Population: California State Department of Finance. Unemployment Data: California Employment Development Department 2000-2009 Income, Age, and Education Data: ESRI - Demographic Estimates are based on the last available Census. Projections are developed by incorporating all of the prior census data released to date. Demographic Data is totaled from Census Block Groups that overlap the City's boundaries 201- and later - Income, Age and education Data - US Census Bureau, most recent American Community Survey **Reported Public School Enrollment reflects the total number of students in the Fremont Union High School District and Cupertino Union School District.
Previously published reports included Fremont Union High School District only.
City of Cupertino
Demographic and Economic Statistics
Last Ten Fiscal Years
110.
CITY OF CUPERTINO
2019 Employer Ranking
(Unaudited)
Employer Ranking Employer_________________ Ranking Apple 1 Insight Solutions Inc 11
De Anza College 2 Intero Real Estate Scv Inv 12
Seagate Technology Inc 3 Keller Williams Realty 13
Health Care Center at the Forum 4 Sugar CRM Inc 14
Magnet Systems Inc 5 Sunny View Retirement Community 15 All Fab Precision Sheet 6 Target 16
BJ's Restaurant & Brewhouse 7 Whole Foods Market 17
Coldwell Banker Residential 8 99 Ranch Market 18
Cupertino Healthcare-Wellness 9 Argonaut Window & Door 19 Forum at Rancho San Antonio 10 Astra Real Estate 20
Source: InfoUSA
111.
Function/Program 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Council and Commissions 1.47 1.46 1.47 1.52 1.57 1.55 1.60 1.55 2.35 2.35 Administration 4.90 4.85 5.05 5.05 10.75 10.75 10.85 10.57 14.12 15.47 Public & Environmental Affairs 6.95 6.95 6.95 6.90 11.00 10.25 11.40 13.95 14.55 15.05 Administrative Services 22.33 22.34 22.48 22.26 11.00 12.00 12.30 12.30 12.00 14.00 Recreation & Community Services 30.78 30.78 29.78 29.53 29.48 31.28 32.18 33.08 35.13 34.80 Community Development 23.73 23.78 23.43 23.90 24.83 24.80 27.30 28.18 28.08 28.13 Public Works 72.59 72.59 73.59 73.59 74.12 77.12 82.12 84.12 84.52 84.95 Law Enforcement 0.00 0.00 0.00 0.00 2.00 2.00 2.00 2.00 2.00 2.00 Total 162.75 162.75 162.75 162.75 164.75 169.75 179.75 185.75 192.75 196.75 Source: City of Cupertino Budget
CITY OF CUPERTINO
Full-Time Equivalent City Employees by Function/Program Last Ten Fiscal Years
(Unaudited)
0 50
100
150
200
250
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Public Works
Community
Development
Recreation &
Community
Services
Administrative
Services
Public &
Environmental
Affairs
Administration
Council and
Commissions
112.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Law Enforcement Sheriff Response
Priority One-Respond within 5 minutes 3.95 Min. 4.49 Min. 4.84 Min. 3.76 Min. 4.30 Min. 4.90 Min. 4.90 Min. 5.07 Min 4.23 Min. 3.95 Min.
Priority Two-Respond within 9 minutes 5.90 Min. 5.76 Min. 6.44 Min. 5.98 Min. 6.39 Min. 6.56 Min. 6.56 Min. 8.00 Min. 7.49 Min. 6.33 Min.
Priority Three-Respond within 20 minutes 9.77 Min. 9.79 Min. 10.62 Min. 10.29 Min. 10.76 Min. 10.52 Min. 10.52 Min. 15.79 Min 14.79 Min. 13.23 Min.
Public Works
Street Sweeping 696 Curb Miles 696 Curb Miles 575 Curb Miles 575 Curb Miles 575 Curb Miles 575 Curb Miles 575 Curb Miles 534 Curb Miles 534 Curb Miles 534 Curb Miles Street Maintenance 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call 24 Hrs of Call Recreation and Community Services
Teen Center Memberships 447 492 576 564 684 424 491 388 57* 78* Sports Center Memberships 1,385 1,598 1,776 1,852 1,950 2,000 1,989 2,015 1,850 1,952 Senior Center Memberships 2,287 2,387 2,470 2,456 2,623 2,549 2,493 2,094 2,260 2,171 Local Resident Rentals at Blackberry Farm 91 120 135 141 148 120 107 Quinlan Community Center Rental Revenue $71,000 $91,000 $133,000 $120,000 $109,342 $110,033 $104,150 $128,778 $72,948 $139,590 Community Development
Approved Building Plan Sets 96% Within 5 Days 97% Within 5 Days 93% Within 5 Days 92% Within 5 Days 95% Within 7 Work Days 95% Within 7 Work Days 95% Within 7 Work Days 95% Within 7 Work Days 95% Within 7 Work Days 95% Within 7 Work Days Discretionary Land Use Applications 100% Within 21 Days 100% Within 21 Days 99% Within 21 Days 99% Within 21 Days 99% Within 21 Work Days 99% Within 21 Work Days 99% Within 21 Work Days 99% Within 21 Work Days 99% Within 21 Work Days 99% Within 21 Work Days Public Notice of Upcoming Projects 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days 100% Within 10 Days Administrative Services
Accounts Payable Processing 5 Days 5 Days 7 Days 7 Days 7 Days 7 Days 7 Days 7 Days 7 Days 7 Days Business License Renewal Certificates 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days 3 Days Library
Volumes in Collection - - - - - 361,817 364,557 369,924 367,979 367,101 Annual Gate Count - - - - - 869,762 880,894 835,073 873,862 904,349 Annual Circulation Children's Items - - - - - 1,474,996 1,544,095 1,448,265 1,453,173 1,535,842 Annual Circulation Adult and Teen Items - - - - - 999,766 1,032,326 950,453 980,609 1,049,166 Adult Classes and Events - - - - - 209 215 242 206 207 Adult Classes and Events Attendence - - - - - 11,860 8,855 9,242 7,622 8,304 Teen Classes and Events - - - - - 52 78 66 79 52
Teen Classes and Events Attendence - - - - - 3,393 3,135 2,571 2,495 1,283 Children's Classes and Events - - - - - 458 493 440 426 424 Children's Classes and Events Attendence - - - - - 25,529 28,532 25,857 24,675 22,851 Volunteer Hours - - - - - 11,786 10,000 9,645 10,302 10,191
* Recreation and Community Services is currently rebuilding the membership base through a new registration application. The current year figure does not include non-resident teens.
Sources: City of Cupertino and Santa Clara County Library District Function/Program
CITY OF CUPERTINO
Operating Indicators by Function/Program
Last Ten Fiscal Years
(Unaudited)
113.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Public Works
Centerlane Miles of Streets 142 142 142 142 142 142 142 142 142 142 Streetlights 2,950 2,950 2,950 2,950 2,950 2,950 2,950 2,950 2,950 2,950 Traffic Signals 39 39 39 48 48 48 48 48 52 52 Culture & Recreation
Parks and Open Spaces 18 19 19 19 21 21 21 21 21 21
Park and Landscape Acreage 169 169 169 169 169 169 169 169 169 169 City Trails 1 1 1 1 3 3 3 3 3 3
Golf Courses 1 1 1 1 1 1 1 1 1 1
Community Center 1 1 1 1 1 1 1 1 1 1
Community Hall 1 1 1 1 1 1 1 1 1 1
Senior Center 1 1 1 1 1 1 1 1 1 1
Sports Center 1 1 1 1 1 1 1 1 1 1
Swimming Pools 1 1 1 1 1 1 1 1 1 1
Tennis Courts 17 17 17 17 17 28 28 28 28 28
Sports Fields 41 41 41 41 41 41 41 41 41 41
City Library 1 1 1 1 1 1 1 1 1 1
Source: City of Cupertino
Function/Program
CITY OF CUPERTINO
Capital Assets Statistics by Function/Program
Last Ten Fiscal Years
(Unaudited)
114.
History
“This place of San Joseph Cupertino has good water and much firewood, but nothing suitable for a settlement because it is among the hills very near to the range of cedars which I mentioned yesterday, and lacks level lands.”
When Spanish explorer San Juan Bautista De Anza traveled through California in 1776, he and his party documented these words about the land surrounding Stevens Creek, named back then as Arroyo San Joseph Cupertino. However, first impressions can often be misleading. Underneath the spiny, overgrown bush was a completely different land waiting to be uncovered. During this time, the area was populated by Native Americans who hunted and gathered, prospering from the abundant resources the land had to offer.
It wasn’t until 1848 when the first American settler, Elijah Stephens, a blacksmith from South Carolina, moved to the area—at this time, named simply ‘West Side’ and primarily owned by the government. After crossing over the Sierra Nevada in wagons, he discovered the true value of the land underneath the bush, and proceeded to purchase over 300 acres of farmland to grow grapes and blackberries. Stephens pioneered the way for farmers, which established West Side as an agricultural hot spot. The land Stephens owned eventually became Blackberry Farm, and the road, creek, and reservoir were all named after him, although misspelled.
In early West Side, many of the newest advances in agriculture were being developed. Settlers were drawn to the land because of its rich earth, where they were able to grow products that competed on the world market. Once the bush had been cleared, they grew grapes, which covered the West Valley area with vineyards by the late 1800s. By the 1900s, a plant louse called Phylloxera spread throughout the vineyards, attacking the roots of the grape vines, killing the grapes and putting a halt to wine production. As a solution, nearly everything was replanted with fruit orchards. When the fruit trees blossomed, visitors would come to the orchards for “The Valley of Heart’s Delight” festivals, which celebrated the prosperous agriculture of the West Valley area.
Apart from the farmland, West Side was primarily known as a crossroads, an intersection between Saratoga-Sunnyvale Road and Stevens Creek. This served as a way station for travelers to pass through while going from town to town. As more people came to West Side to take advantage of the rich farm land, more family holdings gathered around the cross-roads. Starting off as just a post office and home union store, West Side’s humble cross-roads brought many diverse communities, all attracted by the preferable climate and profitable market for crops.
As more people were drawn to the area around the cross-roads, the orchards were gradually replaced with modern houses for workers. The population steadily grew, and the face of West Side changed, progressing to a more modern town. The community wanted to rename the city, as to not confuse it with other cities, as well as establish a unique identity. John T. Doyle, a lawyer from San Francisco, and writer of historical anthologies on the area, chose the name “Cupertino” after the original name of the creek.
After the post-World War II population boom, the growing community petitioned for Cupertino to become an incorporated town. Members of the community were worried that the alternative to incorporation was to have parts of Cupertino annexed by surrounding cities, splitting up the community and erasing the local culture. To preserve the rural atmosphere, lower taxes for farmers, start a local government, and prepare for growth, Cupertino voted for incorporation. In 1955, Cupertino officially became the 13th city in Santa Clara County.
By the 1970s, Cupertino once again began to undergo dramatic changes. The growing community attracted several large technology corporations. Lockheed Martin, HP, Intel, and many other big names established themselves in the Silicon Valley. Apple Inc. was founded in Cupertino in 1976 and quickly grew into the tech giant it’s known for today.
In the late 20th century, Cupertino and the surrounding areas experienced another surge in population growth, this time due to the immigration of people from Asian countries. Immigration laws at the time were in the favor of families looking to move to the Silicon Valley. People immigrated here for a variety of reasons—whether they were aspiring for career prospects with major tech companies, or striving for a quality education for their children, everyone who immigrated here had a common goal: to find opportunities to work hard for a better life for themselves and their families.
2019 Community Economic Profile
Cupertino, with a population of 64,344 and City limits stretching across 13 square miles, is considered one of the most prestigious cities to live and work in the Bay Area.
Economic health is an essential component to maintaining a balanced city, which provides high- level opportunities and services that create and help sustain a sense of community and quality of life. Public and private interests must be mutual so that success as a partnership is a direct reflection of success as a community. The cornerstone of this partnership is a cooperative and responsive government that fosters residential and business prosperity and strengthens working relationships among all sectors of the community.
Because Cupertino is a mature, 93% built-out city, the City of Cupertino focuses on business retention and revitalization. Cupertino is world renowned as the home of high-tech giants, such as Apple, Inc. and Seagate Technologies, and as a community with stellar public schools. De Anza College, one of the largest single-campus community colleges in the country, is another major employer and a magnet for attracting local and international students. The City’s proactive economic development efforts have resulted in an innovative environment for start-ups and growing companies to thrive. The City strives to retain and attract local companies through active outreach and a responsive and customer-oriented entitlement process.
Cupertino is excited to have a number of new mixed-use development projects offering more retail and dining options, as well as provide additional housing opportunities to meet the needs of the growing community.
The Main Street and Nineteen800 mixed-use developments have created a vibrant downtown area for Cupertino, offering a large selection of restaurants and retailers, including Alexander’s Steakhouse, Eureka!, Rootstock Wine Bar, Oren’s Hummus, Lazy Dog, Chef Hung, HaiDiLao Hot Pot Restaurant, Pressed Juicery, Orangetheory, 85 Degree Bakery, Target Express, Steins Beer Garden, Kura Sushi, Vitality Bowls, Doppio Zero, Koja Kitchen, Bishops Cuts & Colors, Capezio, Howard’s Shoes, and Meet Fresh. Housing, office, and a new Residence Inn by Marriott are available to support the thriving area. Benihana, Bowlmore, and Ice Center Cupertino also serve as anchors.
The construction of new retail and commercial development strengthens existing popular venues in Cupertino, including The Marketplace. The Marketplace has a variety of stores and restaurants popular with students, families, and working professionals. They include Daiso, Marukai Groceries, Super Cue, La Patisserie Bakery, Beard Papa’s, Legend’s Pizza, Aloha Fresh, Merlion Restaurant, Icicles, Kumino, Garlic Mediterranean Grill, Rori Rice, and Erik’s DeliCafé.
Cupertino Village is undergoing renovations to upgrade existing buildings, construct new buildings, parking, and open-courtyard space. The shopping center is home to 99 Ranch Market, Starbucks, Gogigo Korean BBQ, Creamistry, MOD Pizza, Ten Ren Tea, Fantasia Coffee & Tea, Happy Lemon, Joy Luck Palace, Kee Wah Bakery, and many other Asian restaurants, bakeries, and shops.
Cupertino features many other retail opportunities, including TJ Maxx and Home Goods, Whole Foods, Target, and over 180 restaurants to serve residents and the local workforce. There are now seven hotels providing over 1,000 rooms, to serve the area: The Aloft Cupertino, Cupertino Hotel, Hilton Garden Inn, Juniper Hotel operated by Curio, Marriott Courtyard, the Residence Inn by Marriott, and the newest addition is the Hyatt House.
The redevelopment of the Homestead Square Shopping Center, located at Homestead Road and De Anza Boulevard, includes a 24-hour Safeway, Ulta Beauty, Ross Stores, Stein Mart, Pet Club, Michael’s, Rite Aid, FedEx Kinko’s and numerous restaurants, such as Fish’s Wild, 1000 Degrees Neapolitan Pizzeria, Yayoi Teishoku Japanese Restaurant, Starbucks, and Chipotle.
Apple completed construction of its new corporate campus, Apple Park, which includes approximately 2.8 million square feet of office and R&D space north of Highway 280 between Wolfe Road and Tantau Avenue. A state of the art Visitors Center, Observation Deck, flagship retail store and café are open to the public seven days a week.
2019 City Profile
The City of Cupertino operates as a general law city with a City Council-City Manager form of government. Five council members serve four year, overlapping terms, with elections held every two years. The Council meets twice a month on the first and third Tuesday at 6:45 p.m. in Cupertino Community Hall. The meetings can be viewed on the City website.
The City has 201.25 authorized full-time benefited employee positions. City departments include Administration (City Council, Commissions, City Manager, City Attorney, City Clerk, Economic Development, Sustainability, Public Affairs); Administrative Services (Finance, Human Resources); Community Development (Planning, Building, Housing Services, Code Enforcement); Parks and Recreation; Public Works (Engineering, Maintenance, Transportation, Solid Waste, Environmental Programs, Storm Drain Management); and Innovation & Technology (IT, GIS, Website and Applications, Video). Public safety services are provided by the Santa Clara County Sheriff’s Department and the Santa Clara County Fire District.
Assisting the City Council are several citizen advisory commissions/committee including:
Audit Committee
Fine Arts Commission
Housing Commission
Library Commission
Parks and Recreation Commission
Planning Commission
Public Safety Commission
Sustainability Commission
Teen Commission
Technology, Information and
Communication Commission
Members of the volunteer commissions are appointed by the City Council and vacancies are announced so that interested residents can apply for the positions. For more information, visit cupertino.org/commissions.
Housing
The median sales price for an existing single-family home was $2,130,000 in January 2019. For housing programs in Cupertino, please see “Programs & Applications.”
Community Health Care Facilities
Cupertino is served by the Cupertino Medical Clinic, NovaCare Occupational Health Services.
Nearby hospitals include Kaiser Permanente Medical Center in Santa Clara, El Camino Hospital in Mountain View, O’Connor Hospital in San Jose, Community Hospital of Los Gatos, Stanford Hospital in Palo Alto, and the Saratoga Walk-in Clinic in Saratoga.
Utilities
Gas & Electric Pacific Gas and Electric, 800-743-5000 Phone AT&T residential service, 800-894-2355 AT&T business service, 800-750-2355
Cable Comcast, 800- 945-2288
Solid Waste & Recycling Recology, 408-588-7200
Water San Jose Water Company, 408-279-7900 California Water Service, 650-917-0152
Sewer Service Cupertino Sanitary District, 408-253-7071
Tax Rates and Government Services
Residential, commercial, and industrial property is appraised at full market value as it existed on March 1, 1975, with increases limited to a maximum of 2% annually. Property created or sold since March 1, 1975 bears full cash value as of the time created or sold, plus the 2% annual increase. The basic tax rate is $1.00 per $100 (full cash value) plus any tax levied to cover bonded indebtedness for county, city, school, and other taxing agencies. Assessed valuations and tax rates are published annually after July 1.
Assessed Valuation (Secured and Unsecured)
Cupertino: $22,531,311,774 (7/18)
County: $483,246,439,238 (7/18)
Retail Sales Tax
Grand Total = 9.00%.
Breakdown = Cupertino 1.00%, State 6%, County Transportation 0.25%, County General .125%, Local District (Valley Transportation Authority) 1.625%.
Transportation
Rail: The CalTrain station is four miles north of city. The Amtrak station is 10 miles south.
Air: The San Francisco International Airport is located roughly 30 miles north, and the Mineta San Jose International Airport is located approximately 11 miles south.
Bus: Cupertino is served by the Santa Clara Valley Transportation Authority. The routes listed below pass through the City. For Cupertino-specific schedules and maps visit their online website:
Route 23 San Jose – Mountain View/Palo Alto
Route 25 San Jose – De Anza College
Route 26 Eastridge – Lockheed
Route 36 East San Jose – Vallco
Route 51 Vallco – Moffett/Ames
Route 53 Westgate – Sunnyvale
Route 55 De Anza – Great America
Route 81 East San Jose – Vallco
Express 101 Camden/Branham – Palo Alto
Express 501 Palo Alto – I.B.M Bailey
Car: The City of Cupertino is in the heart of the world-renowned Silicon Valley. The major highway transportation facilities are Interstate Route 280 and State Route 85 freeways. The City is linked internally by several principal arterials and Santa Clara County expressways. Principal arterials are De Anza Boulevard, Stevens Creek Boulevard, and Wolfe Road. Nearby expressways are Lawrence Expressway and Foothill Expressway.
Sister Cities
City of Cupertino recognizes the value of developing people-to-people contacts by strengthening the partnerships between the city and its four sister cities of Copertino, Italy; Hsinchu, Taiwan; Toyokawa, Japan, and Bhubaneswar, India. Cupertino’s Sister City partnerships have proven successful in fostering educational, technical, economic, and cultural exchanges. Over the years, there have been many delegations visiting both the cities as well as many local students participating in annual student exchange programs.
Education
________________________________________________________________________________________________________________ Winners of numerous state and national awards for excellence, Cupertino’s schools are widely acknowledged as models of quality instruction.
Cupertino Union School District serves over 18,000 students in a 26 square mile area that includes Cupertino and portions of five other cities. The district has 20 elementary schools and five middle schools, including several choice programs. Eighteen schools have received state and/or national awards for educational excellence.
Student achievement is exceptionally high. Historically, district test scores place Cupertino among the premier public school districts in California. The district is a leader in the development of standards-based system of education and is nationally recognized for leadership in the use of technology as an effective tool for learning. Quality teaching and parent involvement are the keys to the district’s success.
The Fremont Union High School District serves 10,000 students in a 42 square mile area covering all of Cupertino, most of Sunnyvale, and portions of San Jose, Los Altos, Saratoga, and Santa Clara. The five high schools of the district have garnered many awards and recognition based on both the achievement of students and the programs designed to support student achievements.
Many high schools in the district exceed their established achievement targets for the State Academic Performance Index. District students are encouraged to volunteer and provide service
to organizations within the community. During their senior year, if students complete 80 hours of service to a non-profit community organization, they are recognized with a “Community Service Award” medal that may be worn at their graduation ceremonies.
Building on its tradition of excellence and innovation, De Anza College challenges students of every background to develop their intellect, character, and abilities; to achieve their educational goals; and to serve their community in a diverse and changing world.
De Anza College offers a wide range of quality programs and services to meet the work force development needs of our region. The college prepares current and future employees of Silicon Valley in traditional classroom settings and customized training arranged by employers.
Several De Anza programs encourage economic development through college credit courses, short-term programs, services for manufacturers, technical assistance, and/or recruitment and retention services.
Programs & Applications
Community Outreach Programs
Leadership 95014
Leadership 95014 is a program designed by the City of Cupertino, Wilfred Jarvis Institute, and other local sponsors to offer an exciting adult program that is guaranteed to enhance the participants’ leadership skills. The ten full-day sessions feature inside looks at local governments, the social sector, local non-profit organizations, and educational institutions. This 9-month program is offered annually, September to May, and applications can be found online.
Neighborhood Block Leader Program
Good neighborhoods are those where neighbors work together on common issues and look out for each other. Block leaders take extra steps to connect neighbors and build community, making our neighborhoods safer and more harmonious. The Block Leader Program teaches residents how to get to know their neighbors and how to organize activities so neighbors can more easily communicate with each other. Block leaders are vital links between City Hall and the neighborhoods, and leaders gain the inside track on neighborhood development activities.
Neighborhood Watch
Neighborhood Watch is a crime prevention program that enlists the active participation of citizens in cooperation with law enforcement to reduce crime in our communities. It involves:
neighbors getting to know each other and working together in a program of mutual assistance; citizens being trained to recognize and report suspicious activities in their neighborhoods; and implementation of crime prevention techniques such as home security and operation
identification. To organize a Neighborhood Watch program in your neighborhood, please contact the Neighborhood Watch Coordinator at 408.777.3177.
eCAP
Email Community Alert Program (eCAP) was created by the Santa Clara County Sheriff’s Office to prevent and reduce crime by raising community awareness, minimizing opportunities for crime, and increasing the possibility of solving crimes with the public’s help. Cupertino residents may voluntarily register their email addresses with the Sheriff’s Office for community alert messages. Citizens can sign-up at a Neighborhood Watch meeting or log-on to the City of Cupertino’s eCAP online registration.
Affordable Housing: BMR (Below Market Rate) Program
The City of Cupertino requires 15% of all new construction be affordable to households below 120% of the County median income. Rental units are affordable to very low and low-income households while ownership units are affordable to median and moderate-income households.
The City of Cupertino contracts with West Valley Community Services (WVCS) to screen and place qualified households in most of the city’s BMR units. WVCS maintains a waiting list of interested persons for these BMR units. If interested, please call 408.255.8033. More information can be found online.
Smart Phone Applications
Mobile 95014
City of Cupertino’s Mobile 95014 app offers latest listing of Cupertino news and events as well as local parks, schools, and recreation offerings in the city. This app showcases environmental services and community services such as Block Leaders and Neighborhood Watch programs. Users can learn about public safety and contact City Council members and City officials. The app also offers links to Cupertino’s social media sites.
Trees 95014
Trees 95014 is an iPhone/iPad and Android app which provides details about the city-planted trees in Cupertino. Users can search for trees by street name or by current location. The search results show the picture of the tree and details such as location, height, diameter, and species.
Cupertino residents can also sign up their tree, name their tree, and request tree service through this app.
Eats 95014
Eats 95014 is the local restaurant app that showcases Cupertino’s dining options such as restaurants, grocery stores, farmers’ markets, and vineyards. The app provides information on the services offered at such eating places including store hours, parking information, noise level, directions, and website link.
Ready 95014
Ready 95014 is an app that puts safety information into the hands of Cupertino residents.
Steps to prepare and respond to emergencies including earthquakes, floods, fires, and pandemics are outlined in an easy-to-understand format. The app also streams Cupertino’s own AM radio station (1670 AM) and has a map of the City’s Area Resource Centers, satellite locations opened after disasters to provide public assistance.
Website Applications
Cupertino.org/ShopAndDine
This interactive website app offers users mapping features of current Cupertino businesses and restaurants.
Community Statistics
Facts and Figures1
1 Claritas 2019 Estimates and California Statewide Direct Primary Election June 5, 2018 Population in City Limits 64,344
Average Household Income $228,515
Average Age 40
Registered Voters 28539
Democrats 11,113
Republicans 4648
American Independent 402
Other 218
No Political Party Designated 12,158
Top 40 Sales Tax Producers
Third Quarter 2018, in Alphabetical Order
Apple Cloud Trekkers
Technologies
Lazy Dog Cafe Shane Company
7 Eleven Dental Arts of
California
Marina Food Shell Station
76 Station Dynasty Seafood
Restaurant
Marukai
Supermarket
Sherry Precision
Dental Art
99 Ranch Market Estel Group Mirapath Target
Alexander's Steak
House
Galpao Gaucho Pro Installations TJ Maxx
Alliance Haidilao Hot Pot Ross Ulta Beauty
Aqui Cal Mex Huawei
Technologies
Rotten Robbie Valero
Argonaut Window &
Door
Insight Direct Safeway Vardys Jewelers
Benihana Insight Public Sector Scandinavian
Designs
Vikhar Inc.
BJs Restaurant &
Brewhouse
Kura Revolving
Sushi Bar
Seagate Technology Whole Foods Market
Community and Recreation Services
Blackberry Farm
Blackberry Farm has been upgraded and restored to improve the natural habitat for native trees, animals, and fish. Improvements to the park include construction of a new ticket kiosk, re- plastered pools, a new water slide, bocce ball, horseshoe courts, and numerous upgrades to the west bank picnic area. The park is located at 21979 San Fernando Avenue. Telephone: 408-777- 3140.
The Blackberry Farm Golf Course is located at 22100 Stevens Creek Boulevard. Telephone: 408- 253-9200.
The Quinlan Community Center
The City of Cupertino’s Quinlan Community Center is a 27,000 square foot facility that provides a variety of recreational opportunities.
Most prominent is the Cupertino Room - a multi-purpose room that can accommodate 300 people in a banquet format.
Telephone: 408-777-3120.
Cupertino Sports Center
The Sports Center is a great place to meet friends. The facility features 17 tennis courts, complete locker room facilities, and a fully-equipped fitness center featuring free weights, Cybex, and cardio equipment. A teen center and a child-watch center are also included. The center is located at the corner of Stevens Creek Boulevard and Stelling Road. Telephone: 408-777-3160.
Cupertino Senior Center
The Senior Center provides a welcome and friendly environment for adults over age 50. There is a full calendar of opportunities for learning, volunteering, and enjoying life. There are exercise classes, computer lab classes, and English as a second language classes, and cultural and special interest classes. The center also coordinates trips and socials.
The Senior Center is located at 21251 Stevens Creek Boulevard and is open Monday through Friday, 8 a.m. to 5 p.m. Telephone: 408-777-3150.
Civic Center and Library
The complex has a 6,000 square foot Community Hall, plaza with fountain, trees, and seating areas. City Council meetings, Planning Commission sessions, and Parks and Recreation Commission sessions are held in the Community Hall.
The 54,000 square foot library continues to be one of the busiest libraries in the Santa Clara County Library system. For more information, call 408-446-1677.
McClellan Ranch Park
A horse ranch during the 1930’s and 40’s, this 18-acre park has the appearance of a working ranch.
Preserved on the property are the original ranch house, milk barn, livestock barn, and two historic buildings: Baer’s Blacksmith Shop, originally located at DeAnza and Stevens Creek, and the old water tower from the Parish Ranch, now the site of Memorial Park. Rolling Hills 4-H Club members raise rabbits, chickens, sheep, swine, and cattle. The Junior Nature Museum, which features small live animal exhibits and dispenses information about bird, animal, and plant species of the area, is also located at the ranch. The newly opened Environmental Education Center has Open House hours on Friday, Saturday, and Sunday. McClellan Ranch is located at 22221 McClellan Road. Telephone: 408-777-3120.
Things to Do and See
Euphrat Museum of Art
The highly regarded Euphrat Museum of Art, at its new location next to the new Visual Arts and Performance Center at De Anza College, presents one-of-a-kind exhibitions, publications, and events reflecting the rich diverse heritage of our area. The Museum prides itself on its changing exhibitions of national and international stature emphasizing Bay Area artists. Museum hours are 10 a.m. – 3 p.m. Monday through Thursday. Telephone: 408-864-5464
Fujitsu Planetarium
The Fujitsu Planetarium on the De Anza College campus is a must-visit Cupertino facility for stargazers. It hosts a variety of planetarium shows and events, including educational programs for school groups and family astronomy evenings. For more information, visit the website at http://planetarium.deanza.edu or call 408-864-8814.
Flint Center
The cultural life of the Peninsula and South Bay is enhanced by programs presented at the Flint Center for Performing Arts located at 21250 Stevens Creek Boulevard in the De Anza College campus. The center opened in 1971 and was named in honor of Calvin C. Flint, the first chancellor of the Foothill-De Anza Community College District. The box office is open 10 a.m. – 4 p.m.
Tuesday through Friday and 1.5 hours prior to any performance. Box office: 408-864-8816; administrative office: 408-864-8820.
Cupertino Historical Society
The Cupertino Historical Society was founded in 1966 by a group of 177 longtime residents and is dedicated to the preservation and exhibition of the city’s history. Their museum, located at the Quinlan Community Center, develops and expands the learning opportunities that it offers to the ethnically diverse community of the City of Cupertino. Telephone: 408-973-1495.
Farmers’ Markets
There are two farmers’ markets located in the City of Cupertino. One is held on Fridays from 9:00 a.m. to 1:00 p.m. at Creekside Park, and the other is held every Sunday from 9:00 a.m. to 1:00 p.m. at The Oaks Shopping Center, 21275 Stevens Creek Blvd.
California History Center
The California History Center and Foundation is located on the De Anza College campus. The center has published 37 volumes on California history and has a changing exhibit program. The center’s Stocklmeir Library Archives boast a large collection of books, pamphlet files, oral history tapes, videotapes, and a couple thousand student research papers. The library’s collection is for reference only. Heritage events focusing on California’s cultural and/or natural history are offered by the center each quarter. For more information, call 408-864-8987. The center is open September through June, Tuesday through Thursday, from 9:30 a.m. to noon and 1:00 p.m. to 4:00 p.m.
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APPENDIX C
SUMMARY OF PRINCIPAL LEGAL DOCUMENTS
The following is a summary of certain provisions of the Trust Agreement and the Lease 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 AND SUMMARY OF CERTAIN PROVISIONS
OF THE TRUST AGREEMENT
DEFINITIONS
Unless the context otherwise requires, the terms defined below will for all purposes have the meanings defined below, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined below. All capitalized terms used below and not defined below will have the meanings ascribed thereto in the Lease.
“Additional Certificates” means certificates of participation authorized by a Supplemental Agreement that are executed and delivered by the Trustee under and pursuant to the Trust Agreement. “Additional Payments” means all amounts payable by the City as Additional Payments as defined in the Lease.
“Assignment Agreement” means the Assignment Agreement, dated as of the date of the Trust Agreement, by and between the Trustee and the Corporation, and any duly authorized and executed amendments thereto.
“Beneficial Owner” means any person which (a) has the power, directly or in directly, to vote or consent with respect to, or to dispose of ownership of, any Certificates (including persons holding Certificates through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Certificates for federal income tax purposes.
“Business Day” means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the State of New York or the State of Ca lifornia are authorized or re quired by law or executive order to remain closed.
“Certificates” means the $22,040,000 City of Cupert ino 2020A Certificates of Participation to be executed and delivered by the Trustee pursuant to the Trust Agreement. “Certificate Year” means the period extending from J une 2 each year to June 1 of the subsequent calendar year, provided that the firs t Certificate Year will commence on the Delivery Date and end on June 1, 2021.
“City” means the City of Cupertino, a municipal corporation and general law city organized and existing under the laws and Constitution of the State, and its successors and assigns. “City Representative” means the Mayor, the City Manager, the Assistant City Manager, the Administrative Services Director, or any other person au thorized by the City Manager of the City to act on behalf of the City with respect to the Lease or the Trust Agreement.
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“Code” means the Internal Revenue Code of 1986, a nd the regulations issued thereunder, as the same may be amended from time to time, and any successor provisions of law. Reference to a particular section of the Code is deemed to be a reference to any successor to any such section. “Continuing Disclosure Certificate” means that certain Continuing Disclosure Certificate dated as of October 22, 2020, executed by the City and acknowledged by Urban Futures, Inc., as Dissemination Agent, as it may be amended from time to time in accordance with the terms thereof. “Corporation” means the Cupertino Public Facilities Corporation, a nonprofit public benefit corporation organized under the laws of the State, its successors and assigns. “Corporation Representative” means the President, Vice President, S ecretary, and Treasurer of the Corporation, or any other person authorized by the Presid ent or Treasurer to act on behalf of the Corporation under or with respect to the Lease.
“Delivery Costs” means and includes all items of expense directly or indirectly payable by or reimbursable to the City or the Corporation relating to the prepayment of the Refunded Certificates from the proceeds of the Certificates, including but not limited to costs provided in the contract of purchase with the Original Purchaser, filing and recording costs, settlement costs, printi n g c o s t s , w o r d p rocessing costs, reproduction and binding costs, initial fees and charges of the Trustee, including its first annual administration fee and the fees of its counsel, legal fees and charges, financing and other professional consultant fees, fees of auctioning the Certificates, costs of ra ting agencies and costs of providing information to such rating agencies, any computer and other expenses incurred in conne ction with the Certificates, fees for execution, transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing. “Delivery Date” means the date of delivery of the Certificates. “Depository” means the securities depository acting as depository pursuant to the Trust Agreement. “DTC” means The Depository Trust Company, New York, New York, a limited purpose trust company organized under the laws of the State of New York in its capacity as securities depository for the Certificates.
“Event of Default” means an event of default under the Lease, as defined therein. “Fiscal Year” means the fiscal year of the City commencing July 1 and ending June 30 of the next year.
“Government Obligations” means Permitted Investments of the type described in paragraphs (A) or (B) of the definition thereof.
“Independent Counsel” means an attorney duly admitted to the practice of law before the highest court of the state in which such attorney maintains an office and who is not an employee of the Corporation, the Trustee or the City.
“Interest Payment Date” means June 1 and December 1 of each year commencing December 1, 2020. “Lease” means the Lease Agreement related to the Ce rtificates, dated as of the date of the Trust Agreement, by and between the City and the Corporation, and any duly authorized and executed amendments thereto.
“Lease Payment” means any of the Lease Payments required to be paid by the City to the Corporation pursuant to the Lease.
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“Lease Payment Date” means the second Business Day prior to each Interest Payment Date. “Lease Payment Fund” means the fund by that name established and held by the Trustee pursuant to the Trust Agreement.
“Leased Premises” has the meaning set forth in the Lease. “Letter of Representations” means the letter of th e City delivered to and accepted by the Depository on or prior to delivery of the Certificates as book-entry certificates making reference to the DTC Operational Arrangements memorandum, as it may be amended from time to time, setting forth the basis on which the Depository serves as depository for such book-entry certificates, as such lett ers were originally executed or as they may be supplemented or revised or replaced by letters from the City and the Trustee delivered to and accepted by the Depository.
“Moody’s” means Moody’s Investors Service or any successors or assigns thereto. “Net Proceeds” means any proceeds of any insura nce, performance bonds or taking by eminent domain or condemnation paid with respect to the Leased Premises remaining after payment therefrom of any expenses (including attorneys’ fees) incurred in the collection thereof. “Net Proceeds Fund” means the fund by that name established and held by the Trustee pursuant to the Trust Agreement.
“Nominee” means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to the Trust Agreement.
“Original Purchaser” means Stifel, Nicolaus & Comp any, Incorporated, as original purchaser of the Certificates on the Delivery Date.
“Outstanding” when used as of any particular time w ith respect to Certificates, means (subject to the provisions of the Trust Agreement) all Certificates or Additional Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except:
(1) Certificates or Additional Certificates theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation;
(2) Certificates or Additional Certificates for the payment or prepayment of which funds or Government Obligations, together with interest earned thereon, in the necessary amount will have theretofore been deposited with the Trustee (whether upon or prior to the maturity or prepayment date of such Certificates or Additional Certificates), provided that, if such Certificates are to be prepaid prior to maturity, notice of such prepayment will have been given as provided in the Trust Agreement or provision satisfactory to the Trustee will have been made for the giving of such notice; and (3) Certificates or Additional Certificates in lieu of or in exchange for which other Certificates or Additional Certif icates will have been executed and delivered by the Trustee pursuant to the Trust Agreement.
“Owner” or “Certificate Owner” or “Owner of a Cer tificate”, or any similar term, when used with respect to a Certificate means the person in whose name such Certificate is registered on the registration books maintained by the Trustee.
“Participants” means those broker-dealers, banks and other financial institutions from time to time for which the Depository holds book-entry certificates as securities depository.
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“Permitted Investments” means, if and to the extent permitted by law and by any policy guidelines promulgated by the City:
A. Direct 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) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America.
B. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself):
1. Farmers Home Administration (FmHA)
Certificates of beneficial ownership
2. Federal Housing Administration Debentures (FHA)
3. General Services Administration
Participation certificates
4. Government National Mortgage Association (GNMA or “Ginnie Mae”) GNMA-guaranteed mortgage-backed bonds
GNMA-guaranteed pass-through obligations
5. U.S. Maritime Administration
Guaranteed Title XI financing (qualified under the Ship Financing Act of 1972)
6. U.S. Department of Housing and Urban Development (HUD) Project Notes
Local Corporation Bonds
C. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself):
1. Federal Home Loan Bank System
Senior debt obligations
2. Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”) Participation certificates
Senior debt obligations
3. Federal National Mortgage Association (FNMA or “Fannie Mae”) Mortgage-backed securities and senior debt obligations (excluding stripped mortgage securities which are valued greater than par on the portion of unpaid principal)
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4. Student Loan Marketing Association (SLMA or “Sallie Mae”) Senior debt obligations
5. Resolution Funding Corp (REFCORP)
The interest only component of REFCORP strips which have been stripped by request to the Federal Reserve Bank of New York
6. Farm Credit System Corp. - Consolidated system-wide bonds and notes D. Money market funds registered under the Investment Company Act of 1940, whose shares are registered under the Securities Act of 1933, and having a rating by Standard & Poor’s of “AAAm-G,” “AAAm” or “AAm” or by Moody’s of “Aaa,” “Aa1” or “Aa2,” including funds for which the Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Trustee to the fund whether as a custodian, transfer agent, investment advisor or otherwise.
E. Certificates of deposit secured at all times by collateral described in (A) and/or (B) above and having a maturity of one year or less. Such certificates must be issued by commercial banks, savings and loan associations or mutual sa vings banks whose short-term obligations are rated “A-1+” by Standard & Poor’s and “Prime-1” by Moody’s, which may include the Trustee and its affiliates. The collateral must be held by a third party and the Owners must have a perfected first security interest in the collateral.
F. Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC (including those of the Trustee and its affiliates).
G. Commercial paper rated at the time of investment “Prime - 1” by Moody’s and “A-1+” or better by Standard & Poor’s.
H. Investment agreements, in cluding guaranteed investment agreements, acceptable to the Trustee.
I. Bonds or notes issued by any state or municipality which are rated by Moody’s or Standard & Poor’s in one of the two highest rating categories assigned by such agencies.
J. Federal funds, banker deposit product or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured or unguaranteed obligation rating of “Prime - 1” or “A3” or better by Moody’s or “A-1+” or better by Standard & Poor’s, including those of the Trustee and its affiliates.
K. Repurchase agreements rated “AA” or better by Standard and Poor’s and that provide for the transfer of securities from a dealer bank or securities firm (selle r/borrower) to the Trustee (buyer/lender), and the tran sfer of cash from the Trustee to the deal er bank or securities firm with an agreement that the dealer bank or securities firm w ill repay the cash plus a yield to the Trustee, in exchange for the securities at a specified date or dates.
L. Any guaranteed investment contract, including forward delivery agreements (“FDAs”) and forward purchase agreements (“FPAs”), with a financial institution or insurance company which has at the date of execution thereof an outstanding issue of unsecured, uninsured and unguaranteed debt obligations or a claims-paying ability rated within the two highest rating categories of Standard & Poor’s or Moody’s. Only Permitted Investments described in clauses A, B or C above and having maturities equal to or less than 30 years from their date of delivery will be considered eligible for any collateralization/delivery purposes for guaranteed investment contracts, FDAs or FPAs;
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M. Pre-refunded municipal bonds rated “Aaa” by Moody’s and “AAA” by Standard & Poor’s. If, however, the issue is only rated by St andard & Poor’s (i.e., ther e is no Moody’s rating), then the pre-refunded bonds must have been pre-refunded with cash, direct U.S. or U.S. guaranteed obligations, or AAA rated pre-refunded municipals to satisfy this condition.
N. The Local Agency Investment Fund of the State, provided that the Trustee may deposit and withdraw monies in its own name.
O. Any other investment which the City is permitted by law to make (including investment agreements and forward delivery or forward purchase agreements). “Value” of the above investments will be determined by the manner currently employed by the Trustee or any other manner consistent with industry standard. “Prepayment” means any payment made by the City pursuant to the Lease as a prepayment of Lease Payments.
“Prepayment Fund” means the fund by that name established and held by the Trustee pursuant to the Trust Agreement.
“Principal Office or Corporate Trust Office” means the corporate trust office of the Trustee in Los Angeles, California, or such other or additional offices as may be designated by the Trustee; provided, however, that for the purposes of payment, transfer or exchange of Certificates such term means the office or agency of the Trustee at which, at any particular time its corporate trust agency business will be conducted. “Project” means the real property and public capital improvements refinanced with proceeds of the Refunded Certificates and any other project identified in the Lease or any supplement thereto as a Project. “Record Date” means the close of business on the fifteenth (15th) day of the month preceding each Interest Payment Date, whether or not such fifteenth (15th) day is a Business Day. “Refunded Certificates” means the $43,940,000 aggr egate principal amount of the City of Cupertino Certificates of Participation (2012 Refinancing Project). “S&P” or “Standard & Poor’s” means S&P Global Ratings, a Standard & Poor’s Financial Services LLC business, or any successors or assigns thereto.
“Site Lease” means the Site Lease related to the Cert ificates, dated the date of the Trust Agreement, by and between the Corporation and the City, and any duly authorized and executed amendments thereto. “Special Counsel” means Stradling Yocca Carlson & Rauth, a Professional Corporation, or any other attorney or firm of attorneys of nationally recognized standing in matters pertaining to the tax-exempt status of interest on obligations issued by states and their political subdivisions and acceptable to the City. “State” means the State of California.
“Supplemental Agreement” means a supplement to the Trust Agreement providing for the execution and delivery of Additional Certificates pursuant to the Trust Agreement. “Tax Certificate” means the Tax Certificate, date d as of the Delivery Date, concerning matters pertaining to the use and investment of proceeds of the Certificates executed and delivered to the City on the date of execution and delivery of the Certificates, including any and all exhibits attached thereto.
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“Term” means the time during which the Lease is in effect, as provided in the Lease. “Trustee” means The Bank of New York Mellon Trust Company, N.A., a national banking association duly organized and existing under the laws of the United States of America, and any successor trustee. “Trust Agreement” or “Agreement” means the Trust Agreement, together with any amendments thereof or supplements thereto permitted to be made under the Trust Agreement.
THE CERTIFICATES
Equal Security. In consideratio n of the acceptance of the Certificates by the Owners, the Trust Agreement will be deemed to be and will constitute a c ontract between the Trustee and the Owners to secure the full and final payment of the interest, if any, and principal represented by the Certificates which may be executed and delivered thereunder, subject to each of the agreements, conditions, covenants and terms contained in the Trust Agreement; and all agreements, co nditions, covenants and terms contained in the Trust Agreement required to be observed or performed by or on behalf of the Trustee will be for the equal and proportionate benefit, protection and se curity of all Owners without distinct ion, preference or priority as to security or otherwise of any Certificates of a Series ove r any other Certificates of a Series by reason of the number or date thereof or the time of execution or de livery thereof or for any cause whatsoever, except as expressly provided in the Trust Agreement. All of the Ce rtificates of a Series are equally secured, except as may be otherwise expressly provided in the Trust Agreement.
Transfer and Exchange
Transfer of Certificates. Any Certificate may, in accordance with its terms, be transferred upon the books required to be kept pursuant to the provisions of the Trust Agreement by the person in whose name it is registered, in person or by its duly authorized attorney, upon surrender of such Certificate for cancellation at the Principal Office accompanied by delivery of a written instrument of transfer in a form acceptable to the Trustee, duly executed. Whenever any Certificate or Ce rtificates will be surrendered for transfer, the Trustee will execute and deliver a new Certificate or Certificates of the same tenor and maturity, for like aggregate principal amount in authorized denominations. The cost of printing Certificates and any services rendered or expenses incurred by the Trustee in co nnection with any transfer will be paid by the City. The Trustee may require the payment by the Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer, and there will be no other charge to any Owner for any such transfer.
Prior to any transfer of the Certificates outside the bo ok-entry system (including, but not limited to, the initial transfer outside the book-entry system) the transferor will provide or cause to be provided to the Trustee all information necessary to allow the Trustee to comply with any applicable tax reporting obligations, including without limitation any cost basis reporting obligations under Internal Revenue Code Section 6045, as amended.
The Trustee will conclusively rely on the information provided to it and will have no responsibility to verify or ensure the accuracy of such information.
Exchange of Certificates. Certificates may be exchanged at the Principal Office for a like aggregate principal amount of Certificates of other authorized denominations of the same tenor and maturity. The Trustee may require the payment by the Certificate Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. The cost of printing Certificates and any services rendered or expenses incurred by the Trustee in connection with any exchange will be paid by the City. All Certificates surrendered pursuant to the pr ovisions of the Trust Agreement will be cancelled and destroyed by the Trustee and will not be redelivered.
Time for Transfer or Exchange. The Trustee will not be obligated to transfer or exchange any Certificate after a Record Date and before the following Interest Payment Date, or during the period in which it is selecting Certificates for prepayme nt, or after notice of prepayment has been given as provided in the Trust Agreement.
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Certificate Register
The Trustee will keep or cause to be kept at its Principal Office or another office designated by the Trustee sufficient books for the registration and transfer of the Certificates which will, during normal working hours and upon reasonable notice, be open to inspection by the City and the Corporation; and, upon presentation for such purpose, the Trustee will, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on said books, Certificates. The City, the Corporation and the Trustee will be entitled to treat the registered owne r of a Certificate as the absolute owner thereof for all purposes, whether or not a Certificate will be overdue and the City, the Corporation and the Trustee will not be affected by any notice to the contrary.
Additional Certificates
Subsequent to the execution and delivery by the Tr ustee of the Certificates , the Trustee will, upon written request or requests of the City Representative and of the Corporation Representative, execute and deliver from time to time one or more series of Additional Certificates in such aggregate principal amount as may be set forth in such written request or requests, provided that there has been compliance with all of the following conditions, which are conditions precedent to the preparation, execution and delivery of such Additional Certificates:
(a) The parties to the Trust Agreement have executed a Supplemental Agreement which sets forth the terms and provisions of such Additional Certificates, including the establishment of such funds and accounts, which may be separate and apart from the funds and accounts established under the Trust Agreement for the Certificates, as are necessary or appropriate; (b) The scheduled principal and interest payable with respect to such Additional Certificates will be payable only on Interest Payment Dates applicable to the Certificates; (c) The Lease will have been amended, if ne cessary, to (i) increase or adjust the Lease Payments due and payable on each Lease Payment Date to an amount sufficient to pay the principal, premium (if any) and interest payable with respect to all Outstanding Certificates, including all Additional Certificates, as and when the same mature or become due and payable (except to the extent such principal, premium and interest may be payable out of moneys on deposit with the Trustee in accordance with the Trust Agreement), and (ii) ma ke such other revisions to the Lease as are necessitated by the execution and delivery of such Additional Certificates (provided, however, that such other revisions will not prejudice the rights of the Owners of Outstanding Certificates as granted them under the terms of the Trust Agreement);
(d) There has been delivered to the Trustee a counterpart of the amendments required by the Trust Agreement;
(e) The Trustee has received a certificate of the Corporation Representative that there exists on the part of the Corporation no Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default); (f) The Trustee has received a certificate of th e City Representative that (i) there exists on the part of the City no Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default) and ( ii) the Lease Payments as increased or adjusted do not exceed in any year the fair rental value of th e Leased Premises (as such term is defined in the amended Lease);
(g) The Trustee has received an opinion of Special Counsel substantially to the effect that (i) said Supplemental Agreement and said amendments to the Lease comply in all respects with
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the requirements of the Trust Agreement, (ii) said Supplemental Agreement and said amendments to the Lease have been duly authorized, executed and delivered by the City and the Corporation, as applicable (provided that said opinion of Special Counsel, in rendering the opinions set forth in this clause (i), will be entitled to rely upon one or more other opinions of counsel, including counsel to any of the respective parties to said Supplemental Agreement or said amendments to the Lease), (iii) assuming that no Event of Default has occurred and is continuing, the Trust Agreement, as amended by said Supplemental Agreement, and the Lease, as amended by the respective amendments thereto, constitute the legal, valid and binding obligations of the City and the Corporation, as applicable, enforceable against said parties in ac cordance with their respect ive terms (except to the extent that enforcement thereof may be limite d by bankruptcy, insolvency, moratorium, debt adjustment or other laws affecting creditors’ rights generally, and except to the extent that enforcement thereof may be limited by general principles of equity, regardless of whether enforcement is sought in a legal or equitable proceeding), and (iv) the execution of such Supplemental Agreement and said amendments to the Lease, and performance by the parties under the Trust Agreement, will not result in the inclusion of the interest portion of any Lease Payments payable with respect to any Certificates, including Additional Certificates (to the extent such Additional Certificates are executed and delivered as tax-exempt Certificates), theretofor e prepared, executed and delivered, in the gross income of the Owners of the Certificates or the owners of any Additional Certificates (to the extent such Additional Certific ates are executed and delivered as tax-exempt Certificates) for purposes of federal income taxation;
(h) There will have been delivered to the Trustee an endorsement to or reissuance of the title insurance policy delivered under the Lease providing that the insured amount is at least equal to the aggregate principal amount of all of the Certificates and Additional Certificates outstanding upon the execution and delivery of such Additional Certificates; and (i) Such other conditions will have been satisfied, and such other instruments will have been duly executed and delivered to the Trustee, as the City or the Corporation will have reasonably requested.
Upon delivery to the Trustee of the foregoing inst ruments, the Trustee will cause to be executed and delivered Additional Certificates of a Series repres enting the aggregate principal amount specified in such Supplemental Agreement, and such Additional Certificates of like Series will be equally and ratably secured with all Certificates of like Series, including any Add itional Certificates, theretofore prepared, executed and delivered, all without preference, priority or distinction (other than with respect to maturity, payment, prepayment or sinking fund payment (if any)) of any one Certificate of a Series, including Additional Certificates, over any other; provided, however, that no provision of the Trust Agreement will require the City to consent to or otherwise permit the preparation, execution and delivery of Additional Certificates, it being understood and agreed that any such consent or other action of the City to permit the preparation, execution and delivery of Additional Certificates, or lack thereof, will be in the sole discretion of the City.
PREPAYMENT FUND
Establishment of Prepayment Fund.
The Trustee will establish a special fund designated as the “City of Cupertino (2020A Certificates) Prepayment Fund,” referred to in the Trust Agreement as the “Prepayment Fund”; will keep such fund separate and apart from all other funds and moneys held by it; and will administer such fund as provided in the Trust Agreement. Moneys to be used for prepayment of the Certificates will be deposited into the Prepayment Fund and used solely for the purpose of prepaying the Certificates in advance of their maturity on the date designated for prepayment and upon presentation and surrender of such Certificates to the Trustee.
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Surplus
Any funds remaining in the Prepayment Fund afte r prepayment and payment of all Certificates Outstanding, including accrued interest and payment of any applicable fees and expenses to the Trustee pursuant to the Trust Agreement and any other Additi onal Payments payable under the Lease or provision made therefor satisfactory to the Tr ustee, and provision for any amounts required to be transferred to the Rebate Fund pursuant to the Trust Agreement, will be withdrawn by the Trustee and remitted to the City.
LEASE PAYMENTS; LEASE PAYMENT FUND
Assignment of Rights in Lease
The Corporation has, pursuant to the Assignment Agre ement, absolutely assigned and set over to the Trustee certain of its rights in the Lease, including but not limited to all of the Corporation’s rights to receive and collect all of the Lease Payments, the Prepayments and all other amounts required to be deposited in the Lease Payment Fund pursuant to th e Lease or pursuant to the Trust Agreement. All Lease Payments, Prepayments and such other amounts to which the Corporation may at any time be entitled (other than amounts due to the Corporation under the Lease) are to be paid directly to the Tr ustee, and all of the Lease Payments and Prepayments collected or received by the Corporation are to be deemed to be held and to have been collected or received by the Corporation as the agent of the Trustee and if received by the Corporation at any time are to be deposited by the Corporation with the Tr ustee within five (5) Business Days after the receipt thereof, and all such Lease Payments are to be deposi ted by the Trustee upon the receipt thereof in the Lease Payment Fund, all such Prepayments are to be deposited by the Trustee upon the receipt thereof in the Prepayment Fund.
Security Interest in Moneys and Funds
Under the Trust Agreement, the Corporation and the City, as their interests may appear, grant to the Trustee for the benefit of the Owners of the Certificates a lien on and a security interest in all moneys in the following funds or accounts held by the Trustee under the Trust Agreement (excepting only the Rebate Fund and any moneys to be deposited into the Rebate Fund), including, without limitation, the Lease Payment Fund, the Prepayment Fund and the Net Procee ds Fund, and all such moneys are to be held by the Trustee in trust and applied to the purposes specified in the Trust Agreement and in the Lease.
Pledge of Lease Payments and Proceeds
The Lease Payments are by the Trust Agreement i rrevocably pledged to and will be used for the punctual payment of the interest and principal represente d by the Certificates (and Ad ditional Certificates to the extent provided in a Supplemental Agreement). Any proceeds from the re-letting or any other disposition of the Leased Premises pursuant to the Lease (referred to in the Trust Agreement as the “Lease Proceeds”) are by the Trust Agreement irrevocably pledged equally to the Certificates and any Additional Certificates.
Except as permitted under the Trust Agreement with respect to Additional Certificates, the Lease Payments and Lease Proceeds will not be used for any other purpose while any of the Certificates remain Outstanding.
This pledge will constitute a first lien on the Lease Pa yments and Lease Proceeds in accordance with the terms of the Trust Agreement.
Establishment of Lease Payment Fund
The Trustee will establish a special fund designated as the “City of Cupertino (2020A Certificates) Lease Payment Fund,” referred to in the Trust Agreement as the “Lease Payment Fund.” All moneys at any time deposited by the Trustee in the Lease Payment Fund will be held by the Trustee in trust for the benefit of the Owners of the Certificates. So long as any Cer tificates are Outstanding, neither the City nor the Corporation will have any beneficial right or interest in the Lease Payment Fund or the moneys deposited
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therein, except only as provided in the Trust Agreement, and such moneys will be used and applied by the Trustee as set forth in the Trust Agreement.
Deposits
There will be deposited in the Lease Payment Fund all Lease Payments and in the Prepayment Fund all Prepayments received by the Trust ee, including any moneys received by the Trustee for deposit therein pursuant to the Lease, or pursuant to the Trust Agreem ent, which moneys will be applied as a credit towards any Lease Payment then due.
Application of Moneys
Except as provided in the Trust Agreement, all amounts in the Lease Payment Fund will be used and withdrawn by the Trustee solely for the purpose of payi ng the principal and interest with respect to the Certificates as the same will become due and payabl e, in accordance with the provisions of the Trust Agreement.
On or before each Interest Payment Date, the Trustee will set aside an amount sufficient to pay the interest becoming due and payable on such Interest Payment Date on all Outstanding Certificates and Additional Certificates. Moneys so set aside will be used and withdrawn by the Trustee solely for the purpose of paying the interest with respect to the Certificates as it will become due and payable (including, accrued interest with respect to any Certificates prepaid prior to maturity).
On or before each Interest Payment Date on which the principal of the Certificates will be payable, the Trustee will set aside an amount equal to (i) the principal amount of the Certificates and Additional Certificates coming due and payable on such Interest Payment Date pursuant to the Trust Agreement, (ii) the prepayment price of the Certificates and Addi tional Certificates (consisting of th e principal amount thereof and any applicable premiums) required to be prepaid on such Interest Payment Date pursuant to any of the provisions of the Trust Agreement. Moneys so set aside will be used and withdrawn by the Trustee solely for the purpose of (i) paying the principal of the Certificates and Additiona l Certificates at the maturity thereof, or (ii) paying the principal of and premium (if any) on any Certificat es and Additional Certificat es upon the prepayment thereof pursuant to the Trust Agreement.
Surplus
Any funds remaining in the Lease Payment Fund af ter payment of all Certificates Outstanding, including accrued interest and payment of any applicable fees to the Trustee pursuant to the Trust Agreement and any other Additional Payments due under the Lease, or provision made therefor satisfactory to the Trustee, and provision for any amounts required to be transferred to the Rebate Fund pursuant to the Trust Agreement, will be withdrawn by the Trustee and remitted to the City.
NET PROCEEDS FUND
Establishment of Net Proceeds Fund: Deposits
The Trustee will establish when required a special fund designated as the “City of Cupertino (2020A Certificates) Net Proceeds Fund,” referred to in th e Trust Agreement as the “Net Proceeds Fund,” to be maintained and held in trust for the benefit of the Owners, subject to disbursement therefrom as provided in the Trust Agreement. The Trustee will deposit Net Proceeds in the Net Proceeds Fund as provided in the Lease.
Casualty Insurance. The Trustee will disburse Ne t Proceeds for replacement or repair of the Leased Premises as provided in the Lease, or transfer such proceeds to the Prepayment Fu nd upon notification of the City Representative as provided in the Lease. Pending such application, such Net Proceeds may be invested
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by the Trustee as directed by the City Representative in Permitted Investments that mature not later than such times moneys are expected to be needed to pay such costs of repair or replacement. After all of the Certificates have been paid and the entire amount of principal and interest with respect to the Certificates has been paid in full, or provision made for payment satisfactory to the Trustee, including provision for all amounts required to be transferred to the Rebate Fund pursuant to the Trust Agreement, the Trustee will pay any remaining moneys in the Net Proceeds Fund to the City after payment of any amounts due to the Trustee pursuant to the Trust Agreement and any other Additional Payments due under the Lease.
Title Insurance. Proceeds of any policy of title insurance received by the Trustee with respect to the Leased Premises will be applied and disbursed by the Trustee upon the written request of the City as follows:
(a) If the City determines that the title defect giving rise to such proceeds has not substantially interfered with its use and occupancy of the Leased Premises and will not result in an abatement of Lease Payments and Additional Paym ents payable by the City under the Lease (such determination to be certified by the City in writing), such proceeds will be remitted to the City and used for any lawful purpose thereof; or
(b) If the City determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Leased Premises and will result in an abatement of Lease Payments and Additional Paym ents payable by the City under the Lease (such determination to be certified by the City Representa tive in writing); then the Trustee will immediately deposit such proceeds in the Prepayment Fund and such proceeds will be applied to the prepayment of Certificates in the manner provided in the Trust Agreement.
Cooperation. The Corporation and the Trustee will co operate fully with the City at the expense of the City in filing any proof of loss with respect to any insurance policy maintained pursuant to the Lease and in the prosecution or defense of any pros pective or pending condemnation proceeding with respect to the Leased Premises or any item or portion thereof; provided, however, the Trustee will not be obligated to take any action under the Trust Agreement if it is not indemnified to it s satisfaction from and against any liability or expense arising therefrom.
MONEYS IN FUNDS; INVESTMENT
Held in Trust
The moneys and investments held by the Trustee under the Trust Agreement, other than in the Rebate Fund, are irrevocably held in trust for the benefit of the respective Owners and, in the case of the Rebate Fund, for payment as required to the United States Treasury, and for the purposes in the Trust Agreement, and such moneys, and any income or interest earned thereon, will be expended only as provided in the Trust Agreement, and will not be subject to levy or attachment or lien by or for the benefit of any creditor of the Corporation, the Trustee or the City, or any of them.
Investments Authorized
By Trustee. Subject to the further provisions of the Trust Agreement, moneys held by the Trustee under the Trust Agreement will be invested and reinvested on maturity thereof by the Trustee pursuant to the Trust Agreement. The Trustee will report any such investments to the City on a monthly basis in its regular statements.
Upon Direction of the City. The City Representative will direct by electronic mail, to the designated trust officer responsible for the administration of the Trust Agreement, followed by oral notification and distribution by U.S. Mail or overnight courier service of such notice, such investment in specific Permitted Investments not less than two Business Days prior to the date that such Permitted Investment is to take effect.
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Such investments and reinvestments will be made giving full consideration for the time at which funds are required to be available based upon, among other things, scheduled completion of the various components of the Project. In the event that the City Representative does not so direct the Trustee, the Trustee will hold such funds uninvested.
Investments purchased with funds on deposit in the Lease Payment Fund and Prepayment Fund are to mature not later than the Interest Payment Date or prepayment date, as appropriate, immediately succeeding the investment. Investments instructed by the City Representative to be purchased with funds on deposit in the Delivery Cost Fund will mature not later than the dates upon which such funds will be needed to be expended for the payment of Delivery Costs. The Trustee may conclusively rely upon the written instructions of the City Representative as to both the suitability and legality of the directed investments.
Registration. Such investments, if registrable, will be registered in the name of the Trustee for the benefit of the Owners and held by the Trustee or its nominee.
Trustee as Purchaser or Agent. The Trustee may purchas e or sell to itself or any affiliate, as principal or agent, investments authorized by the Trust Agreement. The Trustee may act as purchaser or agent in the making or disposing of any investment. The Trustee or an y of its affiliates may act as a sponsor of, or as an advisor to any provider of, Permitted Investments under the Trust Agreement. The City and the Corporation acknowledge that, to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the City and the Corporation the right to re ceive brokerage confirmations of security transactions as they occur, the City and the Cor poration specifically waive receipt of such confirmations to the extent permitted by law. The Trustee will furnish the City periodic cash transaction statements which include detail for all investment transactions made by the Trustee under the Trust Agreement.
Trustee Standard of Care. Except as otherwise provided in the Trust Agreement, the Trustee will not be responsible or liable for any consequences of any invest ment of funds or sale of such investment made by it in accordance with the Trust Agreement or disposition made by it in accordance with the Trust Agreement.
Crediting of Investments
Except as otherwise provided in the Trust Agreement, any income, profit or loss on the investment of moneys held by the Trustee under the Trust Agreement will be credited to the respective fund for which it is held.
Accounting
The Trustee will furnish to the City, not less than monthly, an accounting (which may be in the form of its regular statements) of all investments made by the Trustee and all funds and amounts held by the Trustee; provided, that the Trustee will not be obligated to deliver an accounting for any fund or account that (i) has a balance of zero and (ii) has not had any activit y since the last reporting date. The Trustee will keep accurate records of all funds administered by it and of all Certificates paid and discharged.
Valuation and Disposition of Investments
Valuation. Subject to the provisions of the Tr ust Agreement, for the purpose of determining the amount in any fund, all Permitted Investments (except i nvestment agreements) credited to such fund will be valued at the lower of the cost or the market price, ex clusive of accrued interest. With respect to all funds and accounts, investments will be valued by the Trustee not le ss often than annually or more often than monthly.
In making any such valuations, the Trustee may utilize, and conclusively rely upon such valuation services as may be available to the Trustee, including those within its regular accounting system.
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Disposition. Subject to the provisions of the Trus t Agreement, the Trustee will sell, or present for prepayment, any Permitted Investment so purchased by the Trustee whenever it will be necessary in order to provide moneys to meet any required payment, transfer , withdrawal or disbursement from the fund to which such Permitted Investment is credited.
Commingling of Moneys in Funds
The Trustee may, and upon the written request of the City Representative will, commingle any of the funds held by it pursuant to the Trust Agreement into a separate fund or funds for investment purposes only; provided, however, that all funds or accounts held by the Trustee under the Trust Agreement will be accounted for separately notwithstanding such commingling by the Trustee. The City will ensure that any such commingling complies with Section 1.148-4 of the Treas ury Regulations, and will provide direction to the Trustee accordingly. In no event will the Trustee have any duty or obligation, at any time and in any manner to monitor compliance with any governmental regulations relating to commingling of accounts.
Tax Covenants
General. The City and the Corporation have covenanted pursuant to the Trust Agreement with the Owners of the Certificates that, notw ithstanding any other provisions of the Trust Agreement, they will not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of interest component evidenced by the Certificates under Section 103 of the Code. The City and the Corporation (to the extent that the Corporation may have control over the Project or the proceeds of the Certificates) will not, directly or indirectly, use or permit the use of proceeds of the Certificates or the Project, or any por tion thereof, by any person other than a governmental unit (as such term is used in Section 141 of the Code), in such manner or to such extent as would result in the loss of exclusion from gross income for federal income tax purposes of the interest components evidenced by the Certificates.
Use of Proceeds. The City and the Corporation (to the extent that the Corporation may have control over the Project or the proceeds of the Certificates) will no t take any action, or fail to take any action, if any such action or failure to take action would cause the Lease Payments evidenced by Certificates to be “private activity bonds” within the meaning of Section 141 the Code, and in furtherance thereof, will not make any use of the proceeds of the Certificates or the Project, or an y portion thereof, or any other funds of the City, that would cause the Lease Payments evidenced by the Certificates to be “private activity bonds” within the meaning of Section 141 of the Code. To that end, so long as any Certificates ev idencing Lease Payments are outstanding, the City and the Corporation, with respect to such proceeds, and the Project will comply with applicable requirements of the Code and all regulations of the United States Department of the Treasury issued under the Trust Agreement and under Section 103 of the Code, to the extent such requirements are, at the time, applicable and in effect. The City will establish reasonab le procedures necessary to ensure continued compliance with Section 141 of the Code and the continued qualification of the Lease Payments evidenced by the Certificates as “governmental bonds.”
Arbitrage. The City and the Corporation (to the extent that the Corporation may have control over the Project or the proceeds of the Certificates) will not, directly or indirectly, use or permit the use of any proceeds of any Certificates, or of the Project, or other funds of the City, or take or omit to take any action, that would cause the Lease Payments evidenced by the Certificates to be “arbitrage bonds” within the meaning of Section 148 of the Code. To that end, the City and the Corporation will comply with all requirements of Section 148 of the Code and all regulations of the United States Department of the Treasury issued under the Trust Agreement to the extent such requirem ents are, at the time, in effect an d applicable to the Lease Payments evidenced by the Certificates.
Federal Guarantee. The City and the Corporation (to the extent that the Corporation may have control over the proceeds of the Certificates) will not make any us e of the proceeds of the Certificates or any other
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funds of the City, or take or omit to take any other action, that would cause the Lease Payments evidenced by the Certificates to be “federally guaranteed” within the meaning of Section 149(b) of the Code.
Compliance with Tax Certificate. In furtherance of the foregoing tax covenants of the Trust Agreement, the City covenants that it will comply with the provisions of the Tax Certificate, which is incorporated in the Trust Agreement as if fully set forth in the Trust Agreement. These covenants will survive payment in full or defeasance of the Certificates.
Rebate Fund
The Trustee will establish a special fund designated the “City of Cupertino (2020A Certificates) Rebate Fund” (the “Rebate Fund”). Absent an opinion of Special Counsel that the exclusion from gross income for federal income tax purposes of the interest component evidenced by the Certificates will not be adversely affected, the City will cause to be deposited in the Rebate Fund such amounts as are required to be deposited therein pursuant to the provisions of the Tr ust Agreement and the Tax Certificate. All amounts at any time on deposit in the Rebate Fund will be held by the Trustee in trust, to the extent required to satisfy the requirement to make rebate payments to the United St ates of America (the “Rebate Requirement”) pursuant to the Section 148 of Code and the Treasury Regulations pr omulgated thereunder (the “Treasury Regulations”).
Such amounts will be free and clear of any lien under the Trust Agreement and will be governed by the Trust Agreement and by the Tax Certificate executed by the City. The Trustee will be deemed conclusively to have complied with the Rebate Requirement and the Tax Certificate if it follows the directions of the City, and will have no independent responsibility to, or liability resulting from its failure to, enforce compliance by the City with the Rebate Requirement. The Trustee will have no responsibility to independently make any calculation or determination or to review the City’s calculations.
(i) Within forty-five (45) days after the end of the fifth (5th) Certificate Year and each fifth Certificate Year thereafter, (1) the City will calculate or cause to be calculated with respect to the Certificates the amount that would be considered the “rebate amount” within the meaning of Section 1.148-3 of the Treasury Regulations, and (2) the City will transfer to the Trustee for deposit in the Rebate Fund, if and to the extent required, amounts sufficient to cause the balance in the Rebate Fund to be equal to the “rebate amount” so calculated.
(ii) The City will not be required to deposit any amount to the Rebate Fund in accordance with preceding sentence if the amount on deposit in the Rebate Fund prior to the deposit required to be made under the Trust Agreement equals or exceeds the “rebate amount” calculated in accordance with the Trust Agreement. Such excess may be withdrawn from the Rebate Fund to the extent permitted under the Trust Agreement.
(iii) The City will not be required to calculate the “rebate amount,” and will not be required to deposit any amount to the Rebate Fund in accordance with the Trust Agreement, with respect to all or a portion of the proceeds of the Certificates (including amounts treated as proceeds of the Certificates) (1) to the extent such proceeds satisfy the expenditure requirements of Section 148(f)(4)(B) or Section 148(f)(4)(C) of the Code or Secti on 1.148-7(d) of the Treasury Regulations, whichever is applicable, and otherwise qualify for the exception to the Rebate Requirement pursuant to whichever of said sections is applicable, (2) to the extent such proceeds are subject to an election by the City under Section 148(f)(4)(C)(vii) of the Code to pay a one and one-half percent (1½%) penalty in lieu of arbitrage rebate in the event any of the percentage ex penditure requirements of Section 148(f)(4)(C) are not satisfied, or (3) to the extent such proceeds qual ify for the exception to arbitrage rebate under Section 148(f)(4)(A)(ii) of the Code for amounts in a “bona fide debt service fund.” Withdrawal Following Payment of Certificates. Any funds remaining in the Rebate Fund after the payment or prepayment of all the Certificates and any amounts described in the Trust Agreement, or provision
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made therefor satisfactory to the Trustee, including ac crued interest and payment of any applicable fees and expenses to the Trustee, will be withdrawn by the Trustee and remitted to the City.
Withdrawal for Payment of Rebate. Upon the City’s written direction, but subject to the exceptions contained in the Trust Agreement to the requirement to calculate the “rebate amount” and make deposits to the Rebate Fund, the Trustee will pay to the United States of America, from amounts on deposit in the Rebate Fund, (i) not later than sixty (60) days after the end of (1) the fifth Certificate Year, and (2) each fifth (5th) Certificate Year thereafter, an amount that, together with all previous rebate payments, is equal to at least ninety percent (90%) of the “rebate amount” calculated as of the end of such Certificate Year in accordance with Section 1.148-3 of the Treasury Regulations; and (ii) not later than sixty (60) days after the payment of all Certificates, an amount equal to one hundred percent (100 %) of the “rebate amount” calculated as of the date of such payment (and any income attributable to the “rebate amount” determined to be due and payable) in accordance with Section 1.148-3 of the Treasury Regulations.
Rebate Payments. Each payment required to be ma de pursuant to the Trust Agreement will be made to the Internal Revenue Service Center, Ogden, Utah 84201 on or before the date on which such payment is due, and will be accompanied by Internal Revenue Service Form 8038-T, which will be completed by the arbitrage rebate consultant for execution by the City and provided to the Trustee.
Deficiencies in the Rebate Fund. In the event that, prior to the time any payment is required to be made from the Rebate Fund, the amount in the Rebate Fund is not sufficient to make such payment when such payment is due, the City will calculate the amount of such deficiency and direct the Trustee to deposit an amount received from the City equal to such deficiency into the Rebate Fund prior to the time such payment is due.
Withdrawals of Excess Amounts. In the event that immediately following the calculation required by the Trust Agreement, but prior to any deposit made thereunder, the amount on de posit in the Rebate Fund exceeds the “rebate amount” calculated in accordance with the Trust Agreement, upon written instructions from the City, the Trustee will withdraw the excess from the Rebate Fund and credit such excess to the Lease Payment Fund.
Record Keeping. The City will retain records of all determinations made under the Trust Agreement until six years after the complete retirement of the Certificates.
Survival after Defeasance. Notwithstanding anything in the Trust Agreement to the contrary, the Rebate Requirement will survive the payment in full or defeasance of the Certificates.
THE TRUSTEE
Appointment of Trustee
Appointment. The Bank of New York Mellon Trust Company, N.A., a national banking association organized under the laws of the United States of Amer ica, has been appointed Trustee by the Corporation and the City.
Qualifications. The Corporation and the City agree that they will maintain a Trustee having a corporate trust office in New York, New York, San Fran cisco, California, Santa Ana, California, or Los Angeles, California capable of exercising trust powers in the State of California, with a combined capital (exclusive of borrowed capital) and a surplus of at le ast Fifty Million Dollars ($50,000,000), or be a member of a bank holding company system, which will have a combined capital and surplus of at least Fifty Million Dollars ($50,000,000), and subject to supervision or examin ation by federal or state authority, so long as any Certificates are Outstanding. If such bank, nationa l banking association, corporation or trust company publishes a report of condition at least annually pursuant to law or to the requirements of any supervising or
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examining authority above referred to then for the purpose of the Trust Agreement the combined capital and surplus of such bank, national banking association, co rporation or trust company will be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.
Removal. So long as there is no Event of Default, with 30 days prior notice the City, may remove the Trustee initially appointed, and any successor thereto, and may appoint a successor or successors thereto.
Resignation. The Trustee may, upon written notice to the City and the Corporation, resign; provided that such resignation will not take effect until the successor Trustee is appointed as provided in the Trust Agreement. Upon receiving such notice of resignation, th e City will promptly appoint a successor Trustee. In the event the City does not name a successor Trustee w ithin thirty (30) days after receipt of notice of the Trustee’s resignation, then the Trustee may petition a federal or state court to seek the immediate appointment of a successor Trustee and be reimbursed by the City for all costs incurred in connection therewith.
Successor. Any successor Trustee will be a bank, national banking association, corporation or trust company meeting the qualifications as set forth in th e Trust Agreement. Any resignation or removal of the Trustee and appointment of a successor Trustee will beco me effective upon acceptance of appointment by the successor Trustee. Upon such acceptance, the successor Trustee will mail notice thereof to the Owners at their respective addresses set forth on the Certificate registration books.
Merger or Consolidation
Any company or banking association into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it is a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided that such company will be eligible under the Trust Agreement, will be the successor to the Trustee without the execution or filing of any paper or further act, anything in the Trust Agreement to the contrary notwithstanding.
Protection of the Trustee
Reliance Upon Papers or Documents. The Trustee will be protected and will incur no liability in acting or proceeding in good faith upon any resolution, not ice, telegram, facsimile, request, consent, direction, waiver, certificate, statement, affidavit, voucher, bond, requisition or other paper or document which it in good faith believes to be genuine and to have been passed or si gned by the proper board or person or to have been prepared and furnished pursuant to any of the provisions of the Trust Agreement, and the Trustee will be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may, in the absence of bad faith on its part, accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. In the event the Trustee will make any investigation into the content of any such certifications, the Trustee will not thereby be deemed to have expanded the scope of its duties.
Reliance Upon Opinions of Counsel. The Trustee may consult with its counsel or counsel to the City with regard to legal questions and the opinion of such counsel will be full and complete authorization and protection in respect of any action taken or suffered by it under the Trust Agreement in good faith in accordance therewith. Before being re quired to take any action, the Trustee may require an opinion of Independent Counsel acceptable to the Trustee which opinion will be made available to the other parties to the Trust Agreement upon request, which counsel may be coun sel to any of the parties to the Trust Agreement, or a verified certificate of any party to the Trust Agreem ent, or both, concerning the proposed action and the opinion of such counsel will be full and complete authorization and protection in respect of any action taken by the Trustee in reliance thereon and the City will promptly reimburse the Trustee for such costs.
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Reliance Upon Requested Certificates. Whenever in the administration of its duties under the Trust Agreement, the Trustee deems it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Trust Agreement, such matter (unless other evidence in respect thereof be specifically prescribed in the Trust Agreement), in the ab sence of bad faith on its part, will be deemed to be conclusively proved and established by the certificate of the City Representative or the Corporation Representative and such certificate will be full warranty to the Trustee for any action taken or suffered under the provisions of the Trust Agreement in reliance thereon, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable, provided however that the duties and obligations of the Trustee will not be deemed expanded thereby.
Rights of the Trustee
Ownership of Certificates. The Trustee may become an Owner with the same rights it would have if it were not Trustee; may acquire and dispose of other bonds or evidence of indebtedness of the City with the same rights it would have if it were not the Trustee; and may act as a depository for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Owners, whether or not such committee will represent the Owners of the majority in principal amount of the Certificates then Outstanding.
Attorneys, Agents, Receivers. The Trustee may ex ecute any of the trusts or powers and perform the duties required of it under the Trust Agreement by or through attorneys, agents, or receivers, will not be responsible for the actions or omissions of such attorneys, agents or receivers if appointed by it with reasonable care, and will be entitled to advice of counsel concerning all ma tters of trust and its duty under the Trust Agreement.
Funds and Accounts. In addition to the funds and accounts established or required to be established pursuant to the Trust Agreement, the Trustee may esta blish such additional funds and accounts as it deems necessary or appropriate to perform its duties under the Trust Agreement, and will have the right to close such accounts in its discretion.
Standard of Care. The Trustee will not be liable in connection with the performance of its duties under the Trust Agreement, except for its own negligence or willful misconduct. The Trustee will only perform those duties specifically set forth in the Trust Agreement and no implied duties, covenants or obligations whatsoever will be read into the Trust Agreement. In the event of and during the continuance of an Event of Default, the Trustee will exercise such care in performing its duties under the Trust Agreement as a prudent person would exercise under the circumstances in the conduct of its own affairs. No action by the Trustee will be construed or deemed to expand the limitation on the scope of the Trustee’s duties. The Trustee will not be considered in breach of or in default in its obligations under the Trust Agreement in the event of a delay in the performance of such obligations due to unforeseeable causes beyond its control and without its fault or negligence, including, but not limited to, acts of God or of the public enemy or terrorists, acts of government, acts of the other party, fires, floods, epidemics, quarantine restrictions, strikes, freight embargoes, earthquakes, explosion, mob violence, riot, inability to procure or general sabotage or rationing of labor, equipment, facilities, sources of ener gy, material or supplies in the open market, litigation or arbitration involving a party or others relating to zoning or other governmental action or inaction pertaining to the Leased Premises, malicious mischief, condemnation, and unus ually severe weather or delays of suppliers or subcontractors due to such causes or any similar event and/or occurrences beyond the control of the Trustee.
Compensation of the Trustee. As an Additional Payment under the Lease, the City will, from time to time, pay such amounts as are specified in any written agreement with the City and, on demand, pay to the Trustee to the extent not covered by such agreement reasonable compensation for its services and the services of any accountants, consultants, attorneys and other experts as may be engaged by the Trustee to provide services under the Trust Agreement pursuant to a written agreement between the City and the Trustee. Further, in the event of a default under the Trust Agreement, the City agrees that the Trustee’s fees and costs will be
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deemed to be a substantial contribution to the trust and bankruptcy estate, if applicable. Upon an Event of Default, and only upon an Event of Default, the Trustee will have a first right of payment prior to payment on account of principal of and premium, if any, and interest on any Bond, upon the trust estate for the foregoing fees, charges and expenses incurred by it, all in accorda nce with the Trust Agreement. The City’s obligation under the Trust Agreement will remain valid and bi nding notwithstanding maturity and payment of the Certificates or resignation and removal of the Trustee.
Indemnification of Trustee. The City will, to th e extent permitted by law, indemnify and save the Trustee and its officers, directors, agents, and employees harmless from and against (whether or not litigated) all claims, losses, costs, expenses, liability and damages, including legal fees and expenses, arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on, the Leased Premises by the City, (ii) any breach or default on the part of th e City in the performance of any of its obligations under the Trust Agreement and any other agreement made and entered into for purposes of the Leased Premises, (iii) any act of the City or of any of its agents, contract ors, servants, employees or licensees with respect to the Leased Premises, (iv) any act of any assignee of, or purchaser from, the City or of any of its or their agents, contractors, servants, employees or licensees with respect to the Leased Premises, (v) the exercise and performance by the Trustee of its powers and duties under the Trust Agreement or any related document, (vi) the sale of the Certificates and the carrying out of any of the transactions contem plated by the Certificates or the Trust Agreement, or (vii) any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made in light of the circumstances in which they were made, not misleading in any official statement or other disclosure document utilized in connection with the sale of the Certificates . The indemnification set forth in the Trust Agreement will extend to the Trustee’s officers, agents, employees, successors and assigns. No indemnification will be made in the Trust Agreement or other agreements for willful misconduct or negligence by the Trustee, its officers, agents, employees, successors or assigns. Th e City’s obligations unde r the Trust Agreement will remain valid and binding notwithstanding maturity and payment of the Certificates, or the resignation or removal of the Trustee.
In accepting the trust created by the Trust Agreement, the Truste e acts solely as Trustee for the Owners and not in its individual capacity, and all persons, including, without limitation, the Owners, Corporation and City, having any claim against the Trustee arising from the Trust Agreement will look only to the funds and accounts held by the Trustee under the Trust Agreement for payment, except as otherwise provided in the Trust Agreement or where the Trustee has breached its standard of care as described in the Trust Agreement. Under no circumstances will the Trus tee be liable in its individual capacity for the obligations evidenced by the Certificates.
No provision of the Trust Agreement will require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties under the Trust Agreement or in the exercise of any of its rights or powers.
The Trustee will not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of not less than a majority in aggregate principal amount of the Certificates at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee or in the exercise of any right under the Trust Agreement. In the event of conflicting instructions under the Trust Agreement, th e Trustee will have the right to decide the appropriate course of action and be protected in so doing.
The Trustee is authorized and dir ected to execute, in its capacity as Trustee, the Assignment Agreement.
Every provision of the Trust Agreement, the Leas e, the Site Lease and the Assignment Agreement relating to the conduct or liability of the Trustee will be subject to the provisions of the Trust Agreement.
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The Trustee will have no responsibility or liability with respect to any information, statement or recital in any official statement, offering memorandum or any other disclosure material prepared or distributed in any respect relating to the Certificates.
The Trustee will not to be deemed to have know ledge of any Event of Default under the Trust Agreement or under the Lease unless it has actual knowledge thereof at its Principal Office.
Before taking any action under the Trust Agreemen t at the request of the Owners, the Trustee may require that a satisfactory indemnity bond be furnished by the Owners for the reimbursement of all expenses to which it may be put and to protect it against all liability, except liability which is adjudicated to have resulted from its negligence or willful misconduct in connection with any action so taken.
The permissive right of the Trustee to do things enumerated in the Trust Agreement will not be construed as a duty and it will not be answerable for other than its negligence or willful misconduct.
The Trustee will not be responsible for or accountable to anyone for th e subsequent use or application of any moneys which will be released or withdrawn in accordance with the Trust Agreement.
The Trustee will have no duty to review, verify, or analyze any financial statements furnished to it by the District, and will hold such financial statements solely as a repository for the Owners. The Trustee will not be deemed to have notice of any information contained therein or any default or Event of Default that may be disclosed therein in any manner.
Trustee’s Disclaimer of Warranties. THE TRUSTEE MAKES NO WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIE D, AS TO THE VALUE, DESIGN, CONDITION,
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR FITNESS FOR THE USE CONTEMPLATED BY THE CITY OF THE LEASED PREMISES, OR ANY PORTION THEREOF. THE CITY ACKNOWLEDGES THAT THE CITY IS LEASING THE LEASED PREMISES AS IS. In no event will the Trustee be liable for incidental, indirect, special or consequential damages, in connection with or arising out of the Lease, the Site Lease, the Assignment Agreement or the Trust Agreement for the existence, furnishing, functioning or the City’s use and possession of the Leased Premises.
MODIFICATION OR AMENDMENT OF AGREEMENTS
Amendments Permitted
With Consent. The Trust Agreement and the rights and obligations of the Owners, and the Lease and the rights and obligations of the parties thereto, may be modified or amended at any time, with notice to any rating agency then rating the Certif icates, by a Supplemental Agreement or amendment thereto which will become effective when the written consents of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificat es disqualified as provided in the Trust Agreement, will have been filed with the Trustee. No such modification or amendment will:
(a) extend or have the effect of extending the maturity of any Certificate or reducing the fixed interest rate with respect thereto or extending the time of payment of interest, or reducing the amount of principal thereof or reducing any premium payable upon the prepayment thereof, without the express consent of the Owner of such Certificates being affected, or (b) reduce or have the effect of reducing the percentage of Certificates required for the affirmative vote or written consent to an amendment or modification of the Lease, or (c) modify any of the rights or obligations of the Trustee without its written assent thereto, or
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(d) amend the provisions of the Trust Agreement dealing with permitted amendments without the prior written consent of the Owners of all Certificates then outstanding.
The Trustee will have the right to require such opinions of counsel as it deems necessary concerning (i) the lack of material adverse effect of the amendment on Owners, (ii) the fact that the amendment will not affect the tax status of interest with respect to the Certificates or any Additional Certificates, and (iii) such modification or amendment is authorized or permitted by the terms of the Trust Agreement. Any such Supplemental Agreement or amendments thereto will become effective as provided in the Trust Agreement.
Without Consent. The Trust Agreement and the rights and obligations of the Owners, and the Lease and the rights and obligations of the parties thereto, may be modified or amended at any time by a Supplemental Agreement or amendments thereto without the consent of any such Owners, but only to the extent permitted by law and only:
(a) to add to the covenants and agreements of the City under the Trust Agreement, (b) to cure, correct or supplement any ambiguous or defective provision contained in the Trust Agreement or in the Lease,
(c) in regard to matters arising under the Trust Agreement or under the Lease Agreement, as the parties thereto may deem necessary or desirable, will not adversely affect the interest of the Owners,
(d) to substitute the Leased Premises, or a portion thereof, in accordance with the Lease, (e) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of the interest component of Lease Payments and the interest payable with respect to the Certificates, (f) to add to the rights of the Trustee,
(g) to provide for the execution and delivery of Additional Certificates in accordance with the provisions of the Trust Agreement.
No such modification or amendment, however, will modify and of the rights or obligation of the Trustee without its written assent thereto. Any such Supplemental Agreement will become effective upon execution and delivery by the parties to the Trust Agreement or thereto, as the case may be.
The Trustee will have the right to require such opinions of counsel as it deems necessary concerning (i) the lack of material adverse effect of the amendm ent on Owners and (ii) the fact that the amendment will not affect the tax status of interest with respect to the Certificates or any Additional Certificates. Any such Supplemental Agreement or amendments thereto will become effective as provided in the Trust Agreement.
Procedure for Amendment with Written Consent of the Owners In the event the consent of the Owners is required for an amendment to the Trust Agreement, the Trust Agreement or the Lease may be amended by Supplement al Agreement, subject to the procedures set forth below. A copy of the form of such Supplemental Agreement, together with a request to the Owners for their consent thereto, will be mailed by the Trustee to each Owner of a Certificate at his address as set forth in the Certificate registration books, but failure to receive co pies of such Supplemental Agreement and request so mailed will not affect the validity of the Supplemental Agreement when assented to as provided in the Trust Agreement.
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Such Supplemental Agreement will not become effective unless there will be filed with the Trustee the written consent of the Owners of at least a majority in aggregate principal amount of the Certificates then Outstanding (exclusive of Certificates disqualified as provided in the Tr ust Agreement) and notices will have been mailed as provided the Trust Agreement. An y such consent will be binding upon the Owner of the Certificate giving such consent and on any subsequent Owner (whether or not such subsequent Owner has notice thereof) unless such consent is revoked in writing by the Owner giving such consent or a subsequent Owner by filing such revocation with the Trustee prior to the date when further notice has been mailed as provided in the Trust Agreement.
After the Owners of the required percentage of Certificates have filed their consent to such Supplemental Agreement, the Trustee will mail a notice to the Owners of the Certificates in the manner provided in the Trust Agreement for the mailing of such Supplemental Agreement, stating in substance that such Supplemental Agreement has been consented to by th e Owners of the required percentage of Certificates and will be effective as provided in the Trust Agreement (but failure to mail copies of said notice will not affect the validity of such Supplemental Agreement or c onsents thereto). A record, consisting of the papers required by the Trust Agreement to be filed with the Trus tee, will be proof of the matters therein stated until the contrary is proved. The Trustee may obtain and conclusively rely on an opinion of counsel with regard to such matters.
Disqualified Certificates
Certificates owned or held by or for the account of the City or the Corporation or by any person directly or indirectly controlled or controlled by, or under direct or indirect common control with the City or the Corporation (except any Certificates held in any pension or retirement fund) will not be deemed Outstanding for the purpose of any vote, consent, waiv er or other action or any calculation of Outstanding Certificates provided for in the Trust Agreement, and will not be entitled to vote upon, consent to, or take any other action provided for in the Trust Agreement.
The City or the Trustee may adop t appropriate regulations to require each Owner, before his consent provided for in the Trust Agreement will be deemed effective, to reveal if the Certificates as to which such consent is given are disqualified as provided in the Trust Agreement. Up on request of the Trustee, the City and Corporation will specify to the Trustee those Certificates disqualified pursuant to the Trust Agreement and the Trustee may conclusively rely on such certificate.
Effect of Supplemental Agreement
From and after the time any Supplemental Agreem ent becomes effective pursuant to the Trust Agreement, the Trust Agreement or the Lease, as the case may be, will be deemed to be modified and amended in accordance therewith, the respective rights, duties and obligations of the parties thereto and all Owners of Certificates Outstanding, as the case may be, will therea fter be determined, exercised and enforced under the Trust Agreement subject in all respects to such modification and amendment, and all the terms and conditions of any Supplemental Agreement will be deemed to be part of the terms and conditions of the Trust Agreement or the Lease, as the case may be, for any and all purposes.
Endorsement or Replacement of Certificates Delivered After Amendments The City may determine that Certificates delivered after the effective date of any action taken as provided in the Trust Agreement will bear a notation, by endorsement, in form approved by the City, as to such action. In that case, upon demand of the Owner of any Outstanding Cer tificate at such effective date and presentation of his Certificate for such purpose at the Principal Office, a suitable notation will be made on such Certificate. The City may determine that new Certifi cates, so modified as in the opinion of the City is necessary to conform to such Owner’s action, will be prepared, executed and delivered. In that case, upon demand of the Owner of any Certificate then Outstand ing, such new Certificate will be exchanged in the
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Principal Office without cost to such Owner, for a Cer tificate of the same charact er then Outstanding, upon surrender of such Certificate.
Amendatory Endorsement of Certificates
Subject to the Trust Agreement, the provisions of the Trust Agreement will not prevent an Owner from accepting any amendment as to the particular Certif icates held by him, provided that due notification thereof is made on such Certificates.
Copies of Amendments Delivered to Rating Agencies
Copies of any modifications or amendments to the Trust Agreement, the Lease, the Site Lease or the Assignment Agreement will be delivered by the City to any rating agency then rating the Certificates at least 10 days prior to the effective date thereof.
COVENANTS
Compliance With and Enforcement of the Lease
The City has covenanted and agreed with the Owners to perform all obligations and duties imposed on it under the Lease. The Corporation has covenanted and agreed with the Owners to perform all obligations and duties imposed on it under the Lease.
The City will not do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or an y such omission of or refraining from action, would or might be a ground for cancellation or termination of the Lease by the Corporation thereunder. The Corporation and the City, immediately upon receiving or giving any notice, communication or other document in any way relating to or affecting their respective esta tes, or either of them, in the Leased Premises, which may or can in any manner affect such estate of the City, will deliver the same, or a copy thereof, to the Trustee.
Payment of Taxes
The City will pay all taxes as provided in the Lease.
Observance of Laws and Regulations
The City will well and truly keep, observe and perform all valid and lawful obligations or regulations imposed on it by contract, or prescribed by any law of the United States, or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of any and every right, privilege or franchise owned or acquired by the City, including its right to exist and carry on business as a municipal corporation, to the end that such rights, privileges and franchises will be maintained and preserved, and will not become abandoned, forfeited or in any manner impaired.
Prosecution and Defense of Suits
The City will promptly, and also upon request of the Trustee or any Owner, from time to time take such action as may be necessary or proper to remedy or cure any defect in or cloud upon the title to the Leased Premises, and will prosecute all such suits, actions an d other proceedings as may be appropriate for such purpose.
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City Budgets
In accordance with the Lease, the City Representative will certify to the Trustee on or before August 1 of each year that the City has includ ed in its annual budget all Lease Payments (other than Lease Payments of advance rental) and Additional Payments (to the extent the amounts of such Additional Payments are known to the City at the time its annual budget is proposed) due u nder the Lease in the Fiscal Year covered by its annual budget and the amount so included. If the City fails to certify that it has included all such Lease Payments and Additional Payments in such annual budget, the Trustee will promptly provide the City written notice specifying that the City has failed to observe and perform its covenant and agreement in the Lease and requesting that such failure be remedied within 30 days, or such failure will constitute an Event of Default under the Lease. The Trustee will forward a copy of such notice to the Corporation. Upon receipt of such notice, the City will notify the Trustee in writing of the proceedings proposed to be taken by the City, and will keep the Trustee advised in writing of all proceedings thereafter taken by the City.
Further Assurances
The Corporation and the City will make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Trust Agreement, and for the better assuring and confirming unto the Owners the rights and benefits provided in the Trust Agreement.
Continuing Disclosure
The City has covenanted and agreed that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Trust Agreement, failure of the City to comply with the Continuing Disclosure Certificate will not be considered an Event of Default under the Trust Agreement; however, any Owner or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under the Trust Agreement and the Continuing Disclosure Certificate.
LIMITATION OF LIABILITY
Limited Liability of the City
Except for the payment of Lease Payments, Add itional Payments and Prepayments when due in accordance with the Lease and the performance of the other covenants and agreements of the City contained in the Trust Agreement and in the Lease, the City will have no obligation or liability to any of the other parties to the Trust Agreement or to the Owners with respect to th e Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee.
No Liability of the City or Corporation for Trustee Performance Except as expressly provided in the Trust Agreemen t, neither the City nor the Corporation will have any obligation or liability to any other parties thereto or to the Owners with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement.
No Investment Advice. The Trustee will have no obligation or responsibility for providing information to the Owners concerning the investment character of the Certificates.
Sufficiency of the Trust Agreement or Lease Paymen ts. The Trustee makes no representations as to the validity or sufficiency of the Certificates, will incur no responsibility or liability in respect thereof, other than in connection with the duties or obligations in the Trust Agreement or in the Certificates assigned to or imposed upon it. The Trustee will not be responsible or liable for the sufficiency or enforceability of the
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Lease, the Site Lease or the Assignment Agreement. The Trustee will not be liable for the sufficiency or collection of any Lease Payments or other moneys required to be paid to it under the Lease (except as provided in the Trust Agreement), its right to receive moneys pursu ant to said Lease, or the value of or title to the Leased Premises.
Actions of Corporation and City. The Trustee will have no obligation or liability to any of the other parties or the Owners with respect to the Trust Agreement or failure or refusal of any other party to perform any covenant or agreement made by any of them un der the Trust Agreement or the Lease, but will be responsible solely for the performance of the duties and obligations expressly imposed upon it under the Trust Agreement.
Recitals and Agreements of Corporation and City. Th e recitals of facts, covenants and agreements in the Trust Agreement and in the Certificates contained will be taken as statements, covenants and agreements of the City or the Corporation (as the case may be), and the Trustee assumes no responsibility for the correctness of the same.
Limitation of Rights to Parties and Certificate Owners
Nothing in the Trust Agreement or in the Certificat es expressed or implied is intended or will be construed to give any person other than the City, the Corporation, the Trustee and the Owners, any legal or equitable right, remedy or claim under or in respect of the Trust Agreement or any covenant, condition or provision of the Trust Agreement; and all such covenant s, conditions and provisions are and will be for the sole and exclusive benefit of the City, the Corporation, the Trustee and the Owners.
Except as expressly provided in the Trust Agreement, the Corporation will not have any obligation or liability to the Owners with respect to the payment when due of the Lease Payments by the City or with respect to the observance or performance by the City of the other agreements, conditions, and covenant imposed upon the City by the Lease or by the Trust Agreement.
EVENTS OF DEFAULT AND REMEDIES OF CERTIFICATE OWNERS
Assignment of Rights
The parties to the Trust Agreement have acknowledg ed that pursuant to th e Assignment Agreement the Corporation has transferred, assigned and set over to the Trustee for the benefit of the Owners, certain of the Corporation’s rights under the Lease.
Events of Default
Remedies. If an Event of Default occurs, th en, and in each and every such case during the continuance of such Event of Default, the Trustee may exercise any and all remedies available pursuant to law or granted pursuant to the Lease; provided, however, th at notwithstanding anything in the Trust Agreement or in the Lease to the contrary, THERE WILL BE NO RIGHT UNDER ANY CIRCUMSTANCES TO
ACCELERATE THE MATURITIES OF THE CERTIFICATES OR OTHERWISE TO DECLARE ANY LEASE PAYMENTS NOT THEN IN DEFAULT TO BE IMMEDIATELY DUE AND PAYABLE.
Actual Knowledge. The Trustee will not be deemed to have knowledge of any Event of Default unless and until the trust officer responsible for the administration of the Trust Agreement will have actual knowledge thereof, or will have received written notice thereof at the Principal Office.
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Application of Funds
All moneys received by the Trustee pursuant to any right given or action taken under the provisions of the Trust Agreement or the Lease, will be deposited into the Lease Payment Fund and be applied by the Trustee after payment of all amounts due and payable to the Trustee pursuant to the Trust Agreement and the Lease in the following order upon presentation of the Certificates, and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid - First, Costs and Expenses: to the payment of the costs, fees a nd expenses of the Trustee in declaring such Event of Default and in performing its duties and obligations under the Trust Agreement, including reasonable compensation to its or their agents, attorneys and counsel and then to any such amounts incurred by the Owners;
Second, Interest: to the payment to the persons entitled thereto of all installments of interest then due in the order of the maturity of such installment, and, if the amount available is not sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and Third, Principal: to the payment to the persons entitled thereto of the unpaid principal with respect to any Certificates which will have become due, whether at maturity or by call for prepayment, in the order of their due dates, with interest on the overdue principal and interest at a rate equal to the rate paid with respect to the Certificates and, if the amount available will not be sufficient to pay in full all the amounts due with respect to the Certificates on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference.
Institution of Legal Proceedings
If one or more Events of Default will happen and be continuing, the Trustee may, and upon the written request of the Owners of a majority in principal amount of the Certificates then Outstanding, and upon being indemnified to its satisfaction therefor, will, proceed to protect or enforce its rights or the rights of the Owners by a suit in equity or action at law, either for the sp ecific performance of any covenant or agreement contained in the Trust Agreement or in the Lease, or in aid of the execution of any power in the Trust Agreement granted, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee will deem most effectual in support of any of its rights or duties under the Trust Agreement; provided that such written request will not be otherwise than in accordance with provisions of law and the Trust Agreement and that the Trustee will have the right to decline to follow any such written request if the Trustee will be advised by counsel that the action or proceeding so requested may not be taken lawfully or if the Trustee in good faith will determine that the action or proceeding so requested would be unjustly prejudicial to the Certificate Owners not a party to such written request or expose the Trustee to liability. In no event will counsel to the Trustee be deemed counsel to the Owners, and any communications between the Trustee and its counsel will be deemed confidential and privileged.
Non-Waiver
Nothing in the Trust Agreement or in the Certificates will affect or impa ir the obligation of the City to pay or prepay the Lease Payments as provided in the Lease. No delay or omission of the Trustee or of any Owner of any of the Certificates to exercise any righ t or power arising upon the happening of any Event of Default will impair any such right or power or will be construed to be a waiver of any such Event of Default or an acquiescence therein, and every pow er and remedy given by the Trust Agreement to the Trustee or to the Owners may be exercised from time to time and as ofte n as will be deemed expedient by the Trustee or the Owners.
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Remedies Not Exclusive
No remedy conferred or reserved to the Trustee or to the Owners in the Trust Agreement is intended to be exclusive of any other remedy, and every such remedy will be cumulative and will be in addition to every other remedy given under the Trust Agreement, at law or in equity or by statute or otherwise.
Power of Trustee to Control Proceedings
In the event that the Trustee, upon the happening of an Event of Default, will have taken any action, by judicial proceedings or otherwise, pursuant to its duties under the Trust Agreement, whether upon its own discretion or upon the request of the Owners of a majo rity in principal amount of the Certificates then Outstanding, it will have full power, in the exercise of its discretion for the best interest of the Owners of the Certificates, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee will 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 at least a majority in principal amount of the Outstanding Certificates under the Trust Agreement opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation.
Limitation on Certificate Owners’ Right to Sue
No Owner of any Certificate executed under the Tr ust Agreement will have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon the Trust Agreement, unless (a) such Owner will have previously given to the Trus tee written notice of the occurrence of an Event of Default under the Lease; (b) the Owners of a majority in aggregate principal amount of all the Certificates then Outstanding will have made written request upon the Trustee to exercise the powers granted or to institute such action, suit or proceeding in its own name; (c) said Owners will have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee will have refused or omitted to comply with such request for a period of 60 days after such written request will have been received by, and said tender of indemnity will have been made to, the Trustee; and (e) there has been a default in the payment of such Owner’s proportionate interest in the Lease Payments as the same become due.
Such notification, request, tender of indemnity, refusal or omission, and default are, in every case, to be conditions precedent to the exercise by any Owner of any remedy under the Trust Agreement; it being understood and intended that no one or more Owners will have any right in any manner whatever by his or their action to enforce any right under the Trust Agr eement, except in the manne r provided in the Trust Agreement and for the equal benefit of all Owners of the Outstanding Certificates.
The right of any Owner of any Certificate to receive payment of said Owner’s proportionate interest in the Lease Payments as the same become due, or to institute suit for the enforcement of such payment, will not be impaired or affected without the consent of such Owner, notwithstanding any provision of the Trust Agreement.
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MISCELLANEOUS
Defeasance
Methods. If and when any Outstanding Certificates ar e paid and discharged in any one or more of the following ways:
(i) Payment or Prepayment : by well and truly paying or causing to be paid the principal, interest and prepayment premiums (if any) with respect to such Certificates Outstanding, as and when the same become due and payable;
(ii) Cash: if prior to maturity by depositing with the Trustee, in trust, concurrent with the giving of such notice, an amount of cash which (together with cash then on deposit in the Lease Payment Fund together with the interest to accrue thereon, in the event of payment or provision for payment of all Outstanding Certificates) is sufficient to pay such Certificates Outstanding, including all principal and interest and premium, if any; or
(iii) Government Obligations : by irrevocably depositing with the Trustee, in trust, Government Obligations together with cash, if required, in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon (and, in the event of payment or provision for payment of all Outstanding Certificates, moneys then on deposit in the Lease Payment Fund together with the interest to accrue thereon), be fully sufficient to pay and discharge such Certificates (including all principal and intere st represented thereby and prepayment premiums if any) at or before their maturity or prepayment date;
and all other amounts due under the Trust Agreement have been paid in full, then, notwithstanding that any Certificates will not have been surrendered for payment, all obligations of the Corporation, the Trustee and the City with respect to such Certificates will cease and terminate, except only the obligation of the City and the Corporation to comply with the Trust Agreement and the obligation of the Trustee to pay or cause to be paid, from Lease Payments paid by or on behalf of the City from funds deposited pursuant to paragraphs (ii) and (iii) above, to the Owners of the Certificates not so surrender ed and paid all sums due with respect thereto, and in the event of deposits pursuant to paragraphs (ii) and (iii) above, the Certificates will continue to represent direct and proportionate interests of the Owners thereof in applicable Lease Payments under the Lease.
Surplus Moneys. Any funds held by the Trustee, at the time of payment or provision for payment of all Outstanding Certificates pursuant to the one of the procedures described in the Trust Agreement, which are not required for the payment to be made to the Owners, will be paid over to the City, after the payment of any amounts due to the Trustee pursuant to the Trust Agreement and any other Additional Payments due under the Lease.
Surviving Provisions. Notwithstanding the satisfaction and discharge of the Trust Agreement, the Trustee will retain such rights, powers and privilege s under the Trust Agreement as may be necessary or convenient for the payment of the principal, interest an d prepayment premium, if any, on the Certificates and for the registration, transfer and exchange of the Certificates.
Opinions and Reports. Prior to any defeasance becoming effective, the City will cause to be delivered (i) unless the defeasance is to be accomplished solely through a cash deposit, an executed copy of a report, addressed to the Trustee and the City, in form and substa nce acceptable to the City of a nationally recognized firm of certified public accountants, verifying that the Government Obligations and cash, if any, satisfy the requirements of the Trust Agreement, (ii) a copy of th e escrow deposit agreement entered into or refunding instructions executed by the City in connection with such defeasance, and (iii) a copy of an opinion of Special Counsel, dated the date of such de feasance and addressed to the Trustee and the City, in form and substance
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acceptable to the City, to the effect that such Ce rtificates are no longer Ou tstanding under the Trust Agreement.
Non-Presentment of Certificates. In the event any Certificate will not be presented for payment when the principal with respect thereto becomes due, either at maturity, or at the date fixed for prepayment thereof, if moneys sufficient to pay such Certificate will have been deposited in the Prepayment Fund or Lease Payment Fund, as applicable, all liability of the City and the Trustee to the Owner thereof for payment of such Certificate will forthwith cease, terminate and be comp letely discharged, and thereupon it will be the duty of the Trustee to hold such moneys, without liability for interest thereon, for the benefit of the Owner of such Certificate who will thereafter be restricted exclusivel y to such moneys, for any claim of whatever nature on his or her part under the Trust Agreement or on, or with respect to, said Certificate.
Any moneys so deposited with and held by the Trustee not so applied to the payment of Certificates within two years after the date on which the same will have become due will be paid by the Trustee to the City, free from the trusts created by the Trust Agreement. Pr ior to forwarding any such moneys to the City, the Trustee may publish notice of its intention to transfer such funds in The Bond Buyer or another financial newspaper of general circulation in New York, New York. In addition, Trustee will be indemnified from and against any and all liabilities to third parties resulting from its actions under the Trust Agreement. Thereafter, Owners will be entitled to look only to the City for payment, and then only to the extent of the amount so repaid by the Trustee. The City will not be liable for any interest on the sums paid to it pursuant to the defeasance provisions of the Trust Agreement and will not be regarded as a trustee or trustees of such money.
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DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE LEASE
DEFINITIONS
Unless the context otherwise requires, the capitalized terms used below will, for all purposes of the Lease, have the meanings specified in the Trust Ag reement, together with any amendments thereof or supplements thereto permitted to be made thereunder; and the additional terms defined in below will, for all purposes of the Lease, have the meanings specified be low. Unless the context otherwise indicates, words importing the singular number will include the plural number and vice versa. “Environmental Regulations” means all Laws and Regulations, now or later in effect, with respect to Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act, as amended (42 U.S.C. Section 9601, et seq.) (together with the regulations promulgated thereunder, “CERCLA”), the Resource Cons ervation and Recovery Act, as amended (42 U.S.C.
Section 6901, et seq.) (together with the regulati ons promulgated thereunder, “RCRA”), the Emergency Planning and Community Right-to-Know Act, as amended (42 U.S.C. Section 11001, et seq.) (together with the regulations promulgated thereunder, “Title III”), the Clean Water Act, as amended (33 U.S.C. Section 1321 et seq.) (together with the regulations promulgated th ereunder, “CWA”), the Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.) (together with the regulations promulgated thereunder, “CAA”) and the Toxic Substances Control Act, as amended (15 U.S.C. Section 2601 et seq.) (together with the regulations promulgated thereunder, “TSCA”), and any state or local similar laws and regulations and any so-called local, state or federal “superfund” or “superlien” law.
“Interest Component” means the portion of each Lease Payment designated in the Lease as the Interest Component.
“Leased Premises” means the site described in the Lease and any improvements thereon being leased to the City by the Corporation under the Lease.
“Permitted Encumbrances” means, as of any particular time: (i) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the City may, pursuant to provisions of the Lease, permit to remain unpaid; (ii) the Assignment Agreement; (iii) the L ease; (iv) the Site Lease; (v) any contested right or claim of any mechanic, laborer, materialman, supplier or vendor filed or perfected in the manner prescribed by law to the extent permitted under the Lease; (vi) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions, liens or restrictions which exist of record as of the Delivery Date, which the City certifies will not materially impair the use of the Leased Premises by the City; and (vii) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of a memora ndum of the Lease and to which the Corporation, the City and the Trustee consent in writing. “Principal Component” means the portion of the Lease Payments designated in the Lease as the Principal Component.
APPLICATION OF PROCEEDS
Further Assurances and Corrective Instruments
The Corporation and the City have agreed that they will, from time to time, execute, acknowledge and deliver, or cause to be executed, acknowledged and deliv ered, such supplements to the Lease and such further instruments as may reasonably be required for correcting any inadequate or incorrect description of the Leased Premises leased by the Lease or intended so to be or for carrying out the expressed intention of the Lease.
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AGREEMENT TO LEASE; TERM OF LEASE; LEASE PAYMENTS
Lease
The Corporation has by the Lease leased the Leased Premises to the City, and the City has by the Lease leased the Leased Premises from the Corporation, upon the terms and conditions set forth in the Lease.
The Lease will not operate as a merger of the City’s le asehold estate in the Leased Premises pursuant to the Lease and its fee estate in the Leased Premises and will not cause the extinguishment of the leasehold interest granted to the Corporation under the Site Lease.
Term
The term of the Lease will commence on the date of execution and delivery of the Certificates and will end on June 1, 2030, unless extended pursuant to the Lease, or unless terminated prior thereto upon the earliest of any of the following events:
Default and Termination. A default by the City an d the Corporation’s election to terminate the Lease under the termination provisions of the Lease;
Payment of All Lease Payments. The payment by th e City of all Lease Payments and any Additional Payments required under the Lease; or
Prepayment. The deposit of funds or Government Obligations with the Trustee in amounts sufficient to pay all Lease Payments as the same will become due, as provided in the Lease and the Trust Agreement.
Extension of Lease Term
The Term of the Lease may be extended in connection with the execution and delivery of any Additional Certificates. If on the final maturity date of the Certificates or any Additional Certificates all Interest Components and Principal Components represented thereby have not been fully paid by the City as a result of a default in the payment of the Lease Paymen ts, or because the Lease Payments under the Lease have been abated at any time as permitted by the terms thereof, then the Term will be extended until all Certificates and Additional Certificates are fully paid, except that the Term will in no event be extended beyond the tenth anniversary of the final scheduled maturity of any Certificate or Additional Certificate.
Lease Payments
Time and Amount. Subject to the provisions of the Lease regarding abatement in event of loss of use of any portion of the Leased Premises, and regarding pr epayment of Lease Payments , the City has agreed to pay to the Corporation, its successors and assigns, as annual rental for the use and possession of the Leased Premises, the Lease Payments (denominated into components of principal and interest, the Interest Component of such Lease Payment being paid semiannually) in the amounts specified in the Lease, to be due and payable in arrears on each Lease Payment Date which are sufficient in both time and amount to pay when due the annual principal and interest represented by the Certificat es. In the event that any Additional Certificates are executed and delivered pursuant to the Trust Agreement, the City and the Trustee will execute an amendment to state the Lease Payments due under the Lease as a re sult of the execution and delivery of such Additional Certificates.
The obligation of the City to pay Lease Payments will commence on the Delivery Date for the Certificates.
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In the event the City does not pay a Lease Payment due on the respective Lease Payment Date, the Trustee will provide prompt written notice to the City of su ch failure to pay; provided, however, that failure to give such notice will not excuse any event of default under the Lease.
Credits. Any amount held in the Lease Payment Fund on any Lease Payment Date (other than capitalized interest, which will be credited in accorda nce with the Trust Agreement, and other than amounts resulting from the prepayment of the Lease Payments in part but not in whole pursuant to the Lease and other amounts required for payment of principal with respect to any Certificates or Additional Certificates that have matured or been called for payment and have not been presented for payment or interest) will be credited towards the applicable Lease Payment then due and payable. The City need not transfer additional cash to the Trustee on any Lease Payment Date if the amounts then held in the Lease Payment Fund (other than those amounts excluded under the prior sentence) are at least equal to the Lease Payment then required to be paid.
Rate on Overdue Payments. In the event the City should fail to make any of the Lease Payments required in the Lease, the Lease Payment in default will continue as an obligation of the City until the amount in default will have been fully paid, and the City agrees to pay the same with interest thereon, to the extent permitted by law, from the date such amount was originally payable at the rate equal to the original interest rate payable with respect to each Certificate or Additi onal Certificate, as applic able, represented by such delinquent Lease Payment.
No Withholding. Notwithstanding any dispute between the Corporation and the City, including a dispute as to the failure of any portion of the Leased Premises in use by or possession of the City to perform the task for which it is leased, the City will make all Lease Payments and Additional Payments when due and will not withhold any Lease Payments pending the final resolution of such dispute.
Fair Rental Value
The Lease Payments and Additional Payments will be paid by the City in consideration of the right of possession of, and the continued quiet use and enjoyment of, the Leased Premises dur ing each such period for which said Lease Payments are to be paid. The parties to the Lease have agreed and determined that such total rental represents the fair rental value of the Leased Pr emises. In making such determination, consideration has been given to the fair market value and replacement cost of the Leased Premises , other obligations of the parties under the Lease (including but not limited to costs of maintenance, taxes and insurance), the uses and purposes which may be served by the Leased Premises and the benefits therefrom which will accrue to the City and the general public, and the transfer of the Corporati on’s leasehold interest in th e Leased Premises at the end of the Term.
Budget and Appropriation
The City has covenanted to take such action as may be necessary to include all Lease Payments and Additional Payments (to the extent the amounts of such Additional Payments are known to the City at the time its annual budget is proposed), due under the Lease in its annual budget and to make the necessary annual appropriations therefor, and to maintain such items to th e extent unpaid for that Fiscal Year in its budget throughout such Fiscal Year. To the extent the amount of such payments becomes known after the adoption of the annual budget, such amounts will be included and maintained in such budget as amended. During the Term, the City will furnish annually to the Trustee a certificate of the City Representative stating that all Lease Payments and Additional Payments due under the Lease for the applicable Fiscal Year have been included in its annual budget on or before August 1 of each Fiscal Year. The covenants on the part of the City contained in the Lease will be deemed to be and will be constr ued to be duties imposed by law and it will be the ministerial duty of each and every public official of the City to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease agreed to be carried out and performed by the City.
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The obligation of the City to pay Lease Payments and Additional Payments under the Lease will constitute a current expense of the City and will not in any way be construed to be a debt of the City, or the State, or any political subdivision thereof, in contra vention of any applicable constitutional or statutory limitation or requirements concerning the creation of in debtedness by the City, the State, or any political subdivision thereof, nor will anything contained in the Lease constitute a pledge of general revenues, funds or moneys of the City beyond the Fiscal Year for which the City has appropriated funds to pay Lease Payments and Additional Payments under the Lease or an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation.
Assignment of Lease Payments
Certain of the Corporation’s rights under the Lease, including the right to receive and enforce payment of the Lease Payments (including Prepayments), and Additional Payments to be made by the City under the Lease, have been assigned ab solutely to the Trustee, subject to certain exceptions, pursuant to the Assignment Agreement, to which assignment the City has consente d by the Lease. The Cor poration by the Lease has directed the City, and the City by th e Lease has agreed, to pay to the Trus tee at the Trustee’s corporate trust office designated in the Trust Agreement, or to the Trustee at such other place as the Trustee directs in writing, all Lease Payments, or Prepayments thereof payable by the City under the Lease. The Corporation will not assign or pledge the Lease Payments or other amount s derived from the Leased Premises and from its other rights under the Lease except as provided under the te rms of the Lease, the Assignment Agreement and the Trust Agreement, or its duties and obligations except as provided under the Lease.
Abatement of Lease Payments and Additional Payments
In the Event of Damage, Destruction, Condemnation or Title Defect. Except to the extent that proceeds of the type described in the following para graph are available, the amount of Lease Payments and Additional Payments will be completely or partially ab ated during any period in which by reason of material damage, destruction or taking by eminent domain or co ndemnation of the Leased Premises or defects in the title with respect to the Leased Premises there is substantial interference with the use and right of possession of all or a portion of the Leased Premises by the City. The amount of such abatement will be such that the resulting Lease Payments, exclusive of the amounts described in the following paragraph, do not exceed the fair rental value (as determined by an independent real estate appraiser selected by the City, who is not an employee of the City) for the use and possession of the portion of the Leased Premises not damaged, destroyed, interfered with or taken. Such abatement will continue for the period commencing with such material damage, destruction, interference or taking and ending with the substantial completion of the replacement or work of repair or the removal of the title defect causing such interference with use. Except as provided the Lease, in the event of any such damage , destruction, interference or taking, the Lease will continue in full force and effect and the City waives an y right to terminate the Lease by virtue of any such damage, destruction, interference or taking.
Notwithstanding a substantial interference with the use and possession of all or a portion of the Leased Premises, the City will remain obligated to make Lease Payments which would otherwise be abated (i) to the extent that moneys derived from any person as a result of any delay in the reconstruction, replacement or repair of the Leased Premises, or any porti on thereof, are available to pay the amount which would otherwise be abated; and (ii) to the extent that moneys are available in the Lease Payment Fund to pay the amount which would otherwise be abated. The Lease Payments will be payable from such amounts paid under (i) and (ii) above as an obligation of the City payable from a special fund.
Repair or Replacement. In the event of abatement under the Lease, unless the abatement will be avoided as a result of a prepayment of Lease Payments fr om Net Proceeds pursuant to the Lease, the City will use its best efforts to repair or replace the damaged or destroyed or taken portion of the Leased Premises, as the case may be, from Net Proceeds or special funds of the C ity or other moneys the application of which would, in the opinion of Special Counsel, addressed to the Trustee, the City and the Corporation not result in the
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obligations of the City under the Lease constituting indebtedness of the City in contravention of the Constitution and laws of the State.
Additional Payments
In addition to the Lease Payments, the City will also pay such amounts (“Additional Payments”) as will be required for the payment of all administrative co sts of the Corporation relating to the Leased Premises, the Certificates and any Additional Certificates, including without limitation all expenses, compensation and indemnification of the Trustee payable by the City under the Trust Agreement, taxes of any sort whatsoever payable by the Corporation as a result of its leasehold interest in the Leased Premises or undertaking of the transactions contemplated in the Leas e or in the Trust Agreement, fees of auditors, accountants, attorneys or engineers and any and all other necessary administrative costs of the Corporation or charges required to be paid by it to comply with the terms of the Certificat es and any Additional Certificates or of the Trust Agreement, including premiums or insurance maintained pursuant to the Lease or to indemnify the Corporation and its employees, officers and directors and the Trustee. All such Additional Payments to be paid under the Lease will be paid when due directly by the City to the respective parties to whom such Additional Payments are owing.
Net-Net-Net Lease
The Lease will be deemed and construed to be a “net -net-net lease” and the City has agreed that the Lease Payments will be an absolute net return to the Corporation, free and clear of any expenses, taxes, fees, insurance premiums, rebate payments, reserve deposits, co sts associated with the Leased Premises, charges or set-offs whatsoever, except as expressly provided in the Lease.
INSURANCE
Public Liability and Leased Premises Damage
Coverage. The City will maintain or cause to be maintained, throughout the Term of the Lease, a standard comprehensive general public liability and property damage insurance policy or policies in protection of the City and the Corporation and their officers, agen ts and employees. Said policy or policies will provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the use or operation of any City property or portion thereof.
Limits. Said policy or policies will provide coverage in the minimum liability limits of One Million Dollars ($1,000,000) for personal injury or death of each person and Three Million Dollars ($3,000,000) for personal injury or deaths of two or more persons in ea ch accident or event, and in a minimum amount of Five Hundred Thousand Dollars ($500,000) for damage to pr operty resulting from each accident or event (in each case subject to a deductible clause of not to exceed Five Hundred Thousand Dollars ($500,000)). Such public liability and property damage insurance may, however, be in the form of a single limit policy covering all such risks in an amount equal to the liability limits set forth in the Lease.
Joint or Self-Insurance. Such liab ility insurance, including the deduct ible, may be maintained as part of or in conjunction with any other insurance coverage carried by the City, and, subject to compliance with the Lease, may be maintained in the form of self-insurance by the City.
Payment of Net Proceeds. The proceeds of such liability insurance will be applied toward extinguishment or satisfaction of the liability with respect to which the insurance proceeds will have been paid.
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Workers’ Compensation
The City will also maintain workers’ compensation insurance issued by a responsible carrier authorized under the laws of the State to insure its employees against liability for compensation under the Workers’ Compensation Insurance and Safety Act now in force in the State, or any act later enacted as an amendment or supplement thereto (with provision for self-insurance).
Casualty and Theft Insurance
Casualty and Theft Insurance; Coverage. The City wi ll procure and maintain, or cause to be procured and maintained, throughout the Term of the Lease, insurance against loss or damage to any portion of the Leased Premises caused by fire and lightning, with extended coverage and theft, vandalism and malicious mischief insurance. Said extended coverage insurance will, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance, excluding flood and earthquake. The City will not be required to purchase or maintain earthquake insurance with respect to the Leased Premises.
Amount. Such insurance will be in an amount not less than the replacement cost of the Leased Premises, subject to a “deductible clause” not to excee d Five Hundred Fifty Thousand Dollars ($500,000) for any one loss or, in the case of a flood and earthquake rider, ten percent (10%) of the coverage obtained. The term “full replacement value” as used in this para graph will mean the actual replacement cost of the improvements constituting the Leased Premises.
Joint or Self-Insurance. Such insurance may be maintained as part of or in conjunction with any other insurance carried or required to be carried by the City, and, subject to compliance with the Lease, may be maintained in the form of self-insurance by the City. Insurance obtained through a California joint powers authority of which the City is a member will not be deemed to be self-insurance.
Payment of Net Proceeds. The Net Proceeds of such insurance will be paid to the Trustee and deposited in the Net Proceeds Fund and applied as provided in the Lease.
Rental Interruption Insurance
Coverage and Amount. Upon delivery of the Leased Premises to it for occupancy, the City will maintain or cause to be maintained rental income or use and occupancy insurance in an amount not less than the maximum remaining scheduled Lease Payments in an y future twenty-four (24) month period, to insure against loss of rental income from the Leased Premises caused by perils covered by the insurance required to be maintained as provided in the Lease. Such rent al interruption insurance will name the Trustee and the Corporation as additionally insured parties and the Trustee as the loss payee.
Joint Insurance. Such insurance may be maintained as part of or in conjunction with any other rental income or use and occupancy insurance carried by the City, but may not be maintained in the form of self- insurance by the City.
Payment of Net Proceeds. The Net Proceeds of such rental interruption insurance will be paid to the Trustee and deposited in the Lease Payment Fund, to be credited towards the payment of the Lease Payments in the order in which such Lease Payments come due an d payable if there are insufficient Net Proceeds to pay all Lease Payments due in any such Certificate Year.
Title Insurance
The City will obtain and, throughout the Term of th e Lease, maintain or cause to be maintained title insurance on the Leased Premises, in the form of an ALTA leasehold title insurance policy (with western
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regional exceptions), in an amount equal to the aggreg ate principal amount of the Certificates and Additional Certificates Outstanding, issued by a company of reco gnized standing, duly authorized to issue the same, payable to the Trustee for the benefit of the Owners, subject only to Permitted Encumbrances. Said policy or policies will insure the City’s leasehold estate unde r the Lease in the Leased Premises, subject only to Permitted Encumbrances. All Net Proceeds received under said policy or policies will be deposited with the Trustee and applied as provided in th e Trust Agreement. So long as any of the Certificates and Additional Certificates remain Outstanding, each policy of the title insurance obtained pursuant to the Lease or required thereby will provide that all proceeds thereunder will be payable to the Trustee for the benefit of the Certificate Owners and the owners of any Additional Certificates. The Net Proceeds of such insurance will be applied as provided in the Lease.
General Insurance Provisions
Form of Policies. All policies of insurance required to be procured and maintained pursuant to the Lease and any statements of self-insurance will be in a form certified by the City Representative or an insurance agent, broker or consultant to the City to comply with the provisions of the Lease. All such policies will provide that the insured parties will be given thirty (30) days’ notice of each expiration, any intended cancellation thereof or reduction of th e coverage provided thereby. Each policy of insurance required to be procured and maintained pursuant to the Lease regarding casualty and theft insurance, regarding rental interruption insurance and regarding title insurance will provide that all proceeds thereunder will be payable to the Trustee for the benefit of the Owners. All required insurance policies must be provided by a commercial insurer rated A by Best or A- and A3 by S&P and Moody’s, respectively. All policies will name the City, the Corporation and the Trustee as insureds and the Trustee as a loss payee.
Payment of Premiums. The City will pay or cause to be paid when due the premiums for all insurance policies required by the Lease, and will promptly furnish or cause to be furnished to the Trustee a certificate to such effect, as described in the Lease.
Protection of the Trustee. The Trustee will not be responsible for the sufficiency or adequacy of any insurance required in the Lease and will be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss agreed to by the Trustee.
Evidence of Insurance. The City will cause to be delivered to the Trustee annually on or before August 1 a certificate stating that the insurance policies required by the Lease are in full force and effect. The Trustee will be entitled to rely upon any certificate so provided as to the City’s compliance with the Lease Agreement, and the Trustee will have no further duties in that regard.
Self-Insurance. The City may only elect to self-insure as permitted by the Lease if and to the extent such self-insurance method or plan of protection will afford reasonable protection to the Corporation and the Trustee, in light of all circumstances, giving considerati on to cost, availability and similar plans or methods of protection adopted by other cities in the State other than the City. Insurance provided through a California joint powers authority of which the City is a member or with which the City contracts for insurance will not be deemed to be self-insurance for purposes of the Lease. Any self-insurance maintained by the City pursuant to the Lease will comply with the following terms:
(a) The self-insurance program will be approved in writing by the City’s City Manager or Assistant City Manager and an independent insu rance consultant in accordance with the California Labor Code and the California Government Code;
(b) The self-insurance program will include an actuarially sound claims reserve fund out of which each self-insured claim will be paid; the adequacy of such fund will be evaluated on an annual basis by the City Representative in a cer tified statement delivered to the Trustee; and any
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deficiencies in any self-insured claims reserve fund will be remedied in accordance with the recommendation of the City Representative;
(c) The self-insurance fund must be held in a separate trust fund by an independent trustee; and
(d) In the event the self-insurance program will be discontinued, the actuarial soundness of its claims reserve fund, as determined by the City Representative, will be maintained.
Cooperation
The Corporation will cooperate fully with the City at the expense of the City in filing any proof of loss with respect to any insurance policy maintained pursuant to the Lease and in the prosecution or defense of any prospective or pending condemnation proceeding with respect to the Leased Premises or any portion thereof.
DAMAGE, DESTRUCTION AND EMINENT DOMAIN; USE OF NET PROCEEDS Application of Net Proceeds
Deposit in Net Proceeds Fund. The City will remit to the Trustee any Net Proceeds received by the City and the Trustee as provided in the Lease regarding casualty and th eft insurance and title insurance promptly upon receipt thereo f, and pursuant to the Trust Agreement, the Trustee will deposit such Net Proceeds of insurance in the Net Proceeds Fund. The C ity and/or the Corp oration will transfer to the Trustee any other Net Proceeds received by the City and/or Corpor ation in the event of any accident, destruction, theft or taking by eminent domain or condemnation with re spect to the Leased Premises, for deposit in the Net Proceeds Fund.
Disbursement for Replacement or Repair of the L eased Premises. Upon receipt of the certification described in paragraph (a) below and the requisition described in paragraph (b) below, the Trustee will disburse moneys in the Net Proceeds Fund to the person, firm or corporation named in the requisition as provided in the Lease.
(a) Certification. The City Representati ve must certify to the Corporation and the Trustee that:
(i) Sufficiency of Net Proceeds. The Ne t Proceeds available for such purpose, together with any other funds supplied by the City to the Trustee in a subaccount of the Net Proceeds Fund for such purpose, are expected to equal at least 100% of the projected costs of replacement or repair, as demonstrated in an attached reconstruction budget, and (ii) Timely Completion. In the event that damage, destruction or taking results or is expected to result in an abatement of L ease Payments, such replacement or repair can be fully completed within a period not in excess of the period in which rental interruption insurance proceeds, as described in the Lease together with other identified available moneys, will be available to pay in full all Lease Payments coming due during such period as demonstrated in an attached reconstruction schedule.
(b) Requisition. The City Representative must deliver to the Trustee a Requisition stating with respect to each payment to be made (1) the requisition number, (2) the name and address of the person, firm or corporation to whom payment is due, (3) the amount to be paid and (4) that each obligation mentioned therein has been properly incurre d, is a proper charge against the Net Proceeds Fund, has not been the basis of any previous withdrawal, and specifying in reasonable detail the nature
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of the obligation. Each such cost requisition will be sufficient evidence to the Trustee of the facts stated therein and the Trustee will have no duty to confirm the accuracy of such facts.
Any balance of the Net Proceeds remaining after such replacement or repair has been completed and after payment or provision for payment of all Certificates as provided in the Trust Agreement and all Additional Certificates as provided in any Supplemen tal Trust Agreement pursuant to which such Additional Certificates are executed and delivered will be paid to the City after payment of amounts due the Trustee pursuant to the Trust Agreement.
Disbursement for Prepayment. If the City Representa tive notifies the Trustee in writing of the City’s determination that the certification provided above cannot be made or that replacement or repair of any portion of the Leased Premises is not economically feasible or in the best interest of the City, then the Trustee will promptly transfer the Net Proceeds to the Prepayment Fund as provided in the Trust Agreement and apply them to prepayment of the Certificat es as provided in the Trust Agreem ent and Additional Certificates as provided in a Supplemental Trust Agreement and prepay ment of Lease Payments as provided in the Lease; provided that in the event of damage or destruction in whole of the Leased Premises and in the event such Net Proceeds, together with funds then on hand in the Le ase Payment Fund are not sufficient to prepay all the Certificates and Additional Certificates then Outstandi ng, then the City will not be permitted to certify that repair, replacement or improvement of all of the Leased Premises is not economically feasible or in the best interest of the City. In such event, the City will proceed to repair, repl ace or improve the L eased Premises as described in the Lease from legally available funds in the then-current Fiscal Year and will make the required notification to the Trustee pursuant to the Trust Agreem ent and the Trustee will disburse moneys in the Net Proceeds Fund to the person, firm, or corporation named in the Requisition as provided therein.
COVENANTS WITH RESPECT TO THE LEASES PREMISES
Use of the Leased Premises
The City represents and warrants that it has an im mediate need for, and expects to make immediate use of, all of the Leased Premises, which need is not temporary or expected to diminish in the foreseeable future.
Interest in the Leased Premises and the Lease
Corporation Holds Leasehold Interest During Term. During the Term of the Lease, the Corporation does and will hold a leasehold interest in the Leased Premises pursuant to the Site Lease. The City will take any and all actions reasonably required, including but not limited to executing and filing any and all documents reasonably required, to maintain and evidence such title and interest at all times during the Term of the Lease.
Title Transferred to the City at End of Term. Upon expiration of the Term as provided in the Lease, all right, title and interest of the Corporation in and to all of the Leased Premises will be transferred to and vest in the City, without the necessity of any additional document of transfer.
Quiet Enjoyment
During the Term, the Corporation will provide the City with quiet use and enjoyment of the Leased Premises, and the City will during such Term peaceabl y and quietly have and hold and enjoy the Leased Premises, without suit, trouble or hindrance from the Cor poration, or any person or entity claiming under or through the Corporation except as expressly set forth in the Lease. The Corporation will, at the request of the City, join in any legal action in which the City asserts its right to such possession and enjoyment to the extent the Corporation may lawfully do so. Notwithstanding the foregoing, the Corporation will have the right to inspect the Leased Premises as provided in the Lease.
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Installation of the City’s Personal Property
The City may at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed other items of equipment or other property in or upon any portion of the Leased Premises. All such items will remain the sole property of the City, regardless of the manner in which the same may be affixed to such portion of the Leased Premises, in which neither the Corporation nor the Trustee will have any interest, and may be modified or removed by the City at any time; provided that the City will repair and restore any and all damage to such portion of the Leased Premises resulting from the installation, modification or removal of any such items of equipm ent. Nothing in the Leas e prevents the City from purchasing items to be installed pursuant to this paragraph, provided that no lien or security interest will attach to any part of the Leased Premises.
Access to the Leased Premises
The City agrees that the Corporation, any Corporation Representative and the Corporation’s successors, assigns or designees will have the right at all reasonable times to enter upon the Leased Premises or any portion thereof to examine and inspect the Leased Prem ises. The City further agr ees that the Corporation, any such Corporation Representative, and the Corporation’s successors, assigns or designees will have such rights of access to the Leased Premises as may be reason ably necessary to cause the proper maintenance of the Leased Premises in the event of failure by the City to perform its obligations under the Lease.
Maintenance, Utilities, Taxes and Assessments
(a) Maintenance; Repair and Replacement. Throughout the Term of the Lease, as part of the consideration for the rental of the Leased Premises, all repair and maintenance of the Leased Premises will be the responsibility of the City, and the City will pay for or otherwise arrange for the payment of the cost of the repair and replacement of the Leased Premises resulting from ordinary wear and tear or want of care on the part of the City or any sublessee thereof. In exchange for the Lease Payments provided in the Lease, the Corporation has agreed to provid e only the Leased Premises, as more specifically set forth in the Lease. The City waives the benefits of subsections 1 and 2 of Section 1932 of the California Civil Code, but such waiver will not limit any of the rights of the City under the terms of the Lease.
(b) Tax and Assessments; Utility Charges. The City will also pay or cause to be paid all taxes and assessments, including but not limited to utility charges, of any type or nature charged to the Corporation or the City or levied, assessed or char ged against any portion of the Leased Premises or the respective interests or estates therein; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the City will be obligated to pay only such installmen ts as are required to be paid du ring the Term of the Lease as and when the same become due.
(c) Contests. The City may, at its expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom; provided that prior to such nonpayment it will furnish the Corporation and the Trustee with the opinion of an Independent Counsel acceptable to the Corporation, to the effect that, by nonpayment of any such items, the interest of the Corporation in such portion of the Leased Premises will not be materially endangered and that the Leased Premises will not be subject to loss or forfeiture. Otherwise, the City will promptly pay such taxes, assessments or charges or make provisions for the payment thereof in form satisf actory to the Corporation. The Corporation will cooperate fully in such contest, upon the request and at the expense of the City.
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Modification of the Leased Premises
Additions, Modifications and Improvements. The City will, at its own expense, have the right to make additions, modifications, and improvements to any portion of the Leased Premises if such improvements are necessary or beneficial for the use of such por tion of the Leased Premises . All such additions, modifications and improvements will thereafter comprise pa rt of the Leased Premises and be subject to the provisions of the Lease. Such additions, modifications and improvements will not in any way cause an abatement of Lease Payments with respect to the Leased Premises or cause it to be used for purposes other than those authorized under the provisions of State and federal law or in any way which would impair the State tax-exempt status or the exclusion from gross income for federal income tax purposes of the interest with respect to the Certificates and Additional Certificates (to the extent such Additional Certificates were executed and delivered as tax-exempt Certificates); and the Leased Premises, upon co mpletion of any additions, modifications and improvements made pursuant to the Lease, will have an annual fair rental value which is not less than the annual Lease Payments.
No Liens. Except for Permitted Encumbrances, the City will not permit any mechanic’s or other lien to be established or remain against the Leased Premises for labor or materials furnished in connection with any additions, modifications or improvements made by the C ity pursuant to the Lease; provided that if any such lien is established and the City will first notify or cause to be notified the Corporation of the City’s intention to do so, the City may in good faith contest any lien filed or established against the Leased Premises, and in such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and will provide the Corporation with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Trustee (as assignee of the Corporation). The Corporation will cooperate fully in any such contest, upon the request and at the expense of the City.
Replacements, Redevelopment and Renovation. The City will, at its own expense, or with the proceeds of Additional Certificates, have the right to make replacements, redevelopment or renovation of all or a portion of the Leased Premises if the following conditions precedent are satisfied:
(a) The City receives an opinion of Special Counsel, a copy of which the City will furnish to the Corporation and the Trustee, that (1 ) such replacement does not adversely affect the federal income tax exclusion or the State tax-exempt status of the interest with respect to the Certificates and Additional Certifi cates (to the extent such Additional Certificates were executed and delivered as tax-exempt Certificates), and (2) the Lease will remain the legal, valid, binding and enforceable obligation of the City;
(b) In the event such replacement, redevelopment or renovation would result in the temporary abatement of Lease Payments as provided in the Lease, the City will notify any rating agency then providing a rating on the Certificates and will deposit moneys with the Trustee in advance for payment of Lease Payments from the proceeds of Additional Certificates or from special funds of the City or other moneys, the application of which would not, in the opinion of Special Counsel (a copy of which will have been delivered to the Trustee), result in such Lease Payments constituting indebtedness of the City in contravention of the Constitution and laws of the State; (c) The City will certify to the Trustee that it has sufficient funds to complete such replacement, redevelopment or renovation; and
(d) In the case of replacement(s), redevelopment or renovation other than from the proceeds of Additional Certificates, the City and the Trustee receive an independent appraisal from a California certified general appraiser that the annual fair rental value of the replacements will be at least equal to the annual Lease Payments immediately prior to such replacement or redevelopment.
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Encumbrances; Alternative Financing Methods
Encumbrances. Except as provided in the Lease, the City will not, directly or indirectly, create, incur, assume or suffer to exist any mortgage, pledge, liens, charges, encumbrances or claims, as applicable, on or with respect to the Leased Premises, other than Permitted Encumbrances and other than the respective rights of the Corporation and the City as provided in the Lease. Except as expressly provided in the Lease, the City will promptly, at its own expense, take such action as may be necessary to duly discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim, for which it is responsible, if the same will arise at any time; provided that the City may contest such liens if it desires to do so. The City will reimburse the Corporation for any expense incurred by it in order to discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim.
Alternative Financing Methods. Notwithstanding the foregoing, the City may create or suffer to create any mortgage, pledge, liens, charges, encumbrances or claims upon the Leased Premises or any improvements thereto, provided that (1) any such mortgage, pledge, liens, charges, encumbrances or claims will at any time while any of the Certificates or Addi tional Certificates remain Outstanding be and remain subordinate in all respects to the Site Lease and Lease and any security interest given to the Trustee for the benefit of the Owners and (2) the City will have first delivered to the Trustee an opinion of Special Counsel substantially to the effect that such mortgage, pledge, liens, charges, encumbrances or claims would not result in the inclusion of the interest with respect to the Certificates and the Additional Certificates (to the extent such Additional Certificates are executed and delivered as tax-exempt Certificates) in the gross income of the owners thereof for purposes of federal income taxation or impair the State tax-exempt status of such interest payments.
Corporation’s Disclaimer of Warranties
THE CORPORATION AND ITS ASSIGNS HAS MADE NO WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIE D, AS TO THE VALUE, DESIGN, CONDITION,
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR FITNESS FOR THE USE CONTEMPLATED BY THE CITY OF THE LEASED PREMISES, OR ANY PORTION THEREOF. THE CITY HAS ACKNOWLEDGED THAT THE CITY IS LEASING THE LEASED PREMISES AS IS. In no event will the Corporation and its assigns be liable for incidental, indirect, special or consequential damages, in connection with or arising out of the Lease, the Site Lease, the Assignment Agreement or the Trust Agreement for the existence, furnishing, functioning or the City’s use and possession of the Leased Premises.
The City’s Right to Enforce Warranties of Vendors or Contractors The Corporation has by the Lease irrevocably appointe d the City its agent and attorney-in-fact during the Term of the Lease, so long as the City is not in default thereunder, to assert from time to time whatever claims and rights, including without limitation, warranty claims, claims for indemnification and claims for breach of any representations, respecting the Leased Premises which the Corporation may have against any vendor or contractor. The City’s sole remedy for the breach of any such warranty, indemnification or representation will be against the vendor or contractor with respect thereto, and not against the Corporation and its assigns, nor will such matter have any effect whatsoever on the rights and obligations of the Corporation with respect to the Lease, including the right to receiv e full and timely Lease Payments and all other payments due under the Lease. The City will be entitled to retain any and all amounts recovered as a result of the assertion of any such claims and rights. The Corporation will, upon the City’s request and at the City’s expense, do all things and take all such actions as the City may request in connection with the assertion of any such claims and rights.
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Compliance with Law, Regulations, Etc.
Except as described in below, the City has, after due inquiry, no knowledge and has not given or received any written notice indicating that the past or pr esent use of the Leased Premises or any practice, procedure or policy employed by it in the conduct of its business materially violates any applicable law, regulation, code, order, rule, judgment or consent agreement, including, without limitation, those relating to zoning, building, use and occupancy, fire safety, health, sanitation, air pollution, ecological matters, environmental protection, hazardous or toxic material s, substances or wastes , conservation, parking, architectural barriers to the handicapped, or restrictive covenants or other agreements affecting title to the Leased Premises (collectively, “Laws and Regulations”). Without limiting the generality of the foregoing, neither the City nor to the best of its knowledge, afte r due inquiry, any prior or present owner, tenant or subtenant of the Leased Premises has, other than as set forth in the Lease or as may have been remediated in accordance with Laws and Regulations, (i) used, treated, stored, transported or disposed of any material amount of flammable explosives, polychlorinated biphenyl compounds, heavy metals, chlorinated solvents, cyanide, radon, petroleum products, asbestos, methane, radioactive materials, pollutants, hazardous materials, hazardous wastes, hazardous, toxic, or regulated substa nces or related materials, as defined in CERCLA, RCRA, CWA, CAA, TSCA and Title III, and the regulations promulgated pursuant thereto, and in all other Environmental Regulations applicable to the City, the Leased Premises or the business operations conducted by the City thereon (collectively, “Hazardous Ma terials”) on, from or beneath the Leased Premises, (ii) pumped, spilled, leaked, disposed of, emptied, discharged or released (collectively referred to as “Release”) any material amount of Hazardous Materials on, from or beneath the Leased Premises, or stored any material amount of petroleum products at the Leased Premises in underground storage tanks.
Excluded from the representations and warranties above with respect to Hazardous Materials are those Hazardous Materials in the amounts ordinarily found in the inventory of, or used in the maintenance of the City’s City Hall, Community Hall, Quinlan Community Center, or related buildings, the use, treatment, storage, transportation and disposal of which has been and will be in compliance with all Laws and Regulations (defined in the Lease as the “Permitted Use”).
No portion of the Leased Premises located in an area of high potential incidence of radon has an unventilated basement or subsurface portion which is occupied or used for any purpose other than the foundation or support of the improvements to the Leased Premises.
Environmental Compliance
Other than the Permitted Use, the City will not use or permit the Leased Premises or any part thereof to be used to generate, manufacture, refine, treat, stor e, handle, transport or dis pose of, transfer, produce or process Hazardous Materials, except, and only to the extent, if necessary to maintain the improvements on the Leased Premises and then, only in compliance with all Environmental Regulations, and any state equivalent laws and regulations, nor will it permit, as a result of any intentional or unintentional act or omission on its part or by any tenant, subtenant, licensee, guest, invitee, contractor, employee and agent, the storage, transportation, disposal or use of Hazardous Materials or the Release or threat of Release of Hazardous Materials on, from or beneath the Leased Premises or onto any other Le ased Premises excluding, however, those Hazardous Materials in those amounts ordinarily found in the inventory of a municipal corporation, the use, storage, treatment, transportation and disposal of which will be in compliance with all Environmental Regulations.
Upon the occurrence of any Release or threat of Releas e of Hazardous Materials other than the Permitted Use, the City will promptly commence and perform, or cause to be commenced and performed promptly, without cost to the Trustee, all investigations, studies, sampling and testing, and all remedial, removal and other actions necessary to clean up and remove all Hazardous Mate rials so released, on, from or beneath the Leased Premises, in compliance with all Environmental Regulations. Notwithstanding anything to the contrary contained in the Lease, underground storage tanks will only be permitted subject to compliance with the Lease and only to the extent necessary to maintain the improvements on the Leased Premises.
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The City will comply with, and will cause all tenants, subtenants, licensees, guests, invitees, contractors, employees and agents on the Leased Premises to comply with, all Environmental Regulations, and will keep the Leased Premises free and clear of any lien s imposed pursuant thereto; provided, however, that notwithstanding that a portion of this covenant is limited to the City’s use of its best efforts, the City will remain solely responsible for ensuring such compliance and such limitation will not diminish or affect in any way the City’s obligations contained in the Lease as provided in the Lease. Upon receipt of any notice from any person with regard to the Release of Hazardous Materials other than the Permitted Use on, from or beneath the Leased Premises, the City will give prompt written notice thereof to the Trustee prior to the expiration of any period in which to respond to such notice under any Environmental Regulation.
Irrespective of whether any representation or warranty contained in the Lease is not true or correct, the City will, to the extent permitted by law, defend, indemnify and hold harmless the Trustee, the Owners, the Corporation and each of their respective employees, agents, officers, directors, trustees, successors and assigns, from and against any claims, demands, penalties, fines, attorneys’ fees (including, without limitation, attorneys’ fees incurred to enforce the indemnification contained in the Lease, consultants’ fees, investigation and laboratory fees, liabilities, settlements (five Business Days’ prior notice of which the Trustee will have delivered to the City) court costs, damages, losses, costs or expenses of whatever kind or nature, known or unknown, contingent or otherwise, occurring in whole or in part, arising out of, or in any way related to, (i) the presence, disposal, Release, threat of Release, removal, discharge, storage or transportation of any Hazardous Materials on, from or beneath the Leased Premises, (ii) any personal injury (including wrongful death) or Leased Premises damage (real or personal) arising out of or related to such Hazardous Materials, (iii) any lawsuit brought or threatened, settlement reached (five Business Days’ prior notice of which the Trustee will have delivered to the City), or governmental order relating to Hazardous Materials on, from or beneath the Leased Premises, (iv) any violation of Environmental Re gulations or the Lease by it or any of its agents, tenants, employees, contractors, licensees, guests, subtenants or invitees, and (v) the imposition of any governmental lien for the recovery of environmental cleanup or removal costs. To the extent that the City is strictly liable under any Environmental Regulation, its obligation under the foregoing indemnification will likewise be without regard to fault on its part with respect to the violation of any Environmental Regulation which results in liability to any indemnitee. The obligations and liabilities under the Lease will survive the payment and satisfaction of all Certificates and Additi onal Certificates or resignation or removal of the Trustee.
The City will conform to and carry out a reasonable program of maintenance and inspection of all underground storage tanks, and will maintain, repair, and replace such tanks only in accordance with Laws and Regulations, including but not limited to Environmental Regulations.
Condemnation of Leased Premises
The City has covenanted and agreed, to the extent it may lawfully do so, that, except as described in the Site Lease, so long as any of the Certificates or Additional Certificates remain outstanding and unpaid, the City will not exercise the power of condemnation with re spect to the Leased Premises. The City has further covenanted and agreed, to the extent it may lawfully do so, that if for any reason the foregoing covenant is determined to be unenforceable or if the City will fail or refuse to abide by such covenant and condemns the Leased Premises, then the appraised value of the Leased Premises will not be less than the sum of: (i) as to Certificates and Additional Certificates then subjec t to optional prepayment, the principal and interest components of such Certificates and Additional Certificat es outstanding through the date of their prepayment, and (ii) as to Certificates and Ad ditional Certificates not then subject to optional prepayment, the amount necessary to defease such Certificates and Additional Certificates to the first available prepayment date in accordance with the Trust Agreement.
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ASSIGNMENT, SUBLEASING AND AMENDMENT
Assignment by the Corporation
Except as provided in the Lease, in the Trus t Agreement and the Assignment Agreement, the Corporation will not assign the Lease to any other person, firm or corporation so as to impair or violate the representations, covenants and warranties contained in the Lease.
Assignment and Subleasing by the City
Assignment. The Lease may be assigned by the City, so long as such assignment does not, in the opinion of Special Counsel, adversely affect the State tax-exempt status or the exclusion from gross income for federal income tax purposes of the interest with respect to the Certificates and any Additional Certificates (to the extent such Additional Certificates are executed an d delivered as tax-exempt Certificates) or affect the validity of the Lease. In the even t that the Lease is assigned by the City, the obligation to make Lease Payments under the Lease will remain the obligation of the City.
Sublease. The City may sublease all or any portion of the Leased Premises, subject to the following conditions: (i) the Lease and the obl igation of the City to make Leas e Payments and Additional Payments under the Lease will remain obligations of the City; (ii) the City will, within 30 days after the delivery thereof, furnish or cause to be furnished to the Corporation and the Trustee a true and complete copy of such sublease; and (iii) the City will furnish to the Corporation and the Trustee, an opinion of Special Counsel to the effect that the sublease will not cause the interest due with respect to the Certificates and any Additional Certificates (to the extent such Additional Certificates are executed and delivered as tax-exempt Certificates) to be subject to State personal income tax or adversely affect th e exclusion from gross income for federal income tax purposes of such amounts, provided that no such opinion will be required with respect to the subleases in effect upon the Delivery Date.
Amendments and Modifications. The Lease may be amended or any of its terms modified with the written consent of the City and the Trustee (as assign ee of the Corporation), in accordance with the Trust Agreement.
EVENTS OF DEFAULT AND REMEDIES
Events of Default Defined
The following will be “events of default” under the Lease and the terms “events of default” and “default” means, whenever they are used in the Lease, any one or more of the following events:
Payment Default. Failure by the City to pay any Lease Payment required to be paid under the Lease by the corresponding Lease Payment Date; and
Covenant Default. Failure by the City to observe and perform any warranty, covenant, condition or agreement on its part to be observed or performed in the Lease or otherwise with respect thereto or in the Trust Agreement or in the Site Lease, other than as referred to in the foregoing paragraph, for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Corporation, the Trustee, or the Owners of not less than 20% in aggregate principal amount of Certificates and Additional Certificates then Outstanding; provided, how ever, if the failure stated in the notice cannot be corrected within the applicable period, the Corporation, the insurer of any Addition al Certificates or such Owners, as the case may be, will not unreasonably withho ld their consent to an extension of such time if corrective action is instituted by the City within the applicable period and diligently pursued until the default is corrected.
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Bankruptcy or Insolvency. The filing by the City of a case in bankruptcy, or the subjection of any right or interest of the City under the Lease to any execution, garnishment or attachment, or adjudication of the City as a bankrupt, or assignment by the City for the benefit of creditors, or the entry by the City into an agreement of composition with creditor s, or the approval by a court of competent jurisdiction of a petition applicable to the City in any proceedings instituted under the provisions of the federal bankruptcy code, as amended, or under any similar act which may later be enacted.
Remedies on Default
Whenever any event of default referred to in the Lease will have happened and be continuing, it will be lawful for the Corporation to exercise any and all re medies available pursuant to law or granted pursuant to the Lease. Notwithstanding anything in the Lease or in the Trust Agreement to the contrary, THERE WILL
BE NO RIGHT UNDER ANY CIRCUMSTANCES TO ACCELERATE THE LEASE PAYMENTS OR
OTHERWISE DECLARE ANY LEASE PAYMENTS NOT THEN IN DEFAULT TO BE IMMEDIATELY DUE AND PAYABLE. After the occurren ce of an event of defa ult under the Lease, the City will surrender possession of the Leased Premises to the Corporation, if requested to do so by the Corporation, the Trustee or the Owners, in accordance with the provisions of the Trust Agreement.
No Termination; Repossession and Re-Lease on Behalf of the City. In the event the Corporation does not elect to terminate the Lease in the manner provided for in the Lease, the Corporation may, with the consent of the City, which consent has been irrevocably given, repossess the Leased Premises and re-lease it for the account of the City, in which event the City’s obligation will accrue from year to year in accordance with the Lease and the City will continue to receive the value of the use of the Leased Premises from year to year in the form of credits against its obligation to pay Lease Paym ents. The obligations of the City will remain the same as prior to such default, to pay Lease Payments and Additional Payments whether the Corporation re-enters or not. The City has agreed to and will remain liable for the payment of all Lease Payments and Additional Payments and the performance of all conditions contained in the Lease and will reimburse the Corporation for any deficiency arising out of the re-leasing of the Leased Premises, or, in the event the Corporation is unable to re-lease the Leased Premises, then for the full amount of all Lease Payments and Additional Payments to the end of the Term of the Lease, but said Lease Payments and Additional Payments and/or deficiency will be payable only at the same time and in the same manner as provided above for the payment of Lease Payments and Additional Payments under the Lease, notwithstanding such repossession by the Corporation or any suit brought by the Corporation for the purpose of effect ing such repossession of the Leased Premises or the exercise of any other remedy by the Corporation.
The City has by the Lease irrevocably appointed the Corporation as the agent and attorney-in-fact of the City to repossess and re-lease the Leased Premises in the event of default by the City in the performance of any covenants contained in the Lease to be performed by the City and to remove all personal property whatsoever situated upon the Leased Premises, to place such property in storage or other suitable place in the County of Santa Clara, for the account of and at th e expense of the City, and the City has by the Lease covenanted and agreed to save harmless the Corporation from any costs, loss or damage whatsoever arising or occasioned by any such repossession and re-leasing of the Leased Premises. The City by the Lease has waived any and all claims for damage caused or which may be caused by the Corporation in repossessing the Leased Premises as provided in the Lease and all claims for damages that may result from the destruction of or the injury to the Leased Premises and all claims for damages to or loss of any property belonging to the City that may be in or upon the Leased Premises.
The City agrees that the terms of the Lease constitute full and sufficient notice of the right of the Corporation to re-lease the Leased Premises in the even t of such repossession without effecting a surrender of the Lease, and further agrees that no acts of the Corporation in effecting such re-leasing will constitute a surrender or termination of the Lease irrespective of the term for which such re-leasing is made or the terms and conditions of such re-leasing, or otherwise, but that , on the contrary, in the ev ent of such default by the
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City the right to terminate the Lease will vest in the Corporation to be effected in the sole and exclusive manner provided for in the Lease.
The City will retain the portion of rental obtained by the Trustee, as assignee of the Corporation, that is in excess of the Lease Payments and Additional Payments, the fees, expenses and costs of the Trustee of re- leasing the Leased Premises, and all amounts payable by the City under the Lease and the Trust Agreement.
In the event that the liability of the City under the Lease is held to constitute indebtedness or liability in any year exceeding in any year the income and revenue provided for such year , the Corporation, or the Trustee or the Owners, as assignees of the Corporation, will not exercise the remedies provided in the Lease.
Termination; Repossession and Re-Lease. In the event of the termination of the Lease by the Corporation at its option and in the manner provided in the Lease on account of default by the City (and notwithstanding any repossession of the Leased Premises by the Corporation in any manner whatsoever or the re-leasing of the Leased Premises), the City nevertheless has agreed to pay to the Corporation all costs, losses or damages howsoever arising or occurring payable at the same time and in the same manner as is provided in the Lease in the case of payment of Lease Payments and Additional Payments. Any proceeds of the re-lease or other disposition of the Leased Premises by the Corporation will be deposited into the Lease Payment Fund and be applied in accordance with the provisions of the Trust Agreement. Any surplus received by the Trustee, as assignee of the Corporation, from such re-leasing over total Lease Payments will be remitted to the City. Additional Payments that would have been due under the Lease and the fees, expenses and costs of the Trustee as assignee of the Corporation on re-leasing the Leased Premises will be remitted to the City. Neither notice to pay rent or to deliver up possession of the Leased Premises given pursuant to law nor any proceeding taken by the Corporation to recover possession of the L eased Premises will of itself operate to terminate the Lease, and no termination of the Lease on account of default by the City will be or become effective by operation of law, or otherwise, unless and until the Corporation has given written notice to the City of the election on the part of the Corporation to terminate the Lease. The City has covenanted and agreed that no surrender of the Leased Premises for the remainder of the Term of the Lease or any termination of the Lease will be valid in any manner or for any purpose whatsoev er unless stated or accepted by the Corporation by such written notice. No such termination will be effected either by operation of law or act of the parties to the Lease, except only in the manner expressly provided in the Lease.
Opinion of Special Counsel. The re-leasing of the Le ased Premises as provided in the Lease will be subject to the opinion of Special Counsel that such re-leasing will not cause the interest with respect to the Certificates and any Additional Cer tificates (to the extent such Additional Certificates are executed and delivered as tax-exempt Certificates) to be subject to State personal income tax or adversely affect the exclusion from gross income for federal income tax purposes of such amounts.
No Termination by the City
Under no circumstances may the City terminate the Lease as a remedy for a default by the Corporation in the performance of any obligation of the Corporation under the Lease.
No Remedy Exclusive
No remedy conferred in the Lease upon or reserved to the Corporation is intended to be exclusive and every such remedy will be cumulative and will be in addition to every other remedy given under the Lease existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default will impair any such right or power or will be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Corporation to exercise any remedy reserved to it in the Lease it will not be necessary to give any notice, other than such notice as may be required in the Lease or by law.
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Agreement to Pay Attorneys’ Fees and Expenses
In the event either party to the Lease should default under any of the provisions of the Lease and the nondefaulting party should employ attorneys or incur other expenses for the collection of moneys or the enforcement of performance or observan ce of any obligation or agreement on the part of the defaulting party contained in the Lease, the defaulting party has agreed that it will pay on demand to the nondefaulting party the reasonable fees of such attorneys and such other expenses so incurred by the nondefaulting party.
No Additional Waiver Implied by One Waiver
In the event any agreement contained in the Lease sh ould be breached by either party and thereafter waived by the other party; such waiver will be limited to the particular breach so waived and will not be deemed to waive any other breach under the Lease.
Application of the Proceeds from the Re-Lease of the Leased Premises All amounts received by the Corporation under the Lease will, subject to the Trust Agreement, be deposited by the Trustee in the Lease Payment Fund a nd credited towards the Lease Payments in order of Lease Payment Dates.
Trustee and Owners to Exercise Rights
Such rights and remedies as are given to the Corporation under the Lease have been assigned by the Corporation to the Trustee under the Assignment Agreement, to which assignment the City has consented by the Lease. Such rights and remedies will be exercise d by the Trustee and the Owners as provided in the Trust Agreement. In addition to the rights and remedies assigned by the Corporation to the Trustee, to the extent that the Trust Agreement and the Lease confer upon or gives or grants to the Trustee any right, remedy or claim under or by reason of the Trust Agreement or the Lease, the Trustee is by the Lease explicitly recognized as being a third party beneficiary under the Lease and ma y enforce any such right, remedy or claim conferred given or granted.
PREPAYMENT OF LEASE PAYMENTS
Security Deposit
Notwithstanding any other provision of the Lease, the City may, on any date, secure the payment of Lease Payments and Additional Payments by a depos it by it with the Trustee of cash and/or Government Obligations as provided in the Trust Agreement. In such event, and provided that the City has paid any other amounts due and owing under the Lease and the Trust Agreement, all obligations of the City under the Lease, and all security provided by the Lease for said obligations, will cease and terminate, excepting only the obligation of the City to make, or cause to be made, Lease Payments and Additional Payments from such deposit. On the date of said deposit title to the Leased Premises will vest in the City automatically and without further action by the City or the Corporation (except as provided in the Lease). Said deposit will be deemed to be and will constitute a special fund for the payment of Lease Payments in accordance with the provisions of the Lease. The Corporation will execute and deliver such further instruments and take such further action as may reasonably be requested by the City for carrying out the title transfer of the Leased Premises.
Extraordinary Prepayment
The City will be obligated to prepay the Lease Payments in whole or in part on any date, from and to the extent of any Net Proceeds or other moneys theretofore deposited in the Prepayment Fund (at least 45 days prior to the date fixed for prepayment of the Certificates and any Additional Certific ates) pursuant to the Trust Agreement. The City and the Corporation have agreed by the Lease that such Net Proceeds or other moneys
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will be credited towards the City’s obligations under th e Lease (except in the case of such Prepayment of the Lease Payments in whole) pro rata among Lease Payments so that following Prepayment, the remaining annual Lease Payments will be proportional to the initial annual Lease Payments.
Optional Prepayment
Subject to the terms and conditions of the Lease, the Corporation has granted by the Lease an option to the City to prepay all or a porti on of the Lease Payments to the extent and on the dates at the prepayment prices set forth in the Trust Agreement and in any Supple mental Agreement. The City will provide notice to the Trustee at least 45 days prior to the date fixed for pr epayment of the Certificates (or on such later date as consented to by the Trustee). The City and the Corporation have agreed that such prepayments will be credited toward the City’s obligations under the Lease corresponding to the resulting prepayment of the Certificates and Additional Certificates in accordance with the Trust Agreement and any Supplemental Agreement on the dates and at the prepayment prices provided therein.
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APPENDIX D
FORM OF LEGAL OPINION
Upon the execution and delivery of the Certificates, Stradling Yocca Carlson & Rauth, a Professional Corporation, Special Counsel, proposes to render its final approving opinion in substantially the following form:
October 22, 2020
City Council
City of Cupertino
Cupertino, California
Re: $22,040,000 City of Cupertino 2020A Certificates of Participation Ladies and Gentlemen:
We have reviewed the Constitution and the laws of the State of California and certain proceedings taken by the City of Cupertino (the “City”) in connection with the authorization, execution and delivery by the City of that certain Lease Agreement, dated as of October 1, 2020 (the “Lease”), by and between the Cupertino Public Facilities Corporation (the “Corporation”) and the City. We have also re viewed that certain Trust Agreement, dated as of October 1, 2020 (the “Trust Agreement”), by and among The Bank of New York Mellon Trust Company, N.A., as trustee (the “Truste e”), the Corporation and the City. In rendering this opinion, we also have relied upon certain representations of fact and certifications made by the Corporation and the City, the initial purchaser of the Certificates (defined below) and others. We have not undertaken to verify through independent investigation the accuracy of the representations and certifications relied upon by us. All capitalized terms used herein shall have the meaning given them in the Trust Agreement unless otherwise defined.
Pursuant to the Trust Agreement, the Trustee has agreed to execute and deliver the $22,040,000 City of Cupertino 2020A Certificates of Participation (the “Certificates”) evidencing un divided fractional interests of the owners of the Certificates in certain lease paym ents (the “Lease Payments”) to be made by the City pursuant to the Lease. Pursuant to that certain Assignment Agreement, dated as of October 1, 2020 (the “Assignment Agreement”), the Corporation has assigned to the Trustee the Corporation’s right to receive Lease Payments from the City under the Lease.
Based upon our examination of the foregoing, and in reliance thereon and on all matters of fact as we deem relevant under the circumstances, and upon consideration of applicable laws, we are of the opinion that:
(1) The obligation of the City to pay Lease Paymen ts in accordance with the terms of the Lease is a valid and binding obligation payable from the funds of the City lawfully available therefore and the obligation of the City to make Lease Payments under the Lease does not constitute a debt of the City, the State of California or any political subdivision thereof within the meaning of any statutory or constitutional debt limitation or restriction and does not constitute a pledge of the faith and credit or taxing power of the City, the State of California or any political subdivision thereof. (2) The Lease and the Trust Agreement have been duly authorized, executed and delivered by the City and constitute valid and legally binding agreements of the City enforceable against the City in accordance with their terms.
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(3) Under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, interest with respect to the Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals. (4) Interest (and original issue di scount) with respect to the Certificates is exempt from personal income taxes imposed in the State of California.
(5) The difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of a maturity are to be sold to the public) and the stated payment price at maturity with respect to such Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Certificate owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Certificate owner will increase the Certificate owner’s ba sis in the applicable Certificate. Original issue discount that accrues to a Certificat e owner is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals (as described in paragraph (3) above) and is exempt from State of California personal income tax.
(6) The amount by which a Certificate owner’s original basis for determining loss on sale or exchange in a Certificate (generally, the purchase pr ice) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Certificate prem ium, which must be amortized under Section 171 of the Code; such amortizable Certificate premium reduces the Certificate owner’s basis in the applicable Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amorti zation of Certificate premium may result in a Certificate owner realizing a taxable gain when a Certificate is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Certificate to the owner.
The opinions expressed in paragraphs (3) and (5) are subject to the condition that the City and the Corporation comply with all requirements of the Inte rnal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to the delivery of the Certificates to assure that such interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue disc ount) with respect to the Certificates to be included in gross income for federal income tax purposes retroactive to the date of delivery of the Certificates. The City and the Corporation have covenanted to comply with all such requirements.
Except as expressly set forth in pa ragraphs (3), (4), (5) and (6) we express no opinion regarding any tax consequences with respect to the Certificates.
Certain agreements, requirements and procedures contained or referred to in the Trust Agreement, the Lease, the Tax Certificate executed by the City, and other documents related to the Certificates may be changed and certain actions may be taken or omitted, under the circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with the approving opinion of counsel nationally recognized in the area of tax-exempt obligations. We express no opinion as to the effect on the tax consequences on and after the date on which any such change occurs or action is taken or omitted upon advice or approval of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation.
We have not made or undertaken to make an investigation of the state of title to any of the real property described in the Lease, the Site Lease, dated October 1, 2020 by and between the City and the Corporation, and the Assignment Agreement or of the accuracy or sufficiency of the description of such property contained therein, and we express no opinion with respect to such matters.
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The opinions expressed herein are limited to matters governed by the laws of the State of California and federal law. We assume no responsibility with respect to the applicability or the effect of the laws of any other jurisdiction.
The opinions expressed herein are based upon our analysis and interpretation of existing statutes, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities.
We call attention to the fact that rights and obligations under the Trust Agreement and the Lease are subject to bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights, by equitable prin ciples, by the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against municipalities in the State of California.
By delivering this opinion, we are not expressing any opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set- off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions containe d in the Trust Agreement or the Lease, nor are we expressing any opinion with respect to the state or quality of title to or interest in any assets described in or as subject to the lien of the Indenture or the accuracy or su fficiency of the description contained therein of, or the remedies available to enforce liens on any assets thereunder.
The opinions expressed herein may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. Our engagement with respect to the Certificates terminates on the date of their execution and delivery.
We express no opinion herein as to the accuracy, completeness or sufficiency of the Official Statement or other offering material relating to the Certificates and expressly disclaim any duty to advise the owners of the Certificates with respect to matters contained in the Official Statement.
Respectfully submitted
,
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APPENDIX E
FORM OF CONTINUING DISCLOSURE CERTIFICATE
Upon execution and delivery of the Certificates, the City proposes to enter into a Continuing Disclosure Certificate in substantially the following form:
This Continuing Disclosure Certificate, dated as of October 22, 2020 (the “Disclosure Certificate”) is executed and delivered by the City of Cupertino (the “City”) in connection with the execution and delivery of the $22,040,000 City of Cupertino 2020A Certificates of Participation (the “Certificates”). The Certificates are being executed pursuant to a Trust Agreement, dated as of October 1, 2020 (the “Trust Agreement), by and among the City, The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), and the Cupertino Public Facilities Corporation (the “Corporation”). The City covenants as follows:
SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the Owners and Beneficial Owners of the Certificates and in order to assist the Participating Underwriter in complying with the Rule.
SECTION 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:
“Annual Report” shall mean any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.
“Beneficial Owner” shall mean any pe rson which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Certificates (including persons holding Certificates through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Certificates for federal income tax purposes.
“Disclosure Representative” shall mean the City Manager of the City, or their designee, or such other officer or employee as the City shall designate in writing from time to time. “Dissemination Agent” shall be Urban Futures, Inc., or any successor Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation. “Financial Obligation” means a (a) debt obligation; (b) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (c) guarantee of (a) or (b). The term “Financial Obligation” shall not include municipal securities as to which a final official statement has been provided to the Mu nicipal Securities Rulemaking Board consistent with the Rule.
“Listed Events” shall mean any of the events listed in Section 5(a) and 5(b) of this Disclosure Certificate.
“Official Statement” shall mean the Official Statement relating to the Certificates, dated September 29, 2020.
“Participating Underwriter” shall mean the original underwriter of the Certificates required to comply with the Rule in connection with the offering of the Certificates.
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“Repository” shall mean the Municipal Securiti es Rulemaking Board, which can be found at http://emma.msrb.org.
“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time. “State” shall mean the State of California.
SECTION 3. Provision of Annual Reports.
(a) The City shall, or, upon delivery of the Annual Report to the Dissemination Agent, shall cause the Dissemination Agent to, not later than March 31 following the end of the City’s fiscal year (which currently ends on June 30), commencing with the report for the Fiscal Year ending June 30, 2020, provide to the Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as pr ovided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the City’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c).
(b) Not later than fifteen (15) business days prior to said date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). If the City is unable to provide to the Repository an Annual Report by the date required in subsection (a) above, the Dissemination Agent shall in a timely manner send a notice to the Repository in substantially the form attached as Exhibit A. (c) The Dissemination Agent shall:
(i) confirm the electronic filing requirements of the Municipal Securities Rulemaking Board for the Annual Report the name and address of each Repository; and (ii) (if the Dissemination Agent is other than the City), file a report with the City certifying that the Annual Report has been provided pursuant to this Disclosure Certificate and stating the date it was provided.
SECTION 4. Content of Annual Reports. The City’s Annual Report shall contain or include:
(a) the City’s audited financial statements for the most recently completed fiscal year, prepared in accordance with generally accepted auditing standards for municipalities in the State of California. If the City’s audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available; and (b) To the extent not contained in the audited financial statements, updated financial information and operating data, for the most recent fiscal year only, relating to the City of the type contained in the Official Statement in the following tables:
(i) Table 5 – Assessed Valuation
(ii) Table 6 – Ten Principal Taxpayers
(iii) Table 7 – Sales Tax Revenues
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SECTION 5. Reporting of Significant Events.
(a) Pursuant to the provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates in a timely manner not more than ten (10) Business Days after the event:
1. principal and interest payment delinquencies;
2. unscheduled draws on debt service reserves reflecting financial difficulties;
3. unscheduled draws on credit enhancements reflecting financial difficulties;
4. substitution of credit or liquidity pr oviders, or their failure to perform;
5. adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability or Notices of Proposed Issue (IRS Form 5701 TEB);
6. tender offers;
7. defeasances;
8. ratings changes; and
9. bankruptcy, insolvency, receivership or similar proceedings of the City.
Note: For the purposes of the event identified in su bparagraph (9), the event is considered to occur when any of the following occur: the appointment of a r eceiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. 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 obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or 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 obligated person.
10. Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a Financial Obligation of the City, any of which reflect financial difficulties. (b) Pursuant to the provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material:
1. unless described in Section 5(a)(5), other notices or determinations by the Internal Revenue Service with respect to the tax status of the Cer tificates or other events affecting the tax status of the Certificates;
2. modifications to the rights of Certificate holders;
3. optional, unscheduled or contingent Certificate prepayments;
4. release, substitution or sale of proper ty securing repayment of the Certificates;
5. non-payment related defaults;
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6. the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City , 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; and
7. appointment of a successor or additional trustee or the change of the name of a trustee.
8. incurrence of a Financial Obligation of the City, or agreement to covenants, events of default, remedies, priority rights, or other similar te rms of a Financial Obligation of the City, any of which affect Bond Owners.
(c) If the City determines that knowledge of the occurrence of a Listed Event under Section 5(b) would be material under applicable federal securities laws, and if the Dissemination Agent is other than the City, the City shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to file a notice of such occurrence with the MSRB in an electronic format as prescribed by the MSRB in a timely manner not more than ten (10) Business Days after the event. (d) If the City determines that the Listed Event under Section 5(b) would not be material under applicable federal securities laws and if the Dissemination Agent is other than the City, the City shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence. (e) The City hereby agrees that the undertaking set forth in this Disclosure Certificate is the responsibility of the City and, if the Dissemination Agent is other than the City, the Dissemination Agent shall not be responsible for determining whether the City’s instructions to the Dissemination Agent under this Section 5 comply with the requirements of the Rule.
SECTION 6. Termination of Reporting Obligation. The City’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the City shall give notice of such termination in the same manner as for a Listed Event under Section 5(c).
SECTION 7. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Dissemination Agent, with or w ithout appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the City pursuant to this Disclosure Certificate. The Dissemination Agent may resign by providing thirty days written notice to the City and the Trustee (if the Dissemination Agent is other than the Trustee). The Dissemination Agent shall not be responsible for the content of any report or notice prepared by the City and shall have no duty to review any information provided to it by the City. The Dissemination Agent shall have no duty to prepare any information report nor shall the Dissemination Agent be responsible for filing any report not provided to it by the City in a timely manner and in a form suitable for filing.
SECTION 8. Amendment; Waiver. Notwithstand ing any other provision of this Disclosure Certificate, the City may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, if the City has received an opinion of co unsel knowledgeable in federal securities laws to the effect that such amendment or waiver would not, in and of itself, cause the undertakings herein to violate the Rule if such amendment or waiver had been effect ive on the date hereof but taking into account any subsequent change in or official interpretation of the Rule.
SECTION 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual
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Report or notice of occurrence of a Listed Event, in ad dition to that which is required by this Disclosure Certificate. If the City chooses to include any inform ation in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.
SECTION 10. Filings with the MSRB. All financial 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 prescrib ed by the MSRB and shall be accompanied by identifying information as prescribed by the MSRB.
SECTION 11. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate, any Holder or Beneficial Owner of the Certificates may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance.
No Certificate holder or Beneficial Owner may institute such action, suit or proceeding to compel performance unless they shall have first delivered to the City satisfactory written evidence of their status as such, and a written notice of and request to cure such failure, and the City shall have refused to comply therewith within a reasonable time.
SECTION 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees, to the extent permitted by law, to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorney’s fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. In performing its duties hereunder, the Dissemination Agent shall not be deemed to be acting in any fiduciary capacity for the City, the Certificate holders , or any other party. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates.
SECTION 13. Notices. Any notices or communicat ions to or among any of the parties to this Disclosure Certificate may be given as follows:
To the City: City of Cupertino
10300 Torre Avenue
Cupertino, California 95014
Attention: City Manager
To the Dissemination Agent Urban Futures, Inc.
17821 East 17th Street, Suite 245
Tustin, CA 92780
Attention: Wing-See Fox, Manager Director
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SECTION 14. Beneficiaries. This Disclosure Certif icate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Certificates, and shall create no rights in any other person or entity.
SECTION 15. Signature. This Disclosure Certificate has been executed by the undersigned on the date hereof, and such signature binds the City to the undertaking herein provided.
CITY OF CUPERTINO
By:
Mayor
ACKNOWLEDGED AND ACCEPT BY:
URBAN FUTURES, INC.,
as Dissemination Agent
By:
Authorized Officer
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EXHIBIT A
NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: City of Cupertino
Name of Certificate Issue: $22,040,000 City of Cupertino 2020A Certificates of Participation
Date of Delivery: October 22, 2020
NOTICE IS HEREBY GIVEN that the City has not provided an Annual Report with respect to the above-named Certificates as required by the Continuing Disclosure Certificate executed by the City on the date of delivery of the Certificates. The City anticipates that the Annual Report will be filed by _____________.
Dated:
Dissemination Agent
By:
[THIS PAGE INTENTIONALLY LEFT BLANK]
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APPENDIX F
DTC BOOK-ENTRY SYSTEM
The information in this Appendix F concerning DTC and DTC’s book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsi bility for the completeness or accuracy thereof. The following description of the procedures and record keeping with respect to beneficial ownership interests in the Certificates, payment of principal, premium, if any, accreted value, if any, and interest with respect to the Certificates to DTC Participants or Beneficial Ow ners, confirmation and transfers of beneficial ownership interests in the Certificates and other related transactio ns by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC.
DTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representativ e of DTC. One fully registered certif icate will be issued for each annual maturity of the Certificates , each in the aggregate principal amount of such annual 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 agency” registered pursuant to the provisi ons 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”). DT CC 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 an d 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 & Po or’s rating of AA+. The DTC Rules ap plicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.
Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC’s records. The ownership interest of each actual purchaser of each Certificate (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Benefici al 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 th e Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on beha lf of Beneficial Owners. Benefici al Owners will not receive certificates representing their ownership interests in the Certificates, ex cept in the event that use of the book-entry system for the Certificates is discontinued.
To facilitate subsequent transfers, a ll Certificates deposited by Direct Pa rticipants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Certificates ar e credited, which may or may not be the Bene ficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
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Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indire ct Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Beneficial Owners of Certificates may wi sh to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the Certificate documents. For exam ple, Beneficial Owners of Certificat es may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.
Prepayment notices shall be sent to DTC. If less than all of the Certificates within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates unless authorized by a Direct Partic ipant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Corporation as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or votin g rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Prepayment proceeds, distributions, and dividend payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and correspon ding detail information from the Corporation or the Trustee, on payabl e date in accordance with their respec tive holdings shown on DTC’s records.
Payments by Participants to Beneficial Owners will be go verned 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 Corporation, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Corpora tion 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.
A Certificate Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Certif icates by causing the Direct Participant to transfer the Participant’s interest in the Certificates, on DTC’s records, to the Trustee. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are transferred by Direct Participants on DTC’s records and followed by a book- entry credit of tendered Certificates to the Trustee’s DTC account. DTC may di scontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the Corporation or the Trustee.
Under such circumstances, in the event that a successor depository is not obtaine d, physical certificates are required to be printed and delivered.
DTC may discontinue providing its services as deposito ry with respect to the Certificates at any time by giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Certificate certificates are re quired to be printed and delivered and the registration and transfer provisions of the Trust Agreement will apply.
The City may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Certificat e certificates will be printed and delivered to DTC and the registration and transfer provisions of the Trust Agreement will apply.
CITY OF CUPERTINO 2020A CERTIFICATES OF PARTICIPATION
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21959
BYLMIS
OF
CUPERTINO PUBLIC FACILITIES CORPORATIOH
ARTICLE I
Offlces and Seal
Sectlon 1. Offlces. The prlnclpa1 offlce of the Corporatlon for the trBnsa busThall be Clty Hall, 10300 Torre Avenue, Cupertlno, Ca11fornla 95014. The Board of D1rectors may, hovever, fix and change from time to tlme the prlncipa1 offlce from one 1ocation to another by notlng the change of address in the mlnutes of the meeLlng of the Board of Dlrectors at vhlch the address vas fixed or changed. The fixlng or changlng of such address shall not be deemed an * yendment to these By1avs.
Sectlon 2. Seal. The Corporatlon shal1 have a seal, consisting of two ( 2trlrc1es h'! th the vords ' Cupertino Pub1ic Facllities Corporatlon,' vith the date of incorporatlon of this Corporation.
ARTICLE II
Directors
Sectlnh 1, Povers. Subject to the 1imitations of the Artic1es of Incorporation of this Corporation, thr terms of these By1a'- is, and the 1avs of the State of California, the povers of this Corporation shall be vested in and exercised by and its property controlled and its affairs conduc: ed by the Board of Directors.
Section 2. Number. The Ccrporation shall have five ( 5) Directors.
Directors are co11ectively to be xncivn as the Board of Directors. The number of Directors may !: ie changed by a By- lav or aniendment t! iereo5 du1y adopted 5} the Board of Direc! ors.
Section 3. Se1ection, Tenure of Office and Vacancies. The rhembers of the City Council of the City of Cupertino, California ( the " City") shall constitute the Board of Directors of the Corporation, and each member of the City Ccunc' i1 of the City shal1 be and remain a member of the Board of Directors af the Corporatlon for so long as such member remains a rneiber of the City Council of the City. The Hayor of the City sha11 sit as Chairman of the Board cf Directors.
Section 4. Compensation. Direciors sha11 serve vithout compensation but each Director may be reimbursed nis or her necessary and actual expenses, inc' ludfng travel incident to hfs services as Director, pursbant to fZ
resolutlon of the Board of Dlrectors.
decllne sald relmbursement.
Any Dlrector may e1ect@ hver, to
Sectlon 5. Orgamzatlori ? 4eetlnqs. Irmiedlately rolloylnq the annua? meeting of the Board of Dlrectors or any specla1 meetlng of the Board of Dfrectors at vhlch Dlrectors shal' l have been elected, the Dlrectors shall meet for the purpose of organlz' ing the Board, the e1ectlon of officers and the transactlori or su: h buslness as may come before the meetlng. Pendlng such orgarrlzatlon meetlng, all offlcers of the Corporatlon shall hold over, except any offjcer requlred by lav or these By1aws to be a Dlrector and vho does not qualjfy as a Director. A Director e1ected at such meetlng of the Board of Directors sha11 forthvlth become a merriber of the Board of Dlrectors for purposes of such organ1zatlon.
In the event such an organlzat1ona1 meetlng sha11 not be held itmiedlate1y fo11ovfng such meeting of the Board of Directors, lt shall thereafter be he1d at the next regu1ar meeting or at a speclal rneetlng and notice thereof sha11 be glven in the manner provlded ln Section 9 of thls Artic1e for notice of speclal meetings.
Sectlon 6. Reqular and Orqanlzatfonal Meetinqs. Regular meetlngs of the Board of Directors sha11 be held at such time as the Board may flx by resolution from time to time: provided, hovever, that at least one regular meeting shall be he1d each year and such meetings sha11, in al1 respects, conform to provisions of the Ralph M. Brovn Act, being Sections 54950 through 54961 of the Government Code of the State of Ca1ifornia ( the " Brown Act").
No notice of any organizational meeting of the Board of Directors, he1d irnmediate1y fo11oving the annua1 meeting of the Board of Directors or on or after any special meeting of the Board of Directors sha11 have been elected, need be given; provided, that if such an organizational meeting is not held immediately folloving such meeting of the Board of Direciors, then notice thereof shal1 be given in a manner provided in Section 9 of this Article, in the same manner as notice of specia1 meetings.
Section 7. Special Meetinqs. Special meetings of the Board of Directors shall be cal1ed, noticed and he1d in accordance with the provisions of Section 54956 of the Brown Act.
Section 8. . A quorum shall consist of a majority of the members of the Board of Directors unless a greater number is expressly required by statute, by the Artic1es of Incorporation of this Corporation, or by these Bylaws. Every act or decision done or made by a majority of the Directors present at a meeting du1y held at which a quorum is present, shal1 be the act of the Board of Directors.
Section 9. Order of Busir; ess. The order oF business at the regular meeting of the Board of Directors and, so far as possib1e, at a1l other meetfngs of the BoarrJ of Directors, shall be essentially as follows, except as otherwise determined by the Directors at such meeting:
a) Report on the number of Directors present in person in order to determine the existence of a quorum.
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b) Readlng of the notlce of the meetlng arid proof or the de1lvery or malllng ther' eof, or the valver or valvers of notlce of the meetlng then flled@ as the case may be.
c) Readlng of unapproved minutes of prevlous meetlngs of the Board of Dlrectors and the taklng or actlon vlth respect to approval thereof.
d) Presentation and conslderatlon of reports of officers and commltteeS.
e) E1ectlon of Directors.
f) Unfinished buslness.
g) Hem business.
h) Adjournment.
Section 10. Resiqnatiori and Removal of Directors. Any Dfrector of this (, orporation may resign at any ttme by giving vrftten notice to the President or to the Board of Directors; prov5r: Jed, hoyever, ln the event of such resignation, such Director' s position sria11 remaln vacant unti1 a nev City Counci1 member is elected to fi11 such Director' s position as Clty Council member, Such resignation shall take effect at the tiw: specified therein, and, un1ess otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any Director may be removed by the Board of Directors at any regu? ar meetfng or at any special meeting of the Board of Directors, the notice of whic!" i, among other things, indicates that the removal of one or more Directors identified therein sha11 be considered at such meeting by reason of such Directors' ( l) unexcused absence for four consecutive meetings of the Board of Directors, or ( 2) commission of any act vhich tends to discredit the Corporation.
Section 11. Non1iabi1iiy for Debts. The private prop= rty of the Directors sha11 be exempt from execution or other liabilfty for any de5ts, 1iabi1ities or ob1igations of the Corporation and no Dfrector shali ba 1iable or resp: insib' le for any debts, 1iabi1ities or obligations of the Corporation.
Section 12. Indemnity by Corporation for Litiqation Exr, enses of Offlcer, Direc". or or Emp1oyee. Should any Director, officer or employee of the Corporation be sued, either a1orie or vith others, because he is or vas a director, officer or eiployee of the Corporation, in any proceeding arts' ing out of his a11eged misfeasance or nonfeasance in the performance of his duties or out of any a11eged wrongfq? act against the Corporation or by the Corporation, indemnity rcr his reasonable eypenses, including attorneys' fees incurred in the defense of the proceedir) s, may be assessed against the Corporation, its receiver, or its director by the court in the same or a separat= proceeding if the person sued acted in gocd faith and ir, a ffianr! er such person reasonably be1ieved to be in the besi ihterests of the Corporation and, in the case of a crimina1 prsc= eding, had no reasonable cause to be11eve the conduct of such person yas unlawfvl The aiount M SuCh i ndemni t} Shal1 be SO mtJ Ch Of the expe ' l SeS, inC luding at tar neJ S ' feeS * 3-
fnCurred lri the defense Of the prOCetdlq, 8S the COurt deterf! in! S and FINDS to be reasonable.
AIIT! CLE m
Cfiflcers
Sectlon 1. Officers. The officers of the Corporatfon shall be a Presldent, a Vlce nt, a Secretary, a treasurer and such other @fflcers as the Board of Directors may appolnt. ! hen the dutles do rxt confHct, one person, other than th= Presldent, may hold more than one of these offices. The Corporatlon may also have, at the dlscretlon of the Board of Directors, one or more addltlona1 Vlce Presldents, one or more Asslstant Secretarles, and one or more Asslstant Treasurers, Sectlon 2. Electfon of Officers. The offfcers of the Corporatfon shall be chosen by and shal1 serve at the pleasure of ti;= Board of Dlrectors arid each sha11 hold offlce unti1 he sha1l resign or shal1 be removed or othervise dlsquallfied to serve or hls successor sha'! 1 be elected and quallfled to serve; except that the Treasurer of the Corporation sha11 be the Director of Finance of the City
Section 3. Subordinate Officers. The Baard of Directors may elect or authortze the appointment of such other officers than those hereinr. bove mentioned as the business of the Corpriration may require, each of vhcm sha11 ho1d office for such period, have such authority and perform such duties as are provided in these Bylavs, or as the Board of Dtrectorq from time to tfme may authorize or determine.
5B( tion 4, Removal of Officers. Any officer may be removed, elther with or hithout cause, by a majority cf the Directors then in office at any regu1ar or special meeting of the Board, or, exceot ln the case of ar; officer chosen by the Board of Directors, by any officers upon vhom sucS power of removal may be conferred by the Board of Directors. Shou1d a vacancy occur in any office as a result of daath, " esiqnation, removal, disqualification or any other cause, the Board of Directors may de1egate the powers and duties of such office to any officers or to any Directors cntil such time as a successor far said office has been = 1ected and appointed.
Section 5. President. The President shal1 preside at al1 aeetings of the Board of Directors and exercise and perform such oiher posers and duties as may be from time to time assigned to him by the Board of Directors or be prescribed by the Bylaws.
The Presideht sha11 also be the chief corp- irate officer of the Corporatiori and shall, subject to the control of the Board or Directors, have genera? supervision, direction and control of the business anJ officers of the Corporation. He shal1 preside at al1 meetings of the Board of Directors. He sha11 be ex officio rnem!: ier of all standing cormiit: ees, and Snal? havP the gereral povers and dutieS Of management usua11y VeSted in the office of President of a corporation and shall have such other pCiser> and duties as may be prescribed by the Board of Directors or by these By) avs. 4-
Section 6. Vice Prtslderil In the ab: erice or dlsablllty or th Prtildent, the Vfce President, or the V1ce Presldenti In order or theft ranks al f4xea by the toaro or 01rectors* or ir not ranked, the vic@ Preildent deslgnated by the BOard Or Dlrectori* shati perform a? 1 trie dutie! Of the President and Vheri SCI 8Ctlr< Shall haV! , , tse prrverS or aZ be ubjeCt tO a1' t Of the rettr" lCtlOns utxn the Preildent. The Vlce PRESIDENTS Hall tlaVe % uCh Other pO' aerS and perfofi' n PauCh Other dutleS AS e! 4y rrOffl tfffie to tlme be prescrlbed ror them, r= spectlvely, by the Board or Directors cr b} theSeBylavs-
Sectlon 7. . The Secretary shall keep or cause to be kept a book o at the prlnclpa1 offlce or at such other place as the 8aard of Dlrectors may order, or all meetlngs of the Directors, vlth the tm arid place of holdlngl vhether regolar or speclal, and 1 € ipecla1, hov authoSzedi the notlce thereof glven. the names of those present at Dlrectors' meetings and the proceedlr. gs thereol The Secretary : ha11 glve or cause : o be qlven notice of arl meetlngs of the Board of Dfrectors of the Corporatlon, shall keep the corporate records ln sure custody and shall have such other povers and perf' ors such other dutlcs as may be prescrlbed by the b.. iard of Dlrectors or these 6ylavs.
Section B. Treasurer. The Treasurer sM1l keep and malhtaln or cause ta be kept and mairotained adequate and correct amourits of its assets, lla5iHtles, recelpts, dfstiursements, gains and ' losses. The boks of accouht shal1 at al1 times be open to inspection by any Director. The Treasurer shal1 deposit all rnonies and ott, er veluables lri the nar: e am to the credit of the Corporation in such depositorles as may be designated by the Directors. He sha11 dlsburse the funds of the Ccirporatlon AS shall be ordered by the Board of Directors, shall render to the Presldent and the Directors vhenever they shaH request lt, an account of all of his transactions as Treasurer and of the financia' i condltton of the Corporatlon, sha1l take proper vouchers for al1 disburseri, nts of the funds of the Corporation, and shall have such other pover= and perform such other dutfes as may be prescribed tiy the Board of Direr. Lors or by these Bylass.
Section 9. Assistant Secretartes ant; Assistant Treasurers. The Assistarit Secretaries and the Assistant Treasurers in the craer of their seniority as specified by the Directors shal1, iri the abseqce or disability or the Secretary or the Treasurer, respectively, perforr: the da! ies arc exercise the povers of the Secretary or Treasurer ara' shaN perform such duties as the Board of Directors shal1 prescribe.
ARTICLE IV
Objects arid % rpases
5ecjion 1. Nature of Objects and Pur(.: ises- The 5u5in@55 of 1hi5 Corporation is to be operated and cortducteu in she prorr+ o: iori of its objects and purposes as set forth in Article II cf iis Artic? ps of Incorgoration.
Section 2. Dis olcttion. The Corporatiori rriay the dissolved :) ya vote sir the Directors, or by the action of : he Board of Directors in ac: ordarce vith the provisions of Califorr. i4 1av. r") On the disso1ution or nin0ir. g up of i-
thls Corporatlori@ and after payment or provlsion for payment, all debts arc llabmtleS, the assets Of thl$ Corporation Shall tie dl$ trltiuted tO the lty, If for any reason the Clty lx unablp or unvllllng to accept the assets or the Corporatlon, sald assets vll1 be dlstrlbuted to the Federal Goverrwnt: to a state or local government ror pub? lc purposes: or to a nonproflt fund, foundation, or corporatlon vhlch ls crganlzed and operated for charltable pqrposes and vhlch has estabHshed lts tax- exempt status under Sectlon 50.( c)( 3) or 501( c)( 4) of the fnterna1 tevenue Code of 1954* as amended.
taxation pursuant to Section 501( c)( 3) or 501( c)(',) of the Interna1 Revenue Code of 1954, as amended, and from State taxation, upon comp? lance vlth the provlslons of Callfornla 1av re1atlng to merger and conso11datlon
ARTICLE V
General Provlsions
Section 1. Payment of ? 4oney, Siqriatiires. A11 checks, drafts or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the Corporatfon and any and all securitles ovned by or held by the Corporation requlring signature for transfer sha11 be signed or endorsed by such person or persons and in such manner as from time to time shall be determined by the Board of Directors.
Sec'. ion 2. Execution oF Contracts. The Board of Directors, except as in the Bylavs othervise provided, may authorize any officer or offfcers, agent or agents, to enter into any contract or execute any contract or execute any instrument in the name of and on beha1f of the Corporatton and such authority may be genera7 or confined to spec5f5c instances and unless so authorized by the Board of Directors, no offfcer, agerit or emp1oyee sha11 have any pcver or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liati1e for any purpose or in any amount.
Section 3. Fiscal Year. The fiscal year of the Corporation shal1 commence on ' bf1e 1st day of Ju1y of each year and sha11 end on the 30th day of June of the next succeeding year.
Section 4. Annual Audit. The affairs and financial condition of the Corporation shal1 be audtted annually at the end of each fiscal year commencing hith fiscal year 1985- 1986 by an independent certified public accountant se1ecied by the Board of Directors and a vritten report of such audit and appropriate financial statements sha11 (: re submitted to the E' oard of Directors prior to the next regu1ar tneeting of '. he Board of Directors of the Corporation fol1owing the completion of svch audit. Additional audits anay be authorized as considered necessary or desirab1e by the Board cf Directors,
6-
ARTICLE Vr
Exempt Actlvltle$
Notvlthstanding any other provfflons of these 8y1avs, no CHrector, oFflcer, employee or represeritatlve or thls Corporatlon shal1 take ar. y actlon or carry on any actfvlty by or on behalf or the Corporatlon not permltted to be taken or carrled on by an organlzatlon exempt under Secllon 501( c)( 3) or 501( c)( 4) or the Internal Revenue Code or 1954@ as amermed, and the Regulatlons proailgated thereunder as they nov exlst or as they may hereafter be amended.
ARTICLE Vll
Amendment to Bylavs
These Bylavs
D' lrectors.
may be amended by rnajorlty vote of the Coard of
ADOPTED b} thP ; Qar' d Of Dlrectors Of ihe Cupertlno Pub1ic Facilltles Corporptlon on Jun'.= 2, 1986.
SecrpAry
7-
S[ CRETARY' S CERTIFICATE
I, the underslgned, do hereby certlfy:
1. That I an the duly elected and actlng Secretary of the Cupertlr+ o Publlc Facl11tles Corporatlon, a Callfornla nonproflt publlc beneflt corporatlon; and
2. T% at the foregoing By1avs constltute a full, true and corpect copy of the Bylavs of sald Corporatlon ln ful1 force and effect as of tri; date hereof.
of
IN fflfTNESS kHEREOF, I have hereunto subscr' lbed my native thls 1986.
day
I / l/ , y
Secre
8-
1532485
P! LffD
JUN O ':' tga: s
ARTICL[ S OF INCORPORATIaN
a' a " a fil d! b!; e
CUPERTINO PUBuC FACILITI[( CORPORATION
I.
The name of thls corporatfon ls the Cupertlno Publlc Facl11tles Corporation.
II.
A. This corporatlon ls a nonproflt publlc benefft corporatlon and ls not organlzed for the private galn of any person. It ls orgarvlz= d under the Nonprofit Publlc Benefit Corporat' ion Lay for charitab1e purposes.
B. lhe purposes for vhich this corporation is formed are:
1) The specific and primary purposes for vhtch this corporation is formed are:
a. To render financial asststan: e to the City of Cupertino, State of California ( the " City"), by financlng, refinancing, acquiring, constructlng, improving, leasing and sel1ing buildings, bui1ding improvements, equipment, e1ectrical, vater, sever, road and other pubjic improvements, larr' s, and any other real or personal property for the benefit of
residents of the City and surrounding areas.
b, To acquire by lease, purchase or otherwise, rea1 or persona1 property or any iriterest therein; to construct, reconstruct, modify, add to, improve or othervise acquire or equip
buildings, structures or improvements and ( by sale, lease, sublease, leaseback, gift or othervise) make any part or all of any such real or personal property available to or for the benefit of the residents of the C5'. y.
c, To promote the comn good and genera1 welfare of the
residents of the City, and the governmental enterprises in the City and surrounding areas by the acquisition of the real and personal property as hereinabove described.
d, To borrov the necessary funds to pay thp cost of financirig, refinancing, acquiring, constructing, replacing,
estab1ishing, improving, maintaining, equippirg and operating such properties and facilities for the herein described purposes, the indebtedness for hhich borrowed money may, but JT
need not, be evldenced by secur' ltles or thls corporatlori or any klnd or character ' Issued at any one or ryre tlms, vhlch may be elther unsecured or secured by any aortgage, trust deed, oledge, encumbrance or other llen upon any part or ail or the properlles and assets at any tlme then or thereaftera owned or acqulred by thls corporatlon.
e. To recelve 11mlted ora condltiona1 glfts or grants ln trust, j , or by vay of testamentary devlses, bequests or
grants ln trust, or othemse, funds of ail klnds lncludlng property, both rea1, personal and mixed, vhether prlnclpa: or lncome, tangjb1e ar Intangtb1e, present or future, vested or contlngent, ln order tc' carry on the purposes of thls
corporatlon.
2) The general purposes and povers are to have and exercfse a? l rlghts and powers riov or hereafter conferred on nonproflt corporatloqs under the 1avs of the State of Callrornja; provfded, hovevar, that this corporatlon shal1 not, except to an lnsubstantlal degree, engage in any actlvltles or exercise any powers that are not ln furtherance of the specific and primary pvrposes of thls corporation; provlded, further, that this corporation shall not have the poyer to, and shal1 not, do any act or conduct any activity, plan, scheme, design or course of conduct vhich in ar, y vay conflicts vith Sections 501( c)( 3) or 501( c)( 4) of the Interial Reve; iue Code of 1954, as amended, arid regu1ations promu1gated pursuant to such Sections as they nov exist or as they may hereafter be amended.
III.
The name and address in the State cif Ca1ifornia of this rorporatlon' s initla1 agent for service of process is:
Sr. Blaine Snyder
Director of Finance
City of Cupertfrio
1C1300 Torre Avenue
Cupertino, CA 95014
IV.
7tl@ County in the State of California vhere the principle offices for the transaction off the business of this ccrporation is Santa Clara County,
The property of this corporatioq is irrevocabiy dedicated to charitable purposes and no part of the net in: ome or assets of th'! s corporation shall ever inure to the benefit of any director, officer or member thereof or to the benefit of any private person. 2-
V.
A. Thls corporatlon ls organized and operated by a group of publlc splrlted cftlzens exclusfve? y for chat- ftab? e purposes vltltfn the meaning or Sectlon 501( c)( 4) of the Internal Revenue Code or 1954@ as amended.
B. Notv' lthstandlng any other provlslon of these Artlcles, thls corporatlon shall not carry on any other actlvltles not pertltted to be carrled on by a corporatlon exempt form federal lncome tax under Sectlon 501( c)( 4) of the 7nternal Revenue Code of 1954, as amended, C. No su!; istantla1 part cf the activftles of thls corporatlon shall conslst of carrylng on propaganda, or othervise attemptlng to lnfluence legfs1at1on, and this corrioratlon shal! not partlclpate or intervene ln any po11tlca1 campaign ( inc1uding the pub11shlng or dlstrlbutlon of statements) on behalf of any candldate for po11tlcal offlce.
A. Diyring the continuance of
of its assets to the Unfted States
any po11tical subdivision thereof,
corporation vhich is organized and
social ve? fare purpose and vhich has
Section 501( c)( 3) or 5C) 1( c)( 4) of
amended.
VI.
this corporatlon, ft rnay dls'!. rlbute any
of Arnerfca, the State of Callfornla, or
to a nonprofit fund, foundation or
operated exc1usive1y for charltable or
established lts tax- exempt status under
the Interna1 Revenue Code or 1954, as
B. Upon the dissolution or vinding up of this corporation, its assets remaining after payment of, or provision made for the payment of, all debts and liabilities of this corporation, shan be distributed to the United States of America, the State of California, or any political subdivision thereof, or to a nonprofit fund, fcundation or corporation vhich is organized and operated exc1usive1y for charitable or social ve1fare purposes and vhlch has estab1' ished its tax- exempt status under Sectiori 501( c)( 3) or 501( c)( 4) of the Interna1 Revenue Code of 1954, as amended. 3-
IN NITNESS WER[ OF, the umerslgned, belng the lncorporator of thts corporatlon, has executed these Artlcles of Incorporatlon, th' ls 30th day of f4ay, 19%.
erlan D. Quln Incorporator
4-
ACTIOH BY VRITTEH CONS[ HT OF INCORPORATOR
CUPERTINO PUBLIC FACILITIES CORPORATION
The underslgned, as sole lncorporator or thls publlc beneflt corporatlon, took the belov stated actlon on June 2, 1986, at 7: 00 p. m., at the offlces of the Clty of Cupertlno, Callfornla pursuant to Sectlon 5134 of the Callfornla Corporations Code ( or the purpose of electing lnltlal dlrectors and settfng the tlme and p1ace for the organ! zatlonal ryetlng.
It vas noted that th= Artlcles of rncorporatlon yre duly flled vlth the Secretary of State of Ca11fornla earller on June 2, 1986 and that corporatlori number vas asslgned to thls corporatfon,
RESOLVED, that the fol1ovlng persons be selected as the in! tla1 dlrectors of the corporation:
John H. Gatto
Philip N. Johnson
John J. Plungy, Jr.
Barbara A. Rogers
i. Reed Sparks
BE IT FURTHEP RESOLVED, that the organlzationa1 rneetlng of the corporation be helci on June 2, 1986, at 7: 00 p. gi., at the offices of the City of Cupertino, Californla, and that the notlce of such meeting sent to the in4tlal directors and other interested persons by Mr. Blaine Snyder, 1s hereby approved and ratified.
A11 further organizational matters being left for the nev directors to take actlon upon, the meeting vas adjourned,
B
I'/'
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06/ 02/ 86
THIS IS TO CERTIFY IHAi ':
c • r.. i
INSTRUMENT IS ATRUE AND CORRECT COP
OF THE ORIGINAL ON FILE IN THIS OFFICE.
ATTEST "
I/
BYLAWS CITY CLERK OF THE CITY OF CUPERTINO
OF
eY_
t. c
CITY CLERK
CUPERTINO PUBLIC FACILITIES CORPORATION _
ARTICLE I
Offices and Seal
Section 1. Offices. The principal office of the Corporation for the transaction of business shall be City Hall, 10300 Torre Avenue, Cupertino, California 95014. The Board of Directors may, however, fix and change from time to time the principal office from one location to another by noting the change of address in the minutes of the meeting of the Board of Directors at which the address was fixed or changed. The fixing or changing of such address shall not be deemed an amendment to these Bylaws.
Section 2. Seal. The Corporation shall have a seal, consisting of two 2) concentric circles with the words " Cupertino Public Facilities Corporation," with the date of incorporation of this Corporation.
ARTICLE II
Directors
Section 1. Powers. Subject to the limitations of the Articles of Incorporation of this Corporation, the terms of these Bylaws, and the laws of the State of California, the powers of this Corporation shall be vested in and exercised by and its property controlled and its affairs conducted by the Board of Directors.
Section 2. Number. The Corporation shall have five ( 5) Directors.
Directors are collecta Ty to be known as the Board of Directors. The number of Directors may be changed by a By - law or amendment thereof duly adopted by the Board of Directors.
Section 3. Selection Tenure of Office and Vacancies. The members of the City Council of the City of Cupertino, California the " City ") shall constitute the Board of Directors of the Corporation, and each member of the City Council of the City shall be and remain a member of the Board of Directors of the Corporation for so long as such member remains a member of the City Council of the City. The Mayor of the City shall sit as Chairman of the Board of Directors.
Section 4. Compensation. Directors shall serve without compensation but each Director may be reimbursed his or her necessary and actual expenses, including travel incident to his services as Director, pursuant to resolution b) Reading of the notice of the meeting and proof of the delivery or mailing thereof; or the waiver or waivers of notice of the meeting then filed, as the case may be.
c) Reading of unapproved minutes of previous meetings of the Board of Directors and the taking of action with respect to approval thereof.
d) Presentation and consideration of reports cf officers and committees.
e) Election of Directors.
f) Unfinished business.
g) New business.
h) Adjournment.
Section 10. Resignation and Removal of Directors. Any Director of this Corporation may resign at any time by giving written notice to the President or to the Board of Directors; provided, however, in the event of such resignation, such Director' s position shall remain vacant until a new City Council member is elected to fill such Director' s position as City Council member. Such resignation shall take effect at the time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any Director may be removed by the Board of Directors at any regular meeting or at any special meeting of the Board of Directors, the notice of which, among other things, indicates that the removal of one or more Directors identified therein shall be considered at such meeting by reason of such Directors' ( 1) unexcused absence for four consecutive meetings of the Board of Directors, or ( 2) commission of any act which tends to discredit the Corporation.
Section 11. Nonliability for Debts. The private property of the Directors shall be exempt from execution or other liability for any debts, liabilities or obligations of the Corporation and no Director shall be liable or responsible for any debts, liabilities or obligations of the Corporation.
Section 12. Indemnity by Corporation for Litigation Expenses of Officer, Director or Employee. Should any Director, officer or employee of the Corporation be sued, either alone or with others, because he is or was a director, officer or employee of the Corporation, in any proceeding arising out of his alleged misfeasance or nonfeasance in the performance of his duties or out of any alleged wrongful act against the Corporation or by the Corporation, indemnity for his reasonable expenses, including attorneys' fees incurred in the defense of the proceedings, may be assessed against the Corporation, its receiver, or its director by the court in the same or a separate proceeding if the person sued acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The amount of such indemnity shall be so much of the expenses, including attorneys' fees, incurred in the defense of the proceeding, as the court determines and finds to be reasonable. 3-
President and when so acting shall have all the powers of and be subject to P--1l of the restrictions upon the President. The Vice Presidents shall have such other powers and perform such other duties as may from time to time be prescribed for them, respectively, by the Board of Directors or by these Bylaws.
Section 7. Secretary. The Secretary shall keep or cause to be kept a book of minutes at the principal office or at such other place as the Board of Directors may order, of all meetings of the Directors, with the time and place of holding, whether regular or special, and if special, how- authorized, the notice thereof given, the names of those present at Directors' meetings and the proceedings thereof. The Secretary shall give or cause to be given notice of all meetings of the Board of Directors of the Corporation, shall keep the corporate records in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws.
Section 8. Treasurer. The Treasurer shall keep and maintain or cause to be kept and maintained adequate and correct amounts of its assets, liabilities, receipts, disbursements, gains and losses. The books of account shall at all times be open to inspection by any Director. The Treasurer shall deposit all monies and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Directors. He shall disburse the funds of the Corporation as shall be ordered by the Board of Directors, shall render to the President and the Directors whenever they shall request it, an account of all of his transactions as Treasurer and of the financial condition of the Corporation, shall take proper vouchers for all disbursements of the funds of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws.
Section 9. Assistant Secretaries and Assistant Treasurers. The Assistant Secretaries and the Assistant Treasurers in the order of their seniority as specified by the Directors shall, in the absence or disability of the Secretary or the Treasurer, respectively, perform the duties and exercise the powers of the Secretary or Treasurer and shall perform such duties as the Board of Directors shall prescribe.
ARTICLE IV
Objects and Purposes _
Section 1. Nature of Objects and Purposes. The business of this Corporation is to be operated and conducted in the promotion of its objects and purposes as set forth in Article II of its Articles of Incorporation.
Section 2. Dissolution. The Corporation may be dissolved by. vote of the Directors, or by the action of the Board of Directors in accordance with the provisions of California law. Upon the dissolution or winding up of this Corporation, and after payment or provision for payment, all debts and liabilities, the assets of this Corporation shall be distributed to the City.
If for any reason the City is unable or unwilling to accept the assets of the Corporation, said assets will be distributed to the Federal Government; to a 5-
501( c)( 4) of the Internal Revenue Code of 1954, as amended, and the Regulations promulgated thereunder as they now exist or as they may hereafter be amended.
ARTICLE VII
Amendment to Bylaws
These Bylaws may be amended by majority vote of the Board of Directors.
ADOPTED by the Board of Directors of the Cupertino Public Facilities Corporation on June 2, 1986.
By / s / Dorothy Cornelius
Secretary
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CALIFORNIA DEBT ADVISORY COMMISSION
GUIDELINES FOR LEASES AND
CERTIFICATES OF PARTICIPATION
KATHLEEN BROWN
State Treasurer and Chair
CDAC 93-8
CD
CA
STATE OF CALIFORNIA
CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION
915 CAPITOL MALL, ROOM 400
P.O. BOX 942809
SACRAMENTO, CA 94209-0001
TELEPHONE: (916) 653-3269
FAX: (916) 654-7440
November 1993
To All Interested Parties:
I am pleased to announce the release of Guidelines for Leases and Certificates of Participation as part of the California Debt Advisory Commission's ongoing effort to assist and educate state and local officials on matters surrounding tax-exempt leasing in California. This publication constitutes the fifth document issued by the Commission on the subject of tax-exempt lease financing since 1991.
The Commission's focus on tax-exempt lease financing is attributable to its important role in financing capital facilities and equipment for public agencies in California. Because of its flexibility and market acceptance, leasing has become the financing method of choice for a growing number of governmental agencies. This ~quiet revolution" in municipal finance, however, has raised concerns as to the role of the public in deciding questions of infrastructure spending and public borrowing. I believe that this document outlines a constructive approach for making governmental leasing practices both cost -effective and accountable.
Two other aspects of this publication should be noted. First, these Guidelines are voluntary in nature, which not only recognizes the fiscal autonomy of state and local agencies, but also the fact that governmental leasing has been well managed to date . Second, the focus of the Guidelines falls predominantly on local leasing practices. Insofar as the majority of tax -exempt leasing in California is conducted locally, this focus seems appropriate.
In closing, I would like to acknowledge the efforts of the Project Team which assisted the Commission in drafting the Guidelines: American Government Financial Services; Government Financial Strategies; Orrick, Herrington & Sutcliffe; and Stone & Youngberg. Their research and insights added greatly to the final product.
Sincerely,
KATHLEEN BROWN
State Treasurer and Chair
MEMBERS
Kathleen Browns
State Treasurer
Pete Wilson
Governor
Gray Davis
State Controller
Robert G. Beverly
State Senator
Lucy Killea
State Senator
Jim Costa
State Assemblyman
Patrick J. Nolan
State Assemblyman
Donald W. Merz
Treasure/Tax Collector
County of Sonoma
Phillis E. Currie
Chief Financial Officer
Los Angeles City Department
of Water and Power
CALIFORNIA DEBT ADVISORY COMMISSION
The California Debt Advisory Commission is the State’s clearinghouse for public debt issuance information. The Commission was created by the California Legislature in 1981 to assist State and local government agencies with the monitoring, issuance, and management of public debt.
The California Debt Advisory Commission members include:
Kathleen Brown
California State Treasurer and Chair
Pete Wilson
Governor
or
Russell S. Gould
Director
Department of Finance
Gray Davis
State Controller
Robert G. Beverly
State Senator
Lucy Killea
State Senator
Jim Costa
State Assemblyman
Patrick J. Nolan
State Assemblyman
Donald W. Merz
Treasurer/Tax Collector
Sonoma County
Phyllis E. Currie
Chief Financial Officer
Los Angeles Department of Water and Power
Steve Juarez
Executive Director
Additional information concerning this report or the programs of the California Debt Advisory Commission may be obtained by contacting:
California Debt Advisory Commission
(916) 653-3269
ACKNOWLEDGEMENTS
The Commission staff received research and writing assistance in the development of these Guidelines through a contract with the firms American Government Financial Services (Robert Doty and Gene Albaugh), Government Financial Strategies (Lori Raineri), Orrick, Herrington & Sutcliffe (Philip Morgan and Richard Hiscocks) and Stone & Youngberg (Warren Miller and Edward Schilling). Stephen Shea and Robert Doty were the principal authors of the text. Steve Juarez edited the document. Charmette Bonpua, Eileen Park, Martha Riley, Mary Scharosch and Ted White contributed research and technical assistance. Berma Williams formatted the document for publica- tion.
Members of the Commission’s Technical Advisory Committee and other finance profession- als from California and throughout the nation reviewed drafts of the document and contributed greatly to the final product. At the risk of missing someone, the Commission extends its thanks to the following people: Debbe Bailey, Modesto City Schools; Charles Bell, Charles A. Bell Securities Corp.; Jan Brockman, Orrick, Herrington & Sutcliffe; David Brodsly, Moody’s Investors Service; Lisa Cole, Cole & Associates; Janet Corcoran, Port Authority of NY & NJ; Rafael Costas, Franklin Funds; James Curtis, County of Nevada; Sandra Davis, County of Los Angeles; Greg Eden, Charles Eden & Co.; Phil Ezell, City of Roseville, CA; Jeffrey Foltz, City of Yuba City, CA; Thomas Gardner, County of Yolo, CA; John Gibson, Stone & Youngberg; Jeffrey Green, Port Authority of NY & NJ; John Gunyou, Minnesota Department of Finance; Alice Hammer, John Nuveen & Co.; Cheryl Hines, Morgan Stanley & Co.; Joseph Hinsberg, City of Lincoln, CA; Wes Hough, Public Resources Advisory Group; Jay Hull, County of Napa, CA; Norma Lammers, CSAC; Doug Latimer, County of Nevada, CA; Jeffrey Leifer, Leifer Capital; Fredrick Morawcznski, County of Yuba, CA; Phil Ozenick, County of Placer, CA; John Petersen, Government Finance Group; George Pugh, Craigie Inc.; Larry Rolapp, Fieldman, Rolapp & Associates; Stan Smith, Wyoming State Treasurer; William Sweeney, Florida Division of Bond Finance; Jeffrey Thiemann, Standard & Poor’s Corp.; Carlos Urrutia, City of Rocklin; Sharon Stanton White, Jones, Hall, Hill & White; and Sharon Yonashiro, County of Los Angeles.
T
TABLE OF CONTENTS
Page
Executive Summary.............................................................................................. i Introduction .......................................................................................................... 1 Overview of Leasing Terms ......................................................................................................................... 1 Operating Lease .......................................................................................................................................... 1 Tax-Exempt Lease ...................................................................................................................................... 2 Vendor-Financed Lease ................................................................................................................ 2 Third-Party Financed Lease ......................................................................................................... 3 Certificates of Participation ...................................................................................................................... 4 Tax-Exempt Leases vs. Installment Sale Agreements ............................................................ 5 Lease Revenue Bonds ................................................................................................................................ 5 Historical Development of Tax-Exempt Leasing in California ............................................................ 5 The Quiet Revolution in Public Finance ................................................................................................... 7 Chapter I: Financial Management Guidelines ................................................. 9 Incorporating Tax-Exempt Leases Into the Capital Budget .................................................................. 9 Overview of Chapter I Guidelines .............................................................................................................. 10 Guideline 1: Identify the General Fund Lease Capacity ................................................................ 11 Forecasting General Fund Expenditures and Revenues ...................................................................... 11 There is No Magic Number ...................................................................................................................... 12 Guideline 2: Determine the Necessity for the Proposed Project ................................................... 13 Prioritizing Capital Projects ..................................................................................................................... 13 Project Essentiality ..................................................................................................................................... 14 Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing ........................................ 14 Small Equipment and Vendor Leases .................................................................................................... 14 Pay-As-You-Go Financing ........................................................................................................... 14 Master Leases ................................................................................................................................. 15 Lease Lines of Credit .................................................................................................................... 15 Lease Pools ...................................................................................................................................... 15 Tax-Exempt Leases for Major Capital Projects .................................................................................... 15 Tax-Exempt Leases versus General Obligation Bonds .......................................................... 16 Guideline 4: Do Not Fund Operating Expenses With Long-Term Lease Obligations ............ 17 Restructuring Governmental Obligations .............................................................................................. 17 Guideline 5: Subject All Leases to Fiscal Controls ........................................................................... 17 Central Oversight of Leasing ................................................................................................................... 17 Accounting and Financial Reporting ..................................................................................................... 18 Chapter II: Structuring and Marketing Guidelines......................................... 20 Overview of Chapter II Guidelines ............................................................................................................. 20 Guideline 6: Incorporate Necessary Security Features ................................................................... 21 Capitalized Interest .................................................................................................................................... 21 Avoiding Capitalized Interest Through An Asset Transfer ................................................... 21 Insurance Requirements ............................................................................................................................ 22 Builders Risk Insurance and Performance Bonds .................................................................... 22 Property and Casualty Insurance ................................................................................................. 22 Rental Interruption Insurance ...................................................................................................... 22 Title Insurance ................................................................................................................................ 22 Earthquake Insurance .................................................................................................................... 22 Flood Insurance .............................................................................................................................. 23 Pollution Insurance ........................................................................................................................ 23 Public Liability Insurance ............................................................................................................. 23 Self-Insurance ................................................................................................................................. 23 Reserve Fund ............................................................................................................................................... 23 Guideline 7: Consider Earmarking General and Special Fund Repayment Sources ............. 24 Earmarking General Fund Revenues ...................................................................................................... 24 Earmarking Special Fund Revenues ....................................................................................................... 24 Federal Transit Administration Funds ....................................................................................... 25 State Gas Tax Revenues ................................................................................................................ 25 Guideline 8: Do Not Rely Upon Volatile Repayment Sources ........................................................ 25 Developer Impact Fees and Connection Fees ........................................................................................ 26 Fines and Forfeiture Revenues ................................................................................................................. 26 Guideline 9: The Term of the Lease Should Not Exceed Useful Life of the Asset ................... 27 Guideline 10: Evaluate Credit Enhancement Needs ......................................................................... 27 Bond Insurance ........................................................................................................................................... 27 Letter of Credit ............................................................................................................................................ 28 Asset Transfer ............................................................................................................................................. 28 The Credit Plus Program .......................................................................................................................... 28 Guideline 11: Solicit Competitive Bids for Small Leases ................................................................ 29 Middle Market Leases ............................................................................................................................... 29 Bifurcated Bidding ..................................................................................................................................... 29 Minimize Time Between Lease Bidding and Funding ........................................................... 30 Guideline 12: Control the Resale of Privately Placed Leases ........................................................ 30 Ensuring Vendor Performance ................................................................................................................ 30 Private Party Bankruptcy Risk ................................................................................................................. 31 Securitized Vendor Leases ........................................................................................................................ 31 GFOA Policy Statement ............................................................................................................................ 32 AB 1160 Reforms ....................................................................................................................................... 32 Chapter III: Legal Guidelines ............................................................................ 33 Legal Classification of Leases ..................................................................................................................... 33 Abatement Lease ........................................................................................................................................ 33 Nonappropriation Lease ............................................................................................................................ 34 Special Fund Obligations ............................................................................................................................. 34 Statutory Authority to Lease & Dispose of Property ............................................................................... 35 Statutory Procedures for Disposition of Property ................................................................................. 35 Public Purpose Requirement .................................................................................................................... 35 Overview of Chapter III Guidelines ........................................................................................................... 36 Guideline 13: Understand the Contractual Obligations Imposed by Lease Documents ........ 36 Guideline 14: Confirm That Lease Documents Reflect the Financial Transaction ................. 37 Guideline 15: Review Small Lease Documentation ........................................................................... 38 Guideline 16: Follow Legal Formalities, Even for Small Leases .................................................. 38 Authorization .............................................................................................................................................. 38 Capitalized Interest .................................................................................................................................... 39 Tax Exemption ........................................................................................................................................... 39 Filing of Forms ........................................................................................................................................... 39 Arbitrage and Rebate ................................................................................................................................. 40 Private Activity Bonds ............................................................................................................................... 40 Small Issuer Status ..................................................................................................................................... 40 Chapter IV: Public Policy Guideline ................................................................. 41 Impact of Debt Restrictions on Tax-Exempt Leasing Practices ........................................................... 41 Recent Grand Jury Reports on Leasing ..................................................................................................... 43 Santa Barbara County ................................................................................................................................ 43 Nevada County ............................................................................................................................................ 43 Santa Cruz County ..................................................................................................................................... 43 Other Leasing Controversies ....................................................................................................................... 43 Balancing Management Discretion and Public Participation ............................................................... 44 Guideline 17: Solicit Public Participation in Tax-Exempt Leasing Decisions ........................... 46 Option 1: Schedule Public Hearings on the Capital Budget ............................................................. 46 Option 2: Establish a Citizens Oversight Committee on Public Finance ...................................... 47 Option 3: Consider an Advisory Vote for Controversial Projects .................................................... 47 Chapter V: School District Guidelines .............................................................. 50 Role of Tax-Exempt Leasing in School Finance ..................................................................................... 50 Richmond Unified School District Default ............................................................................................... 51 Lessons from the Richmond USD Default ............................................................................................ 52 Overview of Chapter V Guidelines ............................................................................................................ 52 Guideline 18: Conform to AB 1200 Criteria for Long-Term Borrowing ................................... 53 Guideline 19: Subject COP Bridge Loans to the Same Financial Review as Long-Term Obligations ....................................................................................................... 54 Guideline 20: Evaluate the Marketing Implications of Noneviction Clauses ............................ 55 Glossary .......................................................................................................................................................... 57 Index ........................................................................................................................................................... 68 Figures and Tables
Figure 1: Vendor-Financed Lease Structure ............................................................................................ 3 Figure 2: Third-Party Lease Structure ...................................................................................................... 3 Figure 3: Certificate of Participation Lease Structure ........................................................................... 4 Figure 4: Local Agency Tax-Exempt Leasing, 1982-1992 ................................................................... 7 Table 1: Selected Statutory Authorizations To Lease Property California Local Governments ................................................................................................ 35 Table 2: AB 1200 Criteria for Reviewing Proposed Long-Term School District Debt ............................................................................................................................... 54 i
EXECUTIVE SUMMARY
Government agencies acquire needed capital assets in one of two ways: by entering into a rental agreement to obtain use, but not ownership, of the asset; or by purchasing the asset, either outright or through a financing arrangement, to obtain use and ownership. Leasing, the most malleable of financing tools, can accommodate both options. Government agencies regularly enter into operating leases, or true leases, to rent property such as equipment and office space. And agencies execute lease-purchase agreements, or tax-exempt leases, to finance not only minor equipment procurements, but also the construction or acquisition costs of major capital projects, such as schools and courthouses. In this application, tax-exempt leasing, often involving the sale of Certificates of Participation (COPs), serves as an alternative to issuing municipal bonds.
These Guidelines are intended to help public officials understand the promise and perils of tax-exempt leasing, and to apply this tool judiciously. The Commission chooses to promulgate voluntary Guidelines, rather than advocate statutory reforms, in recognition that governmental leasing in California has been well managed to date. The number of troubled financings have been relatively few, considering the volume of leasing undertaken in the state. This track record reflects not only the professionalism of elected officials and their staffs, but also the discipline imposed by the financial markets.
CHAPTER I: FINANCIAL MANAGEMENT GUIDELINES
The fine legal distinctions between leases and debt are not material to the financial considerations that should discipline governmental leasing practices. In face of competing demands for their limited general fund resources, government agencies can afford only so many long-term lease obligations. Before assuming such obligations, agencies should assess their general fund conditions and establish reasonable limits on their leasing activity. Moreover, agencies should subject leasing decisions to central planning and control procedures, to prevent the unplanned accumulation of lease obligations, which are fixed commitments that diminish needed budgetary flexibility. Observance of these review and oversight procedures can help agencies manage the financial risks posed by tax-exempt leasing.
Guideline 1: Identify the General Fund Lease Capacity
A key to successfully managing tax-exempt leasing is to identify that portion of general fund revenues which safely can be devoted to lease payments on an annual basis. This ratio, called the general fund lease capacity , serves as the benchmark for evaluating changes in the actual ratio of lease payments to general fund revenues in any year, or the general fund lease burden. Agencies should establish or revise their general fund lease capacities in the course of preparing their annual capital budgets. Agencies should monitor their general fund lease burdens on an ongoing basis, and evaluate tax-exempt leasing proposals in terms of their effect on this ratio. Simply stated, agencies should keep their general lease burdens within their general fund lease capacities. These ratios offer a simple but effective means of constraining long-term lease obligations, and serve as common reference points for elected officials, staff, citizens and investors. ii
Guideline 2: Determine the Necessity for the Proposed Project Tax-exempt leasing offers one option for financing the construction or acquisition of capital projects.
Projects financed in this manner, however, may not always receive the same review and oversight as those financed through conventional forms of debt, since leases are exempt from voter approval and other procedural requirements that apply to debt issuance. If an agency does not centralize the review and oversight of tax-exempt leasing proposals, an individual department may be able to execute a tax-exempt lease for a project that it favors, but which represents a low priority from an agencywide perspective. Projects of dubious merit are less likely to be financed through conventional forms of debt, since elected officials are reluctant to authorize such measures, or place them before the voters—who, if given the chance, are likely to reject them anyway. It is important to emphasize, therefore, that the necessity for the project, rather than the expediency of its financing, should justify the funding decision.
Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing The goal of any asset acquisition decision is to acquire the asset at the lowest possible cost. To translate this goal into policy, an agency must evaluate the cost-effectiveness of different procurement options. If an agency has enough cash on hand to purchase the asset outright, this evaluation is pretty straightforward — a matter of identifying the lowest price tag or bid. But if the asset is to be financed through debt or a tax-exempt lease, this evaluation is considerably more complex, involving the comparison of transaction costs and cash flows over time. Agencies should evaluate the cost-effectiveness of tax-exempt leasing for major capital projects through their capital budgeting processes. Agencies may choose to review the cost-effectiveness of smaller, more routine leasing decisions periodically, rather than on a case-by-case basis, to conserve administrative resources.
Guideline 4: Do Not Fund Operating Expenses With Long-Term Lease Obligations Most finance professionals strongly discourage the use of long-term obligations to fund current operating expenses. Although this admonition applies to all forms of public borrowing, it is particularly relevant to leasing, which offers the only practical method of deficit financing for local agencies in California.
Specifically, agencies can engineer sale-leasebacks or lease-leasebacks of existing assets to generate the cash needed to paper over an operating deficit. The well-publicized Richmond Unified School District COP default in 1991 involved just such an asset transfer . Deficit financing in this manner reflects an unwillingness or inability on the part of management to address the underlying discrepancy between revenues and expenditure obligations.
Guideline 5: Subject All Leases to Fiscal Controls
In order to make sound leasing decisions, agencies need financial reports which accurately reflect the scope of their leasing activity. Channeling all leases, both large or small, through centralized oversight and accounting systems allows agencies to generate such reports and serves as a check against the unplanned accumulation of general fund lease obligations. Central oversight also allows the similar spending requests of separate departments to be grouped into larger transactions or lease pools to achieve economies of scale in leasing. Typically, the finance department is best suited to this oversight role, though the cooperation of the purchasing department also is desirable.
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CHAPTER II: STRUCTURING AND MARKETING GUIDELINES
After determining through the capital budget review that tax-exempt leasing offers the best financing alternative for a given project, an agency faces a number of considerations in preparing the issue for sale. Many of these considerations arise whenever an agency taps the capital markets. For any bond issue, it is necessary to (1) size the issue, (2) design a maturity structure, (3) select the method of sale, and (4) retain professional assistance. But the structuring and marketing of tax-exempt lease obligations involves additional consider- ations, which are addressed in this chapter. The goal of these efforts is to achieve the best financing terms possible.
Guideline 6: Incorporate Necessary Security Features
The presence of abatement risk distinguishes tax-exempt lease obligations from debt, and therefore exempts tax-exempt leasing from the procedural requirements which apply when issuing debt. But investors are not willing to extend loans subject to abatement risk merely so that governmental borrowers can avoid legal debt restrictions. To address investor concerns, government agencies should incorporate capitalized interest accounts, insurance policies and reserve funds into their tax-exempt lease offerings. By increasing the size of the borrowing, these security features represent an added cost to the governmental issuer, as all funds borrowed must be repaid with interest. These security features, however, also attract more favorable interest rates (by minimizing investor risk) and protect the issuer from certain risks, as well.
Guideline 7: Consider Earmarking General and Special Fund Repayment Sources For certain types of projects, agencies may be able to earmark revenue sources within the broader categories of general and special funds for the payment of COPs. By internally earmarking specific general fund revenue sources for the payment of tax-exempt lease COPs, agencies can require those who benefit from a particular project to pay for it. By legally pledging certain special fund revenue sources — specifically Federal Transit Administration funds and state gas tax revenues — to the payment of installment sale COPs, agencies can capitalize revenue streams which otherwise must be spent on a pay-as-you-go basis.
Guideline 8: Do Not Rely Upon Volatile Repayment Sources When evaluating the suitability of any revenue source for debt service payments, agencies should look for a stable history of revenue collections. Most taxes and fees are tied to tangible economic transactions which are sensitive to broader economic cycles, to varying degrees. Two types of local revenue sources exhibit a volatility which is not compatible with debt service requirements: developer impact and connection fees, and fine and forfeiture revenues. Agencies should avoid relying on these revenue sources as the primary repayment source for obligations.
Guideline 9: The Term of the Lease Should Not Exceed Useful Life of the Asset The rationale for financing capital acquisitions through borrowing is to link the responsibility of paying for public facilities to the benefits derived from those facilities. For that reason, the term of a financing should not exceed the useful life of the asset. This general principle is all the more relevant to tax-exempt lease obligations. Because the lessee’s obligation under an abatement lease is tied to the right to beneficial use and/ iv
or occupancy of the leased asset, a lease extending beyond the useful life of the asset might not legally be enforceable. Similarly, under a nonappropriation lease, the agency’s willingness to continue appropriations would be suspect during the period in which the asset was no longer available. To promote sound debt management and ensure the marketability of the obligation, agencies usually should establish a lease term shorter than the anticipated useful life of the asset.
Guideline 10: Evaluate Credit Enhancement Needs
As part of the preparations for any bond issue, agencies should evaluate the costs and benefits of obtaining credit enhancement. The two principal forms of credit enhancement — bond insurance and letters of credit — are available for tax-exempt lease obligations. Issuers of tax-exempt lease obligations also have two credit enhancement options which are not available for other types of bonds. First, agencies can structure a lease transaction as an asset transfer, thereby substituting the credit of a more essential facility and eliminating construction risk. Second, cities and counties can participate in the Credit Plus Program, a state intercept program which guarantees payment of tax-exempt lease obligations through allocations of state Motor Vehicle License Fee revenues.
Guideline 11: Solicit Competitive Bids for Small Leases Government agencies should not simply accept the financing terms extended by equipment vendors, which sometimes carry high interest charges. To achieve the lowest possible borrowing costs, agencies instead should separate the acquisition of equipment from its financing, and solicit competitive bids for the latter. A number of institutional investors, attracted by the opportunity to earn tax-exempt interest, should respond to bid solicitations.
Guideline 12: Control the Resale of Privately Placed Leases Privately placed leases, financed through vendors or third parties, typically include a clause permitting the lessor to sell and assign its interest in lease payments to other parties, including lease brokers, finance corporations, banks, and other institutional investors. Most tax-exempt leases sold in California, in fact, rely on such lease assignment provisions (although the largest dollar volume of tax-exempt leases executed in California are marketed as COPs). The lessor’s decision to either retain the lease as an investment or sell and assign it to subsequent investors depends on the both its tax situation and financial capability to hold long-term receivables. As these factors are subject to change, lessors benefit from the liquidity offered by lease assignment clauses.
Governmental lessees routinely agree to lease assignment clauses without much thought, but they should insist that this language incorporate guarantees of vendor performance and specify permissible terms and conditions for securitizing lease obligations. Properly structured assignment clauses can benefit lessors, by providing liquidity, and lessees, by incorporating safeguards and attracting more favorable financing terms than would be available for an illiquid security.
v
CHAPTER III: LEGAL GUIDELINES
Although lease documentation may be presented to a government agency as mere paperwork—forms that need to be filled in, signed and filed away—a lease is, in fact, a legal contract that imposes binding obligations on the governmental lessee and other parties to the transaction. The terms and conditions specified in this “paperwork” suddenly become very important should one of the parties to the lease renege on its contractual obligations. Agencies should review lease documentation to ensure that it accurately reflects the financial terms of the transaction and that covenants do not unduly restrict governmental operations.
Inappropriate lease documentation can create legal and tax problems and raise the cost of borrowing.
Guideline 13: Understand the Contractual Obligations Imposed by Lease Documents A governmental lessee cannot rely on a vendor, underwriter, lease broker or other party to fully assess the impact of a lease agreement on its operations. Even though lease documentation may consist of standardized forms, legal provisions generally are negotiable, and the governmental borrower can insist on more favorable terms and conditions, if necessary to protect its interests. In the event that a government agency is unable or unwilling to satisfy the legal requirements of a lease, it may find itself in a state of technical default, which could lead to a more serious default and damage the agency’s reputation in the securities market. Agencies should, therefore, faithfully comply with all the terms and conditions they agree to as part of lease transactions.
Guideline 14: Confirm that Lease Documents Reflect the Financial Transaction Government agencies should review lease documentation to ensure that the specified terms and conditions accurately reflect the agreed upon financial transaction. Among other things, agencies should ensure that lease documents correctly specify the amount borrowed, the lease term and timing of payments, prepayment options, capitalized interest accounts, and insurance provisions.
Guideline 15: Review Small Lease Documentation
As part of small lease transaction, a government agency may be asked to sign lease documentation that was prepared in boilerplate fashion by an out-of-state firm. So-called standard covenants actually may violate existing covenants in other lease or borrowing documents of the government agency. Even if only small amounts of money are at stake, agencies should review small lease documentation and, if possible, gain counsel’s assurance of legal compliance. Agencies also should consider developing their own documentation for small lease transactions. Such an effort would entail up-front costs, but in the long run would protect an agency from inappropriate small lease documentation.
Guideline 16: Follow Legal Formalities, Even for Small Leases If an agency does not maintain centralized control over its leasing practices, individual departments within the agency may informally execute leases for small equipment items or other purposes. But the interest component of these lease payments may not be excludable from federal and state income taxation if certain procedural requirements are not observed. Consequently, agencies should observe, even for small lease transactions, legal formalities such as appropriate authorization, use of capitalized interest, specification of the interest component, IRS filings, and arbitrage and private activity restrictions. vi
CHAPTER IV: PUBLIC POLICY GUIDELINE
Public borrowing in any form entails certain risks which, if not well-managed, can invite scrutiny of the borrowing decision. Many of the constitutional and statutory provisions governing public indebtedness in California today, in fact, have their origins in bond defaults and other financial calamities of yesteryear. With few exceptions, California’s experience with tax-exempt leasing has been free of the abusive and ill-conceived transactions that might spawn efforts to rein in governmental leasing powers. Still, public officials can only expect to enjoy broad latitude over tax-exempt leasing decisions as long as they observe sound financial management practices.
Public interest in governmental leasing practices also may be piqued by opposition to the capital projects financed in this manner. The construction of public facilities, after all, can profoundly affect a community’s character and influence its pattern of development. Major project proposals can become divisive issues, regardless of how they are to be financed. But in such cases where elected officials choose tax-exempt leasing, which is not subject to voter approval, the public may feel shut out of an important decision. Elected officials themselves, therefore, must decide how to best demonstrate accountability for their tax-exempt leasing decisions.
Guideline 17: Solicit Public Participation in Tax-Exempt Leasing Decisions The challenge in addressing the public policy issues raised by tax-exempt leasing lies in balancing the decision-making authority of elected officials with the desire of the public to participate in important capital spending decisions. The Commission’s main concern is that public agencies solicit public participation in their tax-exempt leasing decisions. At the same time, the Commission recognizes that the relationship between local officials and voters is not uniform in each political jurisdiction throughout the state, and that local officials are in the best position to decide how to achieve the goal of public involvement. This Guideline discusses three constructive approaches to soliciting public participation in tax-exempt leasing decisions: (1) Schedule Public Hearings on the Capital Budget; (2) Establish a Citizens Oversight Committee on Public Finance; and (3) Consider an Advisory Vote on Controversial Projects.
CHAPTER V: SCHOOL DISTRICT GUIDELINES
This chapter presents special Guidelines for school districts, not because school district leases are so different from other leases, but rather that school districts operate under more restrictive financial conditions than other local governments, and face a greater degree of scrutiny of their borrowing decisions. As a consequence, certain considerations apply to school district lease financings which do not fit neatly into a more general treatment of the subject matter. School districts should follow the Guidelines specified in this chapter in addition to, not in lieu of, the Guidelines presented in the other chapters of this document.
Guideline 18: Conform to AB 1200 Criteria for Long-Term Borrowing Among its many provisions, AB 1200 authorizes county superintendents of education to review the budgets of school districts on an annual basis. These reviews assist the state Superintendent of Schools in developing a list of financially troubled school districts each year, which are certified as negative (meaning that vii
the district will be unable to meet its financial commitments through the end of the school year) and qualified (which means the district will be unable to meet its obligations, unless certain events occur).
Districts certified as negative or qualified may not issue certificates of participation, tax anticipation notes, revenue bonds, or any other debt instruments that do not require the approval of the voters of the district, without a determination of the county superintendent of education that repayment of the obligation is probable. These criteria entail the maintenance of a Reserve for Economic Uncertainties, at specified levels, to provide a “cushion” against unforeseen events which might otherwise lead to a lease default. Although the AB 1200 criteria were promulgated for purposes of evaluating the likelihood of repayment of tax-exempt lease obligations proposed for issuance by negative and qualified school districts, the state Department of Education recommends that all districts voluntarily adhere to these standards. The Commission concurs with this judgment.
Guideline 19: Subject COP Bridge Loans to the Same Financial Review as Long-Term Obligations The state Office of Local Assistance (OLA) often funds school site acquisitions years in advance of funding school construction. In the interim, districts often issue COPs with early call provisions to fund school construction. At the time State funds become available, the COPs are retired, and the district is relieved of the debt service obligation. The COPs serve as a bridge loan, akin to a bond or grant anticipation note extending over several years.
Agencies issuing COPs as bridge loans should be fully prepared to service the obligation for its full term, in the event that State funds are not forthcoming. OLA approval of district grant requests does not represent a guarantee of State funding, only an agreement to extend funding in the event State bond funds are available. Districts issuing COPs as bridge loans should, therefore, maintain budgetary reserves in accordance with the AB 1200 Criteria for Long-Term Borrowing, and adhere to the other Guidelines in this document.
Guideline 20: Evaluate the Marketing Implications of Noneviction Clauses One of the remedies in the event of default frequently provided for in trust agreements for lease obligations is the right to evict the lessee for nonpayment. The right to evict the lessee provides a powerful incentive for it to continue payment. In 1991, the OLA began requiring noneviction clauses to be incorporated into facility leases where the underlying site was acquired through State bond funds. As its name suggests, a noneviction clause specifies that the facility lease may not permit any party to evict the district and relet or convert the facility to another use. The OLA will, upon request, consider exceptions to this policy.
The interest rate available for any tax-exempt lease or bond offering reflects the supply of, and demand for, that type of security. Of the multitude of factors which affect demand for individual securities, agencies should be aware of those which they can control, and those which they are powerless to influence. Depending upon how California school district COPs are faring in the market at any given point in time, the presence of a noneviction clause may affect the interest rate available for a new issue. In 1991, the change in OLA policy, accompanied in the same year by the Richmond USD default, soured many investors on California school district COPs, at least for a time. In preparing a tax-exempt lease offering for sale, districts should consider applying for an exception to the OLA policy if the market is demanding a premium for the noneviction clause. - 1 -
INTRODUCTION
The production of government services requires a wide range of capital assets, from the massive dams and aqueducts which bring water to the desert, to the telephones and fax machines which enable routine office communications. Government agencies acquire needed capital assets in one of two ways: by entering into a rental agreement to obtain use, but not ownership, of the asset; or by purchasing the asset, either outright or through a financing arrangement, to obtain use and ownership. Leasing, the most malleable of financing tools, can accommodate both options.
Government agencies regularly enter into operating leases, or true leases, to rent property such as equipment and office space. And agencies execute lease-purchase agreements, or tax-exempt leases, to finance not only minor equipment procurements, but also the construction or acquisition costs of major capital projects, such as schools and courthouses. In this application, tax-exempt leasing, often involving the sale of Certificates of Participation (COPs), serves as an alternative to issuing municipal bonds. As new financing needs emerge and market conditions change, government agencies often find that their leasing powers provide more expedient access to the capital markets than their more limited powers to incur debt.
Overview of Leasing Terms
This overview is included at the outset of this document to clarify the main leasing terms used throughout these Guidelines . Briefly reviewing the leasing vocabulary is no small feat, however, given the different methods of classifying leases under federal and state law — which both differ from the accounting treatment of leases. The goal of this section is to impart a working knowledge of the main leasing terms; a more exhaustive review is presented in the Glossary.1 Operating Lease. An operating lease, or a true lease, is simply a contract to rent property for a period of time shorter than the property’s useful life. At the end of lease term, the property is returned to the lessor, although the lessee may reserve the option to purchase the property at various intervals for its fair market value. Unlike a tax-exempt lease, operating lease payments are not divided into principal and interest components. An operating lease is structured to compensate the lessor for use of the property, not to amortize the purchase price of the asset.
Agencies enter into operating leases for a variety of reasons. As a simple matter of economy, often it is cheaper to rent than purchase an asset, particularly if an agency is not sure that it will need the asset for more than a brief period of time. For equipment such as computers, concerns over technological obsolescence may favor an operating lease, even if purchase is affordable. Operating leases allow for a flexible approach to asset management.
For an operating lease to be a workable procurement option, a private entity first must find it profitable to manufacture or otherwise develop and market the asset. This generally is the case for personal property, such as telephones and copiers, and even real property, such as office buildings, that can accommodate the needs of diverse clients. But for many of the site-specific and highly specialized real property improvements, such as school buildings and police stations, required for the production of government services, the entire market may consist of a single government agency. The business T
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risk of privately developing facilities not easily converted to alternative uses may prove untenable.
Moreover, real property improvements, whether publicly or privately developed, usually must be financed through borrowing. The cost advantage of tax-exempt borrowing afforded to public agencies often renders private development economically unfeasible. Government agencies, consequently, do not always enjoy the option of procuring needed assets through operating leases.2 Tax-Exempt Lease. The term tax-exempt lease refers quite literally to the tax treatment of the interest component of lease payments, though more generally it applies to the variety of lease- purchase agreements which allow a government agency to obtain use and ownership of capital assets.
Technically, the accounting term capital lease more correctly identifies the range of lease-purchase arrangements which result in transfer of title to the lessee, as it is possible to transfer title to the lessee while running afoul of federal and state requirements for tax-exempt status. Most capital leases entered into by government agencies do in fact qualify for tax-exempt status, and these agreements are correctly identified as tax-exempt leases.
Tax-exempt leases are designed to avoid classification as debt for purposes of the constitu- tional debt limitation (Article XVI, Section 18 of the California Constitution), which prohibits cities, counties, school districts and boards of education from incurring indebtedness without two-thirds voter approval. This is accomplished in one of two ways. Under a nonappropriation lease, the government lessee reserves the right to terminate the lease simply by not appropriating funds in its budget for lease payments. In other words, the lease agreement does not automatically obligate the government lessee for a multiyear period. Under an abatement lease, the lease obligation is contingent upon the right to beneficial use and/or occupancy of the leased property. In other words, the lease obligation ceases if the leased property somehow is destroyed. Because neither type of lease imposes an absolute and unconditional general fund obligation, neither is classified as debt under state law.
Tax-exempt leasing serves two distinct roles in governmental finance. First, tax-exempt leasing permits agencies to acquire personal property, such as automobiles and computers, that may be too expensive to purchase outright but has a useful life too short to finance through long-term bond issues. Second, tax-exempt leasing provides the legal framework for borrowing large sums of money from the capital markets to finance major capital projects. In this application, tax-exempt leasing serves as an alternative to issuing municipal bonds. Structuring a major capital project financing as a tax-exempt lease merely provides the legal authority for the borrowing to occur outside of constitutional and statutory debt restrictions. But there should be no confusion as to the essence of the transaction: a government agency is borrowing funds from investors to finance the construction or acquisition of a capital asset. The funds borrowed through the issuance of tax-exempt lease obligations must be repaid in regular installments of principal and interest, just like the funds borrowed through the issuance of municipal bonds.
As a general rule, smaller tax-exempt leases tend to involve fewer parties and less complex structures. These arrangements sometimes are referred to as privately placed tax-exempt leases, due to the fact that the asset acquisition is funded directly by a single or small group of investors.
Because of the relatively small dollar amount involved (usually less than $1 million), there is no need to market the lease through the retail securities market to attract a large number of investors. There are two main categories of privately placed tax-exempt leases:
o Vendor-Financed Lease. Manufacturers of equipment, or vendors, often assume the role of lessor in tax-exempt leases to facilitate the sale of the equipment they manufacture. The vendor may hold the lease for its entire term as an investment, or sell (and assign) the lease - 3 -
resources to cover the various expenses incurred in the manufacture of the asset (payroll, materials, etc.) without receiving immediate compensation for the full purchase price. This relatively straightforward arrangement is depicted in Figure 1.
Figure 1
Vendor-Financed Lease Structure
o Third-Party Financed Lease. In a third-party financed lease, a separate entity, typically a direct investor or a lease broker, provides or arranges the financing of the leased property. The vendor receives full payment for the leased property from the third party. The third party earns tax-exempt interest income from the lease payments made by the lessee. A typical third-party tax-exempt lease financing is illustrated in Figure 2.
Figure 2
Third-Party Lease Structure
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Certificates of Participation. When financing larger capital projects, agencies generally can lower their borrowing costs by marketing lease obligations through the retail securities market and attracting multiple investors, rather than relying on a single or small group of investors as in a privately placed lease. To reach this broad investor base, agencies issue Certificates of Participation (COPs) in tax-exempt lease obligations. COPs pay tax-exempt interest and enjoy the liquidity of a marketable security, akin to a municipal bond. Technically, a COP is a security that evidences an undivided fractional interest in an underlying lease or installment sale agreement. In other words, a COP entitles its owner to a proportionate share of lease (or installment sale) payments made by a government agency pursuant to a lease (or an installment sale) agreement. For all intents and purposes, COPs function like municipal bonds.
COP transactions require the professional assistance of the same municipal finance industry professionals who assist in conventional bond offerings: investment bankers, bond counsel, financial advisors, rating agency representatives, and others. Most COP transactions also require a trustee to collect and disburse lease (or installment sale) payments to multiple investors. To satisfy legal requirements, COP transactions involving tax-exempt leases require both a lessor and a lessee. A government agency may establish a nonprofit corporation to serve as the nominal lessor in tax-exempt lease financings, if no other agency or joint powers authority is available for this purpose. Figure 3 below depicts a typical COP offering.
Figure 3
Certificate of Participation Lease Structure
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o Tax-Exempt Leases vs. Installment Sale Agreements. As noted, a COP entitles its owner to a proportionate share of payments made by a government agency pursuant to either a lease or an installment sale agreement (also known as an installment purchase contract ). Both types of obligations fall outside of the constitutional debt limitation, but for different reasons.
A lease is exempt from the debt limit because it is not an absolute and unconditional general fund obligation. (COPs in California typically evidence rights in abatement leases, rather than nonappropriation leases.) An installment sale agreement, alternatively, is an absolute and unconditional obligation in most cases, but of a special fund, rather than the general fund of the issuing agency. Installment sale agreements rely on the special fund exception to the constitutional debt limitation, rather than the lease exception.
Whether an agency executes a tax-exempt lease or an installment sale agreement depends upon the project in question. Agencies typically execute tax-exempt leases to finance nonenterprise projects, such as schools, courthouses, jails and administration buildings.
Because nonenterprise projects do not generate fee revenues, they must be financed through general fund appropriations (in the absence of a separate bond or tax measure approved for this purpose). Tax-exempt leasing offers the only way for local agencies to leverage (or borrow against) their general fund revenues. A city, county, or school district cannot obligate its general fund under an installment sale agreement because, as an absolute and unconditional obligation, it would violate the constitutional debt limitation. Agencies rely on installment sale agreements to finance enterprise projects, such as sewer and water projects, which are self- supporting through user fees (which are deposited in special funds). Installment sale agreements, as absolute and unconditional obligations, typically represent stronger credits capable of attracting more favorable interest rates than tax-exempt leases.
Lease Revenue Bonds. Lease revenue bonds are issued by a public agency, or on behalf of a public agency, to finance capital improvements which are then leased to a public agency. The bonds are secured by lease payments received from an agency other than the issuer. In a typical lease revenue bond financing, a public agency establishes a joint powers authority or nonprofit corporation which issues lease-revenue bonds to finance the construction of a public facility. The facility is then leased back to the public agency. The joint powers authority or nonprofit corporation pays debt service on the bonds from the lease payments received from the public agency. Unlike a COP financing, the bonds themselves are the tax-exempt lease obligation, not the lease. Lease revenue bonds are used less extensively than COPs because they generally must be sold at competitive sale and are subject to other restrictions which do not apply to COPs. A lease revenue bond offering looks very similar to the COP issue depicted in Figure 3.
Historical Development of Tax-Exempt Leasing in California Tax-exempt leasing is unique as a form of public finance in that it evolved primarily through the courts, rather than the Legislature. A series of court cases in the 1940s and 1950s, collectively referred to as the Offner-Dean line of cases, established the principle that a binding long-term lease with vesting of title at the end of the term does not create debt subject to the two-thirds voter approval requirement of the State Constitution.3 The courts reasoned that lease obligations, unlike debt, are contingent upon the continued use and/or occupancy of the leased property, and consequently do not represent a pledge of future revenues. But in a financial sense, a long-term lease which results in the transfer of title is not so much a lease as a loan, which must be repaid in regular installments of principal - 6 -
and interest, just like a municipal bond. By establishing the validity of long-term leases, the courts provided the legal underpinning for the eventual expansion of leasing into the capital finance function traditionally undertaken through municipal bonds. The bond market would devise security features to protect investors from the risk posed by the contingent nature of lease obligations.
In the 1960s and 1970s, the California Legislature enacted statutes authorizing the issuance of lease revenue bonds for various purposes. From the 1960s through the early 1980s, nonprofit corporations and joint powers authorities acting on behalf of public agencies issued lease revenue bonds to finance the construction of a number of public facilities throughout the state, including the Los Angeles Music Center and the Oakland-Alameda County Coliseum. During the 1970s, lease revenue bonds also were the linchpin of school facility finance in California. The Legislature authorized school districts to establish nonprofit corporations for the purpose of issuing lease revenue bonds to finance the construction of schools, which were then leased back to school districts. To meet these obligations, school districts were authorized to raise property taxes, subject to majority vote. This arrangement afforded school districts a realistic alternative to local general obligation bonds requiring two-thirds voter approval. (Due to the fact school enrollments declined during the 1970s, relatively few schools were built under these provisions.)
A more prominent role for tax-exempt leasing in California public finance emerged from a series of political and economic events beginning in the late 1970s, which curtailed traditional funding sources and shifted new responsibilities to local governments. Proposition 13 in 1978 effectively eliminated the general obligation bonding authority of local governments, by capping ad valorem property tax rates at one percent of assessed value. In the early 1980s, the federal government cut back sharply or eliminated many of its grant programs (such as general revenue sharing) which had supported numerous local projects during the 1960s and 1970s. As a consequence, local governments assumed new responsibilities for financing water and sewer projects needed for compliance with federal environmental regulations. The issuance of enterprise revenue bonds for these purposes was hampered by historically high interest rates which, in many cases, exceeded statutory interest rate ceilings. To address the void in local financing alternatives, agencies began to explore the possibilities of lease financing — initially, through the expanded issuance of lease revenue bonds, and later, through the development of COPs.
In 1986, when Proposition 46 restored local general obligation bonding authority, local agencies issued $4.5 billion in COPs, second only to public enterprise revenue bonds ($5.7 billion) in terms of long term borrowing that year.4 The restoration of general obligation bonding authority would not profoundly change local borrowing practices, however, as a public inclined toward anti-tax and anti- growth sentiments would not readily approve bond measures by a two-thirds majority. Figure 4 illustrates the dramatic growth of tax-exempt leasing by local governments in California during the period from 1982 through 1992.
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Figure 4
Local Agency Tax-Exempt Leasing
1982-1992
The Quiet Revolution in Public Finance
It should not be surprising that the tax-exempt leasing phenomenon started in California, or that California continues to account for a disproportionate share of the nation’s tax-exempt leasing activity.
California is one of only a handful of states that requires supermajority voter approval of local general obligation bonds. Tax-exempt leasing permits local agencies to circumvent this prohibitive barrier and build needed schools, jails, courthouses and other public facilities. California also has enacted some of the most stringent environmental standards in the nation, which translate into substantial outlays for infrastructure, parks and open space. And until recently, California’s economic growth outpaced that of the nation as a whole, which led to development booms that strained the capacity of existing infrastructure and created demands for new facilities.
The emergence of tax-exempt leasing in California represents nothing short of a revolution in public finance, a shift in public borrowing practices notable in both a financial and political sense.
The distinguishing feature of tax-exempt leasing is that it allows agencies to finance capital projects by leveraging general fund revenues, rather than raising new taxes. In this era of fiscal austerity, the leveraging of existing resources has become important, for financing not only major capital projects, but also routine equipment items which once were financed on a cash basis. Even if political events over the past fifteen years had taken shape somewhat differently, tax-exempt leasing probably still would have gained in prominence, as the same underlying economic conditions would have constrained governmental revenue growth.
If the emergence of tax-exempt leasing represents a revolution in public finance, it has been a quiet revolution, largely unnoticed outside the confines of the public finance industry. To the extent that individuals or groups have braved the impervious jargon of leasing for a closer look, they have expressed concerns over how tax-exempt leasing permits government agencies to circumvent voter approval requirements and other legal debt restrictions.5 Yet the fact that tax-exempt leasing involves leveraging general fund revenues, rather than raising new taxes, in many ways justifies the great discretion afforded public officials in these matters.
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These Guidelines are intended to help public officials understand the promise and perils of tax-exempt leasing, and to apply this tool judiciously. The Commission chooses to promulgate voluntary Guidelines, rather than advocate statutory reforms, in recognition that governmental leasing in California has been well managed to date. The number of troubled financings have been relatively few, considering the volume of leasing undertaken in the state. This track record reflects not only the professionalism of elected officials and their staffs, but also the discipline imposed by the financial markets.
NOTES
1. In addition to the Glossary, Chapter 1 of the publication Leases in California: Their Form and Function (CDAC 1991) includes more substantive discussions of the different types of tax-exempt leases. This publication was prepared for CDAC by the firms of Transocean Funding, Cole & Associates, Gaston & Snow, and Public Resources, Inc., and is available from the Commission upon request.
2. It is worth noting that many economists advocate privatizing government assets which are in fact highly specialized and site-specific, such as airports and highways.
Privatizing allows government agencies to generate cash by selling an existing asset (or the right to construct such an asset) to a private entity, which operates the asset and earns a profit. Or, the government agency can continue to operate the asset by leasing it back from the private entity. In general, privatizing works best for those assets where it is possible to charge for use of the asset (through airport landing fees and tolls in the example cited above), as long as the government agency protects against monopoly pricing. But one major problem with privatizing is that it jeopardizes the tax-exempt status of any municipal bonds (or tax-exempt leases) issued to finance the construction or acquisition of the asset.
3. For a more complete discussion of the Offner-Dean line of cases, refer to Leases in California: Their Form and Function , pp 2-1 to 2-5. California Debt Advisory Commission, 1991.
4. Source: Annual Report 1986: Summary of California Public Debt, CDAC. The COP total includes both tax-exempt lease and installment sale COPs.
5. See summary of various county grand jury reports in Chapter IV: Public Policy Guideline, page 43.
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Chapter I
FINANCIAL MANAGEMENT GUIDELINES
Page
Guideline 1: Identify the General Fund Lease Capacity 11 Guideline 2: Determine the Necessity for the Proposed Project 13 Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing 14 Guideline 4: Do Not Fund Operating Expenses with Long-Term Lease Obligations 17 Guideline 5: Subject All Leases to Fiscal Controls 17 Government agencies in California retain a great deal of discretion over their leasing practices, by virtue of the lease exception to the constitutional debt limitation. But the fine legal distinctions between leases and debt are not material to the financial considerations that should discipline governmental leasing practices. In face of competing demands for their limited general fund resources, government agencies can afford only so many long-term lease obligations.
Before assuming such obligations, agencies should assess their general fund conditions and establish reasonable limits on their leasing activity. Moreover, agencies should subject leasing decisions to central planning and control procedures, to prevent the unplanned accumulation of lease obligations, which are fixed commitments that diminish needed budgetary flexibility. These review and oversight procedures, though not dictated by law, allow agencies to manage the financial risks posed by tax-exempt leasing.
Incorporating Tax-Exempt Leases Into The Capital Budget As a general rule, the degree of review and oversight appropriate for leasing decisions corresponds to the financial obligation imposed by the lease. Many small equipment and vendor leases, for example, impose only modest financial obligations on governmental lessors. Rather than subject each vendor lease transaction to an extensive review, an agency might choose to establish an equipment procurement policy specifying permissible acquisitions and methods of financing. A major tax-exempt lease, by contrast, may rank among an agency’s largest financial obligations. Clearly, every major tax-exempt leasing proposal warrants an added degree of scrutiny. Rather than establish a separate administrative framework for this purpose, agencies should incorporate major tax-exempt leasing proposals into their capital budgets and evaluate them according to the same criteria applied to other capital spending proposals. By incorporating tax-exempt leasing proposals into their capital budgets, agencies can ensure that (1) sufficient funds will be available to honor all obligations incurred, (2) projects are funded according to priority, and (3) the cost-effectiveness of funding alternatives is evaluated.
If only major tax-exempt leases merit project-by-project review through the capital budget, agencies need to distinguish between tax-exempt leases for this purpose — a classification problem that can prove to be more complicated than it sounds. For budgeting purposes, government agencies differentiate capital from operating expenses on the basis of the cost and frequency of the expense. Cost is a relative criterion, a function of the size of the government G
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agency in question. For a small agency, a single automobile purchase may represent a substantial outlay, warranting its inclusion in its capital budget. A larger agency probably would choose to evaluate its overall fleet procurement strategy periodically, rather than subject individual vehicle purchases to such an analysis. Frequency refers to the replacement cycle of the item: capital items must have a useful life of at least one year. But as with cost, each agency needs to establish a standard to its liking. The demarcation of capital and operating expenses for budgeting purposes, consequently, is a function of the tangible qualities of the asset, rather than its method of financing.
Incorporating tax-exempt leases into capital budgets should, therefore, be a straightfor- ward matter: lease-financed projects which exceed the agency’s threshold of cost and frequency should be included in the capital budget, lease-financed projects falling below the threshold should not. But the legal and accounting treatment of leases can contribute to a certain amount of budgeting confusion, and result in reduced oversight of tax-exempt leasing decisions.
The mere fact that lease obligations, even those underlying major COP issues, are not classified as debt under State law may cause staff to budget all lease payments as operating expenses, thereby eluding the capital budget review altogether. Although accounting standards distinguish between capital and operating leases, this accounting distinction is not useful for capital budgeting purposes, since it is based on the transfer of title or ownership, rather than on the cost and frequency of the capital expense. 1 A capital lease, for example, might finance the construction of a county jail, which clearly would fall under the purview of the capital budget, or it might finance the purchase of a copying machine, which might not. A standardized accounting definition cannot possibly serve the capital budgeting needs of diverse government agencies.
Consequently, the capital budget need not review all tax-exempt leases, only those financing capital projects (as defined by each agency). The capital budget clearly should cover all large, tax-exempt lease obligations issued in lieu of bonds. But the capital budget might not include smaller tax-exempt leases; nor will it include operating leases. Leases which fall outside of the capital budget, however, should not be immune from review and oversight. Government agencies periodically should review the cost-effectiveness of their more routine leasing decisions, and evaluate alternatives such as pay-as-you-go financing, master leasing, lease lines of credit, and lease pools (see Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing ).
Overview of Chapter I Guidelines
The first three Guidelines in this chapter address the principal financial management, or debt management, issues raised by tax-exempt leasing. Each of these Guidelines can be incorporated into a broader capital budgeting framework. Guideline 1: Identify the General Fund Lease Capacity recommends that agencies identify a maximum percentage of their general fund revenues which safely can be devoted to lease payments on an annual basis. This exercise serves as a simple but effective means of setting limits on long-term lease obligations.
Guideline 2: Determine the Necessity for the Proposed Project reminds agencies that the necessity for a project, rather than the expediency of its financing, should justify the funding decision. Finally, Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing discusses in general terms how to evaluate the cost-effectiveness of tax-exempt leasing for both equipment procurements and major real property improvements. This Guideline recognizes, however, that the financing decision may turn on expediency, rather than cost. - 11 -
Guideline 4: Do Not Fund Operating Expenses With Long-Term Lease Obligations reiterates a fundamental principle of public finance that is particularly relevant to tax-exempt leasing, which offers the only practical method of deficit financing for local agencies in California.
To conclude this chapter, Guideline 5: Subject All Leases to Fiscal Controls recommends that agencies subject all leases, large and small, to central oversight and accounting procedures.
Central oversight of leasing serves as a check against the unplanned accumulation of lease obligations. Central accounting procedures enable agencies to generate financial reports which accurately reflect the scope of their leasing activity. This information is needed to evaluate the cost-effectiveness of routine leasing practices.
Guideline 1: Identify the General Fund Lease Capacity
Government agencies should identify a maximum percentage of general fund revenues which safely can be devoted to lease payments on an annual basis.
The principal objective of capital budgeting is to reconcile capital spending needs with available resources. With respect to tax-exempt leasing, the general fund is the resource in question. A key to successfully managing tax-exempt leasing, therefore, is to identify that portion of general fund revenues which safely can be devoted to lease payments on an annual basis. This ratio, called the general fund lease capacity , serves as the benchmark for evaluating changes in the actual ratio of lease payments to general fund revenues in any year, or the general fund lease burden .2 Agencies should establish or revise their general fund lease capacities in the course of preparing their annual capital budgets. Agencies should monitor their general fund lease burdens on an ongoing basis, and evaluate tax-exempt leasing proposals in terms of their effect on this ratio. Simply stated, agencies should keep their general lease burdens within their general fund lease capacities. These ratios offer a simple but effective means of constraining long-term lease obligations, and serve as common reference points for elected officials, staff, citizens and investors.
Forecasting General Fund Expenditures and Revenues
The task of identifying the general fund lease capacity is by no means an exact science, though quantitative analysis should be brought to bear upon the question. To gauge the affordability of long-term lease obligations, agencies should develop long-term forecasts of general fund expenditures and revenues. (In many cases, such forecasts are prepared in conjunction with the development of the operating budget.) By comparing projections of general fund expenditures and revenues, agencies can estimate how much money will be available for discretionary purposes — specifically, the payment of lease obligations.
Expenditure forecasts should review the growth of various spending categories relative to one another, and to revenues. Labor costs, which comprise the largest chunk of spending for most government agencies, deserve close scrutiny. Other spending obligations vary by type of agency. County governments, for example, are mandated by the federal and state governments to provide various health and welfare services, even if the cost of doing so increases faster than T
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revenues and necessitates cutbacks in other areas. By annually forecasting general fund expenditures, agencies can isolate cost pressures which might threaten the availability of funding for lease payments.
Revenue forecasting is more grounded in statistical analysis than expenditure forecasting, because revenue collections are more a function of measurable variables than unpredictable budgeting decisions. Revenue forecasting techniques range from simple trend analysis (annual percentage change) to econometric models which measure the sensitivity of the tax base to the general business cycle, demographic trends, and changes in tax policy. Whatever technique employed, revenue forecasts should distinguish between those revenues earmarked for specific programs, and those available for discretionary purposes. County governments, to continue the example above, receive a significant portion of their general fund revenues in the form of federal and state grants earmarked for the aforementioned health and welfare programs. To a lesser extent, cities and nonenterprise special districts earmark general fund revenues for specific programs. Cities and counties receive most of their discretionary revenue from property tax, sales tax, and general purpose state grant revenues, principally vehicle license fees. By annually forecasting general fund revenues, agencies can identify poorly performing tax sources and explore revenue-raising alternatives.
Comparing projected levels of general fund expenditures and revenues gives a preliminary indication of how much revenue will be available for discretionary purposes during the forecast period. Agencies should recognize that certain unavoidable expenditures—principally labor costs and the unfunded portion of federal and state mandates—are paid out of so-called discretionary revenue sources. Consequently, agencies need to identify that portion of discretionary revenues which truly will be available for discretionary purposes. Only then does an agency have the information necessary to reasonably determine its general fund lease capacity.
There Is No Magic Number
In establishing the general fund lease capacity, it makes sense to err on the side of caution.
Even the most sophisticated revenue forecasting techniques cannot anticipate political decisions which can profoundly affect revenue collections, such as the shifts in property tax revenues from local governments to school districts enacted in the 1992-93 and 1993-94 State budgets. Ideally, agencies also should set aside anywhere from 2 to 5 percent of their general fund revenues in an unrestricted reserve, to guard against unforeseen emergencies. 3 Funding such a reserve, of course, leaves less money available for lease payments. Most agencies do not permit their general fund lease capacities to exceed 6 to 8 percent of their general fund revenues, but resource constraints usually keep the lease capacity below that range. In any event, the exact ratio chosen for the general fund lease capacity is not as important as the agency’s overall plan for reconciling its capital spending needs to available resources.
Agencies should remember that they have two ways to fund capital outlays from general fund revenues: pay-as-you-go financing and tax-exempt leasing. The analysis required to surmise the affordability of either option essentially is the same — that is, identifying the pool of truly discretionary general fund revenues, and establishing priorities for the disposition of those revenues. If this analysis indicates that an agency can afford to devote more than 5 percent of its general fund revenues to lease payments, it should consider paying for more capital outlays on a cash basis, to reduce interest expenses. Alternatively, agencies will gravitate more toward - 13 -
tax-exempt leasing to the extent that resources constraints necessitate leveraging the general fund to address unmet capital needs. Consequently, it makes sense to evaluate these two options in tandem.
In some respects, the concept of a general fund lease capacity over simplifies the debt management task. There is no magic number. There is no reason why an agency can safely devote, say, 3 percent of its general fund revenues to lease payments, but not 4 percent. Because lease obligations are paid from general fund revenues, the risk of default can arise from any event which erodes an agency’s general fund condition, not just from an excessive lease burden, or problems with an individual lease. But the very planning effort required to establish the general fund lease capacity makes an agency less vulnerable to unforeseen developments which might threaten the integrity of its lease obligations. Projecting general fund expenditures and revenues on an annual basis should alert agencies to rapidly escalating program costs and poorly performing revenue sources. This advance warning should give agencies time to make necessary adjustments. The main benefit of establishing the general fund lease capacity lies not in the ratio itself, but in the planning effort required to develop that ratio.
Guideline 2: Determine the Necessity for the Proposed Project The necessity for the project, rather than the expediency of its financing, should justify the funding decision.
Tax-exempt leasing offers one option for financing the construction or acquisition of capital projects. But projects financed in this manner may not always receive the same review and oversight as those financed through conventional forms of debt, since tax-exempt leases are exempt from voter approval and other procedural requirements for issuing debt. If an agency does not centralize the review and oversight of tax-exempt leasing proposals, an individual department may be able to execute a tax-exempt lease for a project that it favors, but which represents a low priority from an agencywide perspective. Projects of dubious merit are less likely to be financed through conventional forms of debt, since elected officials are reluctant to authorize such measures, or place them before the voters—who, if given the chance, are likely to reject them anyway. It is important to emphasize, therefore, that the necessity for the project, rather than the expediency of its financing, should justify the funding decision .
Prioritizing Capital Projects
A credible capital budgeting effort develops and prioritizes capital spending proposals in a logical and methodical manner. First, staff inventories the existing capital stock and assesses its condition, to generate a list of maintenance and replacement projects. Next, staff identifies any new facilities and expansions needed to accommodate population growth and maintain desired service levels. Staff then identifies any new facilities or upgrades needed to comply with federal and state regulations. Finally, staff adds discretionary projects to the list at the request of elected officials and the general public. Staff then ranks these proposals according to criteria such as fiscal impact, health and safety effects, economic development potential and environ- mental impact. Projects are funded in order of this ranking, subject to the availability of funds. - 14 -
Project Essentiality
In considering the suitability of tax-exempt leasing for any of the projects identified through the capital budget review, the capital project itself should be an important consideration. To compensate for the conditional nature of lease obligations, investors and rating agencies prefer to see tax-exempt leases executed for facilities required for the delivery of essential government services, such as police and fire protection, rather than for discretionary facilities, such as convention centers and museums. The investment community believes, not without reason, that government agencies are more likely to honor lease obligations involving essential government property. In the leasing vocabulary, this credit consideration is referred to as project essentiality .
Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing Government agencies should evaluate the cost-effectiveness of tax-exempt leasing relative to other financing alternatives, and keep in mind that non-cost factors may influence the financing decision.
The goal of any asset acquisition decision is to acquire the asset at the lowest possible cost. To translate this goal into policy, an agency must evaluate the cost-effectiveness of different procurement options. If an agency has enough cash on hand to purchase an asset outright, this evaluation is pretty straightforward — a matter of identifying the lowest price tag or bid. But if an asset is to be financed through debt or a tax-exempt lease, this evaluation is considerably more complex, involving the comparison of transaction costs and cash flows over time.4 Agencies should evaluate the cost-effectiveness of tax-exempt leasing for major capital projects through their capital budgeting processes. Agencies may choose to review the cost- effectiveness of smaller, more routine leasing decisions periodically, rather than on a case-by- case basis, to conserve administrative resources. This review can be conducted either in conjunction with the capital budget, or separately.
Small Equipment and Vendor Leases
Government agencies should not lease small equipment items out of habit. Alternative procurement strategies may be both economical and feasible. By paying for certain equipment items out of current revenues, agencies can avoid interest charges altogether. Where tax- exempt leasing is preferable, agencies should explore alternatives to executing separate leases for each acquisition. Specifically, agencies should evaluate the potential for cost savings through master leases, lease lines of credit and lease pools.
Pay-As-You-Go Financing. A basic tenet of debt management is to avoid unnecessary borrowing. By paying for capital expenses out of current revenues, agencies can avoid interest charges and minimize the administrative chores associated with debt management. Although usually it is not feasible to finance large capital projects out of current revenues, the same is not - 15 -
true for many of the relatively minor equipment items often financed through leases, such as computers, copying machines and telephones. If an agency’s administrative overhead is large enough for its equipment outlays to recur on a predictable basis, it may be able to shift to a pay- as-you-go financing scheme for at least some of these items.
Master Leases . A master lease permits an agency to acquire different pieces of real and personal property under one lease contract. By accepting competitive bids for financing under a master lease agreement, an agency may be able to arrange much better terms than would be possible through a series of small vendor lease transactions. Outstanding leases also may be consolidated under a master lease agreement. Apart from financial considerations, master leasing relieves an agency from the administrative burden of arranging financing for each acquisition, and allows it to coordinate the leasing activities of different departments. 5 To evaluate the financial benefits of master leasing, an agency should compare interest rates and transaction costs under stand-alone leases to those under a master lease. An agency should review its financial reports for information on its past leasing practices, which can serve as the basis for projecting its future leasing needs. Interest rate and transaction cost information can be obtained from investment banking and financial advisory firms.
Lease Lines of Credit . A lease line of credit offers another alternative to arranging financing for individual leases. A lease line of credit offers financing on demand under a fixed or floating interest rate. The specific assets to be financed are not identified at the time the line of credit is negotiated, although lender and borrower agree as to the types of assets eligible for financing. A lease line of credit may be arranged with or without a master lease agreement. As in the case of master leasing, the cost-effectiveness analysis should focus on a comparison of interest rates and transaction costs relative to a series of stand-alone transactions.
Lease Pools . Another alternative to arranging financing for individual leases is to participate in a lease pool sponsored by one of several statewide associations, such as the California State Association of Counties (CSAC), the California School Boards Association (CSBA), the California Special Districts Association (CSDA), and the Association of Bay Area Governments (ABAG). Typically, these associations create a subsidiary to serve as the nominal lessor and issue COPs or lease revenue bonds serviced through lease agreements with participating agencies. As with the other two alternatives, the cost-effectiveness evaluation of participating in a lease pool should focus on a comparison of interest rates and transaction costs relative to stand-alone issuance. In most cases, pooling is more advantageous for small leases under $1 million. The credit quality of any agency’s prospective lease offerings, relative to that of the pool, is an important determinant of potential savings. To protect against risk, investors price pool securities according to the weakest link , or the least secure underlying obligation in the pool. To the extent that an agency’s prospective lease offerings would receive higher credit ratings than that of the pool, the benefit of reduced issuance costs may be offset by a higher interest rate than would be available under stand-alone issuance.
Tax-Exempt Leases for Major Capital Projects
Agencies should perform a cost-effectiveness evaluation of the financing alternatives for each project candidate identified through the capital budget review. The financing alternatives for major capital projects include current revenues, debt, intergovernmental grants and tax- - 16 -
exempt leasing. Pay-as-you-go financing is cheaper than borrowing, as noted above, since it avoids interest charges altogether. But most governmental budgets have limited room to absorb large one-time capital outlays. Intergovernmental grants, though always welcome, have become increasingly scarce in this era of fend-for-yourself federalism. Consequently, the cost- effectiveness evaluation usually reduces to an analysis of borrowing alternatives. In practice, this evaluation entails a present value cost analysis — discounting to present value all initial and continuing costs arising from the financing. The discount rate used in the present value analysis is the expected interest rate on the borrowing, otherwise known as the cost of capital . All things being equal, the most cost-effective financing option should be chosen.
Tax-Exempt Leases versus General Obligation Bonds. For nonenterprise (nonrevenue producing) projects which provide a general benefit to the community — projects such as schools, administration buildings, courthouses and jails, tax-exempt leasing and general obligation (G.O.) bonds may offer the only financing alternatives.6 The general obligation bond alternative usually will win this cost-effectiveness evaluation hands-down. For starters, general obligation bonds receive an agency’s highest credit rating, reflecting the security of the full faith and credit pledge. Tax-exempt lease obligations typically are rated a single category below an agency’s general obligation bond rating, which translates into higher interest rates. In addition, tax-exempt leasing requires a larger borrowing to fund the reserve, capitalized interest account, and insurance premiums — none of which is required in a general obligation bond offering. Finally, tax-exempt leasing entails higher issuance costs, because of added legal work and higher underwriting spreads (G.O. bonds typically are sold through competitive sale, which entails a less aggressive and costly underwriting effort). But the prohibitive barrier posed by the two-thirds voter approval requirement often renders the general obligation bond alternative unworkable.
Pragmatism, rather than price, may dictate the choice of tax-exempt leasing.
For certain types of projects, tax-exempt leasing may offer simply the best financing choice, notwithstanding the feasibility of other options or the added costs involved. Suppose, for example, that an agency could save money by constructing an office building, rather than continuing to rent office space throughout town. Even if the project could be financed through general obligation bonds, doing so would impose an unnecessary tax increase on the public. After all, when voters approve local general obligation bond measures, they authorize not only new debt, but also the property tax override needed to secure that debt. Instead, the agency could finance the office building through a tax-exempt lease, paid for with the funds previously budgeted for rent. The higher borrowing costs under tax-exempt leasing would be preferable to the unnecessary tax increase imposed under the general obligation bond alternative.
In summary, agencies should evaluate the cost-effectiveness of tax-exempt leasing, but remain aware of the shortcomings of this analysis as a decision-making tool. Upon choosing tax- exempt leasing, however, agencies should make every effort to minimize their borrowing costs through the intelligent structuring and marketing of the lease obligation (as discussed in Chapter II: Structuring and Marketing Guidelines ).
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Guideline 4: Do Not Fund Operating Expenses With Long-Term Lease Obligations The proceeds from the issuance of lease obligations should not be used for deficit financing.
Most finance professionals strongly discourage the use of long-term obligations to fund current operating expenses. Although this admonition applies to all forms of public borrowing, it is particularly relevant to leasing, which offers the only practical method of deficit financing for local agencies in California. Specifically, agencies can engineer sale-leasebacks or lease- leasebacks of existing assets to generate the cash needed to paper over an operating deficit. The well-publicized Richmond Unified School District COP default in 1991 involved just such an asset transfer . Deficit financing in this manner reflects an unwillingness or inability on the part of management to address the underlying discrepancy between revenues and expenditure obliga- tions.
Restructuring Governmental Obligations
In rare instances, an asset transfer, or the pledge of future lease revenues where a government agency is lessor, may be executed as part of a workout strategy for a fiscally troubled agency. If this approach permits an agency both to retire existing debts and correct an imbalance between expenditures and revenues, it may be advisable. Nonetheless, borrowing should not substitute for difficult budget-balancing decisions.
Guideline 5: Subject All Leases to Fiscal Controls
Government agencies should subject all leases to centralized oversight and accounting procedures.
In order to make sound leasing decisions, agencies need financial reports which accurately reflect the scope of their leasing activity. Channeling all leases, both large and small, through centralized oversight and accounting systems allows agencies to generate such reports and serves as a check against the unplanned accumulation of general fund lease obligations.
Central Oversight of Leasing
The ease with which government agencies can execute lease transactions can lead to disjointed leasing practices. In a municipal government, for example, the police, fire, public works, and parks departments may independently enter into lease obligations without central review. Although the financial commitment imposed by each lease may be modest, an accumulation of such obligations may represent a significant general fund burden. The problem with decentralized leasing practices arises from the long-term nature of lease obligations, not with individual departments exceeding their budget authority in any single year. If a fiscal crisis necessitates major budget cuts — or even the wholesale elimination of departments — elected - 18 -
officials may find their range of options limited by long-term lease agreements executed at the departmental level. Channelling leases through a central oversight department acts as a check on the accumulation of multiyear spending commitments. Central oversight also allows the similar spending requests of separate departments to be grouped into larger transactions or lease pools to achieve economies of scale in leasing. Typically, the finance department is best suited to this oversight role, although the cooperation of the purchasing department also is desirable.
Accounting and Financial Reporting
As previously mentioned, the different treatments of leases under accounting standards, federal and state law, and local capital budgeting practices can be confusing. For accounting purposes, government agencies should adhere to Generally Accepted Accounting Principles (GAAP), and more specifically, Financial Accounting Standards Board Statement 13, which requires that both the principal and interest portions of lease payments be recorded as debt service expenditures, and that the outstanding liability for the lease obligation be reduced with each lease payment by the principal amount of the payment.
The correct accounting treatment of leases allows agencies to generate accurate financial reports, which advances several financial management objectives. Accurate financial reports permit the ongoing monitoring of the cumulative general fund lease burden, the key financial management (i.e., debt management ) indicator. Accurate information on the volume and type of leasing activity allows administrative staff to evaluate the feasibility of alternatives such as master leases, lease lines of credit, and lease pools. Finally, accurate financial reports allow staff to determine whether rate increases are needed to maintain coverage ratios (above operations, maintenance and debt service expenses) for installment sale agreement COPs issued for government enterprise projects.
NOTES
1. Financial Accounting Standards Board Statement 13. See “Capital Leases,” pages 25-26 in Governmental Accounting, Auditing and Financial Reporting . Chicago:
Government Finance Officers Association, 1988.
2. The ratio of lease payments to general fund revenues is one part of the broader ratio of debt service payments to general fund revenues (or expenditures) used for credit rating purposes. It is possible to shift the composition of borrowing toward or away from leasing without affecting this broader measure. The narrower measure focuses more exclusively on the ability of the general fund to support lease obligations.
3. Under the provisions of AB 1200, school districts may be required to maintain certain ratios of unrestricted general fund reserves. Guideline 18: Conform to AB 1200 Criteria for Long-Term Borrowing recommends that districts adhere to these standards even when they are under no obligation to do so. See Chapter V:
School District Guidelines , pp. 53.
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4. Evaluating the cost-effectiveness of lease-purchase options involving different terms and interest rates requires the application of formulas which are not presented here. For a thorough treatment of this more technical material, please refer to “Cost Calculations for Lease-Purchase Decisions” (Chapter 8) in A Guide to Municipal Leasing , John Vogt and Lisa Cole, eds. Chicago: Municipal Finance Officers Association, Government Finance Research Association, 1983.
5. A more detailed explanation of master leases, including a schematic diagram, can be found in the CDAC publication Leases in California: Their Form and Function , pp 1- 16 through 1-18.
6. See discussion in Chapter IV: Public Policy Guideline , under the heading “Impact of Debt Restrictions on Tax-Exempt Leasing Practices,” pp. 41-42. - 20 -
Chapter II
STRUCTURING AND MARKETING GUIDELINES
Page
Guideline 6: Incorporate Necessary Security Features 21 Guideline 7: Consider Earmarking General and Special Fund Repayment Sources 24 Guideline 8: Do Not Rely Upon Volatile Repayment Sources 25 Guideline 9: The Term of the Lease Should Not Exceed Useful Life of the Asset 27 Guideline 10: Evaluate Credit Enhancement Needs 27
Guideline 11: Solicit Competitive Bids for Small Leases 29 Guideline 12: Control the Resale of Privately Placed Leases 30 After determining through the capital budget review that tax-exempt leasing offers the best financing alternative for a given project, an agency faces a number of considerations in preparing the issue for sale. Many of these considerations arise whenever an agency taps the capital markets. For any bond issue, it is necessary to (1) size the issue, (2) design a maturity structure, (3) select the method of sale, and (4) retain professional assistance. But the structuring and marketing of tax-exempt lease obligations involves additional considerations, which are addressed in this chapter. The goal of these efforts is to achieve the best financing terms possible.
Overview of Chapter II Guidelines
In California, tax-exempt leases executed for major capital projects include an abatement clause — that is, the lease obligation is contingent upon the right to beneficial use and/or occupancy of the leased property. The risk of abatement, however, is incompatible with the investment objectives of most investors in municipal securities, who are a conservative, risk-averse group. To address investor concerns, Guideline 6: Incorporate Necessary Security Features recommends that agencies follow industry practice and incorporate security features which minimize abatement risk into their tax-exempt lease obligations.
Guidelines 7 through 10 address additional considerations relevant to the financial structure of tax-exempt lease obligations. Guideline 7: Consider Earmarking General and Special Fund Repayment Sources describes how earmarking certain revenue streams for the repayment of tax- exempt leases and installment sale agreements can, in certain instances, advance both policy and financial objectives. In evaluating the suitability of different revenue sources for the payment of lease obligations, Guideline 8: Do Not Rely on Volatile Repayment Sources recommends that agencies avoid those exhibiting a volatility incompatible with debt service requirements. Guideline 9: The Term of the Lease Should Not Exceed the Useful Life of the Asset reiterates a general debt management principle that is particularly relevant to leasing, as lease agreements which extend past the useful life of an asset may not legally be enforceable. Finally, Guideline 10: Evaluate Credit Enhancement Needs advises agencies to evaluate the costs and benefits of obtaining not only bond insurance and letters of credit, but also two low-cost credit enhancement alternatives not available for other types of debt: the asset transfer structure and the State Credit Plus program. - 21 -
The focus of the remainder of this chapter shifts away from major tax-exempt leases to the smaller privately placed leases commonly executed for equipment, vehicle and computer procurement.
Guideline 11: Solicit Competitive Bids for Small Leases recommends that agencies separate procurement from financing, and solicit competitive bids for the latter, rather than merely accept the financing terms extended by equipment vendors. Finally, Guideline 12: Control the Resale of Privately Placed Leases recommends that agencies control the resale, or securitization , of lease obligations—not so as to prohibit this activity outright, but merely to specify the circumstances under which it may occur.
Guideline 6: Incorporate Necessary Security Features
Government agencies should incorporate capitalized interest accounts, insurance policies, and reserve funds into their tax-exempt lease obligations to reduce abatement risk and improve the marketability of these securities.
The presence of abatement risk distinguishes tax-exempt lease obligations from debt, and therefore exempts tax-exempt leasing from the procedural requirements that apply when issuing debt.
But investors are not willing to extend loans subject to abatement risk merely so that governmental borrowers can avoid legal debt restrictions. To address investor concerns, government agencies should incorporate the security features described below into their tax-exempt lease offerings. By increasing the size of the borrowing, these security features represent an added cost to the governmental issuer, as all funds borrowed must be repaid with interest. These security features, however, also attract more favorable interest rates (by minimizing investor risk) and protect the issuer from certain risks.
Capitalized Interest
For a construction project financed through an abatement lease, the government lessee’s obligation to make payments from its general fund cannot commence until the facility is completed.
To ensure that investors will be paid during the construction period, and to protect investors from a loss of income resulting from construction delays, the size of the borrowing normally is increased to include interest payments for a sufficient period of time past the scheduled acceptance date. The capitalized interest is segregated into a special account for making lease rental payments during the construction period. Although the period of time for which capitalized interest should cover lease payments can vary, most tax-exempt lease obligations fund capitalized interest accounts at an amount sufficient to cover the estimated construction period plus three to six additional months.
The funds in the capitalized interest account generally are invested in short-term obligations until they are needed. Depending upon the spread between short-term and long-term interest rates (the shape of the yield curve), these short-term obligations may not earn a rate of interest as high as the True Interest Cost of the tax-exempt lease offering (which has a longer average life). Thus, the capitalized interest account needs to include sufficient funds to offset any negative arbitrage , resulting in an additional cost to the issuer.
Avoiding Capitalized Interest Through An Asset Transfer. One way to avoid the added costs of capitalized interest is to structure the lease transaction as an asset transfer . Under an asset transfer, the governmental issuer sells or leases an existing asset that it owns outright in order to fund - 22 -
the construction or acquisition of a separate asset. For example, a county might sell its jail and lease it back, using the proceeds from the sale to construct an administration center. Because the lease agreement is executed for an existing asset, construction risk is eliminated and the need for capitalized interest is substantially reduced or avoided. The governmental issuer may be required to pay for a third party appraisal of the asset, and augment its insurance coverage. (See Asset Transfer discussion in Guideline 10: Evaluate Credit Enhancement Needs. )
Insurance Requirements
Agencies incorporate various insurance policies into their tax-exempt lease agreements to protect investors from a loss of income resulting from construction delays or property damage. (This type of insurance is distinct from bond insurance which protects investors in cases of default or nonpayment, as discussed in Guideline 10: Evaluate Credit Enhancement Needs. ) Insurance proceeds can be used to repair or replace a damaged facility or to pay debt service during a period of rental abatement. In evaluating insurance policies, agencies should weigh the financial risks of accepting higher deductibles in return for lower premiums. The following types of insurance most commonly are incorporated into tax-exempt lease agreements:
o Builders Risk Insurance and Performance Bonds. In addition to capitalized interest, construction risk can be mitigated by purchasing, or requiring a contractor to purchase, commercially available builders risk insurance and performance bonds. Builders risk insurance protects investors from certain types of construction risk, such as fire, storms and construction accidents, but not necessarily others, such as earthquakes and floods. Perfor- mance bonds protect against construction delays caused by builder nonperformance, by providing for funds to pay another contractor to complete the project. Performance bonds typically relieve builders from liability for delays caused by strikes, material shortages, or other events beyond their control.
o Property and Casualty Insurance. An agency normally purchases property and casualty, or all risk , insurance in an amount equal to the lesser of the leased asset’s full replacement value or the outstanding lease obligations. If coverage equals replacement costs, the lease or trust indenture should specify that insurance proceeds will be applied to rebuilding, unless proceeds are sufficient to retire all outstanding lease obligations. o Rental Interruption Insurance. Rental interruption insurance, also called business interrup- tion insurance, provides funds to cover debt service during a period of abatement while the facility is repaired or replaced. The period of time during which rental interruption insurance will pay debt service usually approximates the period required to replace the facility. Such insurance usually is required as a condition of receiving a credit rating for the lease offering. o Title Insurance. Most lease agreements include title insurance equal to the full amount of the borrowing to protect against defects in the title to the property. Title insurance may not be required if the leased asset has been owned for a considerable period of time. o Earthquake Insurance. For agencies in areas of California prone to earthquake risk, investors and rating agencies may require earthquake insurance. The State of California has been conducting ongoing evaluations of earthquake zones in the state, which agencies may refer to in their Official Statements as evidence of why earthquake insurance may or may not - 23 -
be required.1 Government agencies also should be aware of the distinction between choosing to carry earthquake insurance and legally committing themselves to purchase that insurance throughout the term of the lease.
o Flood Insurance. Floods represent a special hazard similar to earthquakes. Rating agencies and investors may require agencies constructing projects in flood plains to purchase flood insurance.
o Pollution Insurance. Under California law, public landfills are required to be insured against certain pollution risks. Pollution insurance also may be advisable for wastewater treatment plants.
o Public Liability Insurance. Unlike the other types of insurance, public liability insurance does not protect investors from abatement risk arising from damage to the facility. Rather, it protects the agency from claims arising from the use and operation of the facility. Because a significant claim could jeopardize an agency’s ability to honor its financial commitments— including its lease obligations—rating agencies and investors may require public liability insurance.
o Self-Insurance. In response to rapidly escalating commercial insurance rates, many public agencies have instituted self-insurance programs. Self-insurance programs, which are subject to annual actuarial reviews of reserve level adequacy, may be a permissible alternative in the eyes of rating agencies and investors. Self-insurance may not be an acceptable alternative to commercial earthquake insurance if the agency’s obligation is limited to self- insurance reserves and does not extend to its general resources. In addition, self-insurance for rental interruption (covering a period of more than one year) may violate the constitutional debt limitation.
Reserve Fund
Tax-exempt lease obligations subject to abatement risk should include reserve funds to provide liquidity during periods of abatement. In the event of construction delays, the reserve supplements the capitalized interest account to protect against late payments. In the event of damage to the project after completion, the reserve provides liquidity while awaiting the receipt of insurance payments.
Reserve funds also provide liquidity in the event of a delay in appropriation brought on by a protracted budget stalemate (in many situations, agencies have no statutory authority to make lease payments without a budget in place).
Although investors prefer a reserve equal to maximum annual debt service, federal tax law restricts the funding of reserves to the lesser of (1) 10% of the par amount, (2) maximum annual debt service, or (3) 125% of average annual debt service. To receive a favorable credit rating, the issuing agency may have to supplement the reserve from other sources. In lieu of a cash funded debt service reserve fund, an agency may obtain a surety bond or letter of credit.
The trust agreement for certificates, or trust indenture for bonds, should specify permitted investments for the debt service reserve fund, as well as the other funds created and managed by the trustee. Because the funds in the reserve need to be readily available, they should be invested in short and medium-term instruments which are highly liquid, or in investment contracts which permit draws - 24 -
on debt service payment dates. Because the trustee is under no obligation to make up investment losses, reserve funds should be invested in high quality securities such as direct or guaranteed obligations of the U.S. government. Moreover, the rating agencies specify permissible reserve fund investments which governmental issuers must observe as a condition of receiving a credit rating.
Guideline 7: Consider Earmarking General and Special Fund Repayment Sources To advance policy and financial objectives, government agencies should consider earmark- ing general and special fund repayment sources for tax-exempt leases and installment sale agreements.
Certificates of participation represent undivided, fractional interests in either a tax-exempt lease or an installment sale agreement, depending on the type of project being financed. For nonenterprise (nonrevenue producing) projects supported by general fund revenues, a tax-exempt lease serves as the underlying obligation. Lease payments are made from any legally available general fund revenues, contingent upon the right to beneficial use and/or occupancy of the leased property (under an abatement lease). For self-supporting enterprise (revenue producing) projects, an installment sale agreement typically serves as the underlying obligation. Installment sale agreements typically are structured as absolute and unconditional special fund obligations.
For certain types of projects, agencies may be able to earmark revenue sources within general and special funds for the repayment of obligations. Earmarking repayment sources can advance the policy objective of linking the benefits received by users of a particular project to taxes or fees collected from those users. Or, earmarking may provide a way of capitalizing a special fund revenue source, thereby offering an alternative to pay-as-you-go financing.
Earmarking General Fund Revenues
In most cases, earmarking general fund revenues for lease payments does not amount to a legal pledge of revenues. Leases usually are payable from all legally available general fund revenues.
But internally earmarking specific general fund sources to the payment of lease obligations can advance the debt management objective of requiring those who benefit from a particular project to pay for it. For example, a city might decide to build a multilevel parking garage paid for by parking revenues.
To address investor concerns as to adequacy of parking fees, the agency might structure the offering as a tax-exempt lease obligation payable from all legally available general fund revenues. But internally, the agency might earmark parking fees for debt service. Parking rates would be set to generate sufficient revenues for debt service. If parking fees did not materialize as expected, the shortfall would be paid from other general fund revenues.
Earmarking Special Fund Revenues
It is not necessary to earmark revenues to the repayment of COPs issued to finance enterprise projects since these financings, by definition, are self-supporting through fees. But not all projects financed through special funds are enterprise projects. Nonenterprise transportation projects, such as highways, roads, and transit equipment, also are paid for through special funds, - 25 -
consisting of federal grant, state gas tax and other transportation-related revenues. Historically, these special fund revenue sources have been spent on a cash basis. In recent years, however, local transit agencies in California successfully have issued COPs for transportation projects by earmarking special fund revenues to the payment of these obligations.
Federal Transit Administration Funds. In 1990, the Federal Transit Administration revised its regulations to permit federal grants to pay for up to 80 percent of both the principal and interest components of a COP issue. Prior to that time, federal transit funds could pay for up to 80 percent of the principal component only, which made the local match requirement prohibitive. Since this regulation was revised, transit agencies in San Diego, Sacramento, and Los Angeles have issued over $200 million in COPs secured by federal transit funds, with the local match requirement paid from local and state sales tax revenues earmarked for transportation.
By leveraging federal funds, agencies can accelerate their bus fleet procurement programs, which can produce a present value savings (from inflation avoidance) when compared to a stretched- out procurement schedule. And by removing older buses from their fleets more quickly, agencies can reduce maintenance costs and introduce sooner more environmentally sensitive equipment.
State Gas Tax Revenues. In 1990, California voters approved Proposition 111, which will double the state gas tax over a period of five years (from 9 cents per gallon in 1990 to 18 cents per gallon in 1994). Collectively, cities and counties each receive approximately 11.5 percent of these revenues, according to a formula based on population and other factors. Although these funds should help agencies address pent-up project demands, their ability to leverage these funds is hampered by the State Constitution, which prohibits the pledging of state gas tax revenues for bonds.
In 1991, the City of Fresno, armed with a legal opinion stating that the prohibition on bonding gas tax revenues does not apply to COP obligations, issued $11.2 million of COPs secured by state gas tax revenues, thereby becoming the first agency in California to borrow against state gas tax revenues. Under the COP structure, certificate holders do not have a lien on gas tax revenues, but all gas tax revenues are deposited monthly with the trustee until sufficient amounts are available to make the annual certificate payments. Funds are then deposited in the City’s transportation account.
Guideline 8: Do Not Rely Upon Volatile Repayment Sources Government agencies should rely on stable revenue sources for repayment of lease obligations.
When evaluating the suitability of any revenue source for debt service payments, agencies should look for a stable history of revenue collections. Most taxes and fees are tied to tangible economic transactions which are sensitive to broader economic cycles, to varying degrees. Sales tax revenues, for example, ebb and flow according to the level of taxable sales, a key indicator of the health of the consumer sector of the economy. The cyclicality of sales tax revenue collection does preclude bonding; it merely results in a higher coverage ratio than would be required for a more stable revenue source. The revenue sources described below, however, exhibit a volatility that is not compatible with debt service requirements. Agencies should avoid relying on these revenue sources as the primary repayment source for obligations.
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Developer Impact Fees and Connection Fees
To address the decline in property tax revenues resulting from Proposition 13, cities and counties have come to rely on their authority to charge developer impact fees as a condition of approving development projects. School districts—though lacking jurisdiction over land use deci- sions—also have received permission, through the Legislature and the courts, to levy developer impact fees. State law requires developer impact fees to be applied to specific infrastructure needs arising from the development project on which the fee was levied.
Relying on developer fees presents a quandary for local agencies. On the positive side, developer fees require new development to pay its own way, which means that the broader community does not have to subsidize the infrastructure costs of development. But developer fees alone do not generate revenues quickly enough to address all growth--related infrastructure needs in a timely manner. Certain types of infrastructure--for example, highways and water supply projects--cannot be expanded incrementally to accommodate growth, but instead must be constructed in large, discrete intervals to realize economies of scale in construction. To avoid growth-related congestion, these facilities ideally should be constructed with enough excess capacity to absorb population increases for several years. Developer fees, which typically are collected at the time building permits are issued, do not generate funds quickly enough to implement the growth management policy of concurrency .
Agencies face the unappealing choice between subsidizing development, or allowing it to congest existing public facilities.
During the housing boom of the late 1980s, communities in rapidly developing areas of the state addressed this dilemma by issuing COPs, rather than waiting for sufficient developer fee revenues to accumulate. Although this approach certainly advanced land use planning goals, it also exposed these agencies to the potential for financial difficulties, to the extent that they depended upon robust developer fee collections to service their obligations. Housing construction is one of the most cyclical sectors of the economy, as evidenced by the dramatic dropoff in local developer fee revenues beginning in 1990. Economists track swings in housing starts to predict economic recoveries and contractions. Developer fee collections, therefore, exhibit a volatility which is not compatible with debt service requirements. The same dynamics apply to water and sewer connection fees. Agencies should avoid relying on these revenue sources as the primary repayment source for obligations.
Fines and Forfeiture Revenues
Cities and counties retain a portion of the fine and forfeiture revenues they collect for various criminal and civil violations, and remit a portion to the State. Fine and forfeiture revenue collections depend upon the levels of fines established by the state Legislature, and the aggressiveness of local enforcement efforts. During the 1980s, many localities initiated successful efforts to enhance collections, by serving warrants to violators delinquent on their accounts. But in 1991, the State required cities to transfer 50 percent, and counties to transfer 75 percent, of their non-parking fines to the State, to offset part of the additional State funding of the trial courts. By reducing the proportion of fine and forfeiture revenues retained locally, this action may serve as a disincentive for local collection efforts. The historical volatility of fine and forfeiture collections, along with the uncertain prospect of future collections, argues against pledging these revenues as a primary repayment source for obligations.
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Guideline 9: The Term of the Lease Should Not Exceed Useful Life of the Asset Government agencies should not agree to lease terms which extend beyond the anticipated useful life of the asset.
The rationale for financing capital acquisitions through borrowing is to link the responsibility of paying for public facilities to the benefits derived from those facilities. For that reason, the term of a financing should not exceed the useful life of the asset. This general principle is all the more relevant to tax-exempt lease obligations. Because the lessee’s obligation under an abatement lease is tied to the right to beneficial use and/or occupancy of the leased asset, a lease extending beyond the useful life of the asset might not be legally enforceable. Similarly, under a nonappropriation lease, the agency’s willingness to continue appropriations would be suspect during the period in which the asset was no longer available. To promote sound debt management and ensure the marketability of the obligation, agencies usually should establish a lease term shorter than the anticipated useful life of the asset.
Guideline 10: Evaluate Credit Enhancement Needs
Government agencies should perform cost-benefit analyses of available credit enhancement alternatives before issuing tax-exempt lease obligations.
As part of the preparations for any bond issue, agencies should evaluate the costs and benefits of credit enhancement. The two principal forms of credit enhancement—bond insurance and letters of credit—are available for tax-exempt lease obligations. But issuers of tax-exempt lease obligations have two additional options that are not available for other types of bonds. First, agencies can structure a lease transaction as an asset transfer, thereby substituting the credit of a more essential facility and eliminating construction risk. Second, agencies can participate in the Credit Plus Program, a state intercept program which guarantees payment of tax-exempt lease obligations through allocations of state Motor Vehicle License Fee revenues.
Bond Insurance
A bond insurance policy protects the bond or certificate holder by paying principal and interest installments in the event that the issuing agency fails to do so. If a default occurs, the trustee follows certain procedures to notify the bond insurer and receive payment. After making the principal and interest payments required under the policy, the bond insurer then assumes the position of investors in terms of seeking legal recourse for payments from the issuing agency.
The added security to investors afforded by bond insurance results in a higher credit rating and lower borrowing costs for the new issue. The governmental lessee must weigh these benefits against the cost of the policy, a premium charged as a percentage of the present value of total debt service insured. The benefits of lower interest rates under the policy should be quantified for each maturity and discounted to present value for comparison with the cost of the one-time premium. Bond insurance firms observe limitations on the volume of California tax-exempt lease obligations they underwrite, which may inhibit the availability of bond insurance.
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Letter of Credit
The letter of credit (LOC) is the other principal form of credit available for new issue municipal securities. LOCs are contractual promises issued by banks to pay specified amounts to designated beneficiaries under certain conditions. For credit enhancement purposes, the LOC is designed to pay the trustee debt service payments in the event the governmental lessee fails to do so, much like a bond insurance policy. In addition to credit enhancement, LOCs serve another function: to provide liquidity for variable rate or tender offer bond or certificate issues. Under this form of LOC, the bank agrees to advance any funds necessary to purchase any bonds or certificates tendered by investors.
A key distinction between LOCs and bond insurance is that LOCs do not cover the entire term of the bond or certificate issue, usually extending no more than three to seven years. The bond indenture typically specifies that if the LOC is not renewed upon expiration, or a suitable substitute cannot be found, the bonds or certificates must be redeemed prior to the LOC expiration date. LOC providers normally charge both initial fees and annual fees for the continued availability of the LOC.
The present value analysis undertaken to evaluate the benefits and costs of obtaining an LOC is similar to that performed for bond insurance.
Asset Transfer
The asset transfer, or equity strip, offers a low-cost option for strengthening the credit rating of a tax-exempt lease offering (in addition to eliminating the need for capitalized interest, as discussed in Guideline 6: Incorporate Necessary Security Features ). Under an asset transfer, an agency sells or leases an existing asset to generate funds for a separate capital project, then leases back the original asset. Even though the purpose of the asset transfer is to fund a new asset, the credit rating is based on the leased asset—the original asset. The asset transfer allows an agency to finance an asset which might not be deemed essential by the investment community—for example, a museum— by substituting the credit of an existing, more essential asset—for example, a courthouse. The proceeds from the sale or lease of the courthouse would pay for the cost of constructing the museum.
The agency would then own the museum outright, and enter into a long-term lease for the courthouse.
Agencies may encounter the criticism that executing an asset transfer is tantamount to mortgaging its assets —a reckless financial practice. This criticism is unwarranted if the proceeds from the sale or lease of the existing asset pays for the construction of a new asset of comparable value.
True, the asset transfer requires an agency to make lease payments on an asset that it previously owned outright, but the agency does not have to make lease payments on the newly acquired asset, which it owns outright. And substituting the credit of a more essential asset into the lease agreement lowers overall borrowing costs.
The Credit Plus Program
The Credit Plus Program is a State intercept program available for cities and counties in California. Under the provisions of the program, cities and counties can elect to guarantee payment of their general obligation bonds and lease obligations through their allocation of motor vehicle license fee revenues from the State. Upon notification from a trustee that a participating city or county did not make a required debt service payment, the State Controller is directed to make the payment from - 29 -
the city or county’s share of motor vehicle license fee revenues. Standard & Poor’s Corporation will assign a minimum “A” rating to the qualified obligations of cities and counties participating in the program.
Guideline 11: Solicit Competitive Bids for Small Leases Government agencies should solicit competitive bids for small lease offerings from lease brokers, finance companies, banks, and other institutional investors, and separate procurement from financing for all lease purchases.
Government agencies should not simply accept the financing terms extended by equipment vendors, which sometimes carry high interest charges. To achieve the lowest possible borrowing costs, agencies should instead separate the acquisition of equipment from its financing, and solicit competitive bids for the latter. A number of institutional investors, attracted by the opportunity to earn tax-exempt interest, should respond to bid solicitations.
Middle Market Leases
Government agencies frequently execute small tax-exempt leases when they need prop- erty—usually equipment, but sometimes real property—that they cannot afford to pay for outright.
Whereas broad investor participation in large tax-exempt lease offerings can be achieved through the retail sale of COPs, smaller tax-exempt leases often are privately placed —sold to a single or a small group of investors. Most privately placed tax-exempt leases are for amounts of less than $1 million, although the amount may run higher.
Equipment vendors often extend financing terms to facilitate the sale of equipment they manufacture. Vendors either hold the lease for its full term as an investment, or sell and assign the lease to one or more subsequent investors. If the vendor holds the lease as an investment, it naturally has an interest in charging as high an interest rate as the market will bear. It is not uncommon for vendors to negotiate transactions with governmental lessees at taxable interest rates by claiming that they need to arrange private financing to underwrite the transaction. If the vendor sells and assigns the lease to subsequent investors, it may receive a broker’s fee, which can result in additional financing costs. Either way, the financing terms extended by vendors may not be competitive. Vendors are not necessarily finance specialists.
Bifurcated Bidding
Agencies should attempt to lower their borrowing costs through bifurcated bidding — soliciting vendor prices for asset acquisition only and independently seeking lease financing rates from third-party companies and financial institutions accustomed to investing in tax-exempt leases. A number of institutional investors attracted by the opportunity for tax-free interest income actively participate in this market: lease brokers, insurance companies, banks, and finance companies (often affiliated with large conglomerates). The market for small tax-exempt leases now is sufficiently competitive so that no government agency should pay interest rates which are above the norm for comparable tax-exempt debt.
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Minimize Time Between Lease Bidding and Funding . Under bifurcated bidding, an agency may solicit funding proposals well in advance of the actual equipment purchase — just to make sure that funds will be on hand when needed. But as a hedge against unfavorable interest rate movements during the interim period, investors may incorporate a risk premium into their bids, resulting in less attractive proposals. To encourage more competitive bidding, agencies should minimize the time between soliciting bids and funding the asset. Alternatively, the governmental lessee can accept rates tied to an index until funding. This protects both the lessor and lessee, by assuring market rates in much the same manner as a lease line of credit.
Guideline 12: Control the Resale of Privately Placed Leases Government agencies should specify the conditions under which their privately placed lease obligations may be sold and assigned.
Privately placed leases, financed through vendors or third parties, typically include a clause permitting the lessor to sell and assign its interest in lease payments to other parties, including lease brokers, finance corporations, banks, and other institutional investors. Most tax-exempt leases sold in California, in fact, rely on such lease assignment provisions (although the largest dollar volume of tax-exempt leases executed in California are marketed as COPs). The lessor’s decision either to retain the lease as an investment or sell and assign it to subsequent investors depends on both its tax situation and financial ability to hold long-term receivables. As these factors are subject to change, lessors benefit from the liquidity offered by lease assignment clauses.
Although governmental lessees routinely agree to lease assignment clauses without much thought, they should insist that this language incorporate guarantees of vendor performance and specify permissible terms and conditions for securitizing lease obligations (discussed below).
Properly structured assignment clauses can benefit lessors, by providing liquidity, and lessees, by incorporating necessary safeguards and attracting more favorable financing terms than would be available for an illiquid security.
Ensuring Vendor Performance
Leases for equipment that requires ongoing servicing typically reserve to the lessee the right to cancel the lease for vendor nonperformance. But if the vendor has sold and assigned the lease, exercising this right of cancellation can injure third party investors. The third party investors may not adequately have been informed about the lease cancellation provision and may incur considerable expense in seeking damages from the vendor. Although the governmental lessee has every right to cancel the lease for vendor nonperformance, its reputation in the securities market may suffer from the false impression that it has reneged on its financial commitments.
Well structured leases address the risk of vendor nonperformance by incorporating perfor- mance bonds, product warranties and maintenance agreements. Such leases also require the lessee to maintain the leased property in good working order.
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Private Party Bankruptcy Risk
The sale and assignment of privately placed leases also introduces risks related to the bankruptcy of the lessor, both for the governmental lessee and investors. Depending on how the sale and assignment provisions are structured, the leased property could be considered part of the lessor’s bankruptcy estate. As part of the bankruptcy proceeding, the governmental lessee could be required to return the leased assets to the lessor for disposition with its other assets.2 The governmental lessee no longer would have use of the leased assets and no legal recourse to recover leased payments already made. And interruption or cancellation of lease payments to investors would damage the governmental lessee’s reputation in the securities market through no fault of its own.
Governmental lessees should assess private lessor bankruptcy risk by reviewing the credit rating of the lessor’s unenhanced debt, if such a rating is available. The lease transaction also may be structured to insulate lease payments from this risk by specifying that any assignment must be absolute.
Securitized Vendor Leases
As long as lease assignment language incorporates adequate protections, governmental lessees may be indifferent toward the sale and assignment of their lease obligations through private sale. In recent years, however, investment banking firms have begun purchasing small vendor lease obligations and packaging them as COPs for public sale. These securitized vendor leases pose two problems for governmental lessees. First, they frequently are marketed with bond offering documents which look as though they were prepared by the governmental lessee, complete with financial statements and audits. These offering documents convey the impression that the governmental lessee “stands behind” the offering, when in fact, the lessee knows nothing about it. If the investment banking firm offering such securities runs afoul of federal tax law, or simply fails to arrange timely payments to investors, the governmental lessee’s reputation in the securities market could unfairly be damaged.
Second, securitized vendor leases often are derived from small-denomination, short-term equipment leases which carry high yields; the availability of such securities on the secondary market could dampen investor interest in an agency’s original issue, lower yielding obligations.3 In January 1991, for instance, Los Angeles County, preparing to market a $28 million equipment lease, unexpectedly encountered a $1.7 million COP securitized vendor lease for sale in the secondary market, derived from a county modular building lease. The availability of a comparable security, yielding a full 200 basis points more than the new lease offering, caused the County to temporarily withdraw its offering. The following day, yields rose unexpectedly in response to developments in the Persian Gulf War. As a consequence, the County had to pay an extra 10 to 20 basis point more than expected, which translates to an additional $200,000 over the life of the issue. - 32 -
GFOA Policy Statement
The problem of securitized vendor leases has not been confined to California. The Government Finance Officers Association (GOFA) approved a policy statement in May 1993 regarding the securitization of leases, which recommends the following:
o Government entities should institute a process for centralizing all information on leases. (See Guideline 5: Subject All Leases to Fiscal Controls in Chapter I: Financial Management Guidelines .)
o The original lease documents should explicitly state what is and is not permissible regarding secondary lease securitization, including that secondary lease documents (1) outline the role of the public agency in the remarketed offering and (2) describe the relationship between the lessee and new investors.
o Government lessees should ensure that all necessary legal opinions are obtained by the lessor prior to the public offering of the remarketed lease obligation.4 AB 1160 Reforms
In response to its unexpected encounter with a securitized vendor lease offering bearing its name, Los Angeles County sponsored legislation which makes such offerings illegal. Assembly Bill 1160 (Chapter 723, Statutes of 1993) makes the sale of fractionalized interests in a California municipal lease obligation without prior written consent a securities fraud, punishable by a fine or imprisonment.
The consent requirement applies to any offering or sale within the State of California. Hence, out- of-state firms selling to any person in California are covered by the statute. The consent requirement does not apply to lease sales between financial institutions, or to sales and resales of unit investment trust shares.
NOTES
1. The results of those studies are reported in the California Department of Conserva- tion, Division of Mines and Geology, Fault-Rupture Hazard Zones in California — Alquist-Priolo Special Studies Zones Act of 1972 With Index to Special Studies Zones Maps (Spec. Pub. 42, Rev. 1992).
2. See “Private Sector Involvement in Municipal Leasing: Analytical Rating Approach,” Moody’s Investors Service, May 6, 1991.
3. See for example Hill, Patrice, “Issuers Stumbling Across Growing Number of Unauthorized Vendor Lease Offerings,” The Bond Buyer , May 20, 1992.
4. GFOA “Policy Statement — Securitization of Leases,” Adopted May 1993. - 33 -
Chapter III
LEGAL GUIDELINES
Page
Guideline 13: Understand the Contractual Obligations Imposed by Lease Documents 36
Guideline 14: Confirm that Lease Documents Reflect the Financial Transaction 37
Guideline 15: Review Small Lease Documentation 38
Guideline 16: Follow Legal Formalities, Even for Small Leases 38 Although lease documentation may be presented to a government agency as mere paperwork—forms that need to be filled in, signed and filed away—a lease is, in fact, a legal contract that imposes binding obligations on the governmental lessee and other parties to the transaction. The terms and conditions specified in this “paperwork” suddenly become very important should one of the parties to the lease renege on its contractual obligations. Agencies should review lease documentation to ensure that it accurately reflects the financial terms of the transaction and that covenants do not unduly restrict governmental operations. Inappropriate lease documentation can create legal and tax problems and raise the cost of borrowing.
Legal Classification of Leases
A tax-exempt lease is designed to avoid classification as debt for purposes of the debt limitation in the State Constitution. This is accomplished in one of two ways:
Abatement Lease. An abatement lease is a long-term obligation to pay rent in each year in which beneficial use and/or occupancy of property are tendered to a government agency. A long line of appellate decisions (referred to as the Offner-Dean line of cases) has held such leases to be outside the constitutional debt limit. The most significant aspects of an Offner-Dean lease are that (1) rent is only due during those periods in which beneficial use and/or occupancy of the leased property are available to the lessee; (2) acceleration of rental payments is not permitted; (3) obligation to pay rental payments is from any lawfully available funds of the lessee; (4) terms and conditions of the lease are similar those found in a commercial context for a similar type of facility; and (5) the lease term should not extend beyond the anticipated useful life of the leased property, and lease payments cannot exceed fair market rental. The abatement lease is by far the most common form of lease used in California.
Typically, governmental agencies in California covenant to budget and appropriate rental payments for the fiscal year in which such payments are due. The obligation to pay rent over a long term, however, may be impaired due to (i) the possibility that failure to complete a project may result in no legal requirement to pay rent, (ii) the abatement of rent during the lease term if beneficial use and/ or occupancy of the leased property are unavailable because of calamity or other events, and (iii) the - 34 -
absence of any right to accelerate rental payments and, in the event of payment defaults, the corresponding requirement of bringing a lawsuit for annual rental payments as they come due each year.
To reduce these risks, a long-term lease often includes the following protections:
o In the event the leased project is to be constructed, interest is capitalized (i.e., borrowed) during the construction period (and for rating agency purposes, six or more months beyond). In addition, the construction contractor is often required to provide payments and performance bonds, and all-risk insurance in an amount equal to 100 percent of the replacement cost of the project. In certain circumstances, earthquake and flood insurance may be required.
Liquidated damages for late completion of the project may also be required in a daily amount equal to daily rental on the tax-exempt lease.
o After the completion of construction of the project, the lessee is often required to maintain various insurance coverages, plus rental interruption insurance covering a period approxi- mately equal to the estimated construction period. Provisions requiring adequate insurance are important so as to reconstruct the leased project and compensate the investors in the event the property is damaged or destroyed; this is a factor that often is given insufficient emphasis in terms of structuring earthquake, rental interruption and other insurance. o A title insurance policy in an amount equal to the aggregate principal amount of the tax-exempt lease usually is required in a lease of real property.
o A debt service reserve equal to approximately one year’s debt service may be funded. o Bond insurance may provide a source of lease payments in the event of default.
The financial considerations associated with these protections are discussed in Chapter II:
Structuring and Marketing Guidelines.
Nonappropriation Lease. A nonappropriation lease provides that a government agency is not obligated to make lease payments from year to year, unless it appropriates funds for the rental payments in its budget. If no rental payments are appropriated, the government agency has no further obligation and loses the right to use the leased facilities. Nonappropriation leases are far less common in California than abatement leases, as the risk of nonappropriation results in less advantageous interest rates.
Special Fund Obligations
Installment sale agreements are payable exclusively and solely from a designated special fund of a government agency. That special fund must be derived from activities related to the purposes for which the special fund obligation is issued. It may not be additionally secured by recourse to the general fund or taxing powers of the issuing agency. In California, these obligations are used to finance self-supporting enterprise facilities. Because a self-supporting enterprise provides a special fund obligation not dependent upon general taxes for payment, the government agency is able, without a vote, to enter into an unconditional agreement to pay principal and interest. - 35 -
Statutory Authority to Lease & Dispose of Property
In a lease financing, a government agency relies on its authority to acquire and dispose of property, rather than its authority to incur debt. A government agency with the authority to acquire or dispose of either real or personal property usually can enter into a lease. California statutes contain a multitude of provisions authorizing various public entities to acquire specific kinds of property. Table 1 lists the types of local agencies which have frequently entered into leases, and the general statutory authority authorizing the acquisition and disposition of property under lease arrangements:
Table 1
Selected Statutory Authorization To Lease Property
California Local Governments
Public Agency
Statutory Authorization
City Government Code Sections 37350, 37351
County Government Code Sections 23004, 25351
Irrigation Districts Water Code Sections 24252, 22425
Redevelopment Agencies Health & Safety Code Sections 33391, 33430 School Districts Education Code Sections 39300 et seq., 39360.1 Although a lease may involve simply a lease of personal or real property from a lessor to a governmental lessee, a lease financing may be structured in such a manner that the governmental entity not only acquires property, but also disposes of property, as in an asset transfer. If the financing structure involves a disposition of property by the government agency, a concern regarding statutory procedures for disposing of property may be raised. In addition, for both acquisition and disposition of property, the public purpose requirement is relevant.
Statutory Procedures for Disposition of Property. Special limitations and authorizations relating to dispositions of property are sometimes contained in the organic acts (such as the charter) of a government agency. In certain instances, government agencies may be required to publicly bid the lease or other disposition of publicly-owned property pursuant to so-called surplus property statutes. This may be of special significance in certain sale-leaseback financings. Other procedures in particular circumstances may be required, such as the publication of the notice of intention to convey property. (See, e.g., Government Code Sections 4217.10 et seq. for cogeneration facilities.) Public Purpose Requirement. Any lease by a government agency (whether to acquire or dispose of property) must be in furtherance of a proper public purpose. California courts have invalidated leases of municipal property to private persons as unconstitutional uses of public property, when a predominant public purpose for the lease could not be identified. Governmental agencies should be clear as to who will be the beneficiary of a tax-exempt lease and that the ultimate use of the property is in furtherance of a public purpose.
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Overview of Chapter III Guidelines
The Guidelines in this chapter offers a user-friendly approach to legal aspects of leasing that government finance officers should understand. Guideline 13: Understand the Contractual Obligations Imposed by Legal Documents offers agencies the commons sense advice to be aware of the mandates and restrictions they agree to as part of lease transactions. Guideline 14: Confirm that Lease Documents Reflect the Financial Transaction reminds agencies to check lease documents for accuracy, and includes a checklist for this purpose. Guideline 15: Review Small Lease Documentation notes that vendor lease documents often are prepared in boilerplate fashion by out- of-state firms lacking an understanding of California law. Agencies should, therefore, review these documents carefully and consider developing their own forms of documentation for small lease transactions. Finally, Guideline 16: Follow Legal Formalities, Even for Small Leases notes that failure to secure appropriate authorization for a lease, or to file the necessary paperwork with the IRS, could jeopardize the tax-exempt status of the lease.
Guideline 13: Understand the Contractual Obligations Imposed by Lease Documents Government agencies should understand the mandates and restrictions imposed by lease documents and not agree to terms that might unduly restrict their operations.
A governmental lessee cannot rely on a vendor, underwriter, lease broker or other party to fully assess the impact of a lease agreement on its operations. Even though lease documentation may consist of standardized forms, legal provisions generally are negotiable, and the governmental borrower can insist on more favorable terms and conditions, if necessary to protect its interests.
The amount of lease documentation usually corresponds to the size and complexity of the transaction. For a small lease transaction, the documentation may consist of the lease agreement between the government agency (as lessee) and the investor (as lessor), and certain tax certifications.
The lease generally specifies rental payment dates and includes covenants binding the agency to, and restricting it from, certain actions. Under a COP transaction, the lease agreement is assigned to a trustee pursuant to an assignment agreement between the financing corporation or joint powers authority, acting as lessor, and the trustee. The trustee, in turn, acts pursuant to a trust agreement. The trust agreement authorizes certificates of participation in lease payments, the terms of the certificates, and the rights and obligations of the trustee and investors in the certificates.
Covenants included in lease documents are intended to and do, in fact, restrict governmental flexibility over financial, operational and other matters. For example, covenants may restrict an agency in the disposition of property, and require the agency maintain certain property and to continue to perform certain activities. Rate covenants in enterprise financings generally require additional charges above the amounts needed solely to pay operation and maintenance costs and debt service. Legal documents also specify insurance requirements, including levels of coverage and deductibles.
In the event that a government agency is unable or unwilling to satisfy the legal requirements of a lease, it may find itself in a state of technical default, which could lead to a more serious default and damage the agency’s reputation in the securities market. Agencies should, therefore, faithfully comply with all the terms and conditions they agree to as part of lease transactions. - 37 -
Guideline 14: Confirm that Lease Documents Reflect the Financial Transaction Government agencies should review each legal document and confirm that it fully and accurately reflects agreed upon business terms.
Government agencies should review lease documentation to ensure that the specified terms and conditions accurately reflect the agreed upon financial transaction. The following is a partial list of financial terms that agencies should review in most lease agreements:
o Amount borrowed. What is the principal amount of the lease? How was it determined? Were project costs “net funded”, that is, reduced by conservatively estimated earnings on the proceeds during any construction period? What interest rate was assumed for that purpose? What was the construction draw schedule?
o Term of the lease. Is the lease financially appropriate? Would a longer term be useful in reducing payment amounts? Could the lease be paid comfortably in a shorter period? Is the lease term limited to the reasonably expected life of the facilities funded through the transaction? (Level payments are the norm for legal and credit reasons.) o Timing of payments. Do lease payment dates correspond appropriately to the government agency’s receipts of revenues to be used to make lease payments? Are the payments “in arrears” or “in advance” (which may impose higher costs)? Are the payments to be made monthly, quarterly or semiannually?
o Prepayment options. What types of prepayments are provided (optional, mandatory, special or extraordinary)? When are prepayments permitted or required? What is the cost of (premium for) prepayment?
o Payment structure. Are payment amounts level over the life of the lease? Or do they increase, decrease or alternate and, if so, why? How does the payment pattern fit the government agency’s expectations for revenue receipts over the life of the lease? o Capitalized interest. Is capitalized interest present when the leased property is not to be immediately available for use? Can capitalized interest be avoided or minimized by an appropriate asset transfer?
o Reserve fund. Is a reserve fund required to be present to gain favorable marketing advantages? What are the reasons for the size of the reserve fund? How and when will earnings on and principal of the reserve fund be applied? o Legal representations. Are the representations made by the government agency true as of the date of the document (or other relevant date)?
o Legal covenants. Are the mandates and restrictions to which the government agency is to be subject appropriately and accurately expressed?
o Insurance. Do insurance policies address abatement risk? Are premiums and deductibles specified?
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In reviewing these terms and conditions, agencies should consider the marketing implications of their decisions. Investors may demand certain provisions, such as rate covenants and insurance requirements. The agency may retain more flexibility over other structural features, such as the timing of payments.
Guideline 15: Review Small Lease Documentation
Government agencies should not simply accept small lease documentation without review; if possible, agencies should receive assurance of counsel that these documents comply with California and federal income tax laws.
As part of a small lease transaction, a government agency may be asked to sign lease documentation that was prepared in boilerplate fashion by an out-of-state firm. Such documentation may not be legal under California law, or it may simply not reflect accepted business practices in the state. Or, the lease documentation may violate federal prohibitions on arbitrage earnings or private activity financing. So-called standard covenants actually may violate existing covenants in other lease or borrowing documents of the government agency.
In tax-exempt lease financings which involve the sale of COPs, government agencies generally retain the assistance of a number of finance professionals who devote substantial time to the preparation and review of the legal documentation to the transaction. Without this level of professional assistance, an agency may be disinclined toward the review of small lease documentation, particularly if the lease and related certification are in fine print. But inappropriate documentation can jeopardize the tax-exempt status of the lease, and present other problems as well. Even if only small amounts of money are at stake, agencies should review small lease documentation and, if possible, gain counsel’s assurance of legal compliance. Agencies also should consider developing their own documentation for use in small lease transactions. Such an effort would entail up-front costs, but in the long run would protect an agency from inappropriate small lease documentation.
Guideline 16: Follow Legal Formalities, Even for Small Leases Small lease transactions should comply with legal formalities, specifically appropriate autho- rization, use of capitalized interest, specification of the interest component, IRS filings, and arbitrage and private activity restrictions.
If an agency does not maintain centralized control over its leasing practices, individual departments within the agency may informally execute leases for small equipment items or other purposes. But the interest component of lease payments may not be excludable from federal and state income taxation if certain procedural requirements are not observed.
Authorization. Authorization is not a matter to be handled casually, but rather in accordance with governing state laws, the agency’s charter (if any) and other regulatory requirements. In most cases, the governing body must specifically approve the execution and delivery of the lease agreement at a meeting that is duly called and at which a quorum is present. - 39 -
Capitalized Interest. Unless the leased property is available immediately for use or the lease involves an asset transfer, capitalized interest generally is required from the date of the lease to the date at which the leased property is reasonably expected to be available for use and/or occupancy (plus an additional contingency period). Most equipment leases are funded after the equipment has been delivered, tested and accepted; consequently, capitalized interest is not a concern.
Tax Exemption. For the interest component of lease payments to be excluded from gross income for purposes of federal tax law, a lease must be characterized as a financing lease , conditional sales agreement or installment purchase contract , rather than a true lease . The characterization of an obligation as a financing lease or conditional sale agreement for purposes of exemption from federal income tax (and in some instances, state tax) must be distinguished from the characterization of the obligation as a lease for purposes of avoiding the state constitutional debt limitation.
Among the circumstances cited in the Revenue Ruling 55-540 which would warrant characterization of a transaction as a conditional sales agreement are the following:
o Portions of the periodic payments are made specifically as applicable to equity to be acquired by the lessee.
o The lessee will acquire title upon the payment of a stated amount of “rental” under the contract.
o The total amount which the lessee is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total sum required to be paid to secure the transfer of title.
o The agreed “rental” payments materially exceed the current fair rental value. This may be indicative that the payments include an element other than compensation for the use of the property.
o The property may be acquired under a purchase option at a price which is nominal in relation to the value of the property at the time when the option may be exercised, as determined at the time of entering into the original agreement, or which is a relatively small amount when compared with the total payments which are required to be made. o Some portion of the periodic payments is specifically designated as interest or is otherwise readily recognizable as the equivalent of interest. The lease should express the interest component explicitly. Without such an expression, there is no interest to be excluded from federal or state income taxation.
Filing of Forms. Under federal income tax law, certain forms (e.g. Forms 8038, 8038-G, 8038-GC and 8038-T) are required to be filed with the Internal Revenue Service. The precise nature of the forms and the timing of the filing depend upon the size of the financing, as well as upon other financings conducted by the government agency during the fiscal year. The government agency is advised to obtain the advice of bond or special counsel as to the appropriate times and manner for filing these forms.
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Arbitrage and Rebate. The federal income tax laws impose complex and burdensome arbitrage and rebate regulations upon government agencies, including a requirement that certain investment earnings, even if permitted under the arbitrage regulations, be rebated to the federal government to the extent that the yield on investments may exceed the yield on the lease. Those government agencies issuing less than $5 million principal amount of tax-exempt securities in the fiscal year in which a lease financing occurs may take advantage of a reduced degree of arbitrage and rebate regulation, although the arbitrage rules continue to play a role. Many equipment leases are not advance funded; consequently, arbitrage is not a concern.
Private Activity Bonds. Under federal tax law, restrictions are placed upon the use of proceeds of a governmental obligation sold by a government agency. If the interest component of lease payments is to be tax-exempt, the proceeds from the sale of the lease cannot be used in more than a small proportion for private purposes and private sources cannot provide credit support for the financing.
Small Issuer Status. A government agency wishing to preserve its status as a “small issuer” under federal tax law may find that leases independently executed by department heads or program administrators cause it to exceed the threshold established in federal law for this purpose. Actually, there are two small issuer exemptions relevant under federal income tax law: one qualifies up to $10 million in obligations of an agency as tax-exempt investments for banks; the other (discussed above) affords certain exemptions from arbitrage and rebate rules to agencies issuing under $5 million in obligations annually.
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Chapter IV
PUBLIC POLICY GUIDELINE
Page
Guideline 17: Solicit Public Participation in Tax-Exempt Leasing Decisions 46 Public borrowing in any form entails certain risks which, if not well-managed, can invite scrutiny of the borrowing decision. Many of the constitutional and statutory provisions governing public indebtedness in California today, in fact, have their origins in bond defaults and other financial calamities of yesteryear. With few exceptions, California’s experience with tax-exempt leasing has been free of the abusive and ill-conceived transactions that might spawn efforts to rein in governmental leasing powers. Still, public officials can only expect to enjoy broad latitude over tax-exempt leasing decisions as long as they observe sound financial management practices.
Public interest in governmental leasing practices also may be piqued by opposition to the capital projects financed in this manner. The construction of public facilities, after all, can profoundly affect a community’s character and influence its pattern of development. Major project proposals can become divisive issues, regardless of how they are to be financed. But in such cases where elected officials choose tax-exempt leasing, which is not subject to voter approval, the public may feel shut out of an important decision. Elected officials themselves must decide how to best demonstrate accountability for their tax-exempt leasing decisions.
This chapter focuses on the public policy context of tax-exempt leasing. To the extent that these concerns are shaped by legal and financial issues, this chapter inevitably overlaps some material found elsewhere in this document. This chapter concerns only those tax-exempt leases executed for major capital projects. Small equipment and vendor leases, discussed elsewhere in this document, can be managed most effectively through internal debt policies, which usually do not warrant broad public involvement.
Impact of Debt Restrictions on Tax-Exempt Leasing Practices California accounts for a disproportionate share of the nation’s tax-exempt leasing activity because its constitutional and statutory debt restrictions are among the most severe in the nation.
Restrictions on public indebtedness in California take the form of voter approval requirements, limits on outstanding indebtedness (expressed as a percentage of assessed valuation), competitive bid requirements, interest rate ceilings and constraints on maturity lengths and debt retirement schedules.
By far the most formidable of these restrictions is the two-thirds voter approval requirement for local bond measures specified in the state Constitution (Article XVI, Section 18). This provision, referred to as the constitutional debt limitation , applies to the general obligation bond measures of cities, counties, and school districts.1 It was incorporated into the State Constitution of 1879 in response to a series of bond defaults resulting from the Depression of 1873. Prior to that time, local borrowing had - 42 -
been controlled by the state Legislature, which freely authorized municipal bond measures without the consent of local voters—often to finance speculative land development schemes which would be classified as private activities today. The two-thirds voter approval requirement was erected as a barrier to reckless borrowing.
Over time, the effect of the constitutional debt limitation has been not so much to restrict public borrowing as to shift the composition of public borrowing toward obligations not subject to the limit.
As discussed in Chapter III: Legal Guidelines, government agencies subject to the debt limit frequently structure their borrowings as special fund obligations and lease obligations to satisfy judicially created exceptions to the debt limit.2 This structuring decision depends upon the legal availability of options for funding the project.
Government enterprises, which are self-supporting through fees, typically finance capital assets, such as water and sewer projects, through special fund obligations. Though exempt from the constitutional debt limitation, special fund obligations may be subject to majority voter approval and other requirements, depending upon the type of agency involved and the statutory authority for the borrowing. The Revenue Bond Law of 1941, for example, requires majority voter approval (and prior to 1991, it required competitive bid). To avoid such restrictions, government enterprise financings frequently are structured as installment sale agreements and marketed as COPs. 3 Government enterprises can raise fees without a popular vote to pay financial obligations arising from installment sale agreements. User charges, or fees, are legally distinct from taxes, and consequently are exempt from restrictions on taxation, most significantly those imposed by Propositions 13 and 62. Most government enterprise financings in California today are not subject to voter approval requirements.
Projects financed through special assessment bonds also qualify for the special fund exception to the constitutional debt limitation. Special assessments are legally distinct from taxes, in that assessments are levied according to the special benefit property receives from a public improvement (over and above that received by the general public). Taxes, alternatively, do not have to be levied according to the benefit received by taxpayers. Consequently, special assessments do not require voter approval, though they are subject to majority protest .4 Both enterprise and nonenterprise projects may be eligible for financing through special assessment bonds. Nonenterprise projects eligible for assessment bond financing tend be localized improvements, such as street grading and paving, sidewalks, landscaping and lighting. By requiring property owners who benefit most from public improvements to pay for them, special assessments offer an equitable means of financing capital projects, without recourse to the general fund of the issuing agency.
The range of financing options is most limited for nonenterprise projects which provide a general benefit to the community—projects such as schools, city halls, police stations, jails and courthouses. For these types of projects, often the only available financing options from local sources are general obligation bonds and tax-exempt lease obligations.5 From a purely financial standpoint, the general obligation bond alternative usually is preferable. Unlike tax-exempt lease obligations, general obligation bonds do not impose a burden on the general fund of the issuing agency, because they are secured by a dedicated property tax override (as well as the full faith and credit of the issuing agency).
Moreover, general obligation bonds attract more favorable interest rates than tax-exempt lease obligations, befitting their status as the most secure form of local government debt. The two-thirds voter approval requirement, however, poses a prohibitive barrier for all but the most popular projects.
Tax-exempt leasing offers an attractive alternative, if an agency can afford the annual lease payments.6
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Recent Grand Jury Reports on Leasing
Over the past two years, three grand juries in California have investigated the leasing practices of their respective counties, and issued reports outlining their concerns. o Santa Barbara County. A Santa Barbara County Grand Jury investigation into the County’s leasing practices led to the release of a report in 1992 outlining a series of controversial recommendations, including a proposal to ban the issuance of COPs for capital projects. The Grand Jury report followed a series of COP issuances by the County over the previous two years which more than tripled the outstanding principal amount of the County’s tax-exempt lease obligations (which, in fairness to the County, had been very low before the series of COP issues). The Grand Jury also expressed its desire for greater public participation in significant financing decisions, and for assurances that the County would adhere to prudent debt management policies.
o Nevada County. Also in 1992, the Nevada County Grand Jury conducted an inquiry into the Nevada County Building Company (NCBC), a nonprofit corporation established in the 1960s to serve as nominal lessor in tax-exempt lease financings. Although the County had engaged in minimal tax-exempt leasing through the years, the NCBC issued two COPs in 1991: one for solid waste facilities (in response to a State mandate); the other for library facilities and other capital improvements (which the County resorted to after falling short of the two-third voter approval requirement for a general obligation bond measure — receiving only 64.7 percent). In addition, the NCBC took the most unusual step of refusing to execute a COP issue approved by the Board of Supervisors for wastewater facilities, in response to public opposition to the proposal. The overall conclusion of the Nevada County Grand Jury was that the County’s reliance on tax-exempt lease financing resulted in a decision-making process for capital spending projects that was not sufficiently democratic. o Santa Cruz County. The 1992-93 final report of the Santa Cruz County Grand Jury focused on the leasing practices of the County and selected cities within the county. The report recognized the necessity of tax-exempt leasing to finance state-mandated projects, but expressed reservations about funding discretionary projects in this manner (specifically land acquisitions for parks). The Grand Jury advocated a greater public role in tax-exempt leasing decisions through the establishment of public oversight committee, consisting of five non- governmental members.
Other Leasing Controversies
Controversies over public leasing practices in California have not been confined to grand jury inquiries. In El Dorado County, public dissatisfaction over a lease revenue bond financing of county administrative facilities led, in 1990, to voter approval of an initiative requiring majority voter approval of all lease financings undertaken by the County’s joint powers authority. In San Jose, a $200 million COP financing for a major league baseball stadium, indirectly supported by a utility users tax increase, most likely would have been executed without voter approval, save for a city charter provision (adopted at the behest of stadium opponents) requiring voter approval before any city revenues can be used for sports facilities. The measure was narrowly defeated by the voters in the June 1992 election. (Because San Jose is a charter city, the utility users tax increase did not require voter approval under - 44 -
Proposition 62, which was a statutory initiative superceded by the municipal affairs doctrine of the State Constitution.) Similarly, the City and County of San Francisco has longstanding charter restrictions on lease financing, which require voter approval under certain circumstances.
Outside of California, similar controversies have arisen in Virginia, Texas, Iowa, and New York. But the most notable case in recent years involved Brevard County, Florida. In 1989, the County issued $23.9 million of COPs to finance the construction of a new administrative center, which consolidated a number of offices previously dispersed throughout the county. But the location of the new building proved to be unpopular with voters, who expressed their displeasure by voting in a new majority to the Board of County Commissioners. In March 1993, the new Board decided to place before the voters a referendum on whether the county should continue making lease payments on the administrative center. The new Board justified its decision on the grounds that (1) the original COP issue circumvented the voters, and (2) the nonappropriation lease underlying the COP issue reserved to the lessee the right to terminate the lease obligation by not appropriating funds for lease payments.
Brevard County residents ultimately voted in favor of continuing lease payments, by a slim margin of 51 percent to 48 percent.
The episode underscored the discrepancy between the legal obligation imposed by a nonappropriation lease, and the bond market’s perception of that obligation.7 Although Brevard County could have exercised its legal right to terminate the lease, the bond market would have viewed such a decision as tantamount to a default. In the eyes of the bond market, a tax-exempt lease obligation is not so much a lease as a loan from investors to a government agency, just like a municipal bond issue. To be sure, the interest rate differential between tax-exempt lease obligations and more secure forms of debt reflects the market’s perception of an added degree of risk. But that risk derives as much from the possibility that agency’s fiscal troubles could result in default, as from the possibility that a fiscally sound agency will simply decide not to appropriate lease payments. Investors never expect actually to be saddled with the assets financed through their capital investments. That prospect is particularly unappealing when the asset in question is of diminished value in alternative uses. Clearly, the interest rate differential between tax-exempt lease obligations and more secure forms of debt would be far greater if lease-financed assets were routinely turned back to investors. The Brevard County case illustrates that an agency’s willingness to meet it financial commitments—though clearly an intangible criterion—is as important as its ability to meet those commitments, as measured by more objective indicators of financial strength.
Balancing Management Discretion and Public Participation As demonstrated by the cases above, the broad latitude over tax-exempt leasing decisions enjoyed by public officials can engender suspicion on the part of the public. In the Nevada County example, this suspicion was compounded by the unusually active role assumed by the Nevada County Building Company, which obscured the traditionally functional role of the nonprofit corporation in a tax- exempt lease transaction. In the Santa Barbara County example, the County’s sudden embrace of tax-exempt leasing, a departure from past practice, gave rise to concerns over the judgment exercised by county debt managers. Collectively, these cases demonstrate a pattern of concern over municipal leasing practices, notwithstanding the unique circumstances attending each case.
At issue in each of these cases is the role of the public in deciding questions of public indebtedness. The fine legal distinctions between leases and debt are not central to this broad question of policy. The fact that lease obligations are contingent upon the right to continued use and/or - 45 -
occupancy of the leased property actually does not diminish the financial obligation incurred by the governmental borrower. As discussed in Chapter II: Structuring and Marketing Guidelines, investors are protected from most of the financial risk of abatement by insurance policies bought and paid for by the governmental borrower. The presence of abatement risk, therefore, merely prescribes certain risk management strategies; it does not justify a relaxed attitude toward the review and oversight of the borrowing decision.
The recognition that a tax-exempt lease imposes a financial obligation tantamount to debt does not imply, however, that this type of obligation necessarily should require voter approval. The principal financial distinction between tax-exempt leases and municipal bonds—that leases are paid from ongoing general fund revenues, not tax increases—is relevant to this question. Although a historical precedent exists for requiring voter approval of bond measures, through the years, voter approval requirements have come to be applied more frequently to questions of taxation, rather than indebtedness. The amount of long-term public borrowing exempt from the constitutional debt limit today is far greater than the amount subject to it, and a significant portion of public borrowing today does not require voter approval. But virtually all local tax increase measures today require voter approval. Arguments for voter approval of tax-exempt lease transactions, therefore, should focus on the financial and policy goals advanced by such a requirement, not the historical precedence of bond referendums.
Requiring voter approval of tax-exempt lease transactions would not strengthen the financial structure of tax-exempt lease obligations. Unlike the voter approval requirements which apply to bond measures, voter approval of tax-exempt lease transactions would not authorize a new tax or revenue source to secure the obligation. With or without voter approval, the tax-exempt lease obligation would be paid from ongoing general fund revenues. For the reasons discussed in Chapter I: Financial Management Guidelines, the key financial management concern relevant to tax-exempt leasing is the cumulative general fund lease burden. Instituting voter approval requirements would focus public attention on individual tax-exempt lease proposals, rather than this broader measure. A voter approval requirement would, however, offer a good indication of a community’s willingness to honor its lease obligations—which could result in more attractive interest rates. Such an expression of community support would be of more value for nonappropriation leases than for abatement leases, which include covenants to budget and appropriate.
A stronger argument for voter approval of tax-exempt lease transactions is that certain public policy issues are important enough to be decided by referendum. As mentioned at the outset of this chapter, the construction of public works can profoundly affect both the character and the physical development of a community. The broad policy implications of tax-exempt leasing decisions, along with their irreversibility, argue for a heightened level of public participation. But here, too, the fact that tax-exempt lease obligations are paid from ongoing revenues, rather than new taxes, is critical. Over the past fifteen years, the voters of California have expressed their desire to elevate all tax increase measures to referendum (principally through Propositions 13 and 62). But local officials have maintained their prerogative over the basic budgeting function — the allocation of limited general fund resources among competing demands. Elected officials routinely make important budgetary decisions without direct voter involvement. Public employee labor contracts and pension benefit packages, for example, do not require voter approval, though usually they have a more profound impact on governmental finances than tax-exempt leasing decisions. Consequently, the argument for voter approval requirements is much stronger for conventional debt instruments requiring a tax increase than it is for tax-exempt lease obligations.
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Furthermore, elected officials cannot implement public policy without making some provision for the capital facility prerequisites of service delivery. Educational services, for example, cannot be delivered without schools; public safety cannot be protected without police stations and jails; the justice system cannot function without courthouses; and so on. Tax-exempt leasing offers one alternative — often the second best alternative — for addressing deficiencies in the physical plant which inhibit service delivery. Ultimately, elected officials bear the responsibility for delivering the best mix of services possible within their budget constraints. Tax-exempt leasing decisions are subordinate to the broader service delivery issues at the heart of the budgeting process.
The challenge in addressing the public policy issues raised by tax-exempt leasing, therefore, lies in balancing the decision-making authority of elected officials with the desire of the public to participate in important capital spending decisions. The following Guideline addresses the Commission’s main concern—that public agencies solicit public participation in their tax-exempt leasing decisions.
At the same time, this Guideline recognizes that the relationship between local officials and voters is not uniform in each political jurisdiction throughout the state, and that local officials are in the best position to decide how to achieve the goal of public involvement.
Guideline 17: Solicit Public Participation in Tax-Exempt Leasing Decisions Government agencies should implement procedures for soliciting public review and comment on tax-exempt leasing proposals.
Elected officials should solicit public review and comment on tax-exempt leasing proposals before reaching a final decision, as they would for other important public policy questions. It is easy to reach agreement on this goal, but somewhat more difficult to identify discrete mechanisms for translating this goal into policy. The options below offer constructive approaches to soliciting public participation in tax-exempt leasing decisions.
Option 1: Schedule Public Hearings on the Capital Budget Of all government programs, none is more enduring than public works. A walk through any downtown offers bricks-and-mortar evidence of how public buildings alter the landscape and shape the character of a community: the elegant city hall; the sleek, modern jail; the sweeping library annex; the Greek revival courthouse; or the lushly landscaped park. Beyond aesthetic considerations, the physical placement of highways, public transit, water and sewer lines and other public infrastructure influences a community’s pattern of development, encouraging either urban sprawl or more densely populated settlements. In the planning stages, capital projects often can be altered at minimal cost to address public concerns; this is rarely the case once a project is set in concrete. Therefore, it is important for the public to participate in the development of capital spending decisions which have broader policy implications.
The first three Guidelines in Chapter I: Financial Management Guidelines instruct agencies on how to incorporate major tax-exempt leasing proposals into their capital budgets. Prior to submitting the capital budget for legislative approval, agencies should schedule public hearings on the proposed document to allow for public reaction to staff recommendations. Inviting public scrutiny at this juncture allows public officials and their staffs to demonstrate the programmatic reasons for tax- - 47 -
exempt leasing proposals, and the programmatic consequences of abandoning those proposals. Public hearings on the capital budget also serve as a forum for reviewing an agency’s cumulative general fund lease burden, and discussing whether the necessary tradeoffs in operating service levels appear to be reasonable. Reviewing tax-exempt leasing proposals within the broader framework of the capital budget allows tax-exempt leasing to be placed in its appropriate context —as merely one option available for addressing a community’s long-term infrastructure needs.
To encourage public attendance, agencies should circulate in advance of the hearings public notice which describes the major projects incorporated into the proposed capital budget.
Option 2: Establish a Citizens Oversight Committee on Public Finance Despite well-intentioned capital budget hearings, agencies may not always achieve meaning- ful public participation at this juncture. Neighborhood groups are more likely to coalesce around individual project proposals than to exhibit broad-minded civic interest in public financial management practices. In the absence of a specific controversy, the relatively obscure rituals of government tend to stay that way.
Public officials need not restrict their outreach efforts to public hearings on the capital budget.
Another option for soliciting public involvement in tax-exempt leasing decisions is to establish a citizens oversight committee on public finance. An oversight committee provides a forum for elected officials to discuss their reasons for reaching key financial decisions, and for constituents to express their concerns. Establishing a formal structure for this purpose may be preferable to leaving this dialogue to chance.
The term oversight committee should not cause alarm: establishing such a body does not, and should not, require elected officials to relinquish decision-making authority. Instead, a citizens committee devoted exclusively to public finance issues allows ordinary citizens to become educated on the intricacies of taxation and indebtedness, thereby dispensing with the argument that these matters are “too complicated” for the public to understand. By rotating committee membership, agencies can make this opportunity available to a greater number of people over time, who, in turn, can share their experiences with other community groups.
This recommendation (which was presented in the Santa Cruz Grand Jury Report) is not entirely novel, as many agencies already have in place debt advisory committees, whose memberships consist of governmental and nongovernmental members in various combinations. There are probably a number of ways to carry out the spirit of this recommendation in practice. The relevant concern, however, is that agencies should actively seek public participation in tax-exempt leasing decisions, as well as other important questions of public finance, rather than interpret their responsibilities in this regard in a narrow, legalistic sense.
Option 3: Consider an Advisory Vote for Controversial Projects Finally, agencies should consider an advisory vote for tax-exempt leasing proposals involving controversial projects. Again, the construction of public facilities can raise important public policy questions, and elected officials should respect the wishes of their constituents regarding such decisions.
The concern here is whether the public wants its tax dollars spent on a project, not whether an agency can afford a project. An advisory vote provides the only sure-fire mechanism for gauging community - 48 -
sentiment. The added time and expense required to conduct an advisory vote certainly is preferable to ultimately reneging on a tax-exempt lease obligation in the face of negative community reaction.
Even if the lease in question contains a nonappropriation clause, its termination could damage an agency’s reputation in the credit markets, making future borrowing more difficult and expensive. If an advisory vote cannot reasonably be accommodated at the next scheduled election, an agency should consider a mail election.
The Commission cannot offer clear-cut criteria as to when an advisory vote should be scheduled, as this question involves balancing management discretion with the public’s desire to participate in important spending decisions. But one key consideration is whether the project involved is truly discretionary. Communities are mandated by the federal and state governments to achieve certain environmental and public health standards with respect to sewage treatment plants, water supply systems, and solid waste disposal—typically big ticket items. Even if the resulting financial burden placed upon ratepayers appears to be excessive, communities do not have the option of noncompliance. The same reasoning applies if a community is under court order to improve its jail or some other facility. If the proposed project is controversial but truly discretionary, however, and a no vote will not threaten the public health or safety, an advisory vote may be in order.
NOTES
1. Special district general obligation bond measures, though not explicitly subject to the constitutional debt limit, may require two-thirds voter approval under Article XIII A, Section 1(b) of the California Constitution, even if the authorizing statute for the particular special district does not require an election. Article XIII A, Section 1(b) was added to the state Constitution by Proposition 46 in 1986, which restored local general obligation bonding authority to local governments by permitting a property tax override above the 1 percent limit imposed by Proposition 13 in 1978, subject to two- thirds voter approval.
2. Because the debt limit applies only to cities, counties, and school districts, other types of agencies — special districts and redevelopment agencies, for example — can issue debt outside of the debt limit. Agencies subject to the debt limit can establish joint powers authorities and public benefit corporations to issue debt outside of the limit.
But they still must find a revenue source to pay for the project.
3. Enterprise project financings also may be channeled through joint powers authorities and issued under authority of the Marks-Roos Bond Pooling Act of 1985, which does not require voter approval or competitive bid. Charter cities may authorize the issuance of revenue bonds by ordinance, and simply exclude voter approval and competitive bid requirements from their charters.
4. Unless specifically exempted, all assessment district proceedings must comply with the Special Assessment Investigations, Limitation and Majority Protest Act of 1931, which provides that if owners of a majority of property in the proposed assessment district protest, the governing board of the agency must drop the proposal for at least one year—unless the protest is overridden by a four-fifths vote. Charter cities and counties may enact their own procedural ordinances for assessment districts, but - 49 -
must comply with Article XVI, Section 19, of the California Constitution, which incorporates the majority protest provision and other sections of the Majority Protest Act.
5. Many of these projects may also be eligible for funding through Mello-Roos bonds, which also require two-thirds voter approval. Mello-Roos bonds are a common method of financing infrastructure in new developments in California, because the landowners (i.e., developers) can authorize the creation of a Mello-Roos district, the levy of a special tax, and the issuance of bonds. But once the District is populated, the two-thirds vote requirement poses a significant barrier.
6. The Commission is on record as supporting a constitutional amendment to authorize majority voter approval of local general obligation bonds. Such a measure would enable local agencies to rely more on general obligation bonds, and less on tax-exempt lease obligations, for financing nonenterprise projects. Reconstituting the composi- tion of public borrowing in this manner undoubtedly would strengthen the financial position of local governments and result in lower borrowing costs. See The Impact of the 1992-93 State Budget on Local Government Finance: Report to the Legislature, page 2. California Debt Advisory Commission 93-3.
7. The abatement lease common in California, which includes a covenant to budget and appropriate, represents a considerably stronger credit than the nonappropriation lease common throughout the rest of the United States, and at issue in Brevard County. Although the Brevard County incident is less relevant to California, it is worth discussing because of its notoriety, and for the benefit of our readers outside of California.
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Chapter V
SCHOOL DISTRICT GUIDELINES
Page
Guideline 18: Conform to AB 1200 Criteria for Long-Term Borrowing 53 Guideline 19: Subject COP Bridge Loans to the Same Financial Review as Long-Term Obligations 54
Guideline 20: Evaluate the Marketing Implications of Noneviction Clauses 55 This chapter presents special Guidelines for school districts, not because school district leases are so different from other leases, but rather that school districts operate under more restrictive financial conditions than other local governments, and face a greater degree of scrutiny of their borrowing decisions. As a consequence, certain considerations apply to school district lease financings which do not fit neatly into a more general treatment of the subject matter. School districts should follow the Guidelines specified in this chapter in addition to, not in lieu of, the Guidelines presented in the other chapters of this document.
Role of Tax-Exempt Leasing in School Finance
School districts are subject to the constitutional debt limitation, which requires two-thirds voter approval of bond measures. To avoid this prohibitive barrier, school districts for years have relied upon the lease exception to the constitutional debt limitation. Prior to Proposition 13, school districts issued lease revenue bonds supported by dedicated property tax overrides, subject to majority voter approval.
By capping property tax rates, Proposition 13 eliminated this financing option, as well as school district general obligation bonding authority. In the ensuing years, the State assumed greater responsibility for school facility finance through the sale of State of California general obligation bonds. But State general obligation bond issues have been unable to keep pace with school district demands, resulting in a backlog of funding requests amounting to several billion dollars. As a result, school districts often must generate needed funds locally.
To address the school facility demands generated by new developments, school districts can rely on developer fees and Mello-Roos bonds. But the range of options available to finance school facilities in established areas is more limited. Although Proposition 46 in 1986 restored school district general obligation bonding authority, the supermajority vote requirement renders this option infeasible in many cases. Consequently, school districts continue to rely on tax-exempt leasing. School districts are frequent issuers of COPs to finance the construction and acquisition costs of both permanent facilities and portable classrooms. But unlike the lease revenue bond financings of the 1970s, which were secured by voter-approved property tax overrides, school district tax-exempt lease obligations today are paid out of ongoing general fund revenues. The credit analysis of school district tax-exempt lease obligations, therefore, is very similar to that for tax-exempt lease obligations issued by other types of government agencies. But the risks of committing general fund revenues to fixed lease obligations is perhaps more pronounced for school districts, which, in the aftermath of Proposition 13, retain very little revenue-raising authority and rely on the State for the bulk of their funding. On the expenditure side of the ledger, personnel costs comprise a large proportion of school district spending, perhaps 80 - 51 -
to 85 percent on average, due to the fact that the delivery of educational services is very labor intensive.1 Consequently, the margin of revenues available to meet all other expenditure obligations, including lease payments, is fairly narrow.
Richmond Unified School District Default
For many investors, the default of the Richmond Unified School District on $9.8 million of COPs in 1991 confirmed their worst fears regarding California school district lease obligations.
Ironically, the Richmond USD default was unique in many respects, and unrepresentative of school district leasing activity in the state. The Richmond USD COPs, issued in two separate installments, involved a complicated lease-leaseback of several school district properties (a lease structure known as an asset transfer ). The proceeds from the COP sales were used to cover the District’s growing operating deficit, which resulted from a series of costly educational reforms that the District simply could not afford. Unfortunately, the District did not issue the COPs with the intent of restructuring its spending commitments. Instead, the cash generated from the sale of the COPs merely postponed the day of reckoning-until April 1991, when the District declared bankruptcy. The District’s first default on a COP lease payment occurred the following August.
Under the direction of a State-appointed administrator, the District withdrew its bankruptcy petition in September 1991. The five-year budget plan for the District subsequently prepared by the administrator did not, however, provide for payments on the COPs in default. In response, the trustee for the COPs filed suit against the State and the District. The defense prepared by the state Attorney General and the counsel for the District asserted that the COP issue was invalid because the lease underlying the obligation created debt in violation of the constitutional debt limit. According to this defense, the debt was created by mortgaging assets owned outright by the District without receiving in return a capital asset of comparable value.
In December 1992, the Superior Court of Contra Costa County ruled that the lease underlying the COPs was valid and enforceable. The ruling stated that the use of the proceeds was irrelevant to the issue of the constitutional debt limit. The trustee for the COPs subsequently filed another motion for defaulted lease rental payments and received a favorable ruling in April 1993. The court ruled, however, that it did not have the power to order the District to budget and appropriate future lease payments.
In August 1993, two years after the District first defaulted on its lease obligation, a tentative agreement was reached to settle the lawsuit brought by investors against the District. The agreement, embodied in AB 535 (Chapter 57, Statutes of 1993 - Bates), authorizes the District to refinance the original COPs, including the amount in arrears (approximately $4 million), plus attorneys’ fees and penalties, through a new 30-year COP issue. By lengthening the maturity schedule, and taking advantage of the decline in interest rates since the time of the original COP issue, the District will be able to reduce its lease payments from $1.4 million to $800,000 annually. To assuage the concerns of potential investors in the new COP offering, proceeds from the refinancing will be placed in an escrow account accessible only to the trustee for the issue, who will pay off the original COPs. In addition, the refinancing will be structured with an intercept mechanism authorizing the state Controller to divert state aid payments from the District to the trustee for the COPs in the event the District misses a scheduled lease payment.
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Lessons from the Richmond USD Default. Despite the notoriety attending the Richmond USD default and subsequent litigation, the legal ramifications of this case for school districts, and the broader leasing market in California, is limited. The defense prepared by the state Attorney General and the counsel for the District was noteworthy for challenging the constitutionality of the unusual leasing application undertaken by the District; however, the broader validity of tax-exempt leasing as a tool of capital finance was never challenged. Only a handful of transactions comparable to the Richmond USD case have been undertaken in California, a small fraction of the multibillion dollar leasing industry. The Superior Court ruling that the use of proceeds is irrelevant to the constitutional debt limit merely echoes the long history of judicial rulings upholding the validity of tax-exempt leasing in California. In light of AB 1200 and other legislation enacted since the time of the original Richmond USD default, it is questionable as to whether school districts could in the future lawfully execute this type of transaction.
Yet the Richmond USD case does shed light on a few unsettling issues. First, it is worth noting that the Richmond USD default was precipitated by the District’s declaration of bankruptcy. When the bankruptcy petition was later withdrawn, the trustee found itself at the mercy of the District’s State- appointed administrator, who—perhaps not surprisingly—gave priority to the repayment of the State loans over the claims of COP holders (as part of the AB 535 agreement, however, the State has subordinated these loans). Although the bankruptcy of a public agency remains an unusual event, it poses a credit risk to tax-exempt lease obligations. Public bankruptcy, or the institution of an unsympathetic state receivership, places investors in the position of requiring a court judgment each year to enforce the covenant to budget and appropriate , traditionally considered to be the strength of the California abatement lease. Though case law indicates that investors will be successful in such instances, the necessity for a court judgment adds an unpredictable variable to the credit analysis.
In addition, the Richmond USD case illustrates the practical barriers to taking possession of leased property to remedy a default. Though the Richmond trust agreement provided for this option, the investors never attempted to avail themselves of it. As noted elsewhere in this document, investors are interested in the rate of return on their capital, not in managing the assets financed through their capital. Moreover, the likelihood that the courts would approve the repossession and reletting of essential public property such as school buildings remains uncertain.
Overview of Chapter V Guidelines
Whatever the broader significance of the Richmond case, it focused attention on California school district COPs, not only of the municipal finance industry, but also the state Legislature. Largely in response to this case, the Legislature enacted Assembly Bill 1200 (Eastin) in 1991 to provide for increased oversight of school district finances (Chapter 1213, Statutes of 1991). AB 1200 specifies minimum financial criteria for school districts considering long-term lease financing. These criteria are mandated for financially troubled districts only; however, the state Department of Education recommends that all districts voluntarily comply with these criteria, advice reiterated in Guideline 18:
Conform to AB 1200 Criteria for Long-Term Borrowing.
The remaining two Guidelines address issues which arise when school facilities are financed through a combination of local funds—generated through the sale of tax-exempt lease obligations— and State bond funds. To avoid delays arising from State funding shortages, school districts often issue COPs with early call provisions, in anticipation of State funding. Once State funds become available, the district retires the outstanding COPs. But districts have no guarantee that State funds will be - 53 -
forthcoming. Guideline 19: Subject COP Bridge Loans to the Same Financial Review as Long- Term Obligations recommends that agencies that issue COPs as bridge loans adhere to the same financial review criteria that apply to long-term borrowings.
Guideline 20: Evaluate the Marketing Implications of Noneviction Clauses addresses a technical issue arising from a recent change in State policy. The State now requires districts to incorporate noneviction clauses into school facility leases as a condition of funding school sites. This policy ensures that the nonappropriation of lease payments will not jeopardize the district’s educational mission. But it also may dampen investor interest in school district lease offerings. In the event that the market appears to demand a premium for the noneviction clause, districts should consider applying for an exception to the State policy.
Guideline 18: Conform to AB 1200 Criteria for Long-Term Borrowing School districts entering into long-term tax-exempt lease obligations should maintain budgetary reserves in accordance with the criteria specified in AB 1200.
Among its many provisions, AB 1200 authorizes county superintendents of education to review the budgets of school districts on an annual basis. These reviews assist the state Superintendent of Schools in developing a list of financially troubled school districts each year, which are certified as negative (meaning that the district will be unable to meet its financial commitments through the end of the school year) and qualified (meaning that the district will be unable to meet its obligations, unless certain events occur).
Districts certified as negative or qualified may not issue certificates of participation, tax anticipation notes, revenue bonds, or any other debt instruments that do not require the approval of the voters of the district , without a determination of the county superintendent of education that repayment of the obligation is probable. [Education Code Section 42133]. The state Department of Education has set forth criteria for making that determination, which are specified in Table 2.2
These criteria entail the maintenance of a Reserve for Economic Uncertainties, at specified levels, to provide a cushion against unforeseen events which might otherwise lead to a lease default.
School districts should be aware of two problems which can complicate their efforts to maintain such fund balances. First, the adequacy of the fund balance will depend upon the accuracy of the revenue and expenditure forecasts prepared by the district (see Guideline 1: Identify the General Fund Lease Capacity ). The concept of a reserve for economic uncertainties implies the existence of economic certainties , that is to say, reasonable estimates of expenditure obligations and revenues in the coming year. Second, the maintenance of a reserve for economic uncertainties is politically difficult during periods of fiscal retrenchment. Individuals and groups asked to sacrifice understandably might view the existence of such a reserve as an unaffordable luxury.3 - 54 -
Table 2
AB 1200 Criteria for Reviewing Proposed
Long-Term School District Debt
1. Expenditures neither exceed revenues, nor create negative fund balances.
2. The Reserve for Economic Uncertainties is not less than the following percentages of total expenditures, transfers out, and uses:
o For districts with 300 or fewer ADA, the greater of 5% or $50,000.
o For districts with 301 - 1,000 ADA, the greater of 4% of $50,000.
o For districts with 1,001 - 30,000 ADA, 3%.
o For districts with 30,001 - 400,000 ADA, 2%.
o For districts with 400,001 or more ADA, 1%.
3. Budgeted salaries and benefits, reserves, and any unappropriated fund balances are sufficient to address pending salary and benefit negotiations.
Hopefully, the AB 1200 requirements, as well as these Guidelines , will assist school district officials in their efforts to persuade all affected parties of the prudence of maintaining budgetary reserves. Although the AB 1200 criteria were promulgated for purposes of evaluating the likelihood of repayment of tax-exempt lease obligations proposed for issuance by negative and qualified school districts, the State Department of Education recommends that all districts voluntarily adhere to these standards. The Commission concurs with this judgment.
Guideline 19: Subject COP Bridge Loans to the Same Financial Review as Long-Term Obligations
School districts issuing COPs as bridge loans in anticipation of State funding should adhere to the same financial criteria which apply to long-term borrowings.
The state Office of Local Assistance (OLA) often funds school site acquisitions years in advance of funding school construction. This policy was adopted to address the erosion in the purchasing power of State bond money caused by rapidly escalating land prices, which characterized the California real estate market until 1990. If the State did not have sufficient bond money to construct all of the facilities demanded by local districts, at least it could expedite site acquisition to mitigate the effects of inflation. But the period of time between site acquisition and the availability of State funds - 55 -
for school construction can stretch into several years. Rather than simply wait, districts often issue COPs with early call provisions to fund school construction. At the time State funds become available, the COPs are retired, and the district is relieved of the debt service obligation. The COPs serve as a bridge loan , akin to a bond or grant anticipation note extending over several years.
Agencies issuing COPs as bridge loans should be fully prepared to service the obligation for its full term, in the event that State funds are not forthcoming. OLA approval of district grant requests does not represent a guarantee of State funding, only an agreement to extend funding in the event State bond funds are available. As mentioned above, the backlog of approved grant applications already totals several billion dollars. And if the 1992 elections are any indication, voters are growing more reluctant to approve State general obligation bond measures, after approving record amounts during the 1980s. Consequently, districts issuing COPs as bridge loans should maintain budgetary reserves in accordance with Guideline 18: Conform to AB 1200 Criteria for Long-Term Borrowing, as well as adhere to the other Guidelines in this document.
Guideline 20: Evaluate the Marketing Implications of Noneviction Clauses School districts should gauge the marketing implications of noneviction clauses required by the State for facility leases of sites financed by State bond funds, and consider applying for an exception to that policy if necessary.
As noted, one of the remedies in the event of default frequently provided for in trust agreements for lease obligations is the right to evict the lessee for nonpayment, which allows the lessor to relet the asset (in certain instances). Due to the highly specialized and site-specific nature of school facilities, these assets may be considerably less valuable in alternative uses, which could result in a financial loss for investors. Nonetheless, the right to evict the lessee provides a powerful incentive for the lessee to continue payment. In 1991, the OLA began requiring noneviction clauses to be incorporated into facility leases where the underlying site was acquired through State bond funds. As its name suggests, a noneviction clause specifies that the facility lease may not permit any party to evict the district and relet or convert the facility to another use. The OLA will upon request, however, consider exceptions to this policy.
The interest rate available for any tax-exempt lease or bond offering reflects the supply of, and demand for, that type of security. Of the multitude of factors which affect demand for individual securities, agencies should be aware of those which they can control, and those which they are powerless to influence. Depending upon how California school district COPs are faring in the market at any given point in time, the presence of a noneviction clause may affect the interest rate available for a new issue. In 1991, the change in OLA policy, accompanied in the same year by the Richmond USD default, soured many investors on California school district COPs, at least for a time. In preparing a tax-exempt lease offering for sale, districts should gauge the marketing implications of the noneviction clause, and consider applying for an exception to the OLA policy if the market is demanding a premium for that clause.
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NOTES
1. This estimate is cited in: Illyes, John W., California School COPs and Bonds After Richmond. Chicago: Nuveen Research, 1991, p. 1. This report also includes a more substantive discussion of the change in OLA’s Limited Term Subordination Policy, discussed in Guideline 20: Evaluate the Marketing Implications of Noneviction Clauses.
2. California State Department of Education Management Advisory No. 92-08 AB 1200: Criteria for Review of Long-Term Debt Instruments Proposed for Issuance by Local Educational Agencies (August 20, 1992).
3. For a more complete discussion of these issues, refer to Allan, Ian J., Unreserved Fund Balance and Local Government Finance . Government Finance Officers Association Research Bulletin , November 1990.
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GLOSSARY
NOTE: The following Glossary has been adapted largely from a publication of the California Debt Advisory Commission, entitled Glossary of Leasing Terms. Certain modifications have been made to the definitions.
This glossary is designed from the perspective of the tax-exempt leasing industry. The glossary defines many terms that also apply to municipal bonds and defines others that have specific meaning for tax- exempt leases. Tax-exempt leasing terminology may vary by transaction structure, the types of parties involved, and even by the individuals involved. For instance, one lessor may request that a lessee execute an acceptance certificate; another may require an acceptance letter. In either case, the document serves the same purpose. Reference is made to the California Debt Issuance Primer , published by CDAC, for additional definitions that apply to the tax-exempt market in general.
Abatement — A legal concept whereby the lessee reduces its rent proportionately or totally to the extent it does not have use of the leased asset. For leases, in California and some other states, a lessee is not required to make rental payments without use of the leased asset, permitting a termination of rent.
Some leases allow a lessee to abate partial payments if use of the asset is limited. Lessor(s)/investor(s) are likely to protect their interests in leases that contain abatement provisions by requiring the lessee to maintain casualty and rental interruption insurance.
Abatement Lease — A type of multi-year tax-exempt lease whereby the lessee can commit to make lease payments for the entire lease term unless the leased asset is not available for use, in which case abatement occurs. (This contrasts with a tax-exempt lease with a non-appropriations clause.) Acceleration of Rents — Also called rental acceleration; an option, found in some tax-exempt leases and exercisable upon a lessee default, that allows the Lessor (or its Assignees ) to declare all future rentals then due and payable.
Acceptance Certificate — A certificate to be signed by the lessee confirming that a leased asset has been fully delivered, inspected, tested and accepted. By signing the acceptance certificate, the lessee acknowledges receipt of the asset as ordered and that it is in satisfactory operating condition.
The acceptance certificate frequently serves as the document that authorizes the lessor or the trustee to make a payment to the vendor for the leased asset.
Advance Funding — A method of funding a lease before lessee acceptance of the leased asset.
Lease proceeds are placed in an escrow account until they are authorized to be disbursed to the vendor(s) or contractors.
Arbitrage — The interest earned as a result of the difference between the interest rate at which funds are borrowed and the rate at which they are invested. The Internal Revenue Code (as amended), with some exceptions requires the rebate to the US Treasury of most arbitrage earnings of tax-exempt borrowers. Arbitrage restrictions must be addressed in the structuring of certificates of participation as well as in other tax-exempt lease transactions in which lease proceeds are funded and escrowed - 58 -
in advance for the benefit of the lessee. A major exception to the rebate requirement was adopted in the 1989 amendments to the Internal Revenue Code. This exception permits a government that borrows funds (including through a lease transaction) for the purpose of a “construction” project to retain arbitrage earnings for up to a two-year period, subject to certain spending tests.
Arbitrage Certificate — A certificate of lessee prepared by the lessor’s counsel, bond counsel, or tax counsel confirming that the tax-exempt lease and investment of any proceeds will not violate arbitrage rules under the Internal Revenue Code. Also known as a No-arbitrage Certificate or a Certificate as to Arbitrage.
Asset — The items of personal or real property being acquired by the lessee through payments over a period of time pursuant to the tax-exempt lease.
Asset-Based Transfer — See also sale-leaseback ; a lease by a government agency of pre-existing governmental assets to provide the leased property in a lease financing and a lease-back by the government agency of those assets pursuant to the lease constituting the basic financing obligation..
Assignee — The party to which an assignment is made.
Assignment — A transfer of legal rights to another; typically, in a tax-exempt lease involving the transfer of the lease and rental payments from the lessor to a paying agent or trustee acting on behalf of the investors or to the investors directly. An assignment may also be used where one investor transfers its interest in the lease to another, especially common in COP transactions. Generally, the lessee will be asked to nominally approve and acknowledge any and all assignments made by the lessor.
However, most lessees are themselves prohibited from assigning their rights in or responsibility for a leased asset to another party. If assignment by the lessee is permitted, the lessee is required to obtain the consent of the lessor and to continue to comply with Internal Revenue Code restrictions relative to the financing.
Bank Qualified — Under current provisions of the Internal Revenue Code, commercial banks can deduct 80% of their interest costs on funds used to acquire or “carry” tax-exempt obligations (bonds and leases) of governments that borrow no more than $10 million in a calendar year; otherwise, the interest cost is not deductible by the bank. The availability of the interest deduction on bank qualified leases makes them more attractive to commercial banks than obligations of larger issuers. Commercial banks may invest in non-bank qualified leases but the loss of the deduction for interest costs on funds borrowed by the bank for the initial investment in the lease, requires additional compensation through a higher interest rate in the lease than in a smaller bank qualified transaction.
Basis Point — An amount equal to one one-hundredth of one percent (.0001); a shorthand expression to describe differences in interest rates, e.g., the difference between 7.00% and 7.10% is ten basis points.
Bond Opinion — The opinion of counsel specializing in municipal bonds and other tax-exempt transactions that the lease transaction is legal, valid and binding on the lessee. The bond opinion may also incorporate the tax opinion. Lease transactions for small dollar amounts frequently do not have a bond opinion. In larger transactions, bond counsel may also provide a 10b-5 opinion respecting compliance with securities laws and disclosure requirements. Most well-known bond counsel are listed in a section of The Bond Buyer’s Directory of Municipal Dealers of the United States , informally known as the “Red Book.”
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Call Protection — Refers to the period of time during which a tax-exempt lease cannot be prepaid; during this period, the investor is assured his yield and his investment is protected from early termination. This is similar to protections provided investors against early redemption of bonds. The investment community also uses this term informally to mean the payment premium.
Capital Improvement Program (CIP) — A plan, that is updated annually, for capital expenditures to be incurred each year over a fixed period of several future years. The CIP identifies each capital project, its expected start and completion dates, the amount projected to be spent each year, and the method of financing those expenditures.
Capital Lease — An accounting term for a lease that provides to the lessee all of the rights and obligations to an asset on a basis similar to circumstances had the lessee purchased the asset on a conditional sale or installment purchase basis. Under FASB Statement 13, a lease is a capital lease if it meets one or more of the following criteria: ownership of the asset is transferred to the lessee by the end of the lease term; it has an option to purchase the asset at a bargain price (frequently $1.00); the lease term equals 75 percent or more of the useful life of the leased asset; or the present value of the lease payments, including any purchase price, equals at least 90 percent of the fair market value of the asset at the start of the lease term.
Capitalized Interest — Bond or lease proceeds that are reserved to pay interest for a period of time early in the term of the issue. In construction projects, interest frequently is capitalized through the construction period until the project is accepted by the lessee.
Captive Credit Corporation — A wholly owned subsidiary of a corporate organization (usually a vendor) that lease finances the products of the parent corporation.
Certificate of Participation (COPs) — A method of structuring and distributing tax-exempt leases to investors by dividing the rental payments and lease into fractionalized interests or shares for individual sale to investors. The share is represented by a formal certificate, much like a bond. COPs can be placed privately or sold publicly. COPs generally are sold for large asset financing and tend to be used more for real property rather than personal property acquisitions.
Closing Costs — See Issuance Costs .
Closing Date — Also known as issuance date ; the date on which the lessor or investor provides funds equal to the principal amount of the lease either to the trustee for subsequent transmittal to the vendor(s) or to the vendor directly. This term is most commonly associated with large COPs transactions where the execution of documents occurs in a formal manner similar to bond closings.
Commitment Fee — A fee sometimes required by the lessor from the date it commits to act as lessor and finance the assets under the lease, until the final funding date. This fee is most commonly applied in a transaction where there is a lengthy period between the commitment by the lessor and the actual funding date. The fee ensures availability of the funds, and in certain instances, availability of a specified interest rate. The commitment fee frequently is refunded by applying an equal amount as a reduction of the lessee’s first lease payment. Payment of a commitment fee may not be allowed under local or state law where payments can only be made if the asset is available for use by the lessee. - 60 -
Competitive Bid — The response made by a vendor, contractor or financial service provider to a request for bid proposal, usually issued by a governmental unit. In tax-exempt leasing, the term usually describes how a vendor of an asset is selected but may also describe how the lease financing is selected, particularly among small-dollar volume privately placed lease agreements or vendor lease agreements.
Competitive Sale — A term describing a method of selling financial obligations (including tax-exempt bonds, leases or COPs) to the bidder presenting the best sealed bid (in terms of price and compliance with the transaction specifications) at the time and place specified by the issuer/lessee (as opposed to a negotiated sale .)
Conditional Sales Agreement — A standard form of financing agreement whereby a buyer acquires the immediate use of an asset (and title thereto) and the seller retains a security interest in the asset and the buyer agrees to pay the seller a series of payments equal to the cost of the asset plus interest. Therefore, the transfer of title is conditionally subject to future payments. This is distinguished from an installment sale where the seller retains title until all installment payments are made. In both forms of sale, for federal tax purposes, the Internal Revenue Code treats the asset as owned by the purchaser with payments to the seller constituting principle and interest ; for a governmental purchaser, interest usually is tax-exempt. This term is sometimes used interchangeably with the term tax-exempt lease; however, in California, there is an important distinction between the two (e.g., a lease is constitutionally legal and a conditional sale is not unless it is secured by a special fund.) COPs — See certificates of participation.
Credit Enhancement — A way to protect investors from investment risks by having a third party provide insurance, a guaranty, or additional collateral (e.g., a letter of credit to ensure performance by the lessee of its obligations under the lease. The investors and any rating agencies will evaluate the credit based upon the party providing the enhancement; assuming this party has a higher credit rating than the lessee, the rating of the overall transaction will be improved, resulting in a lower interest cost to the lessee. A credit enhancement usually provides assurances to the investor against the risks of non-appropriation or abatement as well as against the credit risk of the lessee.
Credit Rating — An independent appraisal of the credit quality of a bond issue or lease, usually supplied by a credit rating agency.
Cross-Default Provision — A clause, if included in a lease, which states that if an event of default arises in other obligations of the lessee, it becomes an event of default under the lease.
Debt — An obligation arising from the borrowing of money to be repaid over a period of time, and if over a multi-year period, subject to state and local constitutional provisions, statutes, and judicial and administrative determinations. In California, tax-exempt leases with non-appropriation or abate- ment clauses are not considered debt under the Offner-Dean series of court cases. They are, however, debt in a financial sense.
Default — The failure of the lessee to pay payments or other sums or obligations when due under the lease or failure to observe a representation or warranty in the lease or violation of a covenant in the lease, and the expiration of applicable periods to cure the default. An event of non-appropriation or abatement is not normally considered an event of default, even when the remedies are substantially similar for each event.
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Defeasance — The termination of the obligations of a issuer/lessee by providing for the full prepayment of its obligations. Frequently, a properly documented, usually larger, tax-exempt lease can be defeased (like a bond) by the deposit of sufficient funds with a trustee to pay the future lease obligations until maturity or until the first date permitted for prepayment of the lease. Depending upon the structure, the amount of funds to be deposited may be determined by giving effect to investment earnings to be derived from the funds deposited, particularly when investments are made for stated maturities and at pre-determined rates. Defeasance is different than prepayment because although the lessee’s obligations are fully satisfied, the lease and the related certificates remain outstanding to be paid later from the funds deposited, avoiding any prepayment premium or similar obligation.
Defeasance usually occurs if a lessee wishes to discharge its obligations before the call protection period has expired and assuming the lease specifically permits such actions.
Disclaimer of Warranties — A reference to typical provisions of tax-exempt leases under which a lessor, who is not a vendor, will disclaim (reject) any and all responsibility for the suitability or performance of the assets selected by the lessee to be financed under the lease agreement.
Disclosure — Information provided on the government agency/lessee and the financing, to permit an investor to evaluate the creditworthiness of the government agency/lessee, the risks associated with the financing, and the appropriate yield required by the investor for the investment. The information must include financial data. Under a 1989 rule of the federal Securities and Exchange Commission (Rule 15c2-12 ), the timing and filing of disclosure statements relating to tax-exempt financings have been regulated. Disclosure is usually provided through an official or offering statement; or for private offerings, a private placement memorandum.
Effective Interest Rate — See also implicit rate; the rate of interest payable by the lessee taking into account accrued and capitalized interest , issuance costs , discounts and premiums. (As opposed to Nominal Interest Rate .)
Enterprise Lease — See Lease Revenue Bond .
Escrow Agent — Also known as trustee; usually a financial institution that provides administrative services, through an escrow agreement, for the benefit of the parties to a financing including the execution and delivery of COPs, the safekeeping of proceeds, and holding physical possession of title documents for the leased asset. Depending on the lease structure, the escrow agent may have other responsibilities such as disbursement of funds to vendors , investment of reserve and acquisition funds (until delivery or construction is completed) and arbitrage calculations. In COPs, the escrow agent’s role may also include the collection of lease payments from the lessee(s) and the regular disbursement of payments of principle and interest to investors.
Essential Use Certificate — A certificate executed by the lessee indicating that the asset being leased is essential to the lessee’s governmental purposes and daily activities. Lessors in almost all capital lease transactions with a non-appropriations provision require confirmation of essential use from the lessee, either through a representation in the lease or a separate certificate, or both. In addition, for some transactions, lessees may also be required to provide a project feasibility study and certify the feasibility of the leased asset as well as its essentiality.
Form 8038, 8038-G, 8038-GC, 8038-T — Forms of the Internal Revenue Service that governmen- tal borrowers (including lessees) must complete to report on the issuance of tax-exempt securities, their general purpose, their general financial terms, the exemption used for tax-exempt private activity bonds, and to transmit arbitrage rebate amounts to the IRS. - 62 -
Full Service Lease — An operating lease in which asset maintenance or other service is the responsibility of the lessor.
Funding Date — The date on which funds are transferred from the investor(s) to the vendor(s), or trustee if the lessee has not accepted the asset. Frequently, the closing date , funding date, and acceptance date occur simultaneously.
Hell-or-High Water Clause — A clause contained in most tax-exempt leases that holds the lessee responsible for its lease payments and all other obligations under the lease regardless of the status of the leased asset or any dispute between the lessee and any other party. This clause does not prevent the lessee from exercising its right to non-appropriate. In some states, such as California, the lease is altered to permit the lessee to terminate rental payments pursuant to an abatement clause .
Implicit Rate — Also called the effective interest rate ; the interest rate at which the present value of all payments made by the lessee, including issuance costs and all rent payments, will equal the asset cost.
Independent Lessor — A lessor that is not affiliated with a bank, credit corporation or any other organization or corporation. The independent lessor might be an investor using its own funds or it might be a lease broker using funds received or to be received from other investors.
Installment Sales Agreement — See Conditional Sales Agreement and Lease Revenue Bond. Also known as an installment purchase contract.
Interest — Compensation paid for the use of money or the return on investment from money invested or lent; the interest rate is the interest charge expressed as a percentage of principal.
Investor — In a tax-exempt lease, the party that provides the funds to pay for the leased asset and benefits from the tax-exempt interest whether directly as a single investor or in concert with many investors as a purchaser of certificates of participation.
Issuance Costs — Costs associated with closing and funding the principal amount of the lease including, but not limited to, fees for the bond, tax and securities counsel, printing costs, credit enhancement costs (if any), credit rating costs (if any), underwriter’s discount (as applicable), financial advisor or other professional fees, governmental filing costs (if any) and, where appropriate, costs of feasibility studies.
Issuance Date — See Closing Date .
Issuer — See Lessee .
Joint Powers Authority — A public authority created by a joint exercise of powers agreement between any two or more governmental agencies. An authority can perform any function which all parties to the agreement can perform independently and which will be of benefit to all parties. Such authorities are unique to California.
Lease Broker — Usually an independent leasing company that negotiates leases between lessees and investors. A lease broker may serve as nominal lessor or may underwrite or guarantee the financing. In either case, the broker assigns its rights and interests in the lease to an investor. - 63 -
Lease Line of Credit — An arrangement that allows a lessee to make periodic withdrawals from a line of credit established to finance lease acquisitions. The arrangement is documented as a single capital lease with multiple equipment schedules. A schedule is executed for and at the time of each acquisition by the lessee. Administratively, a line of credit eliminates the documentation hurdle of separate leases on smaller-valued assets and ensures a continued funding source at rates competitive with larger transactions. A lease line of credit is typically utilized in larger dollar financings with extended or variable delivery schedules or in lease pools .
Lease Pool — An arrangement whereby a number of unrelated capital leases are grouped together for purposes of a single public offering. The governments are usually similar in nature (e.g., school districts) and are brought together through some common interest association. The lease pool is different than a master lease which groups the leasing needs of several departments or agencies in a single government agency/lessee, such as a state or county.
Lease-Purchase Agreement — See tax-exempt lease .
Lease Revenue Bond — Also referred to as lease-backed revenue bond; a bond having as its repayment source a lease to which project revenues have been pledged for making regular payments, although the source of lease payments may also include General Fund revenues. In California, such leases are frequently referred to as enterprise leases , installment sales agreements , or special fund leases.
Lease Term — The length of time during which the lessee has an obligation to make rental payments.
The term should coincide with or be shorter than the useful life of the asset being leased.
Lessee — Also called the issuer; in a tax-exempt lease, the lessee is a unit of government otherwise qualified to issue tax-exempt obligations which finances the acquisition of assets through the tax- exempt lease by paying specified sums of interest and principal for a pre-determined period. In an operating lease, the lessee only uses the asset for a period of time and returns it to the lessor. To be tax-exempt, the lessee must be a qualifying governmental entity under the Internal Revenue Code.
Lessor — In a tax-exempt lease, the secured party that may provide the funds and act as investor or that may assign its interest in the leased property to another party for these purposes. If the lessor is also the investor, the lessor benefits from tax-exempt income. In an operating lease , the lessor owns the asset and derives the tax benefits of ownership which include, as applicable, depreciation.
Letter of Credit — See also credit enhancement ; a credit facility from a financial institution in which the institution agrees to provide specified funds to meet payments due under a tax-exempt lease, if the lessee does not make those payments. A letter of credit is used to allow the financial institution’s credit rating to supplement that of the issuer and to provide additional security that money will be available to pay lease payments. The financial institution is typically reimbursed for any funds drawn by the government agency or by a security interest in the asset.
Master Lease — An arrangement that involves one lease document for the acquisition of different types of assets at different times by one lessee or agencies and departments of one lessee.
Negotiated Sale — The method of selling obligations (including tax-exempt bonds, leases or COPs) where the terms of the obligation, in particular the interest rate, are negotiated between the lessee and the financing source (as opposed to competitive sale ). - 64 -
Net Interest Cost — A technical measure of the interest cost of a lease or bond derived by adding together all interest payments for the term of the issue or lease and dividing that sum by the sum for all bonds of the amount of each bond multiplied by the number of years it is outstanding. Net interest cost differs from true interest cost in that NIC does not take into account the time value of money.
Net Lease — See Triple Net Lease .
No-Arbitrage Certificate — See Arbitrage Certificate.
Nominal Interest Rate — See effective interest rate ; the rate of interest often stated in a tax- exempt lease or quoted by a lessor which does not include the effect of issuance costs , discounts, premiums, or accrued and capitalized interest.
Non-Appropriations Clause — A provision contained in some California and most non-California tax-exempt leases that allows a lessee to discontinue its lease payments if, in future years, funds are not appropriated to make lease payments (usually following a best efforts undertaking by the lessee to obtain the funds.) A lessee is not in default under the lease if it non-appropriates. Due to this annual condition placed on the obligation to pay rent, the courts in many states view rental payments as operating expenses under state law and, therefore, not as debt. In the event of non-appropriation, the lessee loses use and possession of the asset.
Non-Appropriations Lease — A type of capital lease in which the lease can be terminated if sufficient appropriations are unavailable to continue its payments. (This contrasts with an abatement lease .)
Operating Lease — A type of lease that has none of the characteristics of a capital lease for accounting purposes. In an operating lease, the lessee has use of the leased property but the lessor retains ownership, including ownership for tax purposes. The implicit interest rate in an operating lease is at taxable rates and payments are considered rent (and not payments of principal and interest).
The lessee usually must agree to maintain and insure the property and pay all property and sales taxes in the same manner as in a tax-exempt lease . This type of lease is frequently used for assets that the lessee wishes to use for short periods that are less than the full useful of the asset.
Paying Agent — In a COP or master lease arrangement, a party appointed by the lessor or the lessee(s) as agent to collect the proceeds at the sale of the COPs and other sums provided by the investors and disburse such monies as directed by the lessee(s). In addition, the paying agent collects rental payments from the lessee(s) and disburses them to the investor(s) as directed by the lessor or under an agreement with the lessor and lessee(s). This function is frequently performed by the escrow agent, also called trustee.
Premium — The amount by which the price of an obligation exceeds its principal amount; for tax- exempt leases, this usually is expressed in the offering memorandum for the COPs (and may constitute funds available to the underwriter for issuance costs and underwriter’s discount.
Present Value — The equivalent value today of money available in the future, either at one time or in a series of payments. The present value is influenced by the interest rate factor applied to the future payment(s).
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Private Activity Bond — Under federal tax law, bonds of which (i) 10% or more of the proceeds (5% in the case of an unrelated use) are used in the trade or business of nongovernmental persons and 10% or more of the debt service is secured by or derived from property used in the trade or business of nongovernmental persons, or (ii) 5% or more of the proceeds are loaned to nongovernmental persons. Interest on private activity bonds is tax-exempt only if certain requirements of Section 141 of the Internal Revenue Code are satisfied.
Private Placement — A method of selling financial obligations (including tax-exempt bonds, leases and COPs) where the investors are a limited number of informed individual or institutional investors who purchase the obligations for their portfolios and not for resale (as opposed to a public sale).
Public Sale — A method of selling financial obligations (including tax-exempt bonds, leases, and COPs) where an underwriter offers the securities to a large number of investors in denominations as low as $5,000. Normally a public sale is made pursuant to an official statement.
Purchase Option — A provision that gives a lessee the opportunity to purchase the leased asset at specific times during the lease term by paying the then outstanding principal, accrued interest, and, as applicable, the prepayment premium.
Refunding — A financing structure applicable to government obligations, including tax-exempt leases, through which the obligation is redeemed by a new financing of the same or a related issuer on generally more favorable financial or legal terms. Refundings are subject to certain requirements under the Internal Revenue Code.
Renewable Lease — A lease written initially for a short term (commonly one or two years depending on the lessee’s budget cycle) which is renewable for subsequent similar terms until a full term equal to the useful life of the asset is reached. In many such leases, renewal occurs automatically unless the lease is specifically terminated by the lessee.
Rental Interruption Insurance — A form of insurance that provides a flow of funds to protect investors in the event that leased property is not usable and the lessee elects to use the abatement provisions of the lease. If the asset is not usable and, as a result of the lease contract, the lessee is not required to make lease payments, insurance proceeds would be used to continue the payment stream unless or until the property is restored to a usable condition or the investors are paid the principal and interest due. However, many rental interruption insurance contracts are limited to the payment of rentals for a fixed number of years (commonly two) which period is deemed adequate to restore the asset to useable condition.
Reserve Fund — A special fund from which moneys can be drawn to make lease payments if the lessee is otherwise unable. The fund can be set up entirely from lease proceeds or can be wholly or partially funded by the lessee from other available funds and can be funded at issuance or funded over the term of the lease. A typical reserve fund would be an amount equal to maximum annual payments for the lease, but not to exceed 10% of the original principal amount of the lease.
Rule 10b-5 — A rule of the Securities and Exchange Commission under the Securities Exchange Act of 1934, which requires that persons purchasing or selling securities (whether or not registered) not engage in any device or scheme to defraud or make any untrue statement of a material fact or omit to state a material fact to cause the disclosure statement to be misleading. The liabilities of failing to disclose may extend to bond counsel, underwriter’s counsel, underwriters and other participants in the lease financing.
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Rule 15c2-12 — A rule, effective January 1, 1990, of the Securities and Exchange Commission that governs the review and delivery by underwriters of official statements released in conjunction with the sale of municipal securities.
Sale-leaseback — An arrangement in which one party sells an asset it owns or is acquiring to another and leases it back so that the lessee receives an infusion of cash from the sale of the asset but still retains its use. In some instances, the lease may be structured as an operating lease under which the new owner can depreciate the asset or as a capital lease for which the new owner receives tax- exempt interest and the original owner re-acquires the asset. In the latter case, the sale-leaseback may be referred to as a sale-saleback. This structure is frequently used to permit lessees to employ the equity in assets they own to finance capital expenditures or other programs. For some governmental units, a sale-leaseback is not possible since some may only be permitted to sell property if it is “surplus” to its needs. It would then be a contradiction to first declare an asset surplus for the sale and immediately declare it essential for the lease. Surplus property rules vary from one governmental unit to another even within the same state.
Sublease — Also sublet; a document or act by which a lessee allows another party to use the leased asset. Subleasing by the initial lessee is often restricted by the terms of the tax-exempt lease. The restrictions usually are meant to ensure the continuation of the tax-exempt status and the security of the original lease.
Tax-Exempt Lease — Also called a municipal lease, installment purchase lease, conditional sales agreement , or a lease purchase agreement ; a financing arrangement whereby a state or local government or agency or subdivision thereof, as lessee, obtains the use and ownership of an asset by making periodic lease payments of principal and interest. Because the lessee is a tax-exempt entity and will own the asset, and assuming compliance with the Internal Revenue Code and, in California, the Revenue and Taxation Code, interest it pays is exempt for federal and California personal income tax purposes.
Tax Opinion — The opinion of counsel specializing in tax-exempt obligations that the interest portion of rental payments received by the lessor or investor(s) from the lessee is exempt from federal income taxes and, as applicable, California income or franchise taxes. The tax opinion may be incorporated into the bond opinion or be separately provided.
Time Value of Money — See also present value ; an economic concept which takes into account the fact that funds due in later periods may have a diminished present value due to the intervening period and loss of investment earnings by the lender until the payment is received.
Triple Net Lease — Also called a net lease ; a term describing a lease agreement where the lessee is responsible for all maintenance, insurance, utility charges, taxes, and other charges against the property, associated with the leased asset and that all lease payments to be made are net of all such expenses. Tax-exempt leases are usually triple net leases.
True Interest Cost — See also effective interest rate , net interest cost ; a measure of the interest cost of a lease or bond issue that accounts for the time value of money.
Trustee — See Escrow Agent .
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Useful Life — A period of time during which an asset will provide the desired service to the party using it. The useful life of a piece of technical equipment could be substantially less than its expected technical life (e.g., computers due to technical obsolescence.) Vendor — The seller or supplier of personal property.
Vendor-Financed Lease — A privately placed lease that is financed by the vendor providing the financed asset. The vendor also acts as lessor.
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INDEX
AB 535, 51
AB 1160, 32
AB 1200, 18n, 53, 54
Abatement lease, 2, 5, 21, 24, 27, 33, 34, 49n, 52
Accounting, 18
Advisory vote, 47, 48
“All-risk” insurance, 34
Appraisal, 22
Arbitrage, 38, 40
Asset transfer, 21, 22, 27, 28, 35, 37, 51
Assignment, 30, 31, 36
Authorization, 35, 36, 38
Bankruptcy
Municipal, 51, 52
Private party, 31
Bifurcated bidding, 29, 30
Bond insurance, 27, 28, 34
Brevard County, 44
Bridge loans, 54, 55
Builders risk insurance, 22
Capital budget, 9-11, 20, 46, 47
Capital lease, 2, 10, 11, 18n
Capitalized interest, 16, 21, 28, 34, 37, 39
Central oversight, 17
Certificates of Participation (COP), 1, 4, 5, 6, 10, 24-27, 29-32, 36, 38, 42-44, 50, 51, 53, 55 Cities, 2, 12, 28, 29, 35, 41
Citizens Oversight Committee, 47
Competitive Bid, 29, 30, 41, 42, 48n
Concurrency, 26
Conditional sale, 39
Connection fees, 26
Constitutional Debt Limitation, 2, 41, 42, 45, 48n, 50
Controversial projects, 47, 48
Contra Costa County (Superior Court), 51, 52
Cost-effectiveness, 9, 10, 14-16, 19n
Counties, 2, 11, 12, 28, 29, 35, 41
Covenant to budget and appropriate, 33, 45, 52
Credit enhancement, 27-29
Credit Plus Program, 27-29
Debt management, 13, 18, 24, 27
Default, 27, 34, 36, 41, 44
Developer impact fees, 26
- 69 -
Disposition of property, 35
Earmarking, 24
Earthquake insurance, 22, 34
El Dorado County, 43
Enterprise project, 5, 19, 24, 34, 42, 48
Equipment lease, 9, 15, 31, 38, 39
Essentiality, 14
Event of default, 34, 55
FASB Statement No. 13, 18
Federal Transit Administration, 25
Filing of forms, 39
Financial reports, 18, 32
Financing lease, 39
Fines and forfeitures, 26
Fiscal control, 17, 32
Flood insurance, 23, 34
Forecasting, 11, 12
Fresno, 25
GAAP, 18
Gas tax revenues, 25
General benefit, 16, 42
General fund lease burden, 11-13, 17, 45, 47
General fund lease capacity, 11-13
General obligation bonds, 6, 7, 16, 17, 28, 42, 48n, 49n, 50 GFOA Policy Statement, 32
Installment sale agreement, 4, 5, 18, 24, 34, 42
Internal Revenue Service, 39
Issuance costs, 15, 16
Joint powers authority, 4-6, 36
Lease brokers, 29, 36
Lease lines of credit, 10, 15, 18, 31
Lease Pools, 10, 15, 18
Lease revenue bonds, 5, 6, 15, 50
Letters of credit, 23, 27, 28
Los Angeles County, 31, 32
Mail election, 48
Marks-Roos Local Bond Pooling Act of 1985, 48n
Majority protest, 42, 48n
Master lease, 10, 15, 18, 19n
Mello-Roos Bond, 49n, 50
Middle market leases, 29
Municipal affairs doctrine, 44
Negative arbitrage, 21
Nevada County, 44
Nominal lessor, 4
Nonappropriation lease, 2, 5, 27, 34
Nonenterprise project, 5, 16, 24, 42
Noneviction clause, 53, 55, 56n
Nonprofit corporation, 4-6
Office of Local Assistance (OLA), 54, 55
- 70 -
Offner-Dean , 3n, 5, 8n, 33
On behalf of , 5, 6
Operating expense, 9, 17
Operating lease, 1, 11
Pay-as-you-go, 12, 14, 15, 25
Performance bonds, 22, 34
Pollution insurance, 23
Prioritizing capital projects, 13
Private activity bonds, 40
Private placement, 2, 29, 30
Project essentiality (see Essentiality)
Property and casualty insurance, 22
Proposition 13, 6, 26, 45, 48n, 50
Proposition 46, 6, 48n, 50
Proposition 62, 43, 45
Proposition 111, 25
Public liability insurance, 23
Public participation, 44-46
Public purpose requirement, 35
Rebate, 40
Rental interruption insurance, 22, 34
Restructuring governmental obligations, 17
Reserve fund, 17, 23-25, 34, 37
Reserve Bond Law of 1941, 42
Richmond Unified School District, 17, 51, 52, 55
Sacramento, 25
Sale-leaseback, 35
Sales tax, 13, 25
San Diego, 25
San Francisco, 44
San Jose, 43
Santa Barbara County, 43, 44
Santa Cruz County, 43, 47
School district, 2, 5, 6, 13, 18n, 26, 35, 41, 50, 52-54 Security features, 21
Securitized vendor leases, 30, 31
Self-insurance, 23
Small lease, 14, 16, 29, 36, 38
Small issuer, 40
Special Assessment bonds, 42, 48n
Special benefit, 42
Special districts, 12, 48n
Special fund obligation, 5, 24, 25, 34
Surety bond, 23
Surplus property, 35
Tax increase, 17
Tax-exempt lease, 1-5, 7, 9, 10, 13, 15-17, 22, 23, 27, 28, 31, 33-35, 39, 42, 44-46 Term of the lease, 27, 37
Third-party financed lease, 3, 30
Title insurance, 22, 34
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Trust agreement, 23, 55
Two-thirds vote, 5, 6, 17, 42, 50
Vehicle License Fees, 12, 28
Vendor-financed lease, 2, 9, 14, 16, 29-32
Vendor performance, 30
Volatile repayment sources, 25
Form 8038-G
(Rev. October 2021)
Department of the Treasury
Internal Revenue Service
Information Return for Tax-Exempt Governmental Bonds
▶ Under Internal Revenue Code section 149(e)
▶ See separate instructions.
Caution: If the issue price is under $100,000, use Form 8038-GC. ▶ Go to www.irs.gov/F8038G for instructions and the latest information.
OMB No. 1545-0047
Part I Reporting Authority Check box if Amended Return ▶ 1 Issuer’s name 2 Issuer’s employer identification number (EIN) 3a Name of person (other than issuer) with whom the IRS may communicate about this return (see instructions) 3b Telephone number of other person shown on 3a 4 Number and street (or P.O. box if mail is not delivered to street address) Room/suite 5 Report number (For IRS Use Only) 3 6 City, town, or post office, state, and ZIP code 7 Date of issue 8 Name of issue 9 CUSIP number
10a Name and title of officer or other employee of the issuer whom the IRS may call for more information 10b Telephone number of officer or other employee shown on 10a
Part II Type of Issue (Enter the issue price.) See the instructions and attach schedule. 11 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 Health and hospital . . . . . . . . . . . . . . . . . . . . . . . . . . 12 13 Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14 Public safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15 Environment (including sewage bonds) . . . . . . . . . . . . . . . . . . . . 15 16 Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 Other. Describe ▶ 18
19a If bonds are TANs or RANs, check only box 19a .......................................................................... ▶ b If bonds are BANs, check only box 19b ........................................................................................ ▶ 20 If bonds are in the form of a lease or installment sale, check box ................................................. ▶ Part III Description of Bonds. Complete for the entire issue for which this form is being filed.
21 (a) Final maturity date (b) Issue price (c) Stated redemption price at maturity
(d) Weighted
average maturity (e) Yield
$ $ years %
Part IV Uses of Proceeds of Bond Issue (including underwriters’ discount) 22 Proceeds used for accrued interest . . . . . . . . . . . . . . . . . . . . . 23 Issue price of entire issue (enter amount from line 21, column (b)) . . . . . . . . . . . 22 23
24 Proceeds used for bond issuance costs (including underwriters’ discount) 24 25 Proceeds used for credit enhancement . . . . . . . . . . . . 25 26 Proceeds allocated to reasonably required reserve or replacement fund . 26 27 Proceeds used to refund prior tax-exempt bonds. Complete Part V . . . 27 28 Proceeds used to refund prior taxable bonds. Complete Part V . . . . 28 29 Total (add lines 24 through 28) . . . . . . . . . . . . . . . . . . . . . . . 29 30 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here) . . . 30 Part V Description of Refunded Bonds. Complete this part only for refunding bonds. 31 Enter the remaining weighted average maturity of the tax-exempt bonds to be refunded . . . ▶ years 32 Enter the remaining weighted average maturity of the taxable bonds to be refunded . . . . ▶ years 33 Enter the last date on which the refunded tax-exempt bonds will be called (MM/DD/YYYY) . . ▶ 34 Enter the date(s) the refunded bonds were issued ▶ (MM/DD/YYYY) For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 63773S Form 8038-G (Rev. 10-2021) 35 37
36a
Form 8038-G (Rev. 10-2021) Page 2
Part VI Miscellaneous
35 Enter the amount of the state volume cap allocated to the issue under section 141(b)(5) . . . . 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract (GIC). See instructions . . . . . . . . . . . . . . . . . . . . . . . . . b Enter the final maturity date of the GIC ▶ (MM/DD/YYYY) c Enter the name of the GIC provider ▶
37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans to other governmental units . . . . . . . . . . . . . . . . . . . . . . . . 38a If this issue is a loan made from the proceeds of another tax-exempt issue, check box ▶ and enter the following information:
b Enter the date of the master pool bond ▶ (MM/DD/YYYY) c Enter the EIN of the issuer of the master pool bond ▶
d Enter the name of the issuer of the master pool bond ▶ 39 If the issuer has designated the issue under section 265(b)(3)(B)(i)(III) (small issuer exception), check box . . . . ▶ 40 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box . . . . . . . . . . . . . ▶ 41a If the issuer has identified a hedge, check here ▶ and enter the following information:
b Name of hedge provider ▶
c Type of hedge ▶
d Term of hedge ▶
42 If the issuer has superintegrated the hedge, check box . . . . . . . . . . . . . . . . . . . . . ▶ 43 If the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements under the Code and Regulations (see instructions), check box . . . . . . . . ▶ 44 If the issuer has established written procedures to monitor the requirements of section 148, check box . . . . . ▶ 45a If some portion of the proceeds was used to reimburse expenditures, check here ▶ and enter the amount of reimbursement ..................................................................... ▶ b Enter the date the official intent was adopted ▶ (MM/DD/YYYY) Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge Signature
and
Consent
and belief, they are true, correct, and complete. I further declare that I consent to the IRS’s disclosure of the issuer’s return information, as necessary to process this return, to the person that I have authorized above.
Paid
Preparer
Use Only
Signature of issuer’s authorized representative Date
Type or print name and title
Firm’s EIN ▶
Phone no.
PTIN
Form 8038-G (Rev. 10-2021)
Firm’s name ▶
Date
Firm’s address ▶
Check if
self-employed
Preparer’s signature Print/Type preparer’s name
▲
▲
From: Kitty Moore
To: Kirsten Squarcia
Subject: CPFC Written Comms
Date: Monday, November 18, 2024 8:18:17 PM
Attachments: image001.png
Guidelines93-8.pdf
Dear City Clerk,
Please include the following information and attachment, for the CPFC Written Communications:
Kitty Moore
Councilmember
City Council
[email protected]
(408) 777-1389
CALIFORNIA DEBT ADVISORY COMMISSION
GUIDELINES FOR LEASES AND
CERTIFICATES OF PARTICIPATION
KATHLEEN BROWN
State Treasurer and Chair
CDAC 93-8
CD
CA
STATE OF CALIFORNIA
CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION
915 CAPITOL MALL, ROOM 400
P.O. BOX 942809
SACRAMENTO, CA 94209-0001
TELEPHONE: (916) 653-3269
FAX: (916) 654-7440
November 1993
To All Interested Parties:
I am pleased to announce the release of Guidelines for Leases and Certificates of Participation as part of the California Debt Advisory Commission's ongoing effort to assist and educate state and local officials on matters surrounding tax-exempt leasing in California. This publication constitutes the fifth document issued by the Commission on the subject of tax-exempt lease financing since 1991.
The Commission's focus on tax-exempt lease financing is attributable to its important role in financing capital facilities and equipment for public agencies in California. Because of its flexibility and market acceptance, leasing has become the financing method of choice for a growing number of governmental agencies. This ~quiet revolution" in municipal finance, however, has raised concerns as to the role of the public in deciding questions of infrastructure spending and public borrowing. I believe that this document outlines a constructive approach for making governmental leasing practices both cost -effective and accountable.
Two other aspects of this publication should be noted. First, these Guidelines are voluntary in nature, which not only recognizes the fiscal autonomy of state and local agencies, but also the fact that governmental leasing has been well managed to date . Second, the focus of the Guidelines falls predominantly on local leasing practices. Insofar as the majority of tax -exempt leasing in California is conducted locally, this focus seems appropriate.
In closing, I would like to acknowledge the efforts of the Project Team which assisted the Commission in drafting the Guidelines: American Government Financial Services; Government Financial Strategies; Orrick, Herrington & Sutcliffe; and Stone & Youngberg. Their research and insights added greatly to the final product.
Sincerely,
KATHLEEN BROWN
State Treasurer and Chair
MEMBERS
Kathleen Browns
State Treasurer
Pete Wilson
Governor
Gray Davis
State Controller
Robert G. Beverly
State Senator
Lucy Killea
State Senator
Jim Costa
State Assemblyman
Patrick J. Nolan
State Assemblyman
Donald W. Merz
Treasure/Tax Collector
County of Sonoma
Phillis E. Currie
Chief Financial Officer
Los Angeles City Department
of Water and Power
CALIFORNIA DEBT ADVISORY COMMISSION
The California Debt Advisory Commission is the State’s clearinghouse for public debt issuance information. The Commission was created by the California Legislature in 1981 to assist State and local government agencies with the monitoring, issuance, and management of public debt.
The California Debt Advisory Commission members include:
Kathleen Brown
California State Treasurer and Chair
Pete Wilson
Governor
or
Russell S. Gould
Director
Department of Finance
Gray Davis
State Controller
Robert G. Beverly
State Senator
Lucy Killea
State Senator
Jim Costa
State Assemblyman
Patrick J. Nolan
State Assemblyman
Donald W. Merz
Treasurer/Tax Collector
Sonoma County
Phyllis E. Currie
Chief Financial Officer
Los Angeles Department of Water and Power
Steve Juarez
Executive Director
Additional information concerning this report or the programs of the California Debt Advisory Commission may be obtained by contacting:
California Debt Advisory Commission
(916) 653-3269
ACKNOWLEDGEMENTS
The Commission staff received research and writing assistance in the development of these Guidelines through a contract with the firms American Government Financial Services (Robert Doty and Gene Albaugh), Government Financial Strategies (Lori Raineri), Orrick, Herrington & Sutcliffe (Philip Morgan and Richard Hiscocks) and Stone & Youngberg (Warren Miller and Edward Schilling). Stephen Shea and Robert Doty were the principal authors of the text. Steve Juarez edited the document. Charmette Bonpua, Eileen Park, Martha Riley, Mary Scharosch and Ted White contributed research and technical assistance. Berma Williams formatted the document for publica- tion.
Members of the Commission’s Technical Advisory Committee and other finance profession- als from California and throughout the nation reviewed drafts of the document and contributed greatly to the final product. At the risk of missing someone, the Commission extends its thanks to the following people: Debbe Bailey, Modesto City Schools; Charles Bell, Charles A. Bell Securities Corp.; Jan Brockman, Orrick, Herrington & Sutcliffe; David Brodsly, Moody’s Investors Service; Lisa Cole, Cole & Associates; Janet Corcoran, Port Authority of NY & NJ; Rafael Costas, Franklin Funds; James Curtis, County of Nevada; Sandra Davis, County of Los Angeles; Greg Eden, Charles Eden & Co.; Phil Ezell, City of Roseville, CA; Jeffrey Foltz, City of Yuba City, CA; Thomas Gardner, County of Yolo, CA; John Gibson, Stone & Youngberg; Jeffrey Green, Port Authority of NY & NJ; John Gunyou, Minnesota Department of Finance; Alice Hammer, John Nuveen & Co.; Cheryl Hines, Morgan Stanley & Co.; Joseph Hinsberg, City of Lincoln, CA; Wes Hough, Public Resources Advisory Group; Jay Hull, County of Napa, CA; Norma Lammers, CSAC; Doug Latimer, County of Nevada, CA; Jeffrey Leifer, Leifer Capital; Fredrick Morawcznski, County of Yuba, CA; Phil Ozenick, County of Placer, CA; John Petersen, Government Finance Group; George Pugh, Craigie Inc.; Larry Rolapp, Fieldman, Rolapp & Associates; Stan Smith, Wyoming State Treasurer; William Sweeney, Florida Division of Bond Finance; Jeffrey Thiemann, Standard & Poor’s Corp.; Carlos Urrutia, City of Rocklin; Sharon Stanton White, Jones, Hall, Hill & White; and Sharon Yonashiro, County of Los Angeles.
T
TABLE OF CONTENTS
Page
Executive Summary.............................................................................................. i Introduction .......................................................................................................... 1 Overview of Leasing Terms ......................................................................................................................... 1 Operating Lease .......................................................................................................................................... 1 Tax-Exempt Lease ...................................................................................................................................... 2 Vendor-Financed Lease ................................................................................................................ 2 Third-Party Financed Lease ......................................................................................................... 3 Certificates of Participation ...................................................................................................................... 4 Tax-Exempt Leases vs. Installment Sale Agreements ............................................................ 5 Lease Revenue Bonds ................................................................................................................................ 5 Historical Development of Tax-Exempt Leasing in California ............................................................ 5 The Quiet Revolution in Public Finance ................................................................................................... 7 Chapter I: Financial Management Guidelines ................................................. 9 Incorporating Tax-Exempt Leases Into the Capital Budget .................................................................. 9 Overview of Chapter I Guidelines .............................................................................................................. 10 Guideline 1: Identify the General Fund Lease Capacity ................................................................ 11 Forecasting General Fund Expenditures and Revenues ...................................................................... 11 There is No Magic Number ...................................................................................................................... 12 Guideline 2: Determine the Necessity for the Proposed Project ................................................... 13 Prioritizing Capital Projects ..................................................................................................................... 13 Project Essentiality ..................................................................................................................................... 14 Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing ........................................ 14 Small Equipment and Vendor Leases .................................................................................................... 14 Pay-As-You-Go Financing ........................................................................................................... 14 Master Leases ................................................................................................................................. 15 Lease Lines of Credit .................................................................................................................... 15 Lease Pools ...................................................................................................................................... 15 Tax-Exempt Leases for Major Capital Projects .................................................................................... 15 Tax-Exempt Leases versus General Obligation Bonds .......................................................... 16 Guideline 4: Do Not Fund Operating Expenses With Long-Term Lease Obligations ............ 17 Restructuring Governmental Obligations .............................................................................................. 17 Guideline 5: Subject All Leases to Fiscal Controls ........................................................................... 17 Central Oversight of Leasing ................................................................................................................... 17 Accounting and Financial Reporting ..................................................................................................... 18 Chapter II: Structuring and Marketing Guidelines......................................... 20 Overview of Chapter II Guidelines ............................................................................................................. 20 Guideline 6: Incorporate Necessary Security Features ................................................................... 21 Capitalized Interest .................................................................................................................................... 21 Avoiding Capitalized Interest Through An Asset Transfer ................................................... 21 Insurance Requirements ............................................................................................................................ 22 Builders Risk Insurance and Performance Bonds .................................................................... 22 Property and Casualty Insurance ................................................................................................. 22 Rental Interruption Insurance ...................................................................................................... 22 Title Insurance ................................................................................................................................ 22 Earthquake Insurance .................................................................................................................... 22 Flood Insurance .............................................................................................................................. 23 Pollution Insurance ........................................................................................................................ 23 Public Liability Insurance ............................................................................................................. 23 Self-Insurance ................................................................................................................................. 23 Reserve Fund ............................................................................................................................................... 23 Guideline 7: Consider Earmarking General and Special Fund Repayment Sources ............. 24 Earmarking General Fund Revenues ...................................................................................................... 24 Earmarking Special Fund Revenues ....................................................................................................... 24 Federal Transit Administration Funds ....................................................................................... 25 State Gas Tax Revenues ................................................................................................................ 25 Guideline 8: Do Not Rely Upon Volatile Repayment Sources ........................................................ 25 Developer Impact Fees and Connection Fees ........................................................................................ 26 Fines and Forfeiture Revenues ................................................................................................................. 26 Guideline 9: The Term of the Lease Should Not Exceed Useful Life of the Asset ................... 27 Guideline 10: Evaluate Credit Enhancement Needs ......................................................................... 27 Bond Insurance ........................................................................................................................................... 27 Letter of Credit ............................................................................................................................................ 28 Asset Transfer ............................................................................................................................................. 28 The Credit Plus Program .......................................................................................................................... 28 Guideline 11: Solicit Competitive Bids for Small Leases ................................................................ 29 Middle Market Leases ............................................................................................................................... 29 Bifurcated Bidding ..................................................................................................................................... 29 Minimize Time Between Lease Bidding and Funding ........................................................... 30 Guideline 12: Control the Resale of Privately Placed Leases ........................................................ 30 Ensuring Vendor Performance ................................................................................................................ 30 Private Party Bankruptcy Risk ................................................................................................................. 31 Securitized Vendor Leases ........................................................................................................................ 31 GFOA Policy Statement ............................................................................................................................ 32 AB 1160 Reforms ....................................................................................................................................... 32 Chapter III: Legal Guidelines ............................................................................ 33 Legal Classification of Leases ..................................................................................................................... 33 Abatement Lease ........................................................................................................................................ 33 Nonappropriation Lease ............................................................................................................................ 34 Special Fund Obligations ............................................................................................................................. 34 Statutory Authority to Lease & Dispose of Property ............................................................................... 35 Statutory Procedures for Disposition of Property ................................................................................. 35 Public Purpose Requirement .................................................................................................................... 35 Overview of Chapter III Guidelines ........................................................................................................... 36 Guideline 13: Understand the Contractual Obligations Imposed by Lease Documents ........ 36 Guideline 14: Confirm That Lease Documents Reflect the Financial Transaction ................. 37 Guideline 15: Review Small Lease Documentation ........................................................................... 38 Guideline 16: Follow Legal Formalities, Even for Small Leases .................................................. 38 Authorization .............................................................................................................................................. 38 Capitalized Interest .................................................................................................................................... 39 Tax Exemption ........................................................................................................................................... 39 Filing of Forms ........................................................................................................................................... 39 Arbitrage and Rebate ................................................................................................................................. 40 Private Activity Bonds ............................................................................................................................... 40 Small Issuer Status ..................................................................................................................................... 40 Chapter IV: Public Policy Guideline ................................................................. 41 Impact of Debt Restrictions on Tax-Exempt Leasing Practices ........................................................... 41 Recent Grand Jury Reports on Leasing ..................................................................................................... 43 Santa Barbara County ................................................................................................................................ 43 Nevada County ............................................................................................................................................ 43 Santa Cruz County ..................................................................................................................................... 43 Other Leasing Controversies ....................................................................................................................... 43 Balancing Management Discretion and Public Participation ............................................................... 44 Guideline 17: Solicit Public Participation in Tax-Exempt Leasing Decisions ........................... 46 Option 1: Schedule Public Hearings on the Capital Budget ............................................................. 46 Option 2: Establish a Citizens Oversight Committee on Public Finance ...................................... 47 Option 3: Consider an Advisory Vote for Controversial Projects .................................................... 47 Chapter V: School District Guidelines .............................................................. 50 Role of Tax-Exempt Leasing in School Finance ..................................................................................... 50 Richmond Unified School District Default ............................................................................................... 51 Lessons from the Richmond USD Default ............................................................................................ 52 Overview of Chapter V Guidelines ............................................................................................................ 52 Guideline 18: Conform to AB 1200 Criteria for Long-Term Borrowing ................................... 53 Guideline 19: Subject COP Bridge Loans to the Same Financial Review as Long-Term Obligations ....................................................................................................... 54 Guideline 20: Evaluate the Marketing Implications of Noneviction Clauses ............................ 55 Glossary .......................................................................................................................................................... 57 Index ........................................................................................................................................................... 68 Figures and Tables
Figure 1: Vendor-Financed Lease Structure ............................................................................................ 3 Figure 2: Third-Party Lease Structure ...................................................................................................... 3 Figure 3: Certificate of Participation Lease Structure ........................................................................... 4 Figure 4: Local Agency Tax-Exempt Leasing, 1982-1992 ................................................................... 7 Table 1: Selected Statutory Authorizations To Lease Property California Local Governments ................................................................................................ 35 Table 2: AB 1200 Criteria for Reviewing Proposed Long-Term School District Debt ............................................................................................................................... 54 i
EXECUTIVE SUMMARY
Government agencies acquire needed capital assets in one of two ways: by entering into a rental agreement to obtain use, but not ownership, of the asset; or by purchasing the asset, either outright or through a financing arrangement, to obtain use and ownership. Leasing, the most malleable of financing tools, can accommodate both options. Government agencies regularly enter into operating leases, or true leases, to rent property such as equipment and office space. And agencies execute lease-purchase agreements, or tax-exempt leases, to finance not only minor equipment procurements, but also the construction or acquisition costs of major capital projects, such as schools and courthouses. In this application, tax-exempt leasing, often involving the sale of Certificates of Participation (COPs), serves as an alternative to issuing municipal bonds.
These Guidelines are intended to help public officials understand the promise and perils of tax-exempt leasing, and to apply this tool judiciously. The Commission chooses to promulgate voluntary Guidelines, rather than advocate statutory reforms, in recognition that governmental leasing in California has been well managed to date. The number of troubled financings have been relatively few, considering the volume of leasing undertaken in the state. This track record reflects not only the professionalism of elected officials and their staffs, but also the discipline imposed by the financial markets.
CHAPTER I: FINANCIAL MANAGEMENT GUIDELINES
The fine legal distinctions between leases and debt are not material to the financial considerations that should discipline governmental leasing practices. In face of competing demands for their limited general fund resources, government agencies can afford only so many long-term lease obligations. Before assuming such obligations, agencies should assess their general fund conditions and establish reasonable limits on their leasing activity. Moreover, agencies should subject leasing decisions to central planning and control procedures, to prevent the unplanned accumulation of lease obligations, which are fixed commitments that diminish needed budgetary flexibility. Observance of these review and oversight procedures can help agencies manage the financial risks posed by tax-exempt leasing.
Guideline 1: Identify the General Fund Lease Capacity
A key to successfully managing tax-exempt leasing is to identify that portion of general fund revenues which safely can be devoted to lease payments on an annual basis. This ratio, called the general fund lease capacity , serves as the benchmark for evaluating changes in the actual ratio of lease payments to general fund revenues in any year, or the general fund lease burden. Agencies should establish or revise their general fund lease capacities in the course of preparing their annual capital budgets. Agencies should monitor their general fund lease burdens on an ongoing basis, and evaluate tax-exempt leasing proposals in terms of their effect on this ratio. Simply stated, agencies should keep their general lease burdens within their general fund lease capacities. These ratios offer a simple but effective means of constraining long-term lease obligations, and serve as common reference points for elected officials, staff, citizens and investors. ii
Guideline 2: Determine the Necessity for the Proposed Project Tax-exempt leasing offers one option for financing the construction or acquisition of capital projects.
Projects financed in this manner, however, may not always receive the same review and oversight as those financed through conventional forms of debt, since leases are exempt from voter approval and other procedural requirements that apply to debt issuance. If an agency does not centralize the review and oversight of tax-exempt leasing proposals, an individual department may be able to execute a tax-exempt lease for a project that it favors, but which represents a low priority from an agencywide perspective. Projects of dubious merit are less likely to be financed through conventional forms of debt, since elected officials are reluctant to authorize such measures, or place them before the voters—who, if given the chance, are likely to reject them anyway. It is important to emphasize, therefore, that the necessity for the project, rather than the expediency of its financing, should justify the funding decision.
Guideline 3: Evaluate the Cost-Effectiveness of Tax-Exempt Leasing The goal of any asset acquisition decision is to acquire the asset at the lowest possible cost. To translate this goal into policy, an agency must evaluate the cost-effectiveness of different procurement options. If an agency has enough cash on hand to purchase the asset outright, this evaluation is pretty straightforward — a matter of identifying the lowest price tag or bid. But if the asset is to be financed through debt or a tax-exempt lease, this evaluation is considerably more complex, involving the comparison of transaction costs and cash flows over time. Agencies should evaluate the cost-effectiveness of tax-exempt leasing for major capital projects through their capital budgeting processes. Agencies may choose to review the cost-effectiveness of smaller, more routine leasing decisions periodically, rather than on a case-by-case basis, to conserve administrative resources.
Guideline 4: Do Not Fund Operating Expenses With Long-Term Lease Obligations Most finance professionals strongly discourage the use of long-term obligations to fund current operating expenses. Although this admonition applies to all forms of public borrowing, it is particularly relevant to leasing, which offers the only practical method of deficit financing for local agencies in California.
Specifically, agencies can engineer sale-leasebacks or lease-leasebacks of existing assets to generate the cash needed to paper over an operating deficit. The well-publicized Richmond Unified School District COP default in 1991 involved just such an asset transfer . Deficit financing in this manner reflects an unwillingness or inability on the part of management to address the underlying discrepancy between revenues and expenditure obligations.
Guideline 5: Subject All Leases to Fiscal Controls
In order to make sound leasing decisions, agencies need financial reports which accurately reflect the scope of their leasing activity. Channeling all leases, both large or small, through centralized oversight and accounting systems allows agencies to generate such reports and serves as a check against the unplanned accumulation of general fund lease obligations. Central oversight also allows the similar spending requests of separate departments to be grouped into larger transactions or lease pools to achieve economies of scale in leasing. Typically, the finance department is best suited to this oversight role, though the cooperation of the purchasing department also is desirable.
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CHAPTER II: STRUCTURING AND MARKETING GUIDELINES
After determining through the capital budget review that tax-exempt leasing offers the best financing alternative for a given project, an agency faces a number of considerations in preparing the issue for sale. Many of these considerations arise whenever an agency taps the capital markets. For any bond issue, it is necessary to (1) size the issue, (2) design a maturity structure, (3) select the method of sale, and (4) retain professional assistance. But the structuring and marketing of tax-exempt lease obligations involves additional consider- ations, which are addressed in this chapter. The goal of these efforts is to achieve the best financing terms possible.
Guideline 6: Incorporate Necessary Security Features
The presence of abatement risk distinguishes tax-exempt lease obligations from debt, and therefore exempts tax-exempt leasing from the procedural requirements which apply when issuing debt. But investors are not willing to extend loans subject to abatement risk merely so that governmental borrowers can avoid legal debt restrictions. To address investor concerns, government agencies should incorporate capitalized interest accounts, insurance policies and reserve funds into their tax-exempt lease offerings. By increasing the size of the borrowing, these security features represent an added cost to the governmental issuer, as all funds borrowed must be repaid with interest. These security features, however, also attract more favorable interest rates (by minimizing investor risk) and protect the issuer from certain risks, as well.
Guideline 7: Consider Earmarking General and Special Fund Repayment Sources For certain types of projects, agencies may be able to earmark revenue sources within the broader categories of general and special funds for the payment of COPs. By internally earmarking specific general fund revenue sources for the payment of tax-exempt lease COPs, agencies can require those who benefit from a particular project to pay for it. By legally pledging certain special fund revenue sources — specifically Federal Transit Administration funds and state gas tax revenues — to the payment of installment sale COPs, agencies can capitalize revenue streams which otherwise must be spent on a pay-as-you-go basis.