to a meet and confer with the DOF that relates to the payment of security for the Insured Bonds or Policy Costs, the Successor Agency shall notify 2016 Bond Insurer and, if the subject of the meet and confer could impact the payment of or security for the Insured Bonds or Policy Costs, 2016 Bond Insurer shall have the right to participate in the meet and confer process either by appearance with the Successor Agency at the meet and confer or through written submission as 2016 Bond Insurer determines in its discretion. In the event the Successor Agency receives a ROPS denial, whether relating to the Insured Bonds or not, and such denial could delay the receipt of tax revenues necessary to pay debt service, Policy Costs, or 2016 Bond Insurer Reimbursement Amounts relating to the Insured Bonds, the Successor Agency agrees to cooperate in good faith with 2016 Bond Insurer and 2016 Bond Insurer shall receive prompt notice of any such event and shall be permitted to attend any meetings with the Successor Agency and the DOF and to discuss such matters with the DOF directly.

Additional Debt. The Successor Agency shall not issue or incur any bonds, debt or other obligations that are payable from or secured by any property tax or tax increment revenues pledged to the Insured Bonds on a basis senior or superior to the Insured Bonds. The Successor Agency shall not issue or incur any bonds, indebtedness or other obligations payable or secured on a parity basis with the Insured Bonds except for refunding bonds issued to refund the Bonds or other outstanding parity bonds, provided that such refunding bonds generate debt service savings. Any additional subordinate debt shall be payable on the same dates as the Bonds and shall be in all respects, including security and payment, subordinate and junior to the Bonds and the replenishment of the debt service reserve fund for the Bonds, including the reimbursement of all amounts due and payable to 2016 Bond Insurer relating to the 2016 Reserve Policy.

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ROPS. In the event the Successor Agency fails to provide the Oversight Board for approval, or provide the DOF with an Oversight Board approved ROPS, by the statutory deadlines relating to the Insured Bonds for any period, the Successor Agency designates 2016 Bond Insurer as its attorney in fact with the power to make such a request relating to the Insured Bonds.

The Successor Agency will not submit to the Oversight Board or the DOF a request for the final amendment permitted for its Last and Final Recognized Obligation Payment Schedule pursuant to Section 34191.6 of the Health and Safety Code without the prior written consent of 2016 Bond Insurer, unless all amounts that could become due and payable to 2016 Bond Insurer under the Indenture and the Debt Service Reserve Agreement would be included as a line item on the Last and Final Recognized Obligation Payment Schedule following approval of the requested amendment.

Deposit of Redevelopment Obligation Retirement Fund Payments. The Successor Agency agrees to deposit all amounts distributed from the Redevelopment Property Tax Trust Fund by the County Auditor-Controller to the Successor Agency’s Redevelopment Obligation Retirement Fund within 5 business days of receipt with the Trustee for the Bonds to pay debt service on the Bonds. The Successor Agency may take into account any funds on deposit with the Trustee for the payment of the Bonds in the ROPS period covered by the deposit. The Successor Agency agrees that to the extent there exists an Event of Default under the Indenture or the City declares a fiscal emergency, it shall take all steps necessary to cause an amount of RPTTF equal to the amount requested on the ROPS for such period to be deposited directly from the County to the Trustee, to the extent that the County agrees to comply with such procedure

Defeasance. The investments in the defeasance escrow relating to Bonds shall be limited to non-callable, direct obligations of the United States of America and securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of America, or as otherwise maybe authorized under State law and approved by 2016 Bond Insurer.

At least (three) 3 Business Days prior to any defeasance with respect to the Bonds, the Successor Agency shall deliver to 2016 Bond Insurer draft copies of an escrow agreement, an opinion of bond counsel regarding the validity and enforceability of the escrow agreement and the defeasance of the Bonds, a verification report (a “Verification Report”) prepared by a nationally recognized independent financial analyst or firm of certified public accountants regarding the sufficiency of the escrow fund. Such opinion and Verification Report shall be addressed to 2016 Bond Insurer and shall be in form and substance satisfactory to 2016 Bond Insurer. In addition, the escrow agreement shall provide that:

(i) Any substitution of securities following the execution and delivery of the escrow agreement shall require the delivery of a Verification Report, an opinion of bond counsel that such substitution will not adversely affect the exclusion (if interest on the Bonds is excludable) from gross income of the holders of the Bonds of the interest on the Bonds for federal income tax purposes and the prior written consent of 2016 Bond Insurer, which consent will not be unreasonably withheld.

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(ii) The Successor Agency will not exercise any prior optional redemption of Bonds secured by the escrow agreement or any other redemption other than mandatory sinking fund redemptions unless (i) the right to make any such redemption has been expressly reserved in the escrow agreement and such reservation has been disclosed in detail in any official statement for the refunding bonds, and (ii) as a condition to any such redemption there shall be provided to 2016 Bond Insurer a Verification Report as to the sufficiency of escrow receipts without reinvestment to meet the escrow requirements remaining following any such redemption.

(iii) The Successor Agency will not amend the escrow agreement or enter into a forward purchase agreement or other agreement with respect to rights in the escrow without the prior written consent of 2016 Bond Insurer.

Trustee.

(i) 2016 Bond Insurer shall receive prior written notice of any name change of the Trustee for the Bonds or the resignation or removal of the Trustee. Any Trustee must be (A) a national banking association that is supervised by the Office of the Comptroller of the Currency and has at least $250 million of assets, (B) a state-chartered commercial bank that is a member of the Federal Reserve System and has at least $1 billion of assets, or (C) otherwise approved by 2016 Bond Insurer in writing.

(ii) No removal, resignation or termination of the Trustee shall take effect until a successor, acceptable to 2016 Bond Insurer, shall be qualified and appointed. The 2016 Bond Insurer shall have the right to direct the replacement of the Trustee upon the occurrence of an event of a default on the Insured Bonds and any event of default under any senior or subordinate obligations to the extent 2016 Bond Insurer determines in its sole discretion that there exists or could exist a conflict of interest.

Amendments, Supplements and Consents. 2016 Bond Insurer's prior written consent is required for all amendments and supplements to the Indenture, with the exceptions noted below. The Successor Agency shall send copies of any such amendments or supplements to 2016 Bond Insurer and the rating agencies which have assigned a rating to the Bonds.

(i) Consent of 2016 Bond Insurer. Any amendments or supplements to the Indenture shall require the prior written consent of 2016 Bond Insurer with the exception of amendments or supplements:

(A) To cure any ambiguity or formal defect or omissions or to correct any inconsistent provisions in the transaction documents or in any supplement thereto, or

(B) To grant or confer upon the holders of the Bonds any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the holders of the Bonds, or

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(C) To add to the conditions, limitations and restrictions on the issuance of bonds or other obligations under the provisions of the Indenture other conditions, limitations and restrictions thereafter to be observed, or

(D) To add to the covenants and agreements of the Successor Agency in the Indenture other covenants and agreements thereafter to be observed by the Successor Agency or to surrender any right or power therein reserved to or conferred upon the Successor Agency;

(E) To issue additional bonds in compliance with the terms of the Indenture.

(ii) Consent of 2016 Bond Insurer in Addition to Bondholder Consent. Any amendment, supplement, modification to, or waiver of, any of the Indenture that requires the consent of holders of the Bonds or adversely affects the rights or interests of 2016 Bond Insurer shall be subject to the prior written consent of 2016 Bond Insurer.

(iii) Consent of 2016 Bond Insurer in the Event of Insolvency. Any reorganization or liquidation plan with respect to the Successor Agency must be acceptable to 2016 Bond Insurer. In the event of any reorganization or liquidation of the Successor Agency, 2016 Bond Insurer shall have the right to vote on behalf of all holders of the Bonds absent a continuing failure by 2016 Bond Insurer to make a payment under the Insurance Policy. The Successor Agency shall provide 2016 Bond Insurer with immediate written notice of any insolvency event that causes the Successor Agency to be unable to pay its obligations as and when they become due. In the event of a receivership or out-of-court restructuring, 2016 Bond Insurer shall have the right to negotiate and speak on behalf of and bind the bondholders and any agreements reached must be acceptable to 2016 Bond Insurer.

(iv) Consent of 2016 Bond Insurer Upon Default. Anything in the Indenture to the contrary notwithstanding, upon the occurrence and continuance of a default or an event of default, 2016 Bond Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the holders of the Insured Bonds or the Trustee for the benefit of the holders of the Insured Bonds under any Security Document. No default or event of default may be waived without 2016 Bond Insurer's written consent.

(v) 2016 Bond Insurer as Owner. Upon the occurrence and continuance of a default or an event of default, 2016 Bond Insurer shall be deemed to be the sole owner of the Insured Bonds for all purposes under the Indenture, including, without limitations, for purpose approvals, consents, exercising remedies and approving agreements related to the Indenture.

(vi) Consent of 2016 Bond Insurer for acceleration. 2016 Bond Insurer's prior written consent is required as a condition precedent to and in all instances of acceleration.

(vii) Grace Period for Payment Defaults. No grace period shall be permitted for payment defaults on the Bonds. No grace period for a covenant default shall exceed 30 days without the prior written consent of 2016 Bond Insurer.

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(viii) Special Provisions for 2016 Bond Insurer Default. If an 2016 Bond Insurer Default shall occur and be continuing, then, notwithstanding anything in paragraphs (i)-(vi) above to the contrary, (1) if at any time prior to or following an 2016 Bond Insurer Default, 2016 Bond Insurer has made payment under the Insurance Policy, to the extent of such payment 2016 Bond Insurer shall be treated like any other holder of the Bonds for all purposes, including giving of consents, and (2) if 2016 Bond Insurer has not made any payment under the Insurance Policy, 2016 Bond Insurer shall have no further consent rights until the particular 2016 Bond Insurer Default is no longer continuing or 2016 Bond Insurer makes a payment under the Insurance Policy, in which event, the foregoing clause (1) shall control. For purposes of this paragraph, “2016 Bond Insurer Default” means: (A) 2016 Bond Insurer has failed to make any payment under the Insurance Policy when due and owing in accordance with its terms; or (B) 2016 Bond Insurer shall (i) voluntarily commence any proceeding or file any petition seeking relief under the United States Bankruptcy Code or any other Federal, state or foreign bankruptcy, insolvency or similar law, (ii) consent to the institution of or fail to controvert in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator or similar official for such party or for a substantial part of its property, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, or (vi) take action for the purpose of effecting any of the foregoing; or (C) any state or federal agency or instrumentality shall order the suspension of payments on the Insurance Policy or shall obtain an order or grant approval for the rehabilitation, liquidation, conservation or dissolution of 2016 Bond Insurer (including without limitation under the New York Insurance Law).

2016 Bond Insurer As Third Party Beneficiary. 2016 Bond Insurer is recognized as and shall be deemed to be an irrevocable third party beneficiary of the Indenture and may enforce the provisions of the Indenture as if it were a party thereto.

Payment Procedure Under the Insurance Policy. In the event that principal and/or interest due on the Bonds shall be paid by 2016 Bond 2016 Bond Insurer pursuant to the Insurance Policy, the Bonds shall remain outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid by the Successor Agency, the assignment and pledge of the trust estate and all covenants, agreements and other obligations of the Successor Agency to the registered owners shall continue to exist and shall run to the benefit of 2016 Bond Insurer, and 2016 Bond Insurer shall be subrogated to the rights of such registered owners including, without limitation, any rights that such owners may have in respect of securities law violations arising from the offer and sale of the Insured Bonds.

In the event that on the second (2nd) business day prior to any payment date on the Insured Bonds, the Trustee has not received sufficient moneys to pay all principal of and interest on the Bonds due on such payment date, the Trustee shall immediately notify 2016 Bond Insurer or its designee on the same business day by telephone or electronic mail, of the amount of the deficiency. If any deficiency is made up in whole or in part prior to or on the payment date, the Trustee shall so notify 2016 Bond Insurer or its designee immediately upon receipt of payment.

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In addition, if the Trustee has notice that any holder of the Insured Bonds has been required to disgorge payments of principal of or interest on the Insured Bonds pursuant to a final, non-appealable order by a court of competent jurisdiction that such payment constitutes an avoidable preference to such holder within the meaning of any applicable bankruptcy law, then the Trustee shall notify 2016 Bond Insurer or its designee of such fact by telephone or electronic mail, or by overnight or other delivery service as to which a delivery receipt is signed by a person authorized to accept delivery on behalf of 2016 Bond Insurer.

The Trustee shall irrevocably be designated, appointed, directed and authorized to act as attorney-in-fact for holders of the Insured Bonds as follows:

(i) If there is a deficiency in amounts required to pay interest and/or principal on the Insured Bonds, the Trustee shall (i) execute and deliver to 2016 Bond Insurer, in form satisfactory to 2016 Bond Insurer, an instrument appointing 2016 Bond Insurer as agent and attorney-in-fact for such holders of the Insured Bonds in any legal proceeding related to the payment and assignment to 2016 Bond Insurer of the claims for interest on the Insured Bonds, (ii) receive as designee of the respective holders (and not as Trustee) in accordance with the tenor of the Insurance Policy payment from 2016 Bond Insurer with respect to the claims for interest so assigned, and (iii) disburse the same to such respective holders; and

(ii) If there is a deficiency in amounts required to pay principal of the Insured Bonds, the Trustee shall (i) execute and deliver to 2016 Bond Insurer, in form satisfactory to 2016 Bond Insurer, an instrument appointing 2016 Bond Insurer as agent and attorney-in-fact for such holder of the Insured Bonds in any legal proceeding related to the payment of such principal and an assignment to 2016 Bond Insurer of the Insured Bonds surrendered to 2016 Bond Insurer, (ii) receive as designee of the respective holders (and not as Paying Agent) in accordance with the tenor of the Insurance Policy payment therefore from 2016 Bond Insurer, and (iii) disburse the same to such holders.

The Trustee shall designate any portion of payment of principal on Bonds paid by 2016 Bond Insurer, whether by virtue of mandatory sinking fund redemption, maturity or other advancement of maturity, on its books as a reduction in the principal amount of Bonds registered to the then current holder, whether DTC or its nominee or otherwise, and shall issue a replacement Insured Bond to 2016 Bond Insurer, registered in the name directed by 2016 Bond Insurer, in a principal amount equal to the amount of principal so paid (without regard to authorized denominations); provided that the Trustee's failure to so designate any payment or issue any replacement Bond shall have no effect on the amount of principal or interest payable by the Successor Agency on any Bond or the subrogation or assignment rights of 2016 Bond Insurer.

Payments with respect to claims for interest on and principal of Insured Bonds disbursed by the Trustee from proceeds of the Insurance Policy shall not be considered to discharge the obligation of the Successor Agency with respect to such Bonds, and 2016 Bond Insurer shall become the owner of such unpaid Bonds and claims for the interest in accordance with the tenor of the assignment made to it under the provisions of the preceding paragraphs or otherwise.

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Irrespective of whether any such assignment is executed and delivered, the Successor Agency and the Trustee agree for the benefit of 2016 Bond Insurer that:

(i) They recognize that to the extent 2016 Bond Insurer makes payments directly or indirectly (e.g., by paying through the Trustee), on account of principal of or interest on the Insured Bonds, 2016 Bond Insurer will be subrogated to the rights of such holders to receive the amount of such principal and interest from the Successor Agency, with interest thereon, as provided and solely from the sources stated in the Indenture and the Insured Bonds; and

(ii) They will accordingly pay to 2016 Bond Insurer the amount of such principal and interest, with interest thereon as provided in the transaction documents and the Insured Bonds, but only from the sources and in the manner provided therein for the payment of principal of and interest on the Insured Bonds to holders, and will otherwise treat 2016 Bond Insurer as the owner of such rights to the amount of such principal and interest.

Additional Payments. The Successor Agency agrees unconditionally that it will pay or reimburse 2016 Bond Insurer on demand any and all reasonable charges, fees, costs, losses, liabilities and expenses that 2016 Bond Insurer may pay or incur, including, but not limited to, fees and expenses of 2016 Bond Insurer's agents, attorneys, accountants, consultants, appraisers and auditors and reasonable costs of investigations, in connection with the administration (including waivers and consents, if any), enforcement, defense, exercise or preservation of any rights and remedies in respect of the Indenture (“Administrative Costs”). For purposes of the foregoing, costs and expenses shall include a reasonable allocation of compensation and overhead attributable to the time of employees of 2016 Bond Insurer spent in connection with the actions described in the preceding sentence. The Successor Agency agrees that failure to pay any Administrative Costs on a timely basis will result in the accrual of interest on the unpaid amount at the Late Payment Rate, compounded semi-annually, from the date that payment is first due to 2016 Bond Insurer until the date 2016 Bond Insurer is paid in full.

Notwithstanding anything herein to the contrary, the Successor Agency agrees to pay to 2016 Bond Insurer (i) a sum equal to the total of all amounts paid by 2016 Bond Insurer under the Insurance Policy (“2016 Bond Insurer Policy Payment”); and (ii) interest on such 2016 Bond Insurer Policy Payments from the date paid by 2016 Bond Insurer until payment thereof in full by the Successor Agency, payable to 2016 Bond Insurer at the Late Payment Rate per annum (collectively, “2016 Bond Insurer Reimbursement Amounts”) compounded semi-annually. The Successor Agency hereby covenants and agrees that the 2016 Bond Insurer Reimbursement Amounts are payable from and secured by a lien on and pledge of the same revenues and other collateral pledged to the Insured Bonds on a parity with debt service due on the Insured Bonds.

“Late Payment Rate” means the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank, N.A., at its principal office in The City of New York, New York, as its prime or base lending rate (“Prime Rate”) (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank, N.A.) plus 3%, and (ii) the then applicable highest rate of interest on the Insured Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting

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interest rates. In the event JPMorgan Chase Bank, N.A., ceases to announce its Prime Rate, the Prime Rate shall be the prime or base lending rate of such other bank, banking association or trust company as 2016 Bond Insurer, in its sole and absolute discretion, shall designate. Interest at the Late Payment Rate on any amount owing to 2016 Bond Insurer shall be computed on the basis of the actual number of days elapsed in a year of 360 days.

Reserve Account. The prior written consent of 2016 Bond Insurer shall be a condition precedent to the deposit of any credit instrument provided in lieu of a cash deposit into the Reserve Account, if any. Amounts on deposit in the Reserve Account shall be applied solely to the payment of debt service due on the Insured Bonds.

Exercise of Rights by 2016 Bond Insurer. The rights granted to 2016 Bond Insurer under the Indenture to request, consent to or direct any action are rights granted to 2016 Bond Insurer in consideration of its issuance of the Insurance Policy. Any exercise by 2016 Bond Insurer of such rights is merely an exercise of the 2016 Bond Insurer's contractual rights and shall not be construed or deemed to be taken for the benefit, or on behalf, of the holders of the Insured Bonds and such action does not evidence any position of 2016 Bond Insurer, affirmative or negative, as to whether the consent of the holders of the Insured Bonds or any other person is required in addition to the consent of 2016 Bond Insurer. 2016 Bond Insurer shall be entitled to pay principal or interest on the Insured Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Successor Agency (as such terms are defined in the Insurance Policy) and any amounts due on the Insured Bonds as a result of acceleration of the maturity thereof in accordance with the Indenture, whether or not 2016 Bond Insurer has received a claim upon the Insurance Policy.

2016 Reserve Policy Provisions. Notwithstanding anything to the contrary set forth in the Indenture, the Successor Agency and the Trustee have agreed to comply with the following provisions

(i) The Successor Agency shall repay any draws under the 2016 Reserve Policy and pay all related reasonable expenses incurred by 2016 Bond Insurer. Interest shall accrue and be payable on such draws and expenses from the date of payment by the 2016 Bond Insurer at the Late Payment Rate. “Late Payment Rate” means the lesser of (A) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, as its prime or base lending rate (“Prime Rate”) (any change in such Prime Rate to be effective on the date such changes are announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the 2016 Bonds, and (B) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such bank, banking association or trust company bank as the 2016 Bond Insurer in its sole and absolute discretion shall specify. Repayment of draws and payment of expenses and accrued interest thereon at the Late Payment Rate (collectively, the “Policy Costs”) shall commence in the first month following each draw, and each such monthly payment shall

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be in an amount at least equal to 1/12 of the aggregate of Policy Costs related to such draw.

Amounts in respect of Policy Costs paid to the 2016 Bond Insurer shall be credited first to interest due, then to the expenses due and then to principal due. As and to the extent that payments are made to the 2016 Bond Insurer on account of principal due, the coverage under the 2016 Reserve Policy will be increased by a like amount, subject to the terms of the 2016 Reserve Policy.

All cash and investments in the Reserve Account established for the 2016 Bonds shall be transferred to the Interest Account and Principal Account for payment of the debt service on the 2016 Bonds before any drawing may be made on the 2016 Reserve Policy or any other Qualified Reserve Account Credit Instrument in lieu of cash.

Payment of any Policy Cost shall be made prior to replenishment of any cash amounts. Draws on all Qualified Reserve Account Credit Instruments (including the 2016 Reserve Policy) on which there is available coverage shall be made on a pro-rata basis (calculated by reference to the coverage then available thereunder) after applying all available cash and investments in the Reserve Account. Payment of Policy Costs and reimbursement of amounts with respect to other Qualified Reserve Account Credit Instruments shall be made on a pro-rata basis prior to replenishment of any cash drawn from the Reserve Account. For the avoidance of doubt, “available coverage” means the coverage then available for disbursement pursuant to the terms of the applicable alternative credit instrument without regard to the legal or financial ability or willingness of the provider of such instrument to honor a claim or draw thereon or the failure of such provider to honor any such claim or draw.

(ii) Draws under the 2016 Reserve Policy may only be used to make payments on the 2016 Bonds.

(iii) If the Successor Agency shall fail to pay any Policy Costs in accordance with the requirements of paragraph (i) above, the 2016 Bond Insurer shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Indenture other than (i) acceleration of the maturity of the 2016 Bonds, or (ii) remedies which would adversely affect owners of the 2016 Bonds.

(iv) The Indenture shall not be discharged until all Policy Costs owing to the 2016 Bond Insurer shall have been paid in full. The Successor Agency's obligation to pay such amount shall expressly survive payment in full of the 2016 Bonds.

(v) The Trustee shall ascertain the necessity for a claim upon the 2016 Reserve Policy in accordance with the provisions of paragraph (i) above and provide notice to the 2016 Bond Insurer at least three business days prior to each date upon which interest or principal is due on the 2016 Bonds.

(vi) The 2016 Reserve Policy shall expire on the earlier of the date the 2016 Bonds are no longer outstanding and the final maturity date of the 2016 Bonds.


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APPENDIX B

FORM OF BOND COUNSEL OPINION

[Closing Date] Successor Agency to the City of Watsonville Redevelopment Agency Watsonville, California

Re: $11,790,000 Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds Series A

$2,420,000 Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds Taxable Series B

Ladies and Gentlemen:

We have acted as bond counsel to the Successor Agency to the Redevelopment Agency of the City of Watsonville (the “Successor Agency”) in connection with the issuance of its $11,790,000 Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds Series A (the “Tax-Exempt Bonds”) and $2,420,000 Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds Taxable Series B (the “Taxable Bonds” and together with the Tax-Exempt Bonds, the “Bonds”).

The Bonds are being issued pursuant to the authority granted by the Constitution and laws of the State of California, including the Community Redevelopment Law (Part 1, Division 24, commencing with Section 33000 of the California Health and Safety Code) (the “Redevelopment Law”), Article 11 (commencing with Section 53580) of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code (the “Refunding Law”), Resolution No. 1-16 adopted by the Successor Agency on March 8, 2016 (the “Successor Agency Resolution”), and an Indenture of Trust, dated as of May 1, 2016 (the “Indenture”), by and between the Successor Agency and U.S. Bank National Association, as trustee (the “Trustee”). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.

In our capacity as bond counsel to the Successor Agency, we have reviewed the Successor Agency Resolution, Resolution No. 2-16 of the Oversight Board of the Successor Agency to the Redevelopment Agency of the City of Watsonville, the approval letter issued by the State of California Department of Finance, dated April 7, 2016, the Indenture, the Tax Certificate of the Successor Agency, dated the date hereof (the “Tax Certificate”), certifications

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and resolutions of the Successor Agency, the Trustee and others, opinions of counsel to the Successor Agency, and such other documents, opinions and instruments as we deemed necessary to render the opinions set forth herein.

We have assumed the genuineness of all documents and signatures presented to us. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Tax-Exempt Bonds to be included in gross income for Federal income tax purposes. In addition, we call attention to the fact that the rights and obligations under the Bonds and the Indenture are subject to bankruptcy, insolvency, reorganization, arrangement, moratorium and other similar laws affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against public agencies in the State of California.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

1. The Bonds have been duly authorized, executed and delivered by the Successor Agency and are valid and binding special obligations of the Agency, payable solely from the Tax Revenues as described in the Indenture.

2. The Indenture has been duly authorized, executed and delivered by the Successor Agency and constitutes a valid and binding obligation of the Successor Agency enforceable against the Agency in accordance with its terms. The Indenture creates a valid lien on Tax Revenues to secure the payment of the Bonds in accordance with their terms, subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture.

3. Under existing statutes and court decisions and assuming continuing compliance with certain tax covenants described below, (i) interest on the Tax-Exempt Bonds is excluded from gross income for Federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”) and (ii) interest on the Tax-Exempt Bonds is not treated as a preference item in calculating the alternative minimum tax imposed on individuals and corporations under the Code.

Bond Counsel expresses no opinion as to whether interest on the Bonds (or any portion thereof) is included in the adjusted current earnings of certain corporations for purposes of calculating the alternative minimum tax imposed on such corporations.

The Code establishes certain requirements that must be met subsequent to the issuance and delivery of the Tax-Exempt Bonds in order that, for Federal income tax purposes, interest on the Bonds be not included in gross income pursuant to Section 103 of the Code. These requirements include, but are not limited to, requirements relating to the use and expenditure of proceeds of the Tax-Exempt Bonds, restrictions on the investment of proceeds of the Tax-

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Exempt Bonds prior to expenditure and the requirement that certain earnings be rebated to the Federal government. Noncompliance with such requirements may cause interest on the Tax-Exempt Bonds to become subject to Federal income taxes taxation retroactive to their date of issuance, irrespective of the date on which such noncompliance occurs or is ascertained.

On the date of delivery of the Tax-Exempt Bonds, the City will execute a Tax Certificate (the “Tax Certificate”) containing provisions and procedures pursuant to which such requirements can be satisfied. In executing the Tax Certificate, the City covenants that it will comply with the provisions and procedures set forth therein and that they will do and perform all acts and things necessary or desirable to assure that interest paid on the Tax-Exempt Bonds will, for Federal income tax purposes, be excluded from gross income.

In rendering the opinion in paragraph 3 hereof, we have relied upon and assumed (i) the material accuracy of the representations, statements of intention and reasonable expectation, and certifications of fact contained in the Tax Certificate with respect to matters affecting the status of interest paid on the Tax-Exempt Bonds, and (ii) compliance by the City with the procedures and covenants set forth in the Tax Certificate as to such tax matters.

4. Under existing statutes, interest on the Bonds is exempt from State of California personal income taxes.

Except as stated in paragraphs (3) and (4) above, we express no opinion as to any other Federal, state or local tax consequences arising with respect to the Bonds or the ownership or disposition thereof. Furthermore, we express no opinion as the effect of any action hereafter taken or not taken in reliance upon an opinion of other counsel on the exclusion from gross income for Federal income tax purposes of interest on the Bonds, or under state and local tax law.

The foregoing opinions are qualified to the extent that the enforceability of the Bonds and the Indenture may be limited by bankruptcy, moratorium, insolvency or other laws affecting creditor’s rights or remedies and is subject to general principles of equity (regardless of whether such enforceability is considered in equity or at law), to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against governmental entities in the State of California.

We render our opinion under existing statutes and court decisions as of the date hereof, and we assume no obligation to update, revise or supplement this opinion after the issue date to reflect any action hereafter taken or not taken, or any facts or circumstances, or any change in law or in interpretations thereof, or otherwise, that may hereafter arise or occur, or for any other reason.

Respectfully submitted,


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APPENDIX C

BOOK-ENTRY SYSTEM

The information in this APPENDIX C concerning The Depository Trust Company (“DTC”), New York, New York, and DTC’s book-entry system has been obtained from DTC and the Successor Agency takes no responsibility for the completeness or accuracy thereof. The Successor Agency cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the 2016 Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the 2016 Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the 2016 Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC.

The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the 2016 Bonds. The 2016 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 certificate will be issued for each maturity of the 2016 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing Successor Agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information set forth on such website is not incorporated herein by reference.

Purchases of 2016 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2016 Bonds on DTC’s records. The ownership interest of each actual purchaser of each 2016 Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the

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2016 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 2016 Bonds, except in the event that use of the book-entry system for the 2016 Bonds is discontinued.

To facilitate subsequent transfers, all 2016 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 2016 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2016 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such 2016 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of 2016 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2016 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the bond documents. For example, Beneficial Owners of 2016 Bonds may wish to ascertain that the nominee holding the 2016 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the 2016 Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to 2016 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Successor Agency 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 2016 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal, premium (if any), and interest payments on the 2016 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Successor 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, the Trustee, or the Successor Agency, subject to any statutory or regulatory requirements as may be in effect from time to time. Principal, premium (if any), and interest payments with respect to the 2016 Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Successor Agency or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

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DTC may discontinue providing its services as depository with respect to the 2016 Bonds at any time by giving reasonable notice to the Successor Agency or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, certificates representing the 2016 Bonds are required to be printed and delivered.

The Successor Agency may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, representing the 2016 Bonds will be printed and delivered to DTC in accordance with the provisions of the Indenture.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Successor Agency believes to be reliable, but the Successor Agency takes no responsibility for the accuracy thereof.


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APPENDIX D

CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (this “Disclosure Certificate”) is executed and delivered by the Successor Agency to the Redevelopment Agency of the City of Watsonville (the “Successor Agency”) in connection with the issuance of $11,790,000 aggregate principal amount of Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Series A (the “2016A Bonds”) and $2,420,000 aggregate principal amount of Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Taxable Series B (the “2016B Bonds” and, together with the 2016A Bonds, the “2016 Bonds”). The 2016 Bonds are being issued pursuant to an Indenture of Trust, dated as of May 1, 2016 (the “Indenture”), between the Successor Agency and U.S. Bank National Association, as trustee (the “Trustee”). In connection therewith the Successor Agency covenants and agrees as follows:

Section 1. Purpose of this Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Successor Agency for the benefit of the Holders and Beneficial Owners of the 2016 Bonds and in order to assist the Participating Underwriter (as defined herein) in complying with Securities and Exchange Commission Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth above and 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 Report” shall mean any Annual Report provided by the Successor Agency pursuant to, and as described in, Section 3 of this Disclosure Certificate.

“Beneficial Owner” shall mean any person who (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any 2016 Bonds (including persons holding 2016 Bonds through nominees, depositories or other intermediaries); or (b) is treated as the owner of any 2016 Bonds for federal income tax purposes.

“Disclosure Representative” shall mean the Executive Director of the Successor Agency or his or her designee, or such other officer or employee as the Successor Agency shall designate in writing to the Trustee from time to time.

“Dissemination Agent” shall mean initially Willdan Financial Services, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent appointed by the Successor Agency.

“Fiscal Year” shall mean the period beginning on July 1 of each year and ending on the next succeeding June 30, or any twelve-month or fifty-two week period hereafter selected by the Successor Agency, with notice of such selection or change in fiscal year to be provided as set forth herein

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“Holder” shall mean either the registered owners of the 2016 Bonds or, if the 2016 Bonds are registered in the name of The Depository Trust Company or another recognized depository, any applicable participant in such depository system.

“Listed Event” shall mean any of the events listed in Section 5(a) of this Disclosure Certificate.

“MSRB” shall mean the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(1) of the Securities Exchange Act of 1934 or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Marketplace Access (EMMA) website of the MSRB, currently located at http://emma.msrb.org.

“Official Statement” shall mean the Official Statement for the 2016 Bonds, dated April 26, 2016.

“Participating Underwriter” shall mean the original underwriter of the 2016 Bonds listed in the Official Statement required to comply with the Rule in connection with offering of the 2016 Bonds.

“Rule” shall mean Rule 15c2-12 adopted by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“SEC” shall mean the United States Securities and Exchange Commission.

“State” shall mean the State of California.

Section 3. Provision and Contents of Annual Report.

(a) The Successor Agency shall, or shall cause the Dissemination Agent to, no later than March 1 following the end of each fiscal year of the Successor Agency, commencing with the report for Fiscal Year 2015-16 (each an “Annual Report Date”), provide to the MSRB, through EMMA, audited fiduciary fund (private-purpose trust fund) financial statements (the “Audit”) 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. The Audit shall constitute part of the Annual Report required hereunder. If the Audit is not available by the Annual Report Date, the Successor Agency shall provide to the MSRB, through EMMA, unaudited fiduciary fund (private-purpose trust fund) financial statements in a format similar to the Audit contained in the final Official Statement, and the Audit shall be filed in the same manner when it becomes available. The Audit and/or the information required by (i), (ii) and (iii) below may be contained in the City of Watsonville’s comprehensive annual financial report (“CAFR”) and submission of such CAFR to the MSRB through EMMA shall constitute compliance for submission of the Audit and/or the information required by (i), (ii) and (iii) required hereunder, as applicable.

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In addition to the Audit, each Annual Report shall also contain the following information:

(i) Assessed values by land use for the most recent Fiscal Year, in the form presented in Table 3 of the Official Statement;

(ii) Ten largest taxpayers for the most recent tax year, in the form presented in Table 5 of the Official Statement;

(iii) Redevelopment Property Tax Trust Fund Revenues for the most recent Fiscal Year, in the form presented in Table 8 of the Official Statement; and; and

(iv) Annual debt service coverage for the most recent Bond Year for the 2016 Bonds and any outstanding Parity Debt, in the form presented in Table 9 of the Official Statement.

(b) The Annual Report must be submitted in electronic format, accompanied by such identifying information as required by the MSRB. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 3(d) of this Disclosure Certificate. If the Fiscal Year changes for the Successor Agency, the Successor Agency shall give notice of such change in the manner provided hereunder.

(c) Any or all of the items listed above may be included by specific reference to other documents, including official statements or other disclosure documents of debt issues of the Successor Agency or related public entities, available to the public on EMMA or filed with the SEC. The Successor Agency shall clearly identify each such other document so included by reference.

(d) The contents, presentation and format of the Annual Report may be modified from time to time as determined in the judgment of the Successor Agency to conform to changes in accounting or disclosure principles or practices and legal requirements followed by or applicable to the Successor Agency or to reflect changes in the business, structure, operations, legal form of the Successor Agency.

(e) If the Dissemination Agent is unable to verify that an Annual Report has been provided to the MSRB by the date required in subsection (a), the Dissemination Agent shall send a notice to the MSRB in substantially the form attached as Exhibit A.

Section 4. Reserved.

Section 5. Reporting of Listed Events.

(a) Pursuant to the provisions of this section, upon the occurrence of any of the following events (in each case to the extent applicable) with respect to the 2016 Bonds, the Successor Agency shall give, or cause to be given by so notifying the Dissemination Agent in writing and instructing the Dissemination Agent to give, notice of the occurrence of such event, in each case, pursuant to Section 5(c) hereof:

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1. principal or interest payment delinquencies;

2. non-payment related defaults, if material;

3. modifications to the rights of the Holders, if material;

4. optional, contingent or unscheduled calls, if material, and tender offers;

5. defeasances;

6. rating changes;

7. adverse tax opinions or the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the 2016 Bonds or other material events affecting the tax status of the 2016 Bonds;

8. unscheduled draws on the debt service reserves reflecting financial difficulties;

9. unscheduled draws on the credit enhancements reflecting financial difficulties;

10. substitution of the credit or liquidity providers or their failure to perform;

11. release, substitution or sale of property securing repayment of the 2016 Bonds, if material;

12. bankruptcy, insolvency, receivership or similar proceedings of the Successor Agency, which shall occur as described below;

13. appointment of a successor or additional trustee or the change of name of a trustee, if material; or

14. the consummation of a merger, consolidation, or acquisition involving the Successor Agency or the sale of all or substantially all of the assets of the Successor Agency other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material.

For these purposes, any event described in item 12 of this Section 5(a) is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Successor Agency in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Successor Agency, or if such jurisdiction has been assumed by leaving the existing governing body and officials or

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officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Successor Agency.

(b) The Successor Agency, or the Dissemination Agent, if the Dissemination Agent has been instructed by the Successor Agency to report the occurrence of a Listed Event, shall file a notice of such occurrence with the MSRB in a timely manner not more than ten business days after the occurrence of the event.

Section 6. Termination of Reporting Obligation. The Successor Agency’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the 2016 Bonds.

Section 7. Dissemination Agent. The Successor Agency may, from time to time, appoint or engage a different Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. If no successor Dissemination Agent is appointed the Successor Agency shall be the Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Successor Agency pursuant to this Disclosure Certificate. The Dissemination Agent shall receive compensation for the services provided pursuant to this Disclosure Certificate. The Dissemination Agent may resign by providing thirty (30) days written notice to the Successor Agency and the Trustee. The Dissemination Agent shall have no duty or power to enforce compliance by the Successor Agency hereunder.

Section 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Successor Agency may amend this Disclosure Certificate provided, that the Dissemination Agent (if other than the Successor Agency) shall not be obligated to comply with any such amendment that modifies or increases its duties or obligations hereunder, and any provision of this Disclosure Certificate may be waived, provided that in the opinion of nationally recognized bond counsel, such amendment or waiver is permitted by the Rule. In the event of any amendment or waiver of a provision of this Disclosure Certificate, the Successor Agency shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Successor Agency.

Section 9. Filings with the MSRB. All information, operating data, financial statements, notices and other documents provided to the MSRB in accordance with this Disclosure Certificate shall be provided in an electronic format prescribed by the MSRB and shall be accompanied by identifying information as prescribed by the MSRB.

Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Successor 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

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of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the Successor 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 Successor 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 Successor Agency or the Dissemination Agent to comply with any provision of this Disclosure Certificate, the Trustee, at the written request of any Participating Underwriter or the Holders of at least 25% of the aggregate principal amount of Outstanding 2016 Bonds and upon provision of indemnification satisfactory to the Trustee, shall, or any Holder or Beneficial Owner of the 2016 Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Successor Agency or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the Successor Agency or the Dissemination Agent to comply with this Disclosure Certificate shall be an action to compel performance hereunder.

Section 12. Duties, Immunities and Liabilities of the Dissemination Agent. Section 5.12 of the Indenture is hereby made applicable to this Disclosure Certificate as if the Disclosure Certificate were (solely for this purpose) contained in the Indenture. The Dissemination Agent shall be entitled to the protections and limitations from liability afforded to the Trustee thereunder. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the Successor Agency agrees to indemnify and 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 any loss, expense and liabilities due to the Dissemination Agent’s negligence or willful misconduct. The obligations of the Successor Agency under this Section 12 shall survive resignation or removal of the Dissemination Agent and payment of the 2016 Bonds.

Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the Successor Agency, the Trustee, the Dissemination Agent, the Participating Underwriter and the Holders and Beneficial Owners from time to time of the 2016 Bonds, and shall create no rights in any other person or entity.

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Dated: May 10, 2016


By: _____________________________________

Title:____________________________________

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EXHIBIT A

NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Successor Agency to the Redevelopment Agency of the City of Watsonville

Name of Bond Issue: $11,790,000 aggregate principal amount of Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Series A

$2,420,000 aggregate principal amount of Successor Agency to the Redevelopment Agency of the City of Watsonville 2016 Tax Allocation Refunding Bonds, Taxable Series B

Date of Issuance: May 10, 2016

NOTICE IS HEREBY GIVEN that the Successor Agency to the Redevelopment Agency of the City of Watsonville (the “Successor Agency”) has not provided an Annual Report with respect to the above-captioned 2016 Bonds as required by Section 3(a) of the Continuing Disclosure Certificate, dated May 10, 2016, executed and delivered by the Successor Agency. The Successor Agency anticipates that the Annual Report will be filed by ___________, 20__.

Dated: ________, 20__

________, as _____ on behalf of the Successor Agency

By:____________________________________ Authorized Officer

cc: Successor Agency to the Redevelopment Agency of the City of Watsonville

APPENDIX E

FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2015


Moss, Levy & Hartzheim LLP Certified Public Accountants

INDEPENDENT AUDITORS' REPORT

City Council of the City of Watsonville Watsonville, California

Report on the Financial Statements

We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Watsonville (the City), as of and for the fiscal year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the City's basic financial statements as listed in the table of contents.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles general accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Opinions

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining information of the City of Watsonville, as of June 30, 2015, and the respective changes in financial position and, where applicable, cash flows thereof and the respective budgetary comparison for the General Fund, Impact Fees Fund, Low Income Housing Set Aside Fund, and the Redevelopment and Housing Grants Fund for the fiscal year then ended in accordance with accounting principles generally accepted in the United States of America.

15 2400 Professional Parkway, Suite 205 Santa Maria, CA 93455 Tel 805.925.2579 Fax 805.925.2147 mlhcpas.com

BEVERLY HILLS -CULVER CITY· SANTA MARIA

Other Matters

Change in Accounting Principles

As discussed in note V.G to the basic financial statements effective July l, 2014, the City of Watsonville adopted Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date. Our opinion is not modified with respect to this matter

Required Supplementmy Information

Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 19 through 29, Schedule of Changes in the Net Pension Liability and Related Ratios on page 98, Schedule of Proportionate Share of Net Pension Liability on page 100, Schedule of Contributions on pages 99 and IO I be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquires of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Other Information

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City of Watsonville's basic financial statements. The introductory section, statistical section, combining and individual nonmajor fund financial statements and schedules, governmental capital asset schedules, and the major debt service fund budgetary comparison schedule, are presented for purposes of additional analysis and are not a required part of the basic financial statements.

The combining and individual nonmajor fund financial statements and schedules, the governmental capital asset schedules, and major debt service fund budgetary comparison schedule are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such infonnation directly to the underlying accounting and other records used to prepare the basic financial statements or the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements, the governmental capital asset schedules, and the major debt service fund budgetary comparison schedule are fairly stated, in all material respects, in relation to the basic financial statements as a whole.

The introductory section and statistical section has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated December 31, 2015, on our consideration of the City of Watsonville's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control over financial reporting and compliance.

Santa Maria, California December 31, 20 I 5

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CITY OF WATSONVILLE, CALIFORNIAMANAGEMENTS DISCUSSION AND ANALYSIS

As management of the City of Watsonville, we offer readers of the City of Watsonville ’sfinancial statements this narrative overview and analysis of the financial activities of the City ofWatsonville for the fiscal year ended June 30, 2015. We encourage readers to consider theinformation presented here in conjunction with additional information that we have furnished inour letter of transmittal, which can be found on pages 2 - 9 of this report. All amounts, unlessotherwise indicated, are expressed in thousands of dollars.

Financial Highlights

· The assets of the City of Watsonville exceeded its liabilities at the close of the most recentfiscal year by $214,351. There was a prior period adjustment of ($57,386), with most of theadjustment due to the City implemented Governmental Accounting Standards StatementsNo.68, (GASB 68) and No.71 (GASB 71). The implementation of these pronouncementsrequired a prior period adjustment and reduced the City’s net position as of July 1, by($42,123).

· The city’s total restated net position increased by $2,981. Governmental activities netposition increased by $1,939, which most of this increase from increases in property taxesand sale taxes. Business type activities net position increased by $1,042. Most of thisincrease was from Water and Solid Waste ending with positive operating income.

· As of the close of the current fiscal year, the city’s governmental funds reported combinedending fund balances of $18,199 an increase of $5,066 in comparison with the prior fiscalyear’s restated balances. The non-spendable portion of the fund balance was 4,150, therestricted portion was $14,637 and the unassigned amount was ($588). A large portion of theunassigned fund balance was created by one time taxes received by the general fund duringfiscal year 2014-15.

Overview of the Financial Statements

This discussion and analysis is intended to serve as an introduction to the City of Watsonville ’sbasic financial statements. The City of Watsonville’s basic financial statements comprise threecomponents: 1) government-wide financial statements, 2) fund financial statements, and 3) notesto the financial statements. This report also contains other supplementary information inaddition to the basis financial statements themselves.

Government-wide financial statements. The government-wide financial statements aredesigned to provide readers with a broad overview of the City of Watsonville’s finances, in amanner similar to a private-sector business.

The Statement of Net Position presents information on all of the City of Watsonville’s assets andliabilities, with the difference between the two reported as net position. Increases or decreases innet position may serve as a useful indicator of whether the financial position of the City ofWatsonville is improving or deteriorating overtime.

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The Statement of Activities presents information showing how the City of Watsonville ’s netposition changed during the most recent fiscal year. All changes in net position are reported assoon as the underlying event giving rise to the change occurs, regardless of the timing or relatedcash flows. Thus, revenues and expenses are reported in this statement for some items that willonly result in cash flows in future periods (e.g. uncollected taxes).

Both of the government-wide financial statements distinguish functions of the City ofWatsonville that are principally supported by taxes and intergovernmental revenues(governmental activities) from other functions that are intended to recover all or a significantportion of their costs through user fees and charges (business-type activities). The governmentalactivities of the City of Watsonville include general government, public safety, housing, streets,and culture and recreation. The business-type activities of the City of Watsonville include water,sewer, solid waste, and airport activities.

The government-wide financial statements can be found on pages 30 to 33 of this report.

Fund financial statements. A fund is a grouping of related accounts that is used to maintaincontrol over resources that have been segregated for specific activities or objectives. The City ofWatsonville, like other state and local governments, uses fund accounting to ensure anddemonstrate compliance with finance-related legal requirements. All of the funds of the City ofWatsonville can be divided into three categories: governmental funds, proprietary funds andfiduciary fund.

Governmental funds. Governmental funds are used to account for essentially the samefunctions reported as governmental activities in the government-wide financial statements.However, unlike the government-wide financial statements, governmental fund financialstatements focus on near-term inflows and outflows of spendable resources, as well as onbalances of spendable resources available at the end of the fiscal year. Such information may beuseful in evaluation of a government’s near-term financing requirements.

Because the focus of governmental funds is narrower than that of government-wide financialstatements, it is useful to compare the information presented for governmental funds with similarinformation presented for governmental activities in the government-wide financial statements.By doing so, readers may better understand the long-term impact of the government ’s near-termfinancing decisions. Both the governmental funds balance sheet and the governmental fundstatements of revenues, expenditures, and changes in fund balances provide a reconciliation tofacilitate this comparison between governmental funds and governmental activities.

The City of Watsonville maintains sixteen individual governmental funds. Information ispresented separately in the governmental funds balance sheet and in the governmental fundsstatement of revenues, expenditures, and changes in fund balances for the general fund, impactfees fund, housing fund, redevelopment and housing grants fund, and general debt service fundwhich are all major funds. Data for the other eleven governmental funds are combined into asingle, aggregated presentation. Individual fund data for each of these nonmajor governmentalfunds is provided in the form of combining statements elsewhere in this report.

The City of Watsonville adopts a biennial budget (one year adopted and one year proposed) for

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all its governmental funds.

The basic governmental fund financial statements can be found on pages 34 to 41 of this report.

Proprietary funds. The City of Watsonville maintains two types of proprietary funds;Enterprise and Internal Service funds. Enterprise funds are used to report the same functionspresented as business-type activities in the government-wide financial statements. The City ofWatsonville uses enterprise funds to account for Water, Sewer, Solid Waste, and Airportoperations.

Proprietary funds provide the same type of information as the government-wide financialstatements, only in more detail. The proprietary funds financial statements provide separateinformation for the water, sewer, solid waste, and airport operations, all of which are consideredto be major funds of the City of Watsonville.

Internal service funds are an accounting device used to accumulate and allocate costs internallyamong the City of Watsonville’s various functions. The City of Watsonville uses an internalservice fund to account for insurance activities of the City. The fund predominantly benefitsgovernmental funds rather than business-type functions, and it has been included withingovernmental activities in the government-wide financial statements. Conversely, the internalservice fund is presented in the proprietary funds financial statements.

The basic proprietary funds financial statements can be found on pages 42 to 44 of this report.

Fiduciary fund. Fiduciary funds are used to account for resources held for the benefit ofparties’ outside the government. Fiduciary funds are not reflected in the government-widefinancial statements because the resources of those funds are not available to support the City ofWatsonville’s own programs. The accounting used for fiduciary funds is much like that used forproprietary funds.

The basic fiduciary fund financial statements can be found on pages 45-46.

Notes to the financial statements. The notes provide additional information that is essential toa full understanding of the data provided in the government-wide and fund financial statements.The notes to the financial statements can be found on pages 47 to 96 of this report.

Other information. In addition to the basic financial statements and accompanying notes,required supplementary information, combining statements and schedules referred to earlier inconnection with non-major governmental funds are presented immediately following the notes tothe financial statements. Combining and individual fund statements and schedules can be foundon pages 102 to 117 of this report.

Government-wide Financial Analysis

Statement of Net Position. As noted earlier, net position may serve over time as a usefulindicator of a government’s financial position. In the case of the City of Watsonville, assetsexceeded liabilities by $214,351 at the close of the most recent fiscal year.

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By far the largest portion of the City of Watsonville’s net position $212,632 reflects itsinvestment in capital assets (e.g., land, buildings and improvements, machinery, work inprogress, and infrastructure) less any related outstanding debt used to acquire those assets. TheCity of Watsonville uses these capital assets to provide services to citizens; consequently, theseassets are not available for future spending. Although the City of Watsonville’s investment in itscapital assets is reported net of related debt, it should be noted that the resources needed to repaythis debt must be provided from other sources, since the capital assets themselves cannot be usedto liquidate these liabilities.

An additional portion of the City of Watsonville’s net position $44,187 represent resources thatare subject to external restrictions on how they may be used by creditors (such as through debtcovenants), grantors, contributions or laws or regulations of other governments. The remainingbalance of unrestricted net position ($42,469) is a negative reduction of the net position due tothe new GASB 68 pension liability reporting as explained above.

City of Watsonville’s Net PositionJune 30, 2015(in thousands)

At the end of the current fiscal year, the City of Watsonville is able to report positive balances innet investment in capital assets and restricted net position for the government as a whole, as wellas for its separate governmental and business-type activities. Again, with the implementation ofGASB 68 and GASB 71, the unrestricted net position is negative for the City as a whole and foreach activity.

2015 2014 2015 2014 2015 2014$ $ $ $ $ $

Current and other assets 57,935 52,795 57,969 52,435 115,904 105,230Capital assets 118,824 122,785 100,915 103,361 219,739 226,146

Total Assets 176,759 175,580 158,884 155,796 335,643 331,376Deferred inflows of resources 3,478 - 857 - -

Total Deferred Recourses 3,478 - 857 - - -Long-term liabilities outstanding 45,603 10,911 57,902 43,897 103,505 54,808Other Liabilities 5,904 6,056 2,815 1,756 8,719 7,812

Total Liabilities 51,507 16,967 60,717 45,653 112,224 62,620Deferred outflows of resources 10,282 - 3,121 - -

Total Deferred Recourses 10,282 - 3,121 - - -Net Position:Net investment in capital assets 114,148 118,302 98,484 99,277 212,632 217,579Restricted 44,188 42,945 - - 44,188 42,945Unresticted (39,888) (2,634) (2,581) 10,866 (42,469) 8,232

Total Net Position 118,448 158,613 95,903 110,143 214,351 268,756

Activities Activities TotalGovernmental Business-type

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City of WatsonvilleSummary of Changes in Net Position

For the Fiscal Year Ending June 30, 2015(in thousands)

Governmental Activities. Governmental activities increased the City of Watsonville’s NetPosition by a $1,939. Key elements of this increase are as follows:

· Governmental revenues and expenses were lower than last year with decrease in generalgovernment expenses of $6,279 and a decrease of 5,556 in charges for services. There wasan increase in other taxes with the start of Measure G sales tax fund receiving its first sale taxrevenues for public safety and general fund receiving some one time state funds.

· Governmental expenses also decreased by $2,011 under streets. The majority of the decreasewas from the gas tax fund expenses were $2,015 lower than last year. The City tries to saveas tax funds to every other year so that major maintenance projects can be done during thefollowing year.

Governmental Business-typeActivities Activities Total

2015 2014 2015 2014 2015 2014$ $ $ $ $ $

Revenues:Program Revenues:

Charges for services 10,190 15,746 34,548 34,652 44,738 50,398Operating grants and contributions 2,393 2,657 900 603 3,293 3,260Capital grants and contributions - - 590 1,156 590 1,156

General RevenuesProperty taxes 11,868 12,090 - - 11,868 12,090Other taxes 19,125 15,950 - - 19,125 15,950Others 3,390 3,576 270 264 3,660 3,840

Transfers 226 211 (226) (211) - - Total Revenues and Transfers 47,192 50,230 36,082 36,464 83,274 86,694

Expenses:General government 5,494 11,773 - - 5,494 11,773Public safety 25,716 23,020 - - 25,716 23,020Housing 1,298 820 - - 1,298 820Streets 4,697 6,708 - - 4,697 6,708Culture and recreation 7,916 7,334 - - 7,916 7,334Interest on debt 132 190 - - 132 190Water - - 11,583 11,002 11,583 11,002Sewer - - 10,741 9,298 10,741 9,298Solid waste - - 10,136 8,699 10,136 8,699Airport - - 2,580 2,888 2,580 2,888 Total Expenses 45,253 49,845 35,040 31,887 80,293 81,732

Change in net position 1,939 385 1,042 4,577 2,981 4,962Net position - beginning 158,613 158,231 110,143 106,937 268,756 265,168Prior year adjustments (42,104) (3) (15,282) (1,371) (57,386) (1,374)Net position - beginning restated 116,509 158,228 94,861 105,566 211,370 263,794Net position ending 118,448 158,613 95,903 110,143 214,351 268,756

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Expenses and Program RevenuesGovernmental Activities

Revenues by SourceGovernmental Activities

Expenses for debt decreased during the fiscal year. His decrease was from interest on debtdecreased with the elimination of some of the special assessment debt.

Expenses for public safety, housing and culture and recreation increased. The increase ofhousing costs was due increased housing grant activities and the culture and recreation costsincreased due library fund activates increased. Public safety costs also increased due to the newMeasure G fund which started during the fiscal year to support both police and fire activitieswith a special sales tax.

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Business-type activities. Business-type activities increased the City of Watsonville’s restatednet position by $1,042. Key elements of this decrease are as follows:

Expenses and Program RevenuesBusiness-type Activities

· Operating grants and contributions increased by $297. The Sewer’s reimbursement fromlocal governmental agencies was the reason for the increase in operating grants.

· Solid Waste Funds had an increase in charges for services with rate increases approved bythe City Council for the fiscal year 2014-15.

· Water, Sewer and Solid Waste Funds all had decreases in costs of sales and services as forthe fiscal year end. Water Fund had a decrease of $929, Sewer Fund had a decrease of$1,412 and Solid Waste Fund had a decrease of $1,477. A large portion of the savings forthe Water Fund was in salaries and benefits as several key members for the fund retired andthe positions were all filled within the fund creating the savings.

· Airport Fund charges for services increased by $251, due mainly to the implementation ofrevenue enhancing measures to bring fees closer to regional fees charged by other airports/

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Revenues by SourceBusiness-type Activities

Financial Analysis of the City of Watsonville’s Funds

As noted earlier, the City of Watsonville uses fund accounting to ensure and demonstratecompliance with finance-related legal requirements.

Governmental funds. The focus of the City of Watsonville’s governmental funds is to provideinformation on near-term inflows, outflows, and balances of spendable resources. Suchinformation is useful in assessing the City of Watsonville’s financing requirements. Inparticular, restricted fund balances for specific proposes may serve as a useful measure of agovernment’s net resources available for spending on various activities at the end of the fiscalyear.

As of the end of the current fiscal year, the City of Watsonville’s governmental funds reportedcombined ending fund balances of $18,199, an increase of $5,060 in comparison with the priorrestated fund balances. The largest portion of fund balances is restricted for specific purposesand the largest restricted portion is for impact fees in the amount of $3,014. This balance is forprojects that have been budgeted or planned and will be completed within the next five years.The remainders of fund balances are either non-spendable or unassigned at year end. The non-spendable portion of fund balances represents the amounts of funds that cannot be spent becausethey are either not in spendable form or legally required to remain intact. Unassigned fundbalances represent amounts which are unconstrained in that they may be spent for any purpose.

The General Fund is the chief operating fund of the City of Watsonville. At the end of thecurrent fiscal year, the charter reserve of the General Fund was $2,450. As a measure of theGeneral Fund’s liquidity, it may be useful to compare both the charter reserve and total fundbalance to total fund expenditures. The City’s General Fund Reserve did not meet the Charter

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Reserve this fiscal year end. The required Charter Reserve fund balance would be 6.4 percent oftotal general fund expenditures; the total fund balance represented 13 percent of the same amountas the City was able to increase the fund balance with reduction of debt and one time income.

The restated fund balance of the City of Watsonville’s General Fund increased by $2,678 duringthe current fiscal year due to the following key factors:

The General Fund increase in fund balance from one time income from state mandated paymentsand increase in property and sales tax revenues.

The Impact Fees Fund had a fund balance of 3,014, a decrease of ($175) over the prior year’srestated balance. This decrease was due to expenditures begin spent that were funded in previousyears and held in fund balance.

The Housing Fund had a fund balance of $2,341, an increase of $13 over the prior year’sbalance. This increase is due to loan repayments during the fiscal year were greater thanexpenditures.

The Redevelopment and Housing Grants Fund has a negative balance of ($237), a decrease of($153) from the restated beginning fund balance. This decrease is the result of timingdifferences from the time of expending grant funds and receiving reimbursement for those funds.

The government’s Debt Service Fund had a fund balance of $72, a decrease of $7 during thefiscal year. This decrease was from the use of funds held in the debt service fund for debtpayments.

Proprietary funds. The City of Watsonville’s proprietary funds provide the same type ofinformation found in the government-wide financial statements, but in more detail.

Net position and changes of net position for the four major enterprise funds are as follows:Proprietary Funds Change of Restated Net Position

Fund FY 2015 FY 2014 Change % ChangeWater 50,462 49,654 808 1.63%Sewer 39,881 40,302 (421) -1.05%Solid Waste 940 600 340 56.67%Airport 4,621 4,306 315 7.32%

Other factors concerning the finances of these funds have already been addressed in thediscussion of the City of Watsonville’s business-type activities.

General Fund Budgetary Highlights

There were only a few small budget amendments this fiscal year. The City Council added anappropriation of $260,000 as a result of a donation in the appropriation amount from Land Trustof Santa Cruz County for improvements to the Lee Road trail.

Taxes were $2,213 over budget. This increase in tax revenue was due to property tax, sales tax,

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and special sales tax all being over budgeted amounts. Fines revenues were ($276) under budgetwith both court fines and traffic fines lower than budgeted. Street expenditures were $559 lowerthan expected as several maintenance project were postponed to next fiscal year.

Capital Asset and Debt Administration

Capital assets. The City of Watsonville’s capital assets, for its governmental and business typeactivities as of June 30, 2015 was $219,738 (net of depreciation). This represents a ($6,408)decrease from the prior year or (2.83%).

Governmental Type Activities contributed to this decrease by a decrease of (3.23%)

While Business Type Activities contributed to this decrease by a decrease of (2.37%)

Additional information on the City of Watsonville’s capital assets can be found in Note 4 onpages 61 to 62 of this report.

Long-Term Debt. At the end of the current fiscal year, the City of Watsonville had total netdebt outstanding of $103,504. Of this amount, $29,057 comprises debt that represents bondssecured solely by specific revenue sources (e.g. revenue bonds), and $290 in special assessmentdebt for which the government is liable in the event of default by the property owners subject tothe assessment. The other debt for governmental activities is made up of notes payable of

Total City of Watsonville Capital Assets FY 2014-15

Capital Asset FY 2015 FY 2014 Change % ChangeLand 33,303 38,029 (4,726) -12.43%Building and Improvements 146,804 149,302 (2,498) -1.67%Machinery & Equipment 14,440 17,086 (2,646) -15.49%Infrastructure 21,449 18,782 2,667 14.20%Construction in progress 3,742 2,947 795 26.98%Totals 219,738 226,146 (6,408) -2.83%

Governmental Activities Capital Assets FY 2014-15

Capital Asset FY 2015 FY 2014 Change % ChangeLand 14,682 14,682 - 0.00%Building and Improvements 89,419 91,992 (2,573) -2.80%Machinery & Equipment 5,368 5,586 (218) -3.90%Infrastructure 8,980 10,272 (1,292) -12.58%Construction in progress 374 253 121 47.83%Totals 118,823 122,785 (3,962) -3.23%

Business Type Activities Capital Assets FY 2014-15

Capital Asset FY 2015 FY 2014 Change % ChangeLand 18,621 23,347 (4,726) -20.24%Building and Improvements 57,385 57,310 75 0.13%Machinery & Equipment 9,072 11,500 (2,428) -21.11%Infrastructure 12,469 8,510 3,959 46.52%Construction in progress 3,368 2,694 674 25.02%Totals 100,915 103,361 (2,446) -2.37%

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$2,047, debt payable of $2,584, postretirement liability of $3,334, compensated absences of$2,132, net pension of $35,171, and $44 for loans. Business type activities have $245 in loans,postretirement liability of $1,276, compensated absences of $989, due to other governments of$10,879, net pension of $12,053 and landfill closure/postclosure liability of $3,403.

State statutes limit the amount of general obligation debt a governmental entity may issue to 10percent of its total assessed valuation. The current debt limit for the City of Watsonville is$126,133 which is significantly in excess of the City of Watsonville’s outstanding debt subjectto this limit.

Additional information on the City of Watsonville’s long-term debt can be found in Note 5 onpages 65 to 75 of this report.

Economic Factors and Next Year’s Budget

· New COPS grant that will fund three Officers for the next three fiscal years.

· Potential gain of sales tax revenues from the improved economy.

· New half percent sales tax approved for seven years to fund fire and police positions andequipment.

· City Council approved a budget that eliminated the 10% furloughs after six and a half years.

With all the above factors considered, the City of Watsonville future appears to be brighter thanpast fiscal years. Full services have been established, 40 hours work weeks and beenreestablished, new sales tax revenue to increase public safety, and a new federal grant to hirethree new police officers starting in in fiscal year 2015-16.

All of these factors were taken into consideration during the preparation of the City ofWatsonville’s annual budget for the fiscal year 2015-16.

Request for Information

This financial report is designed to provide a general overview of the City of Watsonville’sfinances for all those with an interest in the government’s finances. Questions concerning any ofthe information provided in this report or requests for additional financial information should beaddressed to the Administrative Services Director, City of Watsonville, and 250 Main Street,Watsonville, CA 95076.

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Basic FinancialStatements

29

CITY OF WATSONVILLE, CALIFORNIA

STATEMENT OF NET POSITION

JUNE 30, 2015

Governmental Business-type

Activities Activities Total

$ $ $

ASSETS

Cash and investments 18,263,965 11,313,964 29,577,929

Cash and investments with fiscal agent - 2,663,954 2,663,954

Restricted cash - 10,878,769 10,878,769

Receivables:

Interest 1,898,467 22,289 1,920,756

Taxes 3,389,304 - 3,389,304

Assessments 214,000 - 214,000

Accounts 1,118,156 2,215,612 3,333,768

Intergovernmental 1,140,468 43,027 1,183,495

Internal balances (1,667,172) 1,667,172 -

Loans receivable 32,306,228 28,835,388 61,141,616

Inventories 34,911 328,130 363,041

Deposits 60,000 - 60,000

Land held for resale 1,177,012 - 1,177,012

Capital assets (net of depreciation,

where applicable)

Land 14,682,237 18,621,288 33,303,525

Buildings and Improvements 89,418,776 57,384,804 146,803,580

Machinery 5,368,401 9,072,249 14,440,650

Infrastructure 8,979,971 12,469,569 21,449,540

Construction in progress 374,153 3,367,553 3,741,706

Total Assets 176,758,877 158,883,768 335,642,645

DEFERRED INFLOWS OF RESOURCES

Deferred inflow of resources - Pensions 3,477,933 856,987 4,334,920

Total deferred inflow of resources 3,477,933 856,987 4,334,920

See accompanying notes to financial statements Continued

Primary Government

30



JUNE 30, 2015

Governmental Business-type

Activities Activities Total

$ $ $

LIABILITIES

Accounts payable 1,018,998 1,975,260 2,994,258

Accrued personnel costs 1,019,410 395,078 1,414,488

Insurance claims payable 2,873,790 - 2,873,790

Interest payable 49,434 171,883 221,317

Retentions payable - 7,938 7,938

Unearned revenue 47,316 241,870 289,186

Deposits 894,790 22,189 916,979

Noncurrent liabilities

Due within one year 625,921 1,672,078 2,297,999

Due in more than one year

(Net of capitalized discounts) 44,977,105 56,230,070 101,207,175

Total Liabilities 51,506,764 60,716,366 112,223,130

DEFERRED OUTFLOWS OF RESOURCES

Deferred outflow of resources - Pensions 10,282,221 3,121,075 13,403,296

Total deferred outflow of resources 10,282,221 3,121,075 13,403,296

NET POSITION

Net investment in capital assets 114,147,800 98,484,227 212,632,027

Restricted for:

Debt service 236,324 - 236,324

Impact fee 3,131,417 - 3,131,417

Housing 15,252,015 - 15,252,015

Redevelopment and housing grants 14,891,674 - 14,891,674

Grants, contributions & fees for

specific purpose 10,676,316 - 10,676,316

Unrestricted (39,893,035) (2,580,913) (42,473,948)

Total Net Position 118,442,511 95,903,314 214,345,825

See accompanying notes to financial statements Concluded

Primary Government

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32


STATEMENT OF ACTIVITIES

FOR THE FISCAL YEAR ENDED JUNE 30, 2015

Operating Capital

Charges for Grants and Grants and Governmental Business-type

Functions/Programs Expenses Services Contributions Contributions Activities Activities Total

Primary Government: $ $ $ $ $ $ $

Governmental activities:

General government 5,493,786 5,488,411 25,688 - 20,313 - 20,313

Public safety 25,721,640 1,395,620 955,542 - (23,370,478) - (23,370,478)

Housing 1,297,838 391,486 1,278,398 - 372,046 - 372,046

Streets 4,697,049 1,585,150 115,672 - (2,996,227) - (2,996,227)

Culture and recreation 7,916,283 1,329,653 18,148 - (6,568,482) - (6,568,482)

Interest on long term debt 132,061 - - - (132,061) - (132,061)

Total government activities 45,258,657 10,190,320 2,393,448 - (32,674,889) - (32,674,889)

Business-type activities

Water 11,582,847 12,074,796 - 200,605 - 692,554 692,554

Sewer 10,740,919 10,046,213 285,713 48,860 - (360,133) (360,133)

Solid Waste 10,136,343 10,470,836 12,348 - - 346,841 346,841

Airport 2,579,417 1,956,213 602,562 340,573 - 319,931 319,931

Total business-type activities 35,039,526 34,548,058 900,623 590,038 - 999,193 999,193

Total primary government 80,298,183 44,738,378 3,294,071 590,038 (32,674,889) 999,193 (31,675,696)

General revenues:

Property taxes 11,867,555 - 11,867,555

Sales taxes 13,987,547 - 13,987,547

Utility users taxes 3,436,524 - 3,436,524

Franchise taxes 404,126 - 404,126

Other taxes 1,295,634 - 1,295,634

Intergovermental revenues not restricted to specific program 1,474,719 - 1,474,719

Unrestricted investment earnings 1,916,401 269,522 2,185,923

Transfers 226,125 (226,125) -

Total general revenues and transfers 34,608,631 43,397 34,652,028

Change in net position 1,933,742 1,042,590 2,976,332

Net position - beginning 158,613,211 110,142,579 268,755,790

Prior period adjustments (42,104,442) (15,281,855) (57,386,297)

Net position - beginning, restated 116,508,769 94,860,724 211,369,493

Net position - ending 118,442,511 95,903,314 214,345,825

See accompanying notes to financial statements

Program Revenues Primary Government

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GOVERNMENTAL FUNDS

BALANCE SHEET

JUNE 30, 2015

REDEVELOPMENT OTHER TOTAL

AND HOUSING DEBT GOVERNMENTAL GOVERNMENTAL

GENERAL IMPACT FEES HOUSING GRANTS SERVICE FUNDS FUNDS

$ $ $ $ $ $ $

ASSETS:

Cash and investments 6,301,456 2,481,951 1,000,811 583,845 67,214 7,588,557 18,023,834

Receivables:

Interest 106,582 - 1,016,798 681,160 - 93,927 1,898,467

Taxes 2,618,466 - - - 4,544 766,294 3,389,304

Deferred assessments - - - - 214,000 - 214,000

Accounts 402,021 - 987 462,855 865,863

Intergovernmental 547,524 117,270 - 328,744 - 146,930 1,140,468

Due from other funds 1,337,781 - - - - - 1,337,781

Advances receivable 4,114,660 532,469 - - - 749,028 5,396,157

Loans receivable 4,901,269 - 12,060,545 14,119,142 - 1,225,272 32,306,228

Inventories 34,911 - - - - - 34,911

Land held for resale - - 1,177,012 - - - 1,177,012

Total Assets 20,364,670 3,131,690 15,256,153 15,712,891 285,758 11,032,863 65,784,025

LIABILITIES, DEFERRED INFLOWS OF

RESOURCES, AND FUND BALANCES:

Liabilities:

Accounts payable 635,581 - 2,446 9,814 - 220,621 868,462

Accrued personnel costs 975,096 273 1,221 8,937 - 33,883 1,019,410

Due to other funds - - - - - 887,781 887,781

Advances payable 7,513,329 - - - - - 7,513,329

Unearned revenue 190,661 - - 802,466 - - 993,127

Deposits 848,866 - 471 - - 45,454 894,791

Total Liabilities 10,163,533 273 4,138 821,217 - 1,187,739 12,176,900

Deferred Inflows of Resources

Unavailable revenue 5,570,997 117,270 12,911,029 15,129,046 214,000 1,466,129 35,408,471

Total Deferred Inflows of Resources 5,570,997 117,270 12,911,029 15,129,046 214,000 1,466,129 35,408,471

Fund Balances:

Nonspendable:

Inventories 34,911 - - - - - 34,911

Advance receivable 4,114,660 - - - - - 4,114,660

Restricted for:

Debt service - - - - 71,758 - 71,758

Streets - Impact fees - 3,014,147 - - - - 3,014,147

Housing - - 2,340,986 - - - 2,340,986

Streets - Gas tax - - - - - 1,918,089 1,918,089

Public safety -Narcotics assets seizure - - - - - 70,839 70,839

Housing - Business development - - - - - 201,902 201,902

Housing - Rental rehabilitation - - - - - 412,353 412,353

Cultural and recreation - Library - - - - - 1,011,720 1,011,720

Cultural and recreation - Parks development - - - - - 1,911,552 1,911,552

General government - Retirement tax - - - - - 596,602 596,602

Public safety - Measure G - - - - - 1,248,495 1,248,495

Housing - Inclusionary housing - - - - - 1,838,635 1,838,635

Unassigned 480,569 - - (237,372) - (831,192) (587,995)

Total Fund Balances 4,630,140 3,014,147 2,340,986 (237,372) 71,758 8,378,995 18,198,654

Total Liabilities, Deferred Inflows of

Resources, and Fund Balances 20,364,670 3,131,690 15,256,153 15,712,891 285,758 11,032,863 65,784,025


SPECIAL REVENUE FUNDS

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GOVERNMENTAL FUNDS

RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS

TO THE STATEMENTS OF NET POSITION

JUNE 30,2015

Amounts Reported For Governmental Activities To The Statement

Of Net Position Are Different Because: $

Fund Balances Of Governmental Funds. (Page 36) 18,198,654

Capital Assets Used In Governmental Activities Are Not Financial

Resources And, Therefore, Are Not Reported In The Funds. 190,004,365

Accumulated Depreciation Has Not Been Included In The Funds

Financial Statements. (71,180,827)

Internal Service Fund Is Used By Management To Charge The

Costs Of Insurances To Individual Funds. The Assets And

Liabilities Of The Internal Service Fund Are Included In

Governmental Activities In The Statement Of Net Position. (2,471,902)

Loans, Intergovernmental And Assessment Receivables

Recorded As Unearned Revenue Or Unavailable

Revernue In The Governmental Funds Was

Recorded As Revenue On The Statement Of Activities. 36,354,282

Interest Payable Is Not Due And Payable In The Current Period And

Therefore Not Reported In Governmental Funds. (49,434)

Long-term Liability Is Not Due And Payable In The Current Period And

Therefore Not Reported In Governmental Funds. (45,603,026)

Deferred outflows and inflows of resources relating to pensions: In governmental

funds, deferred outflows and inflows of resources relating to pensions are not

reported because they are applicable to future periods. In the statement of net

position, deferred outflows and inflows of resources relating to pensions are

reported.

Deferred inflows of resources relating

to pensions (10,282,221)

Deferred outflows of resources relating

to pensions 3,477,933

Total net position - governmental activities 118,447,824


35


STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES

GOVERNMENTAL FUNDS



AND HOUSING DEBT SERVICE GOVERNMENTAL GOVERNMENTAL

GENERAL IMPACT FEES HOUSING GRANTS GENERAL FUNDS FUNDS

$ $ $ $ $ $ $

REVENUES:

Taxes 23,473,914 - - - - 8,992,191 32,466,105

Licenses, permits, and fees 4,162,131 438,319 - 22,500 - 625,128 5,248,078

Intergovernmental 1,096,902 4,122 - 1,061,357 - 295,320 2,457,701

Charges for services 2,458,395 - - - - - 2,458,395

Fines 552,094 - - - - - 552,094

Interest 1,916,401 29,592 10,794 - 85,829 32,880 2,075,496

Special assessment - - - - 91,085 - 91,085

Miscellaneous 871,996 - 101,117 - - 1,022,224 1,995,337

Total revenues 34,531,833 472,033 111,911 1,083,857 176,914 10,967,743 47,344,291

EXPENDITURES:

Current:

General government 5,826,801 - - 25,419 - 358,047 6,210,267

Public safety 21,770,822 - - - - 1,122,205 22,893,027

Housing - - 98,733 844,230 - 354,875 1,297,838

Streets 3,284,822 622,382 - - - 345,535 4,252,739

Culture and recreation 3,692,286 - - - - 3,479,897 7,172,183

Debt service:

Principal - - - - 495,145 - 495,145

Interest and fiscal charges - - - - 158,294 - 158,294

Total expenditures 34,574,731 622,382 98,733 869,649 653,439 5,660,559 42,479,493

Excess (deficiency) of revenues over

(under) expenditures (42,898) (150,349) 13,178 214,208 (476,525) 5,307,184 4,864,798

OTHER FINANCING SOURCES (USES)

Transfers in 2,777,687 - - - 469,461 93,195 3,340,343

Transfers out (56,714) (24,534) - (366,827) - (2,702,101) (3,150,176)

Total other financing sources (uses) 2,720,973 (24,534) - (366,827) 469,461 (2,608,906) 190,167

Net change in fund balances 2,678,075 (174,883) 13,178 (152,619) (7,064) 2,698,278 5,054,965

Fund balances, July 1 1,937,611 3,189,030 2,327,808 (84,753) 78,822 5,678,202 13,126,720

Prior period adjustments 14,454 - - - - (2,799) 11,655

Fund balances, July 1, as restated 1,952,065 3,189,030 2,327,808 (84,753) 78,822 5,675,403 13,138,375

Fund balances, June 30 4,630,140 3,014,147 2,340,986 (237,372) 71,758 8,373,681 18,193,340


SPECIAL REVENUE FUNDS

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GOVERNMENTAL FUNDS

RECONCILIATION OF STATEMENT OF REVENUES, EXPENDITURES,

AND CHANGES IN FUND BALANCES OF GOVERNMENTAL

FUNDS TO THE STATEMENT OF ACTIVITIES


$

Amounts Reported For Governmental Activities In The Statement

Of Activities Are Different Because:

Net Change In Fund Balance - Total Governmental Funds (Page 36) 5,054,965

Governmental Funds Report Capital Outlay As Expenditures

However, In The Statement Of Activities The Cost Of

Those Assets Are Allocated Over Their Estimated Useful Lives

And Reported As Depreciation Expense. This Is The Amount

By Which Capital Outlays Was Less Than Depreciation In The

Current Period And Costs of Capital Assets Disposed In

The Current Year. (3,961,330)

Revenues On The Statement Of Activities That Does Not Provide

Current Financial Resources Are Not Reported As Revenues

In Governmental Funds. (378,017)

The Issuance Of Long-term Debt (e.g., Bonds) Provides

Current Financial Resources To Governmental Funds, While

The Repayment Of The Principal Of Long-term Debt Consumes

The Current Financial Resources Of Governmental Funds.

Neither Transaction, However Has Any Effect On Net Position.

This Amount Is The Repayment Of Principal. 495,145

This Amount Of Post Retirement Costs (103,997)

This Amount Of Compensated Absences 88,014

Internal Service Funds Are Used By Management To Charge The Costs

Of Insurance To Individual Funds. 565,819

In Governmental Funds, Pension Costs Are Recognized When Employer Contributions

Are Made. In The Statement Of Activities, Pension Costs Are Recognized

On The Accrual Basis. This Year, The Difference Between Accrual-basis

Pension Costs And Actual Employer Contributions Was:

Premium For The Period Is: 146,910

Interest Expense Reported In The Statement Of Activities Does Not Require

The Use Of Current Financial Resources And, Therefore Is

Not Reported As An Expenditure In Governmental Funds. 26,233

Change In Net Position Of Governmental Funds. (Page 33) 1,933,742


37


GENERAL FUND

STATEMENT OF REVENUES, EXPENDITURES,

AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL


Variance With

Final Budget -

Positive

Original Final Actual (Negative)

$ $ $ $

REVENUES:

Taxes 21,260,980 21,260,980 23,473,914 2,212,934

Licenses, permits, and fees 4,200,195 4,200,195 4,162,131 (38,064)

Intergovernmental 1,259,041 1,259,041 1,096,902 (162,139)

Charges for services 2,571,264 2,571,264 2,458,395 (112,869)

Fines 828,000 828,000 552,094 (275,906)

Interest 1,973,896 1,973,896 1,916,401 (57,495)

Miscellaneous 237,150 237,150 871,996 634,846

Total revenues 32,330,526 32,330,526 34,531,833 2,201,307

EXPENDITURES:

Current:

General government 6,073,819 6,114,296 5,826,801 287,495

Public safety 21,714,739 21,752,048 21,770,822 (18,774)

Streets 3,573,734 3,843,734 3,284,822 558,912

Culture and recreation 3,984,384 4,021,384 3,692,286 329,098

Total expenditures 35,346,676 35,731,462 34,574,731 1,156,731


(under) expenditures (3,016,150) (3,400,936) (42,898) 3,358,038


Transfers in 3,245,976 3,245,976 2,777,687 (468,289) Transfers out (775,091) (775,091) (56,714) 718,377

Total other financing sources (uses) 2,470,885 2,470,885 2,720,973 250,088

Net change in fund balance (545,265) (930,051) 2,678,075 3,608,126

Fund balance, July 1 1,937,611 1,937,611 1,937,611 -

Prior period adjustments - - 14,454 14,454

Fund balance July 1, as restated 1,937,611 1,937,611 1,952,065 14,454

Fund balance, June 30 1,392,346 1,007,560 4,630,140 3,622,580


Budgeted Amounts

38


IMPACT FEES FUND




Variance With

Final Budget -

Positive


$ $ $ $

REVENUES:

Licenses, permits, and fees 297,000 297,000 438,319 141,319

Intergovernmental 45,000 45,000 4,122 (40,878)

Interest 96,500 96,500 29,592 (66,908)

Total revenues 438,500 438,500 472,033 33,533

EXPENDITURES:

Current:

Streets 1,080,807 1,306,547 622,382 684,165

Total expenditures 1,080,807 1,306,547 622,382 684,165


(under) expenditures (642,307) (868,047) (150,349) 717,698


Transfers out (24,534) (24,534) (24,534) -

Total other financing sources (uses) (24,534) (24,534) (24,534) -

Net change in fund balance (666,841) (892,581) (174,883) 717,698


Fund balance, June 30 2,522,189 2,296,449 3,014,147 717,698


Budgeted Amounts

39





Variance With

Final Budget -

Positive


$ $ $ $

REVENUES:

Interest 2,500 2,500 10,794 8,294

Miscellaneous 5,000 5,000 101,117 96,117

Total revenues 7,500 7,500 111,911 104,411

EXPENDITURES:

Current:

Housing 68,791 68,791 98,733 (29,942)

Total expenditures 68,791 68,791 98,733 (29,942)

Net change in fund balance (61,291) (61,291) 13,178 74,469




Budgeted Amounts

HOUSING FUND

40





Variance With

Final Budget -

Positive


$ $ $ $

REVENUES:

Licenses, permits, and fees - - 22,500 22,500

Intergovernmental 1,950,787 1,950,787 1,061,357 (889,430)

Total revenues 1,950,787 1,950,787 1,083,857 (866,930)

EXPENDITURES:

General government 35,416 35,416 25,419 9,997

Housing 1,950,787 1,950,787 844,230 1,106,557

Total expenditures 1,986,203 1,986,203 869,649 1,116,554


(under) expenditures (35,416) (35,416) 214,208 249,624

OTHER FINANCING SOURCES (USES):

Transfers out (366,827) (366,827) (366,827) -

Total other financing sources (uses) (366,827) (366,827) (366,827) -


Fund balance, July 1 (84,753) (84,753) (84,753) -

Fund balance, June 30 (486,996) (486,996) (237,372) 249,624


Budgeted Amounts

REDEVELOPMENT AND HOUSING GRANTS

41


PROPRIETARY FUNDS


JUNE 30, 2015

Governmental

Activities -

Internal Service

WATER SEWER SOLID WASTE AIRPORT TOTALS Fund

$ $ $ $ $ $

ASSETS

Current Assets:

Cash and investments 1,152,739 4,896,396 5,264,529 300 11,313,964 240,131

Cash and investments with fiscal agent 102,394 98,470 56 - 200,920 -

Restricted cash 10,878,769 - - - 10,878,769 -

Receivables:

Accounts 632,227 1,091,724 489,098 2,563 2,215,612 252,293

Interest 22,289 - - - 22,289

Intergovernmental 31,458 - - 11,569 43,027 -

Loans receivable - 62,222 - - 62,222 -

Deposits - - - - - 60,000

Inventories 307,264 - 1,004 19,862 328,130 -

Total Current Assets 13,127,140 6,148,812 5,754,687 34,294 25,064,933 552,424

Noncurrent Assets

Cash and investments with fiscal agent 2,368,005 - 95,029 2,463,034

Advances receivable 4,105,067 958,376 1,168,389 6,231,832 -

Loan receivable 27,899,818 873,348 28,773,166 -

Capital assets:

Land and improvements 6,381,947 8,943,006 438,000 2,858,335 18,621,288 -

Buildings 38,895,439 29,417,748 4,107,495 13,913,203 86,333,885 -

Machinery and equipment 8,786,815 4,126,827 7,239,018 338,632 20,491,292 -

Infrastructure 13,152,043 39,143,180 1,019,970 1,941,125 55,256,318 -

Construction in progress 2,140,239 258,789 - 968,525 3,367,553 -

Accumulated depreciation (22,750,118) (41,399,907) (9,250,807) (9,754,041) (83,154,873) -

Total Capital Assets (Net of

accumulated depreciation) 46,606,365 40,489,643 3,553,676 10,265,779 100,915,463 -

Total Noncurrent Assets 80,979,255 42,321,367 4,817,094 10,265,779 138,383,495 -

Total Assets 94,106,395 48,470,179 10,571,781 10,300,073 163,448,428 552,424

DEFERRED OUTFLOWS OF RESOURSES

Deferred outflow of resources - pension 220,770 355,423 227,401 53,393 856,987 -

Total deferred outflow of resources 220,770 355,423 227,401 53,393 856,987 -

LIABILITIES

Current Liabilities:

Accounts payable 979,279 720,379 224,191 51,411 1,975,260 150,536

Accrued personnel costs 93,776 174,465 99,160 27,677 395,078 -

Insurance claims payable - - - - - 2,873,790

Interest payable 163,087 2,152 6,644 - 171,883 -

Retention payable 7,938 - - - 7,938 -

Customer deposits 22,189 - - - 22,189 -

Due to other funds - - - 450,000 450,000 -

Unearned revenue 9,000 228,785 - 4,085 241,870 -

Current maturities of long term debt:

Compensated absences 9,760 31,030 15,314 3,262 59,366 -

Liability for landfill closure - - 59,500 - 59,500 -

Revenue bonds - 553,415 754,883 - 1,308,298 -

City of watsonville loan 244,914 - - - 244,914 -

Total Current Liabilities 1,529,943 1,710,226 1,159,692 536,435 4,936,296 3,024,326

Noncurrent Liabilities:

Advance payable - - - 4,114,660 4,114,660 -

Compensated absences 152,906 486,130 239,914 51,098 930,048 -

Post retirement 322,669 455,116 413,138 85,176 1,276,099 -

Liability for landfill closure - - 3,343,305 - 3,343,305 -

Due to other governments 10,878,769 - - - 10,878,769 -

Net pension liability 3,105,032 4,998,872 3,198,289 750,946 12,053,139 -

Revenue bonds payable (Net of

capitalized discounts) 27,071,550 - 677,160 - 27,748,710 -

Total Noncurrent Liabilities 41,530,926 5,940,118 7,871,806 5,001,880 60,344,730 -

Total Liabilities 43,060,869 7,650,344 9,031,498 5,538,315 65,281,026 3,024,326

DEFERRED INFLOWS OF RESOURSES

Deferred inflow of resources - pension 804,026 1,294,423 828,174 194,452 3,121,075 -

Total deferred inflow of resources 804,026 1,294,423 828,174 194,452 3,121,075 -

Net Position

Net investment in capital assets 46,259,057 39,837,758 2,121,633 10,265,779 98,484,227 -

Unrestricted 4,203,213 43,077 (1,182,123) (5,645,080) (2,580,913) (2,471,902)

Total Net Position 50,462,270 39,880,835 939,510 4,620,699 95,903,314 (2,471,902)


Business-type Activities -

Enterprise Funds

42


PROPRIETARY FUNDS

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION


Governmental

Activities -

Internal Service


$ $ $ $ $ $

OPERATING REVENUES:

Charges for services 12,074,796 10,046,213 10,470,836 1,956,213 34,548,058 8,863,555

Total Operating Revenue 12,074,796 10,046,213 10,470,836 1,956,213 34,548,058 8,863,555

OPERATING EXPENSES:

Costs of sales and services 8,813,838 9,402,220 9,418,805 2,335,319 29,970,182 8,341,479

Depreciation 1,563,121 1,271,432 638,236 219,417 3,692,206 -

Total Operating Expenses 10,376,959 10,673,652 10,057,041 2,554,736 33,662,388 8,341,479

Operating Income (Loss) 1,697,837 (627,439) 413,795 (598,523) 885,670 522,076

NONOPERATING REVENUES

(EXPENSES)

Lease revenue - - - 602,562 602,562 -

Grant revenue - 285,713 12,348 - 298,061 -

Interest revenue 140,639 94,871 34,012 - 269,522 7,784

Interest expense (1,205,888) (67,267) (79,302) (24,681) (1,377,138) -

Total Nonoperating Revenues

(expenses) (1,065,249) 313,317 (32,942) 577,881 (206,993) 7,784

Income Before Contributions and

Transfers 632,588 (314,122) 380,853 (20,642) 678,677 529,860

Capital contributions -

Grants 49,547 - - 340,573 390,120 -

Connection fees 151,058 48,860 - - 199,918 -

Transfers in - - - - - 35,958

Transfers out (24,599) (155,614) (40,856) (5,056) (226,125) -

Changes in Net Position 808,594 (420,876) 339,997 314,875 1,042,590 565,818

Total Net Position- Beginning 53,534,700 46,966,212 4,394,093 5,247,574 110,142,579 (3,044,251)

Prior period adjustments (3,881,024) (6,664,501) (3,794,580) (941,750) (15,281,855) 6,531

Total Net Position - Beginning,

as restated 49,653,676 40,301,711 599,513 4,305,824 94,860,724 (3,037,720)

Total Net Position - Ending 50,462,270 39,880,835 939,510 4,620,699 95,903,314 (2,471,902)



Enterprise Funds

43


STATEMENT OF CASH FLOWS

PROPRIETARY FUNDS


Governmental

Activities -

Internal Service


$ $ $ $ $ $

CASH FLOWS FROM OPERATING ACTIVITIES:

Receipts from customers and users 11,881,605 10,835,152 10,576,076 2,037,562 35,330,395 -

Receipts from interfund services provided - - - - - 8,943,480

Payments to suppliers (1,196,932) (1,864,457) (2,305,152) (1,497,832) (6,864,373) (8,977,097)

Payments to employees (2,945,732) (4,525,318) (2,922,722) (704,525) (11,098,297) -

Payment for interfund services used (183,557) (8,200) (1,632,358) (270,697) (2,094,812) -

Net cash provided (used) by operating activities 7,555,384 4,437,177 3,715,844 (435,492) 15,272,913 (33,617)

CASH FLOW FRON NONCAPITAL FINANCING ACTIVITIES

Transfers from other funds - - - - - 35,958

Transfers to other funds (24,599) (155,614) (40,856) (5,056) (226,125) -

Net cash provided (used) by noncapital financing activities (24,599) (155,614) (40,856) (5,056) (226,125) 35,958

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES

Acquisition of capital assets (574,497) (190,673) - (481,691) (1,246,861) -

Connection fees 151,058 48,860 - - 199,918 -

Grant revenue 49,547 285,713 12,348 340,573 688,181 -

Principal paid on long term debt (597,322) (531,404) (616,695) - (1,745,421) -

Interest paid on long term debt (1,205,888) (69,915) (83,135) (24,681) (1,383,619) -

Net cash provided (used) by capital and related financing activities (2,177,102) (457,419) (687,482) (165,799) (3,487,802) -

CASH FLOWS FROM INVESTING ACTIVITIES:

Lease revenue - - - 606,647 606,647 -

Interest received 136,970 95,449 34,012 - 266,431 7,784

Net cash provided (used) by investment activities 136,970 95,449 34,012 606,647 873,078 7,784

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,490,653 3,919,593 3,011,518 300 12,421,764 10,125

CASH AND CASH EQUIVALENTS, JULY 1 6,643,249 1,075,273 2,253,067 - 9,971,589 230,006

CASH AND CASH EQUIVALENTS, JUNE 30 12,133,902 4,994,866 5,264,585 300 22,393,353 240,131

Reconciliation of Statement of Net Position:

Cash and investments 1,152,739 4,896,396 5,264,529 300 11,313,964 240,131

Cash with fiscal agent 102,394 98,470 56 - 200,920 -

Restricted cash 10,878,769 - - - 10,878,769 -

12,133,902 4,994,866 5,264,585 300 22,393,653 240,131

Reconciliation of operating income (loss) to net cash

provided (used) by operating activities:

Operating Income 1,697,837 (627,439) 413,795 (598,523) 885,670 522,076

Adjustments to reconcile operating income (loss) to net cash

provided (used) by operating activities:

Depreciation 1,563,121 1,271,432 638,236 219,417 3,692,206 -

(Increase) decrease in receivables (214,257) 560,154 105,240 81,349 532,486 86,456

(Increase) decrease in inventories (3,910) - (26) 9,772 5,836 -

(Increase) decrease in loans receivable 4,928 85,024 - - 89,952 -

(Increase) decrease in due from other governments 20,054 - - 498,620 518,674 -

(Increase) decrease in advance receivable 574,479 2,262,551 2,392,664 (458,828) 4,770,866 -

(Increase) decrease in deferred outflows (2,386) (3,840) (2,458) (577) (9,261) -

(Increase) decrease in pension liability (774,805) (1,247,380) (798,076) (187,385) (3,007,646) -

Increase (decrease) in accounts payable 334,452 484,810 105,123 (193,079) 731,306 37,479

Increase (decrease) in claims payable - - - - - (679,628)

Increase (decrease) in accrued personnel costs (25,321) 114,303 21,211 3,146 113,339 -

Increase (decrease) in retentions payable 5,354 - - (6,590) (1,236) -

Increase (decrease) in unearned revenue 9,000 228,785 - - 237,785 -

Increase (decrease) in customer deposits 12,066 - - - 12,066 -

Increase (decrease) in due to other governments 3,540,492 - - - 3,540,492 -

Increase (decrease) in post retirement 10,254 14,354 11,961 2,734 39,303 -

Increase (decrease) in deferred inflows 804,026 1,294,423 828,174 194,452 3,121,075 -

Total adjustments 5,857,547 5,064,616 3,302,049 163,031 14,387,243 (555,693)

Net cash provided (used) by operating activities 7,555,384 4,437,177 3,715,844 (435,492) 15,272,913 (33,617)

NONCASH INVESTING ACTIVITIES:

Landfill postclosure liability amortization - - $154,583 - $154,583 -

Landfill usage amortization - - $50,830 - $50,830 -



Enterprise Funds

44


PRIVATE PURPOSE TRUST FUND

STATEMENT OF FIDUCIARY NET POSITION

JUNE 30, 2015

ASSETS $

Cash and Investments with Fiscal Agent 1,837,345

Restricted Cash 2,715,494

Receivables

Interest 57,929

Notes 410,000

Total Assets 5,020,768

LIABILITIES

Current Liabilities

Accounts Payable 14,332

Salaries Payable 8,374

Interest Payable 468,302

Unearned Revenue 12,000

Debt Payable 51,484

Bonds Payable 1,040,000

Total Current Liabilities 1,594,492

Noncurrent liabilities

Notes Payable 5,501,304

Post Retirement 64,461

Debt Payable 163,908

Bonds Payable 16,910,000

Total Non Current liabilities 22,639,673

Total Liabilities 24,234,165

Net Position

Unrestricted (19,213,397)

Total Net Position (19,213,397)


45


PRIVATE TRUST FUND

STATEMENT OF CHANGES IN NET POSITION

FOR THE FISCAL YEAR ENDIED JUNE 30, 2015

$

ADDITIONS:

Interest Income 190

Intergovernment 3,522,536

Total Additions 3,522,726

DEDUCTIONS:

Administration 436,486

Interest on debt 905,926

Total Deductions 1,342,412

Change in Net Position 2,180,314

Net Position, July 1, 2014 (22,052,834)

Prior Period Adjustment 659,123

Net Position, July 1, 2014, Restated (21,393,711)

Net Position, June 30, 2015 (19,213,397)


46

47

CITY OF WATSONVILLE, CALIFORNIANOTES TO FINANCIAL STATEMENTS

June 30, 2015

I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A. Reporting entity

The City of Watsonville, California was incorporated in 1868 as a charter city and operates underthe Council-Manager form of government. The City provides the following services: publicsafety (police, fire and building inspections), highway and streets, water, sewer and solid wasteservices, airport, public improvements, planning and zoning, housing and general administration.

B. Government-wide and fund financial statements

The Government-wide financial statements (i.e., the statement of net position and the statementof activities) report information on all of the activities of the primary government. For the mostpart, the effect of interfund activity has been removed from these statements. Governmentalactivities, which normally are supported by taxes and intergovernmental revenues, are reportedseparately from business-type activities, which rely to a significant extent on fees and charges forsupport.

The statement of activities demonstrates the degree to which the direct expenses of a givenfunction or segments are offset by program revenues. Direct expenses are those that are clearlyidentifiable with a specific function or segment. Program revenues include 1) charges tocustomers or applicants who purchase, use, or directly benefit from goods, services, or privilegesprovided by a given function or segment and 2) grants and contributions that are restricted tomeeting the operational or capital requirements of a particular function or segment. Taxes andother items not properly included among programs revenues are reported instead as generalrevenues. Separate financial statements are provided for governmental funds and proprietaryfunds. Major individual governmental funds and major individual enterprise funds are reportedas separate columns in the fund financial statements.

C. Measurement focus, basis of accounting, and financial statement presentation

The government-wide financial statements are reported using the economic resourcesmeasurement focus and the accrual basis of accounting, as are the proprietary funds and specialpurpose trust fund financial statements. Revenues are recorded when earned and expenses arerecorded when a liability is incurred, regardless of the timing of related cash flows. Propertytaxes are recognized as revenues in the year for which they are levied. Grants and similar itemsare recognized as revenue as soon as all eligibility requirements imposed by the provider havebeen met.

Governmental funds financial statements are reported using the current financial resourcesmeasurement focus and the modified accrual basis of accounting. Revenues are recognized assoon as they are both measurable and available. Revenues are considered to be available whenthey are collected within the current period or soon enough thereafter to pay liabilities of thecurrent period.

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June 30, 2015 (Continued)

For this purpose, the government considers revenues to be available if they are collected within60 days of the end of the current fiscal period. Expenditures generally are recorded when aliability is incurred, as under accrual accounting. However, debt service expenditures, as well asexpenditures related to claims and judgments, are recorded only when payment is due.

Property taxes, franchise fees, licenses, and interest associated with the current fiscal period areall considered to be susceptible to accrual and so have been recognized as revenues of the currentfiscal period. Only the portion of special assessments receivable due within the current fiscalperiod is considered to be susceptible to accrual as revenue of the current period. All otherrevenue items are considered to be measurable and available only when cash is received by thegovernment.

The government reports the following major governmental funds:

The General Fund is the government’s primary operating fund. It accounts for allfinancial resources of the government, except those required to be accounted for inanother fund.

The Impact Fees Fund is assessed at the time of development and is used to mitigatecertain increased costs incurred by the government as development occurs. These fundsare then used to increase the capacity of roads, build fire stations, public safetyequipment, or other governmental facilities. The receipt and disbursement of these feesare recorded in this fund.

The Housing Fund is used for low and moderate-income housing projects.

The Redevelopment and Housing Grants Fund provides assistance to low and moderate-income individuals via grants. These grants offer a number of housing programs to helplow to moderate income Watsonville residents improve their housing condition.

The General Debt Service Fund receives funds for the payment of governmental debt ofthe government.

The government reports the following major proprietary funds:

The Water Fund records the receipt of revenues for water services and records theassociated expenses or capital investment. The water service provides water toWatsonville and the surrounding communities, which has a service population ofapproximately 50,000.

The Sewer Fund records the activity of the government's wastewater treatment plant andcollection system. The fund also provides waste treatment services to other local sanitarydistricts, namely Freedom, Salsipuedes, and Pajaro Utility Districts. Thus, thewastewater plant services some 55,000 residents.

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The Solid Waste Fund records the activities of refuse collection, recycling, and landfilloperations. The landfill is located near the County landfill and is used only by thecitizens of the City of Watsonville.

The Airport Fund represents the activities at the airport and the receipt of FederalAviation Agency (FAA) grants. The fund is to be supported by the fees the airportcollects from fuel sales and facility use fees. The FAA provides substantial grant incomefor general airport improvements.

Additionally, the government reports the following fund types:

The Internal Service Fund is used to account for financing of insurance services providedto other government funds and departments on a cost reimbursement basis.

The Private Purpose Trust Fund is used to account for the transactions of the SuccessorAgency of the City of Watsonville Redevelopment Agency.

As a general rule, the effect of interfund activity has been eliminated from government-widefinancial statements. Exceptions to this general rule are payments-in-lieu of taxes and othercharges between the government’s water, sewer, and solid waste functions and various otherfunctions of the government. Elimination of these charges would distort the direct costs andprogram revenues reported for the various foundations concerned.

Amounts reported as program revenues include 1) charges to customers or applicants for goods,services, or privileges provided, 2) operating grants and contributions, and 3) capital grants andcontributions, including special assessments. Internally dedicated resources are reported asgeneral revenues rather than as program revenues. Likewise, general revenues include all taxes.Proprietary funds distinguish operating revenues and expenses from nonoperating items.Operating revenues and expenses generally result from providing services and producing anddelivering goods in connection with proprietary funds principal ongoing operations. Theprincipal operating revenues of the government’s enterprise funds and of the government’sinternal service fund are charges to customers for sales and services. The government alsorecognizes as operating revenue the portion of connection fees intended to recover the cost ofconnecting new customers to the system. Operating expenses for enterprise funds and theinternal service fund include the cost of sales and services, administrative expenses, anddepreciation on capital assets. All revenues and expenses not meeting this definition are reportedas nonoperating revenues and expenses.

When both restricted and unrestricted resources are available for use, it is the government’spolicy to use restricted resources first, then unrestricted resources, as they are needed.

The preparation of the financial statements in conformity with accounting principles generallyaccepted in the United States of America, as prescribed by the GASB and the American Instituteof Certified Public Accountants, require management to make assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts for revenues andexpenses/expenditures.

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D. Assets, liabilities, and net position or equity

1. Deposits and investments

The government’s cash and cash equivalents are considered to be cash on hand, demanddeposits, and short term investments with original maturities of three months or less from thedate of acquisition.

State statutes authorize the government to invest in the following types of investments:

- Securities of the US Government, or its agencies- Certificates of Deposit (or Time Deposits) placed with commercial banks and/or savings and

loan institutions like institutions such as credit unions - Local Agency Investment Fund (State Pool) - Repurchase agreements (repos) for a term of one year or less - Passbook Savings Account Demand Deposits - Debt of the City of Watsonville - Negotiable Certificates of Deposits- Bankers' Acceptances

Investments for the government as well as for its component unit, are reported at fair value. TheState Treasurers Investment Pool operates in accordance with appropriate state laws andregulations. The reported value of the pool is the same as the fair value of the pool shares. Thegovernment has funds held by trustees or fiscal agents pledged to the payment or security ofcertain bonds and certificates of participation. The California Government Code provides thatthese funds, in absence of specific statutory provisions governing the issuance of bonds orcertificates, may be invested in accordance with the ordinance, resolutions, or indenturesspecifying the types of investments the trustees or fiscal agent may make.

Cash and cash equivalents

The cash flow statements require presentation of “cash and cash equivalents”. For the purposesof the statement of cash flows, the government considers all proprietary funds pooled cash andinvestments and cash and investments with fiscal agent as “cash and cash equivalents”.

2. Receivables and payables

Activities between funds that are representative of lending/borrowing arrangements outstandingat the end of the fiscal year are referred to as either “due to/from other funds” (i.e., the currentportion of interfund loans) or “advances to/from other funds” (i.e., the non-current portion ofinterfund loans). All other outstanding balances between funds are reported as “due to/fromother funds”. Any residual balances outstanding between the governmental activities andbusiness-type activities are reported in the government-wide financial statements as “internalbalances.”

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Property taxes are levied and collected by the County of Santa Cruz and paid upon collection tothe various taxing entities including the City. Property taxes are attached as an enforceable lienon property as of January 1. Taxes are levied on July 1 and are payable in two installments onDecember 10 and April 10. Unsecured taxes are due on July 1 and become delinquent on August31. The City recognizes property tax revenues when they become measurable and available forthe payment of claims in the current period.

3. Inventories

All inventories are valued at cost using the first-in/first-out (FIFO) method. Inventories ofgovernmental funds are recorded as expenditures when consumed rather than when purchased.

4. Land held for resale

Land held for resale is carried at the lower of cost or estimated realizable value.

5. Capital assets

Capital assets, which include property, plant and equipment, and infrastructure, (e.g., bridges,curbs and gutters, streets and sidewalks, drainage systems, and lighting systems), andconstruction in progress are recorded in the applicable governmental or business-type activitiescolumns in the government-wide financial statements. The government defines capital assets asassets with an initial, individual cost of more than $5,000 (amount not rounded) and an estimateduseful life in excess of two years. Such assets are recorded at historical cost or estimatedhistorical cost if purchased or constructed. Donated capital assets are valued at their estimatedfair value on the date donated.

The costs for normal maintenance and repairs that do not add to the value of the asset ormaterially extend assets lives are not capitalized.

Major outlays for capital assets and improvements are capitalized as projects are constructed.Interest incurred during the construction phase of capital assets of business-type activities isincluded as part of the capitalized value of the assets constructed.

Property, plant, and equipment of the primary government, depreciated using the straight-linemethod over the following estimated useful lives:

Assets YearsInfrastructure 20 to 50 yearsBuildings 20 to 50 yearsImprovements 20 to 50 yearsMachinery and Equipment 3 to 10 years

6. Compensated absences

It is the government’s policy to allow most employee groups to accumulate sick leave to amaximum of 1,000 hours. Sick leave accumulated above this maximum is paid to employees at

52



50% of such excess in December. The balance of such unused sick leave is lost and the sickleave accrual is reduced to 1,000 hours at January 1 of each year. Earned vacation time isaccumulated up to two times the employee's annual accrual rate and unused vacation is paid atthe employee's hourly rate upon termination.

The maximum accumulation, for fire-fighters on shift duty, of unused sick leave is 62.5 days(1,500 hours). Sick leave accumulation in any calendar year in excess of 1,500 hours shall bepaid at the rate of 50% of such excess. The balance of such unused sick leave is lost and the sickleave accrual is reduced to 1,500 hours at January 1 of each year.

The City accrues for compensated absences in the government-wide and proprietary fundfinancial statements for which they are liable to make payment directly. The General fund,Inclusionary Housing fund, and all 4 Enterprise funds incurred costs associated withcompensated absences during the last fiscal year.

7. Interfund transactionsA description of the basic two types of the City's interfund transactions during the fiscal year andthe related accounting policies are set forth as follows: 1. Transactions related directly to services rendered, or facilities provided, are recorded as

revenues in the fund providing the service or facility and expenditures (or expenses) inthe fund receiving them.

2. Transactions to allocate resources from one fund to another, not contingent on theoccurrence of specific expenditures in the receiving fund, are recorded appropriately astransfers in and transfers out in the respective funds.

8. Long-term obligationsIn the government-wide financial statements, and proprietary fund types in the fund financialstatements, long-term debt and other long-term obligations are reported as liabilities in theapplicable governmental activities, business-type activities, or proprietary fund type statement ofnet position. Bond premiums and discounts are deferred and amortized over the life of the bondusing the effective interest method. Bonds payable are reported net of the applicable bondpremium or discount.

In the financial statements, governmental fund types recognize bond premiums and discounts, aswell as bond issuance costs, during the current period. The face amount of debt issued isreported as other financing sources. Premiums received on debt issuances are reported as otherfinancing sources while discounts on debt issuances are reported as other financing uses.Issuance costs, whether or not withheld from the actual debt proceeds received, are reported asdebt service expenditures.

9. Deferred Outflows and Inflows of Resources

Pursuant to GASB Statement No. 63, “Financial Reporting of Deferred Outflows of Resources,Deferred Inflows of Resources, and Net Position ,” and GASB Statement No. 65, “ItemsPreviously Reported as Assets and Liabilities,” the City recognizes deferred outflows andinflows of resources.

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In addition to assets, the Statement of Net Position will sometimes report a separate section fordeferred outflows of resources. A deferred outflow of resources is defined as a consumption ofnet position by the government that is applicable to a future reporting period. The City has oneitem which qualifies for reporting in the category to Note V.E. for a detailed listing of thedeferred outflows. In addition to liabilities, the Statement of Net Position will sometimes reporta separate section for deferred inflows of resources. A deferred inflow of resources is defined asan acquisition of net position by the City that is applicable to a future reporting period. The Cityhas one item which qualify for reporting in this category; refer to Note V. E. for a detailed listingof the deferred inflows of resources the City has recognized.

10. Fund balances

Fund balances of the governmental funds are classified as follows:

Nonspendable Fund Balance – represents amounts that cannot be spent because they are either not inspendable form (such as inventory) or legally required to remain intact (such as notes receivable orprincipal of a permanent fund).

Restricted Fund Balance – represents amounts that are constrained by external parties, constitutionalprovisions or enabling legislation.

Committed Fund Balance – represents amounts that can only be used for a specific purpose becauseof a formal action by the City’s governing board (ordinance). Committed amounts cannot be used forany purpose unless the governing board removes those constraints by taking the same type of formalaction. Committed fund balance amounts may be used for other purpose with appropriate due processby the governing board. Commitments are typically done through adoption and amendment of thebudget. Committed fund balance amounts differ from restricted balances in that the constraints ontheir use do not come from outside parties, constitutional provisions, or enabling legislation.

Assigned Fund Balance – represents amounts which the City intends to use for a specific purpose, butthat do not meet the criteria to be classified as restricted or committed. Intent maybe stipulated by the government board or by an official or body to which the governing boarddelegates the authority. Specific amounts that are not restricted or committed in a special revenue,capital projects, debt service or permanent fund are assigned for purpose in accordance with thenature of their type or the fund’s primary purpose. An assignment within the general fund conveysthat the intended use of those amounts is for a specific purpose that is narrower than the generalpurpose of the City.

Unassigned Fund Balance – represents amounts which are unconstrained in that they may be spent forany purpose. Only the general fund reports a positive unassigned fund balance. Other governmentalfunds might report a negative balance in this classification because of commitments made, whichinclude future funding sources for specific purposes for which amounts had been restricted,committed or assigned.

When an expenditure is incurred for a purpose for which both restricted and unrestricted fund balanceis available, the City considers restricted funds to have been spent first. When an expenditure is

54



incurred for which committed, assigned or unassigned fund balance are available, the City considersamounts to have been spent first out of committed funds, then assigned funds, and finally unassignedfunds.

11. Net PositionGASB Statement No. 63 requires that the difference between assets added to the deferred outflows ofresources and liabilities added to the deferred inflows of resources be reported as net position. Netposition is classified as either net investment in capital assets, restricted, or unrestricted.

Net position that is net investment in capital assets consist of capital assets, net of accumulateddepreciation, and reduced by the outstanding principal of related debt. Restricted net position is theportion of net position that has external constraints placed on it by creditors, grantors, contributors,laws, or regulations of other governments, or through constitutional provisions or enabling legislation.Unrestricted net position consists of net position that does not meet the definition of net investment incapital assets or restricted net position.

II. Reconciliation of government-wide and fund financial statementsA. Explanation of certain difference between the governmental funds balance sheet and thegovernment-wide statement of net position.

The governmental funds balance sheet includes a reconciliation between fund balances - totalgovernmental funds and net position - governmental activities as reported in the government-widestatement of net position. Two elements of that reconciliation explains that 1) capital assets used ingovernmental activities are not financial resources and, therefore, are not reported in the funds and 2)long-term debt, including bonds payable, are not due and payable in the current period and thereforeare not reported in the funds.

The details of 1) $190,004,365 differences are as follows: Capital Assets: Land $14,682,237 Buildings and improvements 134,009,248 Machinery and equipment 14,433,218 Infrastructure 26,505,509 Construction in progress 374,153 Total $190,004,365

The details of 2) ($45,603,025) differences are as follows:Long-term Debt: Compensated Absences ($2,132,318)

Santa Cruz County Bank Loan (2,584,193)Notes Payable (661,137)City Loan (44,408)Sec 108 Loan (1,386,000)Postretirement (3,333,540)Special assessment bonds (290,000)Net Pension Liability (45,603,025) Total ($45,603,025)

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B. Explanation of certain differences between the governmental funds statement of revenues,expenditures, and changes in fund balances and the government-wide statement of activities

The governmental funds statement of revenues, expenditures, and changes in fund balances includes areconciliation between net changes in fund balances - total government funds and changes in netposition of governmental activities as reported in the government-wide statement of activities. Oneelement of that reconciliation explains that “Governmental funds report capital outlays asexpenditures. However, in the statement of activities the cost of those assets is allocated over theiruseful lives and reported as depreciation expense.”The details of this ($3,961,330) difference are as follows:

Capital outlay $816 632 Depreciation expense (4,777 962) Net adjustment to decrease net changes in fund balances -

total governmental funds to arrive at changes in net position of governmental activities ($3,961,330)

III. Stewardship, compliance, and accountability

A. Budgetary information

Annual budgets are adopted on a basis consistent with accounting principles generally accepted in theUnited States of America for all governmental funds. All annual appropriations lapse at fiscal year-end.

On or before March 31 of each fiscal year, all departments of the City of Watsonville are required tosubmit requests for appropriations to the government’s management so that a budget may beprepared. Before May 31 the proposed budget is presented to the government’s council for review.The council holds public hearings and a final budget must be prepared and adopted no later than June30.

The appropriated budget is prepared by fund, department, and division. The government departmentheads may make transfers of appropriations within a department. Transfers of appropriationsbetween funds require the approval of the City Manager. The legal level of budgetary control (i.e.,the level at which expenditures may not legally exceed appropriations) is the fund level. The councilmade several supplemental budget appropriations during the fiscal year. The general fund budget wasincreased by $384,786 during the fiscal year. The largest portion of this was from a donation by theLand Trust of Santa Cruz County for $260,000 and a corresponding appropriation for maintenance onlee road trail. There were also some grants and operation costs added. City also increased specialrevenue funds appropriations by $389,040 during the year. The City’s Impact Fee fund was increasedby $225,740. This amount was for operation costs for various maintenance projects. OtherGovernmental Funds were increased by $163,300.

Encumbrance accounting is employed in governmental funds. Encumbrances (e.g., purchase orders,contracts) outstanding at fiscal year-end do not constitute expenditures or liabilities because the

56



commitments will be re-appropriated and honored during the subsequent year. Encumbrances wereas follow at year end: General Fund – $694,198, Housing Fund - $3,733, Redevelopment andHousing Fund - $10,889 and Other Governmental Funds - $728,047.

B. Excess of expenditures over appropriations

For the fiscal year ended June 30, 2015, expenditures exceeded appropriations in the City’s housingfund by 29,942, debt service fund by 30,888, retirement tax fund by 5,003,inclusionary housing fundby $69,402, and parking garage fund by $17,435. The parking garage will receive transfers in fromother City funds in the future to reduce its negative balance. The housing, debt service, inclusionaryhousing, and retirement tax funds had excess fund balance to cover these costs.

C. Deficit fund equity

The special revenue funds had the following deficit fund balances: redevelopment and housing grantfund $237,372, parking garage fund of $749,249, and abandoned vehicle fund of $81,943. Theinternal service fund had a deficit net position of $2,471,902 as of June 30, 2015. The specialrevenue funds will make these deficits up with future special revenue funds and the internal servicefund will increase its charges to City users in the future.

IV. Detailed notes on all funds

A. Cash and investments Cash and investments at June 30, 2015, consisted of the following:

Total Pooled Deposits and Investments $43,172,191 Cash and Investments with Fiscal Agent 4,501,299

Total Cash and Investments $47,673,490

The City of Watsonville follows the practice of pooling cash and investments of all funds except forfunds required to be held by outside fiscal agents under the provisions of bond indentures andrestricted cash.

Interest income earned on pooled cash and investments is allocated periodically to the various fundsbased on average cash balances. Interest income from cash and investments with fiscalagents and restricted cash is credited directly to the related fund.

Cash and investments (including monies held by trustees and fiscal agents) as of June 30, 2015 wereas follows:

CashDemand Deposits $ 4,814,319Outstanding Checks (335,761)

Deposits in Transit 129,642Net Demand Deposits 4,608,200

Petty Cash 9,531Cash Subtotal $4,617,731

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InvestmentsAssessment Bonds 290,022Guaranteed Investment Contracts 4,501,299

City Enterprise Loans 244,914Local Agency Investment Fund 38,019,524Investment Subtotal 43,055,759

Total Cash and Investments $47,673,490

The disposition of these monies by major governmental funds business type activities and privatepurpose trust fund was as follows:Governmental Funds: General $6,301,456 Impact Fees 2,481,951

Low Income Housing Set-Aside 1,000,811 Redevelopment & Housing Grants 583,845 Debt Service 67,214 Other Non-major Funds 7,588,557 Total Governmental Funds 18,023,834Business-type Activities: Water 14,501,907 Sewer 4,994,866 Solid waste 5,359,614 Airport 300

Total Business-type Activities 24,856,687

Governmental-type Activities: Internal Service Fund 240,131

Total Governmental-type Activities 240,131

Private Purpose Trust Fund 4,552,838 Total Private Purpose Trust Fund 4,552,838 Total Government Cash $47,673,490

POOLED DEPOSITS/CREDIT RISK:The California Government Code requires California banks and savings and loan associations tosecure a government's deposits by pledging government securities as collateral. The fair value ofpledged securities must equal at least 110% of a government's deposits. California law also allowsfinancial institutions to secure government deposits by pledging first trust deed mortgage noteshaving a value of 150% of the government's total deposit.

The government may waive collateral requirements for deposits, which are fully insured up to$250,000 by federal depository insurance.

At June 30, 2015, the government carrying amount of deposits and cash on hand was $4,617,731 andbank balances was $4,814,319. Our bank balances in excess of the FDIC insurance limitations arefully collateralized by the Bank by pledging identified U.S. Government securities.

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Investments Authorized by the California Government Code and the City’s Investment Policy Maximum Maximum Authorized Maximum Percentage Investment Investment Type Maturity Of * Portfolio In One Issuer

Local Agency Bonds 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Banker’s Acceptances 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements 1 year None None Passbook Savings Acct Demand Deposit N/A None None Medium-Term Notes 5 years 30% None Debt of City of Watsonville N/A None None Money Market Mutual Funds N/A 20% 10% Local Agency Investment Fund (LAIF) N/A None None *Excluding amounts held by bond trustee that are not subject to California Government Code restrictions.

Investments Authorized by Debt Agreements Maximum Maximum Authorized Maximum Percentage Investment Investment Type Maturity Of * Portfolio In One Issuer

U.S. Treasury Obligations None None None U.S. Agency Securities None None None Banker’s Acceptances 180 days None None Commercial Paper 270 days None None Money Market Mutual Funds N/A None None Investment Contracts 30 years None None

Disclosures Relating to Interest Rate Risk

Remaining Maturity (in Months)

12 Months 13 to 24 25-60 More ThanInvestment Type Or Less Months Months 60 Months

State Investment Pool $38,019,524 $38,019,524 $ - $ - $ -Debt of City of Watsonville 534,936 - - 289,936 245,000Guaranteed Inv. Contracts 4,501,299 - - - 4,501,299

Total $43,055,759 $38,019,524 $ - $289,936 $4,746,299

Disclosures Relating to Credit Risk Minimum Exempt Rating as of Fiscal Year End Legal From Not Investment Type Rating Disclosure AAA Rated

State Investment Pool $ 38,019,524 N/A $ - $ - $ 38,019,524Debt of City of Watsonville 534,936 N/A - - 534,936Guaranteed Inv. Contracts 4,501,299 N/A - 4,501,299 - Total $43,055,759 $ - $4,501,299 $38,554,460

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(1) The management of the State of California Pooled Money Investment Account (generally referredto as LAIF) has indicated to the government that as of June 30, 2015 the amortized cost value of thepool was $69,614,988,609 and the estimated fair value of the pool was $69,641,162,418. Thereported value of the government’s portion of LAIF is the same value as the fair value of LAIFshares. LAIF’s (and the government’s) exposure to risk (credit, market or legal) is not currentlyavailable. The State’s Local Agency Investment Fund (LAIF) operates in accordance withappropriate state laws and regulations.

The government has funds held by trustees or fiscal agents pledged to the payment or security ofcertain bonds and certificates of participation. The California Government Code provides that thesefunds, in absence of specific statutory provisions governing the issuance of bonds or certificates, maybe invested in accordance with the ordinance, resolutions, or indentures specifying the types ofinvestments the trustees or fiscal agent may make.

B. Receivables

Receivables as of the fiscal year end for major governmental funds and proprietary funds in theaggregate are on the following page:

Redevelopment Impact and Housing General Nonmajor

General Fees Housing Grants Debt Service FundsGovernmental $ $ $ $ $ $Funds:Receivables:

Interest 106,582 - 1,016,798 681,160 - 93,927 Taxes 2,618,466 - - - 4,544 766,294

Deferred Assessments - - - - 214,000 - Accounts 402,021 - 987 462,855

Intergovernmental 547,524 117,270 - 328,744 - 146,930Total governmental activities receivables 3,674,593 117,270 1,017,785 1,009,904 218,544 1,470,006

Solid InternalProprietary Funds: Water Sewer Waste Airport ServiceReceivables: $ $ $ $ $ Accounts 632,227 1,091,724 489,098 2,563 252,293 Interest 22,289 - Intergovernmental 31,458 - - 11,569 - Total business-type activities receivables 685,974 1,091,724 489,098 14,132 252,293

Note - the government does not use the allowance for uncollectible method, as the loss of revenuesfrom receivables has been immaterial to revenues. Any loss from uncollectible accounts is directlywritten off at the time of the loss.

Unearned Revenue

Governmental funds report unearned revenue in connection with deferred revenue recognition inconnection with resources that have been received, but not yet earned. At the end of the current

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fiscal year, the various components of unearned revenue reported in the governmental funds are asfollows:

Unearned $

Grants drawdowns prior to meeting availabilityrequirements:

General Fund 190,661Special Revenue Funds 802,466

Total unearned revenue 993,127

Loans ReceivableLoans receivable at June 30, 2015 are summarized as follows:General Fund: Barbara Schutter $3,750 Successor Agency 5,334,990 5,338,740Housing Fund: Pajaro Valley Affordable Housing Corporation 250,000 Pajaro Valley Housing Corporation 512,000 Barry Swenson 388,943 Pacific Terrace Assoc. 225,000 MP Transit City Associates 1,185,166 South County Land Corporation 584,946 Evergreen Apartments 1,000,000 Down Payment Assistant Loans 2,324,889 First Time Home Buyers 110,000 Sunny Meadows 3,125,000 Watsonville Pacific Associates 1,200,000 Successor Agency 166,314 Rental Rehab Loans 988,287 12,060,545Redevelopment and Housing Funds: Rental Rehab Loans 4,966,406 Monarch Disabled Housing 100,280 South County Land Corporation 2,573,000 First Time Home Buyers 6,449,456 Down Payment Assistant Loans 30,000 14,119,142Other Governmental Funds 1,225,272 1,225,272 Total $32,743,699

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Proprietary Funds:Water Fund: Successor Agency: Tax Increment Loan 554,818 Pajaro Valley Water Management Agency 27,345,000 27,899,818Sewer Fund: Pajaro Dunes (North) Project 258,365 Pajaro Dunes (South) Project 677,205 935,570 Total $28,835,388

C. Capital assets

Capital asset activity for the fiscal year ended June 30, 2015 was as follows:Beginning Transfer from Ending Balance Increases Decreases Enterprise Balance

$ $ $ $ $Governmental activities:Capital assets, not being depreciated:Land and improvements 14,682,237 - - - 14,682,237Construction in progress 253,134 121,019 - - 374,153

Total capital assets, not being depreciated 14,935,371 121,019 - - 15,056,390

Capital assets, being depreciated:Building and

improvements 134,009,248 - - - 134,009,248Machinery and equipment 14,366,051 240,861 (178,619) 4,925 14,433,218Infrastructure 26,050,757 454,752 - - 26,505,509Total capital assetsbeing depreciated 174,426,056 695,613 (178,619) 4,925 174,947,975Less accumulated depreciation for:Building and

improvements (42,017,591) (2,572,881) - - (44,590,472)Machinery

and equipment (8,779,837) (458,674) 178,619 (4,925) (9,064,817) Infrastructure (15,779,131) (1,746,407) - - (17,525,538)

Total accumulated depreciation (66,576,559) (4,777,962) 178,619 (4,925) (71,180,827)

Total capital assets, being depreciated, net 107,849,497 (4,082,349) ( - ) ( - ) 103,767,148Governmental activities capital assets, net 122,784,868 (3,961,330) ( - ) ( - ) 118,823,538

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Beginning Transfer to Ending Balance Increases Decreases Reclass Governmental Balance

$ $ $ $ $ $Business-type activities:Capital assets, not being depreciated:Land 23,346,849 - - (4,725,561) - 18,621,288Construction in

progress 2,693,867 673,686 - - - 3,367,553Total capital assets, not

being depreciated 26,040,716 673,686 - (4,725,561) - 21,988,841Capital assets, being depreciated:Building and improvements 81,608,324 - - 4,725,561 - 86,333,885Machinery

and equipment 20,974,990 236,410 (715,183) - (4,925) 20,491,292

Infrastructure 54,919,553 336,765 - - - 55,256,318Total capital assets being depreciated 157,502,867 573,175 (715,183) 4,725,561 (4,925) 162,081,495Less accumulated depreciation for:Building and improvements (24,298,082) (1,754,722) - (2,896,277) - (28,949,081)Machinery

and equipment (9,474,947) (875,445) 715,183 (1,788,759) 4,925 (11,419,043)Infrastructure (46,409,746) (1,062,039) - 4,685,036 - (42,786,749)

Total accumulated depreciation (80,182,775) (3,692,206) 715,183 - 4,925 (83,154,873)

Total capital assets,being depreciated, net 77,320,092 (3,119,031) - 4,725,561 - 78,926,622

Business-type activities capital assets, net 103,360,808 (2,445,345) - - - 100,915,463

Depreciation expenses were charged to functions/programs of the primary government as follows:Government activities: General government $734,476 Public safety 2,712,023 Highways and streets 497,793

Culture and recreation 833,670Total depreciation expense - governmental activities $4,777,962

Business-type activities: Water $1,563,121 Sewer 1,271,432

Solid waste 638,236 Airport 219,417

Total depreciation expense - business-type activities $3,692,206

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C. Interfund receivables, payables, and transfers

The composition of interfund activities as of June 30, 2015, is as follows:

Due from/to other fundsCurrent interfund balances arise in the normal course of business and are expected to be repaidshortly after the end of the fiscal year. Due from/to other funds balances at June 30, 2015 wereas follows:

Due from Due to other funds other fundsGovernmental Funds : $ $General 1,337,781 -

Nonmajor Funds - 887,781 Total Governmental Funds 1,337,781 887,781

Enterprise Fund:Airport - 450,000 Total Enterprise Fund - 450,000 Total Government 1,337,781 1,337,781

The General fund covered the current cash shortfall for other non-major special revenue fundsand enterprise funds.

Advances receivable/payableLong-term interfund balances arise in the normal course of business and are not expected to berepaid during the next fiscal year. Advances receivable/payable funds balances at June 30, 2015were as follows: Advances Advances Receivable PayableGovernmental Funds : $ $ General 4,114,660 7,513,329 Impact Fees 532,469 - Nonmajor Funds 749,028 - Total Governmental Funds 5,396,157 7,513,329Enterprise Funds: Water 4,105,067 - Sewer 958,376 - Solid Waste 1,168,389 - Airport - 4,114,660

Total Enterprise Funds 6,231,832 4,114,660 Total Government 11,627,989 11,627,989

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With Council approval, resources may be transferred from one City fund to another. Thegovernment made various interfund transfers as follows: Transfers In General General Debt Nonmajor Internal Fund Service Fund Funds Service Fund TotalTransfers out $ $ $ $ $General 5,374 13,565 13,483 24,292 56,714Impact Fee Fund - 24.534 - - 24,534Redevelopment & Housing Grant 129,700 237,127 - - 366,827Nonmajor Funds 2,642,613 - 59,488 2,702,101Airport - - 5,056 - 5,056Water - 19,543 5,056 - 24,599Sewer - 144,845 5.056 5,713 155,614Solid Waste - 29,847 5,056 5,953 40,856Total Transfers Out 2,777,687 469,461 93,195 35,958 3,376,301

E. LeasesOperating leaseThe government has entered into a non-cancellable operating lease for 911 and public safetydispatching services with Santa Cruz Consolidated Emergency Communications Center. Totalcost for the lease was $50,715 for the fiscal year ended June 30, 2015. The future minimumlease payments as of June 30, 2015 are as follows: Fiscal Year Ending June 30, Amount $ 2016 50,553 2017 50,840 2018 50,160 2019 50,301 2020 50,384 2021 50,406 2022 50,331 2023 50,155 2024 50,755 2025 50,363 2026 50,778 2027 50,193 2028 50,410 2029 50,546 2030 50,556 2031 50,435 2032 50,126 2033 50,611 2034 50,964

Total 958,867

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F. Long-term debt

The government's long-term debt obligations are repaid by the following funds: Revenue Bondsfrom the Sewer, Solid Waste, and Water Enterprise Funds; Capital Leases; and the AirportEnterprise Fund; and notes from the City’s Debt Service Fund.

Due To Other Governments

PVWMA Loan – On August 24, 2012, the City received $3,660,000 in grants funds that werefor the construction of the City’s water recycling Center that were to be passed through to PajaroValley Water Management Agency (PVWMA). The Agency agreed to let the City hold thefunds until 2017, at that time the funds along with accrued interest will be used to pay down the2007 Revenues Bonds issued by the City for PVWMA. Interest will accrue at LAIF (LocalAgency Investment Fund). Current amount of debt at June 30, 2015 is $10,878,769.

PVWMA Loan:

Fiscal Year Principal Interest Debt Service

$ $ $ 2016 - - -

2017 10,835,326 43,443 10,878,769 Total 10,835,326 43,443 10,878,769

City Loans

Water Revenue Refunding Bonds Series 1998 - On November 15, 2010, the governmentissued a $3,084,944 City Loan with an interest rate of 3.39% to refund $3,715,000 of outstanding1998 Series A Water Revenue Bonds with interest rates ranging from 4.74% to 6.75%. Therefunding was undertaken to reduce the total future debt service payments and resulted in aneconomic gain of $153,697 and a reduction of $721,053 in future debt service payments.

2010 City Water Loan:

Fiscal Year Principal Interest Debt Service

$ $ $ 2016 244,914 2,164 247,078

Total 244,914 2,164 247,078

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Fire Capital Lease - On January 13, 2012, the government issued a $122,671 City Loan with aninterest rate of 5.05% to call the purchase option for the lease agreement, with the option topurchase, with Kansas Bank of Manhattan to finance a portion of the costs of building two newfire engines, which started in November of 2006. The total amount for which the governmentwas obligated under the lease was $179,792.

2012 Fire Engine Loan Fiscal

Year Principal Interest Debt Service $ $ $

2016 22,233 2,302 24,5352017 22,175 1,179 23,354

Total 44,408 3,481 47,889

Revenue bondsRevenue bonds constitute special obligations of the government solely secured by a lien on andpledge of the net revenues of the water, sewer, and solid waste systems. The revenue bonds arecollateralized by the revenue of the water, sewer, and solid waste systems and the various specialfunds established by the bond ordinances. There is no defeased debt outstanding at June 30,2015.

Water Revenue Bonds Series 2007 - On November 14, 2007, the government issued$27,345,000 in Water Revenue Bonds with interest rates ranging from 4.00% to 5.00% forPajaro Valley Water Management Agency. The Agency is responsible for making the paymentson the issue.

Sewer Revenue Refunding Bonds Series 2009 - On September 25, 2009, the governmentissued $3,491,786 in Sewer Refunding Bonds with interest rate of 4.10% to refund $4,425,000 ofoutstanding 1998 Sewer Revenue Bonds with interest rates ranging from 4.625% to 5.0%.

Solid Waste Revenue Refunding Bonds Series 2009 - On September 25, 2009, the governmentissued $5,444,243 in Solid Waste Refunding Bonds with interest rates ranging from 4.1% to4.3%. to refund $2,345,000 of outstanding 1998 Solid Waste Revenue Bonds with interest ratesranging from 4.625% to 5.05%, $2,075,000 of outstanding 1996 Solid Waste Revenue Bondswith interest rates ranging from 5.3% to 5.5% and to purchase land for $1,988,518.

Revenue bonds payable at June 30, 2015 consist of the following individual issues: Amount

$ $27,345,000, 2007 water revenue bonds due in annual principal installments ranging from 800,000 to 7,415,000 through May 15, 2037, interest rate ranges from 4.00% to 5.00% 27,345,000

$3,491,786, 2009 sewer revenue refunding bondsdue in annual principal installments ranging from

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$451,774 to $553,415 through May 2016, interestrate of 4.10% 553,415

$5,444,243, 2009 solid waste revenue refundingbonds due in annual principal installments rangingfrom $216,188 to $754,883 through May 2019,interest rate ranges from 4.1% to 4.3% 1,432,043

Total Revenue Bonds 29,330,458

The respective amount due from each of the revenue bonds, with the applied interest is asfollows:

2007 Water Revenue BondsMaturity DateMay 15, Principal Interest Debt Service

$ $ $2016 1,294,059 1,294,0592017 800,000 1,294,059 2,094,0592018 840,000 1,253,259 2,093,2592019 880,000 1,210,419 2,090,4192020 915,000 1,175,219 2,090,2192021 955,000 1,137,704 2,092,704

2022 995,000 1,097,116 2,092,116 2023 1,040,000 1,053,585 2,093,585

2024 1,090,000 1,001,585 2,091,585 2025 1,145,000 947,085 2,092,085 2026 1,195,000 895,560 2,090,560 2027 1,250,000 841,785 2,091,785

2028 1,305,000 785,535 2,090,535 2029* 1,370,000 724,200 2,094,200

2030* 1,435,000 659,125 2,094,125 2031 1,500,000 590,963 2,090,963 2032* 1,570,000 523,463 2,093,463 2033 1,645,000 448,888 2,093,888

2034* 1,720,000 370,750 2,090,750 2035* 1,805,000 284,750 2,089,750 2036* 1,900,000 194,500 2,094,500 2037 1,990,000 99,500 2,089,500

27,345,000 17,883,109 45,228,109 * Principal applied to a sinking fund in years 2015 and 2016

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2009 Sewer Revenue Refunding Bonds Fiscal Year Principal Interest Debt Service

$ $ $ 2016 553,415 17,075 570,490 Total 553,415 17,075 570,490

2009 Solid Waste Revenue Refunding BondsFiscal

Year Principal Interest Debt Service $ $ $ 2016 754,883 52,722 807,605 2017 216,188 26,819 243,007 2018 225,584 17,423 243,007 2019 235,388 7,618 243,006 Total 1,432,043 104,582 1,536,625

Limited obligation bonds

Limited obligation bonds consist of bonds issued for improvements in special assessmentdistricts and are secured by liens against the assessed property. The government has agreed toestablish certain reserve funds and to act as agent for property owners with respect to payment ofdebt service. In the event of delinquency, however, the government is not obligated to retirebonds from available funds or to bring legal action against property holders.

Due to Governmental Accounting Standards Board Statement No. 6, the City must include itsassessment bonds payable within the Government-wide Statements. However, the City ofWatsonville has incurred no financial liability due to Assessment District Bonds. In the case ofdefault, the government has authority to foreclose on the delinquent account.

Limited obligation bonds payable at June 30, 2015 consist of the following:

Amount$30,138 Second Street Court Improvement $assessment district bonds due in annualprincipal installments ranging from $2,000 to$2,138 through September 2017, interestrate is 6.50%. 6,000

$104,456 Progress Drive assessment districtbonds due in annual principal installmentsranging from $456 to $11,000 throughSeptember 2015, interest rate is 6.25%. 11,000

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$55,944 Watson Drive assessment districtbonds due in annual principal installmentsranging from $944 to $4,000 throughSeptember 2017, interest rate is 6.00%. 8,000

$738,448 Atkins Lane assessment districtbonds due in annual principal installmentsranging from $944 to $4,000 throughSeptember 2020, interest rate is 6.0%. 245,000

$100,022 7th, 8th & 9th Street assessment districtbonds due in annual principal installmentsranging from $5,000 to $10,000 throughSeptember 2017, interest rate is 6.0%. 20,000 Total limited obligation bonds payable at

June 30, 2015 290,000

The annual requirements to amortize all limited obligation bonds outstanding as of June 30,2015 are as listed on the following page:

Fiscal Year Principal Interest Debt Service$ $ $

2016 76,000 18,339 94,339 2017 65,000 13,840 78,840 2018 51,000 9,685 60,685 2019 49,000 6,370 55,370 2020 49,000 3,185 52,185

Total 290,000 51,419 341,419

Debt payableOn April 13, 2012, the government entered into a commercial term loan with Santa Cruz CountyBank to finance the cost of installing solar panels through the City of Watsonville. The totalamount for which the government is obligated under the loan was $3,014,285. Installation of thesolar panels was completed in the 2012/13 fiscal year.

Interest rate for the loan is 5.29% with principal payments ranging from $159,000 to $282,376through fiscal year 2027.

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The annual requirements to amortize the loan outstanding as of June 30, 2015is as follows:

Fiscal Year Principal Interest Debt Service $ $ $

2016 159,000 134,628 293,628 2017 167,522 126,106 293,628 2018 176,501 117,127 293,628 2019 185,962 107,666 293,628 2020 195,929 97,699 293,628 2021 206,431 87,197 293,628 2022 217,495 76,133 293,628 2023 229,153 64,475 293,628 2024 241,436 52,192 293,628 2025 254,377 39,251 293,628 2026 268,011 25,617 293,628 2027 282,376 11,252 293,628 Total 2,584,193 939,343 3,523,536

Notes payable

Section 108 -The government entered into contract with the Secretary of U.S. Department of Housing andUrban Development. The contract is for loan guarantee assistance under Section 108 of theHousing and Community Development Act of 1974, as amended, 42 U.S.C. #5308. Thepromissory note, in the amount of $2,530,000, is for the Downtown Parking Garage Project. Thenote is to be repaid with future Community Development Block Grant funds over a period oftwenty years at an interest rate of 1.26%.

The annual requirements to amortize the Section 108 note outstanding as of June 30, 2015is as follows:

Maturity DateAugust 1 Principal Interest Debt Service

$ $ $ 2015 114,000 17,479 131,479 2016 117,000 25,220 142,220 2017 121,000 24,172 145,172 2018 126,000 22,771 148,771 2019 133,000 20,683 153,683 2020 140,000 18,047 158,047 2021 147,000 14,934 161,934 2022 155,000 11,308 166,308 2023 163,000 2,902 165,902 2024 170,000 2,423 172,423 Total 1,386,000 159,939 1,545,939

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PG&E LoansThe City entered into several agreements with Pacific Gas & Electric Company (PG&E) toretrofit City lights with qualified energy saving lights throughout the City. The notes are to berepaid with future energy savings over various periods at interest rates of 0%.

Street Lights:The annual requirements to amortize the PG&E note outstanding as of June 30, 2015 are asfollows:

Fiscal Year Principal $ 2016 30,298 2017 30,298 2018 30,298 2019 30,298 2020 30,298 2021 15,149 Total 166,639

Rodriquez Parking Garage Lights:Fiscal Year Principal $ 2016 21,018 2017 21,018 2018 6,012 Total 48,048

Beach Street Parking Garage Lights:Fiscal Year Principal $ 2016 6,825 2017 6,825 2018 6,825 2019 6,825 2020 5,120 Total 32,420

City Buildings Lights:Fiscal Year Principal $ 2016 10,555 2017 10,555 2018 10,555 2019 10,555 2020 10,555 2021 10,555 2022 8,795 Total 72,125

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State of California Energy Commission

The City entered into an agreement with State of California Energy Commission to retrofit theCity’s owned street lights with qualified energy saving lights. The note is to be repaid withfuture energy savings over a period of eight years at an interest rate of 3%.

The annual requirements to amortize the State of California Energy Commission noteoutstanding as of June 30, 2015 are as on the following page:

Fiscal Year Principal Interest Debt Service $ $ $ 2016 58,053 9,852 67,905 2017 59,834 8,071 67,905 2018 61,642 6,263 67,905 2019 63,505 4,400 67,905 2020 65,420 2,486 67,906 2021 33,451 503 33,954 Total 341,905 31,575 373,480

Municipal landfill closure and post-closure liability and requirements

The government operates a landfill solely for the disposal of Watsonville resident’s solid waste.The landfill is regulated by the California Integrated Waste Management Board, which requiresthat the government set aside certain funds for the landfill's eventual closure. As of June 30,1998, the government’s Solid Waste Division had completed the closure of the old landfill celland recognized $403,773 of expenditures to complete the closure. The government is nowoperating a new cell, which was expected to provide landfill capacity for 23 years with anestimated post-closure cost of $1,274,981.

The government recognizes a portion of the closure and postclosure care costs in each operatingperiod. The amount recognized each year to date for the new landfill is based on the landfillcapacity used as of the balance sheet date. As of June 30, 2015, the new landfill cell had used95.3% of its projected space. The estimated closure and post-closure costs were $1,598,151 and$1,342,447. The estimated remaining closure and postclosue costs are $74,437 and $62,527,which will be recognized as the remaining capacity is used (estimated to be 1.6 years). To date,the fund has $599,170 for post closure costs for the closed phase I and II cells and has set asideclosure costs of $1,523,715 and post-closure costs of $1,279,920 for the open phase III cell for atotal of $3,402,805. The estimated costs of closure and postclosure care are subject to changessuch as the effects of inflation, revision of laws and other variables.

POSTEMPLOYMENT LIABILITY

Plan DescriptionEmployees who have retired from service at eligible retirement age may continue health carebenefits at their own cost until age sixty-five. At June 30, 2015, thirty two retired employeesparticipated in this program.

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June 30, 2015 (Continued)Funding PolicyFor the retiree to be fully eligible to participate in the plan offered by the City of Watsonville, asingle-employer postemployment defined benefit plan, the employee must be at least 50 years ofage and have at least 5 years of service. Retirees self pay for their benefits at 105% of the activeper-capita health costs, as reset by the administrator every July 1st. During fiscal year 2014-2015, expenditures of $119,000 were recognized for post-retirement health insurancecontributions on a pay as you go basis.

The City is required to contribute the net annual required contribution (ARC) of the employer, anamount actuarially determined in accordance with the parameters of the GASB Statement No.45. The ARC represents a level of funding that if paid on an ongoing basis, is projected to covernormal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over aperiod not to exceed thirty years. The current ARC rate is 5.5 percent of annual covered payroll.

Annual OPEB CostFor fiscal year 2014-2015, the City’s annual OPEB cost (expense) of $262,300 was equal to theARC plus NOO interest less an NOO amortization as follows:

Annual Required Contribution = ARC $354,700Interest on Beginning of the Year (NOO) 147,300Amortization (239,700)Annual OPEB Cost (expense) 262,300Benefit Payments (119,000)Increase in OPEB 143,300Beginning Net OPEB Obligation 4,530,800Ending Net OPEB Obligation $4,674,100

The City’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, andthe net OPEB obligation of 2014-2015, was as follows:

% of Annual Fiscal Year Annual OPEB Cost Net OPEB Ended OPEB Cost Contributed Obligation June 30, 2013 $798,100 32.5% $4,366,400 June 30, 2014 $270,200 39.2% $4,530,800 June 30, 2015 $262,300 45.4% $4,674,100

Funded Status and Funding ProgressThe funded status of the plan is as follows:

6/30/13 6/30/11 Actuarial Actuarial Actuarial accrued liability (AAL) $3,588,200 $8,049,300

Actuarial value of plan assets - - Unfunded actuarial accrued liability (UAAL) $3,588,200 $8,049,300

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Funded ratio (actuarial value of plan assets/AAL) 0% 0% Covered payroll (active plan members) $24,994,900 $26,344,600 UAAL as a percentage of covered payroll 14% 31%

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts andassumptions about the probability of occurrence of events far into the future. Examples includeassumptions about future employment, mortality, and the healthcare cost trend. Amountsdetermined regarding the funded status of the plan and the annual required contributions of theemployer are subject to continual revisions as actual results are compared with the pastexpectations and new estimates are made about the future.

Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive plan (theplan as understood by the employer and plan members) and include the types of benefitsprovided at the time of each valuation and the historical pattern of sharing of benefit costsbetween the employer and plan members to that point. The actuarial methods and assumptionsused include techniques that are designed to reduce short-term volatility in actuarial accruedliabilities and the actuarial value of assets, consistent with the long-term perspective of thecalculations.

In the June 30, 2013, actuarial valuation, the projected unit cost actuarial cost method was used.The actuarial assumptions included a 3.5% investment rate of return (net of administrativeexpenses) and an annual healthcare cost trend rate of 4.5%. Inflation rate is the discount rate of3.25% which is the combined expected long-term rate of return on the City’s assets not investedin an irrevocable trust and inflation. Projected benefit increases used are as follows: initialmedical, drug and vision benefit costs increase rates but are expected to reach an ultimate 4.5%trend by the plan year 2030/31. Dental benefit costs are projected to increase at 3.0% each year.

For the amortizations of the Unfunded AAL and Net OPEB Obligations, the “level dollar”method was used over a rolling 30 years. The amortization periods are considered opened. Theplan used a 3.25% per annum inflation rate. The duration of coverage for retirees and theireligible dependents is until the earlier of the retiree’s age 65 or the retiree’s Medicare eligibility.Retiree self-pays are defined as 105% of the active per-capita health cost, as reset by theadministrator every July first.

Current costs are beginning funded out of the General Fund and all 4 of the Enterprise funds.

The City did not pre-fund retiree healthcare costs nor did the City establish an irrevocable trustfor retiree healthcare costs. The decision not to use an irrevocable trust was made because of thecurrent national and state economic issues and the possibility that the funds may be required toprovide current services.

Changes in long-term liabilitiesLong-term libility activity for the fiscal year ended June 30, 2015, was as following on the nextpage:

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June 30, 2015 (Continued) Prior Beginning Period Ending Due Within

Balance Additions Reductions Adjustment Balance One YearGovernmental type $ $ $ $ $ $activities:

General Obligation Debt:City loan 65,572 - (21,164) - 44,408 22,233Debt payable 2,735,104 - (150,911) - 2,584,193 159,000Notes payable 2,281,207 - (234,070) - 2,047,137 240,749 Subtotal 5,081,883 - (406,145) - 4,675,738 421,982Bonds payable: Special assessment debt with government

commitment 379,000 - (89,000) - 290,000 76,000 Other liabilities: Compensated absences 2,220,332 1,707,271 (1,795,285) - 2,132,318 127,939

Postretirement liability 3,229,543 190,360 (86,362) - 3,333,541 -Net pension - 10,282,222 (20,725,617) 45,614,825 35,171,429 -Governmental activity Long-termLiabilities 10,910,758 12,179,851 (23,102,409) 45,614,825 45,603,026 625,921

Prior Beginning Period Ending Due Within

Balance Additions Reductions Adjustment Balance One YearBusiness-type activities: $ $ $ $ $ $Bonds payable:

Revenue bonds 30,586,332 - (1,255,874) - 29,330,458 1,308,298 Less deferred amounts:

For issuance discounts (273,450) - - - (273,450) - Total bonds payable 30,312,882 - (1,255,874) - 29,057,008 1,308,298Due to other government 7,338,277 3,540,492 - - 10,878,769 -City loans 842,236 - (597,322) - 244,914 244,915Compensated absences 956,781 839,356 (806,723) - 989,414 59,366Postretirement liability 1,236,796 71,941 (32,638) - 1,276,099 -Net pension - 3,121,074 (6,128,720) 15,060,785 12,053,139 -Landfill closure/ postclosure 3,210,001 252,304 (59,500) - 3,402,805 59,500Business-type activityLong-term liabilities 43,896,973 7,825,167 (8,880,777) 15,060,785 57,902,148 1,672,078

G. Deferred Inflows of ResourcesAt June 30, 2015, deferred inflows of resources, reported in the governmental fund financialstatements, consisted of the following on the next page:

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H. Nonspendable fund balancesIn the fund financial statements, nonspendable segregate portions of fund balance that are notavailable. The nonspendable fund balance established as of June 30, 2015 was as follows:

General FundInventories $34,911

V. Other information

A. Risk managementThe government is exposed to various risks of loss related to torts; theft of, damage to, anddestruction of assets; errors and omissions; injuries to employees; and natural disasters. Thegovernment also provides health insurance coverage to employees. There have been nosignificant reductions in insurance coverage for any risk of loss in the past fiscal year, and settledclaims have not exceeded the commercial coverage in any of the past three fiscal years. Thegovernment has established a risk management fund to account for and finance its uninsuredrisks of loss.

The government's risk management programs provide coverage for up to a maximum of$150,000 for each Workers' Compensation claim; $500,000 for each General Liability claim; and$110,000 for each employee Health Insurance claim. Settled claims exceeded self-insurancelevels in the amount of $301,658 in the current fiscal year and $205,401 in the prior fiscal year.The government purchases commercial insurance for claims in excess of coverage provided bythe self-insurance programs. There have been no significant changes in insurance coverage ascompared to last fiscal year.

All funds of the government participate in the self-insurance programs. The employee healthinsurance program is funded by contributions of a flat rate per employee to the self-insurancefund. Other self-insurance programs are funded by budgeted appropriations. Funding isestimated to provide amounts needed to pay prior and current fiscal year claims and to establishreserves for catastrophic losses.

Liabilities in the self-insurance fund at June 30, 2015 totaled $2,873,790 as follows: HealthBenefits $102,912; General Liability $577,000; and Workers’ Compensation $2,193,878.

The basis for estimating incurred but not reported claims is based on the statute of limitation on


AND HOUSING DEBT GOVERNMENTAL GOVERNMENTAL

GENERAL IMPACT FEES HOUSING GRANTS SERVICE FUNDS FUNDS

Deferred Inflows of Resources $ $ $ $ $ $ $ Unavailable revenue 5,570,997 117,270 12,911,029 15,129,346 214,000 1,466,129 35,408,771

Total Deferred Inflows of Resources 5,570,997 117,270 12,911,029 15,129,346 214,000 1,466,129 35,408,771

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CITY OF WATSONVILLE, CALIFORNIANOTES TO THE FINANCAIL STATEMENTS

June 30, 2015 (Continued)accepting claims as follows:

Health Benefits are estimated at 2 times the current fiscal year’s average monthly cost, GeneralLiability is estimated at 6 months of current fiscal year’s average monthly claim cost, andWorkers’ Compensation is estimated by using the last two weeks of current fiscal year’s averagemonthly claim cost.

2013-14 2014-15 Claims incurred but not reported: $ $ Beginning 1,319,907 447,871

Incurred claims 5,465,755 6,022,751 Claims paid (6,337,791) (5,790,710)

Ending 447,871 679,912Claims payable:

Beginning 2,181,892 3,105,547Incurred claims 6,277,593 4,259,523

Claims paid 5,353,938) (5,171,192) Ending 3,105,547 2,193,878

B. Public entity risk pool

In November 1994, the government became a member of the Public Agency Risk SharingAuthority of California (PARSAC), formerly known as California Municipal InsuranceAuthority (CMIA). PARSAC, a consortium of 36 California cities, which was established inMay 1986 to pool resources, share risks, purchase excess insurance, and to share costs forprofessional risk management and claims administration. The Authority’s governing boardconsists of one appointed official and an alternate from participating cities.

General liability

The City is self-insured for general liability claims up to $500,000 (effective November 11,1994) for each occurrence. Coverage for individual losses in excess of $500,000, up to$10,000,000 is provided through the Public Risk Sharing Authority of California (PARSAC).Under this program, members share in losses between the members’ individual self-insuredretention and $1,000,000 under a risk sharing pool program; and from $1,000,000 to$10,000,000, coverage is provided by another risk pool, CARMA.

Estimates for all liabilities have been accrued in the Self-Insurance Internal Service Fund, whichincluded an estimate for incurred but not reported claims. At June 30, 2015, total estimatedclaims payable for General Liability were $577,000.

C. Commitments and Contingencies

LitigationVarious claims and lawsuits are pending against the government. In the opinion of governmentmanagement, the potential claims loss will not be significant to the government's financialstatements.

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Grant audits

The government receives grants for specific purposes that are subject to review and audit bygrantor agencies. Such audits could result in a request for reimbursement by the grantor forexpenditures disallowed under the terms and conditions of the appropriate agency. In theopinion of City management, such disallowance, if any, will not be significant.

Contingency

Proposition 218, which was approved by the voters in November 1996, regulates thegovernment’s ability to impose, increase and extend taxes, assessments and fees. Any new,increased or extended taxes, assessments, and fees subject to the provisions of Proposition 218require voter approval before they can be implemented. Additionally, Proposition 218 providesthat these taxes, assessments, and fees are subject to the voter initiative process and may berescinded in the future by the voters. Therefore, the government’s ability to finance the servicesfor which the taxes, assessments and fees were imposed may be significantly impaired. Certainlanguage in the initiative is unclear as to the scope and impact of the proposition. Future courtrulings or state legislation may clarify these issues. At this time it is uncertain as to the effectthat Proposition 218 will have on the government’s ability to maintain or increase the revenue itreceives from taxes, assessments and fees, or its effect on interfund payments in lieu of taxes andtransfers of surplus funds from enterprise funds to the general fund. Also unclear is the extent towhich a 1995 California Supreme Court ruling (the Guardino case) upholding the voter approvalrequirements of a previously enacted state initiative (Proposition 62) is applicable to priorperiods. However, because the City of Watsonville is a Charter City, management believes thatthe Guardino ruling does not apply to its general law application in the cited case.

D. Post-employment health care benefits

Retiree benefits - COBRA benefits

Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the governmentprovides health care benefits to eligible former employees and their eligible dependents. Certainrequirements are outlined by the federal government for this coverage. The premium plus a 2%administration fee is paid in full by the insured on or before the tenth day of the month for theactual month covered. This program is offered for a duration between 18 and 36 months, afterthe termination date, depending on circumstances related to eligibility to Medicare, death ordivorce. During the last fiscal year, two former employees participated in the program.

E. Defined benefit pension plans

1. CALPERS miscellaneous employees plan

A. General Information about the Miscellaneous Pension Plan

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Plan Description

All qualified permanent and probationary miscellaneous employees are eligible to participate inthe City’s Miscellaneous Employee Pension Plan, agent multiple-employer defined benefitpension plan administered by the California Public Employees’ Retirement System (CalPERS),which acts as a common investment and administrative agent for its participating memberemployees. Benefit provisions under the Plan is established by State statue and City resolution.CalPERS issues publicly available reports that include a full description of the pension planregarding benefit provisions, assumptions and membership information that can be found on theCalPERS website.

Benefits Provided

CalPERS provides service retirement and disability benefits, annual cost of living adjustmentsand death benefits to plan members, who must be public employees and beneficiaries. Benefitsare based on years of credited service, equal to one year of full time employment. Members withfive years of total service are eligible to retire at age 55 with statutorily reduced benefits. Allmembers are eligible for nonduty disability benefits after 10 years of service. The death benefit isone of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the OptionalSettlement 2W Death Benefit. The cost of living adjustments for each plan are applied asspecified by the Public Employees’ Retirement Law.

The Plans’ provisions and benefits in effect at June 30, 2015, are summarized as follows:

Miscellaneous Prior to After Prior toHire Date July 1, 2011 July 1, 2011 January 1, 2013Benefit Formula 2% @ 55 2% @ 60 2% @ 62Benefit vesting schedule 5 years of service 5 years of service 5 years of serviceBenefit payments monthly for life monthly for life monthly for lifeRetirement age 55 60 62Monthly benefits, as a % of eligible compensation 2% to 2.34% 2% to 2.34% 1% to 2.5%Required employee contribution rates 7% 7% 6.25%Required employee contribution rates 12.124% 12.124% 12.124%

Employees Covered – At June 30, 2015, the following employees were covered by the benefitterms for the Plan

MiscellaneousInactive employees or beneficiaries currently receiving benefits 256Inactive employees entitled to but not yet receiving benefits 249Active employees 267 Total 772

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Contributions - Section 20814(c) of the California Public Employees’ Retirement Law requiresthat the employer contribution rates for all public employers be determined on an annual basis bythe actuary and shall be effective on the July 1 following notice of a change in the rate. Fundingcontributions for the Plan is determined annually on an actuarial basis as of June 30 by CalPERS.The actuarially determined rate is the estimated amount necessary to finance the costs of benefitsearned by employees during the year, with an additional amount to finance any unfundedaccrued liability. The City is required to contribute the difference between the actuariallydetermined rate and the contribution rate of employees. Contributions to the pension plan fromthe City were $1,769,613 for the fiscal year ended June 30, 2015.

B. Net Pension Liability

The City’s net pension liability for the plan is measured as the total pension liability less thepension plan’s fiduciary net pension. The net pension liability of the Plan is measured as of June30, 2014, using an annual actuarial valuation as of June 30, 2013 rolled forward to June 30, 2014using standard update procedures. A summary of principal assumptions and methods used todetermine the net pension liability is shown below.

Actuarial Assumptions – The total pension liabilities in the June 30, 2013 actuarial valuationswere determined using the following actuarial assumptions:

Miscellaneous Valuation Date June 30, 2013 Measurement Date June 30, 2014 Actuarial Cost Method Entry-Age Normal Cost Method Actuarial Assumptions: Discount Rate 7.50% Inflation 2.75% Payroll Growth Varies by Entry Age & Service Projected Salary Increase 3.3% - 14.2 (1) Investment Rate of Return 7.5 % (2) Mortality Derived using CALPERS Membership Data for all funds

(1) Depending on age, service and type of employee(2) Net pension plan investment expenses, including inflation

The underlying mortality assumptions and all other actuarial assumptions used in the June 30,valuation were based on the results of a January 2014 actuarial experience study for the period1997 to 2011. Further details of the Experience Study can be found on the CalPERS website.

Discount Rate - The discount rate used to measure the total pension liability was 7.50%. Todetermine whether the municipal bond rate should be used in the calculation of a discount ratefor each plan, CalPERS stress tested plans that would most likely result in a discount rate thatwould be different from the actuarially assumed discount rate. Based on the testing, none of the

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CITY OF WATSONVILLE, CALIFORNIANOTES TO THE FINANCAILS TATEMENTS


tested plans run out of assets. Therefore, the current 7.50 percent discount rate is adequate andthe use of the municipal bond rate calculation is not necessary. The long term expected discountrate of 7.50 percent will be applied to all plans in the Public Employees Retirement Fund(PERF). The stress test results are presented in a detailed report that can be obtained from theCalPERS website.

According to Paragraph 30 of Statement 68, the long-term discount rate should be determinedwithout reduction for pension plan administrative expense. The 7.50 percent investment returnassumption used in this accounting valuation is net of administrative expenses. Administrativeexpenses are assumed to be 15 basis points. An investment return excluding administrativeexpenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightlyhigh Total Pension Liability and Net Pension Liability. CalPERS checked the materialitythreshold for the difference in calculation and did not find it to be a material difference.

CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset LiabilityManagement (ALM) review cycle that is scheduled to completed in February 2018. Any changesto the discount rate will require Board action and proper stakeholder outreach. For these reasons,CalPERS expects to continue using a discount rate net of administrative expenses for GASB No.67 and No. 68 calculations through at least the 2017-18 fiscal year. CalPERS will continue tocheck the materiality of the difference in calculation until such time as we have changed ourmethodology.

The long-term expected rate of return on pension plan investments was determined using abuilding-block method in which best-estimate ranges of expected future real rates of return(expected returns, net pension plan investment expense and inflation) are developed for eachmajor asset class.

In determining the long-term expected rate of return, CalPERS took into account both short-termand long-term market return expectations as well as the expected pension fund cash flows. Usinghistorical returns of all the funds’ asset classes, expected compound returns were calculated overthe short-term (first 10 years) and the long-term (11-60 years) using a building-block approach.Using the expected nominal returns for both short-term and long-term, the present value ofbenefits were calculated for each fund. The expected rate of return was set by calculating thesingle equivalent expected return that arrived at the same present value of benefits for cash flowsas the one calculated using both short-term and long-term returns. The expected rate of returnwas then set equivalent to the single equivalent rate calculated above and rounded down to thenearest one quarter of one percent.

The table below reflects the long-term expected real rate of return by asset class. The rate ofreturn was calculated using the capital market assumptions applied to determine the discount rateand asset allocation. These rates of return are net of administrative expenses.

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New Strategic Real Return Real Return Asset Class Allocation Years 1-10(a) Years 11+(b)

Global Equity 47% 5.25% 5.71%Global Fixed Income 19 0.99 2.43Inflation Sensitive 6 0.45 3.36Private Equity 12 6.83 6.95Real Estate 11 4.50 5.13Infrastructure and Forestland 3 4.50 5.09Liquidity 2 (.55) (1.05)

(a) An expected inflation of 2.5% was used for this period.(b) An expected inflation of 3.0% was used for this period.

D. Changes in the Net Pension Liability

The changes in the Net Pension Liability for the Plan follow:

Miscellaneous Plan:

Increase (Decrease) Total Pension Plan Fiduciary Net Pension Liability Net Position Liability (Asset)Balance at June 30, 2013: $ 112,697,136 $ 81,597,739 $ 31,099,397

Change in the year: Service cost 2,348,593 - 2,348,593 Interest on the total pension Liability 8,369,558 - 8,369,558 Contributions – employer - 1,750,491 (1,750,491) Contributions – employee - 1,087,253 (1,087,253) Net investment income - 14,090,974 (14,090,974) Benefit payments (4,554,651) (4,554,651) - Net change 6,163,500 12,374,067 (6,210,567)Balance at June 30, 2014 $ 118,860,636 $ 93,971,806 $ 24,888,830

Sensitivity of the Net Pension Liability to Changes in the Discount Rate – The followingpresents the net pension liability of the City for the Plan, calculated using the discount rate forthe Plan, as well as what the City’s net pension liability would be if it were calculated using adiscount rate that is 1-persent point lower or 1-persent point higher than the current rate:

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Miscellaneous1% Decrease 6.50%Net pension liability $ 40,914,837

Current Discount Rate 7.50%Net pension liability $ 24,888,830

1% Increase 8.50%Net pension liability $ 11,597,963

Pension Plan Fiduciary Net Pension – Detailed information about the pension plan’s fiduciarynet position is available in the separate issued CalPERS financial report.

E. Pension Expenses and Deferred Outflows/Inflows of Resources Related toPension

For the year ended June 30, 2014, the City recognized pension expense of $ 1,984,711. At June30, 2015, the City reported deferred outflows of resources and deferred inflows of resourcesrelated to pensions from the following sources:

Deferred Outflows Deferred Inflows of Resources of Resources

Pension contributions subsequent to measurement date $1,769,613 $ -Difference between actual and expected experience - -Changes in assumptions - -Net difference between projected and actualEarnings on plan investments - (6,444,787) Total $1,769,613 $(6,444,787)

The amount of $1,769,613 was reported as deferred outflows of resources related to contributionssubsequent to the measurement date will be recognized as a reduction of the net pension liabilityin the year ended June 30, 2016. Other amounts reported as deferred outflows of resources anddeferred inflows of resources to pensions will be recognized as pension expense as follows:

Deferred Year ended Outflows/(Inflows) of June 30 Resources 2016 $ (1,611,197) 2017 $ (1,611,197) 2018 $ (1,611,197) 2019 $ (1,611,196)

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F. Payable to Pension Plan

At June 30, 2015, the City had no amount outstanding for contributions to the pension planrequired for the fiscal year ended June 30, 2015.

2. CALPERS safety (police & fire) employees plan

A. General Information about the Pension Plan

Plan Descriptions

All qualified public safety permanent and probationary employees are eligible to participate inthe City’s Safety Employee Pension Plan, cost-sharing multiple employer defined benefit plansadministered by the California Public Employees’ Retirement System (CalPERS). Benefitprovisions under the Plans are established by State statue and City resolution. CalPERS issuespublicly available reports that include a full description of the pension plans regarding benefitprovisions, assumptions and membership information that can be found on the CalPERS website.

Benefits Provided

CalPERS provides service retirement and disability benefits, annual cost of living adjustmentsand death benefits to plan members, who must be public employees and beneficiaries. Benefitsare based on years of credited service, equal to one year of full time employment. Members withfive years of total service are eligible to retire at age 50 with statutorily reduced benefits. Allmembers are eligible for nonduty disability benefits after 10 years of service. The death benefit isone of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the OptionalSettlement 2W Death Benefit. The cost of living adjustments for each plan are applied asspecified by the Public Employees’ Retirement Law.

The Plans’ provisions and benefits in effect at June 30, 2015, are summarized as follows:

Safety Prior to After Prior toHire Date July 1, 2011 July 1, 2011 January 1, 2013Benefit Formula 3% @ 50 3% @ 55 2.7% @ 57Benefit vesting schedule 5 years of service 5 years of service 5 years of serviceBenefit payments monthly for life monthly for life monthly for lifeRetirement age 50 55 57Monthly benefits, as a % of eligible compensation 2% to 2.7% 2% to 2.7% 1% to 2.5%Required employee contribution rates 9% 9% 11.5%Required employee contribution rates 27.849% 21.367% 12.124%

Contributions - Section 20814(c) of the California Public Employees’ Retirement Law requiresthat the employer contribution rates for all public employers be determined on an annual basis bythe actuary and shall be effective on the July 1 following notice of a change in the rate. Fundingcontributions for the Plan is determined annually on an actuarial basis as of June 30 by CalPERS.

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The actuarially determined rate is the estimated amount necessary to finance the costs of benefitsearned by employees during the year, with an additional amount to finance any unfundedaccrued liability. The City is required to contribute the difference between the actuariallydetermined rate and the contribution rate of employees. Contributions to the pension plan fromthe City were $2,565,307 for the fiscal year ended June 30, 2015.

B. Pension Liabilities, Pension Expenses and Deferred Outflows/Inflows ofResources Related to Pensions

At June 30, 2015, the City reported a liability of $22,335,738 for its proportionate share of thenet pension liability. The net pension liability was measured as of June 30, 2014 and the totalpension liability used to calculate the net pension liability was determined by an actuarialvaluation as of that date. The City’s proportion of the net pension liability was based on aprojection of the City’s long-term share of contributions to the pension plan relative to theprojected contributions of all Pension Plan participants, actuarially determined. At June 30, 2014,the City’s proportion was 0.5958%, which decreased by .02273% from its proportion measuredas of June 30, 2013.

For the year ended June 30, 2015, the City recognized pension expense of $2,307,465. Pensionexpense represents the change in the net pension liability during the measurement period,adjusted for actual contributions and the deferred recognition of changes in investment gain/loss,actuarial gain/loss, actuarial assumptions or method, and plan benefits. At June 30, 2015, theCity reported deferred outflows of resources and deferred inflows of resources related topensions from the following sources:

Deferred Outflows Deferred Inflows of Resources of Resources City contribution subsequent to the measurement date $ 2,565,307 $ -

Difference between actual and expected experience - -Changes in assumptions - -Net difference between projected and actual earnings on plan investments - (6,743,898)Changes to proportion and difference between City contribution and proportionate share of contribution - -Adjusted due to difference in proportion - (214,611) Total $2,565,307 $ (6,958,509)

Deferred outflows of resources and deferred inflows of resources above represent theunamortized portion of changes to net pension liability to be recognized in future periods in asystematic and rational manner.

The amount of $2,565,307 reported as deferred outflows of resources related to pensionsresulting from City contributions subsequent to the measurement date will be recognized as areduction of the net pension liability in the fiscal year ended June 30, 2016.

Other amounts reported as deferred outflows of resources and deferred inflows of resourcesrelated to pensions will be recognized in the pension expense as follows on the next page:

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Deferred Year ended Outflows/(Inflows) of June 30 Resources 2015 $ (1,762,623) 2016 $ (1,762,623) 2017 $ (1,747,290) 2018 $ (1,685,973)

Actuarial Assumptions

The total pension liability in the June 30, 2013 actuarial valuation was determined using thefollowing actuarial assumptions:

SafetyValuation date June 30, 2013Measurement Date June 30, 2014Actuarial Cost Method Entry-Age Normal Cost MethodActuarial Assumptions: Discount Rate 7.50% Inflation Rate 2.75% Salary Increase Varies by Entry Age and Service Investment Rate of Return 7.5% Net Pension Plan Investment And Administrative Expenses: Includes Inflation Mortality Derived using CalPERS’ Membership Data for all Funds (1) Post-Retirement Benefits Contact COLA up to 2.75% until Increase Purchase Power Protection Allowance Floor on Purchasing Power applies: 2.75% thereafter

(1) The mortality table used was developed based on CalPERS’ specific date.The table includes 20 years of mortality improvements using Society ofActuaries Scale BB. For more details on this table please refer to the 2014experience study report.

Discount Rate

The discount rate used to measure the total pension liability was 7.50%. To determine whetherthe municipal bond rate should be used in the calculation of a discount rate for each plan,CalPERS stress tested plans that would most likely result in a discount rate that would bedifferent from the actuarially assumed discount rate. Based on the testing, none of the testedplans run out of assets. Therefore, the current 7.50 percent discount rate is adequate and the use

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CITY OF WATSONVILLE, CALIFORNIANOTES TO THE FINANCAIL STATEMENTS


of the municipal bond rate calculation is not necessary. The long term expected discount rate of7.50 percent will be applied to all plans in the Public Employees Retirement Fund (PERF). Thestress test results are presented in a detailed report that can be obtained from the CalPERSwebsite.

According to Paragraph 30 of Statement 68, the long-term discount rate should be determinedwithout reduction for pension plan administrative expense. The 7.50 percent investment returnassumption used in this accounting valuation is net of administrative expenses. Administrativeexpenses are assumed to be 15 basis points. An investment return excluding administrativeexpenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightlyhigh Total Pension Liability and Net Pension Liability. CalPERS checked the materialitythreshold for the difference in calculation and did not find it to be a material difference.

CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset LiabilityManagement (ALM) review cycle that is scheduled to completed in February 2018. Any changesto the discount rate will require Board action and proper stakeholder outreach. For these reasons,CalPERS expects to continue using a discount rate net of administrative expenses for GASB No.67 and No. 68 calculations through at least the 2017-18 fiscal year. CalPERS will continue tocheck the materiality of the difference in calculation until such time as we have changed ourmethodology.

The long-term expected rate of return on pension plan investments was determined using abuilding-block method in which best-estimate ranges of expected future real rates of return(expected returns, net pension plan investment expense and inflation) are developed for eachmajor asset class.

In determining the long-term expected rate of return, CalPERS took into account both short-termand long-term market return expectations as well as the expected pension fund cash flows. Usinghistorical returns of all the funds’ asset classes, expected compound returns were calculated overthe short-term (first 10 years) and the long-term (11-60 years) using a building-block approach.Using the expected nominal returns for both short-term and long-term, the present values ofbenefits were calculated for each fund. The expected rate of return was set by calculating thesingle equivalent expected return that arrived at the same present value of benefits for cash flowsas the one calculated using both short-term and long-term returns. The expected rate of returnwas then set equivalent to the single equivalent rate calculated above and rounded down to thenearest one quarter of one percent.

The table below reflects the long-term expected real rate of return by asset class. The rate ofreturn was calculated using the capital market assumptions applied to determine the discount rateand asset allocation. These rates of return are net of administrative expenses.

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New Strategic Real Return Real Return Asset Class Allocation Years 1-10(a) Years 11+(b)

Global Equity 47% 5.25% 5.71%Global Fixed Income 19 0.99 2.43Inflation Sensitive 6 0.45 3.36Private Equity 12 6.83 6.95Real Estate 11 4.50 5.13Infrastructure and Forestland 3 4.50 5.09Liquidity 2 (.55) (1.05)

(a) An expected inflation of 2.5% was used for this period.(b) An expected inflation of 3.0% was used for this period.

Sensitivity of the Proportionate Share of the Net Pension Liability to Changes in Discount Rate

The following represents the City’s proportionate share of the net pension liability calculatedusing the discount rate of 7.5 percent, as well as what the City’s proportionate share of the netpension liability would be if it were calculated using a discount rate that is 1-percentage pointlower (6.5 percent) or 1- percentage point higher (8.5 percent) than the current rate:

Public Safety1% Decrease 6.50%Net pension liability $38,436,912

Current Discount Rate 7.50%Net pension liability $22,335,738

1% Increase 8.50%Net pension liability $9,069,064

Pension Plan Fiduciary Net Position

Detailed information about the pension plan’s fiduciary net position is available in the separatelyissued CalPERS financial reports.

C. Payable to Pension Plan

At June 30, 2015, the City had no amount outstanding for contributions to the pension planrequired for the fiscal year ended June 30, 2015.

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CITY OF WATSONVILLE, CALIFORNIANOTES TO THE FINANCAILS STATEMENTS


F. Prior period adjustmentsIn the preparation of the financial statements, several entries were necessary to adjust fund equityto begin the fiscal year ending June 30, 2015 for government wide governmental activities,governmental activities and business-type activities. The adjustments were as follows:

Beginning Balance Balance Additions Decreases Restated

$ $ $ $Government Wide: Governmental 158,613,211 525,760 (42,630,202) 116,508,769 Business-type 110,142,579 508,350 (15,790,195) 94,860,734Governmental Funds:

General Fund 1,937,611 510,814 (496,360) 1,952,065 Other Governmental Funds 5,678,202 8,415 (11,214) 5,675,403Proprietary Funds: Water 53,534,700 10,573 (3,891,597) 49,653,676 Sewer 46,966,212 497,777 (7,162,278) 40,301,711 Solid Waste 4,394,093 - (3,794,580) 599,513 Airport 5,247,574 - (941,750) 4,305,824 Internal Service Fund (3,044,251) 6,351 - (3,037,720)

Following are detailed explanations of prior period adjustments:Government Wide – Governmental Activities:

1. Adjustments were made to correct prior year’s over accrued revenues ($440,319) and underaccrued $451,903.

2. Adjustments were made to correct prior year’s expenses ($8,674).3. Adjustment was made to correct prior year’s expenses $6,531.4. Adjustment was made to correct prior year’s over accrual of receivable ($58,581) and under

accrued $67,326.5. A prior period adjustment of ($42,122,628) was made which affects the statement of net position.

Prior period adjustment was to record net pension liability of ($45,614,825) and deferred outflowof resources of $3,492,197, due to the implementation of GASB Statements No. 68 and No. 71.

Business-type Activities:1. Adjustment was made to correct over accrual of accounts receivable ($1,259,904) and under

accrual of $508,350.2. Adjustment was made to correct over accrual of revenue ($317,242).3. A prior period adjustment of $(14,213,059) was made which affects the statement of net position.

Prior period adjustment was to record net pension liability of $(15,060,785) and deferred outflowof resources of $847,726, due to the implementation of GASB Statements No. 68 and No. 71.

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Governmental Funds:General Fund:

1. Adjustments were made to correct prior year’s over accrued revenues ($440,319) and underaccrued $443,488.

2. Adjustments were made to correct prior year’s expenditures ($2,140).3. Adjustment was made to correct prior year’s over accrual of receivable ($53,901) and under

accrued $67,326.Other Governmental Funds:

1. Adjustment was made to correct prior year’s accrued revenue $8,415.2. Adjustments were made to correct prior year’s expenditures ($6,534).3. Adjustment was made to correct prior year’s receivables ($4,680).

Proprietary Funds:Water Fund:

1. Adjustment was made to correct prior year’s receivables $10,573.2. Adjustment was made to correct over accrual of revenue ($230,144).3. A prior period adjustment of $(3,661,453) was made which affects the statement of net position.


Sewer Fund:1. Adjustments were made to correct prior year’s receivables of 497,777 and ($1,180,511).2. Adjustment was made to correct over accrual of revenue ($87,098).3. A prior period adjustment of $(5,894,669) was made which affects the statement of net position.


Solid Waste Fund:1. Adjustment was made to correct prior year’s receivables ($23,158).2. A prior period adjustment of $(3,771,422) was made which affects the statement of net position.


Airport Fund:1. Adjustment was made to correct prior year’s receivables ($56,235).2. A prior period adjustment of $(885,515) was made which affects the statement of net position.

Prior period adjustment was to record net pension liability of ($938,331) and deferred outflow ofresources of $52,816, due to the implementation of GASB Statements No. 68 and No. 71.

3.Internal Service Fund:

1. Adjustment was made to correct prior year’s expenses $6,351.

G. New Accounting Pronouncements

Governmental Accounting Standards Board Statement No. 68

For the fiscal year ended June 30, 2015, the City implemented Governmental Accounting StandardsBoard (GASB) Statement No. 68, “Accounting and Financial Reporting for Pensions.” This Statement iseffective for periods beginning after June 15, 2014. The objective of this Statement is to improveaccounting and financial reporting by state and local governments for pensions. This Statement replacesthe requirements of GASB Statement No. 27, “Accounting for Pensions by State and Local Governmental

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Employers” as well as the requirements of GASB Statement No. 50, “Pension Disclosures.” ThisStatement establishes standards for measuring and recognizing liabilities, deferred outflows of resources,deferred inflows of resources, and expenses related to pensions. Implementation of the GASB StatementNo. 68 and the impact on the City’s financial statements are explained in Note V. - E. – Defined BenefitPension Plan and Note V. – F. - Prior Period Adjustment.

Governmental Accounting Standards Board Statement No. 71

For the fiscal year ended June 30, 2015, the City implemented Governmental Accounting StandardsBoard (GASB) Statement No. 71, “Pension Transition for Contributions Made Subsequent to theMeasurement Date.” This Statement is effective for periods beginning after June 15, 2014. The objectiveof this Statement is to address an issue regarding application of the transition of GASB Statement No. 68,“Accounting and Financial Reporting for Pensions.” The issue relates to amounts associated withcontributions, if any, made by a state or local government employer or nonemployer contributing entity toa defined benefit pension plan after the measurement date of the government’s beginning net pensionliability. This statement will eliminate the source of potential significant understatement of restatedbeginning net position and expense in the first year of implementation of GASB Statement No. 68 in theaccrual-basis financial statements of employers and nonemployer contributing entities. Implementation ofthe GASB Statement No. 71 and the impact on the City’s financial statements are explained in Note V. -E. – Defined Benefit Pension Plan and Note V. – F. - Prior Period Adjustment.

H. Successor Agency Trust for Assets of former Redevelopment Agency of the City ofWatsonville.

On December 29, 2011 the California Supreme Court upheld Assembly Bill 1X 26 (“Bill”) that providesfor the dissolution of all redevelopment agencies in the State of California. This action impacted thereporting entity of the City of Watsonville that previously had reported a redevelopment agency withinthe reporting entity of the City as a blended component unit.

The Bill provides that upon dissolution of a redevelopment agency, either the city or other unit of localgovernment will agree to serve as the “successor agency” to hold the assets until they are distributed toother units of state and local governments. On January 10, 2012, they City Council elected to become theSuccessor Agency for the former redevelopment agency in accordance with the Bill as part of City

Resolution number 4-12.

After enactment of the law, which occurred on June 28, 2011, redevelopment agencies in the State ofCalifornia cannot enter into new projects, obligations or commitments. Subject to the control of a newlyestablished oversight board, remaining assets can only be used to pay enforceable obligations in existenceas the date of the dissolution (including the completion of any unfinished projects that were subject tolegally enforceable contractual commitments).

In future fiscal years, successor agencies will only be allocated revenue in the amount that is necessary to

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pay the estimated annual installment payments on enforceable obligations of former redevelopmentagency until all enforceable obligations of the prior redevelopment agency have been paid in full and allassets have been liquidated.

The Bill directs the State Controller of the State of California to review the propriety of any transfers ofassets between redevelopment agencies and other public bodies that occurred after January 1, 2011. If thepublic body that received such transfers is not contractually committed to a third party for the expenditureor encumbrance of those assets, the state Controller is required to order the available assets to betransferred to the public body designated as the successor agency by the Bill.

Management believes, in consultation with legal counsel, that the obligations of the formerredevelopment agency due to the City are valid enforceable obligations payable by the successor agencytrust under the requirements of the Bill. The City’s position on this issue is not a position of settled lawand there is considerable legal uncertainty regarding this issue. It is reasonably possible that a legaldetermination may be made at a later date by an appropriate judicial authority that would resolve thisissue unfavorably to the City.

In accordance with the timeline set forth in the Bill (as modified by the California Supreme Court onDecember 29, 2011) all redevelopment agencies in the State of California were dissolved and ceased tooperate as a legal entity as of February 1, 2012.

Prior to that date, the final seven months of activity of the redevelopment agency continued to be reportedin the government funds of the City. After the date of dissolution, the assets and activities of thedissolved redevelopment agency are reported in a fiduciary fund (private-purpose trust fund) in thefinancial statements of the City.

The following is a schedule of long-term liabilities for the fiscal year ended June 30, 2015:

Balance Additions Reductions Balance One Year $ $ $ $ $

Tax allocation bonds 18,945,000 - (995,000) 17,950,000 1,040,000Debt payable 265,377 - (49,985) 215,392 51,484Postretirement liability 64,461 - - 64,461 -Notes payable 6,790,772 - (1,289,468) 5,501,304 - Total 26,065,611 - (2,334,453) 23,731,158 1,091,484

Tax allocation bonds

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In June of 2004 the former Redevelopment Agency of the City of Watsonville issued taxallocation bonds in three series as follows:

1. Series A - $19,000,0002. Series B-1 - $2,310,0003. Series B-2 - $4,635,000



2004 Tax Allocation Bonds, Series A

A portion of the proceeds from the issue was used to finance a portion of the costs of design andconstruction of the Civic Center Plaza and Parking Structure project in downtown Watsonville.Interest rates for the Series A bonds range from 4% to 5% with principal payments ranging from$400,000 to $1,050,000 through fiscal year 2034.

The 2004 Tax Allocation Bonds, Series A have the following redemption schedule:Maturity DateSeptember 1 Principal Interest Debt Service

$ $ $ 2015 700,000 637,398 1,337,398 2016 730,000 606,820 1,336,820 2017 760,000 573,843 1,333,843

2018 795,000 538,458 1,333,458 2019 830,000 500,668 1,330,668 2020 870,000 460,500 1,330,500

2021 910,000 418,225 1,328,225 2022 955,000 373,931 1,328,931 2023 1,000,000 326,875 1,326,875 2024 1,050,000 276,250 1,326,250 2025 400,000 240,000 640,000 2026 415,000 219,625 634,625 2027 440,000 198,250 638,250 2028 460,000 175,750 635,750 2029 485,000 152,125 637,125 2030 505,000 127,375 632,375 2031 * 535,000 101,375 636,375 2032 * 560,000 74,000 634,000 2033 * 585,000 45,375 630,375 2034 * 615,000 15,375 630,375

Total 13,600,000 6,062,218 19,662,218

* Principal applied to a sinking fund in years 2031 to 2034.

2004 Tax Allocation Bonds, Series B-1

A portion of the proceeds from this issue was used to finance certain low and moderate income

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housing capital improvements within the former Redevelopment Project Area. Interest rates forthe Series B-1 bonds range from 4% to 5% with principal payments ranging from $95,000 to$170,000 through fiscal year 2025.



The 2004 Tax Allocation Bonds, Series B-1 have the following redemption schedule:

Maturity DateSeptember 1 Principal Interest Debt Service

$ $ $ 2015 115,000 63,718 178,718 2016 120,000 58,634 178,634 2017 125,000 53,181 178,181 2018 130,000 47,444 177,444 2019 135,000 41,397 176,397 2020 140,000 34,950 174,950

2021 150,000 28,063 178,063 2022 155,000 20,625 175,625 2023 165,000 12,625 177,625 2024 170,000 4,250 174,250 Total 1,405,000 364,887 1,769,887

2004 Tax Allocation Bonds, Series B-2

A portion of the proceeds from this issue was used to finance certain low and moderate incomehousing capital improvements within the former Redevelopment Project Area. Interest rates forthe Series B-1 bonds range from 3% to 6.25% with principal payments ranging from $175,000 to$380,000 through fiscal year 2025.

The 2004 Tax Allocation Bonds, Series B-2 have the following redemption schedule:

Maturity DateSeptember 1 Principal Interest Debt Service

$ $ $ 2015* 225,000 174,175 399,175 2016* 235,000 160,375 395,375 2017* 250,000 145,825 395,825 2018* 265,000 130,375 395,375 2019* 280,000 114,025 394,025 2020** 300,000 96,250 396,250 2021** 315,000 77,031 392,031 2022** 335,000 56,719 391,719

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2023** 360,000 35,000 395,000 2024** 380,000 11,875 391,875 Total 2,945,000 1,001,650 3,946,650

* Principal applied to a sinking fund in years 2015 to 2019.** Principal applied to a sinking fund in years 2020 to 2024.


June 30, 2015 (Continued)Debt payable

The County of Santa Cruz discovered overpayment of tax increment allocations error in fiscalyear 2008/09, which resulted in the former Agency receiving $494,292 in excess revenues inprior fiscal years. The former Agency agreed to repay the County of Santa Cruz over a ten yearperiod. The loan has a 0% imputed interest rate.

Fiscal Year Principal $ 2016 51,484 2017 53,029 2018 54,619 2019 56,260 Total 215,392

Postretirement liability

As of the transfer of the former Agency assets to the Successor Agency, the Postretirementliability was $64,462. This amount will be reduced by an allocation of future costs incurred bythe City from former staff members of the former Agency.

Notes Payable

On May 25, 2004, the City’s Water Utility Fund loaned the former Redevelopment Agency$1,243,601 to fund the its payment to the County of Santa Cruz for excess tax increment errorswhich resulted in excess tax increment payments. The loan has an interest rate of 2.5% withrepayment to be over 20 years. As of the transfer of the former Agency assets to the SuccessorAgency, the note balance was $720,253. The State of California deemed this note as non-enforceable obligation, and the city could not be paid back until a finding of completion wasreceived from the State’s Department of Finance, which the City received on February 21,2014. The amount of the repayment was recalculated with an interest rate in accordance withHealth and Safety Code Section 34191.4(b)(2). The loan balance was adjusted to $554,818.

The City and former Agency had several notes payable from the former Agency to the City forvarious costs and fees associated with the construction of the Civic Plaza as follows:Civic Plaza Loan for Deferred Impact Fees $48,967Parking Garage Loan for Construction Costs $3,236,651Library Project Loan for Construction Costs $1,192,579

The State of California deemed these notes as non-enforceable obligation, and the city could not

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be paid back until a finding of completion was received from the State’s Department of Finance,which the City received on February 21, 2014 and the Successor Agency’s oversight boardmade a finding that the notes were for legitimate redevelopment purpose. The Oversight Boardalso made the finding for all the above notes. The Department of Finance again deemed thenotes as non-enforceable. During the last fiscal year the City won the litigation and the abovenotes will be paid back when funds become available



On March 8, 2011, the former Agency authorized a loan from the former Agency’s 20%Housing Set Aside Fund to make the State mandated payment to the County SupplementalEducation Revenue Augmentation Fund for the fiscal years 2010-2011 in the amount of$629,940. During the fiscal year 2007-08, an error was found in the original cost allocationplan which resulted in the former Redevelopment Agency owing the City $631,402. As ofyear-end, the balance was $468,289

Notes Payable Recap:

Water Utility fund $554,818Civic Plaza Loan 48,967Parking Garage Loan 3,236,651Library Project Loan 1,192,579Administration Loan 468,289

Total Notes Payable $5,501,304

Prior period adjustmentsIn the preparation of the private purpose trust fund, several entries were necessary to adjust netposition to begin the fiscal year ending June 30, 2015. The adjustments were as follows:

Beginning Balance Balance Additions Decreases Restated

$ $ $ $Beginning Net Position (22,052,834) 659,123 - (21,393,711)

Following are detailed explanations of prior period adjustments:

1. Adjustment was made to correct notes payables $659,123.

RequiredSupplementary

Information

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The following table provides required supplementary information regarding the City's Miscellaneous Pension

Plan.

2015

TOTAL PENSION LIABILITY

Service Cost 2,348,593$

Interest 8,369,558

Benefit Payments, Including Refunds of Employee Contributions (4,554,651)

Net Change in Total Pension Liability 6,163,500

Total Pension Liability - Beginning 112,697,136

Total Pension Liability - Ending (a) 118,860,636$

PLAN FIDUCIARY NET POSITION

Contributions - Employer 1,750,491$

Contributions - Employee 1,087,253

Net Investment Income (2) 14,090,974

Benefit Payments, Including Refunds of Employee Contributions (4,554,651)

Net Change in Fiduciary Net Position 12,374,067

Plan Fiduciary Net position - Beginning 81,597,739

Plan Fiduciary Net position - Ending (b) 93,971,806$

Plan Net Pension Liability/(Asset) - Ending (a) - (b) 24,888,830$

Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 79.06%

Covered- employee payroll 17,390,545$

Plan Net Pension Liability/(Asset) as a Percentage of Covered-Employee

Payroll 143.12%

Notes to Schedule:

Benefit Changes: The figures above do not include any liability impact

that may have resulted from plan changes which occurred after June 30, 2013.

This applies for voluntary benefits changes as well as any offers of Two Years

Additional Service Creadit (a.k.a. Golden Handshakes).

Changes of Assumptions: There were no chnages in assumptions.

(2) Net of adminstrative expenses.

* Fiscal Year 2015 was 1st year of implementation.

SCHEDULE OF CHANGES IN THE NET PENSION LIABILITY AND RELATED RATIOS


LAST 10 YEARS*

JUNE 30, 2015

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The following table provides required supplementary information regarding the City's Miscellaneous Pension Plan.

2015

Contractually required contribution (actuarially determined) 1,769,613$

Contribution in relation to the actuarially determined

contributions (1,769,613)

Contribution deficiency (excess) -$


Contributions as a percentage of covered-employee payroll 10.07%

Notes to Schedule

Valuation Date: 6/30/2013

Methods and assumptions used to determine contribution rates:

Discount Rate 7.50%

Inflation 2.75%

Salary Increases Varies by Entry Age and Service

Investment Rate of Return 7.5% Net of Pension Plan Investment

and Administrative Expenses;

includes Inflation

Mortality Rate Table (1) Derived using CalPERS' Membership

Data for all Funds

Post Retirement Benefit Contract COLA up to 2.75% until

Increase Purchasing Power Protection Allowance

Floor on Purchasing Power applies,

2.75% thereafter

(1) The mortality table used was developed based on CalPERs' specific data.

The table includes 20 years of mortality improvements using Society of

Actuaries Scale BB. For more details on this table please refer to the 2014

experience study report.


SCHEDULE OF CONTRIBUTIONS

LAST 10 YEARS*

JUNE 30, 2015

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The following table provides required supplementary information regarding the City's Safety Pension Plan.

2015

Proportion of the net pension liability 0.35895%

Proportionate share of the net pension liability 22,335,737$


Proportionate share of the net pension liability as

percentage of covered-employee payroll 211.89%

Plan's total pension liability 17,719,018,179$

Plan's fiduciary net position 13,968,041,341$

Plan fiduciary net position as a percentage of the

total pension liability 78.83%

Notes to Schedule:

Changes in assumptions - In 2015, amounts reported as changes in assumptions resulted primarily from

adjustments to expected retirement ages of general employees.

*- Fiscal year 2015 was the 1st year of implementation, therefore only one year is shown.


SCHEDULE OF PROPORTIONATE SHARE OF NET PENSION LIABILITY

LAST 10 YEARS*

JUNE 30, 2015

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The following table provides required supplementary information regarding the City's Safety Pension Plan.

2015

Contractually required contribution (actuarially determined) 2,565,307$

Contribution in relation to the actuarially determined

contributions (2,565,307)

Contribution deficiency (excess) -$


Contributions as a percentage of covered-employee payroll 25.02%

Notes to Schedule

Valuation Date: 6/30/2013

Methods and assumptions used to determine contribution rates:

Discount Rate 7.50%

Inflation 2.75%

Salary Increases Varies by Entry Age and Service

Investment Rate of Return 7.5% Net of Pension Plan Investment

and Administrative Expenses;

includes Inflation

Mortality Rate Table (1) Derived using CalPERS' Membership

Data for all Funds

Post Retirement Benefit Contract COLA up to 2.75% until

Increase Purchasing Power Protection Allowance

Floor on Purchasing Power applies,

2.75% thereafter

(1) The mortality table used was developed based on CalPERs' specific data.

The table includes 20 years of mortality improvements using Society of

Actuaries Scale BB. For more details on this table please refer to the 2014

experience study report.


SCHEDULE OF CONTRIBUTIONS

LAST 10 YEARS*

JUNE 30, 2015

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City of Watsonville, CaliforniaNonmajor Governmental Funds

Special Revenue Funds

Gas TaxThe City of Watsonville receives various revenues from taxes imposed on the sale of gasoline.These funds are to be used for maintaining and improving Watsonville's roads and transportationsystem.

Narcotics Assets SeizureFederal and State law authorize the seizure of assets used in the sale of illegal drugs. Theproceeds from these seizures are to be used to further Police enforcement. These monies areaccounted for in this fund.

Business DevelopmentThis fund collects a business license surcharge and downtown property tax assessment which isthen remitted to the Chamber of Commerce and Economic Development for their respectivepurposes.

Rental RehabilitationThese grants provide low cost loans for the rehabilitation of low cost rental housing.

LibraryThe Library Fund receives sales tax, grants, donations and state subventions for the advancementof the Library in Watsonville. This fund receives such revenues and records their expenditures.

Parks DevelopmentThis fund's revenues are grants, park development impact fees and 1972 Landscape and LightingAssessment fees. These funds are used to acquire, improve and maintain the government’sparks.

(Continued)

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City of Watsonville, CaliforniaNonmajor Governmental Funds


Retirement TaxThe City of Watsonville participates in the California Public Employees Retirement System.The government's contribution for General Fund employees is funded by a voter approvedproperty tax override. The tax is collected in this fund and then used to pay for appropriateretirement expenses.

Parking GarageThis fund is used to record operating costs used to maintain the government’s parking garagedowntown.

Measure G Sales TaxThis fund was established in 2014, the Citizens of Watsonville approved an additional sales taxof .5% for seven years to increase funding for public safety.

Abandoned VehicleThe government has assigned a Watsonville Police Department Service Specialist toaggressively enforce all State laws and City of Watsonville Ordinances pertaining to theabatement of all abandoned, wrecked, dismantled, inoperative vehicles or parts from any and allprivate or public properties. This fund collects State and County funds used to pay for theseservices.

Inclusionary HousingThe government levies an impact fee on all market rate housing development, which eitherrequires a specified number of below market housing units be created or the payment of a fee.This fund collects those fees and uses them to create low-income housing.

(Concluded)


NONMAJOR GOVERNMENTAL FUNDS

COMBINING BALANCE SHEET

JUNE 30, 2015

NARCOTICS RENTAL

GAS ASSETS BUSINESS REHABILI- PARKS

TAX SEIZURE DEVELOPMENT TATION LIBRARY DEVELOPMENT

$ $ $ $ $ $

ASSETS:

Cash and investments 1,792,501 116,293 201,902 428,409 400,713 1,771,623

Receivables:

Interest - - - 28,570 - -

Taxes 156,663 - - - - 7,883

Accounts 1,900 - - 393,920 66

Intergovernmental 65,981 - - - - -

Advances receivable - - - - 253,594 134,772

Loans receivable - - - 62,770 - -

Total Assets 2,017,045 116,293 201,902 519,749 1,048,227 1,914,344



Liabilities:

Accounts payable 32,888 - - 8,845 36,507 280

Accrued personnel costs 87 - - 7,211 - 2,512

Due to other funds - - - - - -

Deposits - 45,454 - - - -

Total Liabilities 32,975 45,454 - 16,056 36,507 2,792


Unavailable revenue 65,981 - - 91,340 - -

Total Deferred Inflows of Resources 65,981 - - 91,340 - -

Total Liabilities and Deferred in Flows of

Resources 98,956 45,454 - 107,396 36,507 2,792

Fund Balances:

Restricted for:

Gas tax 1,918,089 - - - - -

Assets seizure - 70,839 - - - -

Business development - - 201,902 - - -

Rental rehabilitation - - - 412,353 - -

Library - - - - 1,011,720 -

Parks development - - - - - 1,911,552

Retirement tax - - - - - -

Measure G - - - - - -

Inclusionary housing - - - - - -

Unassigned - - - - - -

Total Fund Balances 1,918,089 70,839 201,902 412,353 1,011,720 1,911,552


Resources, and Fund Balances 2,017,045 116,293 201,902 519,749 1,048,227 1,914,344

Continued


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COMBINING BALANCE SHEET

JUNE 30, 2015

RETIREMENT PARKING ABANDONED INCLUSIONARY

TAX GARAGE MEASURE G VEHICLE HOUSING TOTAL

$ $ $ $ $ $

ASSETS:

Cash and investments 514,054 541 873,750 - 1,488,771 7,588,557

Receivables:

Interest - - - - 65,357 93,927

Taxes 82,548 - 519,200 - 766,294

Accounts - 49,606 - 17,363 - 462,855

Intergovernmental - - 80,949 - - 146,930

Advances receivable - - - - 360,662 749,028

Loans receivable - - - - 1,162,502 1,225,272

Total Assets 596,602 50,147 1,473,899 17,363 3,077,292 11,032,863



Liabilities:

Accounts payable - 10,921 120,382 - 10,798 220,621

Accrued personnel costs - - 24,073 - - 33,883

Due to other funds - 788,475 - 99,306 - 887,781

Deposits - - - - - 45,454

Total Liabilities - 799,396 144,455 99,306 10,798 1,187,739


Unavailable revenue - - 80,949 - 1,227,859 1,466,129

Total Deferred Inflows of Resources - - 80,949 - 1,227,859 1,466,129

Total Liabilities and Deferred in Flows of

Resources - 799,396 225,404 99,306 1,238,657 2,653,868

Fund Balances:

Restricted for:

Gas tax - - - - - 1,918,089

Assets seizure - - - - - 70,839

Business development - - - - - 201,902

Rental rehabilitation - - - - - 412,353

Library - - - - - 1,011,720

Parks development - - - - - 1,911,552

Retirement tax 596,602 - - - - 596,602

Measure G - - 1,248,495 - - 1,248,495

Inclusionary housing - - - - 1,838,635 1,838,635

Unassigned - (749,249) - (81,943) - (831,192)

Total Fund Balances 596,602 (749,249) 1,248,495 (81,943) 1,838,635 8,378,995


Resources, and Fund Balances 596,602 50,147 1,473,899 17,363 3,077,292 11,032,863

Concluded


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COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES


NARCOTICS RENTAL

GAS ASSETS BUSINESS REHABILI- PARKS

TAX SEIZURE DEVELOPMENT TATION LIBRARY DEVELOPMENT

$ $ $ $ $ $

REVENUES:

Taxes 1,474,719 - - - 2,845,710 -

Licenses, permits and fees - - 66,298 2,791 65,117 253,326

Intergovernmental 277,172 - - - 18,148 -

Interest 5,838 383 1,248 - 7,313 6,391

Miscellaneous - 1,028 - - 28,618 813,396

Total revenues 1,757,729 1,411 67,546 2,791 2,964,906 1,073,113

EXPENDITURES:

Current:

General government - - 62,045 69,184 - -

Public safety - 5,314 - - - -

Housing - - - - - -

Streets 345,535 - - - - -

Culture and recreation - - - - 3,231,020 248,877

Total expenditures 345,535 5,314 62,045 69,184 3,231,020 248,877

Excess (deficiency) of revenues over 1,412,194 (3,903) 5,501 (66,393) (266,114) 824,236 (under) expenditures


Transfers in - - - - - -

Transfers out (340,000) - - - (91,676) -

Total other financing sources (uses) (340,000) - - - (91,676) -

Net change in fund balances 1,072,194 (3,903) 5,501 (66,393) (357,790) 824,236

Fund balances, July 1 844,675 67,547 196,401 478,746 1,369,510 1,087,316

Prior period adjustments 1,220 7,195 - - - -

Fund balances, July 1, as restated 845,895 74,742 196,401 478,746 1,369,510 1,087,316

Fund balances, June 30 1,918,089 70,839 201,902 412,353 1,011,720 1,911,552

Continued


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COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES


RETIREMENT PARKING ABANDONED INCLUSIONARY

TAX GARAGE MEASURE G VEHICLE HOUSING TOTALS

$ $ $ $ $ $

REVENUES:

Taxes 2,395,802 - 2,275,960 - - 8,992,191

Licenses, permits and fees - 149,631 - 61,587 26,378 625,128

Intergovernmental - - - - - 295,320

Interest - 226 - - 11,481 32,880

Miscellaneous - - - - 179,182 1,022,224

Total revenues 2,395,802 149,857 2,275,960 61,587 217,041 10,967,743

EXPENDITURES:

Current:

General government 5,003 221,815 - - - 358,047

Public safety - - 1,027,465 84,112 - 1,116,891

Housing - - - - 354,875 354,875

Streets - - - - - 345,535

Culture and recreation - - - - - 3,479,897

Total expenditures 5,003 221,815 1,027,465 84,112 354,875 5,655,245

Excess (deficiency) of revenues over 2,390,799 (71,958) 1,248,495 (22,525) (137,834) 5,312,498

(under) expenditures

Transfers in - 93,195 - - - 93,195

Transfers out (2,270,425) - - - - (2,702,101)

Total other financing sources (uses) (2,270,425) 93,195 - - - (2,608,906)

Net change in fund balances 120,374 21,237 1,248,495 (22,525) (137,834) 2,703,592

Fund balances, July 1 476,228 (765,806) - (59,418) 1,983,003 5,678,202

Prior period adjustments - (4,680) - - (6,534) (2,799)

Fund balances, July 1, as restated 476,228 (770,486) - (59,418) 1,976,469 5,675,403

Fund balances, June 30 596,602 (749,249) 1,248,495 (81,943) 1,838,635 8,378,995

Concluded


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NONMAJOR SPECIAL REVENUE FUNDS

SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL


Variance With Variance With

Final Budget - Final Budget -

Positive Positive

Original Final Actual (Negative) Original Final Actual (Negative)

$ $ $ $ $ $ $ $

REVENUES:

Taxes 1,371,140 1,371,140 1,474,719 103,579 - - - -

Intergovernmental 515,000 713,540 277,172 (436,368) - - - -

Interest 20,000 20,000 5,838 (14,162) 2,500 2,500 383 (2,117)

Miscellaneous - - - - 10,000 10,000 1,028 (8,972)

Total revenues 1,906,140 2,104,680 1,757,729 (346,951) 12,500 12,500 1,411 (11,089)

EXPENDITURES:

Public safety - - - - 74,000 78,000 5,314 72,686

Streets 1,377,277 1,438,777 345,535 1,093,242 - - - -

Total expenditures 1,377,277 1,438,777 345,535 1,093,242 74,000 78,000 5,314 72,686


(under) expenditures 528,863 665,903 1,412,194 746,291 (61,500) (65,500) (3,903) 61,597


Transfers out (340,000) (340,000) (340,000) - - - - -

Total other financing sources (uses) (340,000) (340,000) (340,000) - - - - -

Net change in fund balances 188,863 325,903 1,072,194 746,291 (61,500) (65,500) (3,903) 61,597

Fund balances, July 1 844,675 844,675 844,675 - 67,547 67,547 67,547 -

Prior period adjustments - - 1,220 1,220 - - 7,195 7,195

Fund balances, July 1, as restated 844,675 844,675 845,895 1,220 67,547 67,547 74,742 7,195

Fund balances, June 30 1,033,538 1,170,578 1,918,089 747,511 6,047 2,047 70,839 68,792

Budgeted Amounts

GAS TAX NARCOTICS ASSETS SEIZURE

Budgeted Amounts

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Positive Positive


$ $ $ $ $ $ $ $

REVENUES:

Licenses, permits and fees 65,000 65,000 66,298 1,298 3,000 3,000 2,791 (209)

Interest - - 1,248 1,248 - - - -

Total revenues 65,000 65,000 67,546 2,546 3,000 3,000 2,791 (209)

EXPENDITURES:

Current:

General government 62,045 62,045 62,045 - 473,520 473,520 69,184 404,336

Total expenditures 62,045 62,045 62,045 - 473,520 473,520 69,184 404,336


(under) expenditures 2,955 2,955 5,501 2,546 (470,520) (470,520) (66,393) 404,127

Net change in fund balances 2,955 2,955 5,501 2,546 (470,520) (470,520) (66,393) 404,127

Fund balances, July 1 196,401 196,401 196,401 - 478,746 478,746 478,746 -

Fund balances, June 30 199,356 199,356 201,902 2,546 8,226 8,226 412,353 404,127

Budgeted Amounts

BUSINESS DEVELOPMENT RENTAL REHABILITATION

Budgeted Amounts

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Positive Positive


$ $ $ $ $ $ $ $

REVENUES:

Taxes 3,150,018 3,150,018 2,845,710 (304,308) - - - -

Licenses, permits and fees 59,000 59,000 65,117 6,117 222,334 222,334 253,326 30,992

Intergovernmental 45,000 45,000 18,148 (26,852) - - - -

Interest 25,000 25,000 7,313 (17,687) 7,500 7,500 6,391 (1,109)

Miscellaneous 4,000 4,000 28,618 24,618 - - 813,396 813,396

Total revenues 3,283,018 3,283,018 2,964,906 (318,112) 229,834 229,834 1,073,113 843,279

EXPENDITURES:

Current:

Culture and recreation 4,040,040 4,071,840 3,231,020 840,820 658,026 658,026 248,877 409,149

Total expenditures 4,040,040 4,071,840 3,231,020 840,820 658,026 658,026 248,877 409,149


(under) expenditures (757,022) (788,822) (266,114) 522,708 (428,192) (428,192) 824,236 1,252,428


Transfers out (91,676) (91,676) (91,676) - - - - -

Total other financing sources (uses) (91,676) (91,676) (91,676) - - - - -

Net change in fund balances (848,698) (880,498) (357,790) 522,708 (428,192) (428,192) 824,236 1,252,428

Fund balances, July 1 1,369,510 1,369,510 1,369,510 - 1,087,316 1,087,316 1,087,316 -

Fund balances, June 30 520,812 489,012 1,011,720 522,708 659,124 659,124 1,911,552 1,252,428

LIBRARY PARKS DEVELOPMENT

Budgeted AmountsBudgeted Amounts

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Positive Positive


$ $ $ $ $ $ $ $

REVENUES:

Taxes 2,270,425 2,270,425 2,395,802 125,377 - - - -

Licenses, permits, and fees - - - - 133,000 133,000 149,631 16,631

Miscellaneous - - - - - - 226 226

Total revenues 2,270,425 2,270,425 2,395,802 125,377 133,000 133,000 149,857 16,857

EXPENDITURES:

Current:

General government - - 5,003 (5,003) 134,380 204,380 221,815 (17,435)

Total expenditures - - 5,003 (5,003) 134,380 204,380 221,815 (17,435)


(under) expenditures 2,270,425 2,270,425 2,390,799 120,374 (1,380) (71,380) (71,958) (578)


Transfers in - - - - 93,197 93,197 93,195 (2)

Transfers out (2,270,425) (2,270,425) (2,270,425) - - - - -

Total other financing sources (uses) (2,270,425) (2,270,425) (2,270,425) - 93,197 93,197 93,195 (2)

Net change in fund balances - - 120,374 120,374 91,817 21,817 21,237 (580)

Fund balances, July 1 476,228 476,228 476,228 - (765,806) (765,806) (765,806) -

Prior period adjustments - - - - - - (4,680) (4,680)

Fund balances, July 1, as restated 476,228 476,228 476,228 - (765,806) (765,806) (770,486) (4,680)

Fund balances, June 30 476,228 476,228 596,602 120,374 (673,989) (743,989) (749,249) (5,260)

RETIREMENT TAX

Budgeted Amounts

PARKING GARAGE

Budgeted Amounts

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Positive Positive


$ $ $ $ $ $ $ $

REVENUES:

Taxes 10,142,613 10,142,613 2,275,960 (7,866,653) - - - -

Intergovernmental 90,000 90,000 - (90,000) - - - -

Licenses, permits and fees - - - - 84,112 84,112 61,587 (22,525)

Total revenues 10,232,613 10,232,613 2,275,960 (7,956,653) 84,112 84,112 61,587 (22,525)

EXPENDITURES:

Current:

Public safety 1,969,924 1,969,924 1,027,465 942,459 84,112 84,112 84,112 -

Total expenditures 1,969,924 1,969,924 1,027,465 942,459 84,112 84,112 84,112 -


(under) expenditures 8,262,689 8,262,689 1,248,495 (7,014,194) - - (22,525) (22,525)

Net change in fund balances 8,262,689 8,262,689 1,248,495 (7,014,194) - - (22,525) (22,525)

Fund balances, July 1 - - - - (59,418) (59,418) (59,418) -

Fund balances, June 30 8,262,689 8,262,689 1,248,495 (7,014,194) (59,418) (59,418) (81,943) (22,525)

Budgeted Amounts Budgeted Amounts

MEASURE G ABANDONED VEHICLE

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SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL


Variance With

Final Budget -

Positive


$ $ $ $

REVENUES:

Licenses, permits and fees 50,000 50,000 26,378 (23,622)

Interest 5,000 5,000 11,481 6,481

Miscellaneous - - 179,182 179,182

Total revenues 55,000 55,000 217,041 162,041

EXPENDITURES:

Current:

Housing 285,473 285,473 354,875 (69,402)




Prior period adjustments - - (6,534) (6,534)

Fund balance, July 1, as restated 1,983,003 1,983,003 1,976,469 (6,534)


Budgeted Amounts

INCLUSIONARY HOUSING

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CITY OF WATSONVILLE - DEBT SERVICE FUND

SCHEDULE OF REVENUES, EXPENDITURES,



Variance With

Final Budget -

Positive


$ $ $ $

REVENUES:

Interest 84,486 84,486 85,829 1,343

Special assessment 112,570 112,570 91,085 (21,485)

Total revenues 197,056 197,056 176,914 (20,142)

EXPENDITURES:

Debt service:

Principal 331,075 370,075 354,067 16,008

Interest and fiscal charges 252,476 252,476 299,372 (46,896)



(under) expenditures (386,495) (425,495) (476,525) (51,030)


Transfers in 404,331 404,331 469,461 65,130

Total other financing sources (uses) 404,331 404,331 469,461 65,130

Net change in fund balance 17,836 (21,164) (7,064) 14,100

Fund balance, July 1 78,822 78,822 78,822 -

Fund balance, June 30 96,658 57,658 71,758 14,100

Budgeted Amounts

GENERAL

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CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS

COMPARATIVE SCHEDULE BY SOURCE

JUNE 30, 2015

2015 2014

$ $

GOVERNMENTAL FUNDS CAPITAL ASSETS:

Land 14,682,237 14,682,237

Buildings and improvements 134,009,248 134,009,248

Machinery and equipment 14,433,218 14,366,051

Infrastructure 26,505,509 26,050,757

Construction in progress 374,153 253,134

Total Governmental Funds Capital Assets 190,004,365 189,361,427

INVESTMENT IN GOVERNMENTAL CAPITAL ASSETS BY SOURCE

General fund 146,904,078 146,261,140

Other special revenue funds 38,989,559 38,989,559

Capital leases 4,110,728 4,110,728

Total Governmental Funds Capital Assets 190,004,365 189,361,427

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CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENTAL FUNDS

SCHEDULE BY FUNCTION AND ACTIVITY

JUNE 30, 2015

Machinery

and Construction

Function and Activity Land Buildings Improvements Equipment Infrastructure in Progress Total

$ $ $ $ $ $ $

City Manager - - - 15,352 ` - - 15,352

City Clerk - - - 59,083 - - 59,083

Community Develop. - - - 93,807 - - 93,807

Finance - - - 502,001 - - 502,001

Fire - 778,870 226,800 1,909,655 - - 2,915,325

Library - 964,278 77,700 3,371,869 - - 4,413,847

Nondepartmental 14,682,237 85,468,642 4,746,202 924,155 21,195,615 368,653 127,385,504

Parks and Recreation - 3,070,166 4,969,743 987,144 - - 9,027,053

Police - 2,625,196 581,373 2,285,115 - - 5,491,684

Public Works - 18,230,384 12,269,894 4,285,037 5,309,894 5,500 40,100,709

Total Governmental

Funds Capital Assets 14,682,237 111,137,536 22,871,712 14,433,218 26,505,509 374,153 190,004,365

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CAPITAL ASSETS USED IN THE OPERATION OF GOVERNMENT FUNDS

SCHEDULE OF CHANGES BY FUNCTION AND ACTIVITY


Capital Assets Capital Assets

Assets Assets

Function and Activity June 30, 2014 Additions Deletions June 30, 2015

$ $ $ $

City Manager 15,352 - - 15,352

City Clerk 59,083 - - 59,083

Community Develop. 93,807 - - 93,807

Finance 495,643 6,358 - 502,001

Fire 2,878,345 69,382 (32,402) 2,915,325

Library 4,422,535 - (8,688) 4,413,847

Nondepartmental 126,765,556 619,948 - 127,385,504

Parks and Recreation 9,065,194 - (38,141) 9,027,053

Police 5,465,203 125,869 (99,388) 5,491,684

Public Works 40,100,709 - 40,100,709

Total Government

Funds Capital Assets 189,361,427 821,557 (178,619) 190,004,365

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F-1

APPENDIX F

STATE DEPARTMENT OF FINANCE APPROVAL LETTER


~t-lT 0,:,. ..t- • ,I>.

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¥ DEPARTMENT OF EDMUND G . BROWN JR .• GOVERNOR

<.'~1.,,oi>t-''P' FI NAN C E------9-1_5_L_ST_R_E-ET-.-S-AC_R_A_M-EN_T_o_C_A_•_9_5B-, 4-·-37_0_6_•_w_w_w-.o-o-,.-cA-.-Go-v

April 7, 2016

Ms. Jan Davison, Redevelopment and Housing Director City of Watsonville 250 Main Street Watsonville, CA 95076

Dear Ms. Davison:

Subject: Approval of Oversight Board Action

The City of Watsonville Successor Agency (Agency) notified the California Department of Finance (Finance) of its March 9, 2016 Oversight Board (OB) Resolution on March 9, 2016. Pursuant to Health and Safety Code (HSC) section 34179 (h), Finance has completed its review of the OB action.

Based on our review and application of the law, OB Resolution No. 2-16 (OB), approving the issuance of the 2016 Tax Allocation Refunding Bonds (Refunding Bonds), is approved. The Agency anticipates achieving net present value savings of approximately $3, 152,244 through the issuance of the Refunding Bonds.

Finance's approval is based on the understanding that no bonds will be issued unless such bonds meet the limitations outlined in HSC section 34177.5 (a). Following the issuance of the Refunding Bonds, the Agency's debt service payment obligations for the Refunding Bonds should be placed on future Recognized Obligation Payment Schedules for Finance's review and approval.

This is our determination with respect to the OB action taken.

Please direct inquiries to Wendy Griffe, Supervisor, or Jonathan Cox, Lead Analyst, at (916) 445-1546.

cc: Mr. Ezequiel Vega, Administrative Service Director, City of Watsonville Ms. Edith Driscoll, Auditor-Controller Treasurer-Tax Collector, Santa Cruz County


G-1

APPENDIX G

SUPPLEMENTAL INFORMATION – THE CITY OF WATSONVILLE

The following information relating to the City of Watsonville, California (the “City”) is provided for informational purposes only. The 2016 Bonds (as defined in the front part of this Official Statement) are payable Tax Revenues as described in this Official Statement and are not payable or secured by a pledge of the faith and credit or taxing power of the City.

General

The City is located alongside the Pacific Coast Highway (Highway 1) approximately 18 miles southeast of Santa Cruz and 48 miles south of San Jose. The City covers approximately 7 square miles. The City is a municipal corporation and a charter city with the council-manager form of government. The City was incorporated on March 30, 1868, and was chartered in 1903. The City Council of the City (the “City Council”) is comprised of seven members that are elected by district for alternating four-year terms. The City Council appoints the City Manager and administers municipal affairs under policy guidelines established by the City Council.

Governmental Services

The City maintains its own Police Department which consists of 68 sworn officers and 20 professional staff. Also, the City has its own Fire Department which consists of 34 Suppression Personnel and 5 administrative staff members. The City has other departments that range from Community Development to Public Works & Utilities and owns a municipal airport. Through its various departments, the City provides general government services such as building permit processing, preservation, utility services, affordable housing, park services, and waste management.

Education

Public educational services through the high school level in the City are provided by the Pajaro Valley Unified School District (“Pajaro Valley”). Pajaro Valley includes 8 alternative and charter schools, 16 elementary schools, 5 middle schools, 1 junior high school, 3 high schools, and an adult education school. There are several institutions of higher education within close proximity of the City. The University of California, Santa Cruz is 20 miles north and California State University, Monterey Bay is 20 miles south. Additionally, Cabrillo College, located in the City, offers numerous two-year degree programs that range from accounting to the arts.

G-2

Population

The following table provides a comparison of population growth for the City and the County from 2011 and 2015.

Change in Population City of Watsonville and Santa Cruz County

2011-2015

City of Watsonville Santa Cruz County

Year (January 1) Population

Percentage Change Population

Percentage Change

2011 51,208 - 263,954 - 2012 51,471 0.5% 265,555 0.6% 2013 51,751 0.5 267,868 0.9 2014 51,874 0.2 269,322 0.5 2015 52,087 0.4 271,646 0.9

Source: State of California Department of Finance, Population Research Unit, “Population Estimates for California

Cities and Counties.”

Employment and Industry

A number of national companies are headquartered in the City including S. Martinelli & Co., Harvest Drive Properties LLC, Home Depot, Granite Construction Company, Driscoll Berries, Monterey Mushroom, Granite Rock, and West Marine Products. The City’s food processor businesses freeze and distribute more fruits and vegetables than any other single area in the United States. The primary crops grown include strawberries, apples, fresh flowers, cauliflower, broccoli, and artichokes. Although agriculture and food processing are the mainstay of the City’s and Pajaro Valley’s economic structure, the City has been further diversifying through the addition of electronics, manufacturing and service firms, healthcare providers, and the establishment of distribution centers for non-agricultural products.

A number of new development projects in the City are discussed in the body of this Official Statement. One of the largest is the planned development of a new Federal Express package distribution facility. Federal Express has proposed a 195,000-square-feet facility on 25.8 acres between Highway 1, the Seaview Ranch housing complex and Ohlone Parkway. The new facility will be built on a 25 acre site and replace Federal Expresses’ existing facility located at 165 Technology Drive. The new facility is expected to provide between 300 to 600 jobs and to assist the development of an additional 70 acres of real property as result of improved infrastructure.

G-3

The following tables show the City’s employment data and the County’s labor force data. The great recession had a particularly severe impact on employment within the City. The City has a higher unemployment rate in comparison to the rest of Santa Cruz County.

City of Watsonville Annual Average Labor Force Data For the Years 2010-2014(1)

Year

Labor Force

Employed

Unemployed

Unemployment Rate

2010 23,900 17,800 6,200 25.8% 2011 23,800 17,800 6,000 25.3 2012 23,700 18,200 5,500 23.2 2013 23,300 18,600 4,700 20.1 2014 25,200 22,400 2,800 11.2

(1) 2015 figures are not available Source: Employment Development Department of the State of California.

Santa Cruz County Annual Average Labor Force Data For the Years 2010-2015

Year

Labor Force

Employed

Unemployed

Unemployment Rate

2010 150,100 131,100 19,000 12.6% 2011 149,600 131,200 18,400 12.3 2012 150,500 133,700 16,800 11.2 2013 151,700 137,300 14,400 9.5 2014 142,400 130,000 12,400 8.7 2015(1) 141,000 129,300 11,700 8.3 2016(2) 141,900 129,100 12,800 9.0

(1) As of December 2015. (2) As of January 2016. Source: Employment Development Department of the State of California.

G-4

Commercial Activity

The following table summarizes the volume of retail and food services sales and the total taxable transactions for the City for 2009 through 2013, the most recent years available.

CITY OF WATSONVILLE TOTAL TAXABLE TRANSACTIONS

2009-2013

Year

Retail & Food Services ($000’s)

% Change

Retail & Food Services Sales

Permits

Total Taxable Transactions

($000’s) %

Change

Total Sales

Permits

2009 $381,538 - 698 $495,137 - 1,119 2010 401,411 5.2% 726 516,230 4.3% 1,149 2011 426,431 6.2 743 537,997 4.2 1,163 2012 439,364 3.0 722 551,398 2.5 1,141 2013 455,395 3.6 717 585,790 6.2 1,110

Source: State Board of Equalization, “Taxable Sales in California (Sales & Use Tax).” 2014 & 2015 data not available. Transportation

The City is located alongside the Pacific Coast Highway, a major traffic route, at the juncture with Highway 129. Highway 101 is also 10 miles east of the City and is accessible via Highway 129. Further, the City owns a municipal airport which provides hangar and tie-down permits. Additionally, the City is serviced by the Santa Cruz Metro Transit District, which provides services throughout Santa Cruz County, and is a major transfer point between the Santa Cruz Metro and the Monterey-Salinas Transit.

H-1

APPENDIX H

SPECIMEN MUNICIPAL BOND INSURANCE POLICY


!

!

!

MUNICIPAL BOND INSURANCE POLICY

ISSUER: [NAME OF ISSUER] Policy No: _____ MEMBER: [NAME OF MEMBER] BONDS: $__________ in aggregate principal Effective Date: _________ amount of [NAME OF TRANSACTION] [and maturing on]

Risk Premium: $__________ Member Surplus Contribution: $ _________

Total Insurance Payment: $_________ BUILD AMERICA MUTUAL ASSURANCE COMPANY (“BAM”), for consideration received, hereby UNCONDITIONALLY AND

IRREVOCABLY agrees to pay to the trustee (the “Trustee”) or paying agent (the “Paying Agent”) for the Bonds named above (as set forth in the documentation providing for the issuance and securing of the Bonds), for the benefit of the Owners or, at the election of BAM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer.

On the later of the day on which such principal and interest becomes Due for Payment or the first Business Day following the Business Day on which BAM shall have received Notice of Nonpayment, BAM will disburse (but without duplication in the case of duplicate claims for the same Nonpayment) to or for the benefit of each Owner of the Bonds, the face amount of principal of and interest on the Bonds that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by BAM, in a form reasonably satisfactory to it, of (a) evidence of the Owner’s right to receive payment of such principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner’s rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in BAM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by BAM is incomplete, it shall be deemed not to have been received by BAM for purposes of the preceding sentence, and BAM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, any of whom may submit an amended Notice of Nonpayment. Upon disbursement under this Policy in respect of a Bond and to the extent of such payment, BAM shall become the owner of such Bond, any appurtenant coupon to such Bond and right to receipt of payment of principal of or interest on such Bond and shall be fully subrogated to the rights of the Owner, including the Owner’s right to receive payments under such Bond. Payment by BAM either to the Trustee or Paying Agent for the benefit of the Owners, or directly to the Owners, on account of any Nonpayment shall discharge the obligation of BAM under this Policy with respect to said Nonpayment.

Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. “Business Day” means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer’s Fiscal Agent (as defined herein) are authorized or required by law or executive order to remain closed. “Due for Payment” means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless BAM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration) and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. “Nonpayment” means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. “Nonpayment” shall also include, in respect of a Bond, any payment made to an Owner by or on behalf of the Issuer of principal or interest that is Due for Payment, which payment has been recovered from such Owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction. “Notice” means delivery to BAM of a notice of claim and certificate, by certified mail, email or telecopy as set forth on the attached Schedule or other acceptable electronic delivery, in a form satisfactory to BAM, from and signed by an Owner, the Trustee or the Paying Agent, which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount, (d) payment instructions and (e) the date such claimed amount becomes or became Due for Payment. “Owner” means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that “Owner” shall not include the Issuer, the Member or any other person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds.

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BAM may appoint a fiscal agent (the “Insurer’s Fiscal Agent”) for purposes of this Policy by giving written notice to the Trustee, the Paying Agent, the Member and the Issuer specifying the name and notice address of the Insurer’s Fiscal Agent. From and after the date of receipt of such notice by the Trustee, the Paying Agent, the Member or the Issuer (a) copies of all notices required to be delivered to BAM pursuant to this Policy shall be simultaneously delivered to the Insurer’s Fiscal Agent and to BAM and shall not be deemed received until received by both and (b) all payments required to be made by BAM under this Policy may be made directly by BAM or by the Insurer’s Fiscal Agent on behalf of BAM. The Insurer’s Fiscal Agent is the agent of BAM only, and the Insurer’s Fiscal Agent shall in no event be liable to the Trustee, Paying Agent or any Owner for any act of the Insurer’s Fiscal Agent or any failure of BAM to deposit or cause to be deposited sufficient funds to make payments due under this Policy.

To the fullest extent permitted by applicable law, BAM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to BAM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy may not be canceled or revoked.

This Policy sets forth in full the undertaking of BAM and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. THIS POLICY IS ISSUED WITHOUT CONTINGENT MUTUAL LIABILITY FOR ASSESSMENT.

In witness whereof, BUILD AMERICA MUTUAL ASSURANCE COMPANY has caused this Policy to be executed on its behalf by its Authorized Officer.

BUILD AMERICA MUTUAL ASSURANCE COMPANY By: _______________________________________ Authorized Officer

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Notices (Unless Otherwise Specified by BAM) Email: [email protected] Address: 1 World Financial Center, 27th floor 200 Liberty Street New York, New York 10281 Telecopy: 212-962-1524 (attention: Claims)

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CALIFORNIA ENDORSEMENT TO MUNICIPAL BOND INSURANCE POLICY NO.

This Policy is not covered by the California Insurance Guaranty Association established pursuant to Article 15.2 of Chapter 1 of Part 2 of Division 1 of the California Law.

Nothing herein shall be construed to waive, alter, reduce or amend coverage in any other section of the Policy. If found contrary to the Policy language, the terms of this Endorsement supersede the Policy language

IN WITNESS WHEREOF, BUILDAMERICA MUTUAL ASSURANCE COMPANY has caused this policy to be executed on its behalf by its Authorized Officer.

BUILD AMERICA MUTUAL ASSURANCE COMPANY By _______________________________________________ Authorized Officer

I-1

APPENDIX I

SPECIMEN MUNICIPAL BOND DEBT SERVICE INSURANCE POLICY


MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICY

ISSUER:

,

MEMBER:

,

BONDS: $_______ in aggregate principal amount of

Maximum Policy Limit: $

Policy No:

Effective Date:

Risk Premium: $

Member Surplus Contribution: $

Total Insurance Payment: $

BUILD AMERICA MUTUAL ASSURANCE COMPANY (“BAM”), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the “Trustee”) or paying agent (the “Paying Agent”) for the Bonds named above under the Security Documents, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer.

BAM will make payment as provided in this Policy to the Trustee or Paying Agent on the later of (i) the Business Day on which such principal and interest becomes Due for Payment and (ii) the first Business Day following the Business Day on which BAM shall have received a completed Notice of Nonpayment in a form reasonably satisfactory to it. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by BAM is incomplete, it shall be deemed not to have been received by BAM for purposes of this paragraph, and BAM shall promptly so advise the Trustee or Paying Agent who may submit an amended Notice of Nonpayment.

Payment by BAM to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of BAM under this Policy. Upon disbursement under this Policy in respect of a Bond and to the extent of such payment, (a) BAM shall become the owner of such Bond, any appurtenant coupon to such Bond and right to receipt of payment of principal of or interest on such Bond and shall be fully subrogated to the rights of the Owner, including the Owner’s right to receive payments under such Bond and (b) BAM shall become entitled to

reimbursement of the amount so paid (together with interest and expenses) pursuant to the Security Documents and Debt Service Reserve Agreement.

The amount available under this Policy for payment shall not exceed the Policy Limit. The amount available at any particular time to be paid to the Trustee or Paying Agent under the terms of this Policy shall automatically be reduced by and to the extent of any payment under this Policy. However, after such payment, the amount available under this Policy shall be reinstated in full or in part, but only up to the Policy Limit, to the extent of the reimbursement of such payment (after taking into account the payment of interest and expenses) to BAM by or on behalf of the Issuer. Within three (3) Business Days of such reimbursement, BAM shall provide the Trustee or the Paying Agent with Notice of Reinstatement, in the form of Exhibit A attached hereto, and such reinstatement shall be effective as of the date BAM gives such notice.

Payment under this Policy shall not be available with respect to (a) any Nonpayment that occurs prior to the Effective Date or after the end of the Term of this Policy or (b) Bonds that are not outstanding under the Security Documents. If the amount payable under this Policy is also payable under another BAM issued policy insuring the Bonds, payment first shall be made under this Policy to the extent of the amount available under this Policy up to the Policy Limit. In no event shall BAM incur duplicate liability for the same amounts owing with respect to the Bonds that are covered under this Policy and any other BAM issued insurance policy.

Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. “Business Day” means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer’s Fiscal Agent (as hereinafter defined) are authorized or required by law or executive order to remain closed. [“Debt Service Reserve Agreement” means the Debt Service Reserve Agreement, if any, dated as of the effective date hereof, in respect of this Policy, as the same may be amended or supplemented from time to time.] “Due for Payment” means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless BAM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration) and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. “Nonpayment” means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. “Nonpayment” shall also include, in respect of a Bond, any payment made to an Owner by or on behalf of the Issuer of principal or interest that is Due for Payment, which payment has been recovered from such Owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction. “Notice” means delivery to BAM of a notice of claim and certificate, by certified mail, email or telecopy as set forth on the attached Schedule or other acceptable electronic delivery, in a form satisfactory to BAM, from and signed by the Trustee or the Paying Agent, which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount, (d) payment instructions and (e) the date such claimed amount becomes or became Due for Payment. “Owner” means, in respect of a Bond, the person or entity who, at the time of

Nonpayment, is entitled under the terms of such Bond to payment thereof, except that “Owner” shall not include the Issuer, the Member or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. “Policy Limit” means the dollar amount of the debt service reserve fund required to be maintained for the Bonds by the Security Documents from time to time (the “Reserve Account Requirement”), or the portion of the Reserve Account Requirement for the Bonds provided by this Policy as specified in the Security Documents or Debt Service Reserve Agreement, if any, but in no event shall the Policy Limit exceed the Maximum Policy Limit set forth above. The Policy Limit shall automatically and irrevocably be reduced from time to time by the amount of or, if this Policy is only providing a portion of the Reserve Account Requirement, in the same proportion as, each reduction in the Reserve Account Requirement, as provided in the Security Documents or Debt Service Reserve Agreement. “Security Documents” means any resolution, ordinance, trust agreement, trust indenture, loan agreement and/or lease agreement and any additional or supplemental document executed in connection with the Bonds. “Term” means the period from and including the Effective Date until the earlier of (i) the maturity date for the Bonds and (ii) the date on which the Bonds are no longer outstanding under the Security Documents.

BAM may appoint a fiscal agent (the “Insurer’s Fiscal Agent”) for purposes of this Policy by giving written notice to the Trustee and the Paying Agent specifying the name and notice address of the Insurer’s Fiscal Agent. From and after the date of receipt of such notice by the Trustee and the Paying Agent, (a) copies of all notices required to be delivered to BAM pursuant to this Policy shall be simultaneously delivered to the Insurer’s Fiscal Agent and to BAM and shall not be deemed received until received by both and (b) all payments required to be made by BAM under this Policy may be made directly by BAM or by the Insurer’s Fiscal Agent on behalf of BAM. The Insurer’s Fiscal Agent is the agent of BAM only, and the Insurer’s Fiscal Agent shall in no event be liable to the Trustee, Paying Agent or any Owner for any act of the Insurer’s Fiscal Agent or any failure of BAM to deposit or cause to be deposited sufficient funds to make payments due under this Policy.

To the fullest extent permitted by applicable law, BAM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to BAM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy may not be canceled or revoked.

This Policy is being issued under and pursuant to and shall be construed under and governed by the laws of the State of New York, without regard to conflict of law provisions.

This Policy sets forth in full the undertaking of BAM and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. THIS POLICY IS ISSUED WITHOUT CONTINGENT MUTUAL LIABILITY FOR ASSESSMENT.

In witness whereof, BUILD AMERICA MUTUAL ASSURANCE COMPANY has caused this Policy to be executed on its behalf by its Authorized Officer.

BUILD AMERICA MUTUAL ASSURANCE COMPANY

By: ______________________________________ Authorized Officer

Schedule Notices (Unless Otherwise Specified by BAM) Email: [email protected] Address: 200 Liberty Street, 27th floor New York, New York 10281 Telecopy: 212-962-1524 (attention: Claims)

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!!!!! CALIFORNIA ENDORSEMENT TO MUNICIPAL BOND DEBT

SERVICE RESERVE INSURANCE POLICY

NO.

This Policy is not covered by the California Insurance Guaranty Association established pursuant to Article 15.2 of Chapter 1 of Part 2 of Division 1 of the California Law.

Nothing herein shall be construed to waive, alter, reduce or amend coverage in any other section of the Policy. If found contrary to the Policy language, the terms of this Endorsement supersede the Policy language

IN WITNESS WHEREOF, BUILDAMERICA MUTUAL ASSURANCE COMPANY has caused this policy to be executed on its behalf by its Authorized Officer. BUILD AMERICA MUTUAL ASSURANCE COMPANY By _______________________________________________ Authorized Officer !

EXHIBIT A

NOTICE OF REINSTATEMENT

[DATE]

[TRUSTEE][PAYING AGENT] [INSERT ADDRESS]

Reference is made to the Municipal Bond Debt Service Reserve Insurance Policy, Policy No. ________ (the “Policy”), issued by Build America Mutual Assurance Company (“BAM”). The terms which are capitalized herein and not otherwise defined shall have the meanings specified in the Policy.

BAM hereby delivers notice that it is in receipt of payment from the [Issuer], or on its behalf, pursuant to the Security Documents or Debt Service Reserve Agreement, if any, and, as of the date hereof, the Policy Limit is $_________, subject to reduction as the Reserve Account Requirement for the Bonds is reduced in accordance with the terms set forth in the Security Documents.

BUILD AMERICA MUTUAL ASSURANCE COMPANY

By: ______________________________________ Name: Title:
