NEW ISSUE – BOOK-ENTRY ONLY Ratings:Fitch: “AA+”

Moody’s: “Aa1”Standard & Poor’s: “AA+”

See “RATINGS” herein

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions and assuming certain representations and compliance with certain covenants and requirements described in this Official Statement, interest on the Series 2009 Bonds 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 and corporations. In the further opinion of Bond Counsel, interest on the Series 2009 Bonds is exempt from State of California personal income tax. The Authority has designated the 2009 Bonds as “bank qualified” under the provisions of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended. See “BANK QUALIFIED OBLIGATIONS” and “TAX MATTERS.”

$9,155,000SANTA MONICA PUBLIC FINANCING AUTHORITY

LEASE REVENUE REFUNDING BONDS, SERIES 2009(Public Safety Facility Project)

(Bank Qualified)Dated: December 16, 2009 Due: July 1, as shown below

The Santa Monica Public Financing Authority Lease Revenue Refunding Bonds, Series 2009 (Public Safety Facility Project) (the “Series 2009 Bonds”) are payable from base rental payments (the “Base Rental Payments”) to be made by the City of Santa Monica (the “City”) for the right to the use of certain real property (the “Site”) on which the Project (defined below) is located (the Site and the Project together, the “Property”) pursuant to a Lease Agreement, dated as of September 1, 1999, as amended by a First Amendment to Lease Agreement, dated as of January 1, 2002, and as further amended by a Second Amendment to Lease Agreement, dated as of December 1, 2009 (as so amended, the “Lease Agreement”), by and between the City, as lessee, and the Santa Monica Public Financing Authority (the “Authority”), as lessor. See “SECURITY FOR THE SERIES 2009 BONDS.” The Series 2009 Bonds are being issued to provide funds to (i) refinance the Authority’s outstanding Lease Revenue Bonds, Series 1999 (Public Safety Facility Project) (the “Refunded Bonds”) and (ii) pay the costs incurred in connection with the issuance of the Series 2009 Bonds. See “THE REFUNDING PLAN.” The City has covenanted under the Lease Agreement to make all Base Rental Payments provided for therein, to include all such payments as a separate line item in its annual budgets, and to make all the necessary annual appropriations for such Base Rental Payments. The City’s obligation to make Base Rental Payments is subject to abatement during any period in which, by reason of material damage to, or destruction or condemnation of, the Property, or any defects in title to the Property, there is substantial interference with the City’s right to use and occupy any portion of the Property. See “RISK FACTORS—Abatement.”

The Series 2009 Bonds are being issued in fully registered book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). Interest on the Series 2009 Bonds is payable semiannually on January 1 and July 1 of each year, commencing July 1, 2010. Purchasers will not receive certificates representing their interest in the Series 2009 Bonds. Individual purchases will be in principal amounts of $5,000 or integral multiples thereof. Principal of and interest and premium, if any, on the Series 2009 Bonds will be paid by The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) to DTC for subsequent disbursement to DTC Participants who are obligated to remit such payments to the beneficial owners of the Series 2009 Bonds. See “THE SERIES 2009 BONDS—Book-Entry Only System” herein.

The Series 2009 Bonds will be issued on a parity with the Authority’s Series 2002A Bonds (defined herein), originally issued in January, 2002 pursuant to the Indenture, dated as of September 1, 1999 (as amended, the “Indenture”) by and between the Authority, the City and the Trustee, in the original aggregate principal amount of $17,310,000 and currently outstanding in the aggregate principal amount of $12,345,000, and any additional bonds (“Additional Bonds”) issued pursuant to the Indenture. The Series 2002A Bonds, the Series 2009 Bonds and any such Additional Bonds are collectively referred to as the “Bonds.”

The Series 2009 Bonds are subject to extraordinary redemption prior to maturity as described herein. See “THE SERIES 2009 BONDS—Redemption” herein.The Series 2009 Bonds are special obligations of the Authority, payable solely from Base Rental Payments and the other assets pledged therefor under the

Indenture. Neither the faith and credit nor the taxing power of the Authority, the City or the State of California, or any political subdivision thereof, is pledged to the payment of the Series 2009 Bonds. The Authority has no taxing power.

The obligation of the City to make the Base Rental Payments does not constitute a debt of the City or the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the City or the State of California is obligated to levy or pledge any form of taxation or for which the City or the State of California has levied or pledged any form of taxation.

MATURITY SCHEDULE

Maturity Date (July 1)

Principal Amount

Interest Rate Yield CUSIP†

Maturity Date (July 1)

Principal Amount

Interest Rate Yield CUSIP†

2010 $550,000 2.00% 0.29% 802437 CN1 2016 $775,000 3.00% 2.34% 802437 CU52011 665,000 2.00 0.63 802437 CP6 2017 800,000 5.00 2.66 802437 CV32012 685,000 2.00 0.93 802437 CQ4 2018 840,000 3.25 2.90 802437 CW12013 695,000 3.00 1.21 802437 CR2 2019 870,000 3.50 3.11 802437 CX92014 715,000 3.00 1.57 802437 CS0 2020 895,000 4.00 3.26 802437 CY72015 735,000 5.00 2.00 802437 CT8 2021 930,000 4.00 3.41 802437 CZ4

THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION.

The Series 2009 Bonds will be offered when, as and if issued and received by the Underwriter, subject to the approval as to their validity by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel. Stradling Yocca Carlson and Rauth, a Professional Corporation is also acting as Disclosure Counsel to the City. Certain legal matters will be passed upon for the City by its City Attorney. Public Resources Advisory Group has served as financial advisor to the City in connection with the issuance of the Series 2009 Bonds. It is anticipated that the Series 2009 Bonds in definitive form will be available for delivery to DTC in New York, New York on or about December 16, 2009.

Dated: December 3, 2009† Copyright 2009, American Bankers Association. CUSIP® data herein in provided by Standard & Poor’s, CUSIP® Service Bureau, a division of The McGraw-Hill Companies,

Inc. The City, Authority and the Underwriter take no responsibility for the accuracy of such data.

No dealer, broker, salesperson or other person has been authorized by the City or the Authority to give any information or to make any representations in connection with the offer or sale of the Series 2009 Bonds other than those contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by the City or the Authority. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Series 2009 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

This Official Statement is not to be construed as a contract with the purchasers or owners of the Series 2009 Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact.

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

This Official Statement and the information contained herein are subject to completion or amendment without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or the Authority or any other parties described herein since the date hereof. These securities may not be sold nor may an offer to buy be accepted prior to the time the Official Statement is delivered in final form. This Official Statement is being submitted in connection with the sale of the Series 2009 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the City. All summaries of documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions.

Certain statements included or incorporated by reference in this Official Statement constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “project,” “budget,” “intend” or similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information under the caption “CITY OF SANTA MONICA FINANCES.”

THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE CITY DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT. IN EVALUATING SUCH STATEMENTS, POTENTIAL INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS WHICH COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.

IN CONNECTION WITH THE OFFERING OF THE SERIES 2009 BONDS, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2009 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE SERIES 2009 BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICE STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

THE SERIES 2009 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

The City maintains a website; however, information presented there is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the Series 2009 Bonds.

CITY OF SANTA MONICA (County of Los Angeles, California)

City Council

Ken Genser, Mayor

Pam O’Connor, Mayor Pro Tempore Robert T. Holbrook

Richard Bloom Kevin McKeown

Gleam Davis Bobby Shriver

Santa Monica Public Financing Authority

Ken Genser, Chairperson

Pam O’Connor, Chairperson Pro Tempore Robert T. Holbrook

Richard Bloom Kevin McKeown

Gleam Davis Bobby Shriver

City Manager/Authority Executive Director P. Lamont Ewell

City Attorney/Authority Attorney Marsha Jones Moutrie

City Clerk/Authority Secretary Maria M. Stewart

Director of Finance/Authority Treasurer/City Treasurer Carol Swindell

Financial Advisor

PROFESSIONAL SERVICES

Public Resources Advisory Group Los Angeles, California

Bond Counsel and Disclosure Counsel Stradling Yocca Carlson & Rauth, a Professional Corporation

Newport Beach, California

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

Los Angeles, California

(THIS PAGE INTENTIONALLY LEFT BLANK)

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TABLE OF CONTENTS

Page

INTRODUCTION .................................................................................................................................................. 1 Changes Since Preliminary Official Statement .................................................................................................. 3

THE SERIES 2009 BONDS ................................................................................................................................... 3 General ................................................................................................................................................................ 3 Registration, Transfers and Exchanges .............................................................................................................. 4 Redemption ......................................................................................................................................................... 4 Book-Entry Only System .................................................................................................................................... 5 Transfer and Exchange of Bonds ........................................................................................................................ 5

SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2009 BONDS.............................................. 6 Pledge of Revenues ............................................................................................................................................. 6 Abatement ........................................................................................................................................................... 6 Substitution and Removal of Property................................................................................................................ 7 Action on Default ................................................................................................................................................ 8 Reserve Fund ...................................................................................................................................................... 8 Base Rental Payments ......................................................................................................................................... 9 Additional Rental Payments ............................................................................................................................... 9 Insurance ........................................................................................................................................................... 10

SOURCES AND USES OF FUNDS .................................................................................................................... 11 BASE RENTAL PAYMENT SCHEDULE ......................................................................................................... 11 THE REFUNDING PLAN ................................................................................................................................... 12 THE PROPERTY ................................................................................................................................................. 12 THE AUTHORITY .............................................................................................................................................. 13 CITY OF SANTA MONICA ............................................................................................................................... 13

General .............................................................................................................................................................. 13 Government and Administration ...................................................................................................................... 13 Population ......................................................................................................................................................... 14 City Enterprise Operations ............................................................................................................................... 14 Retirement System ............................................................................................................................................ 15 Pension Funding Information ........................................................................................................................... 16 Other Post Employment Benefits ..................................................................................................................... 16 Medical Trusts .................................................................................................................................................. 17 Labor Relations ................................................................................................................................................. 17 Industry and Employment ................................................................................................................................. 17 Effective Buying Income .................................................................................................................................. 21 Education .......................................................................................................................................................... 21 Culture and Recreation ..................................................................................................................................... 22 Taxable Transactions ........................................................................................................................................ 22 Building Permit Activity ................................................................................................................................... 24 Principal Property Taxpayers ........................................................................................................................... 25 Utilities .............................................................................................................................................................. 25

CITY OF SANTA MONICA FINANCES ........................................................................................................... 25 Accounting Policies and Financial Reporting .................................................................................................. 26 Budgetary Process ............................................................................................................................................. 26 Assessed Valuations ......................................................................................................................................... 27 Ad Valorem Property Taxes; Proposition 1A .................................................................................................. 29 Tax Receipts...................................................................................................................................................... 30 Vehicle License Fee Reduction ........................................................................................................................ 32 Long-Term Debt ............................................................................................................................................... 33 General Fund Financial Summary .................................................................................................................... 36

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Investment of City Funds .................................................................................................................................. 39 Insurance ........................................................................................................................................................... 40

RISK FACTORS .................................................................................................................................................. 41 General Considerations — Security for the Series 2009 Bonds ...................................................................... 41 Abatement ......................................................................................................................................................... 42 Seismic Activity and Natural Disasters ............................................................................................................ 42 Other Financial Matters .................................................................................................................................... 43 State Budget ...................................................................................................................................................... 43 Substitution, Addition and Removal of Property; Additional Bonds .............................................................. 45 Limited Recourse on Default; No Acceleration of Base Rental ...................................................................... 46 Possible Insufficiency of Insurance Proceeds .................................................................................................. 46 Limitations on Remedies .................................................................................................................................. 47 Loss of Tax Exemption ..................................................................................................................................... 47 No Liability of Authority to the Owners .......................................................................................................... 47

CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS ............ 47 Article XIIIA of the California Constitution .................................................................................................... 47 Article XIIIB of the California Constitution .................................................................................................... 48 Proposition 62 ................................................................................................................................................... 48 Proposition 218 ................................................................................................................................................. 49 Unitary Property................................................................................................................................................ 50 Future Initiatives ............................................................................................................................................... 50

TAX MATTERS ................................................................................................................................................... 50 BANK QUALIFIED OBLIGATIONS ................................................................................................................. 52 CERTAIN LEGAL MATTERS ........................................................................................................................... 52 ABSENCE OF LITIGATION .............................................................................................................................. 52 UNDERWRITING ............................................................................................................................................... 52 RATINGS ............................................................................................................................................................. 53 FINANCIAL ADVISOR ...................................................................................................................................... 53 CONTINUING DISCLOSURE ............................................................................................................................ 53 FINANCIAL STATEMENTS OF THE CITY .................................................................................................... 53 MISCELLANEOUS ............................................................................................................................................. 54 APPENDIX A SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS............................................ A-1 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE YEAR

ENDED JUNE 30, 2008 ...................................................................................................... B-1 APPENDIX C PROPOSED FORM OF BOND COUNSEL OPINION ..................................................... C-1 APPENDIX D FORM OF CONTINUING DISCLOSURE CERTIFICATE ............................................. D-1 APPENDIX E BOOK-ENTRY ONLY SYSTEM ..................................................................................... E-1

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OFFICIAL STATEMENT

$9,155,000 SANTA MONICA PUBLIC FINANCING AUTHORITY LEASE REVENUE REFUNDING BONDS, SERIES 2009

(PUBLIC SAFETY FACILITY PROJECT)(Bank Qualified)

INTRODUCTION

This Official Statement (which includes the cover page and Appendices hereto) (the “Official Statement”), provides certain information concerning the sale and delivery of $9,155,000 aggregate principal amount of Santa Monica Public Financing Authority Lease Revenue Refunding Bonds, Series 2009 (Public Safety Facility Project) (the “Series 2009 Bonds”).

The Series 2009 Bonds are being issued in fully registered book-entry only form, initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). Interest on the Series 2009 Bonds is payable semiannually on January 1 and July 1 of each year, commencing July 1, 2010. Purchasers will not receive certificates representing their interest in the Series 2009 Bonds. Individual purchases will be in principal amounts of $5,000 or integral multiples thereof. Principal of and interest on the Series 2009 Bonds will be paid by The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) to DTC for subsequent disbursement to DTC Participants who are obligated to remit such payments to the beneficial owners of the Series 2009 Bonds. See “THE SERIES 2009 BONDS—Book-Entry Only System” herein. The Series 2009 Bonds are subject to redemption prior to maturity as described herein. See “THE SERIES 2009 BONDS—Redemption.”

The net proceeds of the sale of the Series 2009 Bonds will be used to (i) refinance the Authority’s outstanding Lease Revenue Bonds, Series 1999 (Public Safety Facility Project) (the “Refunded Bonds”) and (ii) pay the costs incurred in connection with the issuance of the Series 2009 Bonds.

The Authority issued the Refunded Bonds in 1999 pursuant to an Indenture, dated as of September 1, 1999 (the “Original Indenture”) to (i) finance a portion of the costs of the acquisition, construction and installation of a public safety facility and related improvements, facilities and equipment (the “Project”), (ii) fund a reserve fund for the Refunded Bonds, and (iii) pay the costs of issuance of the Refunded Bonds. In 2002, the Authority issued its Lease Revenue Bonds, Series 2002A (Public Safety Facility Project), pursuant to the Original Indenture (defined below), as amended by a First Supplemental Indenture, dated as of January 1, 2002, in the original aggregate principal amount of $17,310,000 and currently outstanding in the aggregate principal amount of $12,345,000 (the “Series 2002A Bonds”) to finance additional costs of the Project (including capitalized interest), fund an additional contribution to the Reserve Fund for the Bonds, and pay certain costs of issuance.

The Series 2009 Bonds are payable from base rental payments (the “Base Rental Payments”) to be made by the City for the right to the use of certain real property on which the Project is located (the “Site”) and the Project (together, the Site and the Project comprise the “Property”) pursuant to a Lease Agreement, dated as of September 1, 1999 (the “Original Lease Agreement”), as amended by a First Amendment to Lease Agreement, dated as of January 1, 2002, as further amended by a Second Amendment to Lease Agreement, dated as of December 1, 2009 (as so amended, the “Lease Agreement”), between the City, as lessee, and the Santa Monica Public Financing Authority (the “Authority”), as lessor.

The Series 2009 Bonds will be issued pursuant to an Indenture, dated as of September 1, 1999 (the “Original Indenture”), as amended by a First Supplemental Indenture, dated as of January 1, 2002, (the “First Supplemental Indenture”) and as further amended by a Second Supplemental Indenture, dated as of December 1, 2009 (as so amended, the “Indenture”), by and among the Authority, the City and the Trustee.

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The Series 2009 Bonds will be issued on a parity with the Series 2002A Bonds. Pursuant to the Indenture, the Authority may issue additional bonds (the “Additional Bonds”) payable from the Base Rental Payments on a parity with the Series 2002A Bonds and the Series 2009 Bonds (the Series 2002A Bonds, the Series 2009 Bonds and any such Additional Bonds being collectively referred to as the “Bonds”).

Pursuant to a Ground Lease, dated as of September 1, 1999 (the “Ground Lease”), the City has leased the real property on which the Project is located (the “Site”) to the Authority. The Authority has subleased the Site and the Project (together, the “Property”) to the City under the Lease Agreement. The Lease Agreement obligates the City to make Base Rental Payments.

The Trustee and the Authority have entered into an Assignment Agreement, dated as of September 1, 1999, as amended by a First Amendment to Assignment Agreement, dated as of January 1, 2002 and by a Second Amendment to Assignment Agreement, dated as of December 1, 2009, pursuant to which the Authority has assigned to the Trustee for the benefit of the Bond Owners substantially all of the Authority’s right, title and interest in and to the Ground Lease and the Lease Agreement, including its right to receive the Base Rental Payments due under the Lease Agreement.

The City covenants under the Lease Agreement to take such action as may be necessary to include all Rental Payments, which are comprised of Base Rental Payments and Additional Rental Payments (which include taxes and assessments affecting the Property, administrative costs of the Authority relating to the Property, fees and expenses of the Trustee and other amounts payable under the Lease Agreement), due under the Lease Agreement as a separate line item in its annual budgets and to make the necessary annual appropriations therefor, subject to abatement as described herein.

Base Rental Payments are subject to complete or partial abatement in the event and to the extent that there is substantial interference with the City’s right to use and occupy the Property or any portion thereof. See “RISK FACTORS—Abatement.” Abatement of Base Rental Payments under the Lease Agreement, to the extent payment is not made from alternative sources as set forth below, would result in all Bond Owners receiving less than the full amount of principal of and interest on the Bonds. To the extent proceeds of insurance are available or there are moneys in the Reserve Fund established under the Indenture, Base Rental Payments (or a portion thereof) may be made during periods of abatement.

THE SERIES 2009 BONDS ARE SPECIAL OBLIGATIONS OF THE AUTHORITY, PAYABLE SOLELY FROM BASE RENTAL PAYMENTS AND THE OTHER ASSETS PLEDGED THEREFOR UNDER THE INDENTURE. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE AUTHORITY, THE CITY OR THE STATE OF CALIFORNIA (THE “STATE”), OR ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE SERIES 2009 BONDS. THE AUTHORITY HAS NO TAXING POWER.

THE OBLIGATION OF THE CITY TO MAKE THE BASE RENTAL PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE CITY OR THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION, AND DOES NOT CONSTITUTE AN OBLIGATION FOR WHICH THE CITY OR THE STATE IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY OR THE STATE HAS LEVIED OR PLEDGED ANY FORM OF TAXATION.

The City has agreed to provide, or cause to be provided, to the Municipal Securities Rulemaking Board for purposes of Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission certain annual financial information and operating data and, in a timely manner, notice of certain material events. These covenants have been made in order to assist the Underwriter in complying with SEC Rule 15c2-12(b)(5). See “CONTINUING DISCLOSURE” herein for a description of the specific nature of the annual report and notices of material events and a summary description of the terms of the disclosure agreement pursuant to which such reports are to be made.

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The Bank of New York Mellon Trust Company, Los Angeles, California, will act as Trustee with respect to the Series 2009 Bonds. The Series 2009 Bonds will be issued subject to the approval as to their legality by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel. Certain legal matters will be passed upon for the City and the Authority by the City Attorney and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Disclosure Counsel. The City’s financial statements for the fiscal year ended June 30, 2008 included as Appendix B hereto have been audited by Mayer Hoffmann McCann, P.C., certified public accountants, Irvine, California (the “Auditor”). See Appendix B—“AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2008” herein. The City’s financial statements are public documents and are included within this Official Statement without the prior approval of the Auditor. Accordingly, the Auditor has not performed any post-audit of the financial condition of the City.

Certain events could affect the ability of the City to make the Base Rental Payments when due. See “RISK FACTORS” for a discussion of certain factors that should be considered, in addition to other matters set forth herein, in evaluating an investment in the Series 2009 Bonds.

The presentation of information, including tables of receipt of revenues, is intended to show recent historical information and, except for the estimated actual results for Fiscal Year 2008-09 and budget discussion for Fiscal Year 2009-10, is not intended to indicate future or continuing trends in the financial position or other affairs of the City. No representation is made that past experience, as it might be shown by such financial and other information, will necessarily continue or be repeated in the future.

The summaries or references to the Indenture, Lease Agreement, the Ground Lease, the Assignment Agreement and other documents, agreements and statutes referred to herein, and the description of the Series 2009 Bonds included in this Official Statement, do not purport to be comprehensive or definitive, and such summaries, references and descriptions are qualified in their entireties by reference to each such document or statute. All capitalized terms used in this Official Statement (unless otherwise defined herein) which are defined in the Indenture or the Lease Agreement shall have the meanings set forth therein, some of which are summarized in APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS.”

Changes Since Preliminary Official Statement

Under “TAX MATTERS”, the third sentence of the first paragraph has been revised. Bond Counsel notes that, with respect to corporations, interest on the Series 2009 Bonds may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations.

Similar revision is made to the form of Bond Counsel opinion attached as Appendix E.

THE SERIES 2009 BONDS

General

The Series 2009 Bonds shall be issued in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof, so long as no Series 2009 Bond shall have more than one maturity date. The Series 2009 Bonds will be dated as of and bear interest (calculated on the basis of a 360-day year comprised of twelve 30-day months) from the dated date thereof at the rates set forth on the cover page hereof. Interest on the Series 2009 Bonds will be paid semiannually on January 1 and July 1 (each, an “Interest Payment Date”) of each year, commencing July 1, 2010.

Interest on the Series 2009 Bonds will be payable from the Interest Payment Date next preceding the date of authentication thereof unless (i) a Series 2009 Bond is authenticated on or before an Interest Payment Date and after the close of business on the preceding Record Date, in which event it will bear interest from

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such Interest Payment Date, (ii) a Series 2009 Bond is authenticated on or before the first Record Date, in which event interest thereon will be payable from the dated date thereof, or (iii) interest on any Series 2009 Bond is in default as of the date of authentication thereof, in which event interest thereon will be payable from the date to which interest has been paid in full, payable on each Interest Payment Date. Interest will be paid in lawful money of the United States on each Interest Payment Date to the Persons in whose names the ownership of the Series 2009 Bonds is registered on the Registration Books at the close of business on the immediately preceding Record Date, except as provided below. Interest will be paid by check of the Trustee mailed by first class mail, postage prepaid, on each Interest Payment Date to the Series 2009 Bond Owners at their respective addresses shown on the Registration Books as of the close of business on the preceding Record Date.

The principal and premium, if any, of the Series 2009 Bonds will be payable in lawful money of the United States of America upon presentation and surrender thereof upon maturity or earlier redemption at the Office of the Trustee. The Series 2009 Bonds will be subject to extraordinary redemption as set forth herein.

Registration, Transfers and Exchanges

The Series 2009 Bonds will be issued as fully registered bonds, registered in the name of Cede & Co. as nominee of DTC, and will be available to actual purchasers of the Series 2009 Bonds (the “Beneficial Owners”) in the denominations set forth above, under the book-entry system maintained by DTC, only through brokers and dealers who are or act through DTC Participants (as defined herein) as described herein. Beneficial Owners will not be entitled to receive physical delivery of the Series 2009 Bonds. See “THE SERIES 2009 BONDS—Book-Entry Only System.”

Redemption

Extraordinary Redemption from Condemnation Award or Insurance Proceeds. The Series 2009 Bonds are subject to redemption, in whole or in part, on any date, in denominations of $5,000 or any integral multiple thereof, from and to the extent of any insurance proceeds or condemnation award received with respect to all or a portion of the Property, deposited by the Trustee in the Redemption Fund pursuant to the Indenture, at a Redemption Price equal to the principal amount of the Series 2009 Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium. The Series 2009 Bonds are not otherwise subject to optional redemption by the City prior to maturity.

Selection of Bonds for Redemption. Whenever provision is made in the Indenture for the redemption of less than all of the Bonds, the Trustee shall select the Bonds to be redeemed from all Bonds not previously called for redemption (a) with respect to any redemption from and to the extent of any insurance proceeds or condemnation award received with respect to all or a portion of the Property and the corresponding provision of any Supplemental Indenture pursuant to which Additional Bonds are issued, among maturities of all Series of Bonds on a pro rata basis as nearly as practicable, and (b) with respect to any other redemption of Additional Bonds, among maturities as provided in the Supplemental Indenture pursuant to which such Additional Bonds are issued, and by lot among Bonds of the same Series with the same maturity in any manner which the Trustee in its sole discretion shall deem appropriate and fair. For purposes of such selection, all Bonds shall be deemed to be comprised of separate $5,000 denominations and such separate denominations shall be treated as separate Bonds which may be separately redeemed.

Notice of Redemption. So long as the Bonds are held in book-entry form, notices of redemption will be mailed by the Trustee only to DTC and not to any Beneficial Owners. The Trustee on behalf and at the expense of the Authority shall mail (by first class mail) notice of any redemption to the respective Owners of any Bonds designated for redemption at their respective addresses appearing on the Registration Books, to the Securities Depositories and to one or more Information Services, at least 15 but not more than 60 days prior to the date fixed for redemption. Such notice shall state the date of the notice, the redemption date, the redemption place and the Redemption Price and shall designate the CUSIP numbers, the Bond numbers and the maturity or maturities (except in the event of redemption of all of the Bonds of such maturity or maturities

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in whole) of the Bonds to be redeemed, and shall require that such Bonds be then surrendered at the principal corporate trust office of the Trustee for redemption at the Redemption Price, giving notice also that further interest on such Bonds will not accrue from and after the date fixed for redemption. Neither the failure to receive any notice so mailed, nor any defect in such notice, shall affect the validity of the proceedings for the redemption of the Bonds or the cessation of accrual of interest thereon from and after the date fixed for redemption.

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

Effect of Notice of Redemption. Notice having been mailed as aforesaid, and moneys for the Redemption Price, and the interest to the applicable date fixed for redemption, having been set aside in the Redemption Fund, the Bonds shall become due and payable on said date, and, upon presentation and surrender thereof at the principal corporate trust office of the Trustee, said Bonds shall be paid at the Redemption Price thereof, together with interest accrued and unpaid to said date.

If, on said date fixed for redemption, moneys for the Redemption Price of all the Bonds to be redeemed, together with interest to said date, shall be held by the Trustee so as to be available therefor on such date, and, if notice of redemption thereof shall have been mailed as aforesaid and not canceled, then, from and after said date, interest on said Bonds shall cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the redemption of Bonds shall be held in trust for the account of the Owners of the Bonds so to be redeemed without liability to such Owners for interest thereon.

Book-Entry Only System

General. DTC will act as securities depository for the Series 2009 Bonds. The Series 2009 Bonds will be issued as fully-registered bonds registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered Series 2009 Bond will be issued for each maturity of the Series 2009 Bonds, each in the initial aggregate principal amount of such maturity, and will be deposited with DTC. See APPENDIX E—“BOOK-ENTRY ONLY SYSTEM.”

Transfer and Exchange of Bonds

The following provisions regarding the exchange and transfer of the Series 2009 Bonds apply only during any period in which the Series 2009 Bonds are not subject to DTC’s book- entry system. While the Series 2009 Bonds are subject DTC’s book-entry system, their exchange and transfer will be effected through DTC and the Participants and will be subject to the procedures, rules and requirements established by DTC.

Any Bond may, in accordance with its terms, be transferred upon the books required to be kept by the Trustee pursuant to the provisions of the Indenture by the Person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer, duly executed in a form acceptable to the Trustee. Whenever any Bond or Bonds shall be surrendered for transfer, the Authority shall execute and the Trustee shall authenticate and shall deliver a new Bond or Bonds of the same Series in a like aggregate principal amount, in any Authorized Denomination. The Trustee shall require the Bond Owner requesting such transfer to pay any tax or other governmental charge required to be paid with respect to such transfer.

The Bonds may be exchanged at the principal corporate trust office of the Trustee for a like aggregate principal amount of Bonds of the same Series of other authorized denominations. The Trustee shall require the payment by the Bond Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange.

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The Trustee shall not be obligated to make any transfer or exchange of Bonds of a Series during the period established by the Trustee for the selection of Bonds of such Series for redemption, or with respect to any Bonds of such Series selected for redemption.

SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2009 BONDS

Pledge of Revenues

The Series 2009 Bonds are payable from and secured by Base Rental Payments and Additional Rental Payments and certain amounts on deposit in the funds and accounts established under the Indenture. Base Rental Payments shall be paid by the City from any and all legally available funds. See, “CITY OF SANTA MONICA,” “CITY OF SANTA MONICA FINANCES” and “RISK FACTORS.” The City has covenanted in the Lease Agreement to take such action as may be necessary to include all Base Rental Payments and Additional Rental Payments due under the Lease Agreement as a separate line item in its annual budgets and to make the necessary annual appropriations therefor.

The Authority, pursuant to the Assignment Agreement, will assign to the Trustee for the benefit of the Series 2009 Bond Owners all of the Authority’s right, title and interest in and to the Ground Lease and the Lease Agreement, including, without limitation, its right to receive Base Rental Payments to be paid by the City under and pursuant to the Lease Agreement; provided that, the Authority will retain the rights to indemnification and to payment of reimbursement of its reasonable costs and expenses under the Lease Agreement. The City will pay Base Rental Payments directly to the Trustee, as assignee of the Authority. See “—Base Rental Payments” below.

The Series 2009 Bonds will be issued on a parity with the Series 2002A Bonds, originally issued in January 2002 pursuant to the Original Indenture, as amended by the First Supplemental Indenture, in the original aggregate principal amount of $17,310,000 and currently outstanding in the aggregate principal amount of $12,345,000. The Series 2002A Bonds are payable from and secured by Base Rental Payments and Additional Rental Payments and certain amounts on deposit in the funds and accounts established under the Indenture on a parity with the Series 2009 Bonds and any Additional Bonds issued pursuant to the Indenture. Pursuant to the Indenture, the Authority may issue Additional Bonds payable from the Base Rental Payments on a parity with the Series 2002A Bonds and the Series 2009 Bonds. See APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—The Indenture—Additional Bonds.”

Subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture, all of the Base Rental Payments and any other amounts (including proceeds of the sale of the Bonds) held in the Base Rental Payment Fund, the Reserve Fund, the Interest Fund, the Principal Fund and the Redemption Fund are pledged by the Authority pursuant to the Indenture to secure the payment of the principal of, premium, if any, and interest on the Bonds in accordance with their terms, the provisions of the Indenture and the Act. Said pledge constitutes a first lien on such assets.

The Series 2009 Bonds are special obligations of the Authority, payable solely from Base Rental Payments and the other assets pledged therefor under the Indenture. Neither the faith and credit nor the taxing power of the Authority, the City or the State, or any political subdivision thereof, is pledged to the payment of the Series 2009 Bonds. The Authority has no taxing power.

Abatement

Base Rental Payments and Additional Rental Payments are paid by the City in each Rental Period for and in consideration of the right to use and occupy the Property and in consideration of the continued right to the quiet use and enjoyment thereof during each such period. Except as otherwise specifically provided in the Lease Agreement, during any period in which, by reason of material damage to, or destruction or condemnation of, the Property, or any defect in title to the Property, there is substantial interference with the

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City’s right to use and occupy any portion of the Property, Rental Payments shall be abated proportionately, and the City waives the benefits of Civil Code Sections 1932(1), 1932(2) and 1933(4) and any and all other rights to terminate the Lease Agreement by virtue of any such interference, and the Lease Agreement shall continue in full force and effect. The amount of such abatement shall be agreed upon by the City and the Authority; provided, however, that the Rental Payments due for any Rental Period shall not exceed the annual fair rental value of that portion of the Property available for use and occupancy by the City during such Rental Period. Such abatement shall continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or destruction of the Property, ending with the substantial completion of the work of repair or replacement of the Property, or the portion thereof so damaged or destroyed; and the term of the Lease Agreement shall be extended as provided in the Lease Agreement, except that the term shall in no event be extended ten years beyond the stated termination date of the Lease Agreement. The Trustee cannot terminate the Lease Agreement in the event of such substantial interference. Abatement of Base Rental Payments and Additional Rental Payments is not an event of default under the Lease Agreement and does not permit the Trustee to take any action or avail itself of any remedy against the City. See APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—The Lease Agreement Rental Abatement.”

Notwithstanding the foregoing, to the extent that moneys are available for the payment of Rental Payments due under the Lease Agreement in any of the funds and accounts established under the Indenture, such Rental Payments will not be abated as provided above but, rather, will be payable by the City as a special obligation payable solely from said funds and accounts.

Substitution and Removal of Property

The Authority and the City may amend the Lease Agreement to substitute alternate real property for any portion of the Property or to release a portion of the Property from the Lease Agreement, upon compliance with all of the conditions set forth in the Lease Agreement and described below. After a substitution or release, the portion of the Property for which the substitution or release has been effected shall be released from the leasehold encumbrance of the Lease Agreement.

The Lease Agreement provides that there shall be no reduction in or abatement of the Base Rental Payments due from the City thereunder as a result of such substitution or release. Any such substitution or release shall be subject to the following specific conditions precedent to such substitution or release:

(a) an independent certified real estate appraiser selected by the City shall have found (and shall have delivered a certificate to the City and the Trustee setting forth its findings) that the Property, as constituted after such substitution or release, (i) has an annual fair rental value greater than or equal to 105% of the maximum Base Rental Payments payable by the City in any Rental Period, and (ii) has a useful life equal to or greater than the useful life of the Property, as constituted prior to such substitution or release;

(b) the City shall have obtained or caused to be obtained a CLTA title insurance policy or policies with respect to any substituted property in the amount of the fair market value of such substituted property (which fair market value shall have been determined by an independent certified real estate appraiser), of the type and with the endorsements described in the Lease Agreement;

(c) the City shall have provided the Trustee with an opinion of counsel to the effect that such substitution or release will not, in and of itself, cause the interest on the Bonds to be included in gross income for federal income tax purposes;

(d) the City shall have given, or shall have made arrangements to be given, any notice of the occurrence of such substitution or release required to be given pursuant to the Continuing Disclosure Certificate;

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(e) the City, the Authority and the Trustee shall have executed, and the City shall have caused to be recorded with the Los Angeles County Recorder, any document necessary to reconvey to the City the portion of the Property being substituted or released and to include any substituted real property in the description of the Property contained in the Lease Agreement and in the Ground Lease; and

(f) the City shall have certified to the Trustee that the substituted real property is of approximately the same degree of essentially to the City as the portion of the Property for which it is being substituted.

See APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—The Lease Agreement—Substitution or Release of the Property”

Action on Default

Should the City default under the Lease Agreement, the Trustee, as assignee of the Authority under the Lease Agreement, may terminate the Lease Agreement and recover certain damages from the City, or may retain the Lease Agreement and hold the City liable for all Base Rental Payments thereunder on an annual basis, and will have the right to re-enter and re-let the Property. In the event such re-letting occurs, the City would be liable for any resulting deficiency in Base Rental Payments. Base Rental Payments may not be accelerated upon a default under the Lease Agreement. See “RISK FACTORS—Limited Recourse on Default; No Acceleration of Base Rental.”

For purposes of certain actions of Bond Owners under the Indenture and the Lease, such as certain consents and amendments and the direction of remedies following default, Series 2009 Bond Owners do not act alone and may not control such matters to the extent such not supported by the requisite number of the Owners of all Bonds, including Series 2002A Bonds (or its related bond insurer) and Additional Bonds, if any.

For a description of the events of default and permitted remedies of the Trustee (as assignee of the Authority) contained in the Lease Agreement and the Indenture, see APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—The Lease Agreement—Default” and “—The Indenture—Events of Default,” “—Other Remedies of the Trustee,” and “Limitation on Suits.”

Reserve Fund

A reserve fund (the “Reserve Fund”) has been established by the Indenture for the Bonds and was funded initially from proceeds of the Refunded Bonds and the Series 2002A Bonds, respectively, in the amount equal to the least of (a) “10% of the proceeds of the issue” within the meaning of Section 148 of the Code, (b) the maximum amount of debt service on the Bonds payable in any one year, and (c) 125% of the average amount of debt service on the Bonds payable in each year (the “Reserve Requirement”). As of the date of issuance of the Series 2009 Bonds, the amount of the Reserve Requirement (calculated with respect to the Series 2002A Bonds and the Series 2009 Bonds) will equal the amount described in (b) above, namely $2,329,085.00 and will be funded from existing amounts on deposit in the Reserve Fund.

The Authority may substitute a Credit Facility for all or part of the moneys on deposit in the Reserve Fund by depositing such Credit Facility with the Trustee so long as, at the time of such substitution, the amount on deposit in the Reserve Fund, together with the amount available under all Credit Facilities, shall be at least equal to the Reserve Requirement.

If, on any Interest Payment Date, the amount on deposit in the Interest Fund is insufficient to pay the interest on the Bonds payable on such Interest Payment Date, the Trustee shall transfer from the Reserve Fund and deposit in the Interest Fund an amount sufficient to make up such deficiency. If, on any July 1, the amount on deposit in the Principal Fund is insufficient to pay the principal amount of the Bonds due on such July 1,

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either as a result of the maturity thereof or mandatory sinking fund redemption, the Trustee shall transfer from the Reserve Fund and deposit in the Principal Fund an amount sufficient to make up such deficiency.

Moneys, if any, on deposit in the Reserve Fund shall be withdrawn and applied by the Trustee for the final payment of principal of and interest on the Bonds.

If the sum of the amount on deposit in the Reserve Fund, plus the amount available under all available Credit Facilities, is less than the Reserve Requirement, the first of Base Rental Payments thereafter received from the City under the Lease Agreement and not needed to pay the principal, if any, of and interest on the Bonds scheduled to be paid on the following Interest Payment Date shall be used to increase the amount on deposit in the Reserve Fund to an amount which, when added to the amount available under all available Credit Facilities, shall equal the Reserve Requirement.

Base Rental Payments

Rental Payments, including Base Rental Payments, shall be paid by the City to the Authority for and in consideration of the right to use and occupy the Property and in consideration of the continued right to the quiet use and enjoyment thereof during each Rental Period for which such Rental Payments are to be paid. Each Base Rental Payment shall be deposited with the Trustee no later than the 15th day of the month next preceding each Interest Payment Date (the “Base Rental Deposit Date”) on which such Base Rental Payment is due. All Base Rental Payments will be paid directly by the City to the Trustee, and if received by the Authority at any time will be transferred by the Authority with the Trustee within one Business Day after the receipt thereof. All Base Rental Payments received by the Trustee will be deposited by the Trustee in the Base Rental Payment Fund.

Pursuant to the Indenture, on the Business Day immediately preceding each Interest Payment Date and on the Business Day immediately preceding each Principal Payment Date, the Trustee will transfer amounts in the Base Rental Payment Fund as are necessary to the Interest Fund and the Principal Fund to provide for the payment of the interest on and principal of the Series 2009 Bonds.

Scheduled Base Rental Payments relating to the Series 2002A Bonds and the Series 2009 Bonds are set forth below under the heading “BASE RENTAL PAYMENT SCHEDULE.”

THE OBLIGATION OF THE CITY TO MAKE THE BASE RENTAL PAYMENTS DOES NOT CONSTITUTE A DEBT OF THE CITY OR THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION, AND DOES NOT CONSTITUTE AN OBLIGATION FOR WHICH THE CITY OR THE STATE IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY OR THE STATE HAS LEVIED OR PLEDGED ANY FORM OF TAXATION.

Additional Rental Payments

For the right to use and occupy the Property, the Lease Agreement requires the City to pay, as Additional Rental payments thereunder, in addition to the Base Rental Payments, such amounts as shall be required for the payment of the following:

(i) All taxes and assessments of any type or nature charged to the Authority or the City or affecting the Property or the respective interests or estates of the Authority or the City therein.

(ii) All reasonable administrative costs of the Authority relating to the Property including, but without limiting the generality of the foregoing, salaries, wages, fees and expenses, compensation and indemnification of the Trustee payable by the Authority under the Indenture, fees of auditors, accountants, attorneys or engineers, and all other necessary and reasonable administrative costs of the

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Authority or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Indenture or the Lease Agreement or to defend the Authority and its members, officers, agents and employees.

(iii) Insurance premiums for all insurance required pursuant to the Lease Agreement.

(iv) Any amounts with respect to the Lease Agreement or the Bonds required to be rebated to the federal government in accordance with section 148(f) of the Internal Revenue Code of 1986.

(v) All other payments required to be paid by the City under the provisions of the Lease Agreement or the Indenture.

Amounts constituting Additional Rental Payments payable under the Lease Agreement will be paid by the City directly to the person or persons to whom such amounts shall be payable. The City will pay all such amounts when due or at such later time as such amounts may be paid without penalty or, in any other case, within 60 days after notice in writing from the Trustee to the City stating the amount of Additional Rental Payments then due and payable and the purpose thereof.

Insurance

The Lease Agreement requires the City to maintain or cause to be maintained fire, lightning and special extended coverage insurance (which shall include coverage for vandalism and malicious mischief, but need not include coverage for earthquake damage) on all improvements constituting any part of the Property in an amount equal to the greater of 100% of the replacement cost of such improvements or 100% of the outstanding principal amount of the Bonds. Each such policy of insurance shall contain a standard replacement cost endorsement providing for no deduction for depreciation and a stipulated amount endorsement. All insurance required to be maintained pursuant to the Lease Agreement may be subject to a deductible in amount not to exceed $500,000. The City’s obligation to maintain the insurance described above may be satisfied by self-insurance, provided such self-insurance complies with the requirements of the Lease Agreement. See APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—The Lease Agreement—Insurance.”

The Lease Agreement requires the City to maintain rental interruption insurance to cover the Authority’s loss, total or partial, of Base Rental Payments resulting from the loss, total or partial, of the use of any part of the Property as a result of any of the hazards covered by the casualty insurance described in the preceding paragraph, in an amount sufficient at all times to pay an amount not less than the product of two times the maximum amount of Base Rental Payments scheduled to be paid during any Rental Period. The City is not permitted to self-insure its obligation to maintain rental interruption insurance.

The City is also required to maintain or cause to be maintained, throughout the term of the Lease Agreement, a standard commercial general liability insurance policy or policies in protection of the City, the Authority and their respective members, officers, agents and employees, and worker’s compensation insurance as described in APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—The Lease Agreement—Insurance.”

The City is required under the Lease Agreement to provide, at its own expense, one or more CLTA title insurance policies for the Property, in the aggregate amount of not less than the initial aggregate principal amount of the Series 2009 Bonds, insuring the fee interest of the City in the Property, the Authority’s leasehold estate in the Property under the Ground Lease, and the City’s subleasehold estate in the Property under the Lease Agreement, subject only to Permitted Encumbrances, and providing that all proceeds thereunder are payable to the Trustee for the benefit of the Owners.

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SOURCES AND USES OF FUNDS

The sources and uses of funds with respect to the Series 2009 Bonds are shown below.

Sources Principal Amount of Series 2009 Bonds $ 9,155,000.00 Plus: Available Series 1999 Bond Amounts 250,589.38 (1)

Plus: Original Issue Premium Total Sources

558,698.75 $ 9,964,288.13

Uses Escrow Fund $ 9,729,439.38 Cost of Issuance Fund 200,565.19 (2) Underwriter’s Discount Total Uses

34,283.56 $ 9,964,288.13

(1) Includes January 1, 2010 Refunded Bonds interest installment. (2)

BASE RENTAL PAYMENT SCHEDULE

Includes legal, financial advisory, rating agency, printing fees and other miscellaneous costs of issuance.

Following is the annual schedule of Base Rental Payments due with respect to the Series 2009 Bonds and the Series 2002A Bonds:

Period Ending (July 1)

Series 2009 Principal

Series 2009 Interest*

Series 2002A Bonds *

Total Payments

2010 $ 550,000.00 $ 168,485.42 $ 1,353,178.76 $ 2,071,664.18 2011 665,000.00 300,050.00 1,355,778.76 2,320,828.76 2012 685,000.00 286,750.00 1,351,978.76 2,323,728.76 2013 695,000.00 273,050.00 1,356,978.76 2,325,028.76 2014 715,000.00 252,200.00 1,354,463.76 2,321,663.76 2015 735,000.00 230,750.00 1,359,563.76 2,325,313.76 2016 775,000.00 194,000.00 1,356,778.76 2,325,778.76 2017 800,000.00 170,750.00 1,356,497.50 2,327,247.50 2018 840,000.00 130,750.00 1,357,897.50 2,328,647.50 2019 870,000.00 103,450.00 1,355,635.00 2,329,085.00 2020 895,000.00 73,000.00 1,355,175.00 2,323,175.00 2021 930,000.00 37,200.00 1,356,512.50 Total

2,323,712.50 $ 9,155,000.00 $ 2,220,435.42 $ 16,270,438.82 $ 27,645,874.24

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THE REFUNDING PLAN

The Series 2009 Bonds are being issued to provide a portion of the moneys, together with certain funds on deposit with The Bank of New York Mellon Trust Company, N.A., acting as escrow agent (the “Escrow Agent”), to redeem the Authority’s outstanding Refunded Bonds in the aggregate principal amount of $9,385,000 at a redemption price equal to the principal amount thereof plus accrued interest and premium of 1.00% on January 1, 2010. The Refunded Bonds are currently outstanding in the aggregate principal amount of $9,385,000 as follows:

Maturity Date (July 1) Principal Amount

2010 $ 585,000 2011 610,000 2012 645,000 2013 675,000 2014 710,000 2015 745,000 2016 785,000 2017 830,000 2018 875,000 2019 925,000 2020 975,000 2021 Total

1,025,000 $ 9,385,000

Pursuant to the Original Indenture, the Authority will deliver a portion of the proceeds of the

Series 2009 Bonds to the Trustee to transfer to the Escrow Agent for deposit in an escrow fund (the “Escrow Fund”) established under the Escrow Agreement, dated as of December 1, 2009, by and between the Authority and the Escrow Agent (the “Escrow Agreement”). Proceeds of the Series 2009 Bonds and other moneys held in the Escrow Fund to redeem the Refunded Bonds will be held in cash. The cash deposited in the Escrow Fund will be sufficient to pay on January 1, 2010 the redemption price of the Refunded Bonds, together with accrued interest and premium through the date of redemption. Amounts in the Escrow Fund will be irrevocably pledged to secure, when due, the payment of the principal of, interest and premium due with respect to the Refunded Bonds.

As a result of the deposit of funds under the Escrow Agreement, all of the Authority’s obligations with respect to the Refunded Bonds, including the pledge and lien on the Base Rental Payments which secure the Authority’s obligations with respect to the Refunded Bonds, will be fully discharged upon the issuance of the Series 2009 Bonds.

THE PROPERTY

The Property is comprised of the Site and the Project. The Site is an approximately one acre parcel of real property located adjacent to City Hall.

The City leases the Site to the Authority pursuant to the Ground Lease. The Authority subleases the Site and the Project (i.e., the Property) to the City pursuant to the Lease Agreement.

The Project, a $66 million 118,000 square foot four-story specialized office building housing the City’s police and fire department central operations, municipal jail, emergency operations center and 100 spaces of subterranean parking, was dedicated in August 2003. Considered a part of the City’s new Civic Center area, the Project is located at 333 Olympic Drive immediately east of City Hall, between the Santa Monica Freeway, Olympic Drive and 4th Streets.

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The Authority’s Refunded Bonds were issued in 1999 and generated Project funds in the amount of $11,772,000. These funds, in conjunction with $30,383,000 of City funds were to be used to finance the Project initially. Due to construction bids that were substantially above construction cost estimates, the Authority issued the Series 2002A Bonds to finance $15,000,000 of the estimated cost increase. The City also provided $3,045,000 of City funds and interest earnings to finance a portion of the cost increase. Final project costs included $2.6 million for construction of an Olympic Drive Extension that runs between Fourth Street and Main Street and $3.3 million for facility equipment.

County Covenant. A Courthouse facility currently owned by the County of Los Angeles is located adjacent to the Site. In 1962, the City entered into and recorded against a portion of the Site a Covenant and Affidavit regarding Maintenance of Yards for Buildings and Limitations (the “Covenant”) whereby the City agreed to maintain a portion of the Site unobstructed from ground to sky. The Covenant remains as long as the Courthouse building exists or the Covenant is terminated by the County Engineer. The Project encroaches on the area covered by the Covenant. The City and the County recorded an Amendment to the Covenant suspending this obligation of the City during the period of time that the Site is used for purposes substantially similar to the Project or if bonds related to the Site are outstanding (the “Suspension Period”). If during the Suspension Period the use of the Site is substantially changed from the current projected use of the Site, the City and the County, or its successor, are required to meet and agree on the change in use in order to maintain the suspension of the Covenant. Pursuant to Chapter 1082 of the Statutes of 2002, the State accepted transfer of court facilities, including the Courthouse facility on or about November 18, 2008. See “RISK FACTORS—Limited Recourse on Default; No Acceleration on Base Rental.”

THE AUTHORITY

The Santa Monica Public Financing Authority was organized pursuant to the provisions of Article I of Chapter 15 of Division 7 of Title 1 of the State Government Code and a Joint Exercise of Powers Agreement, dated as of July 25, 1995, by and between the City and the Redevelopment Agency of the City of Santa Monica. The Authority was organized for the purpose of financing and assisting local agencies in financing capital improvements, working capital, liability or other insurance needs or projects. The Authority has no financial liability to the Owners of the Series 2009 Bonds with respect to the payment of Base Rental Payments by the City or with respect to the performance by the City of the other agreements and covenants it is required to perform.

CITY OF SANTA MONICA

General

The City of Santa Monica is situated on the western side of Los Angeles County, bordered by the City of Los Angeles on three sides and by the Pacific Ocean to the west. The City encompasses an area slightly greater than eight square miles and, as of January 1, 2009, has an estimated population of 92,494 persons.

The Santa Monica Freeway passes through the approximate center of the City on an east-west course and provides direct connection with downtown Los Angeles, approximately 16 miles to the east. About six miles southeast of the City is Los Angeles International Airport, which is easily accessible via the San Diego Freeway, about one mile beyond the eastern border of Santa Monica on a north-south course.

Government and Administration

The City of Santa Monica was incorporated in 1886 and adopted its City Charter in 1945. In 1947 a council-manager form of government was established following a vote of the City’s residents and approval by the California Legislature. The City Council consists of seven members with overlapping terms of four years. Elections are held every two years, at which time three Council members or four Council members are elected.

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After each election, Council members select one of their group to act as Mayor, who then presides over Council meetings.

The City Council appoints a City Manager, City Attorney and City Clerk. The City Manager is responsible for supervising day-to-day operations of the City and for carrying out policies set by the Council.

Population

The following table sets forth population data for the City of Santa Monica.

City of Santa Monica Population (January 1)

Year Population

1970 88,289 1980 88,314 1990 86,905 2000 84,084 2001 85,576 2002 87,994 2003 89,339 2004 90,410 2005 90,678 2006 90,750 2007 91,124 2008 91,439 2009 92,494

Source: 1970-2000 data from US Census Bureau; 2001-2009 data from State of California Department of Finance.

City Enterprise Operations

Santa Monica operates an airport, bus line, cemetery, pier and civic auditorium. The City also provides water, refuse collection, recycling, wastewater and stormwater services. A portion of the revenues from these enterprises is annually paid to the City’s General Fund for various administrative support services provided to the enterprises.

The Santa Monica Airport is a 227-acre general aviation airport, located at the southeastern edge of the City. The Airport has the capacity to park a minimum of 550 based aircraft and 40 transient aircraft. The City rents an average of 205 of its own aircraft parking tie-down spaces, and also receives commercial lease revenues and commissions on fuel sold at the airport.

In 2008-09, the City’s 200 regular buses carried more than 20 million revenue passengers, while traveling approximately 6 million miles. The system provides coverage at low cost (a bus route operates within a quarter-mile of almost every resident; regular fares are $0.75 for local service and $1.75 for express service; discount fares are available for the elderly, handicapped and students through the purchase of tokens or pre-paid card). The City’s Big Blue Bus also manages paratransit services, carrying 24,000 revenue passengers in 2008-09. In addition, Big Blue Bus provides charter and excursion programs.

Woodlawn Cemetery was purchased by the City in 1897 and the mausoleum was purchased in 1972. It is operated as an enterprise competitive with comparable private facilities. It is located in the south-central portion of the City.

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The Santa Monica Pier is a local historical landmark built in 1909 and just celebrated its centennial. It currently contains an amusement park, carousel, games, restaurants, entertainment venues, and retail. Santa Monica Amusements, a privately-owned enterprise, operates Pacific Park, with its Ferris wheel, roller coaster, famous vintage wooden carousel, games and a food court. The Santa Monica Pier Aquarium has been operated by Heal the Bay since June 2003.

The Water Division of Santa Monica is operated as a self-supporting enterprise. About 15% of the City’s water is supplied by its own wells, stored in over 16 acres of well fields and reservoir grounds on City-owned property inside and outside the city limits. The remaining 85% of the water is purchased from the Metropolitan Water District of Southern California. The City’s modern, automated system delivers over 12 million gallons per day to approximately 17,000 water accounts. The City’s water chemists supervise over 9,500 separate water quality and safety tests per year in State-licensed laboratories, to ensure that the highest standards are met before delivering the water to the customer’s tap.

During the State’s drought years, the City implemented several conservation programs. One of the City’s water/wastewater conservation programs is a program of retrofitting bathrooms in the City with ultra low flow toilets and low flow showerheads. This program, which currently results in a wastewater reduction of approximately 1.4 million gallons per day, significantly reduces the City’s wastewater treatment and disposal costs by eliminating the need for the City to acquire additional capacity in the local Hyperion Sewage Treatment Plant.

Santa Monica’s Urban Runoff Recycling Facility, otherwise known as the “SMURRF,” treats dry weather runoff water (from excessive irrigation, spills, construction sites, pool draining, car washing, the washing down of paved areas, and some wet weather runoff) to produce 200,000 gallons a day of recycled water that is safe for all landscape irrigation and dual-plumbed systems (buildings plumbed to accept recycled water for the flushing of toilets).

Retirement System

The City contributes to the State of California Public Employees’ Retirement System (PERS), an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for cities in the State. The City’s payroll for employees covered by PERS for the year ended June 30, 2009 was $136,441,000. Total payroll for the City for the year ended June 30, 2009 was $174,093,000.

All full-time City employees and part-time City employees who have worked over 1,000 hours during a fiscal year are eligible to participate in PERS, with benefits vesting after 5 years of service. Employees are designated as safety (police officers, firefighters and others designated as safety by law) or miscellaneous (all others).

Safety employees who retire at or after age 50 with 5 years of credited service are entitled to an annual retirement benefit, payable monthly for life, in an amount equal to a benefit factor multiplied by their final compensation which is the average monthly pay rate for the last consecutive 12 months of employment (or any 12-month period in which pay was higher). For fire safety employees, the benefit factor is an amount equal to between 2.4% and 3.0% multiplied by the number of years of credited employment. The percentage amount is based upon the age of the employee at retirement, increasing from age 50 to age 55. For police safety employees the benefit factor is 3.0% multiplied by the number of years of service. This percentage starts at age 50 and does not increase.

Miscellaneous members who retire at age 50 with 5 years of credited service are entitled to an annual retirement benefit, payable monthly for life, in an amount equal to a benefit factor multiplied by their final compensation. Final compensation for miscellaneous members is the average monthly pay rate for the last consecutive 12 months (or any 12-month period in which pay was higher) of employment. The benefit factor

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is an amount equal to between 2.0% and 2.7% multiplied by the number of years of credited employment. The percentage amount is based upon the age of the employee at retirement, increasing from age 50 to age 55.

PERS also provides death and disability benefits. These benefit provisions and all other requirements are established by state statute and City ordinance.

PERS requires that miscellaneous employees contribute 8% and safety employees contribute 9% of their annual salary to PERS. However, this benefit, like all others, is subject to collective bargaining. Currently all of the City’s bargaining units have negotiated for the City to contribute this portion on behalf of the employee. The City is required to contribute the remaining amounts necessary to fund the benefits for its members using the actuarial basis recommended by the PERS actuaries and actuarial consultants and adopted by the PERS Board of Administration. The miscellaneous members reimburse the City for the cost of an enhanced benefit at a rate of 6.7%.

For Fiscal Year 2008-09, employer contribution rates were as follows:

Annual Rate Components

Miscellaneous Category

Safety Category Fire Police

A. Normal cost rate 9.583% 13.431% 17.674% B. Unfunded liability rate 5.875 8.216 C. Total Required

15.741 15.458% 21.647% 33.415%

The contribution to PERS for Fiscal Year 2008-09 of $40,645,943 was made in accordance with

actuarially determined requirements computed through an actuarial valuation performed as of June 30, 2007. The City contributed $26,944,672 (18% of current covered payroll); employees contributed $13,701,271 (8.8% of current covered payroll), of which $13,497,001, was paid by the City and $204,270 was paid by employees.

Fiscal Year ended June 30

Three-Year Trend Information for the Annual Pension Cost Funding for the Plan (Unaudited)

Annual pension cost (APC)

Percentage of APC contributed

Net pension obligation

2009 $26,944,672 100% __ 2008 24,767,790 100 — 2007 20,719,971 100 —

Pension Funding Information

As of June 30, 2008, the date of the latest actuarial valuation, the City’s underfunded liability was $150,156,936 This under funded liability was primarily the result of a decline in the value of the plan assets, less than anticipated investment returns by PERS and an increase in benefits for Public Safety employees. The City has addressed the under funded liability through additional contributions, as determined by PERS, in excess of the amount required to fund the current normal cost liability. Maintaining this funding schedule PERS has estimated that the under funded balance will be amortized over 15 years. The City cannot predict the level of future contributions to PERS which may be required by PERS but such amounts may increase significantly over current levels.

Other Post Employment Benefits

In addition to providing pension benefits through PERS, the City, in accordance with agreements with various bargaining units and groups, provides medical insurance benefits that are considered other postemployment benefits (“OPEB”) to certain retired employees. Employees of the Supervisory Team Associates bargaining unit become eligible for a medical insurance benefit if they were hired prior to June 30,

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1990, fulfill length of service requirements and have more than 75 unused sick leave days upon retirement. Employees of the Executive Pay Plan group and management employees of the Rent Control Board are eligible for a city paid medical insurance benefit if their combined retirement age and years of public service equals or exceeds 70. Although not delineated in any written agreement, all retirees are allowed to continue participating in one of the City’s health plans at the same rate as active employees. The City also maintains minimum benefits for public safety employees provided by the City’s contract with its healthcare provider. In Fiscal Year 2009, the City paid $549,000 for retiree health benefits. The City pays for OPEB on a pay-as-you-go basis.

The Governmental Accounting Standards Board recently published Statement No. 45, requiring governmental agencies that fund post-employment benefits on a pay-as-you-go basis, such as the City, to account for and report the outstanding obligations and commitments related to such post-employment benefits in essentially the same manner as for pensions. The City retained AON Consulting (the “Actuarial Consultant”) to calculate the City’s post employment benefits funding status. In a report dated October 20, 2009 (the “Report”), the Actuarial Consultant concluded that, as of July 1, 2008, the City’s unfunded actuarial accrued liability for post employment benefits based upon a 5% discount rate was $17,721,000. The Report also concluded that the annual required contribution (“ARC”) for the year beginning July 1, 2009 is $1,722,000. The ARC is the annual amount that would be necessary to fund the OPEB in accordance with the Governmental Accounting Standards Board’s Statements No. 45. The City cannot predict the level of future contributions to PERS which may be required but such amounts may increase significantly over current levels.

Medical Trusts

In addition to other post-employment benefits described above, the City contributes, pursuant to bargaining unit agreements, monies to the medical trusts that provide post-employment medical benefits to employees. The amount of benefits provided to employees under these plans is limited solely to the amount contributed, related investment earnings, and forfeitures. During Fiscal Year 2008-09 the City contributed $2,734,181 towards the retiree medical trusts. These are administered through third-party administrators and the City does not perform the investing function or have other significant responsibility relating to the management of plan assets. Thus, plan assets and any related liabilities have been excluded from the City’s basic financial statements.

Labor Relations

In accordance with the Meyers-Milias-Brown Act, the City has adopted an Ordinance, which establishes the procedures for the administration of employer-employee relations. This includes the procedure by which the City meets and confers with representatives of recognized employee organizations (i.e. unions and associations) regarding matters within the scope of representation, including wages, hours and other terms and conditions of employment within the appropriate unit.

Of the approximately 2,018 budgeted permanent City employees, most are represented by nine unions or associations, including 908 by the Municipal Employees Association, 202 by the Santa Monica Police Officers Association, 106 by Local 1109 of the Firefighters Association, 281 by the United Transportation Union, 40 by the Management Team Associates, 89 by the Supervisory Team Associates, 241 by the Administrative Team Associates, 23 by the Public Attorneys Union, and 16 by the Public Attorneys Legal Support Staff. All City employees are covered by existing multiple- or single-year contracts. An Executive Pay Plan covers 20 employees.

Industry and Employment

The Santa Monica business community is comprised of a diverse collection of businesses ranging from traditional retailers to hi-tech post-production and internet firms. Tourism, health industries, and retail augment the large business service sector. Mainstay firms like Saint John’s and UCLA-Santa Monica

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Hospitals, Loews and Marriott Hotels, and new car dealerships occupy a more traditional niche as large institutional property owners, sales tax producers, and employers. Major entertainment and multimedia-software industry firms like Universal Music Group, Apple, Google, Yahoo and MTV are among over 200 hi-tech, multimedia, and related entertainment firms of all sizes. These companies relocate to Santa Monica and West Los Angeles because they appreciate the quality of life here and because the hi-tech and entertainment clusters provide a critical mass of support firms and other similar firms in the area.

The City invests significant governmental resources in its pedestrian-oriented commercial districts, including such nationally-recognized venues as the Third Street Promenade, Santa Monica Place Mall, the Santa Monica Pier, Main Street, and Montana Avenue. The City provides support for the Santa Monica Convention & Visitor’s Bureau, and a variety of other services, including parking in the downtown. Recent completed City projects include the Annenberg Community Beach House, a public facility that received a $27.5 million grant from the Annenberg Foundation, the award-winning Main Library that expanded the Library’s ability to offer programs and services to library patrons, infrastructure improvements to the Pier including new public restrooms and the Virginia Avenue Park in the Pico Neighborhood.

This investment has paid off in a healthy retail and restaurant sector and an active tourism industry which provides significant sales tax revenues to the City, and will continue to do so even through the recent economic turndown. The three largest business types producing taxable goods in the City are; New Motor Vehicle Dealers, 21% of the City’s sales tax revenue; Restaurants with Liquor, 10.5% of the City’s sales tax revenue, and Specialty Stores, 3.7% of the City’s sales tax revenue. When grouped into major business groups, General Consumer Goods provide 30.7% of the City’s sales tax revenue, Autos and Transportation provide 25.0% of the City’s sales tax revenue, and Restaurants and Hotels provide 21.0% of City’s sales tax revenue.

The City’s economic condition has been affected by the current economic recession. Taxable sales for the fiscal year ending June 30, 2009, were 10.2% lower than for the fiscal year ending June 30, 2008. Office vacancy rates were 4.9% higher than for fiscal year ending June 30, 2008.

The City’s tourism industry and occupancy rates benefit from its proximity to Southern California points of interest, including the beach, Pacific Park on the Santa Monica Pier, the Third St. Promenade, and the Getty Center in nearby Brentwood. Hotel occupancy rates currently stand at 77.3% for 2009, down 8.6% for the year-to-date over 2008 totals, with over 3,500 hotel rooms available daily.

As of December 31, 2008, an estimated 79,376 people were employed by approximately 6,570 firms in the City with a total of almost $1.45 billion in payroll. This figure does not include a substantial number of self-employed persons or contract workers. Unemployment in the City (as compared to the County) is lower in the City at 10.5%.

The City’s focus on “quality of life” issues has created a positive environment on the Westside in which to live, work, and visit. The resulting environment has attracted a stable, dynamic business base and a strong local economy.

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The following table summarizes employment and payroll information within the City as of December 31, 2008.

City of Santa Monica 2008 Employment and Payroll

By Major Industry Division As of December 31, 2008

Major Division Industry Firms % of Total

Firms

Average Annual

Employment % of Total

Employment Annual Payroll

% of Total Payroll

Professional, Scientific, & Technical Services 1,185 18.0% 11,784 14.8% $ 297,739,975 20.5% Health Care & Social Assistance 834 12.7 8,537 10.8 111,412,050 7.7 Retail Trade 634 9.6 9,709 12.2 108,787,722 7.5 Information 599 9.1 8,033 10.1 272,275,051 18.7 Arts, Entertainment, & Recreation 558 8.5 1,809 2.3 79,691,974 5.5 Real Estate & Rental & Leasing 380 5.8 3,169 4.0 77,167,950 5.3 Accommodation & Food Services 371 5.6 11,606 14.6 78,917,524 5.4 Other Services 350 5.3 3,194 4.0 27,709,321 1.9 Finance & Insurance 252 3.8 2,857 3.6 125,750,857 8.7 Admin & Support & Waste Mgmt & Remediation 223 3.4 2,629 3.3 35,705,875 2.5 Wholesale Trade 227 3.5 2,511 3.2 47,182,010 3.2 Construction 224 3.4 2,021 2.5 30,018,682 2.1 Manufacturing 98 1.5 975 1.2 13,523,229 0.9 Educational Services 84 1.3 2,590 3.3 25,590,350 1.8 Local Govt 49 0.7 6,170 7.8 88,203,766 6.1 Transportation & Warehousing 31 0.5 349 0.4 3,864,843 0.3 Management Of Companies And Enterprises 23 0.4 486 0.6 13,462,360 0.9 Non-Classified 430 6.5 416 0.5 8,519,925 0.6 Utilities 6 0.1 250 0.3 5,167,975 0.4 Federal Govt 6 0.1 265 0.3 3,703,691 0.3 Agriculture, Forestry, Fishing & Hunting 4 *** *** *** *** *** State Govt 1 *** 13 *** 116,196 0.01 Mining *** 1 *** *** *** *** Total 6,570 79,376 $ 1,454,564,528

Source: City of Santa Monica (from data by Major NAICS Sectors)

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The major employers within the City boundaries and the number of persons employed by each organization are shown below:

City of Santa Monica Major Employers As of June 30, 2009

Company Number of Employees

Santa Monica College 2,143 City of Santa Monica 2,366 Santa Monica-UCLA Hospital 1,767 Saint John’s Hospital Medical Center 1,682 Santa Monica-Malibu Unified School District 1,643 The Rand Corporation 898 MTV Networks 878 Activision Blizzard Inc. 781 ET Whitehall Santa Monica Partners LP 654 Universal Music Group 518 Rubin Postaer and Associates 430 Loews Hotels Total jobs provided by principal employers

428 13,760

Total jobs in Santa Monica 79,376 Principal Employers As Percent Of Total Jobs 17.3%

Source: Voluntary reporting of employment levels to the City of Santa Monica by individual organizations. Total jobs in Santa

Monica as provided by the Labor Market Information Division, State of California Employment Development Department as of August 31, 2009.

The following chart provides a comparison, for the years indicated, of the average annual unemployment rates in the City of Santa Monica, the City of Los Angeles, the County of Los Angeles, the State of California and the United States. The City’s 2008 unemployment rate of 6.2% was below the City of Los Angeles rate of 8.3%, the County rate of 7.5% and the State rate of 7.2%, but was higher than the national rate of 5.8%. The City’s September 2009 unemployment rate was 10.5%, reflecting the ongoing current difficult economic environment.

Annual Average Unemployment Rates

For Calendar Years 2003 through 2009

Year City of Santa

Monica City of Los

Angeles County of Los

Angeles State of

California United States

2003 5.7% 7.7% 7.0% 6.8% 6.0% 2004 5.3 7.2 6.5 6.2 5.5 2005 4.4 5.9 5.3 5.4 5.1 2006 3.9 5.3 4.8 4.9 4.6 2007 4.1 5.7 5.1 5.4 4.6 2008 6.2 8.3 7.5 7.2 5.8 2009 10.5 (1) 14.0 12.7 12.2 9.8

(1)

Source: State of California, Employment Development Department, Labor Market Information Division, based on March 2008 benchmark and U.S. Department of Labor, Bureau of Labor Statistics.

As of September 2009.

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Effective Buying Income

For 2009, the City’s median household effective buying income was greater than the median household effective buying income for the Los Angeles-Long Beach-Santa Ana Statistical Area, the State of California and the United States. The following table summarizes the total effective buying income for the City, the Los Angeles-Long Beach Statistical Area, the State and the United States for calendar year 2008 through the third quarter of 2009.

City of Santa Monica Effective Buying Income

For Calendar Years 2008 Through 2009

Year and Area Total Effective Buying Income

(000s omitted) Median Household Effective

Buying Income

2008 City of Santa Monica $3,985,397,500 $51,448 Los Angeles-Long Beach MSA 280,261,545,000 46,933 California 814,894,437,500 48,203 United States 6,300,794,040,000 41,792 2009 (1) City of Santa Monica $4,011,022,500 $52,152 Los Angeles-Long Beach MSA 280,261,545,000 46,933 California 814,894,437,500 48,203 United States 6,443,994,426,250 42,303 (1)

Source: Survey of Buying Power and Media Market. As of September 30, 2009.

Education

Public instruction in the City is provided by the Santa Monica-Malibu Unified School District with 10 elementary schools (three of which are in the City of Malibu), three middle schools, two high schools (one of which is in the City of Malibu), one continuation high school, one alternative school, an adult education program and child care and development centers. Total enrollment for the last five school years was as follows:

City of Santa Monica Public School Enrollment

For 2004-05 through 2008-09

Year Enrollment

2004-05 12,545 2005-06 12,191 2006-07 11,911 2007-08 11,688 2008-09 11,580

(1)

(1)

Source: Santa Monica-Malibu Unified School District. Estimated.

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The Santa Monica-Malibu Unified School District also provides additional programs, such as bilingual education, computer literacy, the Gifted and Talented program, the Regional Occupation Program (vocational skills), and pre-school and school age child care programs.

There are nine private nursery/kindergarten schools and 16 private/parochial schools in Santa Monica. The City also has one community college, Santa Monica College, which includes technical and vocational schools, including the Academy of Entertainment and Technology.

Culture and Recreation

Each year, Southern California’s natural and commercial attractions bring millions of visitors to the region. Good weather, miles of Pacific coastline, and picturesque mountain ranges combine with world class destinations such as the Getty Center, Disneyland, the Los Angeles Music Center, the Rose Bowl, Knott’s Berry Farm, Universal Studios Hollywood, and the Long Beach Aquarium to make the Los Angeles basin one of the most traveled to places in the world.

Santa Monica’s strong recreational identity is historically tied to the beachside community’s extraordinary natural setting and mild climate. Residents walk, bike, skate, participate in cultural events, experience nature, and engage in a wide range of active sports throughout the year. In the most fundamental sense, recreation within a town like Santa Monica has to do with establishing ties between people and building a sense of community by creating opportunities for physical, social and cultural interaction. Santa Monica residents and visitors see the entire City as their park system—where users enjoy the community’s renowned public gathering places including the Third Street Promenade and Santa Monica Pier, green streets, 245 acres of sandy beach and 24 parks to pursue their recreational activities of choice.

The City continues to have a profound effect on the development of art and culture in this country. More visual and performing artists, arts presenters, designers, architects, and film and music producers per capita can be found in Santa Monica than in any other city in the State. Santa Monica has over 70 galleries, three major museums (including the Santa Monica Museum of Art, the California Heritage Museum, and the Museum of Flying), over a dozen theaters and performance spaces presenting a wide range of music, dance and performance art, bookstores, photography, video, film, and award-winning architecture - all thriving in its many walkable and attractive neighborhoods.

The exceptional physical, recreational, and cultural environment in Santa Monica provides residents with a wide range of arts and leisure opportunities.

Taxable Transactions

Taxable transactions for the City in 2008 showed a 6.3% decrease below the 2007 level. The future rate of growth of taxable transactions may be adversely affected by the growth of electronic commerce to the extent that Federal and/or State laws, policies and sales tax collection procedures are not altered to include taxable transactions via electronic commerce.

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The following table indicates the level of taxable transactions in the City by type of business from calendar years 2004 through 2008.

City of Santa Monica Taxable Transactions by Type of Business

for Calendar Years 2004 – 2008 (in Thousands of Dollars)

Business 2004 2005 2006 2007 2008

Apparel Stores $ 302,756 $ 329,556 $ 336,010 $ 333,651 $ 311,386 General Merchandise 84,334 75,618 68,565 62,818 51,547 Food Stores 67,825 75,971 81,477 85,452 87,586 Eating & drinking places 374,767 409,645 435,807 452,246 449,260 Building materials & farm implements 101,540 103,851 119,648 125,718 110,439 Auto dealers & auto suppliers 691,828 710,000 716,162 715,633 648,404 Service stations 89,261 101,214 132,437 137,283 145,869 Other retail stores 613,781 634,605 649,123 689,179 626,490 Retail stores total 2,326,092 2,440,460 2,539,229 2,601,980 2,430,981 All other outlets 598,595 676,497 724,944 658,730 Total all outlets

625,884 $ 2,924,687 $ 3,116,957 $ 3,264,173 $ 3,260,710 $ 3,056,865

Source: Hinderleiter, de Llamas and Associates.

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The table below compares 2009 second calendar quarter sales taxes with 2008 second calendar quarter sales taxes as indicated taxable sales. Across the board sales taxes are down versus 2008 second calendar quarter figures, which is consistent with statewide trends.

City of Santa Monica Second Quarter Sales Taxes by Major Business Group

(unadjusted)

Business 2009 2008 Difference

New Motor Vehicle Dealers $863,061 $1,061,202 (18.7)% Restaurants Liquor 619,358 630,591 (1.8) Auto Lease 408,352 544,565 (25.0) Electronics/Appliance Sales 324,101 418,006 (22.5) Family Apparel 317,316 418,396 (24.2) Restaurants No Alcohol 287,587 281,930 (2.0) Service Stations 278,271 429,455 (35.2) Women's Apparel 226,185 301,310 (24.9) Specialty Stores 221,462 306,791 (27.8) Home Furnishings 209,828 258,589 (18.9) Hotels – Liquor 161,260 197,822 (18.5) Restaurants Beer & Wine 160,958 190,378 (15.5) Grocery Stores Liquor 135,535 139,737 (3.0) Sporting Goods/Bike Stores 113,608 128,334 (11.5) All Others 1,580,384 2,003,881 Subtotal

(21.1) $5,907,266 $7,310,987 (19.2)%

County/State Pools 668,247 761,502 Total

(12.2) $6,575,513 $8,072,489 (18.5)%

Source: City of Santa Monica Finance Department.

Building Permit Activity

The following table shows the number and value of building permits issued in the City.

City of Santa Monica Building Construction

For Fiscal Years 2004-05 through 2008-09

Fiscal Year Ended June 30

Residential Number of Units

Residential Construction Value

Nonresidential Construction Value

2005 426 $109,876,149 $96,421,910 2006 238 96,693,536 66,449,275 2007 633 128,120,760 174,264,297 2008 187 87,863,887 171,541,504 2009 82 53,935,976 50,190,611

Source: Construction Industry Research Board.

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Principal Property Taxpayers

The ten principal property taxpayers in the City based on reported gross assessed values for Fiscal Year 2009-10, are listed below.

CITY OF SANTA MONICA Principal Property Taxpayers

For Fiscal Year 2009-10 (Based on Taxes Levied)

Property Taxpayer/Type of Business

(1)

Net Assessed Valuation

(Incl. Secured & Unsecured)

% of Total

1) California Colorado Center LLC $ 470,425,014 1.95% 2) Water Garden Realty Holding 456,900,932 1.90 3) Douglas Emmett LLC 307,106,724 1.27 4) SC Enterprises SMBP LLC 304,000,000 1.26 5) CREP 2700 Holdings 226,807,200 0.94 6) Ocean Avenue LLC 145,571,407 0.60 7) Equity Office Properties Trust 138,508,958 0.57 8) New Santa Monica Beach Hotel LLC 138,119,347 0.57 9) Maguire Properties Lantana North LLC 136,458,496 0.57 10) RAND Corporation 132,635,402 Top Ten Total

0.55 $ 2,456,533,480 10.19%

(1)

Source: City of Santa Monica Finance Department (from data from Los Angeles County Assessor) Does not reflect the impact of pending appeals of assessed valuation.

Utilities

Southern California Gas Company and Southern California Edison Company (“SCE”) provide gas and electricity service within the City, respectively. The City purchases for its own use a large portion of renewable energy from Commonwealth Energy Corporation. Commonwealth provides this energy in conjunction with SCE services. Verizon California supplies local telephone service. The City provides water and wastewater service.

CITY OF SANTA MONICA FINANCES

The following selected financial information provides a brief overview of the City’s finances. This financial information has been extracted from the City’s audited financial statements and, in some cases, from unaudited information provided by the City’s Finance Department. The most recent audited financial statements of the City with an unqualified auditor’s opinion is included as Appendix B hereto. See “FINANCIAL STATEMENTS” and APPENDIX B—“AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE YEAR ENDED JUNE 30, 2008.” The City’s financial statements are public documents and are included within this Official Statement without the prior approval the Auditor. Accordingly, the Auditor has not performed any post-audit analysis of the financial condition of the City.

Accompanying the Independent Auditor’s Report in Appendix B is the City Management’s Discussion and Analysis, which is not audited, but is supplementary information required by the Government Accounting Standards Board. Management’s Discussion and Analysis presents a summary and overview of the City’s financial condition. Management’s Discussion and Analysis should be reviewed in conjunction with the information presented below to obtain an understanding of the City’s financial condition.

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The audited financial statements of the City for fiscal year ended June 30, 2009 are expected to be released during December, 2009. The City does not believe that the Fiscal Year 2008-09 audited financial statements will show a material difference in the City’s financial condition from the unaudited Fiscal Year 2008-09 financial information provided herein.

Accounting Policies and Financial Reporting

The City’s accounting records are organized and operated on a “fund” basis, which is the basic fiscal and accounting entity in governmental accounting. The three broad fund categories include governmental, proprietary and fiduciary funds. The operations of the different funds are accounted for with separate sets of self-balancing accounts with assets, liabilities, fund balance or net assets, revenues, and expenditures or expenses. The basis of accounting for all funds is more fully explained in the Notes to the City of Santa Monica combined audited financial statements contained in Appendix B.

The Government Finance Officers Association has awarded its Certificate of Achievement for Excellence in Financial Reporting to the City for the past 25 years.

Budgetary Process

During May of each year, the City Manager submits to the City Council a proposed operating and capital improvements budget for the fiscal year commencing the following July 1. The operating and capital improvements budget includes proposed expenditures and expenses and the means of financing them. Public hearings are conducted by the City Council to obtain citizen comments, and prior to June 30, the budget is adopted through passage of appropriate resolutions. See “—General Fund Financial Summary” for a summary of the City’s general fund budget for Fiscal Year 2009-10.

The budgetary process is guided by City Council’s priorities, with input from residents, neighborhood groups, Boards, Commissions, and businesses following fall neighborhood meetings and various year-round opportunities for suggestions and comments. In May of each year, the City Manager submits a proposed operating and capital budget to the City Council for the fiscal year commencing on July 1. Study sessions and public hearings are conducted by the City Council to obtain staff and citizen comments to the proposed budget, and prior to June 30, the budget is adopted through passage of appropriate resolutions. See “—General Fund Financial Summary” for a summary of the City’s general fund budget for Fiscal Year 2009-10.

In response to a downturn in the economy beginning in Fiscal Year 2008-2009 and the resulting impact on key revenue sources for the City, the adopted budget for Fiscal Year 2009-10 and the budget plan for Fiscal Year 2010-2011 reflect a combination of measures to balance expenditures and revenues in an organized and orderly manner. The City Council set aside an economic uncertainty reserve of $8.2 million using monies previously reserved for potential utility users tax losses. Departments were asked in January 2009 to plan for expenditures savings of at least 3% for Fiscal Year 2008-09 and to develop their Fiscal Year 2009-2010 budgets with an additional 5% reduction. In addition, employees agreed to forego performance bonuses. These expenditure reductions, along with limited enhancements, fee adjustments and the use of planned one-time funding sources allowed the City to close the budget gap in Fiscal Year 2009-2010 and will provide time for further assessment as a permanent strategy to balance expenditures and revenues is developed. Despite indications that the recession is ending, sales tax, utility users tax, and transient occupancy tax remain weak, and the state’s ability to divert City funds remains a threat. While the State did divert property taxes from cities, counties and special districts, the City has been able to participate in a securitization which will mitigate the effects of this state diversion of Proposition 1A funds. See “RISK FACTORS—State Budget—City Impact” below. In Fiscal Year 2010-11, the City will again respond to fiscal challenges with savings from a continuing hiring freeze, the use of funds designated for use in times of economic hardship, and a strategic reduction in City services. In accordance with fiscal policy, the budget for Fiscal Year 2009-10 and the budget plan for Fiscal Year 2010-11 provide for a general fund reserve of 10% for emergencies or an unanticipated

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financial reversal; however the total fund balance as of June 30, 2009, is significantly larger than this reserve amount, providing flexibility to respond to the uncertain economy.

Assessed Valuations

The City uses the facilities and services of the County of Los Angeles (the “County”) for the assessment and collection of taxes. City taxes are collected at the same time and on the same tax rolls as are the County, City and special district taxes. Assessed valuations are the same for both City and County taxing purposes.

The valuation of property in the City is established by the Los Angeles County Assessor, except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the full value of the property, as defined in Article XIIIA of the California Constitution. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.”

The California State Legislature adopted two types of State-reimbursed exemptions beginning in the tax year 1969-70. The first currently exempts 100% of the full value of business inventories from taxation. The second exemption currently provides a credit of $7,000 of the full value of an owner- occupied dwelling for which application has been made to the Los Angeles County Assessor. Revenue estimated to be lost to local taxing agencies due to the above exemptions has in the past been reimbursed from State sources. Reimbursement is based upon total taxes due upon such exemption values and therefore is not reduced by any estimated amount of actual delinquencies. The breakdown of assessed value of taxable property within the City for Fiscal Years 2005-06 through 2009-10 is set forth in the table below.

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City of Santa Monica Assessed Value of Taxable Property

For Fiscal Years 2005-06 through 2009-10

Fiscal Year

Ended June 30 Real Property

Personal Property

Public Utilities Secured Gross

Less Exemptions Secured Net (1) Net Unsecured

Total Assessed Valuations

2006 $17,818,362,618 $ 36,240,768 $742,865 $17,856,346,251 $ 535,704,727 $17,320,641,524 $777,908,774 $18,098,550,298 2007 19,407,566,948 231,255,829 742,865 19,639,565,642 810,600,441 18,828,965,201 876,645,078 19,705,610,279 2008 20,861,475,912 230,361,744 742,365 21,092,580,021 847,012,250 20,245,567,771 877,156,158 21,122,723,929 2009 23,100,511,228 228,270,851 742,365 23,329,524,444 904,660,628 22,424,863,816 987,848,754 23,412,712,750 2010 23,951,442,065 234,194,136 742,365 24,186,378,566 1,134,966,580 23,051,411,986 969,009,242 24,020,421,228 (1)

Source: Los Angeles County Auditor-Controller Includes Homeowner Exemption. City is reimbursed by State for taxes lost because of these exemptions.

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Ad Valorem Property Taxes; Proposition 1A

Taxes are levied for each fiscal year on taxable real and personal property which is situated in the County as of the preceding January 1. However, upon a change in ownership of real property or completion of new construction, State law permits an accelerated recognition and taxation of increases in real property assessed valuation (known as a “floating lien date”). For assessment and collection purposes, property is classified either as “secured” or “unsecured” and is listed accordingly on separate parts of the assessment roll. The “secured roll” is that part of the assessment roll containing State and County assessed property secured by a lien which is sufficient, in the opinion of the assessor, to secure payment of the taxes. Other property is assessed on the “unsecured roll.” See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS.”

The County levies a one percent property tax on behalf of all taxing agencies in the County. The taxes collected are allocated on the basis of a formula established by State law enacted in 1979. Under this formula, the County and all other taxing entities receive a base year allocation plus an allocation on the basis of “situs” growth in assessed value (new construction, change of ownership, inflation) prorated among the jurisdictions which serve the tax rate areas within which the growth occurs. Tax rate areas are specifically defined geographic areas which were developed to permit the levying of taxes for less than county-wide or less than city-wide special districts and school districts. In addition, the County levies and collects additional approved property taxes and assessments on behalf of any taxing agency within the County.

Property taxes on the secured roll are due in two installments, on November 1 and February 1. If unpaid, such taxes become delinquent after December 10 and April 10, respectively, and a ten percent penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared tax-defaulted on or about June 30. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus costs and redemption penalty of one and one-half percent per month to the time of redemption. If taxes are unpaid for a period of five years or more, the tax-defaulted property is subject to sale by the Treasurer and Tax Collector of the County of Los Angeles.

Property taxes on the unsecured roll are assessed as of the January 1 lien date and become delinquent, if unpaid, on August 31. A ten percent penalty attaches to delinquent taxes on property on the unsecured roll and an additional penalty of one and one-half percent per month begins to accrue on November 1. The taxing authority has four ways of collecting delinquent unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer, (3) filing a certificate of delinquency for recordation in the County Recorder’s office in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the taxpayer. City taxes are collected on the same bill as County taxes.

For a number of years, the State Legislature has shifted property taxes from cities, counties and special districts to the Educational Revenue Augmentation Fund. The term “ERAF” is often used as a shorthand reference for this shift of property taxes. In 1992-93 and 1993-94, in response to serious budgetary shortfalls, the State Legislature and administration permanently redirected over $3 billion of property taxes from cities, counties, and special districts to schools and community college districts. The 2004-05 California State Budget included an additional $1.3 billion shift of property taxes from certain local agencies, including the City, to occur in Fiscal Years 2004-05 and 2005-06. The City’s portion of such property tax shift for each of these two Fiscal Years was $2,716,305. To date, over $45 million has been shifted.

Proposition 1A. On November 2, 2004, California voters approved Proposition 1A, which amended the State Constitution to significantly reduce the State’s authority over major local government revenue sources. Under Proposition 1A, the State may not (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-

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third approval of both houses of the State Legislature, or (iv) decrease Vehicle License Fees revenues without providing local governments with equal replacement funding. Under Proposition 1A, the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including (a) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State, and (b) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. See “RISK FACTORS—State Budget” for information related to the Proposition 1A shift approved by the State for Fiscal Year 2009-10 and its impact on the City’s General Fund.

See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Article XIIIA of the California Constitution”.

The City’s receipt of property taxes is affected by property tax delinquencies, appeals, refunds and collection of delinquent amounts. The countywide delinquency rate in Fiscal Year 2008-09 was 3.5%.

Tax Receipts

Taxes received by the City include Utility User’s Taxes, Sales Taxes, Property Taxes, Business License Taxes, Transient Occupancy Taxes and other miscellaneous taxes. The City has a diversified tax base; the five major tax sources listed above each account for between 11% and 15% of General Fund Revenues. See APPENDIX B—“AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE YEAR ENDED JUNE 30, 2008.”

The following table sets forth tax revenues received by the City, by source:

City of Santa Monica Tax Revenues by Source(1)

Source

For Fiscal Years 2004-05 through 2008-09 ($’s in thousands)

Fiscal Year Ended June 30 2005 2006 2007 2008 2009

Utility User’s Tax

(4)

$ 29,315 $ 30,444 $ 31,243 $ 31,622 $ 31,578 Sales Taxes 27,580 31,872 33,267 32,357 28,297 Property Taxes 25,651 (2) 28,032 32,586 36,068 36,763 Transient Occupancy Tax 23,419 29,209 31,892 34,969 31,265 Business License Taxes 18,970 20,274 22,637 24,654 27,216 Parking Facility Taxes 6,241 6,832 7,400 7,826 7,980 Vehicle License Fees 975 2,062 608 390 263 Real Property Transfer Tax 7,180 5,573 6,409 4,739 2,653 Franchise Taxes 909 (3) -- -- -- -- Condominium Taxes 24 24 39 50 Total

35 $ 140,264 $ 153,922 $ 166,081 $ 172,675 $ 166,105

(1) Does not include Highway Users’ Taxes which are recorded in the Gas Tax Fund, Unit Dwelling Taxes, which are recorded

in the Parks and Recreation Facilities Fund, or TORCA Conversion Taxes, which are recorded in the TORCA Fund. (2) Includes ad valorem property taxes for purposes of paying debt service on general obligation bonds, vehicle license fee

backfill payments, redevelopment agency statutory pass through payments and certain local public safety fund amounts. See “Sales Tax” and “—Vehicle License Fee Reduction” below.

(3) Beginning in Fiscal Year 2005-06, franchise fees are classified as “Licenses and Permits.” (4)

Source: City of Santa Monica Finance Department Unaudited actuals.

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A brief discussion of Property Taxes, Utility User’s Taxes, Transient Occupancy Taxes, Sales Taxes and Business License Taxes follows:

Property Taxes. Property Tax receipts of approximately $36,763,000 provided the largest tax revenue source of the City, contributing approximately 22% of General Fund tax revenues and approximately 15% of total General Fund revenues during Fiscal Year 2008-09. See “—Assessed Valuation,”, “—Ad Valorem Property Taxes” above, as well as “CITY OF SANTA MONICA—Principal Property Tax Payers” for discussion of pertinent aspects of the City’s property tax revenues. Of the approximately $36,763,000 in property tax receipts of the City for Fiscal Year 2008-09 approximately $2.5 million is attributable to debt service on the City’s general obligation bonds which financed certain Library improvements, and such amounts are not available to fund any other activities supported by the City’s General Fund, including Base Rental Payments.

Utility User’s Tax. Utility user’s tax receipts of approximately $31,578,000 provide a major tax revenue source for the City, contributing approximately 19% of General Fund tax revenues and approximately 13% of total General Fund revenues during Fiscal Year 2008-09. The Utility User’s Tax is imposed on all users of natural gas, electricity, water, wastewater, cable television and telephone services within the City’s limits. The tax rate is 10.0% of all utility charges. This tax rate has been in effect since July 1993, and the Utility User’s Tax has been in effect since July 1969. On November 4, 2008, City residents voted to update and modernize the City’s Utility User’s Tax ordinance to include new technologies. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Proposition 62” and “—Proposition 218.”

An exemption from the Utility User’s Tax is available to senior citizens over the age of 62 and to permanently disabled individuals, provided that the combined adjusted gross income of all household members is below $29,788, or $25,995 for persons living alone (as of July 1, 2009). As provided by the California Constitution, insurance companies are exempt from the Utility User’s Tax. In addition, county, state, federal and foreign governments within the City are not subject to this tax, as the City has no authority to impose a tax on these entities. Exemptions account for a minor amount of the total Utility User’s Tax base.

All utility companies, including the City’s water and wastewater operations, collect and transmit the Utility User’s Tax monthly to the City’s Finance Department which then deposits the tax revenues into the General Fund.

Sales Tax. Sales tax receipts of approximately $28,297,000 provide a third major tax revenue source for the City, contributing approximately 17% of General Fund tax revenues and approximately 11% of total General Fund revenues during Fiscal Year 2008-09. Approximately $7,400,000 of amounts shown as sales tax is attributable to State allocations of property taxes related to the “Triple Flip,” described below. Eventually, these amounts should no longer be received as “Triple Flip” payments but should be substantially replaced with a return of the previous sales tax apportionment to the City. Amounts attributed to the “Triple Flip” in Fiscal Year 2007-08 were $8,288,742 and such amounts are budgeted to equal approximately $6,784,000 for Fiscal Year 2009-10.

On March 2, 2004, voters approved a bond initiative formally known as the “California Economic Recovery Act.” This act authorized the issuance of $15 billion of Economic Recovery Bonds to finance ongoing State budget deficits, which are payable from a fund established by the redirection of tax revenues known as the “Triple Flip.” The State issued $11.3 billion of Economic Recovery Bonds prior to June 30, 2004. Under the “Triple Flip,” one-quarter of local governments’ one percent share of the sales tax imposed on taxable transactions within their jurisdiction is being redirected to the State. In an effort to eliminate the adverse impact of the sales tax revenue redirection on local government, State legislation provides for certain property taxes to be redirected to local government. Because these property tax monies were previously earmarked for schools, the legislation provides for schools to receive other State general fund revenues. It is

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expected that the swap of sales taxes for property taxes will terminate once the Economic Recovery Bonds are repaid, some years in the future. See “RISK FACTORS – State Budget Information” herein.

A sales tax is imposed on retail sales or consumption of personal property. The statewide sales tax rate is established by the State Legislature and local overrides may be approved by voters. In Los Angeles County the sales tax rate is 9.75%. 8.25% is collected and administered by the State on taxes collected within the City as follows:

State General Fund ......................................................................................................................... 6.00% Proposition 172 (public safety use) ............................................................................................... 0.50% Proposition 57 (State financing bond) ........................................................................................... 0.25% County Health/Welfare .................................................................................................................. 0.50% County Transportation ................................................................................................................... 0.25% City ................................................................................................................................................. 0.75%

The 0.75% sales tax revenue collected by the State is deposited monthly into the City’s General Fund.

The remaining 1.5% Los Angeles sales tax is authorized locally under Propositions A, C and R for transportation including bus, rail and some streets and road projects. These funds are collected by the State but administered by the Los Angeles County Metropolitan Transportation Authority. A portion of the Proposition A, C and R funds are returned to cities for use on approved projects.

Transient Occupancy Tax. Transient occupancy tax receipts of approximately $31,265,000 represent the fourth largest revenue source for the City, contributing approximately 19% of General Fund tax revenues and approximately 13% of total General Fund revenues during Fiscal Year 2008-09. A transient occupancy tax (“TOT”) is imposed on persons staying 30 days or less in a hotel, motel, inn, hostelry, tourist home, rooming house or other lodging place within the City. The TOT has been in effect since November 1963. The current tax rate is 14%, last increased in 2005. Exemptions are granted to federal, State of California and City of Santa Monica officials or employees on official business. Exemptions account for a very minor amount of the total TOT base. Payments are made to the City on a monthly or quarterly basis and are then deposited to the City’s General Fund. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Proposition 62” and “—Proposition 218.”

Business License Tax. Business license tax receipts of approximately $27,216,000 are an additional significant source of tax revenue for the City contributing approximately 16% of General Fund tax revenues and approximately 13% of total General Fund revenues during Fiscal Year 2008-09. The business license tax represents a City tax upon gross receipts of certain business activities located in the City. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Proposition 62” and “—Proposition 218.”

Other Taxes. The City also imposes a parking facility tax on certain parking garage use and real property transfer tax which have contributed approximately $7,980,000 and $2,653,000, respectively, in Fiscal Year 2008-09, approximately 4% of the General Fund total revenue. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Proposition 62” and “—Proposition 218.”

Vehicle License Fee Reduction

The State imposes a vehicle license fee (“VLF”), which is the portion of the fees paid in lieu of personal property taxes on a vehicle. The vehicle license fee is based on vehicle value and declines as the vehicle ages. Prior to the adoption of the Fiscal Year 2004-05 State Budget, the fee was 2 percent of the value of a vehicle. Through legislation in prior fiscal years, the State enacted vehicle license fee reductions under which the State was required to “backfill” local governments for their revenue losses resulting from the

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lowered fee. The Fiscal Year 2004-05 State Budget permanently reduced the vehicle license fee from 2 percent to 0.65 percent and deleted the requirement for backfill payments, providing, instead, that the amount of the backfill requirement will be met by an increase in the property tax allocation to cities and counties, and such backfill amounts are reflected under “Property Taxes” above. See “RISK FACTORS—State Budget.”

For the Fiscal Year ended June 30, 2009, the City received $263,000 (down from $390,000 in 2007-08) in total vehicle license fees.

Long-Term Debt

The City may issue general obligation bonds for the acquisition and improvement of real property, subject to the approval of two-thirds of the voters voting on the bond proposition. A tax on all real property within the City to pay principal of and interest on general obligation bonds is levied by the City and collected by the County on the secured and unsecured property tax bills. As of September 30, 2009, the City had $16,745,000 in general obligation bonds outstanding. The City Charter of the City limits general obligation bonded indebtedness to 10.0% of the total assessed valuation of property within the City, exclusive of any indebtedness that has been or may be incurred for the purpose of acquiring and establishing a system of waterworks for the supplying of water, or for the purpose of constructing sewers or drains in the City, for which purposes a further indebtedness may be incurred by the issuance of bonds, subject only to the provisions of the California Constitution and of the City Charter.

The City may enter into certain long-term lease obligations without first obtaining voter approval. The City has entered into various lease arrangements under which the City is obligated to make annual payments. Securities have been issued which certificate or are payable from these lease arrangements. As of September 1, 2009, there were $134,960,000 in non-voter approved bonded or certificated City lease obligations outstanding. The City may enter into such arrangement in the future to fund City projects or initiatives, payable from moneys in the General Fund, and such obligations may be material. The City’s 2009-10 budget does not indicate any such new borrowing.

Contained within the City are overlapping local agencies providing public services which have issued general obligation bonds and other types of indebtedness. A table setting forth the direct and overlapping debt of the City as of June 30, 2009 is provided below:

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City of Santa Monica Statement of Overlapping Debt

As of June 30, 2009

2008-09 Assessed Valuation: $23,488,853,129 Redevelopment Incremental Valuation: Adjusted Assessed Valuation: $16,441,474,680

7,047,378,449

Total Debt City’s Share of DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: 6/30/09 % Applicable (1) Los Angeles County Flood Control District $ 84,705,000 1.793 % $ 1,518,761

Debt 6/30/09

Metropolitan Water District 293,425,000 0.892 2,617,351 Los Angeles Community College District 2,408,605,000 0.009 216,774 Santa Monica Community College District 241,365,685 58.287 140,684,817 Los Angeles Unified School District 8,046,220,000 0.0002 16,092 Santa Monica-Malibu Unified School District 126,280,034 58.358 73,694,502 City of Santa Monica 18,455,000 100. 18,455,000 Los Angeles County Regional Park and Open Space Assessment District 246,875,000 1.761 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $241,550,766

4,347,469

DIRECT AND OVERLAPPING GENERAL FUND DEBTLos Angeles County General Fund Obligations $928,941,195 1.761 % $ 16,358,654

:

Los Angeles County Pension Obligations 235,690,861 1.761 4,150,516 Los Angeles County Superintendent of Schools Certificates of Participation 15,904,264 1.761 280,074 Santa Monica Community College District Certificates of Participation 26,710,000 58.287 15,568,458 Los Angeles Unified School District Certificates of Participation 440,351,710 0.0002 881 Santa Monica-Malibu Unified School District Certificates of Participation 16,776,501 58.358 9,790,430 City of Santa Monica General Fund Obligations 67,880,000 100. TOTAL DIRECT AND OVERLAPPING GENERAL FUND DEBT $114,029,013

67,880,000

GROSS COMBINED TOTAL DEBT $355,579,779

(2)

Ratios to 2008-09 Assessed Valuation Direct Debt ($18,455,000) ................................................................... 0.08%

:

Total Direct and Overlapping Tax and Assessment Debt ....................... 1.03% Ratios to Adjusted Assessed Valuation Combined Direct Debt ($86,335,000) ................................................. 0.53%

:

Combined Total Debt ............................................................................ 2.16% STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/09

: $0

(1) Percentage of overlapping agency's assessed valuation located within boundaries of the City. (2)

Source: California Municipal Statistics, Inc.

Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations.

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A table setting forth the pro-forma statement of net debt of the City outstanding as of June 30, 2009 is provided below:

City of Santa Monica Net Debt

(As of June 30, 2009)

Type of Issue Outstanding

Principal Amount Final Maturity General Obligation Bonds Main Library Improvements 1998 $955,000 2010 Main Library Improvements 2002 2022 17,500,000 Subtotal 18,455,000 Lease Obligations Lease Revenue Bonds (Public Safety Facilities) 1999 9,940,000 (1) 2021 Lease Revenue Bonds (Public Safety Facilities) 2002 13,125,000 2021 Parking Authority Lease Revenue Bonds 2002 7,520,000 2016 Lease Revenue Bonds (Civic Center Parking Project) 2004 2034 37,295,000 Subtotal 67,880,000 Revenue Bonds Wastewater Enterprise Revenue Bonds 1993 9,670,000 2022 Wastewater Enterprise Refunding Revenue Bonds 2005 2018 16,090,000 Subtotal 25,760,000 Gross Direct Debt 112,095,000 Less: Revenue Bonds (25,760,000) Net Direct Debt 86,335,000 Plus: Tax Allocation Debt 72,900,000 (2) Plus: Overlapping Debt(3) 269,244,779 Total Net Debt $428,479,779 (1) To be refunded by the Series 2009 Bonds. (2) Debt of the Santa Monica Redevelopment Agency. (3)

Source: City of Santa Monica Finance Department City of Santa Monica Finance Department (from data from California Municipal statistics, Inc.) as of June 30, 2009.

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The following table sets forth assessed value within the City, the applicable debt limit, the ratio of net bonded debt to assessed value and the net bonded debt per capita.

City of Santa Monica Assessed Value, Debt Limit and Ratio of Bonded Debt

to Assessed Value and Per Capita For Fiscal Years 2005-06 through 2008-09

Fiscal Year

Ended June 30

Estimated Population

Total Assessed

Value (000)s

Legal Debt Limit

(000,000)s

Total Net Bonded

Debt (000s)

Ratio of Bonded Debt to

Assessed Value

Net Bonded Debt Per Capita

2005 90,678 $16,546,884 $1,655 $103,060 0.62 $1,137 2006 90,750 18,098,550 1,810 104,750 0.58 1,154 2007 91,124 19,705,610 1,971 99,915 0.51 1,096 2008 91,439 21,122,724 2,112 95,710 0.45 1,047

2009 92,494 (1) 23,412,713 2,341 91,355 0.39 988 (1)

Source: City of Santa Monica Comprehensive Annual Financial Report for Fiscal Years 2004-05 through 2007-08; City of Santa Monica Finance Department for Fiscal Year 2008-09.

Unaudited

General Fund Financial Summary

The information contained in the following tables of revenues, expenditures and changes in fund balances, and assets, liabilities and fund equity has been derived from the City’s audited financial statements for the four Fiscal Years 2004-05 through 2007-08, the unaudited financial statements for Fiscal Year 2008-09 and the City’s adopted Budget for Fiscal Year 2009-10. See APPENDIX B—“AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE YEAR ENDED JUNE 30, 2008.”

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A copy of the City’s audited financial statements for the fiscal year ended June 30, 2008 is attached as Appendix B hereto. Audited financial statements for prior years are available upon request from the Finance Department of the City.

City of Santa Monica General Fund Balance Sheet

For Fiscal Years 2004-05 through 2008-09

Fiscal Year Ended June 30

2005 2006 2007 2008 2009(1)

Assets Cash and investments $ 130,925,620 $ 119,059,275 $ 138,392,952 $ 124,459,829 $ 173,012,780Receivables (net, where applicable, of allowance for uncollectibles

(2)

Accounts 6,273,654 6,112,872 8,306,186 7,301,931 6,804,986 Notes 1,736,229 2,996,229 2,956,229 2,916,229 2,876,229 Property taxes 839,499 1,660,512 487,428 1,038,841 1,197,298 Interest 891,704 1,069,920 1,046,361 1,456,881 1,033,694 Other Governments 90,551 122,434 -- -- -- Due from other funds 222,877 -- 3,402,840 1,376,555 Inventory 769,733 799,614 909,796 938,999 1,381,714 Prepaids 168,092 181,313 189,741 855,343 300,046 Cash with fiscal agent 28,327,648 16,314,299 3,998,825 2,725,992 1,355,138 Advances to other funds 32,543,229 38,547,810 34,269,608 35,105,966 TOTAL ASSETS

-- $ 202,788,836 $ 181,864,278 $ 185,557,126 $ 180,202,851 $ 225,748,103

Liabilities and Fund Balance

Liabilities Accounts payable and accrued liabilities $ 18,279,905 $ 14,009,795 $ 11,747,860 $ 12,293,534 $ 11,156,793 Contracts payable (retained percentage) 1,027,242 538,238 236,491 473,755 515,899 Due to other governments 1,313,747 -- -- 438,629 -- Deferred revenue 12,831,615 13,485,321 16,977,041 17,440,343 996,991 Deposits – payable from restricted assets 781,508 862,692 926,130 754,711 TOTAL LIABILITIES

15,727,952 $ 34,052,017 $ 28,896,046 $ 29,887,522 $ 31,400,972 $ 28,793,873

Fund Balance: Total Reserved Fund Balance 116,386,390 97,044,588 91,843,183 81,056,800 41,432,273 Total Unreserved Fund Balance –

Designated 31,610,855 27,540,221 54,416,418 62,572,543 147,861,391 Total Unreserved Fund Balance –

Undesignated

(2)(3)

20,739,574 28,383,423 9,410,003 5,172,536 TOTAL FUND BALANCE

7,660,566 168,736,819 152,968,232 155,669,604 148,801,879

TOTAL LIABILITIES & FUND BALANCE 196,954,230

$ 202,788,836 $ 181,864,278 $ 185,557,126 $ 180,202,851 $ 225,748,103 (1) Unaudited Actuals. (2) Includes $56.4 million of funds received by the City in 2004 and 2006 in conjunction with a legal settlement related to contamination of the

City’s water and held in a special revenue fund until 2009 when all restrictions on expenditures of funds were lifted. (3)

Source: City of Santa Monica Comprehensive Annual Financial Report for Fiscal Years 2004-05 through 2007-08; City of Santa Monica Finance Department.

Reflects a change in the presentation of amounts needed to fund the remaining full cost of uncompleted projects. Prior to Fiscal Year 2009, this balance was reported as Reserved Fund Balance; starting with Fiscal Year 2009, the balance is reported as Unreserved Fund Balance – Designated. Designation for Specific Continuing Capital Projects at June 30, 2009 is $30.3 million.

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City of Santa Monica General Fund

Summary of Revenues and Capital and Operating Expenditures For Fiscal Years 2004-05 through 2008-09

Fiscal Year Ended June 30

2005 2006 2007 2008 2009Revenues

(1)

Property taxes $ 25,650,975 $ 28,031,618 $ 32,586,134 $ 36,067,632 $ 36,763,026 Sales taxes 27,579,776 31,871,593 33,267,253 32,356,941 28,296,696 Other taxes 68,062,807 94,065,034 100,228,061 104,250,391 100,991,562 Licenses and permits 39,114,188 18,276,305 19,093,485 20,109,435 20,315,341 Intergovernmental 769,170 498,490 1,101,941 446,800 652,174 Charges for services 12,292,054 19,728,267 25,578,687 25,778,223 28,122,186 Fines and forfeitures 13,332,411 13,101,713 14,191,722 14,567,262 14,113,906 Investment income 4,109,730 4,192,437 7,979,847 5,799,315 5,411,464 Rental income 7,209,164 5,165,179 5,873,728 5,696,255 5,388,721 Other 1,426,645 6,263,572 3,980,180 5,117,139 Total revenue

7,510,002 $ 199,546,920 $ 221,194,208 $ 243,881,038 $ 250,189,393 $ 247,565,078

Expenditures General government $ 28,895,001 $ 32,754,548 $ 35,328,010 $ 40,722,122 $ 44,733,450 Public safety 79,226,865 81,621,114 86,716,041 88,308,262 93,282,777 General services 23,081,361 34,613,325 32,679,323 36,943,004 45,437,347 Cultural and recreation services 52,003,224 39,405,674 42,987,556 32,316,853 33,498,492 Library 30,092,186 18,662,989 9,218,047 10,219,930 10,024,203 Housing and community

development 24,436,192 26,750,282 29,684,528 31,538,299 29,377,311 Other 1,087,085 2,189,224 609,225 -- Total expenditures

-- $ 238,821,914 $ 235,997,156 $ 237,222,730 $ 240,048,470 $ 256,353,580

Excess of revenues over expenditures $ (39,274,994) $ (14,802,948) $ (6,658,308) $ 10,140,923 $ (8,788,502) Other financing sources (uses) Proceeds from issuance of long-

term debt $ 38,930,000 -- -- -- -- Transfers in 10,984,330 11,406,631 9,811,028 11,408,818 72,076,580 Transfers out

(2)

(17,031,729) (12,372,270) (13,767,964) (28,417,466) (15,135,727) Premium on debt issued 163,064 -- -- -- Total other financing sources

-- $ 33,045,665 $ (965,639) $ 3,956,936 $ (17,008,648) $ 56,940,853

Excess of revenues and other sources over expenditures and other uses $ (6,229,329) $ (15,768,587) $ 2,701,372 $ (6,867,725) $ 48,152,351 Fund balance at beginning of year $ 174,996,148 $ 168,736,819 $ 152,968,232 $ 155,669,604 Fund balance at end of year

$ 148,801,879 $ 168,736,819 $ 152,968,232 $ 155,669,604 $ 148,801,879 $ 196,954,230

(1) Unaudited actuals. (2)

Source: City of Santa Monica Comprehensive Annual Financial Report for Fiscal Years 2004-05 through 2007-08; City of Santa Monica Finance Department.

Includes $56.4 million in funds received by the City in 2004 and 2006 in conjunction with a legal settlement related to the contamination of the City’s water and held in a special revenue fund until 2009 when all restrictions on expenditures of funds were lifted.

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The following table sets forth the budgetary information for Fiscal Year 2009-10 as adopted June 23, 2009.

City of Santa Monica General Fund

Revenues and Expenditures-Appropriations Fiscal Year 2009-10 Adopted Budget

Fiscal Year 2009-10

Adopted Budget

($000’s)

Budgeted Revenues: Property Taxes $ 35,617 Sales Taxes 27,136 Other Taxes 102,724 Licenses and Permits 21,035 Intergovernmental 499 Charges for Services 29,969 Fines and Forfeitures 17,615 Use of Money & Property 10,418 Other Total Revenues

2,169 $ 247,182

Appropriations General Government $ 44,945 Public Safety 95,313 General Services 36,493 Cultural and Recreation Services 24,141 Library 10,749 Housing and Community Dev. 22,385 Other Subtotal

5,354 $ 239,380

Capital Projects Total Appropriations

25,027 $ 264,407

Budgeted Fiscal Year Revenues Less Appropriations for Operating and Capital

$ (17,225)

Use of One-Time Funding and Fund Balance $ 17,225

(1)

Investment of City Funds

Utility User’s Tax is budgeted at approximately $30.6 million, Transient Occupancy Tax at approximately $33.2 million, and Business License Tax at approximately $26.6 million.

The City may invest moneys not immediately required for operations in a manner consistent with the City’s Investment Policy (the “Investment Policy”) and State law.

The Investment Policy. An Investment Committee, consisting of the City Manager, Assistant City Manager, Deputy City Manager, Director of Finance/City Treasurer, and the Principal Investment Analyst, provides general oversight and acts in an advisory capacity regarding City investments. In addition, the Committee will include one other department head serving one-year terms on a rotating basis. The Committee

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meets at least once each calendar quarter to review and evaluate previous investment activity, to review the current status of all funds held by the City, to discuss anticipated cash requirements and investment activity for the next quarter, and to discuss investment strategy with the Director of Finance/City Treasurer. The policy was recently certified by the Association of Public Treasurers, United States and Canada.

The Investment Policy establishes three objectives for City investment:

(1) Safety of principal

(2)

: The overall value of City funds shall not be diminished in the process of securing and investing those funds or over the duration of the investments.

Liquidity of funds

(3)

: Funds shall be made available to meet all anticipated City obligations and a prudent reserve shall be kept to meet unanticipated cash requirements.

Return on investment

Specific Investment Restrictions. The Investment Policy mandates “prudent” investment in those instruments specifically authorized by State law and establishes additional diversification guidelines with respect to instruments, maturity, and deposit institutions. It is the City Treasurer’s policy to hold investments to maturity and she does not anticipate any event in the future that would require selling investments prior to maturity. The Investment Policy restricts the average weighted maturity of all pooled City investments to a maximum of three years. The City’s practice is not to permit investment of the City’s non-pool securities either in derivatives or reverse repurchase agreements, nor does it permit leveraging of the City’s investment portfolio.

: Earn a market rate of interest from City funds commensurate with the objectives of safety and availability of the principal invested.

The Investment Policy is annually submitted to the City Council for approval. There is no assurance that State law and/or the Investment Policy will not be amended in the future to allow for investments that are currently prohibited.

The Monthly Report. Section 711 of the City Charter delegates investment authority to the City Treasurer. The Investment Policy requires the City Treasurer to keep a record of all investment transactions, and make monthly reports to the City Council and the City Manager detailing and summarizing all transactions and stating the present status of City investments (the “Monthly Report”). The Monthly Report dated as of September 30, 2009, indicates that 70.2% of the City’s investment portfolio ($430.1 million) was invested in Federal Agency securities, 11.9% ($73.1 million, all of which is 100% guaranteed by the Federal Deposit Insurance Corporation through its Temporary Liquidity Guarantee Program) was invested in corporate medium term notes, 12.3% ($75 million) was invested in the Local Agency Investment Fund of the State (LAIF) and 5.3% ($32.6 million) was invested in money market funds. The market value of the City’s investment portfolio was 100.2% of its book value. As of September 30, 2009, the City Treasurer reports an average annual yield to maturity of the City’s investment portfolio of 1.92% and an average weighted maturity of 630 days.

Insurance

The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees and others; and natural disasters. The City has chosen to establish risk financing internal service funds where assets are set aside for claim settlements associated with such risks of loss up to certain limits and has obtained excess liability coverage through the Authority for California Cities Excess Liability (ACCEL), a joint powers authority of twelve medium-size California municipalities. ACCEL is a member of the California State Association of Counties Excess Insurance Authority for the purpose of providing excess workers’ compensation coverage for major employee injury risks through a program of pooled self insurance/re-insurance and insurance on a risk sharing basis.

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The City retains self-insurance up to $1,000,000 for general liability, automobile liability, and bus operations liability. ACCEL covers up to an additional $4,000,000 for all liabilities and arranges placement of excess of liability insurance over $5,000,000 up to $100,000,000. The City retains self insurance up to $750,000 for workers’ compensation. California State Association of Counties Excess Insurance Authority covers up to an additional $4,000,000 for workers’ compensation and arranges for excess of workers compensation over $5,000,000 and up to statutory limits. No claim settlements have exceeded insurance coverage in any of the past three years.

In order to provide funds to pay claims, ACCEL collects premiums from each member. The premiums paid are credited with investment income at the rate earning on the Authority’s investments. Based on ACCEL’s June 30, 2009 audited financial statements, the City had deposits of $2,549,524 (17.1% of ACCEL’s total deposits) net of unpaid claims with ACCEL. Total assets of ACCEL at June 30, 2009 were $30,625,253. ACCEL has no unpaid contributions.

The City’s unpaid claims liabilities are based on the results of actuarial studies. The unpaid claims liabilities are compiled by the Risk Manager of the City and include amounts for claims incurred but not reported as of year end. Claims liabilities are calculated considering the effects of inflation, recent claim settlement trends including frequency and amount of payouts and other economic and social factors. Net present values of the unpaid claims liabilities are estimated for the year ended June 30, 2009, based on interest rates of 4.45%. Revenues of the risk management funds, together with funds to be provided in the future, are expected to provide adequate resources to meet liabilities as they come due.

RISK FACTORS

The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating purchase of the Series 2009 Bonds. However, they do not purport to be an exhaustive listing of risks and other considerations which may be relevant to an investment in the Series 2009 Bonds. In addition, the order in which the following factors are presented is not intended to reflect the relative importance of any such risks.

General Considerations — Security for the Series 2009 Bonds

The Series 2009 Bonds are special obligations of the Authority, payable solely from Base Rental Payments and the other assets pledged under the Indenture. Neither the faith and credit nor the taxing power of the Authority, the City or the State, or any political subdivision thereof, is pledged to the payment of the Series 2009 Bonds. The Authority has no taxing power.

The obligation of the City to make the Base Rental Payments does not constitute a debt of the City or the State or of any political subdivision thereof within the meaning of any constitutional or statutory debt limit or restriction, and does not constitute an obligation for which the City or the State is obligated to levy or pledge any form of taxation or for which the City or the State has levied or pledged any form of taxation.

Although the Lease Agreement does not create a pledge, lien or encumbrance upon the funds of the City, the City is obligated under the Lease Agreement to pay the Base Rental Payments and Additional Rental Payments from any source of legally available funds and the City has covenanted in the Lease Agreement that it will take such action as may be necessary to include all Base Rental Payments and Additional Rental Payments due under the Lease Agreement as a separate line item in its annual budgets and to make necessary annual appropriations for all such Rental Payments. The City is currently liable and may become liable on other obligations payable from general revenues, some of which may have a priority over the Base Rental Payments.

The City has the capacity to enter into other obligations which may constitute additional charges against its revenues. To the extent that additional obligations are incurred by the City, the funds available to

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make Base Rental Payments may be decreased. In the event the City’s revenue sources are less than its total obligations, the City could choose to fund other activities before making Base Rental Payments and other payments due under the Lease Agreement. The same result could occur if, because of California Constitutional limits on expenditures, the City is not permitted to appropriate and spend all of its available revenues. However, the City’s appropriations have never exceeded the limitation on appropriations under Article XIIIB of the California Constitution. See “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS—Article XIIIB of the California Constitution.”

Abatement

In the event of substantial interference with the City’s right to use and occupy any portion of the Property by reason of damage to, or destruction or condemnation of the Property, or any defects in title to the Property, Base Rental Payments will be subject to abatement. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2009 BONDS—Abatement.” In the event that such portion of the Property, if damaged or destroyed by an insured casualty, could not be replaced during the period of time in which proceeds of the City’s rental interruption insurance will be available in lieu of Base Rental Payments, plus the period for which funds are available from the Reserve Fund or other funds and accounts established under the Indenture, or in the event that casualty insurance proceeds are insufficient to provide for complete repair or replacement of such portion of the Property or redemption of the Series 2009 Bonds, there could be insufficient funds to make payments to Owners in full.

It is not possible to predict the circumstances under which such an abatement of rental may occur. In addition, there is no statute, case or other law specifying how such an abatement of rental should be measured. For example, it is not clear whether fair rental value is established as of commencement of the lease or at the time of the abatement. If the latter, it may be that the value of the Property is substantially higher or lower than its value at the time of the execution and delivery of the Series 2009 Bonds. Abatement, therefore, could have an uncertain and material adverse effect on the security for and payment of the Series 2009 Bonds.

If damage, destruction, title defect or eminent domain proceedings with respect to the Property results in abatement of the Base Rental Payments related to such Property and if such abated Base Rental Payments, if any, together with moneys from rental interruption or use and occupancy insurance (in the event of any insured loss due to damage or destruction), eminent domain proceeds, if any, and moneys available in the Reserve Fund, are insufficient to make all payments of principal and interest with respect to the Series 2009 Bonds during the period that the Property is being replaced, repaired or reconstructed, then all or a portion of such payments of principal and interest may not be made. Under the Lease Agreement and the Indenture, no remedy is available to the Series 2009 Bond Owners for nonpayment under such circumstances.

Seismic Activity and Natural Disasters

The City, like all southern California communities, may be subject to unpredictable seismic activity, fires or floods. The City, like most regions that border the Pacific Ocean, is an area of significant seismic activity and, therefore, is subject to potentially destructive earthquakes. The San Andreas fault is the major active fault in the State, and is approximately 40 miles from the Property. Several active or potentially active faults are located closer to the Property, including the Santa Monica fault, the Malibu Coast fault and the Newport-Inglewood fault. According to the City of Santa Monica Final Master Environmental Assessment (dated April 1996), the City is subject to sometimes violent shaking from periodic earthquakes.

On January 17, 1994, a 6.8 magnitude earthquake occurred in Northridge, California which resulted in 450 injuries and 3 fatalities in the City. The City sustained damage to 530 buildings, including 2300 housing units and the temporary shutdown of St. John’s Hospital.

The Safety Element of the City of Santa Monica General Plan (dated January 1995) identifies the area of the City where the Project is located as one that is considered to be at a very low level of susceptibility to

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liquefaction in the event of an earthquake. The State of California Seismic Hazard Evaluation of the Beverly Hills Quadrangle (1999) indicates that the site is not in a liquefaction hazard area in the event of seismic activity. The Final Environmental Impact Report prepared for the Project (February 2003) states that given the dominant silt and clay native soils at the site and the anticipated depth to groundwater of approximately 50 feet below grade, the potential for liquefaction occurring at the existing ground surface is considered low.

The California Department of Mines and Geology has modeled the Site as having a 10 percent probability of experiencing 0.4 - 0.5 g ground acceleration over the next 50 years. The Project was designed in accordance with the then applicable industry standards for structural design in order to minimize the potential for structural failure due to seismic activity.

The City is also susceptible to tsunami and seiche hazards. A tsunami is a sea wave generated by a submarine earthquake, landslide or volcanic eruption. A seiche is another form of earthquake- or landslide-induced wave or oscillation that can be generated in an enclosed body of water such as a lagoon or harbor. Depending on their magnitude, tsunamis and seiches may cause damage along Santa Monica Bay. According to the City, the Project does not appear to be located in an area that is susceptible to tsunami run up and seiche hazards.

In the event of a severe earthquake, fire, flood or other natural disaster, there may be significant damage to both property and infrastructure in the City, which could impact the ability of the City to make Base Rental Payments when due and, accordingly, could have an adverse effect on the Authority’s ability to make timely payments of principal and interest with respect to the Series 2009 Bonds. The City is not required under the Lease Agreement to maintain earthquake or flood insurance on the Property. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2009 BONDS—Insurance.”

Other Financial Matters

Due to recent economic changes in the State and the United States, it is possible that the general revenues of the City will decline, particularly those based on tourism. Such a reduction in revenues may include, but may not be limited to, a decline in TOT and sales tax revenues. Such financial matters may have a detrimental impact on the City’s General Fund, and, accordingly, may reduce the City’s ability to make Base Rental Payments. See “CITY OF SANTA MONICA FINANCES Tax Receipts—Transient Occupancy Tax” for information on TOT revenues of the City; see “CITY OF SANTA MONICA FINANCES—Vehicle License Fee Reduction” for information on the loss of vehicle license fee revenue by the City.

State Budget

The following information concerning the State’s budgets has been obtained from publicly available information which the City believes to be reliable; however, the City does not guaranty the accuracy or completeness of this information and has not independently verified such information. Furthermore, it should not be inferred from the inclusion of this information in this Official Statement that the principal of or interest on the Series 2009 Bonds is payable by or the responsibility of the State of California.

The State of California is experiencing significant financial and budgetary stress. State budgets are affected by national and state economic conditions and other factors over which the City has no control. The State’s financial condition and budget policies affect communities and local public agencies throughout California. To the extent that the State budget process results in reduced revenues to the City, the City will be required to make adjustments to its budget. Each State budget, and notably the State’s 2009-10 budget, contains a number of measures which impact the City’s finances.

The State Budget Act for Fiscal Year 2008-09 was signed by the Governor on September 23, 2008—the latest in State history. Thereafter, on-going weak economic conditions resulted in significant revenue shortfalls and the Governor declared a fiscal emergency and called special sessions of the Legislature to

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consider budget actions to address the problems. The Governor’s proposed budget for Fiscal Year 2009-10, released December 31, 2008, estimated there would be a budget gap of more than $40 billion for the 18-month period ending June 30, 2010. Following lengthy budget negotiations, on February 19, 2009, the State Legislature passed revisions to the State Budget Act for the remainder of Fiscal Year 2008-09, as well as the State Budget Act for Fiscal Year 2009-10 and related legislation, which the Governor signed on February 20, 2009 after making additional line-item vetoes. On July 28, 2009, the Governor signed into law a series of amendments to the 2009-10 State Budget (the “2009-10 Budget Amendments”).

The State’s financial difficulties may affect the amount and timing of payments to or for the benefit of cities of funds provided by the State. From time to time, some of the State’s budget solutions may increase the financial stress of cities and other local governments because they (1) decrease local revenues (particularly the property tax, road improvement funding, public safety or other categorical funded initiatives) or (2) directly or indirectly increase demand for local programs (such as public safety or indigent health programs). There can be no assurances that the State’s financial difficulties will not materially adversely affect the financial condition of the City.

The 2009-10 Budget Amendments were designed to address the State’s budget deficit. The 2009-10 Budget Amendments project $89.5 billion of General Fund revenues and authorize $84.6 billion of expenditures. Since many of the actions taken to balance the State’s Fiscal Year 2009-10 Budget were either one-time actions, or involve loans which have to be repaid, or are based on temporary revenue increases or the limited receipt of federal stimulus funds, budget gaps of several billions of dollars a year are expected to recur in 2010-11 and subsequent years. The State Department of Finance has projected that, using expenditure obligations under existing law and various assumptions concerning revenues in future years, the State would, in the absence of taking additional steps to balance its budget, face an “operating deficit” (expenditures exceeding revenues in the same fiscal year) of $7.4 billion in Fiscal Year 2010-11, $15.5 billion in 2011-12 and $15.1 billion in 2012-13. These projections in turn are based on a number of assumptions.

The financial condition of the State is subject to a number of other risks in the future, including particularly potential significant increases in required state contributions to the Public Employees’ Retirement System, increased financial obligations related to Other Post-Employment Benefits, and increased debt service.

The 2009-10 Budget Amendments included two especially significant revenue provisions affecting the City. The State’s 2009-10 Budget includes an approximately $2 billion borrowing of property tax funds from local government under the provisions of Proposition 1A of 2004. The City’s share of the borrowing, which would have resulted in reduced revenues to the City’s General Fund, was $3,149,130. However, by reason of the City’s participation in the State-sponsored securitization of the City’s Proposition 1A receivable (i.,e, the $3,149,130), the City does not expect to suffer any reduction in General Fund revenues as a result of the State’s Proposition 1A property tax borrowing. . See “CITY OF SANTA MONICA—Ad Valorem Property Taxes; Proposition 1A” for a discussion of Proposition 1A and the securitization of the State’s obligation.

Second, the 2009-10 Budget Amendments include a total of $2.05 billion to be taken from local redevelopment agencies through a seizure of $1.7 billion in Fiscal Year 2009-10, and then an additional $350 million in Fiscal Year 2010-11. These funds are to be deposited in county “Supplemental” Educational Revenue Augmentation Funds (“SERAF”) to be distributed to meet the State’s constitutional minimum funding obligation to schools. The SERAF shift is similar to prior educational augmentation fund shifts which most recently have been invalidated by a local California Superior Court. While the legislative formulation of the SERAF shift is different from prior shifts in certain respects, the California Redevelopment Association believes the shift represents an unconstitutional diversion of redevelopment funds which are dedicated to redevelopment, and has filed suit to invalidate the provisions. The California Redevelopment Association estimates the share of this diversion assessed against the City’s redevelopment agency is $20,863,376 for Fiscal Year 2009-10 and $4,295,401 for Fiscal Year 2010-11. The 2009-10 Budget Amendments allow these funds to be paid by a redevelopment agency through the use of any available funds, and does not require the City to make the payments. However, significant penalties are imposed upon redevelopment agencies which

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do not make the payments. The City cannot predict the outcome of the currently pending or any future challenge to the SERAF shift or other legislative changes which may affect the City’s redevelopment agency, or the impact of such changes on the City’s General Fund.

City Impact. As a result of the Proposition 1A borrowing, the State will withhold approximately $3,149,130 of property tax revenues in Fiscal Year 2010, which the City would otherwise expect the State to repay within 3 years. See “CITY OF SANTA MONICA FINANCES—Ad Valorem Property Taxes; Proposition 1A” for a description of Proposition 1A. However, the City and other local governments have elected to participate in a securitization financing offered by a joint powers authority in which they will receive, up front, property tax revenues being borrowed by the State. California Communities, the joint powers authority, has issued bonds securitizing the future payments by the State and will remit the proceeds of the bonds to the local governments, including the City, which opted to participate in the securitization. The State will then repay the bondholders, to pay off the outstanding bonds including interest costs. As a participant in the financing, the City will receive the full amount of its property tax reduction. Payments to all participating agencies are scheduled to occur in two equal installments on or about January 15, 2010 and May 3, 2010.

The SERAF shift of redevelopment property tax increment funds is significant and, if upheld by the courts and repeated in future fiscal years by the Legislature, could affect the finances of the City’s redevelopment agency for years to come. Nevertheless, the City expects that, if ultimately required to be paid, the City’s redevelopment agency will fund its SERAF payment for Fiscal Year 2009-10 and 2010-11 from its own property tax increment and without direct impact on the City’s General Fund.

The Authority and the City cannot predict what actions will be taken in the future by the State Legislature and the Governor to address the State’s current and future budget deficits. Future State budgets could be affected by national economic conditions and other factors over which the City will have no control. On November 18, 2009, the State Legislative Analyst’s Office estimated the State could face a budget deficit in excess of $20 billion through Fiscal Year 2010-11. To the extent that the State’s annual budget process results in reduced revenues or increased expenses to the City, the City will be required to make adjustments to its budget.

Substitution, Addition and Removal of Property; Additional Bonds

The Authority and the City may amend the Lease Agreement to substitute alternate real property for any portion of or add additional real property to the Property or to release a portion of the Property from the Lease Agreement, upon compliance with all of the conditions set forth in the Lease Agreement and summarized below. After a substitution or release, the portion of the Property for which the substitution or release has been effected shall be released from the leasehold encumbrance of the Lease Agreement. See “SECURITY FOR AND SOURCES OF PAYMENT FOR THE SERIES 2009 BONDS―Substitution, Addition and Removal of Property.” Moreover, the Authority may issue Additional Bonds secured by Base Rental Payments which are increased from current levels.

Although the Lease Agreement requires, among other things, that the Property, as constituted after such substitution or release, has an annual fair rental value greater than or equal to 105% of the maximum Base Rental Payments payable by the City in any Rental Period, it does not require that such Property have an annual fair rental value equal to the annual fair rental value of the Property at the time of substitution or release. Thus, a portion of the Property could be replaced with less valuable real property, or could be released altogether. Such a replacement or release could have an adverse impact on the security for the Series 2009 Bonds, particularly if an event requiring abatement of Base Rental Payments were to occur subsequent to such substitution or release. See APPENDIX A—“SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS—The Lease Agreement—Substitution or Release of the Property.”

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The Indenture requires, among other things, that upon the issuance of Additional Bonds, the Ground Lease and the Lease Agreement shall have been amended, to the extent necessary, so as to increase the Base Rental Payments payable by the City thereunder by an aggregate amount equal to the principal of and interest on such Additional Bonds; provided, however, that no such amendment shall be made such that the sum of Base Rental Payments, including any increase in the Base Rental Payments as a result of such amendment, plus Additional Rental Payments, in any Rental Period shall be in excess of the annual fair rental value of the Property after taking into account the use of the proceeds of any Additional Bonds issued in connection therewith. Such issuance of Additional Bonds could result in the Property, as constituted after such issuance of Additional Bonds, having less than 105% of the maximum Base Rental Payments payable by the City in any Rental Period.

Limited Recourse on Default; No Acceleration of Base Rental

Failure by the City to make Base Rental Payments or other payments required to be made under the Lease Agreement, or failure to observe and perform any other terms, covenants or conditions contained in the Lease Agreement or in the Indenture for a period of 30 days after written notice of such failure and request that it be remedied has been given to the City by the Authority or the Trustee, constitute events of default under the Lease Agreement and permit the Trustee or the Authority to pursue any and all remedies available. In the event of a default, notwithstanding anything in the Lease Agreement or in the Indenture to the contrary, there shall be no right under any circumstances to accelerate the Base Rental Payments or otherwise declare any Base Rental Payments not then in default to be immediately due and payable, nor shall the Authority or the Trustee have any right to re-enter or re-let the Property except as described in the Lease Agreement.

The enforcement of any remedies provided in the Lease Agreement and the Indenture could prove both expensive and time consuming. If the City defaults on its obligation to make Base Rental Payments with respect to the Property, the Trustee, as assignee of the Authority, may retain the Lease Agreement and hold the City liable for all Base Rental Payments thereunder on an annual basis and enforce any other terms or provisions of the Lease Agreement to be kept or performed by the City.

Alternatively, the Authority or the Trustee may terminate the Lease Agreement, retake possession of the Property and proceed against the City to recover damages pursuant to the Lease Agreement. Due to the specialized nature of the Property or any property substituted therefor pursuant to the Lease Agreement and the restrictions on its use, no assurance can be given that the Trustee will be able to re-let the Property so as to provide rental income sufficient to make all payments of principal of, interest and premium, if any, on the Series 2009 Bonds when due, and the Trustee is not empowered to sell the Property for the benefit of the Owners of the Series 2009 Bonds. Any suit for money damages would be subject to limitations on legal remedies against cities in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2009 BONDS” and APPENDIX A—”SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The Lease Agreement—Default.” See also “THE PROPERTY” for a description of the County Covenant and a use restriction applicable to the Property.

Possible Insufficiency of Insurance Proceeds

The Lease Agreement obligates the City to keep in force various forms of insurance, subject to deductibles, for repair or replacement of the Property in the event of damage, destruction or title defects, subject to certain exceptions. The Authority and the City make no representation as to the ability of any insurer to fulfill its obligations under any insurance policy obtained pursuant to the Lease Agreement and no assurance can be given as to the adequacy of any such insurance to fund necessary repair or replacement or to pay principal of and interest on the Series 2009 Bonds when due. In addition, certain risks, such as earthquakes and floods, are not covered by the insurance required under the Lease Agreement. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2009 BONDS—Insurance.”

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Limitations on Remedies

The rights of the Owners of the Series 2009 Bonds are subject to the limitations on legal remedies against cities in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. Additionally, enforceability of the rights and remedies of the Owners of the Series 2009 Bonds, and the obligations incurred by the City, may become subject to the federal bankruptcy code (Title 11, United States Code) (the “Bankruptcy Code”) and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors’ rights generally, now or hereafter in effect, equity principles which may limit the specific enforcement under State law of certain remedies, the exercise by the United States of America of the powers delegated to it by the U.S. Constitution, the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose and the limitations on remedies against cities in the State. Bankruptcy proceedings, or the exercise of powers by the Federal or State government, if initiated, could subject the Owners of the Series 2009 Bonds to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently may entail risks of delay, limitation, or modification of their rights. Under Chapter 9 of the Bankruptcy Code, which governs the bankruptcy proceedings for public agencies such as the City, there are no involuntary petitions in bankruptcy. If the City were to file a petition under Chapter 9 of the Bankruptcy Code, the Owners of the Series 2009 Bonds, the Trustee and the Authority could be prohibited from taking any steps to enforce their rights under the Lease Agreement, and from taking any steps to collect amounts due from the City under the Lease Agreement.

Loss of Tax Exemption

As discussed under the heading “TAX MATTERS,” the interest on the Series 2009 Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date of delivery of the Series 2009 Bonds, as a result of acts or omissions of the Authority or the City in violation of its covenants in the Indenture and the Lease Agreement. Should such an event of taxability occur, the Series 2009 Bonds would not be subject to a special redemption and would remain Outstanding until maturity or until redeemed under the redemption provisions contained in the Indenture.

No Liability of Authority to the Owners

Except as expressly provided in the Indenture, the Authority will not have any obligation or liability to the Owners of the Series 2009 Bonds with respect to the payment when due of the Base Rental Payments by the City, or with respect to the performance by the City of other agreements and covenants required to be performed by it contained in the Lease Agreement or the Indenture, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture.

CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS

There are a number of provisions in the State Constitution that limit the ability of the City to raise and expend tax revenues.

Article XIIIA of the California Constitution

On June 6, 1978, California voters approved an amendment (commonly known as both Proposition 13 and the Jarvis-Gann Initiative) to the California Constitution. This amendment, which added Article XIIIA to the California Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property value to mean “the county assessor’s valuation of real property as shown on the 1975/76 tax bill under ‘full cash value’, or thereafter, the appraised value of real property newly constructed, or when a change in ownership has occurred after the 1975 assessment.” The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or a reduction in the

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consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to one percent of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition (55% in the case of certain school facilities). Property taxes subject to Proposition 13 are a significant source of revenues to the City’s General Fund. See “CITY OF SANTA MONICA FINANCES.”

Legislation enacted by the California Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. Tax rates for voter approved bonded indebtedness and pension liability are also applied to 100% of assessed value. Redevelopment agencies may capture a significant portion of taxes attributable to the assessed value of real property located within redevelopment project areas of such agencies, and this is the case in the City.

Future assessed valuation growth allowed under Article XIIIA (new construction, change of ownership, 2% annual value growth) is allocated on the basis of “situs” among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and school districts share the growth of “base” revenue from the tax rate area. Each year’s growth allocation becomes part of each agency’s allocation the following year. Article XIIIA effectively prohibits the levying of any other ad valorem property tax above the 1% limit except for taxes to support indebtedness approved by the voters as described above.

Article XIIIA has subsequently been amended to permit reduction of the “full cash value” base in the event of declining property values caused by damage, destruction or other factors, and to provide that there would be no increase in the “full cash value” base in the event of reconstruction of property damaged or destroyed in a disaster and in certain other limited circumstances.

Article XIIIB of the California Constitution

At the statewide special election on November 6, 1979, the voters approved an initiative entitled “Limitation on Government Appropriations” which added Article XIIIB to the California Constitution. Under Article XIIIB, state and local government entities have an annual “appropriations limit” which limits the ability to spend certain moneys which are called “appropriations subject to limitation” (consisting of tax revenues and certain state subventions together called “proceeds of taxes” and certain other funds) in an amount higher than the “appropriations limit.” Article XIIIB does not affect the appropriation of monies which are excluded from the definition of “appropriations limit” including debt service on indebtedness existing or authorized as of October 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the “appropriations limit” is to be based on certain 1978-79 expenditures, and is to be adjusted annually to reflect changes in the consumer price index, population and services provided by these entities. Among other provisions of Article XIIIB, if those entities’ revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years.

The City’s appropriations have never exceeded the limitation on appropriations under Article XIIIB of the California Constitution.

Proposition 62

A statutory initiative (“Proposition 62”) was adopted by the voters of the State at the November 4, 1986 General Election which (a) requires that any tax for general governmental purposes imposed by local governmental entities be approved by resolution or ordinance adopted by two-thirds vote of the governmental agency’s legislative body and by a majority of the electorate of the governmental entity, (b) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local

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governmental entity be approved by a two-thirds vote of the voters within the jurisdiction, (c) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax is imposed, (d) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA, (e) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities and (f) requires that any tax imposed by a local governmental entity on or after August 1, 1985 be ratified by a majority vote of the electorate within two years of the adoption of the initiative or be terminated by November 15, 1988. The requirements imposed by Proposition 62 were upheld by the California Supreme Court in Santa Clara County Local Transportation Authority v. Guardino, 11 Ca1.4th 220; 45 Cal.Rptr.2d 207 (1995).

Proposition 62 applies to the imposition of any taxes or the effecting of any tax increases after its enactment in 1986, but the requirements of Proposition 62 are largely subsumed by the requirements of Proposition 218 for the imposition of any taxes or the effecting of any tax increases after November 5, 1996. See “—Proposition 218” below.

The City has effected certain tax increases after the enactment of Proposition 62 in 1986 but prior to the effective date of Proposition 218 on November 5, 1996.

The Guardino decision did not decide, and the California Supreme Court has not otherwise decided, whether Proposition 62 applies to charter cities. The City is a charter city. Cases decided by the California Court of Appeals have indicated that the voter approval requirements of Proposition 62 do not apply to certain taxes imposed by charter cities. See Fielder v City of Los Angeles, 14 Cal. App. 4th 137 (1993), Fisher v County of Alameda, 20 Cal. App. 4th 120 (1993), and Trader Sports, Inc. v. City of San Leandro, 93 Cal. App. 4th 37, 112 Cal. Rptr. 2d 677 (2001).

As of the date of the Official Statement, the City Attorney believes that the provisions of Proposition 62 do not apply to charter cities. However, the City Attorney cannot opine on whether this position may be the subject of future litigation and can give no assurance that this position will be upheld if properly challenged.

If ultimately found applicable to charter cities, however, Proposition 62 could affect the ability of the City to continue the imposition of certain taxes, such as business license taxes, and may further restrict the City’s ability to raise revenue.

Proposition 218

On November 5, 1996, California voters approved Proposition 218—Voter Approval for Local Government Taxes—Limitation on Fees, Assessments, and Charges—Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. Proposition 218 states that all taxes imposed by local governments are deemed to be either general taxes or special taxes. Special purpose districts, including school districts, have no power to levy general taxes. No local government may impose, extend or increase any general tax unless and until such tax is submitted to the electorate and approved by a majority vote. No local government may impose, extend or increase any special tax unless and until such tax is submitted to the electorate and approved by a two-thirds vote.

Proposition 218 also provides that no tax, assessment, fee or charge may be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except: (i) the ad valorem property tax imposed pursuant to Article XIII and Article XIIIA of the California Constitution, (ii) any special tax receiving a two-thirds vote pursuant to the California Constitution, and (iii) assessments, fees and charges for property related services as provided in Proposition 218. Proposition 218 then goes on to add voter requirements for assessments and fees and charges imposed as an incident of property ownership,

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other than fees and charges for sewer, water, and refuse collection services. In addition, all assessments and fees and charges imposed as an incident of property ownership, including sewer, water, and refuse collection services, are subjected to various additional procedures, such as hearings and stricter and more individualized benefit requirements and findings. The effect of such new provisions will presumably be to increase the difficulty a local agency will have in imposing, increasing or extending such assessments, fees and charges.

Proposition 218 also extended the initiative power to reducing or repealing any local taxes, assessments, fees and charges. This extension of the initiative power is not limited to taxes imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees and charges, subject to overriding federal constitutional principles relating to the impairments of contracts. Legislation implementing Proposition 218 provides that the initiative power provided for in Proposition 218 “shall not be construed to mean that any owner or beneficial owner of a municipal security, purchased before or after (the effective date of Proposition 218) assumes the risk of, or in any way consents to, any action by initiative measure that constitutes an impairment of contractual rights” protected by the United States Constitution. However, no assurance can be given that the voters of the City will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges that currently are deposited into the City’s General Fund.

Although a portion of the City’s General Fund revenues are derived from general taxes purported to be governed by Proposition 218, all of such taxes were either imposed, extended or increased prior to the effective date of Proposition 218 or in accordance with the requirements of Proposition 218. No assurance can be given that the voters of the City will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges, such as the transient occupancy tax and the utility tax which support the City’s General Fund. For example, in Fiscal Year 2010, the City has budgeted to receive approximately $30.6 million in General Fund revenues (which constitute approximately 12.4% of General Fund revenues) from the transient occupancy tax, approximately $33.2 million in General Fund revenues (which constitutes approximately 13.4% of General Fund revenues) from the utility user’s tax and approximately $26.6 million from the business license tax. Each of these taxes, and other local taxes, assessments, fees and charges could be subject to reduction or repeal by initiative under Proposition 218.

Unitary Property

Some amount of property tax revenue of the City is derived from utility property which is considered part of a utility system with components located in many taxing jurisdictions (“unitary property”). Under the State Constitution, such property is assessed by the State Board of Equalization (“SBE”) as part of a “going concern” rather than as individual pieces of real or personal property. State-assessed unitary and certain other property is allocated to the counties by SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the City) according to statutory formula generally based on the distribution of taxes in the prior year.

Future Initiatives

Article XIIIA, Article XIIIB and Propositions 62 and 218 were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. From time to time other initiative measures could be adopted, further affecting the City’s current revenues or its ability to raise and expend revenues.

TAX MATTERS

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, interest on the Series 2009 Bonds 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 and corporations. In the further opinion of Bond Counsel, interest on Series 2009 Bonds is exempt from State of

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California personal income tax. Bond Counsel notes that, with respect to corporations, interest on the Series 2009 Bonds may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations.

The difference between the issue price of a Series 2009 Bond (the first price at which a substantial amount of the Bonds of the same series and maturity is to be sold to the public) and the stated redemption price at maturity with respect to such Series 2009 Bond constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to the owner of the Series 2009 Bond before receipt of cash attributable to such excludable income (with respect to the Series 2009 Bonds). The amount of original issue discount deemed received by the owner of a Series 2009 Bond will increase the owner’s basis in the Series 2009 Bond. In the opinion of Bond Counsel original issue discount that accrues to the owner of a Series 2009 Bond is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax.

Bond Counsel’s opinion as to the exclusion from gross income for federal income tax purposes of the portion of each Base Rental Payment constituting interest (and original issue discount) on the Series 2009 Bonds is based upon certain representations of fact and certifications made by the City and others and is subject to the condition that the City and the Authority comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to issuance of the Series 2009 Bonds to assure that the portion of each Base Rental Payment constituting 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 discount) on the Series 2009 Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Series 2009 Bonds. The City and the Authority have covenanted to comply with all such requirements applicable to each, respectively.

The amount by which a Series 2009 Bond Owner’s original basis for determining loss on sale or exchange in the applicable Series 2009 Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Series 2009 Bond premium, which must be amortized under Section 171 of the Code; such amortizable Series 2009 Bond premium reduces the Series 2009 Bond Owner’s basis in the applicable Series 2009 Bond (and the amount of tax-exempt interest received with respect to the Series 2009 Bonds), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Series 2009 Bond premium may result in a Series 2009 Bond Owner realizing a taxable gain when a Series 2009 Bond is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Series 2009 Bond to the Owner. Purchasers of the Series 2009 Bonds should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable Series 2009 Bond premium.

Bond Counsel’s opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Bond Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Indenture, the Lease Agreement, and the Tax Certificate permit certain actions to be taken or to be omitted if a favorable opinion of Bond Counsel is provided with respect thereto. Bond Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) due with respect to any Series 2009 Bond if any such action is taken or omitted based upon the advice of counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation.

The Internal Revenue Service (the “IRS”) has initiated an expanded program for the auditing of tax-exempt bond issues, including both random and targeted audits. It is possible that the Series 2009 Bonds will be selected for audit by the IRS. It is also possible that the market value of the Series 2009 Bonds might be affected as a result of such an audit of the Series 2009 Bonds (or by an audit of similar securities).

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Although Bond Counsel has rendered an opinion that the interest (and original issue discount) on the Series 2009 Bonds is excluded from gross income for federal income tax purposes provided that the City and the Authority continue to comply with certain requirements of the Code, the ownership of the Series 2009 Bonds and the accrual or receipt of interest (and original issue discount) with respect to the Series 2009 Bonds may otherwise affect the tax liability of certain persons. Bond Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Series 2009 Bonds, all potential purchasers should consult their tax advisors with respect to collateral tax consequences with respect to the Series 2009 Bonds.

The form of Bond Counsel’s proposed opinion with respect to the Series 2009 Bonds is attached hereto in Appendix C.

BANK QUALIFIED OBLIGATIONS

The Authority has designated the Series 2009 Bonds as “qualified tax-exempt obligations,” thereby allowing certain financial institutions that are holders of such qualified tax-exempt obligations to deduct a portion of such institution’s interest expense allocable to such qualified tax-exempt obligations, all as determined in accordance with Section 265(b)(3) of the Internal Revenue Code of 1986, as amended.

CERTAIN LEGAL MATTERS

The validity of the Series 2009 Bonds and certain other legal matters are subject to the approving opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Bond Counsel. Stradling Yocca Carlson & Rauth, a Professional Corporation, is also acting as Disclosure Counsel for the City. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix C hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Bond Counsel will receive compensation from the City contingent upon the sale and delivery of the Series 2009 Bonds. From time to time, Bond Counsel represents the Underwriter on matters unrelated to the Series 2009 Bonds.

ABSENCE OF LITIGATION

To the best knowledge of the City, the Authority and the City Attorney, there is no action, suit or proceeding pending or threatened either restraining or enjoining the execution or delivery of the Series 2009 Bonds, the Lease Agreement or the Indenture, or in any way contesting or affecting the validity of the foregoing or any proceedings of the Authority or the City taken with respect to any of the foregoing. There are a number of lawsuits and claims pending against the City. In the opinion of the City and the City Attorney, and taking into account likely insurance coverage and litigation reserves, there are no lawsuits or claims pending against the City which will materially affect the City’s finances so as to impair its ability to pay Base Rental Payments when due.

UNDERWRITING

The Series 2009 Bonds are being purchased by Stone & Youngberg LLC, as Underwriter. The Underwriter has purchased the Series 2009 Bonds from the Authority at an aggregate purchase price representing the principal amount of the Series 2009 Bonds, plus $558,698.75 of original issue premium and less $34,283.56 of Underwriter’s discount.

The Series 2009 Bonds are offered for sale at the initial prices stated on the cover page of this Official Statement, which may be changed from time to time by the Underwriter. The Series 2009 Bonds may be offered and sold to certain dealers at prices lower than the public offering prices.

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RATINGS

Fitch Ratings, Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, have given the Series 2009 Bonds the ratings set forth on the cover page hereof. Such ratings reflect only the views of such rating agencies, and an explanation of the significance of the ratings may be obtained by contacting them at: Fitch, Inc., One State Street Plaza, New York, New York 10004, Moody’s Investors Service, 7 World Trade Center at 250 Greenwich Street, New York, New York 10007, and Standard & Poor’s Ratings Services, 55 Water Street, New York, New York 10041. Such ratings are not a recommendation to buy, sell or hold the Series 2009 Bonds. There is no assurance that such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by such organizations, if in their judgment circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series 2009 Bonds.

FINANCIAL ADVISOR

Public Resources Advisory Group, Los Angeles, California, served as financial advisor to the Authority and the City with respect to the sale of the Series 2009 Bonds. Public Resources Advisory Group will receive compensation contingent upon the sale and delivery of the Series 2009 Bonds

CONTINUING DISCLOSURE

The City has covenanted for the benefit of the Owners of the Series 2009 Bonds to provide annually certain financial information and operating data relating to the Series 2009 Bonds and the City (the “Annual Report”), and to provide notices of the occurrence of certain enumerated events, if material. For a complete listing of items of information which will be provided in each Annual Report and further description of the City’s undertaking with respect to the Annual Report and material events, see APPENDIX E—“FORM OF CONTINUING DISCLOSURE CERTIFICATE.” Such information is to be provided by the City not later than eight (8) months after the end of the City’s fiscal year (which currently would be March 1), commencing with the report for the 2009-10 Fiscal Year. The Annual Report will be filed by the City with the Municipal Securities Rulemaking Board. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The City has never failed to comply in all material respects with any previous undertakings with regard to said Rule to provide annual reports or notices of material events.

FINANCIAL STATEMENTS OF THE CITY

Included herein as Appendix B are the audited financial statements of the City as of and for the year ended June 30, 2008, together with the report thereon dated December 15, 2008 of Mayer Hoffman McCann P.C., Irvine, California, certified public accountants (the “Auditor”). Such audited financial statements have been included herein in reliance upon the report of the Auditor. The Auditor has not undertaken to update the audited financial statements of the City or its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by the Auditor with respect to any event subsequent to its report dated December 15, 2008.

The City has prepared audited financial statements of the City. The audited financial statements of the City for fiscal year ended June 30, 2009 are expected to be released during December, 2009. The City believes that the Fiscal Year 2008-09 audited financial statements will not show a material difference in the City’s financial condition from the unaudited Fiscal Year 2008-09 financial information provided herein and that there has not been any material adverse change in the financial conditions of the City’s General Fund since June 30, 2008, although certain tax revenues have declined since June 30, 2008. See “CITY OF SANTA MONICA FINANCES.”

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MISCELLANEOUS

References are made herein to certain documents and reports which are brief summaries thereof which do not purport to be complete or definitive and reference is made to such documents and reports for full and complete statements of the contents thereof. Copies of the Indenture, the Lease Agreement, the Ground Lease and other documents are available, upon request, and upon payment to the City of a charge for copying, mailing and handling, from the City Clerk at the City of Santa Monica, 1685 Main Street, Santa Monica, California 90401.

Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the Authority or the City and the purchasers or Owners of any of the Series 2009 Bonds.

The execution and delivery of this Official Statement have been duly authorized by the Authority and the City.

SANTA MONICA PUBLIC FINANCING AUTHORITY

By: Treasurer

/s/ Carol Swindell

CITY OF SANTA MONICA

By: City Manager

/s/ P. Lamont Ewell

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APPENDIX A

SUMMARY OF THE PRINCIPAL LEGAL DOCUMENTS

The following statements are summaries of the Ground Lease (“the Ground Lease”), the Lease Agreement (the “Lease Agreement”), the Indenture (the “Indenture”) and the Assignment Agreement (the “Assignment Agreement”). These statements are qualified in their entirety by reference to the full terms of the Ground Lease, the Lease Agreement, the Indenture and the Assignment Agreement, copies of which may be obtained from the City.

DEFINITIONS OF CERTAIN TERMS

The following sets forth the definitions of certain words and terms used in this Summary of the Principal Legal Documents.

“Act” means the Marks-Roos Local Bond Pooling Act of 1985, commencing with Section 6584 of the California Government Code.

“Additional Bonds” means Bonds other than the Series 2002A Bonds and the Series 2009 Bonds issued under the Indenture in accordance with the provisions thereof.

“Additional Rental Payments” means all amounts payable by the City as Additional Rental Payments pursuant to the Lease Agreement.

“Assignment Agreement” means the Assignment Agreement, by and between the Authority and the Trustee, dated as of September 1, 1999, as the same may be amended or supplemented pursuant to the provisions thereof.

“Authority” means the Santa Monica Public Financing Authority, a joint exercise of powers entity organized and existing under and by virtue of the laws of the State of California.

“Authorized Authority Representative” means the Chairman, the Executive Director or the Treasurer of the Authority, or any other person authorized by the Board of Directors of the Authority to act on behalf of the Authority under or with respect to the Indenture.

“Authorized City Representative” means the Mayor of the City, the City Manager of the City, the Director of Finance of the City, the Treasurer of the City, or any other person authorized by the City Council of the City to act on behalf of the City under or with respect to the Indenture.

“Base Rental Payment Fund” means the fund by that name established in accordance with the Indenture.

“Base Rental Payments” means all amounts payable to the Authority by the City as Base Rental Payments pursuant to the Lease Agreement.

“Base Rental Payment Schedule” means the schedule of Base Rental Payments payable to the Authority from the City pursuant to the Lease Agreement and attached thereto as Exhibit C.

“Beneficial Owner” means, whenever used with respect to a Book-Entry Bond, the person whose name is recorded as the beneficial owner of such Book-Entry Bond or a portion of such Book-Entry Bond by a Participant or the records of such Participant or such person’s subrogee.

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“Bonds” means the Santa Monica Public Finance Authority Lease Revenue Bonds issued under the Indenture, including the Series 2002A Bonds, the Series 2009 Bonds and any Additional Bonds.

“Book-Entry Bonds” means the Bonds of a Series registered in the name of the nominee of DTC, or any successor securities depository for such Series of Bonds, as the registered owner thereof pursuant to the terms and provisions of the Indenture.

“Business Day” means a day which is not (a) a Saturday, Sunday or legal holiday, (b) a day on which banking institutions in the State of California, or in any state in which the principal corporate trust office of the Trustee is located, are required or authorized by law (including executive order) to close, or (c) a day on which the New York Stock Exchange is closed.

“Capitalized Interest Account” means the account by that name within the Interest Fund established and held by the Trustee in accordance with the Indenture.

“Certificate of the City” means an instrument in writing signed by an Authorized City Representative. If and to the extent required by the provisions of the Indenture, each Certificate of the City will include the statements provided for in the Indenture.

“City” means the City of Santa Monica, a municipal corporation and charter law city duly organized and existing tinder and by virtue of the Constitution and laws of the State of California and the City’s Charter.

“Closing Date” means October 13, 1999.

“Code” means the Internal Revenue Code of 1986.

“Construction Fund” means the fund by that name established in accordance with the Indenture.

“Continuing Disclosure Certificate” means the Continuing Disclosure Certificate, dated as of September 1, 1999, executed by the City, as originally executed and as it may from time to time be amended in accordance with the terms thereof.

“Continuing Disclosure Certificate (Series 2002A Bonds)” means the Continuing Disclosure Certificate, dated as of January 1, 2002, executed by the City, as originally executed and as it may from time to time be amended in accordance with the terms thereof.

“Continuing Disclosure Certificate (Series 2009 Bonds)” means the Continuing Disclosure Certificate, dated as of December 1, 2009, executed by the City, as originally executed and as it may from time to time be amended in accordance with the terms thereof.

“Costs of Issuance” means all the costs of issuing and delivering the Bonds, including, but not limited to, all printing and document preparation expenses in connection with the Indenture, the Lease Agreement, the Ground Lease, the Assignment Agreement, the Bonds and the preliminary official statement and final official statement pertaining to the Bonds, rating agency fees. CUSIP Service Bureau charges, market study fees, legal fees and expenses of counsel with the issuance and delivery of the Bonds, any computer and other expenses incurred in connection with the execution and delivery of the Bonds, the initial fees and expenses of the Trustee and other fees and expenses incurred in connection with the issuance and delivery of the Bonds, to the extent such fees and expenses are approved by the City.

“Costs of Issuance Fund” means the fund by that name established in accordance with the Indenture.

“Credit Facility” means a letter of credit, insurance policy, surety bond or other such funding instrument issued by an entity the long-term unsecured obligations of which are rated “AA” or better by S&P,

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the term of which extends to the final maturity of the Bonds and deposited with the Trustee pursuant to the Indenture.

“Delivery Date” means October 13, 1999.

“DTC” means The Depository Trust Company, a limited-purpose trust company organized under the laws of the State of New York, and its successors as securities depository for any Series of Book-Entry Bonds, including any such successor appointed pursuant to the Indenture.

“Forward Purchase and Sale Agreement” means an agreement entered into by the Trustee and/or the Authority and/or the City and a bank or financial institution (the “Provider”) rated “A2” or higher by Moody’s and “A” or higher by S&P providing for the Provider to tender, and for the Trustee to purchase, certain eligible securities on one or more dates occurring at least thirty (30) business days after the date of such agreement; provided that (1) securities tendered by the Provider are purchased on a delivery versus payment basis, (2) securities purchased constitute Permitted Investments at the time they are tendered, and (3) the Authority and the City receive an opinion of counsel acceptable to the Authority, to the City and to the Trustee which states that the agreement constitutes a legally valid, binding, and enforceable obligation of the Provider and that in the event of a bankruptcy of the Provider, securities sold by the Provider to the Trustee pursuant to the agreement do not constitute property of the estate of the Provider within the applicable bankruptcy or insolvency laws.

“Ground Lease” means the Ground Lease, dated as of September 1, 1999, by and between the City and the Authority, as originally executed and as it may from time to time be amended in accordance with the provisions thereof and of the Lease Agreement.

“Indenture” means the Indenture, dated as of September 1, 1999, by and among the Authority, the City and the Trustee, as originally executed and as it may from time to time be amended or supplemented in accordance with the provisions thereof.

“Interest Fund” means the fund by that name established in accordance with the Indenture.

“Interest Payment Date” means January 1 and July 1 of each year, commencing on July 1, 2000.

“Lease Agreement” means the Lease Agreement, dated as of September 1, 1999, by and between the City and the Authority, as originally executed and as it may be from time to time amended in accordance with the provisions thereof.

“Moody’s” means Moody’s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, except that if such corporation will no longer perform the function of a securities rating agency for any reason, the term “Moody’s” will be deemed to refer to any other nationally recognized securities rating agency selected by the Authority and approved by the Trustee.

“Net Insurance Proceeds” means any insurance proceeds or condemnation award in excess of $50,000, paid with respect to any of the Property, remaining after payment therefrom of all reasonable expenses incurred in the collection thereof.

“Opinion of Counsel” means a written opinion of counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the Authority or the City and satisfactory to and approved by the Trustee.

“Outstanding,” when used as of any particular time with reference to Bonds, means (subject to the provisions of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except:

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

(b) Bonds with respect to which all liability of the Authority will have been discharged in accordance with the Indenture; and

(c) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds will have been authenticated and delivered by the Trustee pursuant to the Indenture.

“Owner” means, with respect to a Bond, the Person in whose name such Bond is registered on the Registration Books.

“Participant” means any entity which is recognized as a participant by DTC in the book-entry system of maintaining records with respect to Book-Entry Bonds.

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

“Participating Underwriter (Series 2002A Bonds)” has the meaning ascribed thereto in the Continuing Disclosure Certificate (Series 2002A Bonds).

“Participating Underwriter (Series 2009 Bonds)” has the meaning ascribed thereto in the Continuing Disclosure Certificate (Series 2009 Bonds).

“Permitted Encumbrances” means, with respect to the Property, as of any particular time, (a) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the City may, pursuant to provisions of the Lease Agreement, permit to remain unpaid, (b) the Assignment Agreement, (c) the Lease Agreement, (d) the Ground Lease, (e) any right or claim of any mechanic, laborer, materialman, supplier or vendor not filed or perfected in the manner prescribed by law as normally exist with respect to properties similar to the Property for the purposes for which it was acquired or is held by the City, (f) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Delivery Date which the City certifies in writing will not affect the intended use of the Property or impair the security granted to the Trustee for the benefit of the Owners of the Bonds by the Indenture and the Assignment Agreement and to which the Authority and the City consent in writing, and (g) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the Delivery Date which the City certifies in writing do not affect the intended use of the Property or impair the security granted to the Trustee for the benefit of the Owners of the Bonds by the Indenture and the Assignment Agreement and to which the Authority and the City consent in writing.

“Permitted Investments” means any of the following to the extent then permitted by the general laws of the State of California:

(1) (a) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America (“United States Treasury Obligations”), (b) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated (collectively “United States Obligations”). These include, but are not necessarily limited to:

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- U.S. Treasury obligations All direct or fully guaranteed obligations

- Farmers Home Administration Certificates of beneficial ownership

- General Services Administration Participation certificates

- U.S. Maritime Administration Guaranteed Title XI financing

- Small Business Administration Guaranteed participation certificates Guaranteed pool certificates

- Government National Mortgage Association (GNMA) GNMA-guaranteed mortgage-backed securities GNMA-guaranteed participation certificates

- U.S. Department of Housing & Urban Development Local authority bonds

- Washington Metropolitan Area Transit Authority Guaranteed transit bonds

(2) Federal Housing Administration debentures.

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

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

- Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives)

Consolidated systemwide bonds and notes - Federal Home Loan Banks (FHL Banks)

Consolidated debt obligations - Federal National Mortgage Association (FNMA)

Senior debt obligations Mortgage-backed securities (excluded are stripped mortgages securities which are purchased at prices exceeding their principal amounts)

- Student Loan Marketing Association (SLMA) Senior debt obligations (excluded are securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date)

- Financing Corporation (FICO) Debt obligations

- Resolution Funding Corporation (REFCORP) Debt obligations

(4) Unsecured certificates of deposit, time deposits, and bankers’ acceptances (having maturities of not more than 180 days) of any bank, including the Trustee and its affiliates, the short-term obligations of which are rated “A-1+” or better by S&P and “P-I” or better by Moody’s.

(5) Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation (FDIC), in banks, including the Trustee and its affiliates, which have capital and surplus of at least S5 million.

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(6) Commercial paper (having original maturities of not more than 270 days) rated “A-1+” by S&P and “Prime-1” by Moody’s, including funds for which the Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Trustee provide investment advisory or other management services.

(7) Money market funds rated “AAm” or “AArn-G” or better by S&P and “AA” or better by Moody’s.

(8) Repurchase agreements:

(a) With any domestic bank the long term debt of which is rated “AA” or better by S&P and Moody’s (so long as an opinion is rendered that the repurchase agreement is a “repurchase agreement” as defined in the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and that such bank is subject to FIRREA), or any foreign bank rated at least “AA” by S&P and “Aaa” by Moody’s or “AAA” by S & P and at least “Aa” by Moody’s; provided the term of such repurchase agreement is for one year or less.

(b) With (i) any broker-dealer with “retail customers” which has, or the parent company of which has, long-term debt rated at least “AA” by S&P and “Aa” by Moody’s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corp. (SIPC); provided that:

A. The market value of the collateral is maintained for United States Treasury Obligations, at the levels shown below under “Collateral Levels for United States Treasury Obligations”;

B. Failure to maintain the requisite collateral percentage will require the City or the Trustee to liquidate the collateral;

C. The Trustee, the City or a third party acting solely as agent therefor (the “Holder of the Collateral”) has possession of the collateral or the collateral has been transferred to the holder of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor’s books);

D. The repurchase agreement states, and an opinion of counsel is rendered to the effect, that the Trustee has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession);

E. The transferor represents that the collateral is free and clear of any third-party liens or claims;

F. An opinion is rendered that the repurchase agreement is a “repurchase agreement” as defined in the United States Bankruptcy Code;

G. There is or will be a written agreement governing every repurchase transaction;

H. Each of the City and the Trustee represents that it has no knowledge of any fraud involved in the repurchase transaction: and

I. The City and the Trustee receive an opinion of counsel (which opinion will be addressed to the City and the Trustee) that such repurchase agreement is legal, valid and binding and enforceable against the provider in accordance with its terms,

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(9) State Obligations

(a) Direct general obligations of any state of the United States or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated “A’’ by Moody’s and “A” by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated.

(b) Direct, general short-term obligations of any state agency or subdivision described in (a) above and rated “A-1+” by S&P and “Prime-1” by Moody’s.

(c) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state, state agency or subdivision described in (a) above and rated “AA” or better by S&P and “Aa” or better by Moody’s.

(10) Investment agreements with a domestic or foreign bank or corporation (other than a life or property casualty insurance company) the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt of the guarantor, or in the case of a monoline financial guaranty insurance company the claims paying ability of the guarantor, is rated at least “AA” by S&P and “Aa” by Moody’s; provided, that prior written notice of an investment in the investment agreement is provided to S&P and, provided, further, by the terms of the investment agreement:

(a) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the construction fund, construction draws) on the Bonds;

(b) the invested funds are available for withdrawal without penalty or premium, at any time for purposes identified in the Indenture other than acquisition of alternative investment property upon not more than seven days prior notice (which notice may be amended or withdrawn at any time prior to the specified withdrawal date); provided that the Indenture specifically requires the Trustee or the City to give notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid;

(c) the investment agreement will state that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof;

(d) a fixed guaranteed rate of interest is to be paid on invested funds and all future deposits, if any, required to be made to restore the amount of such funds to the level specified under the Indenture;

(e) the Trustee and the City receive the opinion of domestic counsel (which opinion will be addressed to the City) that such investment agreement is legal, valid and binding and enforceable against the provider in accordance with its terms and of foreign counsel (if applicable);

(f) the investment agreement will provide that if during its term (A) the provider’s or the guarantor’s rating by either Moody’s or S&P is withdrawn or suspended or falls below “AA” or “Aa”, respectively, or, with respect to a foreign bank, below the ratings of such provider at the delivery date of the investment agreement, the provider must, at the direction of the City or the Trustee within 10 days of receipt of such direction, either (1) collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider’s books) to the Trustee, the City or a Holder of the Collateral, United States Treasury Obligations which are free and clear of any third-party liens or claims at the Collateral Levels set forth below; or (2) repay the principal of and accrued but unpaid interest on the investment (the choice of (1) or (2) above will be that of the City or Trustee, as appropriate), and (B) the provider’s or the guarantor’s rating by either Moody’s or S&P is withdrawn or

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suspended or falls below “A”, or, with respect to a foreign bank, below “AA” or “Aa” by S&P or Moody’s, as appropriate, the provider must, at the direction of the City or the Trustee, within 10 days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the City or Trustee;

(g) the investment agreement will state, and an opinion of counsel will be rendered to the effect, that the Trustee has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Trustee is in possession); and

(h) the investment agreement must provide that if during its term (A) the provider will default in its payment obligations, the provider’s obligation under the investment agreement will, at the direction of the City or the Trustee, be accelerated and amounts invested and accrued but unpaid interest thereon will be repaid to the City or Trustee, as appropriate, and (B) the provider will become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. (“event of insolvency”), the provider’s obligations will automatically be accelerated and amounts invested and accrued but unpaid interest thereon will be repaid to the City or Trustee, as appropriate.

(11) Pre-refunded municipal obligations rated “AAA” by S&P and “Aaa” by Moody’s meeting the following requirements:

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

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

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

(d) the cash or United States Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; and

(e) no substitution of a United States Treasury Obligation will be permitted except with another United States Treasury Obligation and upon delivery of a new Verification; and

(f) the cash or the United States Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent.

Collateral Levels For United States Treasury Obligations

Remaining Maturity

Frequency of Valuation

1 year or less

5 years or less

10 years or less

15 years or less

30 years or less

Daily 102 105 106 108 114 Weekly 103 111 112 114 120 Monthly 105 117 120 125 133 Quarterly 107 120 130 133 140

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Further Requirements: (a) On each valuation date the City, the Trustee, or the custodian who will confirm to the City and the Trustee, will value the market value (exclusive of accrued interest) of the collateral, which market value will be an amount equal to the requisite collateral percentage times the principal amount of the investment (including unpaid accrued interest thereon) that is being secured, (b) in the event the collateral level is below its collateral percentage on a valuation date, such percentage will be restored within the following restoration periods: one Business Day for daily valuations, two Business Days for weekly and monthly valuations, and one month for quarterly valuations (the use of different restoration periods affect the requisite collateral percentage), (c) the City or the Trustee will terminate the repurchase agreement or the investment agreement, as the case may be, upon a failure to maintain the requisite collateral percentage after the restoration period and, if not paid by the counterparty in federal funds against transfer of the collateral, liquidate the collateral.

“Person” means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

“Principal Fund” means the fund by that name established in accordance with the Indenture.

“Project” means the improvements, facilities and equipment described in Exhibit B to the Lease Agreement.

“Project Costs” means all costs of acquiring, constructing and installing the Project, including but not limited to:

(a) all costs which the Authority or the City will be required to pay to a seller or any other person under the terms of any contract or contracts for the purchase of the Project;

(b) all costs which the Authority or the City will be required to pay a contractor or any other person for the acquisition, construction and installation of the Project;

(c) obligations of the Authority or the City incurred for services (including obligations payable to the Authority or the City for actual out-of-pocket expenses of the Authority or the City) in connection with the acquisition, construction and installation of the Project, including reimbursement to the Authority or the City for all advances and payments made in connection with the Project prior to or after delivery of the Bonds;

(d) the actual out-of-pocket costs of the Authority or the City for test borings, surveys, estimates and preliminary investigations therefor, as well as for the performance of all other duties required by or consequent to the proper acquisition, construction and installation of the Project, including administrative expenses under the Lease Agreement and under the Indenture relating to the acquisition, construction and installation of the Project; and

(e) any sums required to reimburse the Authority or the City for advances made by the Authority or the City for any of the above items or for any other costs incurred and for work done by the Authority or the City which are properly chargeable to the Project.

“Property” means collectively, the Site and the Project.

“Rebate Fund” means the fund by that name established in accordance with the Indenture.

“Redemption Fund” means the fund by that name established in accordance with the Indenture.

“Refunded 1999 Bonds” means the Series 1999 Bonds refunded with the net proceeds of the Series 2009 Bonds.

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

“Rental Payments” means, collectively, the Base Rental Payments and the Additional Rental Payments.

“Rental Period” means the period from the Closing Date through June 30, 2000 and, thereafter, the twelve-month period commencing on July 1 of each year during the term of the Lease Agreement.

“Reserve Fund” means the fund by that name established in accordance with the Indenture.

“Reserve Requirement” means an amount equal to the least of (a) “10% of the proceeds of the issue” within the meaning of Section 148 of the Code, (b) the maximum amount of debt service on the Bonds payable in any one year, and (c) 125% of the average amount of debt service on the Bonds payable in each year.

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns, except that if such entity will no longer perform the functions of a securities rating agency for any reason, the term “S&P” will be deemed to refer to any other nationally recognized securities rating agency selected by the Authority and approved by the Trustee.

“Series” means the initial series of Bonds executed, authenticated and delivered on the Closing Date and identified pursuant to the Indenture as the Series 1999 Bonds and any Additional Bonds, issued pursuant to a Supplemental Indenture and identified as a separate Series of Bonds.

“Series 1999 Bonds” means the Santa Monica Public Financing Authority Lease Revenue Bonds Series 1999 Series A (Public Safety Facility Project), issued under the Indenture.

“Series 2002A Bonds” means the Bonds designated “Santa Monica Public Financing Authority Lease Revenue Bonds, Series 2002A (Public Safety Facility Project)” issued under the Indenture.

“Series 2009 Bonds” means the Bonds designated “Santa Monica Public Financing Authority Lease Revenue Refunding Bonds, Series 2009 (Public Safety Facility Project)” issued under the Indenture.

“Series 2002A Bonds Closing Date” means January 30, 2002.

“Series 2009 Bonds Closing Date” means December 16, 2009.

“Series 2009 Escrow Agreement” means the Escrow Agreement dated as of December 1, 2009, by and between the Authority and the Trustee as Escrow Agent providing for the defeasance of the Refunded 1999 Bonds.

“Series 2009 Escrow Fund” means the fund of that name established under the Indenture.

“Site” means the real property described in Exhibit A to the Lease Agreement.

“Supplemental Indenture” means any supplemental indenture amendatory of or supplemental to the Indenture, but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture.

“Tax Certificate” means the Tax Certificate executed by the Authority and the City at the time of issuance of the Series 1999 Bonds relating to the requirements of Section 148 of the Code, as originally executed and as it may from time to time be amended in accordance with the provisions thereof.

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“Tax Certificate (Series 2002A Bonds)” means the Tax Certificate executed by the Authority and the City at the time of issuance of the Series 2002A Bonds relating to the requirements of Section 148 of the Code, as originally executed and as it may from time to time be amended in accordance with the provisions thereof.

“Tax Certificate (Series 2009 Bonds)” means the Tax Certificate executed by the Authority and the City at the time of issuance of the Series 2009 Bonds relating to the requirements of Section 148 of the Code, as originally executed and as it may from time to time be amended in accordance with the provisions thereof.

“Termination Date” means July 1, 2021, unless extended or sooner terminated as provided in the Lease Agreement.

“Trustee” means BNY Western Trust Company, a banking corporation duly organized and existing under and by virtue of the laws of the State of California, or any successor thereto as Trustee under the Indenture, appointed as provided in the Indenture.

“Written Request of the Authority” means a written request signed in the name of the Authority by an Authorized Authority Representative.

“Written Request of the City” means a written request signed in the name of the City by an Authorized City Representative.

THE GROUND LEASE

The City leases to the Authority, and the Authority leases from the City, for the benefit of the Owners of the Bonds, the Site, subject only to Permitted Encumbrances for the term of the Ground Lease. The parties intend that the Site and the Project will be leased back to the City pursuant to the Lease Agreement. The parties further intend that, to the extent provided in the (hound Lease and the Lease Agreement, if an event of default occurs under the Lease Agreement, the Authority, or its assignee, will have the right for the then remaining term of the Ground Lease to (a) take possession of the Site, (b) if it deems it appropriate, cause an appraisal of the Site and a study of the then reasonable use thereof to be undertaken, and (c) relet the Property. The Ground Lease may be sold or assigned, and the Site may be subleased, as a whole or in part, by the Authority without the necessity of obtaining the consent of the City, if an event of default occurs under the lease Agreement. The Authority will, within 30 days after such an assignment, sale or sublease, furnish or cause to be furnished to the City a true and correct copy of such assignment, sale or sublease, as the case may be. The City agrees that, except with respect to Permitted Encumbrances, it will not mortgage, sell, encumber, assign, transfer or convey the Site or any portion thereof during the term of the Ground Lease.

The term of the Ground Lease commences on the Delivery Date, and will remain in full force and effect from such date to and including July 1, 2021, unless such term is sooner extended or terminated as provided in the Ground Lease. If, on July 1, 2021, the Bonds will not have been fully paid, or provision therefor made in accordance with the Indenture, or the Indenture will not be discharged by its terms, or if the Rental Payments payable under the Lease Agreement will have been abated at any time, then the term of the Ground Lease wilt be automatically extended until the date upon which all Bonds will be fully paid, or provision therefor made in accordance with the Indenture, and the Indenture will be discharged by its terms, except that the term of the Ground Lease will in no event be extended more than ten years. If prior to July 1, 2021, all Bonds will be fully paid, or provisions therefor made in accordance with the Indenture, and the Indenture will be discharged by its terms, the term of the Ground Lease will end simultaneously therewith.

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THE LEASE AGREEMENT

Lease of Property

The Authority leases to the City, and the City leases from the Authority the Property, on the terms and conditions set forth in the Lease Agreement, and subject to all Permitted Encumbrances.

Assignment and Subleasing

Neither the Lease Agreement nor any interest of the City thereunder will be sold, mortgaged, pledged, assigned, or transferred by the City by voluntary act or by operation of law or otherwise. The Property may not be subleased in whole or in part by the City without the prior written consent of the Authority. Any such sublease will be subject to all of the following conditions:

(a) the Lease Agreement and the obligation of the City to make all Rental Payments thereunder will remain the primary obligation of the City;

(b) the City will, within 30 days after the delivery thereof, furnish or cause to be famished to the Authority and the Trustee a true and complete copy of such sublease;

(c) no such sublease by the City will cause the Property to be used for a purpose other than a governmental or proprietary function authorized under the provisions of the Constitution and laws of the State of California;

(d) any sublease of the Property by the City will explicitly provide that such sublease is subject to all rights of the Authority under the Lease Agreement, including, the right to re-enter and re-let the Property or terminate the Lease Agreement upon a default by the City; and

(e) the City will furnish the Authority and the Trustee with an Opinion of Counsel to the effect that such sublease will not, in and of itself, cause the interest on the Bonds to be included in gross income for federal income tax purposes.

Liens

In the event the City will at any time during the term of the Lease Agreement cause any changes, alterations, additions, improvements, or other work to be done or performed or materials to be supplied, in or upon the Property, the City will pay, when due, all sums of money that may become due for, or purporting to be due for, any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to or for the City in, upon, or about the Property and which may be secured by a mechanics’, materialmen’s or other lien against the Property or the Authority’s interest therein, and will cause each such lien to be fully discharged and released at the time the performance of any obligation secured by any such lien matures or becomes due, except that, if the City desires to contest any such lien, it may do so as long as such contestment is in good faith. If any such lien will be reduced to final judgment and such judgment or such process as may be issued for the enforcement thereof is not promptly stayed, or if so stayed and said stay thereafter expires, the City will forthwith pay and discharge said judgment.

Acquisition, Construction and Installation of the Project

The Authority appoints the City as its agent to carry out all phases of the acquisition, construction and installation of the Project. The City accepts such appointment and, as such agent, assumes all duties, rights, responsibilities and liabilities of the Authority regarding the acquisition, construction and installation of the Project. The City, as agent of the Authority, will, in all respects, supervise and provide for, or cause to be supervised and provided for, the acquisition, construction and installation of the Project.

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In connection with the acquisition, construction and installation of the Project, payment of a portion of the Project Costs will be made from the moneys deposited with the Trustee in the Construction Fund, which will be disbursed for such purposes in accordance and upon compliance with the Indenture. Other than such moneys deposited in the Construction Fund, and investment earnings thereon, the Authority will have no obligation to provide moneys to pay any portion of the Project Costs.

The City represents and warrants that it holds in various segregated accounts, funds in an amount no less than the amount specified in the Lease Agreement, which amount, together with investment earnings thereon, and together with the moneys deposited in the Construction Fund on the Delivery Date, and investment earnings thereon, the City expects will be sufficient to pay the Project Costs in full. The City covenants that, until the Project is completed, it will not use any portion of the amount on deposit in such segregated accounts for any purpose other than to pay Project Costs.

Additions to Property

Subject to the Lease Agreement, the City and any sublessee will, at its own expense, have the right to make additions, modifications and improvements to the Property. To the extent that the removal of such additions, modifications or improvements would not cause material damage to the Property, such additions, modifications and improvements will remain the sole property of the City or such sublessee, and neither the Authority nor the Trustee will have any interest therein. Such additions, modifications and improvements will not in any way damage the Property or cause it to be used for purposes other than those authorized under the provisions of state and federal law; and the Property, upon completion of any additions, modifications and improvements made pursuant to the Lease Agreement, will be of a value which is at least equal to the value of the Property immediately prior to the making of such additions, modifications and improvements.

Term of the Lease Agreement

The term of the Lease Agreement will commence on the Delivery Date and will end on the Termination Date, unless such term is extended or sooner terminated as provided in the Lease Agreement. If on the Termination Date the Bonds will not be fully paid, or provision therefor made in accordance with the Indenture, or the Indenture will not be discharged by its terms, or if the Rental Payments will remain due and payable or will have been abated at any time and for any reason, then the term of the Lease Agreement will be extended until the date upon which all Bonds will be fully paid, or provision therefor made in accordance with the Indenture, the Indenture will be discharged by its terms and all Rental Payments will have been paid in full, except that the term of the Lease Agreement will in no event be extended more than ten years beyond such Termination Date, such extended date being the “Maximum Lease Term.” If prior to the Termination Date, all Bonds will be fully paid, or provision therefor made in accordance with the Indenture, the Indenture will be discharged by its terms and all Rental Payments will have been paid in full, the term of the Lease Agreement will end simultaneously therewith.

The City will take possession of the Property on the date that the Project is substantially complete.

Rental Payments

Subject to the provisions of the Lease Agreement relating to a revision of the Base Rental Schedule, the City will pay to the Authority as Base Rental Payments (subject to the provisions of the Lease Agreement) the amount at the times specified in the Base Rental Payment Schedule, a portion of which Base Rental Payments will constitute principal and a portion of which will constitute interest. If the term of the Lease Agreement is extended pursuant to the Lease Agreement, the obligation of the City to pay Rental Payments will continue to and including the Base Rental deposit Date preceding the date of termination of the Lease Agreement. Upon such extension, the Base Rental Payments will be established so that they will be sufficient to pay all extended and unpaid Base Rental Payments; provided, however, that the Rental Payments payable in any Rental Period will not exceed the annual fair rental value of the property.

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The City will also pay, as Additional Rental Payments, such amounts as will be required for the payment of the following: all taxes and assessments of any type or nature charged to the Authority or the City or affecting the Property or the respective interests or estates of the Authority or the City therein; all reasonable administrative costs of the Authority relating to the Property including, but without limiting the generality of the foregoing, salaries, wages, fees and expenses, compensation and indemnification of the Trustee payable by the Authority under the Indenture, fees of auditors, accountants, attorneys or engineers, and all other reasonable and necessary administrative costs of the Authority or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Indenture or the Lease Agreement or to defend the Authority and its members, officers, agents and employees; insurance premiums for all insurance required pursuant to the Lease Agreement; any amounts with respect to the Lease Agreement or the Bonds required to be rebated to the federal government in accordance with section 148(f) of the Code; and all other payments required to be paid by the City under the provisions of the Lease Agreement or the Indenture. Amounts constituting Additional Rental Payments payable under the Lease Agreement will be paid by the City directly to the person or persons to whom such amounts will be payable. The City will pay all such amounts when due or at such later time as such amounts may be paid without penalty or, in any other case, within sixty (60) days after notice in writing from the Trustee to the City stating the amount of Additional Rental Payments then due and payable and the purpose thereof.

Payments of the Rental Payments for the Property during each rental period will constitute the total rental for said rental period.

Each installment of Base Rental Payments payable under the Lease Agreement will be paid in lawful money of the United States of America to or upon the order of the Authority at the principal corporate trust office of the Trustee, or such other place or entity as the Authority will designate. Each Base Rental Payment will be deposited with the Trustee no later than the Base Rental Deposit Date preceding the Interest Payment Date on which such Base Rental Payment is due. Any Base Rental Payment which will not be paid by the City when due and payable under the terms of the Lease Agreement will bear interest from the date when the same is due thereunder until the same will be paid at the rate equal to the highest rate of interest on any of the Outstanding Bonds. Notwithstanding any dispute between the Authority and the City, the City will make all Rental Payments when due without deduction or offset of any kind and will not withhold any Rental Payments pending the final resolution of any such dispute. In the event of a determination that the City was not liable for said Rental Payments or any portion thereof, said payments or excess of payments, as the case may be, will be credited against subsequent Rental Payments due under the Lease Agreement or refunded at the time of such determination. Amounts required to be deposited by the City with the Trustee pursuant to this paragraph on any date will be reduced to the extent of available amounts on deposit in the Base Rental Payment Fund, the Interest Fund or the Principal Fund.

Rental Abatement

Except as otherwise specifically provided in the Lease Agreement, during any period in which, by reason of material damage to, or destruction or condemnation of, the Property, or any defect in title to the Property, there is substantial interference with the City’s right to use and occupy any portion of the Property, Rental Payments will be abated proportionately, and the City waives the benefits of California Civil Code Sections 1932(1), 1932(2) and 1933(4) and any and all other rights to terminate the Lease Agreement by virtue of any such interference, and the Lease Agreement will continue in full force and effect. The amount of such abatement will be agreed upon by the City and the Authority; provided, however, that the Rental Payments due for any Rental Period will not exceed the annual fair rental value of that portion of the Property available for use and occupancy by the City during such Rental Period. The City and the Authority will calculate such abatement and will provide the Trustee with a certificate setting forth such calculation and the basis therefor. Such abatement will continue for the period commencing with the date of interference resulting from such damage, destruction, condemnation or title defect and, with respect to damage to or destruction of the Property, ending with the substantial completion of the work of repair or replacement of the Property, or the portion

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thereof so damaged or destroyed; and the term of the Lease Agreement will be extended as provided in the Lease Agreement, except that the term will in no event be extended beyond the Maximum Lease Term.

Notwithstanding the foregoing, to the extent that moneys are available for the payment of Rental Payments in any of the funds and accounts established under the Indenture, Rental Payments will not be abated as provided above but, rather, will be payable by the City as a special obligation payable solely from said funds and accounts.

Prepayment of Rental Payments

(a) The City may prepay all or a portion of the Base Rental Payments attributable to the Series 2002A Bonds which are payable on or after July 1, 2012, from any source of available funds, on any date on or after July 1, 2011, by paying all or a portion, as elected by the City, of the principal components of such Base Rental Payments plus the accrued but unpaid interest component of such Base Rental Payments to be prepaid to the date of such prepayment, without premium.

(b) The City may prepay, from any source of available funds, all or any portion of the Base Rental Payments attributable to the Series 2002A Bonds by depositing with the Trustee moneys or securities as provided, and subject to the terms and conditions set forth, in the Indenture sufficient to make such Base Rental Payments when due or to make such Base Rental Payments through a specified date on which the City has a right to prepay such Base Rental Payments as described above, and to prepay such Base Rental Payments on such prepayment date, at a prepayment price determined in accordance with subsection (a) above.

The City may prepay, from any source of available funds, all or any portion of the Base Rental Payments attributable to the Series 2009 Bonds by depositing with the Trustee moneys or securities as provided, and subject to the terms and conditions set forth, in the Indenture sufficient to make such Base Rental Payments when due or to make such Base Rental Payments through a specified date on which the City has a right to prepay such Base Rental Payments.

If less than all of the Base Rental Payments attributable to the Series 2002A Bonds are prepaid pursuant to the Lease Agreement then, as of the date of such prepayment pursuant to subsection (a) above, or the date of a deposit pursuant to subsection (b) above, the principal and interest components of such Base Rental Payments will be recalculated in order to take such prepayment into account. The City agrees that if, following a partial prepayment of such Base Rental Payments, the Property is damaged or destroyed or taken by eminent domain, or a defect in title to the Property is discovered, the City will not be entitled to, and by such prepayment waives the right of, abatement of such prepaid Base Rental Payments and the City will not be entitled to any reimbursement of such Base Rental Payments.

If all of the Base Rental Payments are prepaid in accordance with the provisions of the Lease Agreement, then, as of the date of such prepayment as described in (a) above and, if applicable, the corresponding provisions of the Lease Agreement relating to the prepayment of Base Rental Payments attributable to Additional Bonds, or the date of deposit pursuant to (b) above and, if applicable, such corresponding provisions, and payment of all other amounts owed under the Lease Agreement, the term of the Lease Agreement will be terminated.

Prepayments of Base Rental Payments attributable to the Series 2002A Bonds made pursuant to the Lease Agreement will be applied to the redemption of Series 2002A Bonds as provided in the Indenture.

Prepayments of Base Rental Payments attributable to the Series 2009 Bonds made pursuant to the Lease Agreement will be applied to the redemption of Series 2009 Bonds as provided in the Indenture.

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Before making any prepayment pursuant to the Lease Agreement, the City will give written notice to the Authority specifying the date on which the prepayment will be made, which date will be not less than forty-five (45) nor more than sixty (60) days from the date such notice is given to the Authority.

Substitution or Release of the Property

The City will have the right to substitute alternate real property for any portion of the Property or to release a portion of the Property from the Lease Agreement. All costs and expenses incurred in connection with such substitution or release will be borne by the City. Notwithstanding any such substitution or release, there will be no reduction in or abatement of the Base Rental Payments due from the City under the Lease Agreement as a result of such substitution or release. Any such substitution or release of any portion of the Property will be subject to the following specific conditions, which are made conditions precedent to such substitution or release:

(i) an independent certified real estate appraiser selected by the City will have found (and will have delivered a certificate to the City and the Trustee setting forth its findings) that the Property, as constituted after such substitution or release, (A) has an annual fair rental value greater than or equal to 105% of the maximum Base Rental Payments payable by the City in any Rental Period, and (B) has a useful life equal to or greater than the useful life of the Property, as constituted prior to such substitution or release;

(ii) the City will have obtained or caused to be obtained a CLTA title insurance policy or policies with respect to any substituted property in the amount of the fair market value of such substituted property (which fair market value will have been determined by an independent certified real estate appraiser), of the type and with the endorsements described in the Lease Agreement;

(iii) the City will have provided the Trustee with an Opinion of Counsel to the effect that such substitution or release will not, in and of itself cause the interest on the Bonds to be included in gross income for federal income tax purposes;

(iv) the City will have given, or will have made arrangements to be given, any notice of the occurrence of such substitution or release required to be given pursuant to the Continuing Disclosure Certificate;

(v) the City, the Authority and the Trustee will have executed, and the City will have caused to be recorded with the Los Angeles County Recorder, any document necessary to reconvey to the City the portion of the Property being substituted or released and to include any substituted real property in the description of the Property contained in the Lease Agreement and in the Ground Lease; and

(vi) the City will have certified to the Trustee that the substituted real property is of approximately the same degree of essentiality to the City as the portion of the Property for which it is being substituted.

Insurance

The City will maintain or cause to be maintained, throughout the term of the Lease Agreement, a standard commercial general liability insurance policy or policies in protection of the City, the Authority and their respective members, officers, agents 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 ownership of the Property. Said policy or policies will provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in a single accident or event, and in a minimum amount of $500,000 for damage to property (subject to a deductible clause of not to exceed $100,000) resulting from a single event. Such liability insurance may be maintained as part of or in

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conjunction with any other liability insurance coverage carried or required to be carried by the City, and may be maintained in whole or in part in the form of self-insurance by the City, provided that such self-insurance complies with the provisions of the Lease Agreement.

The City will maintain or cause to be maintained, throughout the term of the Lease Agreement, workers’ compensation insurance issued by a responsible carrier authorized under the laws of the State of California to insure employers against liability for compensation under the California Labor Code, or any act enacted as an amendment or supplement thereto or in lieu thereof, such workers’ compensation insurance to cover all persons employed by the City in connection with the Property and to cover full liability for compensation under any such act; provided, however, that the City’s obligations under this paragraph may be satisfied by self-insurance, provided that such self- insurance complies with the provisions of the Lease Agreement.

The City will maintain or cause to be maintained, fire, lightning and special extended coverage insurance (which will include coverage for vandalism and malicious mischief, but need not include coverage for earthquake damage) on all improvements constituting any part of the Property in an amount equal to the greater of 100% of the replacement cost of such improvements or 100% of the outstanding principal amount of the Bonds. Each such policy of insurance will contain a standard replacement cost endorsement providing for no deduction for depreciation and a stipulated amount endorsement. All insurance required to be maintained pursuant to this paragraph may be subject to a deductible in an amount not to exceed $500,000. The City’s obligations under this paragraph may be satisfied by self-insurance, provided such self-insurance complies with the provisions of the Lease Agreement.

The City will maintain rental interruption insurance to cover the Authority’s loss, total or partial, of Base Rental Payments resulting from the loss, total or partial, of the use of any part of the Property as a result of any of the hazards required to be covered by the insurance described in the preceding paragraph in an amount sufficient at all times to pay an amount not less than the product of two times the maximum amount of Base Rental Payments scheduled to be paid during any Rental Period. The City will not be permitted to self-insure this obligation under the Lease Agreement.

The City will pay or cause to be paid when due the premiums for all insurance policies required by the Lease Agreement, and will promptly furnish or cause to be furnished evidence of such payments to the Trustee. All such policies will provide that the Trustee will be given thirty (30) days notice of the expiration thereof, or any intended cancellation thereof The Trustee 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.

The City will cause to be delivered to the Trustee on or before August 15 of each year, commencing August 15, 2000, a schedule of the insurance policies being maintained in accordance with the Lease Agreement and a Certificate of the City stating that such policies are in full force and effect and that the City is in full compliance with the requirements of the Lease Agreement. The Trustee will be entitled to rely upon said Certificate of the City as to the City’s compliance with the Lease Agreement. The Trustee will not be responsible for the sufficiency of coverage or amounts of such policies.

Insurance provided through a California joint powers authority of which the City is a member or with which the City contracts for insurance will be deemed to be self-insurance for purposes of the Lease Agreement. Any self-insurance maintained by the City pursuant to the Indenture will comply with the following terms:

(a) the self-insurance program will be approved in writing by the City’s professionally certified risk manager or by an independent insurance consultant;

(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 each such fund will be evaluated on a bi-annual basis by

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the City’s professionally certified risk manager or by an independent insurance consultant and any deficiencies in any self-insured claims reserve fund will be remedied in accordance with the recommendation of the City’s professionally certified risk manager or such independent insurance consultant, as applicable;

(c) in the event the self-insurance program will be discontinued, the actuarial soundness of its claims reserve fund, as determined by the City’s professionally certified risk manager or by an independent insurance consultant, will be maintained.

The insurance required by the Lease Agreement will be provided by reputable insurance companies with claims paying abilities determined, in the reasonable opinion of the City’s professionally certified risk manager or an independent insurance consultant, to be adequate for the purposes of the Lease Agreement.

Title Insurance

The City will provide, at its own expense, one or more CLTA title insurance policies for the Property, in the aggregate amount of not less than the initial aggregate principal amount of the Series 1999 Bonds. Said policy or policies will insure (a) the fee interest of the City in the Property, (b) the Authority’s ground leasehold estate in the Property under the Ground Lease, and (c) the City’s leasehold estate under the Lease Agreement in the Property, subject only to Permitted Encumbrances. All Net Insurance Proceeds received under said policy or policies will be deposited with the Trustee and applied as provided in the Indenture. So long as any of the Bonds remain Outstanding, each policy of title insurance obtained pursuant to the Indenture or the Lease or required by the Indenture or the Lease Agreement will provide that all proceeds thereunder will be payable to the Trustee for the benefit of the Bond Owners.

Eminent Domain

If all of the Property (or portions thereof such that the remainder is not usable for public purposes by the City) will be taken under the power of eminent domain, the term of the Lease Agreement will cease as of the day that possession will be so taken. If less than all of the Property will be taken under the power of eminent domain and the remainder is usable for public purposes by the City at the time of such taking, then the Lease Agreement will continue in full force and effect as to such remainder, and the parties waive the benefits of any law to the contrary, and in such event there will be a partial abatement of the Rental Payments in accordance with the provisions of the Lease Agreement. So long as any Bonds will be Outstanding, any award made in eminent domain proceedings for the taking of the Property, or any portion thereof, will be paid to the Trustee and applied to the redemption of Bonds as provided in the Indenture. Any such award made after all of the Bonds, and all other amounts due under the Indenture and under the Lease Agreement, have been fully paid, will be paid to the Authority and to the City as their respective interests may appear.

Assignment

The City and the Authority acknowledge the assignment of the Lease Agreement, and the Base Rental Payments payable thereunder, to the Trustee pursuant to the Assignment Agreement.

Default

(a) (i) If the City will fail (A) to pay any Rental Payment payable under the Lease Agreement when the same becomes due and payable, time being expressly declared to be of the essence in the Lease Agreement, or (B) to keep, observe or perform any other term, covenant or condition contained in the Lease Agreement or in the Indenture to be kept or performed by the City, or (ii) upon the happening of any of the events specified in paragraph (b) below, the City will be deemed to be in default under the Lease Agreement and it will be lawful for the Authority to exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement. The City will in no event be in default in the observance or performance of any covenant, condition or agreement in the Lease Agreement on its part to be observed or performed, other

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than as referred to in clause (i)(A) or (ii) of the preceding sentence, unless the City will have failed, for a period of thirty (30) days or such additional time as is reasonably required to correct any such default after notice by the Authority to the City properly specifying wherein the City has failed to perform any such covenant, condition or agreement. Upon any such default, the Authority, in addition to all other rights and remedies it may have at law, will have the option to do any of the following:

(1) To terminate the Lease Agreement in the manner hereinafter described on account of default by the City, notwithstanding any re-entry or re-letting of the Property as hereinafter described in paragraph (2) below, and to re-enter the Property and remove all persons in possession thereof and all personal property whatsoever situated upon the Property and place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the City. In the event of such termination, the City agrees to surrender immediately possession of the Property, without let or hindrance, and to pay the Authority all damages recoverable at law that the Authority may incur by reason of default by the City, including, without limitation, any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon the Property and removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. Neither notice to pay Rental Payments or to deliver up possession of the Property given pursuant to law nor any entry or re-entry by the Authority nor any proceeding in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Property nor the appointment of a receiver upon initiative of the Authority to protect the Authority’s interest under the Lease Agreement will of itself operate to terminate the Lease Agreement, and no termination of the Lease Agreement on account of default by the City will be or become effective by operation of law or acts of the parties thereto, or otherwise, unless and until the Authority will have given written notice to the City of the election on the part of the Authority to terminate the Lease Agreement. The City covenants and agrees that no surrender of the Property or of the remainder of the term of the Lease Agreement or any termination of the Lease Agreement will be valid in any manner or for any purpose whatsoever unless stated by the Authority by such written notice.

(2) Without terminating the Lease Agreement, (a) to collect each installment of Rental Payments as the same become due and enforce any other terms or provisions of the Lease Agreement to be kept or performed by the City, regardless of whether or not the City has abandoned the Property, or (b) to exercise any and all rights of entry and re-entry upon the Property. In the event the Authority does not elect to terminate the Lease Agreement in the manner described in paragraph (1) above, the City will remain liable and agrees to keep or perform all covenants and conditions contained in the Lease Agreement to be kept or performed by the City and, if the Property is not re-let, to pay the full amount of the Rental Payments to the end of the term of the Lease Agreement or, in the event that the Property is re-let, to pay any deficiency in Rental Payments that results therefrom; and further agrees to pay said Rental Payments and/or Rental Payment deficiency punctually at the same time and in the same manner as described above for the payment of Rental Payments under the Lease Agreement, notwithstanding the fact that the Authority may have received in previous years or may receive thereafter in subsequent years Rental Payments in excess of the Rental Payments specified in the Lease Agreement, and notwithstanding any entry or re-entry by the Authority or suit in unlawful detainer, or otherwise, brought by the Authority for the purpose of effecting such re-entry or obtaining possession of the Property. Should the Authority elect to re-enter as provided in the Lease Agreement, the City irrevocably appoints the Authority as the agent and attorney-in-fact of the City to re-let the Property, or any part thereof, from time to time, either in the Authority’s name or otherwise, upon such terms and conditions and for such use and period as the Authority may deem advisable and to remove all persons in possession thereof and all personal property whatsoever situated upon the Property and to place such personal property in storage in any warehouse or other suitable place, for the account of and at the expense of the City, and the City indemnifies and agrees to save harmless the Authority from any costs, loss or damage whatsoever arising out of, in connection with, or incident to any such re-entry upon and re-letting of the Property and removal and storage of such property by the Authority or its duly authorized agents in accordance with the provisions contained in the Lease Agreement. The City agrees that the terms of the Lease Agreement constitute full and sufficient notice of the right of the Authority to re-let the Property in the event of such re-letting without effecting a surrender of the Lease Agreement, and further agrees that no acts of the

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Authority in effecting such re-letting will constitute a surrender or termination of the Lease Agreement irrespective of the use or the term for which such re-letting is made or the terms and conditions of such re- letting, or otherwise, but that, on the contrary, in the event of such default by the City the right to terminate the Lease Agreement will vest in the Authority to be effected in the sole and exclusive manner provided for in paragraph (1) above. The City further agrees to pay the Authority the cost of any alterations or additions to the Property necessary to place the Property in condition for re-letting immediately upon notice to the City of the completion and installation of such additions or alterations.

The City waives any and all claims for damages caused or which may be caused by the Authority in re-entering and taking possession of the Property as provided in the Lease Agreement and all claims for damages that may result from the destruction of or injury to the Property and all claims for damages to or loss of any property belonging to the City, or any other person, that may be in or upon the Property.

(b) If (i) the City’s interest in the Lease Agreement or any part thereof be assigned or transferred, either voluntarily or by operation of law or otherwise, without the written consent of the Authority, and as hereinafter described, or (ii) the City or any assignee will file any petition or institute any proceeding under any act or acts, state or federal, dealing with or relating to the subject or subjects of bankruptcy or insolvency, or under any amendment of such act or acts, either as a bankrupt or as an insolvent, or as a debtor, or in any similar capacity, wherein or whereby the City asks or seeks or prays to be adjudicated a bankrupt, or is to be discharged from any or all of the City’s debts or obligations, or offers to the City’s creditors to effect a composition or extension of time to pay the City’s debts or asks, seeks or prays for reorganization or to elect a plan of reorganization, or for a readjustment of the City’s debts, or for any other similar relief, or if any such petition or any such proceedings of the same or similar kind or character be filed or be instituted or taken against the City, or if a receiver of the business or of the property or assets of the City will be appointed by any court, except a receiver appointed at the instance or request of the Authority, or if the City will make a general assignment for the benefit of the City’s creditors, or (iii) the City will abandon or vacate the Property, then the City will be deemed to be in default under the Lease Agreement.

(c) In addition to the other remedies set forth in the Lease Agreement, upon the occurrence of an event of default, the Authority and its assignee will be entitled to proceed to protect and enforce the rights vested in the Authority and its assignee by the Lease Agreement or by law. The provisions of the Lease Agreement and the duties of the City and of its city council, officers or employees will be enforceable by the Authority or its assignee by mandamus or other appropriate suit, action or proceeding in any court of competent jurisdiction. Without limiting the generality of the foregoing, the Authority and its assignee will have the right to bring the following actions:

(i) Accounting. By action or suit in equity to require the City and its city council, officers and employees and its assigns to account as the trustee of an express trust.

(ii) Injunction. By action or suit in equity to enjoin any acts or things which may be unlawful or in violation of the rights of the Authority or its assignee.

(iii) Mandamus. By mandamus or other suit, action or proceeding at law or in equity to enforce the Authority’s or its assignee’s rights against the City (and its city council, officers and employees) and to compel the City to perform and carry out its duties and obligations under the law and its covenants and agreements with the City as provided in the Lease Agreement.

In the event the Authority will prevail in any action brought to enforce any of the terms and provisions of the Lease Agreement, the City agrees to pay a reasonable amount as and for attorney’s fees incurred by the Authority in attempting to enforce any of the remedies available to the Authority under the Lease Agreement.

Notwithstanding anything to the contrary contained in the Lease Agreement, the Authority will have no right upon a default thereunder by the City to accelerate Rental Payments.

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(d) Notwithstanding anything to the contrary contained in the Lease Agreement, the termination of the Lease Agreement by the Authority and its assignees on account of a default by the City thereunder will not effect or result in a termination of the Ground Lease.

Failure of the Authority to take advantage of any default on the part of the City will not be, or be construed as, a waiver thereof, nor will any custom or practice which may grow up between the parties in the course of administering the Lease Agreement be construed to waive or to lessen the right of the Authority to insist upon performance by the City of any term, covenant or condition of the Lease Agreement, or to exercise any rights given the Authority on account of such default. A waiver of a particular default will not be deemed to be a waiver of any other default or of the same default subsequently occurring. The acceptance of Rental Payments under the Lease Agreement will not be, or be construed to be, a waiver of any term, covenant or condition of the Lease Agreement.

Amendments

The Lease Agreement and the Ground Lease may be amended and the rights and obligations of the Authority and the City thereunder may be amended at any time by an amendment thereto which will become binding upon execution and delivery by the Authority and the City but only with the prior written consent of the Owners of a majority of the principal amount of the Bonds then Outstanding pursuant to the Indenture, provided that no such amendment will (i) extend the payment date of any Base Rental Payments, reduce the interest component or principal component of any Base Rental Payments or change the prepayment terms and provisions, without the prior written consent of the Owner of each Bond so affected, or (ii) reduce the percentage of the principal amount of the Bonds the consent of the Owners of which is required for the execution of any amendment of the Lease Agreement or the Ground Lease.

The Lease Agreement and the Ground Lease and the rights and obligations of the Authority and the City thereunder may also be amended at any time by an amendment thereto which will become binding upon execution by the Authority and the City, but without the written consents of any Owners, but only to the extent permitted by law and only for any one or more of the following purposes:

(a) to add to the agreements, conditions, covenants and terms required by the Authority or the City to be observed or performed in the Lease Agreement or other agreements, conditions, covenants and terms thereafter to be observed or performed by the Authority or the City, or to surrender any right or power reserved therein to or conferred therein on the Authority or the City, and which in either case will not materially adversely affect the interests of the Owners;

(b) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained therein or in regard to questions arising thereunder which the Authority or the City may deem desirable or necessary and not inconsistent therewith, and which will not materially adversely affect the interests of the Owners;

(c) 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 on the Bonds;

(d) to provide for the substitution or release of a portion of the Property in accordance with the provisions of the Lease Agreement:

(e) to provide for the issuance of Additional Bonds in accordance with the Indenture; or

(f) to make such other changes therein or modifications thereto as the Authority or the City may deem desirable or necessary, and which will not materially adversely affect the interests of the Owners.

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THE INDENTURE

Costs of Issuance Fund

The Trustee will establish and maintain a separate special fluid designated the “Costs of Issuance Fund.” On the Closing Date, there will be deposited in the Costs of Issuance Fund the amount specified in the Indenture. There will be additionally be deposited in the Costs of Issuance Fund the portion, if any, of the proceeds of the sale of any Additional Bonds required to be deposited therein under the Supplemental Indenture pursuant to which such Additional Bonds are issued.

The moneys in the Costs of Issuance Fund will be used and withdrawn by the Trustee from time to time to pay the Costs of Issuance upon submission of a Written Request of the Authority stating (a) the Person to whom payment is to be made, (b) the amount to be paid, (c) the purpose for which the obligation was incurred, (d) that such payment is a proper charge against the Costs of Issuance Fund, and (e) that such amounts have not been the subject of a prior disbursement from the Costs of Issuance Fund, in each case together with a statement or invoice for each amount requested thereunder. On June 1, 2002, and on such later date as may be specified in a supplemental Indenture, the Trustee will transfer any amounts then remaining in the Costs of Issuance Fund to the Construction Fund.

Construction Fund

The Trustee will establish and maintain a separate fund designated the “Construction Fund.” On the Closing Date there will be deposited in the Construction Fund the amount specified in the Indenture.

The moneys in the Construction Fund will be used and withdrawn by the Trustee from time to time to pay the Project Costs upon submission of a Written Request of the City stating (i) the Person to whom payment is to be made, (ii) the amount to be paid, (iii) the purpose for which the obligation was incurred, (iv) that such payment constitutes a Project Cost and is a proper charge against the Construction Fund, and (v) that such amounts have not been the subject of a prior disbursement from the Construction Fund, in each case together with a statement or invoice for each amount requested thereunder.

Upon the filing of a Written Certificate of the City stating that the Project has been completed and that all Project Costs have been paid, the Trustee will transfer and apply the amount, if any, remaining in the Construction Fund (x) if such amount is equal to or greater than $50,000, to the Redemption Fund to be used to optionally redeem Bonds, provided that the amount so transferred will not exceed the amount required to provide for the redemption of all Outstanding Bonds and (y) if such amount is less than $50,000, to the Base Rental Payment Fund to be used for the purposes thereof.

Additional Bonds

Conditions for the Issuance of Additional Bonds

(a) The issuance of such Additional Bonds will have been authorized under and pursuant to the Indenture and will have been provided for by a Supplemental Indenture which will specify the following:

. The Authority may at any time issue one or more Series of Additional Bonds (in addition to the Series 1999 Bonds) payable from Base Rental Payments as provided in the Indenture on a parity with all other Bonds theretofore issued under the Indenture, but only subject to the following conditions, which are conditions precedent to the issuance of such Additional Bonds:

(1) The application of the proceeds of the sale of such Additional Bonds;

(2) The principal amount and designation of such Series of Additional Bonds and the denomination or denominations of the Additional Bonds;

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(3) The date, the maturity date or dates, the interest payment dates and the dates on which mandatory sinking fund redemptions, if any, are to be made for such Additional Bonds; provided, however, that (i) the serial Bonds of such Series of Additional Bonds will be payable as to principal annually on July 1 of each year in which principal falls due, and the term Bonds of such Series of Additional Bonds will have annual mandatory sinking fund redemptions on July 1, (ii) the Additional Bonds will be payable as to Interest semiannually on January 1 and July 1 of each year, except that the first installment of interest may be payable on either January 1 or July 1 and will be for a period of not longer than twelve months and the interest will be payable thereafter semiannually on January 1 and July 1, (iii) all Additional Bonds of a Series of like maturity will be identical in all respects, except as to number or denomination, and (iv) serial maturities of serial Bonds or mandatory’ sinking fund redemptions for term Bonds, or any combination thereof, will be established to provide for the redemption or payment of such Additional Bonds on or before their respective maturity dates;

(4) The redemption premiums and terms, if any, for such Additional Bonds;

(5) The form of such Additional Bonds;

(6) The amount to be deposited from the proceeds of sale of such Additional Bonds in the Reserve Fund; provided, however, that the Reserve Fund will be increased at the time that such Additional Bonds become Outstanding to an amount at least equal to the Reserve Requirement, and an amount at least equal to the Reserve Requirement will thereafter be maintained in the Reserve Fund; and

(7) Such other provisions that are appropriate or necessary and are not inconsistent with the provisions hereof;

(b) The Authority will be in compliance with all agreements, conditions, covenants and terms contained in the Indenture, in the Lease Agreement and in the Ground Lease required to be observed or performed by it;

(c) The City will be in compliance with all agreements, conditions, covenants and terms contained in the Indenture, in the Lease Agreement and in the Ground Lease required to be observed or performed by it; and

(d) The Ground Lease will have been amended, to the extent necessary, and the Lease Agreement will have been amended so as to increase the Base Rental Payments payable by the City thereunder by an aggregate amount equal to the principal of and interest on such Additional Bonds, payable at such times and in such manner as may be necessary to provide for the payment of the principal of and interest on such Additional Bonds; provided, however, that no such amendment will be made such that the sum of Base Rental Payments, including any increase in the Base Rental Payments as a result of such amendment, plus Additional Rental Payments, in any Rental Period will be in excess of the annual fair rental value of the Property after taking into account the use of the proceeds of any Additional Bonds issued in connection therewith (evidence of the satisfaction of such condition will be made by a Written Certificate of the City).

Nothing contained in the Indenture will limit the issuance of any bonds or other obligations payable from Base Rental Payments if, after the issuance and delivery of such bonds or other obligations, none of the Bonds theretofore issued under the Indenture will be Outstanding.

Procedure for the Issuance of Additional Bonds. At any time after the sale of any Additional Bonds in accordance with the Act, such Additional Bonds will be executed by the Authority for issuance under the Indenture and will be delivered to the Trustee and thereupon will be authenticated and delivered by the Trustee, but only upon receipt by the Trustee of the following:

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(a) Certified copies of the Supplemental Indenture authorizing the issuance of such Additional Bonds, the amendment to the Lease Agreement required by the Indenture and the amendment to the Ground Lease, if any, required by the Indenture, together with satisfactory evidence that such amendment to the Lease Agreement and such amendment to the Ground Lease, if any, have been duly recorded;

(b) A Written Request of the Authority as to the delivery of such Additional Bonds;

(c) An opinion of Bond Counsel substantially to the effect that (i) the Indenture (including all Supplemental Indentures), the Lease Agreement (including the amendment thereto required by the Indenture) and the Ground Lease (including any amendment thereto required by the Indenture) have been duly authorized, executed and delivered by, and constitute the valid and binding obligations of, the Authority and the City, enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights and by the application of equitable principles and by the exercise of judicial discretion in appropriate cases and subject to the limitations on legal remedies against political subdivisions in the State of California), (ii) such Additional Bonds constitute valid and binding special obligations of the Authority payable solely from Base Rental Payments as provided in the Indenture and are enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights and by the application of equitable principles and by the exercise of judicial discretion in appropriate cases and subject to the limitations on legal remedies against political subdivisions in the State of California), and (iii) the issuance of such Additional Bonds, in and of itself, will not adversely affect the exclusion of interest on the Bonds Outstanding prior to the issuance of such Additional Bonds from gross income for federal income tax purposes;

(d) a Written Certificate of the Authority that the requirements of the Indenture have been met;

(e) a Written Certificate of the City that the requirements of the Indenture have been met, and a Written Certificate of the City as to the fair rental value of the Property, after giving effect to the execution and delivery of the Additional Bonds, and to the use of proceeds received therefrom;

(f) certified copies of the policies of insurance required by the Lease Agreement or certificates thereof, which will evidence that the amounts of the insurance required under the Lease Agreement have been increased, if applicable, to cover the amount of such Additional Bonds;

(g) a CLTA title insurance policy or other appropriate form of policy in the amount of the Additional Bonds of the type and with the endorsements described in the Lease Agreement;

(h) The proceeds of the sale of such Additional Bonds; and

(i) Such further documents as are required by the provisions hereof or by the provisions of the Supplemental Indenture authorizing the issuance of such Additional Bonds.

So long as any of the Bonds remain Outstanding, the Authority will not issue any Additional Bonds or obligations payable from the Base Rental Payments, except pursuant to the Indenture.

Pledge of Base Rental Payments and Additional Rental; Base Rental Payment Fund

Subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth therein, all of the Base Rental Payments and any other amounts (including proceeds of the sale of the Bonds) held in the Base Rental Payment Fund, the Reserve Fund, the Interest Fund, the Principal Fund and the Redemption Fund are pledged to secure the payment of the principal of premium, if any, and interest on the Bonds in accordance with their terms, the provisions of the Indenture and the Act. Said pledge will constitute a first lien on such assets.

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All obligations of the Authority wider the Indenture will be special obligations of the Authority, payable solely from Rental Payments and the other assets pledged therefor thereunder; provided, however, that all obligations of the Authority under the Bonds will be special obligations of the Authority, payable solely from Base Rental Payments and the other assets pledged therefor under the Indenture. Neither the faith and credit nor the taxing power of the Authority, the City or the State of California, or any political subdivision thereof, is pledged to the payment of the Bonds.

All Base Rental Payments will be paid directly by the City to the Trustee, and if received by the Authority at any time will be transferred by the Authority with the Trustee within one Business Day after the receipt thereof. All Base Rental Payments paid by the City will be deposited by the Trustee in the Base Rental Payment Fund.

Deposit of Base Rental Payments

The Trustee will transfer the amounts on deposit in the Base Rental Payment Fund, at the times and in the manner provided in the Indenture, to the following respective funds.

Interest Fund. On the Business Day immediately preceding each Interest Payment Date, the Trustee will transfer from the Base Rental Fund to the Interest Fund the amount, if any, necessary to cause the amount on deposit in the Interest Fund to be equal to the interest due on the Bonds on such Interest Payment Date; provided, however, that on each Interest Payment Date through and including January 1, 2003, prior to making said deposit, the amount set forth in the Indenture, will be transferred from the Capitalized Interest Account within the Interest Fund to the Interest Fund. Any amount remaining in the Capitalized Interest Account on January 2, 2003, will be transferred to the Interest Fund. Moneys in the Interest Fund will be used by the Trustee for the purpose of paying the interest on the Bonds when due and payable.

Principal Fund. On the Business Day immediately preceding each July 1, commencing July 1, 2002, the Trustee will transfer from the Base Rental Fund to the Principal Fund the amount, if any, necessary to cause the amount on deposit in the Principal Fund to be equal to the principal amount of the Bonds due on such July 1, either as a result of the maturity thereof or mandatory sinking fund redemption payments required to be made with respect thereto. Moneys in the Principal Fund will be used by the Trustee for the purpose of paying the principal of the Bonds when due and payable at their maturity dates or upon earlier mandatory sinking fund redemption.

Redemption Fund

Application of Net Insurance Proceeds

. The Trustee, on the redemption date specified in the Written Request of the City filed with the Trustee at the time that any prepaid Base Rental Payment is paid to the Trustee pursuant to the Lease Agreement, will deposit in the Redemption Fund that amount of moneys representing the portion of the Base Rental Payments designated as prepaid Base Rental Payments. Additionally, the Trustee will deposit in the Redemption Fund any amounts required to be deposited therein pursuant to the Indenture. Moneys in the Redemption Fund will be used by the Trustee for the purpose of paying the principal of and interest and premium, if any, on Additional Bonds redeemed pursuant to the corresponding provisions of the Supplemental Indenture pursuant to which such Additional Bonds are issued.

If the Property or any portion thereof will be damaged or destroyed, subject to the further requirements of the Indenture, the City will, as expeditiously as possible, continuously and diligently prosecute or cause to be prosecuted the repair or replacement thereof, unless the City elects not to repair or replace the Property or the affected portion thereof in accordance with the provisions of the Indenture.

The Net Insurance Proceeds (other than Net Insurance Proceeds of rental interruption insurance), including the proceeds of any self-insurance, received on account of any damage or destruction of the Property or a portion thereof will as soon as possible be deposited with the Trustee and be held by the Trustee in a

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special account and made available for and, to the extent necessary, will be applied to the cost of repair or replacement of the Property or the affected portion thereof upon receipt of a Written Request of the City, together with invoices therefor. Pending such application, such proceeds may be invested by the Trustee as directed by the City in Permitted Investments that mature not later than such times as moneys are expected to be needed to pay such costs of repair or replacement.

Notwithstanding the foregoing, the City will, within sixty (60) days of the occurrence of the event of damage or destruction, notify the Trustee in writing as to whether the City intends to replace or repair the Property or the portions of the Property which were damaged or destroyed. If the City does intend to replace or repair the Property or portions thereof, the City will deposit with the Trustee the full amount of any insurance deductible to be credited to the special account.

If the damage, destruction or loss was such that there resulted a substantial interference with the City’s right to the use or occupancy of the Property and an abatement of Rental Payments results from such damage or destruction pursuant to the Lease Agreement, then the City will be required either to (a) apply sufficient funds from the insurance proceeds and other legally available funds to the replacement or repair of the Property or the portions thereof which have been damaged to the condition which existed prior to such damage or destruction, or (b) apply sufficient funds from the insurance proceeds and other legally available funds to the redemption, as set forth in the Indenture and the corresponding provisions of any Supplemental Indenture pursuant to which Additional Bonds are issued, in full of all the Outstanding Bonds or all of those Outstanding Bonds which would have been payable from that portion of the Base Rental Payments which are abated as a result of the damage or destruction. Funds to be applied to the redemption of Bonds in accordance with clause (b) above will be deposited in the Redemption Fund. Any proceeds of any insurance, including the proceeds of any self-insurance remaining after the portion of the Property which was damaged or destroyed is restored to and made available to the City in substantially the same condition and annual fair rental value as that which existed prior to the damage or destruction as required by clause (a) above or the redemption of Bonds as required by clause (b) above, in each case as evidenced by a Written Certificate of the City to such effect, will be deposited into the Reserve Fund to the extent that the amount therein is less than the Reserve Requirement. If the City is not required to replace or repair the Property, or the affected portion thereof, as set forth in clause (a) above or to use such amounts to redeem Bonds as set forth in clause (b) above, then such proceeds will be deposited into the Reserve Fund to the extent that the amount therein is less than the Reserve Requirement. Any amounts not required to be so deposited into the Reserve Fund will if there is first delivered to the Trustee a Written Certificate of the City to the effect that the annual fair rental value of the Property after such damage or destruction, and after any repairs or replacements made as a result of such damage or destruction, is at least equal to 100% of the maximum amount of Base Rental Payments becoming due under the Lease Agreement in the then current rental period or any subsequent rental period and the fair replacement value of the Property after such damage or destruction is at least equal to the principal amount of the Outstanding Bonds, be paid to the City to be used for any lawful purpose.

The proceeds of any award in eminent domain received in respect to the Property will be deposited by the Trustee in the Redemption Fund and applied to the redemption of Bonds pursuant to the Indenture and the corresponding provisions of any Supplemental Indenture pursuant to which Additional Bonds are issued.

Title Insurance

Proceeds of any policy of title insurance received by the Trustee in respect of the Property will be applied and disbursed by the Trustee 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 Property and will not result in an abatement of Rental Payments payable by the City under the Lease Agreement, such proceeds will be remitted to the City and used for any lawful purpose thereof, or

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(b) if the City determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Property and will result in an abatement in whole or in part of Rental Payments payable by the City under the Lease Agreement, then the Trustee will immediately deposit such proceeds in the Redemption Fund and such proceeds will be applied to the redemption of Bonds in the manner provided in the Indenture and the corresponding provisions of any Supplemental Indenture pursuant to which Additional Bonds are issued.

Investment of Moneys

Except as otherwise provided in the Indenture, all moneys in any of the funds or accounts established pursuant to the Indenture and held by the Trustee will be invested by the Trustee solely in Permitted Investments, as directed in writing by the Authority. Moneys in all funds and accounts held by the Trustee will be invested in Permitted Investments maturing not later than the date on which it is estimated that such money s will be required for the purposes specified in the Indenture; provided, however, that Permitted Investments in which moneys in the Reserve Fund are so invested will mature no later than the earlier of five years from the date of investment or the final maturity date of the Bonds and, provided, further, that if such Permitted Investments may be redeemed at par so as to be available on each Interest Payment Date, any amount in the Reserve Fund may be invested in such redeemable Permitted Investments maturing on any date on or prior to the final maturity date of the Bonds. Absent timely written direction from the Authority, the Trustee will invest any funds held by it in Permitted Investments described in paragraph (7) of the definition thereof.

Subject to the provisions of the Indenture, all interest, profits and other income received from the investment of moneys in any fund or account established pursuant to the Indenture will be retained therein.

Permitted Investments acquired as an investment of moneys in any fund established under the Indenture will be credited to such fund. For the purpose of determining the amount in any fund, all Permitted Investments credited to such fund will be valued by the Trustee at the amortized cost thereof, such valuation to be performed not less frequently than semiannually on or before each June 15 and December 15.

The Trustee may act as principal or agent in the making or disposing of any investment, Upon the Written Request of the Authority, the Trustee will sell or present for redemption any Permitted Investments so purchased whenever it will be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund to which such Permitted Investments is credited, and the Trustee will not be liable or responsible for any loss resulting from any investment made or sold pursuant to the Indenture. For purposes of investment, the Trustee may commingle moneys in any of the funds and accounts established under the Indenture.

Covenants

Compliance with Agreements. The Trustee will not authenticate or deliver any Bonds in any matter other than accordance with the provisions of the Indenture, and the Authority and the City will not suffer or permit any default by them to occur under the Indenture, but wilt faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms of the Indenture required to be complied with, kept, observed and performed by them.

Compliance with Ground Lease and Lease Agreement. The Authority and the City will faithfully comply with, keep, observe and perform all the agreements, conditions, covenants and terms contained in the Ground Lease and the lease Agreement required to be complied with, kept, observed and performed by them and, together with the Trustee, will enforce the Ground Lease and the Lease Agreement against the other party thereto in accordance with their respective terms.

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Observance of Laws and Regulations. The Authority, the City and the Trustee will faithfully comply with, keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on them by contract, or prescribed by any law of the United States of America or of the State of California, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise, right or privilege now owned or hereafter acquired by them, including their right to exist and carry on their respective businesses, to the end that such franchises, rights and privileges will be maintained and preserved and will not become abandoned, forfeited or in any manner impaired.

Other Liens

So long as any Bonds are Outstanding, none of the Trustee, the Authority or the City will create or suffer to be created any pledge of or lien on the amounts on deposit in any of the funds or accounts created under the Indenture, other than the pledge and lien as provided for or permitted under the Indenture.

. The City will keep the Property and all parts thereof free from judgments and materialman’s and mechanics’ liens and free from all claims, demands, encumbrances and other liens of whatever nature or character, and free from any claim or liability which materially impairs the City in conducting its business or utilizing the Property, and the Trustee at its option (after first giving the City ten (10) days’ written notice to comply therewith and failure of the City to so comply within such ten-day period) may defend against any and all actions or proceedings, or may pay or compromise any claim or demand asserted in any such actions or proceedings; provided, however, that, in defending against any such actions or proceedings or in paying or compromising any such claims or demands, the Trustee will not in any event be deemed to have waived or released the City from liability for or on account of any of its agreements and covenants contained in the Indenture, or from its liability under the Indenture and to perform such agreements and covenants. The Trustee will have no liability with respect to any determination made in good faith to proceed or decline to defend, pay or compromise any such claim or demand.

The Authority and the Trustee will not encumber the Property other than in accordance with the Ground Lease, the Lease Agreement, the Indenture and the Assignment Agreement.

Prosecution and Defense of Suits. The City will promptly, upon request of the Trustee, take such action from time to time as may be necessary or proper to remedy or cure any cloud upon or defect in the title to the Property or any part thereof, whether now existing or hereafter developing, will prosecute all actions, suits or other proceedings as may be appropriate for such purpose and will indemnify and save the Trustee harmless from all cost, damage, expense or loss, including attorneys’ fees, which it or the Owners may incur by reason of any such cloud, defect, action, suit or other proceeding.

Accounting Records and Statements. The Trustee will keep proper accounting records in which complete and correct entries will be made of all transactions relating to the receipt, deposit and disbursement of the Base Rental Payments, and such accounting records will be available for inspection by the Authority and the City at reasonable hours and under reasonable conditions. The Trustee will, upon written request, make copies of the foregoing available to any Owner or his agent duly authorized in writing.

Recordation and Filing. The City will record, or cause to be recorded, with the appropriate City recorder, the Lease Agreement, the Ground Lease and the Assignment Agreement, or memoranda thereof.

Tax Covenants. Neither the Authority nor the City will take any action, or fail to take any action, if such action or failure to take such action would adversely affect the exclusion from gross income of interest on the Bonds under Section 103 of the Code. Without limiting the generality of the foregoing, the City will comply with the requirements of the Tax Certificate. This covenant will survive payment in full or defeasance of the Bonds.

Further Assurances. Whenever and so often as requested to do so by the Trustee, the Authority and the City will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments and promptly do or cause to be done all such other and further things as

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may be necessary or reasonably required in order to further and more fully vest in the Trustee all advantages, benefits, interests, powers, privileges and rights conferred or intended to be conferred upon it by the Indenture, the Assignment Agreement, the Ground Lease or the Lease Agreement.

Continuing Disclosure

Events of Default

. The City will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Indenture, failure of the City to comply with the Continuing Disclosure Certificate will not constitute an event of default under the Indenture; provided, however, that the Trustee may (and, at the written direction of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Bonds, and upon being indemnified to its reasonable satisfaction therefor, will) or any holder or beneficial owner of Bonds may take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order.

If an event of default (within the meaning of the Lease Agreement) will happen, then such event of default will constitute an event of default under the Indenture. The Trustee may give notice, as assignee of the Authority, of an event of default under the Lease Agreement to the City, and will do so if directed to do so by the Owners of not less than a majority of the aggregate principal amount of Bonds then Outstanding. In each and every case during the continuance of an event of default, the Trustee may and, at the direction of the Owners of not less than a majority of the aggregate principal amount of Bonds then Outstanding, and upon being indemnified to is reasonable satisfaction therefor, will, upon notice in writing to the City and the Authority, exercise any of the remedies granted to the Authority under the Lease Agreement and, in addition, take whatever action at law or in equity may appear necessary or desirable to enforce its rights as assignee pursuant to the Assignment Agreement or to protect and enforce any of the rights vested in the Trustee or the Owners by the Indenture or by the Bonds, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement or for the enforcement of any other legal or equitable right, including any one or more of the remedies set forth in the Indenture.

Other Remedies of the Trustee

Subject to the provisions of the Indenture, the Trustee will have the right:

(a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the Authority or the City or any member, officer or employee thereof, and to compel the Authority or the City or any such member, officer or employee to perform or carry out its or his or her duties under law and the agreements and covenants required to be performed by it or him or her contained in the Indenture;

(b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee; or

(c) by suit in equity upon the happening of any default under the Indenture to require the Authority and the City to account as the trustee of an express trust.

A waiver of any default or breach of duty or contract by the Trustee will not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee to exercise any right or remedy accruing upon any default or breach of duty or contract will impair any such right or remedy or will be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Trustee by law or by the Indenture may be enforced and exercised from time to time and as often the Trustee will deem expedient.

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If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee or any Owner, then subject to any adverse determination, the Trustee, such Owner, the Authority and the City will be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken.

Subject to the provisions of the indenture, no remedy in the Indenture conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy will be cumulative and will be in addition to every other remedy given under the Indenture or now or hereafter existing at law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any law. The assertion or employment of any right or remedy under the Indenture, or otherwise, will not prevent the concurrent assertion or employment of any other appropriate right or remedy.

Except as expressly provided in the Indenture, the Authority will not have any obligation or liability to the Owners with respect to the payment when due of the Base Rental Payments by the City, or with respect to the performance by the City of the other agreements and covenants required to be performed by it contained in the Lease Agreement or the Indenture, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture.

Except for the payment when due of the Base Rental Payments and the performance of the other agreements and covenants required to be performed by it contained in the Lease Agreement, the Ground Lease or the Indenture, the City will not have any obligation or liability to the Owners with respect to the Indenture or the preparation, execution, delivery or transfer of the Bonds or the disbursement of the Base Rental Payments by the Trustee to the Owners, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Indenture.

Except as expressly provided in the Indenture, the Trustee will not have any obligation or liability to the Owners with respect to the payment when due of the Base Rental Payments by the City, or with respect to the performance by the Authority or the City of the other agreements and covenants required to be performed by them contained in the Lease Agreement, the Ground Lease or the Indenture.

All payments received by the Trustee with respect to the rental of the Property after a default by the City pursuant to the Lease Agreement (including, without limitation, any proceeds received in connection with the sale, assignment or sublease of the Authority’s right, title and interest in the Ground Lease), and all damages or other payments received by the Trustee for the enforcement of any rights and powers of the Trustee under the Lease Agreement, will be deposited into the Base Rental Payment Fund and as soon as practicable thereafter applied, together with all other funds held under the Indenture (except funds in the Rebate Fund):

(a) to the payment of all amounts due the Trustee under the Indenture; and

(b) to the payment of all amounts then due for principal and interest on the Bonds, in respect of which, or for the benefit of which, money has been collected (other than Bonds which have become payable prior to such event of default and money for the payment of which is held by the Trustee), ratably without preference or priority of any kind, according to the amounts of principal and interest, respectively, on such Bonds due and payable; and

All rights of action and claims under the Indenture or the Bonds may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee will be brought in its own name as trustee of an express trust, and any recovery of judgment will, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Owners in respect of which such judgment has been recovered.

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Limitation on Suits

No Owner of any Bond will have any right to institute any proceeding, judicial or otherwise, with respect to the Indenture, or for the appointment of a receiver or Trustee, or for any other remedy under the Indenture, unless (a) such Owner has previously given written notice to the Trustee of a continuing event of default; (b) the Owners of not less than 25% of the aggregate principal amount of Bonds then Outstanding will have made written request to the Trustee to institute proceedings in respect of such event of default in its own name as Trustee under the Indenture; (c) such Owner or Owners will have afforded to the Trustee indemnity reasonably satisfactory to the Trustee against the costs, expenses and liabilities to be inclined in compliance with such request; (d) the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity will have failed to institute any such proceedings; and (e) no direction inconsistent with such written request has been given to the Trustee during such sixty-day period by the Owners of a majority of the aggregate principal amount of Bonds then Outstanding; it being understood and intended that no one or more Owners will have any right in any manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, disturb or prejudice the rights of any other Owner of Bonds, or to obtain or seek to obtain priority or preference over any other Owner or to enforce any right under the Indenture, except in the manner provided in the Indenture and for the equal and ratable benefit of all the Owners of Bonds.

The Trustee

The Authority appoints and employs the Trustee to receive, deposit and disburse the Base Rental Payments, to authenticate, deliver and transfer the Bonds and to perform the other functions contained in the indenture, all in the manner provided in the Indenture and subject to the conditions and terms of the Indenture. By executing and delivering the Indenture, the Trustee accepts the appointment and employment referred to above and accepts the rights and obligations of the Trustee provided in the Indenture, subject to the conditions and terms of the Indenture. Other than when an event of default has occurred and is continuing, the Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Indenture, and no implied covenants or obligations will be read into the Indenture against the Trustee. In case an event of default has occurred and is continuing, the Trustee will exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Trustee covenants and agrees that it will not encumber the Property.

The Authority may by an instrument in writing remove the Trustee initially a party to the Indenture and any successor thereto unless an event of default will have occurred and then be continuing, and will remove the Trustee initially a party to the Indenture and any successor thereto if at any time (a) requested to do so by an instrument or concurrent instruments in writing signed by the Owners of a majority in aggregate principal amount of Bonds at the time Outstanding (or their attorneys duly authorized in writing), or (b) the Trustee will cease to be eligible in accordance with the following sentence, and will appoint a successor Trustee, but the Trustee and any successor Trustee will be a bank or trust company having a combined capital (exclusive of borrowed capital) and surplus of at least fifty million dollars ($50,000,000) and subject to supervision or examination by federal or state authorities. If such bank or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of the Indenture the combined capital and surplus of such bank 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.

The Trustee may at any time resign by giving written notice of such resignation to the Authority and the City and by giving notice, by first-class mail, postage prepaid, of such resignation to the Owners of the Bonds at their addresses appearing on the Registration Books. Upon receiving such notice of resignation, the Authority will promptly appoint a successor Trustee by an instrument in writing; provided, however, that in the event the Authority does not appoint a successor Trustee within thirty (30) days following receipt of such notice of resignation, the resigning Trustee may, at the expense of the Authority, petition the appropriate court

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having jurisdiction to appoint a successor Trustee. Any resignation or removal of a Trustee and appointment of a successor Trustee will become effective only upon acceptance of appointment by the successor Trustee.

Modification or Amendments to Indenture

The Indenture and the rights and obligations of the Authority, the City, the Owners of the Bonds and the Trustee may be modified or amended from time to time and at any time by a Supplemental Indenture, which the Authority, the City and the Trustee may enter into with the written consent of the Owners of a majority in aggregate principal amount of all Bonds then Outstanding, which will have been filed with the Trustee. No such modification or amendment will (i) extend the fixed maturity of any Bonds, or reduce the amount of principal thereof or the rate of interest thereon, or extend the time of payment, without the consent of the Owner of each Bond so affected, or (ii) reduce the aforesaid percentage of Bonds the consent of the Owners of which is required to effect any such modification or amendment, or (iii) permit the creation of any lien on the Base Rental Payments and other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture or deprive the Owners of the Bonds of the lien created by the Indenture on such Base Rental Payments and other assets (except as expressly provided in the Indenture), without the consent of the Owners of all of the Bonds then Outstanding. It will not be necessary for the consent of the Bond Owners to approve the particular form of any Supplemental Indenture, but it will be sufficient if such consent will approve the substance thereof.

The Indenture and the rights and obligations of the Authority, the City, the Trustee and the Owners may also be modified or amended from time to time at any time by a Supplemental Indenture, which the Authority, the City and the Trustee may enter into without the consent of any Bond Owners for any one or more of the following purposes.

(a) to add to the covenants and agreements of the Authority or the City in the Indenture contained other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved to or conferred upon the Authority or the City under the Indenture;

(b) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision contained in the Indenture;

(c) to provide for the issuance of one or more Series of Additional Bonds, and to provide the terms and conditions under which such Series of Additional Bonds may be issued, subject to and in accordance with the provisions of the Indenture;

(d) to modify, amend or supplement the Indenture in such manner as to permit the qualification hereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute;

(e) to modify, amend or supplement the Indenture in such manner as to cause interest on the Bonds to be excludable from gross income for purposes of federal income taxation by the United States of America; and

(f) in any other respect whatsoever as the Authority and the City may deem necessary or desirable, provided that such modification or amendment does not materially adversely affect the interests of the Bond Owners under the Indenture, in the opinion of Bond Counsel filed with the Authority, the City and the Trustee.

Promptly after the execution by the Authority, the City and the Trustee of any Supplemental Indenture, the Trustee will mail a notice (the form of which will be furnished to the Trustee by the Authority), by first class mail postage prepaid, setting forth in general terms the substance of such Supplemental Indenture,

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to the Owners of the Bonds at the respective addresses shown on the Registration Books. Any failure to give such notice, or any defect therein, will not, however, in any way impair or affect the validity of any such Supplemental Indenture.

No Supplemental Indenture will modify any of the rights or obligations of the Trustee without its prior written consent.

Upon the execution of any Supplemental Indenture pursuant to the Indenture, the Indenture will be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the Authority, the City, the Trustee and all Owners of Bonds Outstanding will thereafter be determined, exercised and enforced under the Indenture subject in all respects to such modification and amendment, and all the terms and conditions of any such Supplemental Indenture will be deemed to be part of the terms and conditions of the Indenture for any and all purposes.

Bonds delivered after the execution of any Supplemental Indenture pursuant to the Indenture may, and if the Authority so determines will, bear a notation by endorsement or otherwise in form approved by the Authority and the Trustee as to any modification or amendment provided for in such Supplemental Indenture, and, in that case, upon demand of the Owner of any Bonds Outstanding at the time of such execution and presentation of his Bonds for the purpose at the principal corporate trust office of the Trustee a suitable notation will be made on such Bonds. If the Supplemental Indenture will so provide, new Bonds so modified as to conform, in the opinion of the Authority and the Trustee, to any modification or amendment contained in such Supplemental Indenture, will be prepared and executed by the Authority and authenticated by the Trustee, and upon demand of the Owners of any Bonds then Outstanding will be exchanged at the principal corporate trust office of the Trustee, without cost to any Bond Owner, for Bonds then Outstanding, upon surrender for cancellation of such Bonds, in equal aggregate principal amount of the same interest rate and maturity.

The provisions of the Indenture will not prevent any Bond Owner from accepting any amendment as to the particular Bonds held by such Owner.

Discharge of Indenture

If the Authority will pay or cause to be paid or there will otherwise be paid to the Owners of all Outstanding Bonds the principal thereof and the interest and premium, if any, thereon at the times and in the manner stipulated in the Indenture, then the Owners of such Bonds will cease to be entitled to the pledge of the Base Rental and the other assets as provided in the Indenture, and all agreements, covenants and other obligations of the Authority and the City to the Owners of such Bonds under the Indenture will thereupon cease, terminate and become void and be discharged and satisfied. In such event, the Trustee will execute and deliver to the Authority and the City all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee will pay over or deliver to the Authority all money or securities held by it pursuant hereto which are not required for the payment of the principal of and interest and premium, if any, on such Bonds.

Subject to the provisions of the above paragraph, when any of the Bonds will have been paid and if, at the time of such payment, the Authority and the City will have kept, performed and observed all of the covenants and promises in such Bonds and in the Indenture required or contemplated to be kept, performed and observed by them on or prior to that time, then the Indenture will be considered to have been discharged in respect of such Bonds and such Bonds will cease to be entitled to the lien of the Indenture and such lien and all covenants, agreements and other obligations of the Authority and the City under the Indenture will cease, terminate become void and be completely discharged as to such Bonds.

Notwithstanding the satisfaction and discharge of the Indenture or the discharge of the Indenture in respect of any Bonds, those provisions of the Indenture relating to the maturity of the Bonds, interest payments and dates thereof, exchange and transfer of Bonds, replacement of mutilated, destroyed, lost or stolen Bonds,

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the safekeeping and cancellation of Bonds, non-presentment of Bonds, and the duties of the Trustee in connection with all of the foregoing, will remain in effect and will be binding upon the Trustee and the Owners of the Bonds and the Trustee will continue to be obligated to hold in trust any moneys or investments then held by the Trustee for the payment of the principal of and interest and premium, if any, on the Bonds, to pay to the Owners of Bonds the funds so held by the Trustee as and when such payment becomes due. Notwithstanding the satisfaction and discharge of the Indenture or the discharge of the Indenture in respect of any Bonds, those provisions of the Indenture relating to the compensation of the Trustee will remain in effect and will be binding upon the Trustee and the Authority.

If moneys will have been set aside and held by the Trustee for the payment or redemption of any Bonds and the interest thereon at the maturity or redemption date thereof, such Bonds will be deemed to have been paid within the meaning and with the effect provided in the Indenture. Any Outstanding Bonds will prior to the maturity date or redemption date thereof be deemed to have been paid within the meaning of and with the effect expressed in the Indenture if (a) in case any of such Bonds are to be redeemed on any date prior to their maturity date, the Authority will have given to the Trustee in form satisfactory to it irrevocable instructions to mail, on a date in accordance with the provisions of the Indenture, notice of redemption of such Bonds on said redemption date, said notice to be given in accordance with the Indenture, (b) there will have been deposited with the Trustee either (i) money in an amount which will be sufficient, or (ii) Federal Securities that are not subject to redemption other than at the option of the holder thereof, the interest on and principal of which when paid will provide money which, together with the money, if any deposited with the Trustee at the same time, will, as verified by an independent certified public accountant, be sufficient to pay when due the interest to become due on such Bonds on and prior to the maturity date or redemption date thereof, as the case may be, and the principal of and premium, if any, on such Bonds, and (c) in the event such Bonds are not by their terms subject to redemption within the next succeeding sixty (60) days, the Authority will have given the Trustee in form satisfactory to it irrevocable instructions to mail as soon as practicable, a notice to the owners of such Bonds that the deposit required by clause (b) above has been made with the Trustee and that such Bonds, are deemed to have been paid in accordance with the Indenture and stating the maturity date or redemption date upon which money is to be available for the payment of the principal of and premium, if any, on such Bonds.

Notwithstanding any provisions of the Indenture, to the extent permitted by law, any moneys held by the Trustee in trust for the payment of the principal of or premium or interest on, any Bonds and remaining unclaimed for two years after the date of deposit of such moneys, will be repaid to the Authority free from the trusts created by this Indenture, and all liability of the Trustee with respect to such moneys will thereupon cease; provided, however, that before the repayment of such money s to the Authority as aforesaid, the Trustee may (at the cost of the Authority) first mail, by first class mail postage prepaid, to the Owners of Bonds which have not yet been paid, at the respective addresses shown on the Registration Books, a notice, in such form as may be deemed appropriate by the Trustee with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Authority of the moneys held for the payment thereof.

Series 2009 Bonds

Terms of Series 2009 Bonds; Interest Computation

(1) The Series 2009 Bonds will be issued in fully registered form without coupons in Authorized Denominations, so long as no Series 2009 Bond will have more than one maturity date. The Series 2009 Bonds will be dated as of the Series 2009 Bonds Closing Date, will be issued in the aggregate principal amount, will mature on July 1 of each year and will bear interest (calculated on the basis of a 360-day year comprised of twelve 30-day months) at the rates per annum as set forth in the Indenture.

.

(2) Interest on the Series 2009 Bonds will be payable from the Interest Payment Date next preceding the date of authentication thereof unless (i) a Series 2009 Bond is authenticated on or before an Interest Payment Date and after the close of business on the preceding Record Date, in which event it will bear

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interest from such Interest Payment Date, (ii) a Series 2009 Bond is authenticated on or before the first Record Date, in which event interest thereon will be payable from the dated date thereof, or (iii) interest on any Series 2009 Bond is in default as of the date of authentication thereof, in which event interest thereon will be payable from the date to which interest has been paid in full, payable on each Interest Payment Date. Interest will be paid in lawful money of the United States on each Interest Payment Date to the Persons in whose names the ownership of the Series 2009 Bonds is registered on the Registration Books at the close of business on the immediately preceding Record Date, except as provided in the Indenture. Interest will be paid by check of the Trustee mailed by first class mail, postage prepaid, on each Interest Payment Date to the Series 2009 Bond Owners at their respective addresses shown on the Registration Books as of the close of business on the preceding Record Date.

(3) The principal and premium, if any, of the Series 2009 Bonds will be payable in lawful money of the United States of America upon presentation and surrender thereof upon maturity or earlier redemption at the Office of the Trustee.

(4) The Series 2009 Bonds will be subject to redemption as provided in the Indenture.

Form of Series 2009 Bonds. The Series 2009 Bonds will be in substantially the form set forth in the Indenture, with appropriate or necessary insertions, omissions and variations as permitted or required thereby.

Deposit of Proceeds of Series 2009 Bonds

(1) The Trustee will deposit in the Costs of Issuance Fund the amount set forth in the Indenture.

. On the Series 2009 Bonds Closing Date, the proceeds received from the sale of the Series 2009 Bonds will be deposited by the Trustee in the following respective funds, as directed by a Written Request of the City:

(2) The Trustee will deposit in the Series 20090 Escrow Fund the amount set forth in the Indenture.

The Trustee will establish and hold hereunder in trust for the benefit of the owners of the Series 1999 Bonds and the Series 2009 Bonds a fund to be named the Series 2009 Escrow Fund. Upon receipt and deposit in the Series 2009 Escrow Fund of the moneys described above, the Trustee will concurrently transfer all such moneys to the Escrow Agent for application in accordance with the Escrow Agreement, at which time the Series 2009 Escrow Fund will be closed and earnings therein, if any, will be deposited in the Interest Fund.

Tax Covenants. Neither the Authority nor the City will take any action, or fail to take any action, if such action or failure to take such action would adversely affect the exclusion from gross income of interest on the Series 2009 Bonds under Section 103 of the Code. Without limiting the generality of the foregoing, the Authority and the City will comply with the requirements of the Tax Certificate (Series 2009 Bonds), which is incorporated in the Indenture as if fully set forth therein. This covenant will survive payment in full or defeasance of the Series 2009 Bonds. The Authority and the City have made a similar covenant with respect to the Series 2002A Bonds.

Rebate Fund

(a) There will be deposited in the Rebate Fund such amounts as are required to be deposited therein pursuant to the Tax Certificate (Series 2009 Bonds). All money at any time deposited in the Rebate Fund will be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement (as defined in the Tax Certificate (Series 2009 Bonds)), for payment to the United States of America. Notwithstanding defeasance of the Series 2009 Bonds pursuant to the Indenture or anything to the contrary contained herein, all amounts required to be deposited into or on deposit in the Rebate Fund will be governed exclusively by the Indenture and by the Tax Certificate (Series 2009 Bonds) (which is incorporated herein by reference). The

.

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Trustee will be deemed conclusively to have complied with such provisions if it follows the written directions of the Authority, and will have no liability or responsibility to enforce compliance by the Authority with the terms of the Tax Certificate (Series 2009 Bonds).

(b) Any funds remaining in the Rebate Fund with respect to the Series 2009 Bonds after payment in full of all of the Series 2009 Bonds and after payment of any amounts described in the Indenture, will be withdrawn by the Trustee and remitted to the Authority.

The Authority and the City have made a similar covenant with respect to the Series 2002A Bonds.

Continuing Disclosure

THE ASSIGNMENT AGREEMENT

. The City will comply with and carry out all of the provisions of the Continuing Disclosure Certificate (Series 2009 Bonds). Notwithstanding any other provision of the Indenture, failure of the City to comply with the Continuing Disclosure Certificate (Series 2009 Bonds) will not constitute an event of default under the Indenture, provided, however, that the Trustee may (and, at the written direction of any Participating Underwriter (Series 2009 Bonds) or the holders of at least 25% of the aggregate principal evidenced by Outstanding Series 2009 Bonds, after receiving indemnification to its satisfaction, will) or any holder or beneficial owner of the Series 2009 Bonds may take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order.

Pursuant to the Assignment Agreement, the Authority, for good and valuable consideration, the receipt of which is acknowledged, sells, assigns and transfers to the Trustee, irrevocably and absolutely, without recourse, for the benefit of the owners of the Bonds, all of its right, title and interest in and to the Ground Lease and the Lease Agreement, including, without limitation, its right to receive the Base Rental Payments to be paid by the City under and pursuant to the Lease Agreement. The Trustee accepts the foregoing assignment, subject to the terms and provisions of the Indenture, and all such Base Rental Payments will be applied and the rights so assigned will be exercised by the Trustee as provided in the Lease Agreement and the Indenture.

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APPENDIX B

AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE YEAR ENDED JUNE 30, 2008

(THIS PAGE INTENTIONALLY LEFT BLANK)

~i~y ~f Santa Monica California

Comprehensive Annual Financial Report

Year Ended June 30, 2008

City of Santa Monica California

Comprehensive Annual Financial Report

Year ended June 30, 2008

Prepared by the Finance Department

Carol Swindell Director of Finance/City Treasurer

Candace Tysdal Financial Operations Manager

Randy Chow Financial Reporting Supervisor

Scott Lowe Financial Reporting Supervisor

Imelda De Leon Senior Accountant

Stephanie Manglaras Senior Accountant

Steven Hull Accountant

Sandra Walker Accountant

Martha Romero Junior Accountant

Michael Towler Junior Accountant

Caline Evans Executive Administrative Assistant

City of Santa Monica, California

Year Ended June 30, 2008

INTRODUCTORY SECTION

CITY OF SANTA MONICA, CALIFORNIA

Comprehensive Annual Financial Report For the fiscal year ended June 30, 2008

Table of Contents

i

Page

INTRODUCTORY SECTION

Letter of Transmittal .......................................................................................................................... v Officials of the City of Santa Monica ................................................................................................ xii Organization Chart – City of Santa Monica ...................................................................................... xiii GFOA Certificate of Achievement for Excellence in Financial Reporting ....................................... xiv

FINANCIAL SECTION

Independent Auditors' Report ............................................................................................................ 1 Management’s Discussion and Analysis (Required Supplementary Information) ............................ 3 Basic Financial Statements:

Government-wide Financial Statements: Statement of Net Assets .............................................................................................................. 15 Statement of Activities ................................................................................................................ 16

Fund Financial Statements: Balance Sheet – Governmental Funds ........................................................................................ 18Statement of Revenues, Expenditures, and Changes in Fund Balances (Deficits) –

Governmental Funds ................................................................................................................ 19 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of

Governmental Funds to the Statement of Activities ................................................................ 20 Statement of Revenues, Expenditures, and Changes in Fund Balance – Budget and Actual

(Non-GAAP Basis) – General Fund ........................................................................................ 21 Statement of Revenues, Expenditures, and Changes in Fund Balance – Budget and Actual

(Non-GAAP Basis) – Special Revenue Source Fund .............................................................. 25 Statement of Net Assets – Proprietary Funds .............................................................................. 28 Statement of Revenues, Expenses, and Changes in Fund Net Assets – Proprietary Funds ........ 30 Statement of Cash Flows – Proprietary Funds ............................................................................ 31 Statement of Fiduciary Assets and Liabilities – Fiduciary Funds ............................................... 34

Notes to Basic Financial Statements: Note 1 – Summary of Significant Accounting Policies ............................................................ 35 Note 2 – Budgetary and Legal Compliance .............................................................................. 43 Note 3 – Reconciliation of Fund Financial Statements to Government-Wide Financial

Statements ................................................................................................................... 44 Note 4 – Prior Period Adjustments ........................................................................................... 47 Note 5 – Cash and Investments ................................................................................................. 48 Note 6 – Notes Receivable ........................................................................................................ 54 Note 7 – Capital Assets ............................................................................................................. 59 Note 8 – Unearned Revenue ..................................................................................................... 60 Note 9 – Long-Term Liabilities ................................................................................................ 62 Note 10 – Fund Deficits .............................................................................................................. 65 Note 11 – Interfund Transactions ................................................................................................ 65 Note 12 – Restricted Net Assets .................................................................................................. 67 Note 13 – Reserved and Designated Fund Balances ................................................................... 68

CITY OF SANTA MONICA, CALIFORNIA

Comprehensive Annual Financial Report For the fiscal year ended June 30, 2008

Table of Contents, Continued

ii

Page

Note 14 – Litigation and Contingencies ...................................................................................... 73Note 15 – Self-Insurance ............................................................................................................. 75 Note 16 – Employee Benefit Programs ....................................................................................... 77Note 17 – Short-Term Loans Payable ......................................................................................... 81

REQUIRED SUPPLEMENTARY INFORMATION

Pension Funding Information ............................................................................................................ 83 OPEB Funding Information……………………………………………………………………… ... 84

SUPPLEMENTARY INFORMATION NON-MAJOR FUNDS / OTHER FINANCIAL INFORMATION

Combining and Individual Fund Statements and Schedules: Combining Balance Sheet – Nonmajor Governmental Funds by Fund Type ................................ 88 Combining Statement of Revenues, Expenditures and Changes in Fund Balances – Nonmajor

Governmental Funds by Fund Type ............................................................................................ 89Combining Balance Sheet – Nonmajor Governmental Funds – Special Revenue Funds .............. 90 Combining Statement of Revenues, Expenditures and Changes in Fund Balances (Deficits) – Nonmajor Governmental Funds – Special Revenue Funds ............................................................ 92 Schedule of Revenues, Expenditures and Changes in Fund Balance (Deficit) – Budget and

Actual (Non-GAAP Basis) – Nonmajor Governmental Funds – Special Revenue Funds: Clean Beaches and Ocean Parcel Tax ...................................................................................... 94 Beach Recreation ..................................................................................................................... 95 Housing Authority ................................................................................................................... 96 Disaster Relief Fund ................................................................................................................ 97 Tenant Ownership Rights Charter Amendment (TORCA) ...................................................... 98 Community Development Block Grant (CDBG) ..................................................................... 99 Miscellaneous Grants ............................................................................................................... 100 Citizens Option for Public Safety ............................................................................................ 101 Rent Control ............................................................................................................................. 102 Air Quality Management District (AQMD) ............................................................................. 103 Parks and Recreation .............................................................................................................. 104 Gas Tax .................................................................................................................................... 105

Combining Balance Sheet – Nonmajor Governmental Funds – Capital Projects .......................... 106 Combining Statement of Revenues, Expenditures and Changes in Fund Balances –

Nonmajor Governmental Funds – Capital Projects ..................................................................... 107 Schedule of Revenues, Expenditures and Changes in Fund Balance – Budget and Actual

(Non-GAAP Basis) – Major and Nonmajor Governmental Funds – Capital Projects Funds: Downtown Redevelopment Project ......................................................................................... 108 Earthquake Recovery Redevelopment Project ......................................................................... 109 Capital Projects ........................................................................................................................ 110 Low/Mod Housing Projects ..................................................................................................... 111 Ocean Park Redevelopment Project ......................................................................................... 112

CITY OF SANTA MONICA, CALIFORNIA

Comprehensive Annual Financial Report For the fiscal year ended June 30, 2008

Table of Contents. Continued

Combining Balance Sheet - Nonmajor Governmental Funds -Debt Service. ...... .. .. ...... .. ... ... ...... 114 Combining Statement of Revenues, Expenditures and Changes in Fund Balances -

Nonmajor Governmental Funds- Debt Service ............ .. .. ..... .............. .. ... ... .. . .... ... . ... .. .... .. ... .. ... 115 Combining Balance Sheet- Nonmajor Governmental Funds - Pennanent Funds ...... ... ..... :· .. ;;.:. ... 116 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances :.

Nonmajor Governmental Funds- Permanent Funds .. ......... ... .. .. ... ... ..... .... ...... .... .. .......... . , .. :.... .. 117 Statement of Net Assets- Nomnajor Enterprise Funds ... ..... .. .............. .... .... ............ ..... .. .. :: .. ........ 120 Statement of Revenues, Expenses and Changes in Fund Net Assets-

Nonmajor Enterprise Funds..................................... ... ....... ................ .. ..... ... ............ ... ... ... .. .... .... 122 Statem~nt of Cash Flows- Nonmajor Enterprise Funds. ......... ........ ........ .. ..... .. .... ..... ..... .... ... .... ... . 123 Statement ofNet Assets - Internal Service Funds .. .... ... ... .... ............ .. ..... ..... ... ...... ... .... .......... .. ... .. 126 Statement of Revenues, Expenses and Changes in Net Assets - Internal Service Funds. .... ......... 127 Statement of Cash Flows - Internal Service Funds......... ...... .................. ..... ... ............... ... .. .... ....... 128 Combining Statement of Fiduciary Assets and Liabilities - Fiduciary Funds .. ........... .. ... .... ......... 130 Combining Statement of Changes in Fiduciary Assets and Liabilities - Fiduciary Funds .. . .. .. ... . . 131

Ill

CITY OF SANTA MONICA, CALIFORNIA

Comprehensive Annual Financial Report For the fiscal year ended June 30, 2008

Table of Contents, Continued

iv

Table Page

Demographic and Economic Information

Demographic and Economic Statistics – Last Ten Calendar Years ...................................... 19 155 Principal Employers – Current Year and Nine Years Ago ................................................... 20 156

Operating Information

Full-time Equivalent City Government Employees by Function/Program – Last Five Fiscal Years ....................................................................................................... 21 157

Operating Indicators by Function/Program – Last Three Fiscal Years ................................ 22 158 Capital Asset Statistics by Function/Program – Last Three Fiscal Years ............................. 23 159

City of

Santa Monica®

December 15, 2008

Finance Department 1717 Fourth Street, Suite 250 Santa Monica, California 90401

Dear Honorable Mayor and Members of the City Council, City Manager, and Citizens of Santa Monica:

Attached is the Comprehensive Annual Financial Report (CAFR) for the City of Santa Monica for the fiscal year ended June 30, 2008.

The CAFR has been prepared by Finance Department staff in conformance with the principles and standards for financial reporting set forth by the Governmental Accounting Standards Board (GASB), the authoritative body establishing U.S. generally accepted accounting principles for local governments.

Responsibility for the accuracy, comprehensiveness and fairness of the presented data and completeness and fairness of presentation, including all disclosures, rests with the City's management. The CAFR has been compiled in a manner designed to fairly set forth the financial positions and results of operations of the City. The CAFR includes disclosures designed to enable the reader to gain an understanding of the City's financial affairs.

In accordance with generally accepted accounting principles, a narrative overview and analysis of the basic financial statements in the form ofManagement's Discussion and Analysis (MD&A) is provided and can be found immediately following the independent auditor's report. This letter of transmittal complements the MD&A and should be read in conjunction with it.

Mayer Hoffman McCann P.C. has issued an unqualified (clean) opinion on the City of Santa Monica' s financial statements for the fiscal year ended June 30, 2008. Their report is located at the front of the financial section of this report.

PROFILE OF THE CITY OF SANTA MONICA

The City of Santa Monica is situated on the western side of Los Angeles County bordered by the City of Los Angeles on three sides and by the Pacific Ocean on the west. It occupies an area slightly greater than eight square miles and serves a residential population of91,439 making it the 19th largest of the 88 cities in Los Angeles County.

The City of Santa Monica, incorporated since 1886 and chartered in 1945, has operated under a council­manager form of government since 1947. The City Council consists of seven members elected by the community at large, each serving four-year terms, with three or four members elected every two years. The Council selects a Mayor from its members and appoints a City Manager to administer the affairs of the City. The Council also appoints a City Attorney and a City Clerk (Director of Records and Election Services). All other department heads are appointed by the City Manager.

tel: 310 458-8281 • fax: 310 394-0647 v C~ Printed on 100% posl-c<>nsumer PCF paper

vi

The City provides a full range of services, including, among others, police and fire protection, water and wastewater utilities, street maintenance, public transportation, parking, parks and recreation, planning, and building and safety. In FY 2007-08 the City also began offering simple annual dark fiber leasing arrangements to Santa Monica businesses and non-profit organizations.

Elementary and secondary education is provided by the Santa Monica Malibu Unified School District, and community college education is provided by the Santa Monica College District. Courts, health and social services are provided by the County of Los Angeles. Gas, electric and telephone services are provided by private utility companies.

Financial data for all funds through which services are provided by the City have been included in this report based on the criteria adopted by GASB.

FINANCIAL CONDITION AND OUTLOOK

With $1.9 billion in reportable assets and $0.4 billion in liabilities, the City’s net assets (assets less liabilities) of $1.5 billion are essentially unchanged from the prior year. During the fiscal year, the General Fund, the City’s major operating fund, realized revenues in excess of budgeted revenues and expended less than appropriations, leaving the General Fund after transfers and changes to reservations and designations with an ending unreserved and undesignated fund balance of $5.2 million.

The national, state and local economies all continue to be in an incredibly fragile state. On the national level, the economy has been in a recession since December 2007 and is clearly suffering through recessionary conditions. The housing market’s severe downturn and resulting “credit crunch” have resulted in unprecedented foreclosure activity and is severely hampering economic growth. Unemployment is at the highest level in five years and expected to increase.

The California economy is plagued by many of the same issues confronting the national economy. Unemployment increased at the highest rate in fourteen years. The housing crisis continues to be the biggest drain on the economy. Growth in state personal income and retail sales over the next 12 to 24 months are expected to be less than in recent years. In addition to housing, the biggest threat to the California economy is the State budget. The State recently adopted a budget after a record delay (85 days), but still faces financial challenges with an estimated $42 billion budget deficit by the end of FY 2009-10.

Historically, Santa Monica has tended to be more resilient than its neighbors in tough economic times. This is due, in large part, to a relatively strong, diversified economy. Unlike many cities, no single source of revenue accounts for more than 15% of total General Fund revenues. However, since many of these tax sources are economy driven, the local economy will be impacted by many of the same challenges as the State and the nation, and revenue growth in the near term is expected to be less than in recent years. Also, the possibility of State borrowing of local tax revenues is present.

During the fiscal year just ended, the City completed a comprehensive review of the financial condition and operations of the Big Blue Bus and established rate structures and multi-year rate increases for the delivery of water and wastewater. In addition, a review of the costs of delivering fee-based services was recently undertaken and fees were adjusted where necessary to cover both operating and capital needs.

The City Council reconfirmed three areas requiring special focus for FY 2008-09 and updated community priorities to guide the work of the City. The three special focus areas are Homelessness, Land Use and Circulation Element Update and Youth. The community priorities are (1) implementation of a Cultural

vii

Master Plan; (2) an ongoing commitment to sustainability; (3) continuing support of the Santa Monica Malibu Unified School District through a Master Facilities Use Agreement; (4) a continuing commitment to responsive service from all department, (5) a plan to address capital investment and maintenance; and, (6) continued support of the City’s Active Living program

The residents of Santa Monica recently affirmed the City’s Utility Users Tax ordinance and eliminated the need for an $8.2 million set aside of the General Fund balance. The City Manager has strongly urged the City Council to use this set-aside to fund an economic uncertainty reserve to allow the city to respond to the impacts of the current economic turmoil.

The Annenberg Community Beach House is scheduled to open in April 2009 after a decade of community input and planning. Possibly the first of its kind, the Beach House is a public beach club, offering everyone the quintessential Southern California experience – a great day at the beach.

The facility features restoration of an historic pool and guest house that were part of the original estate William Randolph Hearst built for Marion Davies at 415 Pacific Coast Highway. New construction includes a playground, splash pad, event space and a pool house with a second floor view deck. Back on the Beach Café has also been refurbished as part of the project. The Beach House will be open for community use during the summer and available to rent for private events during the rest of the year.

The Annenberg Community Beach House is made possible by a generous gift from the Annenberg Foundation, at the recommendation of Wallis Annenberg, and in partnership with the City of Santa Monica and California State Parks. Additional funding comes from the U.S. Department of Housing & Urban Development and the Federal Preserve America grant program.

For more information on the facility, please visit http://beachhouse.smgov.net.

Long Term Financial Planning. The City is dedicated to financial planning in all areas of the organization. Financial planning takes the form of continuous review and refinement of fiscal policies, development of five-year forecasts, and an understanding of the initiatives being undertaken by the entire organization. In June 2008, the City Council adopted the following fiscal policies to help provide critical analysis and sound review for budget development decisions.

General Policies

� The City will maintain sound financial practices in accordance with state law and direct its financial resources towards meeting the City’s long-term goals.

� The City will maintain and further develop programs to assure its long-term ability to pay the costs necessary to provide the level and quality of service required by its citizens.

Operating Budget Policies

� The City will adopt a balanced budget annually by June 30. � Current revenues will be sufficient to support current operating expenditures. � The City will estimate revenues using an objective and analytical process; in the case of assumption

uncertainty, conservative projections will be used. � The City will forecast its General Fund and other major fund expenditures and revenues for a five-

year period and will update the forecast annually. The forecast will be taken into consideration when preparing budget recommendations.

viii

Revenue Policies

� The City will endeavor to maintain a diversified and stable revenue system to minimize the short-term fluctuations in any one revenue source.

� The City will avoid targeting revenues for specific purposes, whenever possible, allowing maximum flexibility in funding decisions on an annual basis.

� One-time revenues will be used for one-time expenditures only. � User fees will be adjusted annually by CPI and reviewed at least once every five years to ensure that

fees recover the costs of providing services. � The City will investigate potential new revenue sources, particularly those which will not add to the

tax burden of residents and local businesses. � The City will work proactively with the League of California Cities and local communities to monitor

legislation that may impact the City financially.

Expenditure Policies

� The City will maintain a level of expenditures that support the essential services and promote quality-of-life to its citizens.

� Each enterprise fund should reflect the true costs of operation, including direct and indirect charges for services.

Debt Policy

� Capital projects may be funded on a pay-as-you-go basis or using debt proceeds. Capital budgeting is limited by the availability of revenues and bond proceeds. The ability to meet debt service requirements will act as a ceiling on capital programming. Because capital expenditures produce long-term benefits, they can appropriately be funded by debt, which can lead to a more equitable tax burden across generations of citizens and taxpayers. However, pay-as-you-go financing provides flexibility when the economy or revenue growth slows. Therefore, the City’s goal is to maintain a balance between pay-as-you-go financing and debt financing for capital projects.

� When the City finances capital projects by issuing bonds, it will pay back the bonds within a period not to exceed the expected useful life of the project.

� When possible, the City will identify a source of repayment for General Fund supported bonds and monitor the source of repayment in the future to ensure it is sufficient to meet debt repayment requirements.

Reserve/Internal Service Fund Policies

� The City will maintain a General Fund operating contingency designation at a level that is equal to at least 10% of the General Fund’s annual operating expenditure budget. Council approval will be required before expending funds from this operating contingency designation.

� In addition to the General Fund operating contingency designation, the City’s goal is to maintain an economic uncertainty designation with the level to be established as needed, but not less than 3% of the General Fund’s annual operating expenditure budget.

� The City will maintain a designation in the General Fund for earned, but unused, vacation benefits of General Fund employees. The assessment of this designation is made annually, on June 30. All other compensated absences are recorded in the respective governmental or proprietary funds.

� The City will maintain a capital/maintenance designation to be determined as part of the annual budget adoption. The capital/maintenance designation is to be made available by Council appropriation to meet unanticipated, unscheduled, and/or unprogrammed capital and maintenance

ix

needs of City infrastructure and facilities. This designation is intended to be used for major capital repair where facility failure, unexpected hazards, or destruction of City property has occurred and where repair or replacement is not planned within the established capital, operations, or other replacement funds.

Capital Improvement Policies

� The City will coordinate preparation of the capital budget with preparation of the operating budget. Future operating costs associated with new capital improvements will be projected and included in the operating budget forecasts.

� The City will identify estimated costs and potential funding sources for each proposed capital project before it is submitted to Council for approval.

� The City administration will identify, for Council consideration, the least costly financing method for all new projects.

Accounting, Auditing & Financial Reporting Policies

� The City’s accounting and financial reporting systems will be maintained in conformance with generally accepted accounting principles and standards of the Government Accounting Standards Board.

� A Comprehensive Annual Financial Report will be prepared and audited by a qualified independent public accounting firm.

Investment Policies

� An investment policy will be submitted annually to the City Council for review and adoption. � The City will invest public funds in a manner that will provide a market rate of return after ensuring

optimum safety and meeting the daily cash flow demands of the City.

Cash Management Policies and Practices. The City’s Investment Policy (Policy) sets broad legal guidelines which govern the investment of cash balances. The Policy, established in accordance with State law, has been certified by the Association of Public Treasurers, United States and Canada. The Policy is reviewed annually and approved by the City Council. The primary objectives of all City investments, in priority order, are safety and preservation of principal, liquidity to meet cash flow needs, and a market rate of return after the first two objectives have been met. Within this framework, the City has developed an Investment Plan (Plan) which guides strategy and structure of the portfolio. The Plan sets targets for the portfolio by investment type as well as benchmarks to measure return.

Debt Administration. At June 30, 2008, the City's general obligation bond rating was the highest possible with an Aaa from Moody’s; AAA from Fitch; and AAA from Standard and Poor’s. All other City indebtedness is considered to be at least investment grade. In November 2008, Standard and Poor’s upgraded the credit rating on the City’s Wastewater Enterprise Refunding Revenue Bonds from AA to AAA. The City’s bonded debt applicable to its debt limit consisted of: $20.1 million of Main Library Improvements Project General Obligation Bonds; $24.4 million in Public Safety Facility Lease Revenue Bonds; $38.1 million in Civic Center Parking Structure Bonds; $76.7 million in Downtown Redevelopment Project Lease Revenue Bonds, Earthquake Recovery Redevelopment Project Tax Allocation Bonds and Ocean Park Redevelopment Projects Tax Allocation Refunding Bonds; and $8.3 million in Parking Authority Lease Revenue Bonds. A calculation of the City's debt limit is detailed in Table 14 of the Statistical Section of this CAFR.

x

The City has other long-term payment obligations, which are not bonded debt, e.g., claims payable. These are detailed in Note 9 in the notes to the basic financial statements.

Risk Management. The City established a Risk Management program in 1986 to minimize the exposure of the City’s assets and resources (both human and financial) to accidental loss. The program is staffed by a full-time Risk Manager and includes risk identification and evaluation, risk control, risk transfer, and risk financing. Services include administration of claims filed by the public and employees and safety training and loss prevention.

Additional information about the City’s risk management practices can be found in Note 15 of the notes to the basic financial statements.

Pension and Other Postemployment Benefits (OPEB). The City contributes to the California Public Employees’ Retirement System (CalPERS), an agent multiple-employer public employee defined benefit pension plan. CalPERS provides retirement and disability benefits, annual cost-of-living adjustments and death benefits to plan members and beneficiaries. CalPERS acts as a common investment and administrative agent for participating public entities within the state of California. Benefit provision and all other requirements are established by the State statute. The amount of the City’s required annual contribution is determined actuarially. It is the policy of the City to fully fund the annual required contribution to ensure that the plan will be able to fully meet its obligation to retired employees.

In addition, in accordance with agreements with various bargaining units, the City provides other postemployment benefits to retirees. Funded on a pay-as-you-go-basis, a net OPEB obligation of $1.2 million is reflected in the Statement of Net Assets as of June 30, 2008.

In addition to the CalPERS pension benefits and other postemployment benefits to retirees described above, the City contributes to postemployment medical premium reimbursement plans for employees. These plans were established by employees to mitigate the impacts of postemployment medical costs and are managed by trustees from the various employee groups.

Additional information regarding the City's pension benefits and other postemployment benefits can be found in Note 16 of the notes to the basic financial statements.

AWARDS

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City for its CAFR for the fiscal year ended June 30, 2007. The Certificate of Achievement is a prestigious national award, recognizing conformance with the highest standards for preparation of State and local government financial reports.

In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized CAFR whose contents conform to program standards. This report must satisfy both generally accepted accounting principles and applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. The City of Santa Monica has received a Certificate of Achievement for each of the last twenty-four years. We believe our current CAFR also conforms to the Certificate of Achievement program requirements.

In keeping with past practice, a copy of this CAFR will be placed on file in the City libraries and sent to City management personnel, bond rating agencies, and other agencies which have expressed an interest in the

financial affairs of the City. It is also available at www.smgov.net/finance.

ACKNOWLEDGEMENTS

The preparation and development of this report would not have been possible without the year-round work of the Finance Department staff and their special efforts, working in conjunction with the City's independent auditors, to produce this report.

I would like to take this opportunity to compliment all those staff members of both the City and our independent auditors who were associated with the preparation of this report. 1 would also like to thank the City Council for their continued interest and support in planning and conducting the financial operations of the City in a responsible and progressive manner.

Respectfully submitted,

c?4MM Carol Swindell Director of Finance/City Treasurer

xi

OFFICIALS OF THE CITY OF SANTA MONICA

As of December 15, 2008

City Council

Ken Genser, Mayor

Pam O’Connor, Mayor Pro Tempore Richard Bloom

Robert Holbrook Herb Katz

Kevin McKeown Bobby Shriver

Administration and Department Heads

City Manager P. Lamont Ewell Assistant City Manager Gordon Anderson Deputy City Manager Elaine Polachek City Attorney Marsha Jones Moutrie City Clerk (Director of Records and Election Services) Maria M. Stewart Director of Community Maintenance Joan Akins (acting) Director of Finance/City Treasurer Carol Swindell Director of Human Resources Donna Peter Director of Information Systems Jory Wolf Chief of Police Timothy Jackman Fire Chief James A. Hone Director of Planning and Community Development Eileen Fogarty City Librarian Gregory T. Mullen Director of Community and Cultural Services Barbara Stinchfield Director of Transit Services Stephanie Negriff Director of Housing and Economic Development Andy Agle Director of Public Works Lee E. Swain

xii

ORGANIZATION OF THECITY OF SANTA MONICAAs of December 15, 2008

CITY COUNCIL

Records & Election ServicesMaria M. Stewart

City ManagerP. Lamont Ewell

City AttorneyMarsha Jones Moutrie

CITIZENS

Assistant City ManagerGordon Anderson

Community & Cultural Services

Barbara Stinchfield

LibraryGregory T. Mullen

Big Blue BusStephanie Negriff

Housing & Economic Development

Andy Agle

Planning & Community DevelopmentEileen Fogarty

Community MaintenanceJoan Akins (acting)

FinanceCarol Swindell

Deputy City ManagerElaine Polachek

Human ResourcesDonna Peter

Information SystemsJory Wolf

PoliceTimothy Jackman

FireJames A. Hone

Public WorksLee E. Swain

xiii

xiv

Certificate of Achievement for Excellence

in Financial Reporting

Presented to

City of Santa Monica California

For its Comprehensive Annual

Financial Report

for the Fiscal Year Ended

June 30, 2007

A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers

Association of the United States and Canada to government units and public employee retirement

systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting

and financial reporting.

President

Executive Director

City of Santa Monica, California

Year Ended June 30, 2008

FINANCIAL SECTION

1

The Honorable Mayor and City Council City of Santa Monica, California

INDEPENDENT AUDITORS’ REPORT

We have audited the accompanying basic financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Santa Monica, California (“City”) as of and for the year ended June 30, 2008, which collectively comprise the City’s basic financial statements, as listed in the table of contents. These financial statements are the responsibility of the management of the City. Our responsibility is to express opinions on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City as of June 30, 2008, the respective changes in financial position and cash flows, where applicable, and the respective budgetary comparison information for the general fund and major special revenue funds of the City for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As described further in note 16 to the financial statements, the City changed its method of accounting for postemployment benefits other than pensions for fiscal year ended June 30, 2008.

The information identified in the accompanying table of contents as management’s discussion and analysis and required supplementary information are not a required part of the basic financial statements, but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

The Honorable Mayor and City Council City of Santa Monica, California Page Two

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

In accordance with Government Auditing Standards, we have also issued a report dated December 15, 2008 on our consideration of the City's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

Irvine, California December 15, 2008

2

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis Year ended June 30, 2008

As management of the City of Santa Monica, California (City), we offer readers of the City’s Comprehensive Annual Financial Report (CAFR) this narrative overview and analysis of the financial activities of the City for the fiscal year ended June 30, 2008. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in the City’s basic financial statements, which immediately follow this section, and the CAFR transmittal letter in the preceding Introductory Section.

FINANCIAL HIGHLIGHTS

� The total assets of the City for its governmental and business-type activities exceeded its liabilities as of June 30, 2008 by $1.5 billion. Of this amount, $963.4 million are capital assets, net of related debt, $233.9 million is for restricted uses as specified by entities outside of the City government, and $314.4 million is for unrestricted uses in accordance with finance-related legal requirements reflected in the City’s fund structure.

� The City’s total net assets increased $6.0 million during the current fiscal year, after an $8.4 million restatement described in note 4.

� At the end of the current fiscal year, the City’s governmental funds reported total ending fund balances of $426.1 million, a decrease of $47.6 million compared with the prior fiscal year, after a $4.0 million restatement described in note 4. Of this amount, $298.9 million was reserved for uses set by various legal requirements and $127.2 million was unreserved. Of the unreserved amount, $72.1 million was designated for various specific uses by the City Council, and $55.1 million was unreserved and undesignated.

� At the end of the current fiscal year, the General Fund fund balance was $148.8 million, a decrease of $6.9 million from the previous fiscal year, which consisted of a decrease of $10.8 million of reserved fund balance and an increase of $3.9 million of unreserved fund balance. Of the $67.8 million unreserved fund balance, $62.6 is designated and $5.2 million is undesignated.

� The City’s investment in capital assets increased by $82.5 million or 9.4%. Please see further detail of capital assets in note 7.

� The City’s long-term debt decreased by $10.2 million or 4.9% during the current fiscal year. Please see further detail of long-term debt in note 9.

OVERVIEW OF THE BASIC FINANCIAL STATEMENTS

Management’s Discussion and Analysis is intended to serve as an introduction to the City’s basic financial statements. The City’s basic financial statements include three components: government-wide financial statements, fund financial statements, and notes to the basic financial statements. The major features of these financial statements, including the portion of the city government they cover and the types of information they contain, are summarized on the following page. The remainder of this overview section of management’s discussion and analysis explains the structure and contents of each of the statements.

3

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

Government-wideStatements Governmental Funds Proprietary Funds Fiduciary Funds

- Statem ent of net assets - Balance sheet - Statement of net assets- Statem ent of act ivities

- Statement of cash f lows

Major Features of City of Santa Monica's Government-wide and Fund Financial Statements

Fund Statements

The ac tivies of the City that are not proprietary or f iduciary, such as police, fire, and library

Ac tivities the City operates similar to private businesses such as the water and sewer system , parking facilities and bus line

Type of asset/ liability informat ion

- Statement of changes in fiduciary net assets

All revenues and expenses during year, regardless of when cash is received or paid

Revenues for which cash is received during or soon within 90 days of year end; expenditures when goods or serv ices have been received and payment is due

All revenues and expenses during year, regardless of when cash is received or paid

Type of inf low/outflow informat ion

All revenues and expenses during year, regardless of when cash is received or paid

- Statement of fiduciary net assets- Statement of revenues ,

expenses, and changes in net assets

Acc rual accounting and econom ic resources focus

Accrual accounting and economic resources focus

Because the C ity only has Agency funds, there is no measurement focus .

Scope Entire City government (except f iduciary funds)

Instances in which the City is the trustee or agent for someone else's resources

Required f inancial statements - Statement of revenues ,

expenditures, and changes in fund balances

All assets and liabilities, both f inancial and capital, short term and long-term

All assets and liabilit ies , both financial and capital, and short-term and long-term

Only assets expected to be used up and liabilities that come due during the year or soon thereafter; no capital assets or long-term debt included

All assets and liabilit ies , both short-term and long-term; the City's fiduc iary funds do not currently contain capital assets, although they can

Modified accrual account ing and current financ ial resources focus

Account ing basis and measurem ent focus

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

The statement of net assets presents information on all the City’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating.

The statement of activities presents information showing how the City’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods.

The government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include public safety (police and fire), streets, library, cultural and recreation, parks, planning and zoning, housing and community development, and general administrative support. The business-type activities of the City include water, wastewater, stormwater, solid waste management, pier, civic auditorium, airport, special aviation services, cemetery, bus lines and parking structures and lots.

4

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

Component units are included in the basic financial statements and consist of legally separate entities for which the City is financially accountable and that have either the same governing board as the City or a governing board appointed by the City of Santa Monica City Council. The blended component units include the Redevelopment Agency of the City of Santa Monica, the Parking Authority of the City of Santa Monica, and the Housing Authority of the City of Santa Monica.

Three related organizations, the Pier Restoration Corporation, the Bayside District Corporation, and the Santa Monica Arts Foundation, are not included in the basic financial statements. While the City is financially accountable and each have a governing board appointed by the City of Santa Monica City Council, the economic resources held by these related organizations are not significant to the City. The fund financial statements provide detailed information about the City’s most significant funds—not the City as a whole.

The government-wide financial statements can be found on pages 15 and 16 of this report.

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

Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the governmental-wide financial statements, governmental fund financial statements focus on near-terminflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the City’s near-term financing requirements.

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

The City maintains 24 individual governmental funds for financial reporting purposes. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances for the General, Special Revenue Source, Downtown Redevelopment Project, and Earthquake Recovery Redevelopment Project funds, which are considered to be major funds. Data for the other 20 governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the non-major funds supplementary section of this report.

The City adopts an annual appropriated budget for its General Fund, 13 of 14 special revenue funds (no budget is adopted for Asset Seizure Fund), and 5 capital project funds. A budgetary comparison statement has been provided for the General Fund, Special Revenue Source Fund, and Downtown Redevelopment Project Fund in the basic financial statements.

The governmental funds financial statements can be found on pages 18 through 25 of this report.

5

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

Proprietary funds. Proprietary funds provide the same type of information as the government-wide financial statements, but in more detail. The proprietary fund financial statements provide separate information for the wastewater and bus operations, which are considered to be major funds of the City. The City maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. Internalservice funds are an accounting device used to accumulate and allocate costs internally among the City’s various functions. The City uses internal service funds to account for its vehicle operations, risk management program and information technology and communications operations. The vehicle operations and insurance services for bus operations primarily benefit business-type activities and are included within business-type activities in the government-wide financial statements. All other risk management functions, information technology and communication services primarily benefit governmental funds and are included within governmental activities in the government-wide financial statements. Individual fund data for the internal service funds is provided in the supplementary information section of this report.

The proprietary funds financial statements can be found at pages 28 through 32 of this report.

Fiduciary funds. Fiduciary funds, which consist solely of trust and agency funds, are used to account for resources held for the benefit of parties outside the City. Fiduciary funds are not included in the government-wide financial statements because the resources are not available to support the City’s operations. The accounting used for fiduciary funds is much like that used for proprietary funds.

The fiduciary funds financial statements can be found on page 34 of this report.

Notes to the basic financial statements. The notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the basic financial statements begin on page 35 of this report.

GOVERNMENT-WIDE FINANCIAL ANALYSIS

As noted earlier, net assets may serve over time as a useful indicator of a government’s financial position. In the case of the City, assets exceeded liabilities by $1.5 billion at the close of the current fiscal year.

As shown below, the largest portion of the City’s net assets, $963.4 million or 63.7%, reflects the City’s investment in capital assets less any related outstanding debt used to acquire those assets. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City’s investment in its capital assets is reported net of related debt, it should be noted that resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate liabilities.

An additional portion of the City of Santa Monica’s net assets, $233.9 million or 15.5% represent resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets, $314.4 million or 20.8%, may be used to meet the government’s ongoing obligations to citizens and creditors.

At the end of the current fiscal year, the City of Santa Monica is able to report positive balances in all three categories of net assets, both for the government as a whole, as well as for its separate governmental and business-type activities. The same situation held true for the prior fiscal year.

6

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

A summary of the government-wide statement of net assets follows:

2007-08 2006-07 2007-08 2006-07 2007-08 2006-07Current and other assets 623.7$ 677.3 137.0 141.1 760.7 818.4Capital assets 724.9 686.1 417.0 403.6 1,141.9 1,089.7

Total assets 1,348.6 1,363.4 554.0 544.7 1,902.6 1,908.1Current and other liabilities 134.3 138.9 25.5 18.6 159.8 157.5Long-term liabilities 198.6 206.4 32.5 34.4 231.1 240.8

Total liabilities 332.9 345.3 58.0 53.0 390.9 398.3Net assets:

Invested in capital assets,net of related debt 574.0 506.3 389.4 374.6 963.4 880.9

Restricted 232.3 273.1 1.6 2.5 233.9 275.6Unrestricted 209.4 243.0 105.0 114.6 314.4 357.6

Total net assets 1,015.7$ 1,022.4 496.0 491.7 1,511.7 1,514.1

CITY OF SANTA MONICANet Assets

(in millions)

Governmental activities Business-type activities Total

7

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

A summary of the government-wide statement of changes in net assets follows:

2007-08 2006-07 2007-08 2006-07 2007-08 2006-07RevenuesProgram revenues:

Charges for services 78.4$ 76.6 74.7 71.8 153.1 148.4 Operating grants and contributions 34.8 27.8 32.2 31.7 67.0 59.5 Capital grants and contributions 4.9 5.4 20.0 12.2 24.9 17.6

General revenues:Sales tax 32.4 33.3 - - 32.4 33.3 Property tax 101.3 89.8 - - 101.3 89.8 Other taxes 108.4 101.3 - - 108.4 101.3 Settlement income 1.0 69.1 - - 1.0 69.1 Investment earnings 22.0 25.5 4.5 7.4 26.5 32.9 Other general revenues 8.0 6.2 3.4 4.1 11.4 10.3

Total revenues 391.2 435.0 134.8 127.2 526.0 562.2 Expenses

General government 38.8 45.8 - - 38.8 45.8 Public safety 91.9 87.8 - - 91.9 87.8 General services 111.2 41.4 - - 111.2 41.4 Cultural and recreation 33.8 43.6 - - 33.8 43.6 Library 11.4 10.7 - - 11.4 10.7 Housing and community

development 92.0 75.0 - - 92.0 75.0 Interest on long term debt 7.6 7.9 - - 7.6 7.9 Water - - 15.5 14.8 15.5 14.8 Solid waste management - - 16.3 18.6 16.3 18.6 Pier - - 4.9 9.5 4.9 9.5 Wastewater - - 20.1 19.6 20.1 19.6 Civic auditorium - - 3.7 3.5 3.7 3.5 Airport - - 5.2 5.3 5.2 5.3 Storm water management - - 0.4 0.5 0.4 0.5 Cemetery - - 1.7 1.5 1.7 1.5 Big Blue Bus - - 65.2 59.6 65.2 59.6 Special aviation - - - 0.1 - 0.1 Parking authority - - 0.3 0.7 0.3 0.7

Total expenses 386.7 312.2 133.3 133.7 520.0 445.9 Excess (deficiency) of revenues

over expenses before transfers 4.5 122.8 1.5 (6.5) 6.0 116.3 Transfers (2.8) (9.0) 2.8 9.0 - -

Increase in net assets 1.7 113.8 4.3 2.5 6.0 116.3 Beginning net assets as restated 1,014.0 908.6 491.7 489.2 1,505.7 1,397.8 Ending net assets 1,015.7$ 1,022.4 496.0 491.7 1,511.7 1,514.1

Governmental activities Business-type activities Total

CITY OF SANTA MONICAChanges in Net Assets

(in millions)

8

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

Governmental Activities. Governmental activities increased the City’s governmental activities net assets by $1.7 million for the current fiscal year, accounting for 28.2% of the $6.0 million growth in the net assets of the City. It should be noted that although the current fiscal year resulted in a net asset increase, ending net assets showed a $6.7 million decline in governmental activities due to prior year adjustments of $8.4 million. The decrease was primarily due to the settlement of a legal dispute. The City had been involved in a dispute with a law firm who represented the City in connection with a settlement reached with various oil companies over the contamination of the City’s aquifers. The dispute was resolved with the City paying the law firm $55 million.

Business-type Activities. Business-type activities increased the City’s net assets by $4.3 million for the current fiscal year, thereby accounting for 71.8% of the growth in the net assets of the City. A key element of this increase was transfers in of $2.8 million for current year’s operations.

FINANCIAL ANALYSIS OF THE CITY'S MAJOR FUNDS

As noted earlier, the City uses fund accounting to demonstrate compliance with finance-related legal requirements.

Governmental funds. The focus of the City’s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City’s financial requirements. In particular unreserved fund balance may serve as a useful measure of a government’s net resources available for spending at the end of the fiscal year.

At the end of the current fiscal year, the City’s governmental funds reported total fund balances of $426.1 million, $51.6 million or 10.8% decrease in comparison with the prior year. Approximately $127.2 million or 29.8% total fund balances constitutes unreserved (designated and undesignated) fund balance, which is available to meet the City’s current and future needs. The remainder of fund balance is reserved to indicate that it is not available for new spending because it has been committed to a variety of restricted purposes. Restrictions, commitments, or other limitations do not significantly affect the availability of fund resources for future use.

General Fund

The General Fund is the chief operating fund of the City. At the end of the current fiscal year, the unreserved (designated and undesignated) fund balance of the General Fund was $67.7 million, while total fund balance was $148.8 million, which was $6.9 million or 4.4% less than the prior year’s General Fund total fund balance. As a measure of the General Fund’s liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 28.2% of total General Fund expenditures, while total fund balance represents 62.0% of total General Fund expenditures.

The City’s management also designates unreserved fund balance to a particular function, project or activity. Fund balance may also be designated for purposes beyond the current year. However, designated fund balance is available for appropriation at any time. Of the $67.7 million General Fund unreserved fund balance, 92.4% is designated. The most significant designations are $25.3 million for operating contingency, $8.2 million for UUT revenue loss, $1.6 million for environmental mitigation, $3.3 million for City Hall renovation, $2.4 million for fire vehicle replacement, $2.6 million for PERS contributions and $9.2 million for compensated absences. Unreserved and undesignated fund balance at year-end was $5.2 million. This amount constitutes funds available for spending at the government’s discretion.

9

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

The General Fund fund balance decreased $6.9 million during the fiscal year ended June 30, 2008. A variety of variances from the prior year--both positive and negative--contribute to the increase as follows:

1. Revenues reflect a net increase of $6.3 million over the prior fiscal year primarily from:

a. A 10.7% increase in property taxes ($3.5 million) resulting from increased property values in the City.

b. A 4.0% increase in other taxes ($4.0 million) due to increases in transient occupancy tax, utilities users’ tax and business license tax.

c. A 27.3% decrease in investment income ($2.2 million) due to decreases in portfolio earnings.

2. Expenditures were $2.8 million higher than the prior fiscal year primarily due to increased public safety, general services and other expenditures. These increases were partially offset by a reduction in cultural and recreation services expenditures due to a departmental reorganization. Transfers out increased by $14.6 million due to funding of a new Capital Projects Fund.

Special Revenue Source Special Revenue Fund The Special Revenue Source Fund fund balance decreased by $49.0 million from the prior year. The decrease was primarily due to legal fees resulting from the MTBE settlement. Downtown Redevelopment Project Fund

The Downtown Redevelopment Project Fund fund deficit decreased by $0.8 million from the prior year. This decrease was primarily due to decreased capital improvement project expenditures in the current year and increased incremental property tax revenues received in the current year.

Earthquake Recovery Redevelopment Project Fund

The Earthquake Recovery Redevelopment Project Fund fund balance decreased by $20.1 million from the prior year. This decrease was primarily due to increased capital improvement project expenditures in the current year and prior period adjustments of $4.0 million (Note 4).

Nonmajor Governmental Funds

All other governmental funds’ fund balances increased $27.6 million or 24.9% from the previous fiscal year. This increase was primarily due to an increase of $19.5 million in transfers in from the General Fund for the new Capital Projects Fund and an increase of $4.7 million in intergovernmental revenue.

Proprietary funds. The City’s proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail.

10

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

The total net assets of the enterprise funds increased by $1.0 million. This was due primarily to increases in operating revenues of $2.9 million, an increase in depreciation expense of $1.5 million, a decrease in investment income of $2.5 million, a decrease in transfers in of $5.0 million, and a $7.8 million increase in capital contributions received.

Total net assets of internal service funds at June 30, 2008 increased $11.3 million. This was primarily due to an increase in operating revenue of $5.6 million (primarily increases of $2.0 million in Vehicle Management Fund and $4.4 million in the Self-Insurance Comprehensive Fund), and a decrease in insurance and bonds expense of $7.1 million.

Wastewater Enterprise Fund

The total net assets of the Wastewater Fund decreased by $2.3 million primarily due to increases in personnel services expense of $0.2 million, increases in materials and supplies expense of $0.2 million, a decrease in investment income of $0.5 million and an increase in loss on disposal of capital assets of $0.4 million.

Big Blue Bus Enterprise Fund

The total net assets of the Big Blue Bus increased $3.1 million. There were increases in personnel services expenses of $2.4 million, increased materials and supplies expense of $1.3 million, increased depreciation expense of $2.1 million and an increase in capital contributions – cash of $7.4 million.

General Fund Budgetary Highlights

Differences between the original budget versus the final amended budget and the final amended budget versus the actual are briefly summarized as follows:

The final revenue budget is greater than the original budget by $0.4 million. Actual results for total revenues exceeded the final adopted budget by $4.0 million primarily due to property taxes and other income exceeding budget by $2.2 million and $1.4 million, respectively.

The final expenditure budget is greater than the original budget by $55.7 million. The increase is comprised primarily of a $48.6 million re-appropriation of continuing capital improvement project budgets from FY 2006-07 to FY 2007-08. Final budgeted expenditures exceeded actual expenditures by $46.3 million mostly due to unspent continuing capital improvement project budgets.

CAPITAL ASSET AND DEBT ADMINISTRATION

Capital Assets. The City’s investment in capital assets as of June 30, 2008, amounted to $1.1 billion (net of accumulated depreciation) an increase of $52.3 million from the prior year balance. This investment in a broad range of capital assets, including land, infrastructure, structures and improvements, equipment, and construction in progress, is detailed as follows:

11

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

2007-08 2006-07* 2007-08 2006-07 2007-08 2006-07*Land 145.3$ 112.1 72.6 69.6 217.9 181.7Land held under easement 72.2 72.1 - - 72.2 72.1Buildings 210.6 204.8 39.5 39.4 250.1 244.2Improvements other than buildings 39.4 50.7 6.6 8.6 46.0 59.3Machinery and equipment 11.5 13.1 46.8 50.0 58.3 63.1Infrastructure 197.6 206.6 208.6 205.6 406.2 412.2Utility systems 5.0 3.5 - - 5.0 3.5Construction in progress 43.3 23.2 42.9 30.4 86.2 53.6

Capital assets, net 724.9$ 686.1 417.0 403.6 1,141.9 1,089.7

* as restated

CITY OF SANTA MONICACapital Assets (net of depreciation)

(in millions)

Governmental activities Business-type activities Total

Some of the City’s major capital asset events in the current fiscal year were:

� Additions to the General Fund construction in progress in FY 2007-08 include $1.0 million in revitalization of the property at 415 Pacific Coast Highway.

� Additions to the Downtown Redevelopment Project Fund in FY 2007-08 include $33.1 million for the purchase of land on 5th Street and construction in progress of $2.1 million for the retrofit of parking structures and $3.1 million in revitalization of the property at 415 Pacific Coast Highway.

� Additions to the Parking Authority Fund in FY 2007-08 include $3.0 million for the purchase of land on 5th Street.

� Additions to the Disaster Relief Fund construction in progress in FY 2007-08 include $4.9 million in expenditures for the Colorado Ocean relief sewer.

� Additions to the Big Blue Bus Fund construction in progress in FY 2007-08 include $17.1 million in expenditures for Phases 2 and 3 of the Campus Expansion construction and for the Ocean Park Community Center (OPCC) Access Center relocation.

� Additions to the Miscellaneous Grants Fund construction in progress in FY 2007-08 include $9.3 million in revitalization of the property at 415 Pacific Coast Highway.

� Additions to the Wastewater Fund in FY 2007-08 include $2.4 million paid to the City of Los Angeles for Santa Monica’s share of the Hyperion Plant capital expenditures and $2.6 to construction in progress for the Colorado Ocean relief sewer.

12

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

Additional information on the City’s capital assets can be found in note 7 to the basic financial statements.

Long-term Debt. At the end of the current fiscal year, the City’s total long-term debt outstanding was $198.2 million, a decrease from the prior year of $10.2 million or 4.9%. This amount was comprised of $99.1 million of revenue bonds which are secured by both governmental and business-type revenue sources, $75.6 million of tax allocation bonds which are secured by future tax revenues, $20.1 million of general obligation bonds which are backed by the assets of the City and $3.4 million of various loans payable. This is shown in the following table:

2007-08 2006-07 2007-08 2006-07 2007-08 2006-07General obligation bonds

(backed by the City) 20.1$ 21.8 - - 20.1 21.8 Revenue bonds and notes

(backed by specific tax and fee 147.5 153.9 27.2 28.7 174.7 182.6 revenues)

Certificates of participation - - - 0.4 - 0.4 Other loans - - 3.4 3.6 3.4 3.6

Total 167.6$ 175.7 30.6 32.7 198.2 208.4

CITY OF SANTA MONICAOutstanding Debt

(in millions)

Governmental activities Business-type activities Total

Additional information on the City’s long-term debt can be found in note 9 to the basic financial statements.

OTHER POTENTIALLY SIGNIFICANT MATTERS

The City had been involved with various legal disputes involving the July 13, 2003 accident at the Farmers Market. The disputes were settled for $21 million which was paid by the City’s insurers through insurance policies. ECONOMIC FACTORS AND NEXT YEAR’S BUDGET The City’s adopted General Fund budget for FY 2007-08 supports the basic responsibilities of local government, the policy interests of City Council Members and diverse concerns of the residents. Management feels that there are adequate resources available to fund the proposed expenditures.

In preparing the budget for the next fiscal year, many factors were taken into consideration.

� The impact on Santa Monica’s economy from the declining housing market and resultant reduction in consumer confidence.

13

CITY OF SANTA MONICA, CALIFORNIA

Management’s Discussion and Analysis, Continued Year ended June 30, 2008

� Revenues from sales tax derived from auto sales and leases have declined in recent quarters and are expected to decline in the future.

� The temporary closure of Santa Monica Place for renovations during parts of FY 2008-09 and FY 2009-10 will also reduce City tax revenues in the near term.

� Anticipated reductions in state subsidies reducing revenue to the capital projects and Big Blue Bus funds.

CONTACTING THE CITY'S FINANCE DEPARTMENT

This management’s discussion and analysis is designed to provide citizens, taxpayers, customers, investors and creditors with a general overview of the City's finances and to demonstrate the City's accountability for the money it receives. If you have questions or need additional financial information, please contact the City of Santa Monica’s Finance Department at www.smgov.net/finance or at (310) 458-8281.

14

City of Santa Monica, California

Year Ended June 30, 2008

Basic Financial Statements

Governmental Business-typeactivities activities Total

Cash and investments (note 5) 482,942,759 $ 103,117,394 586,060,153 Receivables (net, where applicable, of allowances for uncollectibles):

Accounts 7,574,792 21,647,951 29,222,743 Interest 3,673,202 1,180,014 4,853,216 Property taxes 5,272,603 — 5,272,603 Notes (note 6) 62,702,984 — 62,702,984 Other governments 14,513,046 — 14,513,046

Internal balances 12,366,918 (12,366,918) — Inventory 938,999 1,328,148 2,267,147 Prepaids 892,195 102,450 994,645 Restricted cash and investments (note 5) — 20,941,196 20,941,196 Restricted cash with fiscal agent (note 5) 30,055,545 535,909 30,591,454 Due from other governments, restricted — 9,654 9,654 Bond issuance costs, net 2,740,432 469,222 3,209,654 Capital assets not being depreciated (note 7):

Land 145,240,508 72,634,413 217,874,921 Land held under easement 72,237,823 — 72,237,823 Construction in progress 43,306,737 42,884,961 86,191,698

Capital assets being depreciated (note 7):Buildings 253,854,273 67,940,845 321,795,118 Improvements other than buildings 77,194,062 23,221,260 100,415,322 Utility systems 5,198,568 — 5,198,568 Machinery and equipment 33,041,280 126,431,755 159,473,035 Infrastructure 324,776,828 264,599,015 589,375,843 Less accumulated depreciation (229,905,467) (180,697,424) (410,602,891) Total capital assets, net 724,944,612 417,014,825 1,141,959,437

Total assets 1,348,618,087 553,979,845 1,902,597,932

Accounts payable 11,932,568 9,593,513 21,526,081 Accrued liabilities 8,082,310 3,025,928 11,108,238 Accrued interest payable 3,823,218 564,476 4,387,694 Short-term loans payable (note 17) 400,000 — 400,000 Contracts payable (retained percentage) 1,864,610 91,041 1,955,651 Unearned revenue (note 8) 103,579,844 4,332,035 107,911,879 Due to other governments 3,859,917 — 3,859,917 Liabilities payable from restricted assets 800,682 7,853,854 8,654,536 Long-term liabilities:

Compensated absences due within one year (note 9) 5,174,471 1,521,158 6,695,629 Compensated absences due in more than one year (note 9) 4,420,073 992,676 5,412,749 Claims payable due within one year (note 9 and 15) 5,837,864 455,605 6,293,469 Claims payable due in more than one year (note 9 and 15) 19,278,549 1,485,033 20,763,582 Loans and bonds payable due within one year (note 9) 8,375,000 1,759,830 10,134,830 Loans and bonds payable due in more than one year (note 9) 155,497,382 26,314,702 181,812,084

Total liabilities 332,926,488 57,989,851 390,916,339

Invested in capital assets, net of related debt 573,971,975 389,409,515 963,381,490 Restricted for (note 12):

Housing and community development 73,976,356 — 73,976,356 Clean beaches and ocean parcel tax 2,536,009 — 2,536,009 Miscellaneous grants 18,512,612 — 18,512,612 Debt service 18,953,165 — 18,953,165 Development projects 38,400,473 — 38,400,473 Perpetual care - nonexpendable 7,726,238 — 7,726,238 Rail system — 1,625,057 1,625,057 MTBE Settlement 72,176,249 — 72,176,249

Unrestricted 209,438,522 104,955,422 314,393,944 Total net assets 1,015,691,599 $ 495,989,994 1,511,681,593

See accompanying notes to basic financial statements.

Liabilities

Net Assets

CITY OF SANTA MONICA, CALIFORNIA

Statement of Net AssetsJune 30, 2008

Assets

15

Program revenuesOperating Capital

Charges for grants and grants and Governmental Business–typeFunctions/programs Expenses services contributions contributions activities activities Total

Governmental activities:General government 38,849,626 $ 17,188,876 56,343 58,902 (21,545,505) — (21,545,505) Public safety 91,862,403 17,298,741 1,327,128 2,112 (73,234,422) — (73,234,422) General services 111,168,586 19,650,237 12,309,867 41,667 (79,166,815) — (79,166,815) Cultural and recreation services 33,776,210 9,492,174 2,278,222 4,759,706 (17,246,108) — (17,246,108) Library 11,458,259 363,987 160,623 — (10,933,649) — (10,933,649) Housing and community development 91,966,369 14,430,326 18,671,472 — (58,864,571) — (58,864,571) Interest on long-term debt 7,628,437 — — — (7,628,437) — (7,628,437)

Total governmental activities 386,709,890 $ 78,424,341 34,803,655 4,862,387 (268,619,507) — (268,619,507) Business–type activities:

Water 15,489,230 $ 16,130,044 — — — 640,814 640,814 Solid waste management 16,277,710 18,842,702 — — — 2,564,992 2,564,992 Pier 4,867,415 3,107,349 — — — (1,760,066) (1,760,066) Wastewater 20,063,420 12,797,786 1,723 — — (7,263,911) (7,263,911) Civic auditorium 3,718,652 3,117,033 — — — (601,619) (601,619) Airport 5,199,701 4,279,268 — — — (920,433) (920,433) Storm water management 474,683 1,301,350 — — — 826,667 826,667 Cemetery 1,715,605 1,080,532 — — — (635,073) (635,073) Big Blue Bus 65,185,007 13,898,980 32,186,846 20,030,403 — 931,222 931,222 Special aviation 18,333 — — — — (18,333) (18,333) Parking authority 349,576 145,600 — — — (203,976) (203,976)

Total business–type activities 133,359,332 $ 74,700,644 32,188,569 20,030,403 — (6,439,716) (6,439,716) General revenues:

Taxes:Business 26,211,226$ — 26,211,226 Property 101,323,706 — 101,323,706 Sales 32,356,941 — 32,356,941 Transient occupancy 34,969,063 — 34,969,063 Utility users 31,621,621 — 31,621,621 Real property transfer 4,739,502 — 4,739,502 Parking facility tax 7,826,257 — 7,826,257 Other 2,605,760 — 2,605,760

Settlement income 1,012,863 — 1,012,863 Motor vehicle in lieu 390,244 — 390,244 Other income 8,038,022 3,421,837 11,459,859 Investment earnings 22,021,977 4,489,611 26,511,588

Transfers (2,815,040) 2,815,040 — Total general revenues and transfers 270,302,142 10,726,488 281,028,630 Change in net assets 1,682,635 4,286,772 5,969,407

Net assets, beginning, as restated (note 4) 1,014,008,964 491,703,222 1,505,712,186 Net assets, ending 1,015,691,599$ 495,989,994 1,511,681,593

See accompanying notes to basic financial statements.

Net (expense) revenue and changes in net assets

CITY OF SANTA MONICA, CALIFORNIA

Statement of ActivitiesFor the fiscal year ended June 30, 2008

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CITY OF SANTA MONICA, CALIFORNIA

Major Governmental Fund Financial Statements

General Fund – To account for all financial resources necessary to carry out basic governmental activities of the City that are not accounted for in another fund. The General Fund supports essential City services such as police and fire protection, street maintenance, libraries, parks and open space management.

Special Revenue Source Fund (Special Revenue Fund Type) – To account for receipt and expenditure of monies collected for specific uses.

Downtown Redevelopment Project Fund (Capital Projects Fund Type) – To account for the revenues and expenditures of the downtown redevelopment project area of the Redevelopment Agency of the City of Santa Monica. The redevelopment plan for this 9.9-acre project was approved in January 1976 and work was completed in 1980. The project area is located at the southern end of the City’s Third Street Promenade in the downtown core of Santa Monica. It consists of Santa Monica Place and two adjoining parking structures with 2,020 parking spaces.

Earthquake Recovery Redevelopment Project Fund (Capital Projects Fund Type) – To account for the revenues and expenditures of the earthquake redevelopment project area of the Redevelopment Agency of the City of Santa Monica. The redevelopment plan for this 2,307-acre project was approved in June 1994. The project area includes approximately 90 percent of all red-tagged and 80 percent of all yellow-tagged buildings damaged by the January 17, 1994 Northridge Earthquake. Recovery project work is ongoing.

17

CITY OF SANTA MONICA, CALIFORNIAC O S N ON C , C O N

Balance Sheet

G l F dGovernmental Funds

June 30 2008June 30, 2008

Capital projectsp p jfunds funds

EarthquakeEarthquakeS i l R D t R N j T t lSpecial Revenue Downtown Recovery Nonmajor Total

General Source Redevelopment Redevelopment governmental governmentalAssets Fund Fund Project Fund Project Fund funds fundsAssets Fund Fund Project Fund Project Fund funds funds

Cash and investments 124 459 829$ 194 407 246 2 370 121 45 849 132 77 072 704 444 159 032Cash and investments 124,459,829$ 194,407,246 2,370,121 45,849,132 77,072,704 444,159,032R i bl ( t h li bl f ll f ll tibl )Receivables (net, where applicable, of allowances for uncollectibles):

Accounts 7,301,931 — 15,073 — 252,367 7,569,371Notes 2,916,229 10,124,763 1,923,000 716,669 47,022,323 62,702,984Notes 2,916,229 10,124,763 1,923,000 716,669 47,022,323 62,702,984Property taxes 1 038 841 — 49 580 3 121 932 1 062 250 5 272 603Property taxes 1,038,841 — 49,580 3,121,932 1,062,250 5,272,603I te e t 1 456 881 539 263 29 874 646 866 609 127 3 282 011Interest 1,456,881 539,263 29,874 646,866 609,127 3,282,011

hOther governments — — — — 14,513,046 14,513,046Due from other funds 3,402,840 — — — — 3,402,840, , , ,Inventory 938 999 — — — — 938 999Inventory 938,999 938,999Prepaids 855 343 10 556 865 899Prepaids 855,343 — — — 10,556 865,899C h i h fi l 2 725 992 27 329 553 30 055 545Cash with fiscal agent 2,725,992 — — — 27,329,553 30,055,545Capitalized lease receivable — — 1,120,000 — — 1,120,000p , , , ,Advances to other funds (note 11) 35,105,966 — — 6,500,000 9,836,527 51,442,493Advances to other funds (note 11) 35,105,966 6,500,000 9,836,527 51,442,493

Total assets 180 202 851$ 205 071 272 5 507 648 56 834 599 177 708 453 625 324 823Total assets 180,202,851$ 205,071,272 5,507,648 56,834,599 177,708,453 625,324,823Li bili i d F d B lLiabilities and Fund Balances

Liabilities:Accounts payable 5 829 213$ 320 793 22 985 1 272 100 4 297 907 11 742 998Accounts payable 5,829,213$ 320,793 22,985 1,272,100 4,297,907 11,742,998Accrued liabilities 6 464 321 162 247 6 626 568Accrued liabilities 6,464,321 — — — 162,247 6,626,568Sh t t l bl ( t 17) 400 000 400 000Short-term loan payable (note 17) — — — — 400,000 400,000Contracts payable (retained percentage) 473,755 66,517 — 571,651 752,687 1,864,610p y ( p g )Due to other funds — — — — 3,402,840 3,402,840Due to other funds 3,402,840 3,402,840Due to other governments 438 629 6 558 3 414 730 3 859 917Due to other governments 438,629 — 6,558 3,414,730 — 3,859,917D f d 17 440 343 98 621 383 1 120 000 13 702 326 130 884 052Deferred revenue 17,440,343 98,621,383 1,120,000 — 13,702,326 130,884,052Deposits 754,711 — — — 45,971 800,682Advances from other funds (note 11) — — 19,409,014 3,465,452 16,728,370 39,602,836( ) , , , , , , , ,

Total liabilities 31 400 972 99 008 693 20 558 557 8 723 933 39 492 348 199 184 503Total liabilities 31,400,972 99,008,693 20,558,557 8,723,933 39,492,348 199,184,503Fund balances (deficit):Fund balances (deficit):

R d ( 13) 81 056 800 43 056 384 3 548 399 36 839 442 134 444 498 298 945 523Reserved (note 13) 81,056,800 43,056,384 3,548,399 36,839,442 134,444,498 298,945,523Unreserved - designated reported in:g p

General Fund 62,572,543 — — — — 62,572,543General Fund 62,572,543 62,572,543Special revenue funds 7 806 131 1 764 093 9 570 224Special revenue funds — 7,806,131 — — 1,764,093 9,570,224

U d d i t d t d iUnreserved - undesignated reported in:General Fund 5,172,536 — — — — 5,172,536Special revenue funds — 55,200,064 — — 2,596,767 57,796,831Special revenue funds 55,200,064 2,596,767 57,796,831Capital projects funds (18 599 308) 11 271 224 (589 253) (7 917 337)Capital projects funds — — (18,599,308) 11,271,224 (589,253) (7,917,337)

T t l f d b l (d fi it) 148 801 879 106 062 579 (15 050 909) 48 110 666 138 216 105 426 140 320Total fund balances (deficit) 148,801,879 106,062,579 (15,050,909) 48,110,666 138,216,105 426,140,320l li bili i d f d b l $Total liabilities and fund balances 180,202,851$ 205,071,272 5,507,648 56,834,599 177,708,453 625,324,823

Fund balances total governmental funds 426 140 320$Fund balances - total governmental funds 426,140,320$

Amounts reported for governmental activities in the statement of net assets are different because (Note 3):(1) Capital assets used in governmental activities are not current financial resources and therefore are not reported in the balance sheet 724,319,157( ) p g p , ,(2) The interfund capitalized lease receivable is recorded on the balance sheet but eliminated on the statement of net assets (1 120 000)(2) The interfund capitalized lease receivable is recorded on the balance sheet but eliminated on the statement of net assets (1,120,000)(3) Bond issue costs to be amortized over the life of the debt 2 740 432(3) Bond issue costs to be amortized over the life of the debt 2,740,432(4) li bili i d d bl i h i d d h f d i h b l h (1 8 32 144)(4) Long-term liabilities are not due and payable in the current period and therefore are not reported in the balance sheet (178,532,144)(5) Other long-term assets are not available to pay for current period expenditures and, therefore, are deferred in the ( ) g p y p p , ,

funds and recognized as revenue in the statement of activities 27 304 208funds and recognized as revenue in the statement of activities 27,304,208(6) Internal service funds are used by management to charge the costs of vehicle management information technology and(6) Internal service funds are used by management to charge the costs of vehicle management, information technology and

i k t t i di id l f d Th t d li biliti f th i f ti t h l d i krisk management to individual funds. The assets and liabilities of the information technology and riskmanagement (excluding bus) internal service funds are included in the governmental activities in the statement of net assetsg ( g ) gThe assets and liabilities of internal service funds are included in the statement of net assets 14,839,626The assets and liabilities of internal service funds are included in the statement of net assets 14,839,626

N t t f t l ti iti 1 015 691 599$Net assets of governmental activities 1,015,691,599$

18

CITY OF SANTA MONICA CALIFORNIACITY OF SANTA MONICA, CALIFORNIA

St t t f R E dit d Ch i F d B l (D fi it )Statement of Revenues, Expenditures and Changes in Fund Balances (Deficits)Governmental FundsGovernmental Funds

F th fi l d d J 30 2008For the fiscal year ended June 30, 2008

Capital projectsCapital projectsf d funds

EarthquakeEarthquakeS i l R D R N j T lSpecial Revenue Downtown Recovery Nonmajor Totalp y j

General Source Redevelopment Redevelopment governmental governmentalGeneral Source Redevelopment Redevelopment governmental governmentalFund Fund Project Fund Project Fund funds fundsj j

Revenues:Revenues:Property taxes 36,067,632$ — — — — 36,067,632p y , , , ,Incremental property taxes 1 168 638 48 810 455 16 168 953 66 148 046Incremental property taxes — — 1,168,638 48,810,455 16,168,953 66,148,046Sales taxes 32,356,941 — — — — 32,356,941, , , ,Other taxes 104 250 391 5 305 919 109 556 310Other taxes 104,250,391 — — — 5,305,919 109,556,310Licenses and permits 20,109,435 — — — 93,650 20,203,085Licenses and permits 20,109,435 93,650 20,203,085Intergovernmental 446 800 32 560 261 33 007 061Intergovernmental 446,800 — — — 32,560,261 33,007,061Charges for services 25,778,223 297,328 — — 10,151,092 36,226,643Charges for services 25,778,223 297,328 10,151,092 36,226,643Fi d f f it 14 567 262 14 567 262Fines and forfeitures 14,567,262 — — — — 14,567,262Investment income 5,799,315 11,359,869 63,584 2,043,715 2,183,588 21,450,071Investment income 5,799,315 11,359,869 63,584 2,043,715 2,183,588 21,450,071R t l i 5 696 255 1 220 200 90 517 7 006 972Rental income 5,696,255 — 1,220,200 — 90,517 7,006,972Settlement income — 1 012 863 — — — 1 012 863Settlement income 1,012,863 1,012,863Oth 5 117 139 2 136 900 1 450 143 133 039 7 854 276 16 691 497Other 5,117,139 2,136,900 1,450,143 133,039 7,854,276 16,691,497

Total revenues 250 189 393 14 806 960 3 902 565 50 987 209 74 408 256 394 294 383Total revenues 250,189,393 14,806,960 3,902,565 50,987,209 74,408,256 394,294,383E diExpenditures:p

Current:Current:G l 40 722 122 333 335 288 769 41 344 226General government 40,722,122 333,335 — — 288,769 41,344,226g , , , , , ,Public safety 88 308 262 1 244 431 89 552 693Public safety 88,308,262 — — — 1,244,431 89,552,693

l iGeneral services 36,943,004 63,498,519 — — 15,708,986 116,150,509, , , , , , , ,Cultural and recreation services 32 316 853 53 632 13 665 140 46 035 625Cultural and recreation services 32,316,853 53,632 — — 13,665,140 46,035,625Library 10,219,930 — — — 25,180 10,245,110y , , , , ,Housing and community development 31 538 299 144 418 756 101 61 704 273 24 309 636 118 452 727Housing and community development 31,538,299 144,418 756,101 61,704,273 24,309,636 118,452,727

Debt service expenditures:pPrincipal 8 075 000 8 075 000Principal — — — — 8,075,000 8,075,000Interest — — 861,972 — 8,079,860 8,941,832Interest 861,972 8,079,860 8,941,832

Total expenditures 240 048 470 64 029 904 1 618 073 61 704 273 71 397 002 438 797 722Total expenditures 240,048,470 64,029,904 1,618,073 61,704,273 71,397,002 438,797,722Excess (deficiency) of revenuesExcess (deficiency) of revenues

( d ) dit 10 140 923 (49 222 944) 2 284 492 (10 717 064) 3 011 254 (44 503 339)over (under) expenditures 10,140,923 (49,222,944) 2,284,492 (10,717,064) 3,011,254 (44,503,339)Other financing sources (uses):Other financing sources (uses):

T f i ( t 11) 11 408 818 665 165 34 421 428 46 495 411Transfers in (note 11) 11,408,818 665,165 — — 34,421,428 46,495,411Transfers out (note 11) (28 417 466) (429 968) (1 465 353) (9 381 849) (9 880 221) (49 574 857)Transfers out (note 11) (28,417,466) (429,968) (1,465,353) (9,381,849) (9,880,221) (49,574,857)

T t l th fi i ( ) (17 008 648) 235 197 (1 465 353) (9 381 849) 24 541 207 (3 079 446)Total other financing sources (uses) (17,008,648) 235,197 (1,465,353) (9,381,849) 24,541,207 (3,079,446)

N h i f d b l (6 867 725) (48 987 747) 819 139 (20 098 913) 27 552 461 (47 582 785)Net change in fund balances (6,867,725) (48,987,747) 819,139 (20,098,913) 27,552,461 (47,582,785)g ( ) ( ) ( ) ( )

F d b l (d fi i ) b i i fFund balances (deficits) at beginning of year,( ) g g y ,as restated (note 4) 155 669 604 155 050 326 (15 870 048) 68 209 579 110 663 644 473 723 105as restated (note 4) 155,669,604 155,050,326 (15,870,048) 68,209,579 110,663,644 473,723,105

F d b l (d fi i ) d f 148 801 879$ 106 062 579 (15 050 909) 48 110 666 138 216 105 426 140 320Fund balances (deficits) at end of year 148,801,879$ 106,062,579 (15,050,909) 48,110,666 138,216,105 426,140,320y

See accompanying notes to basic financial statements.p y g

19

Net change in fund balances – total governmental funds (47,582,785)$

Amounts reported for governmental activities in the statement of activities are different because:

Capital assets 1) The acquisition of capital assets requires the use of current financial resources

but has no effect on net assets 62,393,9672) The cost of capital assets is allocated over their estimated useful lives and reported

as depreciation expense in the statement of activities (21,888,104)3) The disposal of capital assets is recorded as an expense in the statement of activities

but is not recorded in the fund statements (1,550,899)

Measurement focus:4) Change in accrued interest payable 143,9965) Principal payments on long-term bonded debt use current financial resources

but have no effect on net assets 8,075,0006) Bond premiums are recorded as other financing source in the fund statements but are

amortized in the statement of activities 20,3667) Bond discounts are recorded as other financing uses in the fund statements but are

amortized in the statement of activities (12,485)8) Costs of issuance are recorded as an expenditure in the fund statements but are

amortized in the statement of activities (210,252)9) Deferred loss on refunding recorded as an expenditure in the fund statements but is

amortized in the statement of activities (224,272)10) The increase in compensated absences liability does not require the use of current

financial resources but is recorded as an expense in the statement of activities (948,604)11) Elimination of interest related to interfund loans that are recorded as an expenditure

on the fund statements but eliminated on the government-wide statements 1,079,51812) Revenue recognized for fund statements had been previously recognized in the statement of activities (4,464,561)13) Revenue not recognized for fund statements recognized in the statement of activities 144,89814) The increase in OPEB liability does not require the use of current

financial resources but is recorded as an expense in the statement of activities (1,242,000)

Internal service funds:15) Certain internal service funds are used by management to charge the costs of vehicle

management, information technology, and risk management to individual funds.

The net revenue of certain internal service funds is reported withgovernmental activities 7,948,852

Change in net assets (statement of activities, governmental activities) 1,682,635 $

See accompanying notes to basic financial statements.

CITY OF SANTA MONICA, CALIFORNIA

Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund BalancesGovernmental Funds

For the fiscal year ended June 30, 2008

20

Less Variance with2006-2007 Plus Actual, final budget -

Original Final encumbered 2007-2008 budgetary positivebudget budget Actual expenditures encumbrances basis (negative)

Revenues:Property taxes 33,357,781 $ 33,830,681 36,067,632 — — 36,067,632 2,236,951 Sales tax 33,667,000 32,366,400 32,356,941 — — 32,356,941 (9,459) Other taxes 101,406,000 103,849,000 104,250,391 — — 104,250,391 401,391 Licenses and permits 19,391,903 19,491,903 20,109,435 — — 20,109,435 617,532 Intergovernmental 472,535 536,185 446,800 — — 446,800 (89,385) Charges for services 28,583,855 26,808,155 25,778,223 — — 25,778,223 (1,029,932) Fines and forfeitures 13,869,400 13,869,400 14,567,262 — — 14,567,262 697,862 Investment income 6,025,000 6,125,000 5,799,315 — — 5,799,315 (325,685) Rental income 5,371,655 5,671,655 5,696,255 — — 5,696,255 24,600 Other 3,677,268 3,677,268 5,117,139 — — 5,117,139 1,439,871

T t l 245 822 397 246 225 647 250 189 393 250 189 393 3 963 746

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenditures and Changes in Fund balance - Budget and Actual (Non-GAAP Basis)

General Fund

Total revenues 245,822,397 246,225,647 250,189,393 — — 250,189,393 3,963,746Expenditures:

General government:City council

Salaries 375,858 518,524 518,524 — — 518,524 — Supplies 197,309 136,916 136,916 — — 136,916 —

Total city council 573,167 655,440 655,440 — — 655,440 — City manager

Salaries 2,489,677 2,618,454 2,618,454 — — 2,618,454 — Supplies 1,829,539 1,718,278 1,334,392 98,222 482,108 1,718,278 — Capital outlay — 2,540 2,540 — — 2,540 —

Total city manager 4,319,216 4,339,272 3,955,386 98,222 482,108 4,339,272 — Record and election services

Salaries 1,233,421 1,254,503 1,254,502 — — 1,254,502 1 Supplies 743,390 684,388 617,679 — 66,709 684,388 — Capital outlay 12,755 — — — — — —

Total record and election services 1,989,566 1,938,891 1,872,181 — 66,709 1,938,890 1 Finance

Salaries 5,734,704 5,614,197 5,614,197 — — 5,614,197 — Supplies 2,737,912 3,045,237 2,917,964 34,540 161,813 3,045,237 — Capital outlay 13,980 12,938 52,789 39,851 — 12,938 —

Total finance 8,486,596 8,672,372 8,584,950 74,391 161,813 8,672,372 —

See accompanying notes to basic financial statements. (Continued)

21

Less Variance with2006-2007 Plus Actual, final budget -

Original Final encumbered 2007-2008 budgetary positivebudget budget Actual expenditures encumbrances basis (negative)

City attorneySalaries 7,905,555 $ 7,793,438 7,793,438 — — 7,793,438 — Supplies 304,044 397,056 397,056 — — 397,056 — Capital outlay 7,326 7,648 5,889 1,307 3,066 7,648 —

Total city attorney 8,216,925 8,198,142 8,196,383 1,307 3,066 8,198,142 — Human resources

Salaries 2,405,759 2,406,342 2,406,342 — — 2,406,342 — Supplies 610,129 885,948 863,725 15,087 37,310 885,948 — Capital outlay 6,400 3,093 3,093 — — 3,093 —

Total human resources 3,022,288 3,295,383 3,273,160 15,087 37,310 3,295,383 — Information systems

Salaries 4,643,178 4,389,029 4,352,529 — 36,500 4,389,029 —

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenditures and Changes in Fund balance - Budget and Actual (Non-GAAP Basis)

General Fund

Supplies 807,982 767,960 721,188 8,566 55,338 767,960 — Capital outlay 2,000 5,558 5,558 — — 5,558 —

Total information systems 5,453,160 5,162,547 5,079,275 8,566 91,838 5,162,547 —

Other 2,237,139 5,219,180 2,749,086 — — 2,749,086 2,470,094

Capital improvement 4,381,048 15,026,369 6,356,261 — 2,153,968 8,510,229 6,516,140 Total general government 38,679,105 52,507,596 40,722,122 197,573 2,996,812 43,521,361 8,986,235

Public safety:Police

Salaries 56,787,603 59,411,334 59,411,334 — — 59,411,334 — Supplies 4,507,534 5,174,398 5,139,538 22,719 57,579 5,174,398 — Capital outlay 6,767 2,667 2,667 — — 2,667 —

Total police 61,301,904 64,588,399 64,553,539 22,719 57,579 64,588,399 — Fire

Salaries 21,025,773 21,888,600 21,888,600 — — 21,888,600 — Supplies 1,719,040 1,433,733 1,426,130 — 7,603 1,433,733 — Capital outlay 118,200 113,810 150,867 37,057 — 113,810 —

Total fire 22,863,013 23,436,143 23,465,597 37,057 7,603 23,436,143 — Capital improvement 1,453,100 5,109,925 289,126 — 151,018 440,144 4,669,781

Total public safety 85,618,017 93,134,467 88,308,262 59,776 216,200 88,464,686 4,669,781

(Continued)

22

Less Variance with2006-2007 Plus Actual, final budget -

Original Final encumbered 2007-2008 budgetary positivebudget budget Actual expenditures encumbrances basis (negative)

General services:Environmental and public works management

Salaries 6,794,215 $ 6,596,107 6,596,107 — — 6,596,107 — Supplies 1,797,708 1,993,938 1,904,456 23,312 112,794 1,993,938 — Capital outlay 13,200 7,974 17,561 11,153 1,566 7,974 —

Total environmental and public works 8,605,123 8,598,019 8,518,124 34,465 114,360 8,598,019 — Community maintenance:

Salaries 15,298,346 14,452,105 14,452,105 — — 14,452,105 — Supplies 9,612,323 10,337,313 10,300,668 37,129 73,774 10,337,313 — Capital outlay 53,800 89,633 89,633 — — 89,633 —

Total community maintenance 24,964,469 24,879,051 24,842,406 37,129 73,774 24,879,051 — C it l i t 588 000 22 178 974 3 582 474 11 154 465 14 736 939 7 442 035

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenditures and Changes in Fund balance - Budget and Actual (Non-GAAP Basis)

General Fund

Capital improvement 588,000 22,178,974 3,582,474 — 11,154,465 14,736,939 7,442,035Total general services 34,157,592 55,656,044 36,943,004 71,594 11,342,599 48,214,009 7,442,035

Cultural and recreation services:Community and cultural services

Salaries 11,076,412 11,755,380 11,755,380 — — 11,755,380 — Supplies 19,089,209 19,096,854 17,954,058 444,062 1,586,858 19,096,854 — Capital outlay 20,000 9,442 9,941 9,893 9,394 9,442 —

Total community and cultural services 30,185,621 30,861,676 29,719,379 453,955 1,596,252 30,861,676 — Capital improvement 192,000 10,692,712 2,597,474 — 1,598,080 4,195,554 6,497,158

Total cultural and recreation services 30,377,621 41,554,388 32,316,853 453,955 3,194,332 35,057,230 6,497,158Library:

Salaries 7,636,207 7,656,352 7,656,352 — — 7,656,352 — Supplies 2,556,750 2,512,984 2,519,033 308,188 302,139 2,512,984 —

10,192,957 10,169,336 10,175,385 308,188 302,139 10,169,336 — Capital improvement — 44,545 44,545 — — 44,545 —

Total library 10,192,957 10,213,881 10,219,930 308,188 302,139 10,213,881 —

(Continued)

23

Less Variance with2006-2007 Plus Actual, final budget -

Original Final encumbered 2007-2008 budgetary positivebudget budget Actual expenditures encumbrances basis (negative)

Housing and community development:Planning and community development

Salaries 11,433,750 $ 11,417,284 11,446,982 29,698 — 11,417,284 — Supplies 7,356,362 7,181,099 7,534,091 602,884 236,075 7,167,282 13,817 Capital outlay 26,450 4,425 21,945 17,520 — 4,425 —

Total planning and community development 18,816,562 18,602,808 19,003,018 650,102 236,075 18,588,991 13,817 Housing and economic development

Salaries 4,307,041 3,946,855 3,946,855 — — 3,946,855 — Supplies 8,275,699 8,234,407 8,041,901 159,401 351,907 8,234,407 — Capital outlay 11,700 11,677 11,677 — — 11,677 —

Total housing and economic development 12,594,440 12,192,939 12,000,433 159,401 351,907 12,192,939 — Capital improvement 250,000 2,485,079 534,848 — 1,311,957 1,846,805 638,274

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenditures and Changes in Fund balance - Budget and Actual (Non-GAAP Basis)

General Fund

Total housing and community development 31,661,002 33,280,826 31,538,299 809,503 1,899,939 32,628,735 652,091

Total expenditures 230,686,294 286,347,202 240,048,470 1,900,589 19,952,021 258,099,902 28,247,300 Excess (deficiency) of revenues over

(under) expenditures 15,136,103 (40,121,555) 10,140,923 (1,900,589) (19,952,021) (7,910,509) 32,211,046 Other financing sources (uses):

Transfers in 12,990,515 11,408,818 11,408,818 — — 11,408,818 — Transfers out (28,384,743) (28,582,477) (28,417,466) — — (28,417,466) 165,011

Total other financing sources (15,394,228) (17,173,659) (17,008,648) — — (17,008,648) 165,011

Net change in fund balances (258,125) (57,295,214) (6,867,725) (1,900,589) (19,952,021) (24,919,157) 32,376,057

Fund balance at the beginning of year 155,669,604 155,669,604 155,669,604 — — 155,669,604 —

Fund balance at end of year 155,411,479 $ 98,374,390 148,801,879 (1,900,589) (19,952,021) 130,750,447 32,376,057

See accompanying notes to basic financial statements.

24

Less2006-2007 Plus Actual, Variance –

Original Final encumbered 2007-2008 budgetary positivebudget budget Actual expenditures* encumbrances basis (negative)

Revenues:Charges for services 240,000 $ 240,000 297,328 — — 297,328 57,328 Investment income 6,450,000 6,450,000 11,359,869 — — 11,359,869 4,909,869 Settlement income 8,500,000 8,500,000 1,012,863 — — 1,012,863 (7,487,137) Other 1,168,333 1,168,333 2,136,900 — — 2,136,900 968,567

Total revenues 16,358,333 16,358,333 14,806,960 — — 14,806,960 (1,551,373)

Expenditures:General government:

Capital improvement — 816,295 333,335 — 21,923 355,258 461,037 Total general government — 816,295 333,335 — 21,923 355,258 461,037

General services: Supplies 4,413,335 61,084,279 61,065,333 — 18,946 61,084,279 — Capital improvement 900,000 18,966,146 2,433,186 — 12,095,862 14,529,048 4,437,098

T t l l i 5 313 335 80 050 425 63 498 519 12 114 808 75 613 327 4 437 098

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenditures and Changes inFund Balance – Budget and Actual (Non-GAAP Basis)

Special Revenue Source Fund

Total general services 5,313,335 80,050,425 63,498,519 — 12,114,808 75,613,327 4,437,098

Cultural and recreation services: Capital improvement — 53,632 53,632 — — 53,632 —

Total cultural and recreation services — 53,632 53,632 — — 53,632 —

Library:Capital improvement — 514,000 — — — — 514,000

Total library — 514,000 — — — — 514,000

Housing and community development: Capital improvement 575,000 2,341,993 144,418 — 132,582 277,000 2,064,993

Total housing and community development 575,000 2,341,993 144,418 — 132,582 277,000 2,064,993

Total expenditures 5,888,335 83,776,345 64,029,904 — 12,269,313 76,299,217 7,477,128 Excess (deficiency) of revenues

over (under) expenditures 10,469,998 (67,418,012) (49,222,944) — (12,269,313) (61,492,257) 5,925,755

Other financing sources (uses):Transfers in — 665,165 665,165 — — 665,165 — Transfers out (690,478) (690,478) (429,968) — — (429,968) 260,510

Total other financing sources (690,478) (25,313) 235,197 — — 235,197 260,510

Net change in fund balance 9,779,520 (67,443,325) (48,987,747) — (12,269,313) (61,257,060) 6,186,265

Fund balance at beginning of year 155,050,326 155,050,326 155,050,326 — — 155,050,326 —

Fund balance at end of year 164,829,846 $ 87,607,001 106,062,579 — (12,269,313) 93,793,266 6,186,265

* No encumbrances were outstanding at June 30, 2007

See accompanying notes to basic financial statements.

25

THIS PAGE INTENTIONALLY LEFT BLANK

26

CITY OF SANTA MONICA, CALIFORNIA

Proprietary Fund Financial Statements

Enterprise Funds are used to account for operations that are financed and operated in a manner similar to private business enterprises (a) where the intent is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges, or (b) where the City has decided that periodic determination of revenues earned, expenses incurred and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes.

Wastewater Enterprise Fund – To account for revenues and expenses associated with maintaining the sanitary sewer and storm drain systems within the City.

Big Blue Bus Enterprise Fund – To account for revenues and expenses related to operation of the City's Municipal Bus Lines.

Internal Service Funds – To account for the financing of goods or services provided by one department or agency to other departments or agencies of the City or to other governments, on a cost-reimbursement basis.

27

T l

CITY OF SANTA MONICA, CALIFORNIAStatement of Net Assets

Proprietary FundsJune 30, 2008

TotalNonmajor Total internal

Big Blue enterprise enterprise serviceAssets Wastewater Bus funds funds funds

Current assets:Cash and investments 26,373,738 $ 8,208,243 40,237,652 74,819,633 67,081,488 Restricted cash and investments — — 10,023,097 10,023,097 — Receivables (net, where applicable, of

allowances for uncollectibles):Accounts 2,117,960 13,638,906 5,813,877 21,570,743 82,629 Interest 217,483 110,007 602,718 930,208 640,997

Inventory — 839,628 421,049 1,260,677 67,471 Prepaids 14,859 80,081 7,510 102,450 26,296

Total current assets 28 724 040 22 876 865 57 105 903 108 706 808 67 898 881Total current assets 28,724,040 22,876,865 57,105,903 108,706,808 67,898,881

Noncurrent assets:Restricted cash and investments 1,168,395 8,436,279 1,313,425 10,918,099 — Restricted cash with fiscal agent 535,909 — — 535,909 — Due from other governments, restricted 9,654 — — 9,654 —

Capital assets (note 7):Land 3 189 132 61 085 563 8 359 718 72 634 413Land 3,189,132 61,085,563 8,359,718 72,634,413 —Buildings 230,677 46,590,661 21,119,507 67,940,845 — Improvements other than buildings 421,868 2,863,002 19,936,390 23,221,260 — Machinery and equipment 1,124,254 88,949,838 5,724,079 95,798,171 32,171,322 Infrastructure 209,544,765 — 55,054,250 264,599,015 — Construction in progress 3,054,573 37,915,864 1,914,524 42,884,961 —

217,565,269 237,404,928 112,108,468 567,078,665 32,171,322, , , , , , , , , ,Less: accumulated depreciation (33,898,839) (75,785,690) (53,496,455) (163,180,984) (18,428,723)

Net capital assets 183,666,430 161,619,238 58,612,013 403,897,681 13,742,599

Advances to other funds (note 11) 6,603,197 — — 6,603,197 — Bond issuance costs, net 469,222 — — 469,222 —

Total noncurrent assets 192,452,807 170,055,517 59,925,438 422,433,762 13,742,599

Total assets 221,176,847 $ 192,932,382 117,031,341 531,140,570 81,641,480

(Continued)

28

TotalNonmajor Total internal

Big Blue enterprise enterprise serviceLiabilities Wastewater Bus funds funds funds

Current liabilities:Accounts payable 2,204,920 $ 4,289,787 2,817,335 9,312,042 471,042 Accrued liabilities 207,458 3,168,235 1,042,099 4,417,792 258,933 Contracts payable (retained percentage) — — 91,041 91,041 — Claims payable (note 15) — — — — 6,293,469 Interest payable 535,906 — 28,570 564,476 — Current portion of long-term obligations (note 9) 1,500,000 — 259,830 1,759,830 — Liabilities payable from restricted assets –

deposits 6 924 7 846 930 7 853 854

CITY OF SANTA MONICA, CALIFORNIAStatement of Net Assets, Continued

Proprietary FundsJune 30, 2008

deposits — 6,924 7,846,930 7,853,854 — Total current liabilities 4,448,284 7,464,946 12,085,805 23,999,035 7,023,444

Noncurrent liabilities:Accrued liabilities 35,543 401,377 511,393 948,313 128,466 Advances from other funds (note 11) 6,500,000 — 11,942,854 18,442,854 — Claims payable (note 15) — — — — 20,763,582 Unearned revenue (note 8) — 4,332,035 — 4,332,035 — Long-term obligations, net of current portion (note 9) 23,211,294 — 3,103,408 26,314,702 —

Total noncurrent liabilities 29,746,837 4,733,412 15,557,655 50,037,904 20,892,048 Total liabilities 34,195,121 12,198,358 27,643,460 74,036,939 27,915,492

Invested in capital assets, net of related debt 159,424,358 161,619,238 55,248,775 376,292,371 13,742,599 Restricted for rail system (note 12) — 1,625,057 — 1,625,057 — Unrestricted 27,557,368 17,489,729 34,139,106 79,186,203 39,983,389

Total net assets 186,981,726 $ 180,734,024 89,387,881 457,103,631 53,725,988

39,413,624 Net assets, business-type activities- internal service funds

See accompanying notes to basic financial statements. (527,261) Net adjustment to reflect the allocation of the internal service funds net loss

495,989,994 Net assets of business-type activities

Net assets

29

TotalNonmajor Total internal

Big Blue enterprise enterprise serviceWastewater Bus funds funds funds

Operating revenues - charges for services 12,797,786 $ 13,898,980 48,003,878 74,700,644 31,440,872

Operating expenses:Personnel services 3,602,989 33,914,845 17,593,734 55,111,568 3,740,717 Administrative indirect 781,762 2,557,075 3,297,830 6,636,667 492,718 Contractual services 4,501,609 3,465,022 5,715,821 13,682,452 32,135 Repairs and maintenance 699,189 1,470,980 3,528,895 5,699,064 1,827,392 Materials and supplies 1,350,216 6,392,685 8,060,092 15,802,993 1,503,757 Utilities 35,672 418,922 1,007,446 1,462,040 69,736 Water purchases — — 3,950,104 3,950,104 — Casualty, property and liability costs 243,000 1,491,265 800,366 2,534,631 48,600 Claims expense, net of claims reserve

adjustments — — — — 7,583,641 Insurance and bonds — — — — 3,309,769 Miscellaneous fees and costs — — — — 1,247,687

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenses and Changes in Fund Net Assets

Proprietary Funds

Administrative fees and costs — — — — 160,691 Depreciation 6,011,310 14,232,445 2,718,758 22,962,513 2,427,615 Other 1,496,622 466,353 3,243,688 5,206,663 —

Total operating expenses 18,722,369 64,409,592 49,916,734 133,048,695 22,444,458

Operating income (loss) (5,924,583) (50,510,612) (1,912,856) (58,348,051) 8,996,414

Nonoperating revenues (expenses):Operating grants 1,723 — — 1,723 — Sales tax proceeds — 32,186,846 — 32,186,846 — Investment income 799,940 606,091 2,190,178 3,596,209 2,218,445 Interest expense (1,074,360) — (338,334) (1,412,694) — Gain (loss) on disposal of capital assets (410,811) (967,704) (154,119) (1,532,634) 22,900 Other 371,116 1,747,871 1,276,974 3,395,961 656

Total nonoperating revenues (expenses) (312,392) 33,573,104 2,974,699 36,235,411 2,242,001

Gain (loss) before capitalcontributions and transfers (6,236,975) (16,937,508) 1,061,843 (22,112,640) 11,238,415

Capital contributions - cash — 19,590,403 440,000 20,030,403 — Transfers in (note 11) 3,888,064 786,520 5,204,774 9,879,358 677,752 Transfers out (note 11) — (377,300) (6,442,364) (6,819,664) (658,000)

Change in net assets (2,348,911) 3,062,115 264,253 977,457 11,258,167

Net assets at beginning of year, 189,330,637 177,671,909 89,123,628 456,126,174 42,467,821

Net assets at end of year 186,981,726$ 180,734,024 89,387,881 457,103,631 53,725,988

977,457$ Change in net assets3,309,315 Net adjustment to reflect the consolidation

of internal service fund activities related to See accompanying notes to basic financial statements. enterprise funds

4,286,772$ Change in net assets of business-type activities

30

TotalNonmajor Total internal

Big Blue enterprise enterprise serviceWastewater Bus funds funds funds

Cash flows from operating activities:Cash received from customers 12,691,662 $ 13,898,980 48,358,178 74,948,820 32,725,591 Cash payments for materials and services (7,217,539) (15,016,747) (29,404,586) (51,638,872) (15,808,509) Cash paid for claims and related services — — — — (8,103,948) Cash payments to employees for services (3,700,011) (34,067,681) (17,881,058) (55,648,750) (3,721,367) Other revenue received 371,116 1,747,873 1,276,973 3,395,962 656

Net cash provided by operating activities 2,145,228 (33,437,575) 2,349,507 (28,942,840) 5,092,423

Cash flows from noncapital financing activities:Sales tax proceeds — 28,264,657 — 28,264,657 — Other grants 1,723 — — 1,723 — Repayment of advances made to other funds (48 000) (48 000)

CITY OF SANTA MONICA, CALIFORNIA

Statement of Cash FlowsProprietary Funds

For the fiscal year ended June 30, 2008

Repayment of advances made to other funds — — (48,000) (48,000) — Transfers in 3,888,064 786,520 5,204,774 9,879,358 677,752 Transfers out — (377,300) (6,442,364) (6,819,664) (658,000)

Net cash provided by noncapitalfinancing activities 3,889,787 28,673,877 (1,285,590) 31,278,074 19,752

Cash flows from capital and related financing activitiesCapital contributions received — 22,704,235 440,000 23,144,235 — Acquisition and construction of capital assets (5,476,270) (25,025,838) (5,215,570) (35,717,678) (4,609,826) Proceeds from sale of capital assets 114,836 (20,949) — 93,887 17,992 Reduction in long-term obligations (1,194,486) — (673,808) (1,868,294) — Advances from other funds 6,500,000 — 112,266 6,612,266 — Interest paid on long-term obligations (1,096,185) — (352,102) (1,448,287) —

Net cash used in capitaland related financing activities (1,152,105) (2,342,552) (5,689,214) (9,183,871) (4,591,834)

Cash flows from investing activities – interest receivedon investments 776,655 667,747 2,000,559 3,444,961 2,111,463

Net cash provided by investing activities 776,655 667,747 2,000,559 3,444,961 2,111,463

Net increase (decrease) in cash and cash equivalents 5,659,565 (6,438,503) (2,624,738) (3,403,676) 2,631,804

Cash and cash equivalents at beginning of year 22,418,477 23,083,025 54,198,912 99,700,414 64,449,684

Cash and cash equivalents at end of year 28,078,042 $ 16,644,522 51,574,174 96,296,738 67,081,488

Cash and investments 26,373,738 $ 8,208,243 40,237,652 74,819,633 67,081,488 Restricted cash and investments 1,704,304 8,436,279 11,336,522 21,477,105 —

Total cash and cash equivalents 28,078,042 $ 16,644,522 51,574,174 96,296,738 67,081,488

(Continued)

31

TotalNonmajor Total internal

Big Blue enterprise enterprise serviceWastewater Bus funds funds funds

Reconciliation of operating income (loss) to net cash provided by (used in) operating activities:

Operating income (loss) (5,924,583) $ (50,510,612) (1,912,856) (58,348,051) 8,996,414

Adjustments to reconcile operating income (loss) to net cash provided by (used in)operating activities:

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIAStatement of Cash Flows, Continued

Proprietary Funds

Add depreciation 6,011,310 14,232,445 2,718,758 22,962,513 2,427,615 Change in assets and liabilities:

(Increase) in accounts receivable (106,124) — 127,880 21,756 1,284,719 (Increase) in prepaids (2,382) (4,244) (945) (7,571) (16,650) Decrease in inventory — (153,797) (45,083) (198,880) (19,843) Increase (decrease) in accounts payable 1,893,458 1,432,502 574,809 3,900,769 (7,133,453) Increase (decrease) in accrued liabilities (64,551) 302,290 (232,626) 5,113 57,080 Increase in deposits — (2,841) 589,812 586,971 — Increase (decrease) in contracts payable (545) (26,065) (692,517) (719,127) — (Decrease) in claims payable — — — — (504,115) Decrease in accrued

noncurrent liabilities (32,471) (455,124) (54,699) (542,294) — Other nonoperating revenue received 371,116 1,747,871 1,276,974 3,395,961 656

Total adjustments 8,069,811 17,073,037 4,262,363 29,405,211 (3,903,991)

Net cash provided by (used in) operating activities 2,145,228 $ (33,437,575) 2,349,507 (28,942,840) 5,092,423

There were no significant noncash capital financing or investing activities for the year ended June 30, 2008.

See accompanying notes to basic financial statements.

32

CITY OF SANTA MONICA, CALIFORNIA

Fiduciary Fund Financial Statements

Agency Funds are custodial in nature and used to receive and disburse funds for an entity/individual, which is not part of the City.

33

TotalAgency Funds

Restricted cash and investments (note 5) 3,761,030 $Accounts receivable 26,485

Total assets 3,787,515 $

Accounts payable and accrued liabilities 3,787,515 $l li bili i 3 8 1$

Fiduciary FundsJune 30, 2008

Assets

Liabilities

CITY OF SANTA MONICA, CALIFORNIAStatement of Fiduciary Assets and Liabilities

Total liabilities 3,787,515$

See accompanying notes to basic financial statements.

34

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements For the fiscal year ended June 30, 2008

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. THE REPORTING ENTITY

The City of Santa Monica, California (City) was incorporated November 30, 1886. The City operates under a Council-Manager form of government and provides traditional municipal services as authorized by its charter as well as various enterprise services. As required by accounting principles generally accepted in the United States of America (GAAP), the accompanying basic financial statements present the activities of the City and its component units. The component units discussed below are included in the City’s reporting entity because of the significance of their operations or financial relationships with the City. None are considered major component units for reporting purposes.

As required by GAAP, these basic financial statements present the City and its component units, entities for which the City is considered to be financially accountable. The following entities are reported as blended component units because they have substantively the same governing board as the primary government.

Blended component units, although legally separate entities are, in substance, part of the City’s operations and data from these units are combined with data of the City. Additional detailed information and/or separately issued financial statements for these component units can be obtained from the City’s Director of Finance.

The Redevelopment Agency of the City of Santa Monica (Agency) was established by the City of Santa Monica City Council in 1957 pursuant to the Community Redevelopment Law of California to eliminate blight and to promote economic revitalization within designated project areas of the City.

The Parking Authority of the City of Santa Monica (Authority) was established by the City in 1950 and maintains and operates parking lots and parking structures.

The Housing Authority of the City of Santa Monica (Housing Authority) was established by the City in 1975 to address unsanitary and unsafe inhabited dwelling accommodations and the shortage of affordable safe and sanitary dwelling accommodations for persons with low incomes. Since January 1, 1989, the Housing Authority has administered the Section 8 Housing Assistance Payments Program funded by the United States Department of Housing and Urban Development on behalf of the City.

Following are brief descriptions of organizations created in 1984 as nonprofit public benefit corporations. These basic financial statements do not present these entities for which the City may meet criteria for discrete presentation because the economic resources received or held by an individual organization are not significant to the primary government. Each of the governing bodies acts on behalf of the City through members appointed by the City of Santa Monica City Council for the benefit of the citizens of Santa Monica. Separate financial statements for each can be obtained from the City’s Director of Finance.

The Pier Restoration Corporation maintains and operates the public educational and recreational facility in the City commonly known as the Santa Monica Pier.

35

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

The Bayside District Corporation, formerly the Third Street Development Corporation, combats community deterioration by developing and improving the aging areas in and around the City’s central business district and coordinating public and private sector activities.

The Santa Monica Arts Foundation promotes the arts by raising funds to finance art programs. On June 8, 1990, the City Council merged the City’s Arts Commission with the Santa Monica Arts Foundation.

B. BASIC FINANCIAL STATEMENTS

Basic financial statements consist of the following:

� Government-wide financial statements, � Fund financial statements, and � Notes to the basic financial statements.

The government-wide financial statements consist of the statement of net assets and the statement of activities and report information on all of the non-fiduciary activities of the primary government and its component units. As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. All internal balances in the statement of net assets have been eliminated, with the exception of those representing balances between the governmental activities and the business-type activities, which are presented as internal balances and eliminated in the total government column. In the statement of activities, internal service fund transactions have been eliminated; however, those transactions between governmental and business-type activities have not been eliminated. Exceptions to this general rule are charges between the City’s Water Fund and various other functions of the government. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support.

Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include public safety (police and fire), streets, public improvements, library, cultural, recreation and parks, planning and zoning, housing and community development and general administrative support services. The business-type activities of the City include water, wastewater, storm water, solid waste management, pier, civic auditorium, airport, special aviation services, cemetery, bus lines, and parking structures and lots.

The statement of activities demonstrates the degree to which the direct and indirect expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Indirect expenses are allocated based on the annual cost allocation plan. Program revenues include: 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment, and 2) grants and contributions, including special assessments that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not properly included among program revenues are reported instead as general revenues.

36

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Separate fund financial statements are provided for governmental funds, proprietary funds and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements.

C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION

The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary funds financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Fiduciary (Agency) funds report only assets and liabilities and therefore have no measurement focus.

Governmental funds financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period.The City in general considers revenues available if they are collected within 60 days. Additionally, grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. Expenditures are recorded when the related fund liability is incurred, except for unmatured interest on general long-term debt which is recognized when due, and certain compensated absences and claims and judgments which are recognized when payment is due.

Sales taxes, franchise taxes, licenses, interest, special assessments, charges for services and other miscellaneous revenue are all considered to be susceptible to accrual and have been recognized as revenue in the current fiscal period. Entitlements and shared revenues are recorded at the time of receipt or earlier if susceptible to accrual criteria. Expenditure-driven grants are recognized as revenue when the qualifying expenditures have been incurred, all other eligibility requirements have been met and are recorded at the time of receipt or earlier, and the susceptible to accrual criteria are met. All other revenue items are considered to be measured and available only when cash is received by the government.

The accounts of the City are organized on the basis of funds. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements.

The City reports the following major governmental funds:

The General Fund is the City’s primary operating fund. It accounts for all the financial resources and the legally authorized activities of the City, except those required to be accounted for in other specialized funds.

The Special Revenue Source Fund (Special Revenue Fund type) accounts for receipt and expenditure of monies collected for specific uses.

37

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

The Downtown Redevelopment Project Fund (Capital Projects Fund type) accounts for activities of the downtown redevelopment project area of the Redevelopment Agency of the City of Santa Monica.

The Earthquake Redevelopment Project Fund (Capital Projects Fund type) accounts for activities of the earthquake redevelopment project area of the Redevelopment Agency of the City of Santa Monica.

The City reports the following major proprietary funds:

The Wastewater Enterprise Fund accounts for the activities of maintaining sanitary sewer and storm drain systems within the City.

The Big Blue Bus Enterprise Fund accounts for the activities of the City’s municipal bus lines.

Additionally, the City reports the following fund types:

Permanent Funds account for resources that are legally restricted to the extent that only earnings, not principal, may be used for purposes that support specific programs.

Internal Service Funds account for vehicle operations, risk management, and information technology and communications operations that provide services to other departments of the City on a cost reimbursement basis.

Fiduciary Funds, which consist solely of Agency funds, account for assets held by the City as a trustee or as an agent for individuals or other government units. The only fiduciary fund type used by the City is the Agency Fund type. Agency funds are custodial in nature and do not involve measurement of results of operations. Such funds are unlike all other types of funds, reporting only assets and liabilities. These funds account for assets held by the City in an agency capacity for individuals or other governmental units, including development fees collected on behalf of the school district, various employee payroll deductions that will be remitted to various agencies and other assets held by the City in an agency capacity.

Enterprise funds have elected not to apply Financial Accounting Standards Board (FASB) Statements and interpretations issued after November 30, 1989. The enterprise funds apply all applicable GASB pronouncements as well as statements and interpretations of FASB, the Accounting Principles Board Opinions and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements.

Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the enterprise funds and of the City’s internal service funds are charges to customers for sales and services. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses.

38

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

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

D. ASSETS, LIABILITIES, NET ASSETS OR EQUITY

Cash and Investments

In order to maximize the flexibility of its investment program and to aid in cash budgeting, the City pools the cash of all funds, except for monies deposited with fiscal agents in accordance with related bond indentures. The cash and investments balance in each fund represents that fund's equity share of the City's cash and investment pool. As the City places no restrictions on the deposit or withdrawal of its equity from the pool by a particular fund, the pool operates like a demand deposit account for the participating funds.

Interest income earned on pooled cash and investments is allocated quarterly to the various funds based on quarter-end balances and is adjusted at year-end. Interest income on restricted cash and investments with fiscal agents is credited directly to the related fund.

The City's investments are carried at fair value, except for guaranteed investment contracts, which are carried at cost because they are not transferable and they have terms that are not affected by changes in market interest rates. The fair value of equity and debt securities is determined based on sales prices or bid-and-asked quotations from SEC-registered securities exchanges or NASDAQ dealers. The fair value of the City's share of LAIF is reported to the City on a quarterly basis. LAIF operates in accordance with laws and regulations of the State of California. The reported value of the pool is the same as the fair value of pool shares. Changes in fair value are allocated to each participating fund on an annual basis.

For purposes of the statement of cash flows, the City has defined cash and cash equivalents to be change and petty cash funds, equity in the City's cash and investment pool, and restricted, non-pooled investments with initial maturities of three months or less.

Receivables and Payables

Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as interfund receivables/interfund payables, i.e., the current portion of interfund loans, or advances to/from other funds, the non-current portion of interfund loans. All other outstanding balances between funds are reported as interfund receivables/interfund payables. Any residual balances outstanding between the governmental activities and the business-type activities are reported in the government-wide financial statements as internalbalances.

Advances between funds, as reported in the fund financial statements, are offset by a reservation of fund balance in the applicable governmental funds to indicate that they are not available for appropriation and are not expendable available financial resources.

All trade receivables are shown net of an allowance for uncollectible accounts and estimated refunds due. As of June 30, 2008 the allowance for uncollectible accounts for governmental and business-type activities is $139,883 and $203,486 respectively.

39

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Unbilled service receivables are accrued for at year-end.

Property Taxes

Assessed property values are determined on an annual basis for the period July 1 to June 30 by the Los Angeles County Assessor as of January 1. Article XIIIA of the State Constitution (Proposition 13, approved by voters in June 1978) limits the real property tax rate to 1% of the full market cash value plus rates imposed to fund indebtedness approved by the voters. Locally assessed property is appraised at the 1975-76 full cash value, the base year value, and is adjusted each year after 1975 by the change in the consumer price index, not to exceed an increase of 2%. Property is reappraised to current full value upon either a change in ownership or new construction. If property values decline below the base year value, the value is adjusted to reflect the lower value. Taxes are levied annually on July 1 and become a lien on real property at January 1. Taxes are due November 1 and February 1 and are delinquent if not paid by December 10 and April 10, respectively, at which time applicable penalties and interest are assessed.

Inventories and Prepaid Items

All materials and supplies inventories are valued at cost using the average cost method. Inventory in the General Fund is recorded as expenditures when consumed rather than when purchased.

Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both government-wide and fund financial statements.

Restricted Assets

Certain proceeds of the City's bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because they are maintained in separate bank accounts and their use is limited by applicable bond covenants.

In the absence of specific statutory provisions governing the issuance of bonds, certificates or leases, these bond monies may be invested in accordance with the ordinance, resolutions or indentures specifying the types of investments its trustees or fiscal agents may make. These ordinances, resolutions and indentures are generally more restrictive than the City's general investment policy. In no instance have additional types of investments been authorized that are not permitted by the City's general investment policy.

Capital Assets

Capital assets, which include land, buildings and improvements, equipment, and infrastructure assets (e.g., roads, sidewalks, curbs and gutters and similar items), are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. Capital assets are defined by the City as assets with an initial individual cost of $15,000 or more and an estimated useful life in excess of two years. The City defines buildings, improvements other than buildings, and infrastructure as assets with an individual cost of $100,000 or more and an estimated useful life of two years or longer. Such assets are recorded at historical cost. Donated capital assets are recorded at estimated fair market value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized.

40

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. No interest was capitalized during the year ended June 30, 2008.

Capital assets of the City are depreciated using a straight-line method over the following estimated useful lives:

Assets Years Buildings 5 to 85 Improvements other than buildings 2 to 50 Infrastructure 15 to 75 Utility systems 20 to 100 Machinery and equipment 2 to 30

The City has elected not to capitalize its collection of artwork. GASB 34 waives the requirement for artwork capitalization if the collection meets all the following conditions:

� The collection is held for reasons other than financial gain. � The collection is protected, kept unencumbered, cared for, and preserved. � The collection is subject to an organizational policy requiring that the proceeds from sales of

collection items be used to acquire other items for collections.

The City’s artwork collection meets the above criteria and therefore qualifies for the exemption from the capitalization requirement. The collection includes both permanent and portable artworks, artworks integrated into overall projects, murals, and stand-alone permanently installed paintings and sculptures, art integrated into the design of public works projects (not stand-alone), and a contemporary collection of almost 100 portable artworks which are on display in public areas of City facilities.

Lease Obligations

The City leases various assets under both operating and capital lease agreements. In the government-wide and proprietary funds financial statements, capital leases and the related lease obligations are reported as liabilities in the applicable governmental activities or proprietary funds statement of net assets.

Compensated Absences

It is the City's policy to permit employees to accumulate earned but unused vacation and sick leave benefits up to a maximum determined by bargaining unit agreements. Employees are paid 100% of their accumulated vacation when they terminate employment for any reason. All vacation is accrued when incurred in the government-wide and proprietary fund financial statements. A liability is reported in the governmental funds only if they have matured, for example, as a result of employee resignations or retirements. Additionally, employees of the United Transportation Union are able to exchange unused sick days balances for equal dollars of medical insurance premiums. In order to qualify the employee must have 10 years of service at retirement and at least 50 days of unused sick leave.

41

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Long-Term Liabilities

In the government-wide financial statements and proprietary funds financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net assets. Initial-issue bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. The difference between the reacquisition price of refunding bonds and the net carrying amount of refunded debt (deferred amount on refunding) is amortized over the shorter of the lives of the refunding debt or remaining life of the refunded debt. Bonds payable are reported net of the unamortized portion of applicable premium, discount or deferred amount on refunding. Bond issuance costs, including underwriters' discount, are reported as deferred bond issuance costs. Amortization of bond premiums or discounts, issuance costs and deferred amounts on refunding are included in interest expense when due.

In the governmental funds financial statements, bond premiums, discounts and issuance costs are recognized during the period issued. The face amount of debt issued is reported as other financing sources. Premiums received are reported as other financing sources, while discounts are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. Interest and principal payments are reported as debt service expenditures.

Net Assets and Fund Equity

In the government-wide financial statements and proprietary funds financial statements, net assets are reported in three categories: net assets invested in capital assets, net of related debt, restricted net assets and unrestricted net assets. Net assets invested in capital assets, net of related debt represents capital assets less accumulated depreciation less outstanding principal of related debt. Net assets invested in capital assets, net of related debt does not include the unspent proceeds of capital debt. Restricted net assets represent net assets restricted by parties outside of the City (such as creditors, grantors, contributors, laws and regulations of other governments) and include unspent proceeds of bonds issued to acquire or construct capital assets. The nonexpendable portion of permanent funds is reported as a component of restricted net assets. The City's other restricted net assets are temporarily restricted (ultimately expendable) assets. All other net assets are considered unrestricted.

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

Self-Insurance Program

The City has self-insurance programs to provide for general liability, bus and automobile liability, and workers' compensation claims. These activities are accounted for in self-insurance internal service funds.

Premiums are charged to individual funds and are designed to cover future expenses. The City's Risk Manager oversees the self-insurance programs. It is his or her duty to ensure that programs are

42

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

operated in accordance with City policies. The City’s Risk Manager also provides budget guidance and case reserves and claims analysis. It is the City's intent to maintain cash reserves in the self-insurance funds equal to or greater than estimated losses.

Use of Estimates

The preparation of basic financial statements in conformance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the basic financial statements and accompanying notes. Actual results may differ from those estimates.

(2) BUDGETARY AND LEGAL COMPLIANCE

The City Council is required to adopt an annual budget resolution by June 30 each fiscal year for the General Fund and each special revenue fund (except the Rent Control and Asset Seizure Funds). The City Council also approves any revisions that alter the total expenditures of any major object or program category (salaries, supplies including capital outlay or capital improvements) by department within the same fund (the legal level of budgetary control).

The City Council also approves annual operating budgets for the City’s proprietary, capital projects and internal service funds to facilitate management evaluation and control.

The budget is prepared on a non-GAAP budgetary basis, which considers encumbrances outstanding at year end as an expenditure of that year. Encumbrances outstanding at the beginning of a fiscal year, which were recognized as budgetary expenditures in the prior year, are recognized as GAAP-basis expenditures but not as budgetary expenditures unless re-appropriated. It is the City’s policy to only re-appropriate capital encumbrances and unencumbered balances of specific capital appropriations. In addition, capital leases are budgeted on a cash basis, whereas GAAP requires the full amount of the leased asset purchased to be shown as an expenditure of the current year. Appropriations in governmental funds outstanding at year end lapse, except for encumbered amounts, for which fund balances are reserved at year-end for governmental funds.

A Comprehensive Annual Financial Report Budget Supplement is prepared to reconcile expenditures/expenses at the legal level of control to the summarized amounts presented in the Comprehensive Annual Financial Report and can be obtained from the Finance Department.

43

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(3) RECONCILIATION OF FUND FINANCIAL STATEMENTS TO GOVERNMENT-WIDE FINANCIAL STATEMENTS

Amounts reported for governmental activities in the government-wide statement of net assets are different from those reported for governmental funds in the fund balance sheet. The following provides a reconciliation of those differences:

Assets

Total governmental

funds

Long-term assets and

liabilities (1)

Total governmental

activities internal service

funds (2)

Otheradjustments

and eliminations (3)

Statement of net assets totals

Cash and investments 444,159,032$ — 38,783,727 — 482,942,759 Receivables (net, where applicable,

of allowances for uncollectibles):Accounts 7,569,371 — 5,421 — 7,574,792 Notes 62,702,984 — — — 62,702,984 Property taxes 5,272,603 — — — 5,272,603 Interest 3,282,011 — 391,191 — 3,673,202 Other governments 14,513,046 — — — 14,513,046

Internal balances — — 527,261 11,839,657 12,366,918 Due from other funds 3,402,840 — — (3,402,840) — Inventory 938,999 — — — 938,999 Prepaids 865,899 — 26,296 — 892,195 Cash with fiscal agent 30,055,545 — — — 30,055,545 Capitalized lease receivable 1,120,000 — — (1,120,000) — Advances to other funds 51,442,493 — — (51,442,493) — Bond issuance costs, net — 2,740,432 — — 2,740,432 Capital assets — 724,319,157 625,455 — 724,944,612

Total assets 625,324,823$ 727,059,589 40,359,351 (44,125,676) 1,348,618,087

Liabilities and Fund Balances/Net AssetsLiabilities:

Accounts payable 11,742,998$ — 189,570 — 11,932,568 Accrued liabilities 6,626,568 1,242,000 213,742 — 8,082,310 Accrued interest payable — 3,823,218 — — 3,823,218 Short-term loan payable 400,000 — — — 400,000 Contracts payable (retained percentage) 1,864,610 — — — 1,864,610 Due to other funds 3,402,840 — — (3,402,840) — Due to other governments 3,859,917 — — — 3,859,917 Deferred revenue 130,884,052 — — (27,304,208) 103,579,844 Deposits payable from restricted assets 800,682 — — — 800,682 Compensated absences due within one year — 4,420,073 — — 4,420,073 Compensated absences due in more than

one year — 5,174,471 — — 5,174,471 Claims payable due within one year — — 5,837,864 — 5,837,864 Claims payable due in more than one year — — 19,278,549 — 19,278,549 Long-term debt due within one year — 8,375,000 — — 8,375,000 Long-term debt due in more than one year — 155,497,382 — — 155,497,382 Advances from other funds 39,602,836 — — (39,602,836) —

Total liabilities 199,184,503 178,532,144 25,519,725 (70,309,884) 332,926,488 Total fund balances/net assets 426,140,320 548,527,445 14,839,626 26,184,208 1,015,691,599

Total liabilities and fund balance/net assets 625,324,823$ 727,059,589 40,359,351 (44,125,676) 1,348,618,087

44

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

1)

953,312,341$ Less accumulated depreciation (228,993,184)

724,319,157

Bond issue costs to be amortized over the life of the debt 2,740,432

OPEB costs are not due and payable in the current period and, therefore, (1,242,000)are not reported in the balance sheet

Tax allocation bonds (75,570,000)$General obligation bonds (20,140,000) Revenue bonds (71,900,000) Deferred loss on refunding 3,791,611 Accrued interest on long-term debt (3,823,218) Unamortized premium on long-term debt (268,476) Unamortized issue discount on long-term debt 214,483 Employee compensated absences (9,594,544)

Total long-term liabilities (177,290,144)548,527,445$

2)

14,312,365$

527,261 14,839,626$

3) Other adjustments and eliminations:

(1,120,000)$

27,304,208 26,184,208$

The interfund capitalized lease receivable recorded on the balance sheet buteliminated on the statement of net assets.

Other long-term assets are not available to pay for current period expendituresand, therefore, are deferred in the funds and recognized as revenue in thestatement of activities.

Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in the balance sheet. Capital assets of internal service funds of $625,455, net of accumulated depreciation, are not included in this amount.

Long-term liabilities are not due and payable in the current period and,therefore, are not reported in the balance sheet.

Internal service funds are used by management to charge the costs ofinformation technology and communications operations, self-insurancecomprehensive, auto and workers' compensation to individual funds. The assetsand liabilities of these internal service funds are included in the governmentalactivities on the statement of net assets.

Adjustments for Internal Service Funds are necessary to "close" those funds byrecording charges to and payments from business-type activities to completelycover the Internal Service Funds' costs for the year.

45

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Amounts reported for business-type activities in the government-wide statement of net assets are different from those reported for enterprise funds in the fund statement of net assets. The following provides a reconciliation of those differences:

Total business- OtherTotal type internal adjustments Statement of

enterprise service and net assetsfunds funds (1) eliminations totals

Cash and investments 74,819,633$ 28,297,761 — 103,117,394Receivables (net, where applicable, of allowances for uncollectibles):

Accounts 21,570,743 77,208 — 21,647,951Interest 930,208 249,806 — 1,180,014 Internal balances — (527,261) (11,839,657) (12,366,918)

Inventory 1,260,677 67,471 — 1,328,148 Prepaids 102,450 — — 102,450 Restricted cash and investments 20,941,196 — — 20,941,196Restricted cash with fiscal agent 535,909 — — 535,909 Due from other governments, restricted 9,654 — — 9,654 Advances to other funds 6,603,197 — (6,603,197) — Bond issuance costs, net 469,222 — — 469,222 Capital assets 403,897,681 13,117,144 — 417,014,825

Total assets 531,140,570 41,282,129 (18,442,854) 553,979,845

Accounts payable 9,312,042$ 281,471 — 9,593,513 Accrued liabilities 5,366,105 173,657 (2,513,834) 3,025,928 Accrued interest payable 564,476 — — 564,476 Contracts payable (retained percentage) 91,041 — — 91,041 Deferred revenue 4,332,035 — — 4,332,035 Liabilities payable from restricted assets 7,853,854 — — 7,853,854 Advances from other funds 18,442,854 — (18,442,854) — Compensated absences due within one year — — 1,521,158 1,521,158 Compensated absences due in more than one year — — 992,676 992,676 Claims payable due within one year — 455,605 — 455,605 Claims payable due in more than one year — 1,485,033 — 1,485,033 Long-term debt due within one year 1,759,830 — — 1,759,830 Long-term debt due in more than one year 26,314,702 — — 26,314,702

Total liabilities 74,036,939 2,395,766 (18,442,854) 57,989,851

457,103,631$ 38,886,363 — 495,989,994

1)

39,413,624$

(527,261)$

Adjustment for Internal Service Funds are necessary to "close" those funds for charges to and payments from participating governmental-type activities to completely cover the Internal Service Funds' costs for the year.

Internal service funds are used by management to charge the costs of vehiclemanagement, information technology and risk management to individual funds. The assets and liabilities of the vehicle management and self-insurance bus internal service funds are included in business-type activities in the statement of net assets.

Net Assets

Assets

Liabilities

46

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(4) PRIOR PERIOD ADJUSTMENTS

During the year ended June 30, 2008, the City discovered (a) a capital asset that had been sold in a previous period and (b) discovered a receivable that should have been recorded as an expenditure in a previous period.

The following schedules summarize the effects of the prior period adjustments to the government-wide financial statements and fund financial statements:

Government-wide financial statements:Governmental

ActivitiesNet assets at beginning of yearas previously reported 1,022,448,717$

(a) Adjustment to record capital asset disposal in a previous fiscal year (4,400,000)

(b) Adjustment to eliminate receivable from other governments and record expendituresmade in a previous fiscal year (4,039,753)

Net assets at beginning of year as restated 1,014,008,964$

Fund financial statements:EarthquakeRecovery

RedevelopmentGovernmental funds: Project Fund

Fund balance at beginning of yearas previously reported 72,249,332$

(b) Adjustment to eliminate receivable from other governments and record expendituresmade in a previous fiscal year (4,039,753)

Fund balance at beginning of year as restated 68,209,579$

47

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(5) CASH AND INVESTMENTS

Cash and investments as of June 30, 2008 are classified in the accompanying financial statements as follows:

Statement of net assets:Cash and investments 586,060,153$ Restricted cash and investments 20,941,196Restricted cash with fiscal agent 30,591,454

Fiduciary funds:Restricted cash and investments 3,761,030

Total cash and investments 641,353,833$

Cash and investments as of June 30, 2008 consist of the following:

Cash on hand 56,182$ Deposits with financial institutions (3,584,337)Investments 644,881,988

Total cash and investments 641,353,833$

Investments Authorized by the California Government Code and the City’s Investment Policy

The table below identifies the investment types that are authorized for the City by the California Government Code and the City’s investment policy. The table also identifies certain provisions of the California Government Code (or the City’s investment policy, if more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustees that are governed by the provisions of debt agreements of the City, rather than the general provisions of the California Government Code or the City’s investment policy.

Authorized *Maximum *MaximumInvestment types by investment *Maximum percentage Investment

authorized by state law policy maturity of portfolio in one issuer Local agency bonds Yes 5 years None NoneU.S. Treasury obligations Yes 5 years None NoneU.S. agency securities Yes 5 years None 50% State of California obligations Yes 5 years None NoneCA Local Agency obligations Yes 5 Years None NoneBanker's acceptances Yes 180 days 10% 10% Commercial paper Yes 270 days 15% 10% Negotiable certificates of deposit Yes 5 years 30% 10% Repurchase agreements Yes 1 year None None

Reverse repurchase agreements Yes 92 days 20% of base value None

48

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Authorized *Maximum *MaximumInvestment types by investment *Maximum percentage Investment

authorized by state law policy maturity of portfolio in one issuer Corporate medium-term notes Yes 5 years 30% NoneMutual funds Yes N/A 20% 10% Money market mutual funds Yes N/A 20% 10% Mortgage pass-through securities Yes 5 years 20% NoneTime deposits Yes 5 years None NoneCollateralized certificates of deposit Yes 5 years None NoneCounty pooled investment funds Yes N/A None NoneLocal Agency Investment Fund (LAIF) Yes N/A None NoneJPA pools (other investment pools) Yes N/A None None

* Based on state law requirements or investment policy requirements, whichever is more restrictive.

Investments Authorized by Debt Agreements

Investments of debt proceeds held by bond trustees are governed by provisions of the debt agreements, rather than the general provisions of the California Government Code or the City’s investment policy. The table below identifies the investment types that are generally authorized for investments held by bond trustees. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk.

Maximum Maximum Authorized Maximum percentage Investment

investment type maturity allowed in one issuer U.S. Treasury obligations None None NoneFederal Housing Administration debentures None None NoneU.S. agency securities None None NoneTime deposits None None NoneUnsecured certificates of deposit 180 days None NoneBanker's acceptances 180 days None NoneState obligations None None NoneRepurchase agreements 1 year None NonePre-refunded municipal obligations None None NoneCommercial paper 270 days None NoneMoney market mutual funds None None NoneInvestment contracts 30 years None None

49

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Investments Authorized by Actions of the City Council

Cemetery and Mausoleum Perpetual Care funds are received from cemetery users for the perpetual care of cemetery grounds and of the mausoleum. The funds are legally restricted to the extent that only earnings, and not principal, can be used for restricted perpetual care purposes. These funds represent the accumulation of unspent monies from non-government sources and are not considered by the City to constitute “surplus funds” of a local government. Accordingly, these funds are not considered by the City to be subject to the provisions of the California Government Code Section 53601 or the City’s investment policy. These funds have been invested per instructions of the City Council. The table below identifies the investment types generally authorized for these investments. Current City Council instructions limit amount invested in equities (common stock) to 60% of the total portfolio with the balance to be invested in fixed income securities. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk.

Maximum Maximum Authorized Maximum percentage Investment

investment type maturity allowed in one issuer U.S. Treasury obligations None None NoneU.S. agency securities None None NoneCommon stock None 60% NoneCorporate bonds None None None

Disclosures Relating to Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The fair value of callable securities is also sensitive to market changes in that if interest rates decrease between the time of purchase and the call date, the likelihood that a bond will be called and reinvested at a lower interest rate increases. One of the ways that the City manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.

Information about the sensitivity of the fair values of the City’s investments (including investments held by bond trustee and Charnock funds held jointly with another party in an escrow account) to market interest rate fluctuations is provided by the following table that shows the distribution of the City’s investments by maturity. For purposes of the schedule shown below, any callable securities are assumed to be held to maturity.

50

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Investment type Amount12 Months

or Less13 to 24Months

25 to 60Months

More than60 Months

Held by City:Federal agency securities 432,777,487$ 74,665,476 128,050,965 230,061,046 — Corporate medium term notes 96,531,504 22,108,825 14,069,349 60,353,330 — State investment pool 39,912,581 39,912,581 — — — Money market funds 45,602,942 45,602,942 — — —

Held by others:Treasury notes/ bonds 1,193,880 — 342,214 — 851,666 Federal agency securities 5,815,833 5,665,325 150,508 Corporate medium term notes 1,345,192 83,978 — 1,026,028 235,186 Municipal Bonds 147,681 — — — 147,681 Common stock 4,110,026 4,110,026 — — — Money market funds 17,444,862 17,444,862 — — —

Total 644,881,988$ 209,594,015 142,462,528 291,590,912 1,234,533

Remaining maturity (in months)

Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations

The City’s investments as of June 30, 2008 (including investments held by bond trustees) do not include any investments that are highly sensitive to interest rate fluctuations to a greater degree than already indicated in the information provided above.

Disclosures Relating to Credit Risk

Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the California Government Code, the City’s investment policy, or debt agreements, and the actual rating as of year end for each investment type.

51

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Investment type Amount

Minimum legal rating AAA AA+ AA AA- A+ A BBB+ Not rated

Federal agency securities 432,777,487$ N / A 432,777,487 — — — — — — — Corporate medium term notes 96,531,504 A 12,279,419 2,027,580 — 52,169,199 10,800,850 19,254,456 — — State investment pool 39,912,581 N / A — — — — — — — 39,912,581 Money market funds 45,602,942 AAA 45,602,942 — — — — — — —

614,824,514 Held by others:

Treasury bonds 1,193,880 N / A 1,193,880 — — — — — — — Federal agency securities 5,815,833 N / A 5,815,833 — — — — — — — Corporate medium term notes 1,345,192 N / A 237,233 150,503 83,978 492,694 148,676 — 232,108 — Municipal Bonds 147,681 N / A — — — 147,681 — — — — Common stock 4,110,026 N / A — — — — — — — 4,110,026 Money market funds 17,444,862 AAA 17,444,862 — — — — — — —

644,881,988$ 515,351,656 2,178,083 83,978 52,809,574 10,949,526 19,254,456 232,108 44,022,607

52

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

The Cemetery and Mausoleum perpetual care funds are funds held in trust by the City to pay for perpetual care costs at the City-owned cemetery. Investment of these funds is not covered by the State Government Code. The guidelines for investment of these funds are set by the City Council, and the funds are managed by an outside investment firm using the guidelines.

Concentration of Credit Risk

In regards to limitations on the amount that can be invested in any one issuer, the City’s investment policy generally follows stipulations by the California Government Code. However, the City’s policy adds an additional stipulation that no more than 50% of the portfolio may be invested in a single issuer. Investments in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represent 5% or more of total City investments (excluding investments held by others) are as follows:

Issuer Investment type Reported amountFNMA Federal agency securities 79,116,382$ 12.9 %Federal Home Loan Mortgage Corporation Federal agency securities 118,495,659 19.3Federal Home Loan Bank Federal agency securities 205,987,013 33.5

% of Investment

Custodial Credit Risk

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and the City’s investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure City deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. As of June 30, 2008, City investments in the following investment types were held by the same broker-dealer (counterparty) that was used by the City to buy the securities:

Investment type Reported amountFederal agencies 5,332,850$

For investments identified herein as held by bond trustee, the bond trustee, under direction of the City/Redevelopment Agency/Parking Authority selects the investment under the terms of the applicable trust agreement, acquires the investment, and holds the investment on behalf of the applicable agency.

53

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

Investment in State Investment Pool

The City is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by the California Government Code under the oversight of the Treasurer of the State of California. The fair value of the City’s investment in this pool is reported in the accompanying financial statements at amounts based upon the City’s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis.

(6) NOTES RECEIVABLE

Notes receivable related to governmental activities total $62,702,984 as follows:

Balance at June 30, 2007 Increases Decreases

Balance at June 30, 2008

General FundAmerican Youth Hostel (a) 200,000$ — 40,000 160,000 Mountain View Mobile Inn Residents Assoc. (b) 124,977 — — 124,977 Step Up on Second (c) 1,331,252 — — 1,331,252Employee housing (d) 1,300,000 — — 1,300,000

Total General Fund 2,956,229 — 40,000 2,916,229Special Revenue Source Fund

Community Corporation of Santa Monica (e) 6,774,763 — — 6,774,763Community Corporation of Santa Monica (f) 3,350,000 — — 3,350,000

Total Special Revenue Source Fund 10,124,763 — — 10,124,763Downtown Redevelopment Fund

Community Corporation of Santa Monica (g) 1,055,953 188,047 — 1,244,000Community Corporation of Santa Monica (h) 679,000 — — 679,000

Total Downtown Redevelopment Fund 1,734,953 188,047 — 1,923,000Earthquake Recovery Redevelopment Fund

Community Corporation of Santa Monica (i) 318,307 — — 318,307 Community Corporation of Santa Monica (j) 398,362 — — 398,362

Total Earthquake Recovery Redevelopment 716,669 — — 716,669 Non-major Governmental Funds

Community Corporation of Santa Monica (k) 681,952 — — 681,952 Community Corporation of Santa Monica (l) 2,900,000 — — 2,900,000Habitat for Humanity - Los Angeles (m) 523,685 51,315 — 575,000 Community Corporation of Santa Monica (n) 4,837,693 700,000 — 5,537,693Low- and moderate-income housing (DRPLP) (o) 200,000 — — 200,000 Low- and moderate-income housing (DRPLP) (o) 200,000 — — 200,000 Low- and moderate-income housing (p) 1,441,945 — 140,260 1,301,685Low- and moderate-income housing (q) 1,152,003 47,997 — 1,200,000Low- and moderate-income housing (r) 6,745,807 — — 6,745,807Low- and moderate-income housing (s) 924,478 — — 924,478 Low- and moderate-income housing (t) 5,811,096 1,358,904 — 7,170,000Community Corporation of Santa Monica (u) 3,157,144 — — 3,157,144Low- and moderate-income housing (v) 841,600 — — 841,600 Low- and moderate-income housing (w) 2,733,631 — — 2,733,631MERL Program (x) 14,254,030 — 1,446,947 12,807,083Low income senior housing (y) 46,250 — — 46,250

Total non-major governmental funds 46,451,314 2,158,216 1,587,207 47,022,323Total notes receivable 61,983,928$ 2,346,263 1,627,207 62,702,984

54

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

General Fund

a. On April 12, 1990, the City loaned $500,000 from the General Fund, interest free, to American Youth Hostel, Inc. to assist in financing construction of a 200-bed international youth hostel facility. The thirteenth of seventeen installment loan payments was received in 2008; the remaining principal balance at June 30, 2008 is $160,000.

b. A promissory note in the amount of $290,000, interest free, has been executed with Mountain View Mobile Inn Residents Association for pre-development loan funds to assist in the acquisition and subsequent conversion of the mobile home park located at 1930 Stewart Street to tenant ownership. As of June 30, 2008, $124,977 had been disbursed to the borrower.

c. A promissory note in the amount of $1,331,252 was executed with Step Up on Second, L.P., a California limited partnership, for the construction of a thirty-six bed permanent housing project for mentally disabled low-income persons. The project is located at 1328 Second Street in Santa Monica. The original promissory note dated September 16, 1993 was amended, superseded and replaced in full by a promissory note dated September 9, 1996, the unpaid balance is due not later than September 16, 2043, and may be extended for a period of up to 25 years. Interest has been forgiven and the principal balance as of June 30, 2008 is $1,331,252.

d. On April 12, 2006, the City made a housing loan to P. Lamont Ewell, City Manager, in the amount of $1,300,000 for the purchase of a home within the City limits. The loan is secured by a deed of trust and has a term of 30 years with an interest rate of 4.7%, subject to annual adjustments as set forth in the note, not to exceed 4.855%. The outstanding principal, together with any outstanding interest, is due and payable in full on or before the 30-year anniversary date of the loan. Monthly interest payments are due on the first calendar day of each month. The City Manager must repay any outstanding balance of the loan within two years of ending employment with the City. As of June 30, 2008, the total outstanding balance of the loan was $1,300,000.

Special Revenue Source Special Revenue Fund

e. A revised promissory note in the amount of $6,774,763 was executed with Pacific Court Limited Partnership, c/o Community Corporation of Santa Monica, for an affordable housing project located at 2209 Main Street. Forty-three low- and moderate-income housing units are to be constructed on the site. This is a 55-year loan with 1% interest rate per annum. Payments are to be made from residual receipts. At June 30, 2008, $6,774,763 had been disbursed to the borrower.

f. A revised promissory note in the amount of $3,350,000 was executed with 1424 Broadway Apartments Limited Partnership, c/o Community Corporation of Santa Monica, for an affordable housing project located at 1424 Broadway/1512 15th Street. This is a 55-year loan with 3% interest rate per annum. Payments are to be made from residual receipts. At June 30, 2008, $3,350,000 had been disbursed to the borrower.

Downtown Redevelopment Fund

g. Promissory notes in the amount of $4,458,033, $1,691,967 and $950,000 for a total of $7,100,000 were executed with 26th and Santa Monica Family Housing Limited Partnership, c/o Community Corporation of Santa Monica, for an affordable housing project located at 1349 26th Street. Forty-four low- and moderate-incoming housing units are to be constructed on the site. They are 55-year

55

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

loans with 3% interest rate per annum. Payments are to be made from residual receipts. At June 30, 2008, $1,244,000 had been disbursed to the borrower.

h. A promissory note in the amount of $4,234,507 was executed with The Tahiti, L.P. c/o Community Corporation of Santa Monica for an affordable housing project located at 2411-2423 Centinela Avenue. The loan is for the construction of 36 affordable rental housing units. This is a 55-year loan with a simple interest rate of 3% per annum. Payments are to be made from residual receipts. As of June 30, 2008, $679,000 had been disbursed to the borrower.

Earthquake Recovery Redevelopment Fund

i. Promissory notes in the amount of $4,458,033, $1,691,967 and $950,000 for a total of $7,100,000 were executed with 26th and Santa Monica Family Housing Limited Partnership, c/o Community Corporation of Santa Monica, for an affordable housing project located at 1349 26th Street. Forty-four low- and moderate-income housing units are to be constructed on the site. They are 55-year loans with 3% interest rate per annum. Payments are to be made from residual receipts. At June 30, 2008, $318,307 had been disbursed to the borrower.

j. A promissory note in the amount of $4,234,507 was executed with The Tahiti, L.P. c/o Community Corporation of Santa Monica for an affordable housing project located at 2411-2423 Centinela Avenue. The loan is for the construction of 36 affordable rental housing units. This is a 55-year loan with a simple interest rate of 3% per annum. Payments are to be made from residual receipts. As of June 30, 2008, $398,362 had been disbursed to the borrower.

Non-major Governmental Funds

k. On April 17, 2000, the City executed a promissory note with Community Corporation of Santa Monica for the construction of a twenty unit, large family, affordable housing complex located at 708 Pico Blvd. $579,000 is funded from the City’s Pico Neighborhood Trust Fund, while $221,000 is funded from the City-wide CDBG Fund. This note is a 0% loan to be repaid from residual receipts of the project and is due on October 22, 2053. At June 30, 2008, the outstanding balance is $681,952.

l. A revised promissory note in the amount of $2,900,000 was executed with 1424 Broadway Apartments Limited Partnership, c/o Community Corporation of Santa Monica, for an affordable housing project located at 1424 Broadway/1512 15th Street. This is a 55-year loan with 3% interest rate per annum. Payments are to be made from residual receipts. At June 30, 2008, $2,900,000 had been disbursed to the borrower.

m. A promissory note in the amount of $575,000 was executed with Habitat for Humanity – Los Angeles for an affordable housing project located at 2018 Nineteenth Street. This loan is for the acquisition of a vacant parcel of land where Habitat will build up to six new ownership units that will be sold to very low income buyers. This is a 0% loan with the principal amount due and payable after a two-year deferral period. At June 30, 2008, $575,000 had been disbursed to the borrower.

n. Promissory notes in the amount of $4,458,033, $1,691,967 and $950,000 for a total of $7,100,000 were executed with 26th and Santa Monica Family Housing Limited Partnership, c/o Community Corporation of Santa Monica, for an affordable housing project located at 1349 26th Street. Forty-

56

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

four low- and moderate-income housing units are to be constructed on the site. They are 55-year loans with 3% interest rate per annum. Payments are to be made from residual receipts. At June 30, 2008, $3,845,726 and $1,691,967 respectively, had been disbursed to the borrower.

o. Two promissory notes, for $200,000 each, were executed with the owners of certain rental properties. The notes were for five years at 3% interest per year, and could be renewed for five additional five-year terms as long as the rental properties are maintained for low-and moderate-income households. The first note was due December 22, 1993, and has been extended for the third time to December 22, 2008 under the same terms and conditions; the second note was due December 29, 1994, and has been extended to December 29, 2019 under the same terms and conditions. The promissory notes are payable in full upon sale or transfer of the property (whichever occurs first) or upon expiration of the term of the promissory notes. Upon payment to the City, proceeds must be paid to the State of California as repayment for two $200,000 State Department of Housing and Urban Development Deferred Payment Rehabilitation Loan Program (DPRLP) loans. As these DPRLP loans are currently due, they have been reported as short-term loans payable on the statement of net assets. There were no changes in the loan balances during the year ended June 30, 2008.

p. These represent non-interest bearing, limited appreciation and shared appreciation loans made pursuant to TORCA Program guidelines to assist low- and moderate-income households purchase their rental units. As of June 30, 2008, the outstanding balances of such loans total $1,301,685.

q. A promissory note in the amount of $1,200,000 was executed with Ocean Park Community Center for congregate housing and emergency shelter for very low-income use, located at 1751 Cloverfield Blvd. This loan is for the acquisition and rehabilitation of the site. This is a 55-year loan with 5.98% interest rate per annum with a two-year deferral period. Payments are to be made from residual receipts. At June 30, 2008, $1,200,000 had been disbursed to the borrower.

r. A revised promissory note in the amount of $6,745,807 was executed with Community Corporation of Santa Monica for an affordable housing project located at 3021-3031 Santa Monica Blvd. This loan is for the acquisition, predevelopment expenses and construction of future low- and moderate-income housing. This is a 0% loan with the principal amount due and payable after a two-year deferral period. At June 30, 2008, $6,745,807 had been disbursed to the borrower.

s. A promissory note in the amount of $1,161,185 was executed with Community Corporation of Santa Monica for an affordable housing project located at 1342 Berkeley Street. This loan is for the acquisition and predevelopment expenses for future low- and moderate-income housing. This is a 0% loan with the principal amount due and payable after a two-year deferral period. At June 30, 2008, $924,478 had been disbursed to the borrower.

t. Two promissory notes, one in the amount of $5,870,000 and one for $1,300,000 were executed with Step up on Fifth, L.P. for an affordable housing project located at 1548 Fifth Street. These loans are for the acquisition and construction of the site. This is a 55-year loan with a simple interest rate of 4% per annum. Payments are to be made from residual receipts. At June 30, 2008, $5,870,000 and $1,300,000 respectively, had been disbursed to the borrower.

u. A promissory note in the amount of $4,234,507 was executed with The Tahiti, L.P. c/o Community Corporation of Santa Monica for an affordable housing project located at 2411-2423 Centinela Avenue. The loan is for the construction of 36 affordable rental housing units. This is a 55-year

57

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

loan with a simple interest rate of 3% per annum. Payments are to be made from residual receipts. As of June 30, 2008, $3,157,144 had been disbursed to the borrower.

v. A promissory note in the amount of $841,600 was executed with Community Corporation of Santa Monica for low- and moderate-income housing at 2020-2030 Cloverfield Blvd. This is a 35-year loan with 10.44% interest rate per annum. At June 30, 2008, $841,600 had been disbursed to the borrower.

w. A promissory note in the amount of $2,742,500 was executed with the Santa Monica Housing Partners, L.P for the development of twenty units of affordable senior housing at 1458 14th Street. The loan represents land acquisition financing that achieves site control. The interest rate is 0%. Repayment is deferred during the two year term of the agreement with an option to extend the agreement for eighteen months. At June 30, 2008, the outstanding balance is $2,733,631.

x. The January 17, 1994 Northridge Earthquake resulted in damaged multifamily residences in the City of Santa Monica. To facilitate repair of damaged multifamily residences, the U.S Department of Housing and Urban Development awarded the City of Santa Monica a total of $33,388,000 in emergency funds to finance the City's Multifamily Earthquake Repair Loan (MERL) Program.

The funds were allocated as follows: $2,027,000 – HOME Program Emergency Supplemental Fund, $6,361,000 – HOME Program Presidential Contingency Fund, and $25,000,000 – CDBG Program Emergency Supplemental Fund.

As of June 30, 2008, the following summarizes the total loan amount authorized, amount disbursed since inception of the loan program, the amounts repaid by the borrowers, and the loan balances:

Loan amount Loan amount Amounts Loan balance atFund authorized disbursed repaid/forgiven June 30, 2008

Miscellaneous Grants $ 7,790,695 7,790,695 2,570,323 5,220,372 CDBG 21,739,088 21,727,929 14,141,218 7,586,711

Total $ 29,529,783 29,518,624 16,711,541 12,807,083

y. The Redevelopment Housing Trust Fund, formerly known as “CHARP” provides funds to eligible borrowers in the form of deferred payment loans to make up the financial gap between available non-program resources, including the borrower’s equity and private financing, and the limited equity cooperatives. At June 30, 2008, loans totaling $46,250 are outstanding.

58

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

(7) CAPITAL ASSETS

Capital assets activity for the primary government for year ended June 30, 2008 is as follows:

Balance atJuly 1, 2007 as restated Increases

Decreases(1)

Transfers(1)

Balance atJune 30, 2008

Governmental activities:

Capital assets, not being depreciated:Land 112,070,378$ 33,170,130 — — 145,240,508 Land held under easement 72,066,823 171,000 — — 72,237,823 Construction in progress 23,236,388 25,005,482 (395,836) (4,539,297) 43,306,737

Total capital assets, not being depreciated 207,373,589 58,346,612 (395,836) (4,539,297) 260,785,068

Capital assets, being depreciated:Buildings 237,269,287 1,406,215 (1,138,561) 16,317,332 253,854,273 Improvements other than buildings 91,707,172 1,022,537 (1,431,384) (14,104,263) 77,194,062 Utility Systems 3,575,000 173,272 — 1,450,296 5,198,568 Machinery and equipment 33,886,085 902,973 (2,071,710) 323,932 33,041,280 Infrastructure 323,765,332 740,984 (281,488) 552,000 324,776,828

Total capital assets being depreciated 690,202,876 4,245,981 (4,923,143) 4,539,297 694,065,011

Less accumulated depreciation for:Buildings (32,467,630) (6,333,244) 737,123 (5,167,548) (43,231,299) Improvements other than buildings (41,025,352) (2,855,140) 927,544 5,236,514 (37,716,434) Utility Systems (128,104) (75,212) — — (203,316) Machinery and equipment (20,785,144) (2,653,517) 1,987,996 (106,796) (21,557,461) Infrastructure (117,121,989) (10,225,240) 112,442 37,830 (127,196,957)

Total accumulated depreciation (211,528,219) (22,142,353) 3,765,105 — (229,905,467) Total capital assets, being depreciated, net 478,674,657 (17,896,372) (1,158,038) 4,539,297 464,159,544

Subtotal governmental activities 686,048,246 40,450,240 (1,553,874) — 724,944,612

Business-type activities:

Capital assets, not being depreciated:Land 69,634,413 3,000,000 — — 72,634,413 Construction in progress 30,426,373 23,500,964 (248,616) (10,793,760) 42,884,961

Total capital assets, not being depreciated 100,060,786 26,500,964 (248,616) (10,793,760) 115,519,374

Capital assets, being depreciated:Buildings 59,279,645 554,779 (2,550,181) 10,656,602 67,940,845 Improvements other than buildings 35,934,110 857,487 (2,445,906) (11,124,431) 23,221,260 Machinery and equipment 114,251,058 9,995,639 (753,603) 2,938,661 126,431,755 Infrastructure 254,442,114 2,423,254 (589,281) 8,322,928 264,599,015

Total capital assets being depreciated 463,906,927 13,831,159 (6,338,971) 10,793,760 482,192,875

Less accumulated depreciation for:Buildings (19,929,030) (2,703,645) 1,616,326 (7,406,751) (28,423,100) Improvements other than buildings (27,293,493) (599,403) 2,351,384 8,896,819 (16,644,693) Machinery and equipment (64,255,270) (14,515,779) 585,598 (1,490,068) (79,675,519) Infrastructure (48,849,467) (7,317,052) 212,407 — (55,954,112)

Total accumulated depreciation (160,327,260) (25,135,879) 4,765,715 — (180,697,424) Total capital assets, being depreciated, net 303,579,667 (11,304,720) (1,573,256) 10,793,760 301,495,451 Subtotal business-type activities 403,640,453 15,196,244 (1,821,872) — 417,014,825

Total 1,089,688,699$ 55,646,484 (3,375,746) — 1,141,959,437

(1) In FY07-08, as a result of a review of assets categorized as improvements, certain assets were reclassified between category types and assets that did not meet the capitalization thresholds were disposed.

59

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

Depreciation expense was charged to functions/programs of the primary government as follows:

General government 1,189,636$ Public safety 2,794,967General services 12,253,923Cultural and recreation services 2,743,448Library 1,341,119Housing and community development 1,565,011Capital assets held by the government's internal service funds are charged to the various functions based on their assets usage 254,249

Total depreciation expense - governmental activities 22,142,353$

Business-type activities:Water 1,095,289$ Solid waste management 9,463 Pier 329,220 Wastewater 6,011,310Civic auditorium 284,427 Airport 565,300 Stormwater management 284,130 Cemetery 100,525 Big Blue Bus 14,232,445Special aviation 18,333 Parking authority 32,071 Capital assets held by the government's internal service funds are charged to the various programs based on their assets usage 2,173,366

Total depreciation expense - business-type activities 25,135,879$

Note that depreciation expense does not equal amounts shown on enterprise fund statements because internal service fund amounts relating to business-type activities are included in functions/programs.

The City’s infrastructure assets are recorded at historical cost in the government-wide statements as required by GASB 34.

(8) UNEARNED REVENUE

Governmental funds report unearned revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental and enterprise funds also defer revenue recognition in connection with resources that have been received as of year-end, but not yet earned.

60

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

At June 30, 2008, $1,120,000 related to lease payments made by the City to the Downtown Redevelopment Project Fund is not available and is eliminated as interfund activity. The interest on advances reported in the General Fund and the nonmajor governmental funds also represent interfund activity eliminated in the government-wide financial statements. This interest is earned and included in promissory note balances at year-end. Revenues related to receivables of $6,798,929 in the Disaster Relief Fund and $144,898 in the Community Development Block Grant (CDBG) Fund are deferred in the fund financial statements because they were not available to liquidate liabilities of the current period. However, these amounts are recognized for government-wide financial statement purposes because all requirements for revenue recognition have been met.

The components of unearned revenue are as follows:

Fund financial statements

Eliminate interfund activity

Recognized in government-

wide financials

Government-wide financial

statements

Governmental funds:General Fund:

Interest on advances 14,393,410$ (14,393,410) — —Unearned user fees 519,277 — — 519,277Unearned business license tax 2,527,656 — — 2,527,656

Total General Fund 17,440,343 (14,393,410) — 3,046,933Special Revenue Source Fund:

Settlement proceeds 98,621,383 — — 98,621,383

Downtown Redevelopment Project Fund:Lease payments (1) 1,120,000 (1,120,000) — —

Nonmajor governmental funds:Other receivables (2) 8,855,355 — (6,943,827) 1,911,528Interest on advances 4,846,971 (4,846,971) — —

Total nonmajor governmental funds: 13,702,326 (4,846,971) (6,943,827) 1,911,528Total governmental funds 130,884,052 (20,360,381) (6,943,827) 103,579,844

Enterprise funds:Big Blue Bus Fund:

Bus tokens/Metrocard 64,623 — — 64,623LACMTA funds received prior to

meeting all eligibility requirements 4,267,412 — — 4,267,412Total Big Blue Bus Fund 4,332,035 — — 4,332,035Total enterprise funds 4,332,035 — — 4,332,035Total uneared revenue 135,216,087$ (20,360,381) (6,943,827) 107,911,879

(1) Represents parking lease receivable unavailable therefore deferred in the fund financial statements. (2) Represents grants receivable for which all of the eligibility requirements have not been met.

61

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

(9) LONG-TERM LIABILITIES

Changes in long-term liabilities:

Long-term liability activity for the year ended June 30, 2008, was as follows:

Balance atJuly 1, 2007 Additions Reductions

Balance atJune 30, 2008

Due withinone year

Due beyond one year

Governmental Activities:Revenue bonds 75,770,000 $ — 3,870,000 71,900,000 4,020,000 67,880,000 Tax allocation bonds 78,115,000 — 2,545,000 75,570,000 2,670,000 72,900,000 General obligation bonds 21,800,000 — 1,660,000 20,140,000 1,685,000 18,455,000 Less deferred amounts:

For issuance discounts (226,968) — (12,485) (214,483) — (214,483) For issuance premiums 288,842 — 20,366 268,476 — 268,476

Deferred loss on refunding (4,015,883) — (224,272) (3,791,611) — (3,791,611) Total bonds payable

171,730,991 — 7,858,609 163,872,382 8,375,000 155,497,382 Compensated absences 8,645,940 6,110,636 5,162,032 9,594,544 5,174,471 4,420,073 Claims payable 26,032,048 6,504,480 7,420,115 25,116,413 5,837,864 19,278,549

Subtotal governmental activities 206,408,979 12,615,116 20,440,756 198,583,339 19,387,335 179,196,004

Business-type activities:Certificates of participation 420,000 — 420,000 — — — Loans payable 3,617,046 — 253,808 3,363,238 259,830 3,103,408 Revenue bonds 28,715,000 — 1,455,000 27,260,000 1,500,000 25,760,000 Less deferred amounts:

For issuance discounts (116,839) — (8,013) (108,826) — (108,826) For issuance premiums 229,731 — 19,278 210,453 — 210,453 Loss on refunding (2,882,006) — (231,673) (2,650,333) — (2,650,333)

Total loans and bonds payable

29,982,932 — 1,908,400 28,074,532 1,759,830 26,314,702 Compensated absences 2,926,046 1,712,165 2,124,377 2,513,834 1,521,158 992,676 Claims payable 1,529,118 833,433 421,913 1,940,638 455,605 1,485,033

Subtotal business-type activities 34,438,096 2,545,598 4,454,690 32,529,004 3,736,593 28,792,411 Total 240,847,075 $ 15,160,714 24,895,446 231,112,343 23,123,928 207,988,415

Compensated absences are predominantly liquidated by General Fund resources.

62

CITY OF SANTA MONICA, CALIFORNIA Notes to Basic Financial Statements, Continued

For the fiscal year ended June 30, 2008

A summary of long-term debt outstanding at year end is as follows:

Date of issue Original issue

Finalmaturity

dateInterest

rate Balance at

June 30, 2008 Governmental activities:

Revenue bonds:Downtown Redevelopment 2002 May 1, 2002 5,640,000$ July 1, 2008 2.00-3.60% 1,120,000$Parking Authority 2002 May 1, 2002 10,480,000 July 1, 2016 3.50-4.50% 8,300,000Public Finance Authority 1999 Sept 15, 1999 13,200,000 July 1, 2021 4.25-5.50% 10,470,000Public Finance Authority 2002 Jan 1, 2002 17,310,000 July 1, 2021 2.00-4.75% 13,880,000Public Finance Authority 2004 Dec 1, 2004 38,930,000 July 1, 2025 3.35-5.00% 38,130,000

Subtotal revenue bonds - governmental activities 71,900,000

Tax allocation bonds:Ocean Park Redevelopment 2002 May 1, 2002 19,315,000 July 1, 2018 3.75-5.00% 14,605,000Earthquake Recovery Project 2006 April 1, 2006 64,720,000 July 1, 2030 4.00-5.50% 60,965,000

Subtotal tax allocation bonds - governmental activities 75,570,000

General obligation bonds:Main Library Improvements 1998 June 25, 1998 3,060,000 July 1, 2010 4.00-4.30% 1,390,000Main Library Improvements 2002 Aug 27, 2002 25,000,000 July 1, 2022 2.00-4.60% 18,750,000

Subtotal general obligation bonds - governmental activities 20,140,000

Subtotal governmental activities 167,610,000

Business-type activities:Hyperion Project Revenue 1993 Dec 22, 1993 38,620,000 Jan 1, 2022 4.50-4.25% 9,670,000Hyperion Project Revenue 2005 Oct 1, 2005 20,305,000 Jan 1, 2018 3.00-5.00% 17,590,000Certificates of participation 1995 Aug 15, 1995 4,025,000 July 1, 2007 8.875-9.10% —Loans:

State Dept. of Transportation loans various 1,305,444 July 1, 2010 6.50-7.40% 66,653State Water Resources Control

Board loan Jan 29, 1999 5,000,000$ July 1, 2019 2.60% 3,296,585Subtotal loans payable 3,363,238Subtotal business-type activities 30,623,238Total 198,233,238$

Management believes it is in compliance with all debt covenants.

63

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Annual debt service requirements to maturity are as follows:

Fiscal yearended

June 30, Principal Interest Principal Interest Principal Interest Principal Interest

2009 4,020,000$ 3,171,355 2,670,000 3,459,979 1,685,000 805,201 8,375,000 7,436,535 2010 3,020,000 3,024,217 2,800,000 3,324,310 1,710,000 737,194 7,530,000 7,085,721 2011 3,160,000 2,890,476 2,940,000 3,179,601 1,745,000 664,548 7,845,000 6,734,625 2012 3,295,000 2,756,030 3,095,000 3,025,314 1,250,000 610,937 7,640,000 6,392,281 2013 3,430,000 2,620,317 3,255,000 2,861,066 1,250,000 564,062 7,935,000 6,045,445 2014-2018 18,325,000 10,762,208 18,800,000 11,752,404 6,250,000 2,071,405 43,375,000 24,586,017 2019-2023 15,360,000 6,795,575 15,955,000 7,683,094 6,250,000 712,500 37,565,000 15,191,169 2024-2028 8,330,000 4,226,855 17,755,000 4,080,590 — — 26,085,000 8,307,445 2029-2033 10,530,000 1,972,113 8,300,000 396,094 — — 18,830,000 2,368,207 2034 2,430,000 60,750 — — — — 2,430,000 60,750

71,900,000$ 38,279,896 75,570,000 39,762,452 20,140,000 6,165,847 167,610,000 84,208,195

Fiscal yearended

June 30, Principal Interest Principal Interest Principal Interest Principal Interest

2009 1,500,000$ 1,071,813 — — 259,830 90,186 1,759,830 1,161,999 2010 1,545,000 1,026,813 — — 266,008 82,517 1,811,008 1,109,330 2011 1,600,000 972,738 — — 272,347 74,686 1,872,347 1,047,424 2012 1,650,000 924,738 — — 256,632 66,691 1,906,632 991,429 2013 1,700,000 873,175 — — 263,305 60,019 1,963,305 933,194 2014-2018 9,595,000 3,264,850 — — 1,422,842 193,776 11,017,842 3,458,626 2019-2023 9,670,000 1,067,852 — — 622,274 24,373 10,292,274 1,092,225

27,260,000$ 9,201,979 — — 3,363,238 592,248 30,623,238 9,794,227

Governmental activities

Loans payable

Tax allocation bonds

Revenue bonds TotalCertificates of Participation

Business-type activities

Revenue bonds TotalGeneral obligation bonds

64

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(10) FUND DEFICITS

Special Revenue Fund. A deficit fund balance in the amount of $5,821,981 exists in the Disaster Relief Fund. 10% retention held by FEMA until project end is expected to alleviate this deficit fund balance.

Capital Projects Fund. A deficit fund balance in the amount of $15,050,909 exists in the Downtown Redevelopment Project Fund. This fund balance deficit is primarily due to interest expense on advances from the General fund. Management plans to use future tax increment revenues to pay off the advances and eliminate this fund deficit.

Enterprise Fund. A net deficit in the amount of $1,771,573 exists in the Cemetery Fund due to increased expenses compared to previous years. The deficit is expected to be funded by increased operating revenues and improved operating efficiency.

(11) INTERFUND TRANSACTIONS

The following tables summarize inter-fund advances to/from and transfers in/out at June 30, 2008.

Advances to/from

Advances to/from other funds at June 30, 2008 are as follows:

Advances to Advances from(receivable fund) (payable fund) Amount

General Fund Downtown Redevelopment Project Fund 19,409,014$ Non-major governmental funds 3,842,973 Non-major enterprise funds 11,853,979

Total General Fund 35,105,966 Non-major governmental funds Earthquake Redevelopment Fund 3,465,452 Non-major governmental funds Non-major governmental funds 6,371,075 Earthquake Redevelopment Fund Wastewater Fund 6,500,000 Wastewater Fund Non-major governmental funds 6,514,322 Wastewater Fund Non-major enterprise funds 88,875

Total advances to/from 58,045,690$

Advances represent loans made to provide financing resources for capital projects. These amounts are expected to be repaid in future years, subject to the various loan terms. None of the above balances are expected to be repaid within one year.

65

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Transfers

Transfers to/from other funds at June 30, 2008 are as follows:

Transfer in(receivable fund) Amount

General Fund Special Revenue Source Fund 206,490$ (1)Downtown Redevelopment Fund 307,476 (2)Earthquake Redevelopment Fund 2,158,368 (3)Non-major governmental funds 5,550,694 (4)Big Blue Bus Fund 377,300 (5)Non-major enterprise funds 2,808,490 (6)

Total General Fund 11,408,818Special Revenue Source Fund Non-major governmental funds 665,165 (7)

Total Special Revenue Source Fund 665,165Non-major governmental funds General Fund 26,931,190 (8)

Downtown Redevelopment Fund 1,157,877 (8)Earthquake Redevelopment Fund 3,553,331 (8)Non-major governmental funds 2,779,030 (9)

Total non-major governmental funds 34,421,428Wastewater Fund General Fund 256,785 (10)

Non-major enterprise funds 3,631,279 (11)Total Wastewater Fund 3,888,064

Big Blue Bus Fund General Fund 230,864Non-major governmental funds 555,656 (12)

Total Big Blue Bus Fund 786,520Non-major enterprise funds General Fund 978,875 (13)

Earthquake Redevelopment Fund 3,670,150 (14)Special Revenue Source Fund 223,478 (15)Non-major enterprise funds 2,595 (16)Non-major governmental funds 329,676 (17)

Total non-major enterprise funds 5,204,774Internal service funds General Fund 19,752

Internal service funds 658,000Total internal service funds 677,752Total transfers 57,052,521$

Transfer out(payable fund)

(1) Transfer to subsidize housing, homeless programs and transportation management project expenditures. (2) Transfer to subsidize downtown redevelopment project expenditures. (3) Transfer to subsidize earthquake recovery redevelopment expenditures. (4) Transfer to subsidize housing, streets and roads, senior nutrition, library, transportation management and

various operating expenditures. (5) Transfer to subsidize transit officers' salaries and transit mall maintenance. (6) Transfer to subsidize parking, traffic and airport expenditures.

66

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(7) Transfer to fund transportation related projects. (8) Transfer for the payment of debt service. (9) Transfer for the payment of debt service and to subsidize housing program expenditures. (10) Transfer to subsidize wastewater expenses. (11) Transfer to subsidize environmental programs, stormwater and treatment facility expenses. (12) Transfer to subsidize transportation related expenses. (13) Transfer to subsidize pier, airport and medical trust expenses. (14) Transfer to subsidize economic development expenditures and debt service payments. (15) Transfer to subsidize water and environmental remediation expenses. (16) Transfer to subsidize stormwater management expenses. (17) Transfer to subsidize cemetery management expenses.

(12) RESTRICTED NET ASSETS

Restricted net assets are net assets whose use is subject to constraints externally imposed. The following categories of net assets are restricted as to use by agreements with creditors, developers, grantors, or laws or regulations of other governments: debt service, Clean Beaches and Ocean Parcel Tax, Housing Authority, Community Development Block Grant, Citizens Option for Public Safety, Air Quality Management District, development projects, Asset Seizure, streets projects, low- and moderate-income housing, MTBE settlement, perpetual care, miscellaneous medical coverage and construction of rail system. The remaining categories of funds, Tenant Ownership Rights Charter Amendment and Rent Control, are restricted as to use by law.

Net assets for governmental activities at June 30, 2008, are restricted as follows:

Housing Authority $ 2,985,478Tenant Ownership Rights Charter Amendment 17,554,518Community Development Block Grant 13,719,302Citizens Option for Public Safety 244,015Rent Control 1,704,023Air Quality Management District 183,758Asset Seizure 376,017Streets projects 1,512,032Low- and moderate-income housing 35,697,213

Total housing and community development 73,976,356

Clean Beaches and Ocean Parcel Tax 2,536,009Miscellaneous grants 18,512,612Debt service 18,953,165Development projects 38,400,473Perpetual care - nonexpendable 7,726,238MTBE Settlement 72,176,249

Total restricted net assets $ 232,281,102

Of the net assets for business-type activities at June 30, 2008, totaling $495,989,994, $1,625,057 is restricted for construction of a rail system.

67

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(13) RESERVED AND DESIGNATED FUND BALANCES

In the fund financial statements, reserves and designations segregate portions of fund balances that are either not available or have been earmarked for specific purposes. The various reserves and designations are established by actions of the City Council and Management and can be increased, reduced or eliminated by similar actions.

In governmental funds, fund reservations are presented as a component of fund balances as follows:

Special revenue fund

General FundSpecial Revenue

Source Fund

Downtown Redevelopment

Project Fund

Earthquake Recovery

Redevelopment Fund

Other governmental

funds

Total governmental

fundsReserved fund balancesPrepaids and inventory $ 1,794,342 — — — 10,556 1,804,898 Advances to other funds 20,712,556 — — 6,500,000 4,989,556 32,202,112 Encumbrances 3,560,777 18,946 — — 227,801 3,807,524 Cash liquidity 3,546,996 — — — — 3,546,996 Civic center bonds 2,725,992 — — — — 2,725,992 Notes receivable 2,916,229 10,124,763 1,923,000 716,669 47,022,324 62,702,985 Specific continuing capital projects 41,242,835 19,727,496 1,625,399 29,622,773 47,855,645 140,074,148 Mall assessment district 42,931 — — — — 42,931 Traffic mitigation 4,514,142 — — — — 4,514,142 Long-term receivable from state — — — — 1,125 1,125 Long-term receivable from FEMA — — — — 4,133,189 4,133,189 Rail construction — — — — 3,524,899 3,524,899 Low- and moderate-income housing — 1,886,182 — — — 1,886,182 Childcare center — 614,300 — — — 614,300 Parks — 424,801 — — — 424,801 Traffic — 2,263,740 — — — 2,263,740 Arts — 60,000 — — — 60,000 Third Street mall/downtown parking — 5,763,191 — — — 5,763,191 Animal shelter — 21,456 — — — 21,456 Homeless contributions — 71,118 — — — 71,118 Roads — 2,052,406 — — — 2,052,406 Santa Monica Place redevelopment — 27,985 — — — 27,985 Debt service — — — — 18,953,165 18,953,165 Perpetual care — — — — 7,726,238 7,726,238

Total reserved fund balances $ 81,056,800 43,056,384 3,548,399 36,839,442 134,444,498 298,945,523

Capital projects funds

Prepaids and InventoryReflects the carrying value of these assets. Since these assets are goods or services already purchased, they do not represent available expendable resources.

Advances to Other FundsReflects the balances due, net of deferred interest revenues, from other funds that are long-term in nature and do not represent available expendable resources of the City.

68

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

EncumbrancesEncumbrances outstanding at year-end are reported as reservations of fund balances since they do not constitute expenditures or liabilities.

Cash LiquidityThe City’s Charter provides for a cash liquidity reserve to assure the payment of the operating expenses of the City on a cash basis.

Civic Center BondsReflects the balance of bond proceeds plus accumulated interest at June 30, 2008 which is legally restricted for parking improvements within the Civic Center area.

Notes Receivable Reflects the balances due on loans that are long-term in nature and do not represent available expendable resources of the City.

Specific Continuing Capital Projects Reflects the amount needed to fund the full cost of uncompleted capital projects at June 30, 2008.

Mall Assessment DistrictReflects the balance of assessment revenues accumulated for future debt service for bonds related to the Third Street mall and Downtown Assessment District.

Traffic MitigationRepresents the unspent balance of developer fees restricted for traffic mitigation projects.

Long-Term Receivable from State and FEMAReflects the balances due from the State of California and FEMA for costs incurred after the January 17, 1994 Northridge Earthquake that is long-term in nature and does not represent available expendable resources of the City.

Rail ConstructionRepresents the balance of Proposition A local return funds in the City’s Miscellaneous Grants Fund to be used exclusively for rail transportation improvements along the Santa Monica corridor.

Low- and Moderate-Income HousingRepresents unspent balance of funds from various sources restricted for use for low- and moderate-income housing.

Childcare CenterRepresents unspent balance of developer fees restricted for future childcare center.

ParksRepresents unspent balance of developers fees restricted for parks projects.

TrafficRepresents balance of developer fees restricted for traffic mitigation projects.

69

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

ArtsRepresents balance of funds received from various sources to be used for arts projects.

Third Street Mall/Downtown ParkingRepresents balance of funds received from various sources to be used for Third Street mall/downtown parking.

Animal ShelterRepresents unspent balance of contributions from citizens that are restricted for use for the City’s Animal Shelter.

Homeless ContributionsRepresents balance of funds received from various sources to be used for homeless services.

RoadsRepresents balance of funds received from various sources for road projects.

Santa Monica Place RedevelopmentRepresents reimbursement funds for professional services restricted for the redevelopment of Santa Monica Place.

Debt ServiceRepresents balance of funds held by trustees for future debt service and associated payments in the Debt Service and Capital Projects Funds.

Perpetual CareRepresents balance of funds held by the City restricted for use for expenses associated with perpetual care of the City's Cemetery and Mausoleum.

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

In governmental funds, fund designations are presented as a component of fund balances as follows:

Special revenue fund

General Fund

Special Revenue

Source Fund

Other governmental

funds

Total governmental

funds

Designated fund balancesCivic area development $ 758,708 — — 758,708 Other purposes 6,346,558 — — 6,346,558 Compensated absences 9,153,748 — 316,183 9,469,931 Lifeguard headquarters — — 10,000 10,000 Santa Monica Place 161,221 — — 161,221 Affordable overnight accommodations 340,000 — — 340,000 Parks enhancement 370,845 — — 370,845 City Hall Renovation 3,320,718 — — 3,320,718 Education foundation 420,000 — — 420,000 Low-and moderate-income housing 132,223 — 1,378,935 1,511,158 Rent control — — 58,975 58,975 Consumer protection funds 56,983 — — 56,983 Franchise settlement — 2,000,000 — 2,000,000 MTBE settlement interest — 5,748,208 — 5,748,208 Cable Franchise fee — 57,923 — 57,923 Environmental mitigation 1,569,131 — — 1,569,131 Capital improvements project start-up 260,000 — — 260,000 Employee training 150,000 — — 150,000 Comprehensive land use plan 101,845 — — 101,845 Homelessness capital projects 2,283 — — 2,283 Navy/Ozone/Longfellow improvements 83,000 — — 83,000 UUT revenue loss 8,200,000 — — 8,200,000 Fire vehicle replacement 2,367,600 — — 2,367,600 Green Energy 1,000,000 — — 1,000,000 PERS 2,527,680 — — 2,527,680 Operating contingency 25,250,000 — — 25,250,000 Total designated fund balances $ 62,572,543 7,806,131 1,764,093 72,142,767

Civic Area DevelopmentRepresents the balance of Transient Occupancy Tax receipts designated by City Council to be used for future development of the City's Civic Center area.

Other PurposesRepresents funds designated for other purposes.

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Compensated AbsencesRepresents the estimated liability for compensated absences.

Lifeguard HeadquartersRepresents funds designated for upgrade of lifeguard headquarters.

Santa Monica PlaceRepresents monies designated for future lease payments to the City Redevelopment Agency, Downtown Project, for Santa Monica Place parking structures through June 30, 2009.

Affordable Overnight AccommodationsRepresents balance of funds designated for the development, redevelopment, expansion, replacement, repair, operation or use of affordable overnight accommodations within the City of Santa Monica.

Parks EnhancementRepresents funds designated by Council for use for enhancement of the City's parks.

City Hall RenovationRepresents funds designated by Council for use for City Hall renovation.

Education FoundationRepresents funds designated by Council to help finance a Santa Monica Malibu Unified School District Education Foundation.

Low- and Moderate-Income Housing Represents funds designated by Council for low- and moderate-income housing.

Rent ControlRepresents funds designated by the Rent Control Board to provide for operations uncertainties and the future replacement of certain equipment.

Consumer Protection FundsRepresents funds designated for use by the City Attorney’s Office for consumer protection.

Franchise SettlementRepresents funds received in satisfaction of dispute related to City cable television franchise.

MTBE Settlement InterestRepresents interest earned on funds received from lawsuit related to MTBE contamination of City’s water.

Cable Franchise FeeRepresents funds received for cable franchise fees designated for PEG access facilities.

Environmental MitigationRepresents funds designated for environmental mitigation.

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Capital Improvements Program Project Start-upRepresents funds designated for capital improvements projects related to the library, Virginia Avenue Park and Civic Center Courthouse mitigation and murals.

Employee TrainingRepresents funds designated for employee training.

Comprehensive Land Use PlanRepresents funds for a comprehensive land use plan.

Homelessness Capital Projects Represents balance of funds previously appropriated for various services to homeless persons designated by City Council to be used for homeless service programs.

Navy/Ozone/Longfellow ImprovementsRepresents funds designated by Council for future improvements to borderline neighborhoods.

UUT Revenue LossRepresents funds designated for anticipated utility user tax revenue loss.

Green EnergyRepresents funds for green energy projects.

PERSRepresents funds designated for future payments to PERS.

Fire Vehicle ReplacementRepresents funds designated by Council for a fire vehicle replacement program.

Operating ContingencyRepresents funds designated for operating contingency.

(14) LITIGATION AND CONTINGENCIES

Litigation

The City is regularly subject to certain legal proceedings and claims that arise in the normal course of City operations. Many of these have not yet been fully adjudicated. In the opinion of the City Attorney, there are adequate legal defenses to these actions and it is not anticipated that there will be any adverse material effect on the financial position of the City.

Grants

The City recognizes as revenue grant monies received as reimbursement for costs incurred in certain Federal and State programs it administers. Although the City’s Federal grant programs have been audited through June 30, 2008 in accordance with the requirements of the Federal Single Audit Act of 1997 and the related U.S. Office of Management and Budget Circular A-133, these programs may be subject to financial and compliance audits by the reimbursing agencies. The amount, if any, of

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

expenditures which may be disallowed by the granting agencies cannot be determined at this time, although the City expects such amounts, if any, to be immaterial.

Construction Commitments

The City has a number of construction projects currently underway. Purchase orders, contracts and other commitments for these projects are recorded in order to reserve the portion of the applicable appropriation and are recorded at year-end as reservations of fund balances. Approximately $143 million will be payable upon future performance under these contracts.

Operating Lease Revenue/Expenses

The City has entered into operating lease arrangements as lessor for property. The following schedule is an analysis of the City’s investment in property under operating leases by major classes as of June 30, 2008:

Land 133,785,085$ Buildings 18,226,752 Improvements other than buildings 10,302,396 Infrastructure 8,213,438

170,527,671 Less: Accumulated depreciation (19,906,282)

Total 150,621,389$

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

The following is a schedule of both future minimum lease rental revenue to be received by the City as lessor and lease payments to be made by the City as lessee under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 2008:

Fiscal year ended June 30 Rental revenue Lease payments

2009 6,525,755$ 2,351,597 2010 5,744,563 2,151,651 2011 5,037,687 1,831,025 2012 4,555,152 1,250,627 2013 4,261,034 �������2014 - 2018 16,866,881 ��������2019 - 2023 11,750,037 ������2024 - 2028 10,450,676 2029 - 2033 6,454,147 2034 - 2038 4,835,779 2039 - 2043 2,803,099 2044 - 2048 2,803,099 2049 - 2053 2,803,099 2054 - 2058 2,803,099 2059 - 2063 2,803,099 2064 - 2068 1,261,395

The total long-term lease rental revenues and expenditures/expenses for the year ended June 30, 2008, were $6,063,766 and $1,919,476, respectively.

Line of Credit

On May 1, 2008, the Redevelopment Agency of the City entered into a line of credit agreement with Bank of America. The agreement calls for an initial line of credit up to $50 million which may be increased at the Agency’s request and the bank’s option to $75 million. The line is available through June 2013 and is subject to quarterly interest payments at LIBOR plus 1.25%.

As of June 30, 2008 the City has not drawn on the line.

(15) SELF INSURANCE

The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees and others; and natural disasters. The City has chosen to establish risk financing internal service funds where assets are set aside for claim settlements associated with such risks of loss up to certain limits and has obtained excess liability coverage through the Authority for California Cities Excess Liability (ACCEL), a joint powers authority of twelve medium-size California municipalities. ACCEL is a member of the California State Association of Counties Excess Insurance Authority for the purpose of providing access to excess workers’

75

CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

compensation coverage for major employee injury risks through a program of pooled self insurance/re-insurance and insurance on a risk sharing basis.

The City retains self-insurance up to $1,000,000 for general liability, automobile liability, bus operations liability and workers’ compensation. ACCEL covers up to an additional $4,000,000 for all liabilities and arranges placement of excess of liability insurance over $5,000,000 up to $80,000,000. California State Association of Counties Excess Insurance Authority covers up to $4,000,000 for workers’ compensation and arranges for excess of workers compensation over $4,000,000 up to $300,000,000. No claim settlements have exceeded insurance coverage in any of the past three years.

In order to provide funds to pay claims, ACCEL collects premiums from each member. The premiums paid are credited with investment income at the rate earning on the Authority’s investments. Based on ACCEL’s June 30, 2008 audited financial statements, the City had deposits of $2,674,842 (15.8% of ACCEL’s total deposits) net of unpaid claims with ACCEL. Total assets of ACCEL at June 30, 2008 were $29,960,045. ACCEL has no capital contributions.

The City’s unpaid claims liabilities are based on the results of actuarial studies. The unpaid claims liabilities are compiled by the Risk Manager of the City and include amounts for claims incurred but not reported as of year end. Claims liabilities are calculated considering the effects of inflation, recent claim settlement trends including frequency and amount of payouts and other economic and social factors. Net present values of the unpaid claims liabilities are estimated for the year ended June 30, 2008, based on interest rates ranging from 4.40% to 4.45%. Revenues of the risk management funds, together with funds to be provided in the future, are expected to provide adequate resources to meet liabilities as they come due. Nonincremental claims expenses have not been included as part of the liability for claims.

Changes in the liability for claims during the past two fiscal years for the self-insurance funds follow:

Fund (by fiscal year)Beginning of

year

Current-year claims and changes in estimates

Claims payments End of year

Due within one year

June 30, 2007:Comprehensive 5,387,973$ 817,248 (1,128,569) 5,076,652 999,234 Bus 2,012,795 2,022,013 (2,505,690) 1,529,118 702,369 Automobile 599,311 382,796 (727,649) 254,458 95,350 Workers' Compensation 21,189,344 4,188,819 (4,677,225) 20,700,938 3,239,345

29,189,423$ 7,410,876 (9,039,133) 27,561,166 5,036,298 June 30, 2008:

Comprehensive 5,076,652$ 1,021,194 (1,851,875) 4,245,971 1,523,291 Bus 1,529,118 833,433 (421,913) 1,940,638 455,605 Automobile 254,458 233,103 (252,306) 235,255 89,994 Workers' Compensation 20,700,938 5,250,183 (5,315,934) 20,635,187 4,224,579

27,561,166$ 7,337,913 (7,842,028) 27,057,051 6,293,469

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(16) EMPLOYEE BENEFIT PROGRAMS

Santa Monica Public Employees’ Retirement Plan

The City’s defined benefit pension plan, Santa Monica Public Employees’ Retirement Plan (Plan) provides retirement and disability benefits, annual cost-of living adjustments, and death benefits to plan members and beneficiaries. The Plan is part of the Public Agency portion of the California Public Employees Retirement System (CalPERS), an agent multiple-employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State of California. State statutes within the Public Employees’ Retirement Law establish a menu of benefit provisions as well as other requirements. The City selects optional benefit provisions from the benefit menu by contract with CalPERS and adopts those benefits through City ordinance. CalPERS issues a separate comprehensive annual financial report available from the CalPERS Executive Office, 400 Q Street, Sacramento, California 95811.

Plan Description

All full-time employees of the City and part-time employees who have worked over 1,000 hours during a fiscal year are eligible to participate in the Plan. The City is authorized by statute to establish and amend all plan provisions. Related benefits vest after five years of service. Upon five years of service, employees who retire at or after age 50 are entitled to receive an annual retirement benefit.

The defined pension benefit is payable monthly for life, in an amount that varies, from 2.4% at age 50 to a maximum of 3% at age 55 for fire safety employees, 3% at age 50 for police safety employees and 2% at age 50 to a maximum of 2.7% at age 55 for miscellaneous employees, of the employee’s single highest year’s salary for each year of credited service. The Plan also provides death and disability benefits.

Funding Policy

Active full-time members in the Plan are required to contribute 8% for miscellaneous employees and 9% for safety employees of their annual covered salary. The City makes such employee contributions on their behalf and for their account. The City is required to contribute the actuarially determined remaining amounts necessary to fund the benefits for its members. The actuarial methods and assumptions used are those adopted by the CalPERS Board of Administration. CalPERS prepares separate actuarial valuations for miscellaneous, fire safety and police safety members. The required employer contribution rate for the fiscal year ended June 30, 2008 was 15.765% for miscellaneous members; 32.822% for police safety members and 21.557% for fire safety members. The contribution requirements of the plan members are established by State statute and the employer contribution rate is established and may be amended by CalPERS. The miscellaneous members do reimburse the City for the cost of an enhanced benefit at a rate of 6.7%.

Annual Pension Cost

For the fiscal year ended June 30, 2008, the City’s annual pension cost and actual contributions were $24,767,790. The City also contributed $12,689,485 on behalf of employees. Employees directly contributed $276,893. Total contributions were $37,734,168. The required contribution for the fiscal year ended June 30, 2008 was determined as part of the June 30, 2005 actuarial valuation using the entry age normal actuarial cost method with the contributions determined as a percentage of payroll. The

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses); (b) projected salary increases that vary by duration of service ranging from 3.25% to 14.45% for miscellaneous members, from 3.25% to 11.15% for safety members, and (c) 3.25% cost-of-living adjustment. Both (a) and (b) include an inflation component of 3.00%. The actuarial value of the Plan’s assets was determined using a technique that smoothes the effect of short-term volatility in the market value of investments by computing an expected value of assets along with the actual market value of assets. The Plan’s unfunded accrued liability (or excess assets) is being amortized as a level percentage of projected payrolls on a closed basis over a period not to exceed twenty years.

Three-Year Trend Information for the Annual Pension Cost Funding for the Plan (Unaudited)

Fiscal year ended June 30

Annual pension cost (APC)

Percentage of APC contributed

Net pension obligation

2008 $ 24,767,790 100 % — 2007 20,719,971 100 — 2006 20,236,173 100 —

Pension Funding Information

As of June 30, 2007, the date of the latest actuarial valuation, the City’s under funded liability was $133,291,543. This under funded liability was primarily the result of a decline in the value of the plan assets, less than anticipated investment returns by CalPERS and an increase in benefits for Public Safety employees. The City has addressed the under funded liability through additional contributions, as determined by CalPERS, in excess of the amount required to fund the current normal cost liability. Maintaining this funding schedule CalPERS has estimated that the under funded balance will be amortized over 15 years. Prior to the fiscal year ended June 30, 2002, the City’s pension plan had been over funded for ten years.

For miscellaneous members, the plan was 84.4% funded. The actuarial accrued liability for benefits was $465,717,963 and the actuarial value of assets was $393,225,061, resulting in an unfunded actuarial accrued liability (UAAL) of $72,492,902. The covered payroll (annual payroll of active employees covered by the plan) was $101,760,156, and the ratio of the UAAL to the covered payroll was 71%.

For fire safety members, the plan was 87.8% funded. The actuarial accrued liability for benefits was $133,025,994 and the actuarial value of assets was $116,798,098, resulting in an unfunded actuarial accrued liability (UAAL) of $16,227,896. The covered payroll (annual payroll of active employees covered by the plan) was $11,951,375, and the ratio of the UAAL to the covered payroll was 133%.

For police safety members, the plan was 81.1% funded. The actuarial accrued liability for benefits was $235,335,746 and the actuarial value of assets was $190,765,001, resulting in an unfunded actuarial accrued liability (UAAL) of $44,570,745. The covered payroll (annual payroll of active employees covered by the plan) was $22,730,402, and the ratio of the UAAL to the covered payroll was 191%.

The schedule of funding progress, presented as RSI following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Deferred Compensation Plans

The City offers to its employees an optional deferred compensation plan created in accordance with Section 457 of the Internal Revenue Code. This plan is available to substantially all employees and allows participants to defer a portion of their current income until future years to shelter such funds and earnings from state and federal taxation until withdrawal. The deferred compensation is not available to participants until termination, retirement, death or unforeseeable emergency.

The City offers an employer discretionary, defined contribution plan established and governed under Internal Revenue Code Section 401(a). Employer-only contributions are calculated based upon a percentage of employee compensation under agreements with employee bargaining groups and unions.

The City offers to its as-needed employees a separate Section 457 deferred compensation plan under the Omnibus Budget Reconciliation Act (OBRA). This plan is available to all as-needed employees who are not eligible to participate in CalPERS. This plan requires equal employer and employee contributions based on a percentage of earnings.

These plans are administered through third-party administrators. The City does not perform the investing function and has no fiduciary accountability for the plans. Thus, plan assets and any related liabilities to plan participants have been excluded from the City’s basic financial statements.

Other Postemployment Benefits

In addition to providing pension benefits through CalPERS, the City, in accordance with agreements with various bargaining units and groups, provides medical insurance benefits that are considered other postemployment benefits (OPEB) to certain retired employees. Employees of the Supervisory Team Associates bargaining unit become eligible for a medical insurance benefit if they fulfill length of service requirements and have more than 75 unused sick leave days upon retirement. Employees of the Executive Pay Plan group and management employees of the Rent Control Board are eligible for a city paid medical insurance benefit if their combined retirement age and years of City service equals or exceeds 70. Although not delineated in any written agreement, all retirees are allowed to continue participating in one of the City’s health plans at the same rate as active employees. The City also maintains minimum benefits for public safety employees provided by the City’s contract with its healthcare provider.

The City pays for OPEB on a pay-as-you-go basis.

Annual OPEB Cost and Net OPEB Obligation

The City’s OPEB cost is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance within the parameters of GASB 45, “Accounting and Financial Reporting for Employers for Postemployment Benefits Other than Pensions.” The ARC represents a level of funding that if paid on an ongoing basis is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed 30 years. The following table shows the components of the City’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City’s OPEB obligation to the plan.

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

Development of Net OPEB Obligation and Annual OPEB Cost (in thousands)

Annual required contribution 1,638$Interest on OPEB obligation — Adjustment to annual required contribution —

Annual OPEB expense 1,638Contributions made (396)

Increase in net OPEB obligation 1,242Net OPEB obligation - beginning of the year — Net OPEB obligation - end of the year 1,242$

Schedule of Employer Contributions (in thousands)

AnnualOPEB Costs

Annual Contribution

Percentage Contribution

Net OPEB Obligation

$1,638 $396 24.2% $1,242

Actuarial methods and assumptions

Projections of benefits for financial reporting purposes are based on the plan as understood by the City and its employees and include the types of benefits provided at the time of each valuation. The actuarial methods and assumptions used techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future, and that actuarially determined amounts are subject to continual revision as results are compared to past expectations and new estimates are made about the future.

In the July 1, 2007 actuarial valuation, the entry age normal actuarial cost method was used. The actuarial assumptions included a 5.0% rate of return, which is a blended rate of expected long-term return on plan assets on the City’s own investments calculated based on the funded level of the plan at the valuation date, and an annual health care cost trend of 11.0% initially, reduced by decrements to an ultimate rate of 5.0% after 8 years. Both rates include a 3.25% inflation assumption. The remaining amortization period at July 1, 2007 was thirty years.

Medical Trusts

The City contributes, consistent with bargaining unit agreements, monies to medical trusts that provide postemployment medical benefits to employees. The amount of benefits provided to employees under these plans is limited solely to the amount contributed, related investment earnings, and forfeitures. During FY 2007-08 the City contributed $5,763,636 towards the retiree medical trusts. These are administered through third-party administrators and the City does not perform the investing function or have other significant responsibility relating to the management of plan assets. Thus, plan assets and any related liabilities have been excluded from the City’s basic financial statements.

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CITY OF SANTA MONICA, CALIFORNIA

Notes to Basic Financial Statements, Continued For the fiscal year ended June 30, 2008

(17) SHORT-TERM LOANS PAYABLE

The State Department of Housing and Urban Development Deferred Payment Rehabilitation Loan Program (DPRLP) granted two $200,000 non-interest bearing loans to the City. The proceeds of these loans were used to fund two promissory notes receivable from the owners of certain rental properties. Upon payment to the City, proceeds must be paid to the State of California as repayment for the DPRLP loans.

Short-term loans payable activity for the year ended June 30, 2008 was as follows:

Date of issueBalance at

July 1, 2007 Additions ReductionsBalance at

June 30, 2008

DPRLP loan Dec. 22, 1988 200,000$ — — 200,000 DPRLP loan Dec. 29, 1989 200,000 — — 200,000

Total 400,000$ — — 400,000

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City of Santa Monica, California

Year Ended June 30, 2008

Required Supplementary Information

PENSION FUNDING INFORMATION

Valuation date(June 30)

Entry age normal accrued liability

Actuarial value of assets

Underfundedliability (UAAL)

Annual covered payroll

2007 $ 465,718 $ 393,225 $ 72,493 84.4 % $ 101,760 71.2 %2006 427,544 351,378 76,166 82.2 96,384 79.0 2005 354,403 318,864 35,539 90.0 88,933 40.0

Valuation date(June 30)

Entry age normal accrued liability

Actuarial value of assets

Underfundedliability (UAAL)

Annual covered payroll

2007 $ 133,026 $ 116,798 $ 16,228 87.8 % $ 11,951 135.8 %2006 124,716 107,932 16,784 86.5 11,512 145.8 2005 116,225 99,993 16,232 86.0 10,840 149.7

Valuation date(June 30)

Entry age normal accrued liability

Actuarial value of assets

Underfundedliability (UAAL)

Annual covered payroll

2007 $ 235,336 $ 190,765 $ 44,571 81.1 % $ 22,730 196.1 %2006 219,124 174,553 44,571 79.7 21,212 210.1 2005 199,310 161,418 37,892 81.0 18,721 202.4

Police Safety Members(dollars in thousands)

Funded ratioUAAL as a percentage

of payroll

(dollars in thousands)

Funded ratioUAAL as a percentage

of payroll

Fire Safety Members

CITY OF SANTA MONICA, CALIFORNIA

Required Supplementary Information - Pension Funding InformationYear ended June 30, 2008

Funded ratioUAAL as a percentage

of payroll

Miscellaneous Members(dollars in thousands)

The City’s Pension Plan includes separate valuations for Miscellaneous Members, Fire Safety Members and Police Safety Members. The funded status of the Plan for each of these member groups for the actuarial valuations performed as of June 30, 2005 through 2007 are as follows (valuations for 2008 are not yet available):

83

Type of ValuationValuation date

(July 1)Actuarial value

of assets

Actuarialaccruedliability

Undfunded actuarial accrued liability

(UAAL)Annual covered

payrollUAAL as a

percentage of payroll Interest rate Salary ScaleActual 2007 $ - $ 16,518 $ 16,518 - % $ 124,253 13.29% 5.00% 3.25%

CITY OF SANTA MONICA, CALIFORNIA

Required Supplementary Information - OPEB Funding InformationYear ended June 30, 2008

(dollars in thousands)

Funded ratio

84

City of Santa Monica, California

Year Ended June 30, 2008

Supplementary Information

CITY OF SANTA MONICA, CALIFORNIA

Nonmajor Governmental Fund Financial Statements

Special Revenue Funds are used to account for specific revenues that are legally restricted to expenditures for specified purposes. The nonmajor special revenue funds used by the City in this report are listed below:

Clean Beaches and Ocean Parcel Tax Fund – To account for activity related to implementation of Watershed Management Plan and the passage of Measure V in November 2006.

Beach Recreation Fund – To account for beach parking and concession revenues and expenditures related to beach maintenance and recreation activities.

Housing Authority Fund – To account for the receipt and expenditure of Federal and State funds related to housing programs.

Disaster Relief Special Revenue Fund (Special Revenue Fund Type) – To account for Federal and State disaster relief revenues and expenditures associated with recovery from the January 17, 1994 Northridge Earthquake.

Tenant Ownership Rights Charter Amendment (TORCA) Fund – To account for filing fee and conversion tax revenues and expenditures related to various housing programs authorized by Chapter XX of the City Charter.

Community Development Block Grant (CDBG) Fund – To account for Federal entitlements under the Housing and Community Development Act of 1974, as amended. The City Council annually allocates CDBG funds to various programs.

Miscellaneous Grants Fund – To account for the receipt and expenditure of Federal, State and County awarded grants and special allocations provided to the City.

Citizens Option for Public Safety Fund – To account for the receipt and expenditure of the Citizens Option for Public Safety program established by AB3229 of 1996.

Rent Control Fund – To account for revenues and expenditures of the Rent Control Board.

Air Quality Management District (AQMD) Fund – To account for the receipt and expenditure of Air Quality Management District funds.

Parks & Recreation Fund – To account for funds collected under the City's Unit Dwelling Tax. These funds are to be used for the acquisition, improvement and expansion of public parks, playgrounds and recreational facilities.

Asset Seizure Fund – To account for the receipt and expenditure of equitable sharing program funds.

Gas Tax Fund – To account for State and County gasoline tax allocations and any Federal funds provided to the City for street-related purposes.

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CITY OF SANTA MONICA, CALIFORNIA

Capital Projects Funds are used to account for the accumulation of resources to be used for the acquisition or construction of major capital facilities of the City and Redevelopment Agency. The nonmajor capital projects funds used in this report are listed below:

Capital Projects Fund – Primarily financed through transfers from the General Fund for acquisition, construction and major renovation of City infrastructure and facilities.

Low-and Moderate-Income Housing (Downtown, Earthquake Recovery and Ocean Park Projects) – Under requirements of the State of California Health and Safety Code, the Redevelopment Agency of the City of Santa Monica is required to set aside 20% of tax increment revenues for housing projects benefiting low-and moderate-income households.

Ocean Park Redevelopment Project Fund – To account for the revenues and expenditures of the Ocean Park Project area of the Redevelopment Agency of the City of Santa Monica. This thirty-three acre project consists of two areas: 1A and 1B. The redevelopment plan for the twenty-five acres of Area 1A was approved in June 1960 and work was completed in May 1987. The project contains two 17-story high-rise apartment buildings of 500 units and a park. The redevelopment plan for the eight acres of Area 1B was approved in January 1961 and work was completed in 1983. The project contains two senior citizen residential apartment complexes and a former utility building now used for other purposes.

Debt Service Funds are used to accumulate resources for, and the payment of, general long-term debt principal, interest and related costs. The debt service funds used by the City in this report are listed below:

City Fund – To account for accumulation of resources for, and the payment of, general long-term debt principal, interest and related costs for library, public safety facility and parking authority bonds.

Redevelopment Agency Fund – To account for accumulation of resources for, and the payment of, general long-term debt principal, interest and related costs for the Ocean Park, downtown and earthquake recovery bonds.

Permanent Funds are used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used for restricted purposes. The specific permanent funds used by the City in this report are listed below:

Cemetery Perpetual Care Fund – To account for all funds received by the City from cemetery users for the perpetual care of the cemetery grounds.

Mausoleum Perpetual Care Fund – To account for all funds designated for perpetual care of the mausoleum located at the City cemetery.

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Total Total Totalspecial capital Total Total nonmajorrevenue projects debt service permanent governmental

Assets funds funds funds funds funds

Cash and investments 36,453,209 $ 40,606,192 — 13,303 77,072,704 Receivables (net, where applicable, of

allowances for uncollectibles):Accounts 250,658 — — 1,709 252,367 Notes 27,894,571 19,127,752 — — 47,022,323 Property tax — 1,062,250 — — 1,062,250 Interest 404,332 204,795 — — 609,127 Other governments 14,513,046 — — — 14,513,046

Prepaids 10,556 — — — 10,556 Cash with fiscal agent — 665,162 18,953,165 7,711,226 27,329,553 Advances to other funds 9,836,527 — — — 9,836,527

Total assets 89,362,899 $ 61,666,151 18,953,165 7,726,238 177,708,453

Liabilities and Fund Balances

Liabilities:Accounts payable 4,171,167 $ 126,740 — — 4,297,907 Accrued liabilities 162,247 — — — 162,247 Short-term loan payable 400,000 — — — 400,000 Contracts payable (retained percentage) 752,687 — — — 752,687 Due to other funds 3,402,840 — — — 3,402,840 Deferred revenue 13,702,326 — — — 13,702,326

CITY OF SANTA MONICA, CALIFORNIACombining Balance Sheet

Nonmajor Governmental Funds By Fund Type June 30, 2008

Deposits 45,971 — — — 45,971 Advances from other funds 10,357,295 6,371,075 — — 16,728,370

Total liabilities 32,994,533 6,497,815 — — 39,492,348

Fund balances:Reserved 52,007,506 55,757,589 18,953,165 7,726,238 134,444,498 Unreserved - designated 1,764,093 — — — 1,764,093 Unreserved - undesignated 2,596,767 (589,253) — — 2,007,514

Total fund balances 56,368,366 55,168,336 18,953,165 7,726,238 138,216,105 Total liabilities and

fund balances 89,362,899 $ 61,666,151 18,953,165 7,726,238 177,708,453

88

CITY OF SANTA MONICA, CALIFORNIA

Combining Statement of Revenues, Expenditures and Changes in Fund Balances

Nonmajor Governmental Funds By Fund TypeFor the fiscal year ended June 30, 2008

Total Total Totalspecial capital Total Total nonmajorrevenue projects debt service permanent governmental

funds funds funds funds funds

Revenues:Incremental property taxes — $ 16,168,953 — — 16,168,953 Other taxes 5,305,919 — — — 5,305,919 Licenses and permits 93,650 — — — 93,650 Intergovernmental 32,560,261 — — — 32,560,261 Charges for services 10,063,416 — — 87,676 10,151,092 Investment income 1,731,469 693,670 325,641 (567,192) 2,183,588 Rental income 90,517 — — — 90,517 Other 7,731,778 122,498 — — 7,854,276

Total revenues 57,577,010 16,985,121 325,641 (479,516) 74,408,256

Expenditures:Current:

General government 288,769 — — — 288,769 Public safety 766,601 477,830 — — 1,244,431 General services 15,708,986 — — — 15,708,986 Cultural and recreation services 13,665,140 — — — 13,665,140 Library 25,180 — — — 25,180 Housing and community development 19,689,758 4,619,878 — — 24,309,636

Debt service expenditures:Principal — — 8,075,000 — 8,075,000 Interest — 307,427 7,772,433 — 8,079,860

Total expenditures 50 144 434 5 405 135 15 847 433 — 71 397 002Total expenditures 50,144,434 5,405,135 15,847,433 71,397,002

Excess (deficiency) of revenues over (under) expenditures 7,432,576 11,579,986 (15,521,792) (479,516) 3,011,254

Other financing sources (uses):Transfers in 203,671 18,490,200 15,727,557 — 34,421,428 Transfers out (6,443,406) (3,107,139) — (329,676) (9,880,221)

Total other financing sources (uses) (6,239,735) 15,383,061 15,727,557 (329,676) 24,541,207

Net change in fund balances 1,192,841 26,963,047 205,765 (809,192) 27,552,461

Fund balances at beginning of year 55,175,525 28,205,289 18,747,400 8,535,430 110,663,644

Fund balances at end of year 56,368,366$ 55,168,336 18,953,165 7,726,238 138,216,105

89

CITY OF SANTA MONICA, CALIFORNIACombining Balance Sheet

Nonmajor Special Revenue FundsJune 30, 2008

Clean Beaches Communityand Ocean Beach Housing Disaster Development

Assets Parcel Tax Recreation Authority Relief TORCA Block Grant

Cash and investments 2,458,548 $ 6,468,425 2,972,686 — 8,160,198 1,209,848 Receivables (net, where applicable, of

allowances for uncollectibles):Accounts 67,195 174,049 6,157 — — 3,257 Notes — — — — 9,371,971 10,802,229 Interest 10,349 76,624 24,261 141 82,701 3,108 Other governments — — 169,025 10,933,243 — 144,899

Prepaids — — — 560 — — Advances to other funds — — — — — 6,717,627

Total assets 2,536,092 $ 6,719,098 3,172,129 10,933,944 17,614,870 18,880,968

Liabilities and Fund Balances

Liabilities:Accounts payable 83 $ 176,003 186,651 37,523 60,352 129,523 Accrued liabilities — 49,100 — 2,311 — — Short-term loan payable — — — — — — Contracts payable (retained percentage) — — — — — 40,274 Due to other funds — — — 3,402,840 — — Deferred revenue — — — 6,798,929 — 4,991,869 Deposits — 45,971 — — — — Advances from other funds — 3,842,973 — 6,514,322 — —

Total liabilities 83 4,114,047 186,651 16,755,925 60,352 5,161,666

Fund balances:Reserved 883,000 1,856,482 — 4,134,874 16,517,467 12,672,885 Unreserved - designated — 82,660 — — — 1,046,417 Unreserved undesignated 1 653 009 665 909 2 985 478 (9 956 855) 1 037 051Unreserved - undesignated 1,653,009 665,909 2,985,478 (9,956,855) 1,037,051 —

Total fund balances (deficits) 2,536,009 2,605,051 2,985,478 (5,821,981) 17,554,518 13,719,302 Total liabilities and fund

balances 2,536,092 $ 6,719,098 3,172,129 10,933,944 17,614,870 18,880,968

90

Totalnonmajor

Citizens specialMiscellaneous Option for Rent Parks and Asset revenue

Grants Public Safety Control AQMD Recreation Seizure Gas Tax funds

10,390,873 244,949 1,830,705 152,989 255,243 449,214 1,859,531 36,453,209

— — — — — — — 250,658 7,720,371 — — — — — — 27,894,571

135,761 3,149 28,623 2,669 2,289 6,194 28,463 404,332 3,237,779 — — 28,100 — — — 14,513,046

4,600 — 5,396 — — — — 10,556 3,118,900 — — — — — — 9,836,527

24,608,284 248,098 1,864,724 183,758 257,532 455,408 1,887,994 89,362,899

3,125,298 4,083 54,003 — — 79,391 318,257 4,171,167 4,138 — 106,698 — — — — 162,247

400,000 — — — — — — 400,000 654,708 — — — — — 57,705 752,687

— — — — — — — 3,402,840 1,911,528 — — — — — — 13,702,326

— — — — — — — 45,971 — — — — — — — 10,357,295

6,095,672 4,083 160,701 — — 79,391 375,962 32,994,533

14,507,637 231,067 16,648 112,250 170,753 76,995 827,448 52,007,506 332,518 — 302,498 — — — — 1,764,093

3 672 457 12 948 1 384 877 71 508 86 779 299 022 684 584 2 596 7673,672,457 12,948 1,384,877 71,508 86,779 299,022 684,584 2,596,767

18,512,612 244,015 1,704,023 183,758 257,532 376,017 1,512,032 56,368,366

24,608,284 248,098 1,864,724 183,758 257,532 455,408 1,887,994 89,362,899

91

CITY OF SANTA MONICA, CALIFORNIACombining Statement of Revenues, Expenditures and

Changes in Fund Balances (Deficits)Nonmajor Special Revenue Funds

For the fiscal year ended June 30, 2008

CleanBeaches Community

and Ocean Beach Housing Disaster DevelopmentParcel Tax Recreation Authority Relief TORCA Block Grant

Revenues:Other taxes 2,505,448 $ — — — 381,320 — Licenses and permits — 93,650 — — — — Intergovernmental — — 16,277,007 5,973,724 — 1,731,516 Charges for services — 5,941,208 — — — — Investment income 30,561 296,028 96,729 10,703 373,448 50,322 Rental income — 71,294 — — — — Other — 592,590 40,629 25,773 100,000 —

Total revenues 2,536,009 6,994,770 16,414,365 6,010,200 854,768 1,781,838

Expenditures:Current:

General government — 237,222 — 51,547 — — Public safety — — — — — — General services — 2,775,801 — 5,973,724 — 670,225 Cultural and recreation services — 3,575,851 — — — 34,833 Library — — — — — — Housing and community development — — 14,009,342 — 196,414 955,555

Total expenditures — 6,588,874 14,009,342 6,025,271 196,414 1,660,613 Excess (deficiency) of revenues

over (under) expenditures 2,536,009 405,896 2,405,023 (15,071) 658,354 121,225

Other financing (uses):Transfers in — 6,790 196,881 — — — Transfers out — — (1,242,028) — (28,506) (1,144,775)

Total other financing (uses) — 6 790 (1 045 147) — (28 506) (1 144 775)Total other financing (uses) 6,790 (1,045,147) (28,506) (1,144,775)

Net change in fund balances 2,536,009 412,686 1,359,876 (15,071) 629,848 (1,023,550)

Fund balances (deficits) at beginning of year — 2,192,365 1,625,602 (5,806,910) 16,924,670 14,742,852

Fund balances (deficits) at end of year 2,536,009 $ 2,605,051 2,985,478 (5,821,981) 17,554,518 13,719,302

92

Totalnonmajor

Citizens specialMiscellaneous Option for Parks and Asset revenue

Grants Public Safety Rent Control AQMD Recreation Seizure Gas Tax funds

2,368,839 — — — 50,312 — — 5,305,919 — — — — — — — 93,650

6,591,277 175,223 — 560,418 — 37,677 1,213,419 32,560,261 — — 4,122,208 — — — — 10,063,416

592,491 12,826 152,313 12,259 9,350 23,248 71,191 1,731,469 — — — — — — 19,223 90,517

6,970,410 — 2,376 — — — — 7,731,778

16,523,017 188,049 4,276,897 572,677 59,662 60,925 1,303,833 57,577,010

— — — — — — — 288,769 240,922 178,852 — — — 346,827 — 766,601

4,869,326 — — 643,291 — — 776,619 15,708,986 10,054,209 — — — 247 — — 13,665,140

25,180 — — — — — — 25,180 367,383 — 4,161,064 — — — — 19,689,758

15,557,020 178,852 4,161,064 643,291 247 346,827 776,619 50,144,434

965,997 9,197 115,833 (70,614) 59,415 (285,902) 527,214 7,432,576

— — — — — — — 203,671 (2,130,290) — — — — — (1,897,807) (6,443,406)

(2 130 290) — — — — — (1 897 807) (6 239 735)(2,130,290) (1,897,807) (6,239,735)

(1,164,293) 9,197 115,833 (70,614) 59,415 (285,902) (1,370,593) 1,192,841

19,676,905 234,818 1,588,190 254,372 198,117 661,919 2,882,625 55,175,525

18,512,612 244,015 1,704,023 183,758 257,532 376,017 1,512,032 56,368,366

93

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

Revenues:Other taxes 2,300,000 $ 2,505,448 — — 2,505,448 205,448 Investment income 40,000 30,561 — — 30,561 (9,439)

Total revenues 2,340,000 2,536,009 — — 2,536,009 196,009

Expenditures:

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)

Year ended June 30, 2008

Clean Beaches and Ocean Parcel Tax Special Revenue Fund

General services: Capital improvement 883,000 — — 600,000 600,000 283,000

Total general services 883,000 — — 600,000 600,000 283,000

Net change in fund balance 1,457,000 2,536,009 — (600,000) 1,936,009 479,009

Fund balance at beginning of year — — — — — —

Fund balance at end of year 1,457,000 $ 2,536,009 — (600,000) 1,936,009 479,009

* No encumbrances were outstanding at June 30, 2007.

94

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures encumbrances basis (negative)

Revenues:Licenses and permits 97,433 $ 93,650 — — 93,650 (3,783) Charges for services 5,123,054 5,941,208 — — 5,941,208 818,154 Investment income 246,000 296,028 — — 296,028 50,028 Rental income 72,274 71,294 — — 71,294 (980) Other 511,924 592,590 — — 592,590 80,666

Total revenues 6,050,685 6,994,770 — — 6,994,770 944,085

Expenditures:General government:

Capital improvement 390,911 237,222 — — 237,222 153,689

T t l l t 390 911 237 222 237 222 153 689

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance (Deficit) – Budget and Actual (Non-GAAP Basis)Beach Recreation Special Revenue Fund

Total general government 390,911 237,222 — — 237,222 153,689

General services:Community maintenance

Salaries 1,518,271 1,518,271 — — 1,518,271 — Supplies 1,246,310 1,255,182 8,872 — 1,246,310 — Capital outlay 2,348 2,348 — — 2,348 —

Total environmental and public works 2,766,929 2,775,801 8,872 — 2,766,929 — Capital improvement 250,000 — — — — 250,000

Total general services 3,016,929 2,775,801 8,872 — 2,766,929 250,000

Cultural and recreation services:Salaries 478 477 — — 477 1 Supplies 3,572,768 3,524,893 — 47,875 3,572,768 — Capital improvement 1,455,397 50,481 — 64,497 114,978 1,340,419

Total cultural and recreation services 5,028,643 3,575,851 — 112,372 3,688,223 1,340,420

Total expenditures 8,436,483 6,588,874 8,872 112,372 6,692,374 1,744,109

Excess (deficiency) of revenues over(under) expenditures (2,385,798) 405,896 (8,872) (112,372) 302,396 (800,024)

Other financing sources – transfers in 6,790 6,790 — — 6,790 —

Net change in fund balance (2,379,008) 412,686 (8,872) (112,372) 309,186 (800,024)

Fund balance at beginning of year 2,192,365 2,192,365 — — 2,192,365 —

Fund balance (deficit) at end of year ( 186,643) $ 2,605,051 (8,872) (112,372) 2,501,551 (800,024)

95

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances* basis (negative)

Revenues:Intergovernmental 15,146,900 $ 16,277,007 — — 16,277,007 1,130,107 Investment income 8,600 96,729 — — 96,729 88,129 Other — 40,629 — — 40,629 40,629

Total revenues 15,155,500 16,414,365 — — 16,414,365 1,258,865

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Housing Authority Special Revenue Fund

Expenditures:Housing and community development:

Supplies 15,275,200 14,003,242 — — 14,003,242 1,271,958 Capital improvement 6,100 6,100 — — 6,100 —

Total housing and community development 15,281,300 14,009,342 — — 14,009,342 1,271,958

Excess (deficiency) of revenues over(under) expenditures (125,800) 2,405,023 — — 2,405,023 2,530,823

Other financing sources (uses):Transfers in 196,881 196,881 — — 196,881 — Transfers out (333,081) (1,242,028) — — (1,242,028) (908,947)

Net change in fund balance (262,000) 1,359,876 — — 1,359,876 1,621,876

Fund balance at beginning of year 1,625,602 1,625,602 — — 1,625,602 —

Fund balance at end of year 1,363,602 $ 2,985,478 — — 2,985,478 1,621,876

* No encumbrances were outstanding at June 30, 2007 and 2008.

96

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

RevenuesIntergovernmental 7,200,000 $ 5,973,724 — — 5,973,724 (1,226,276) Investment income 24,000 10,703 — — 10,703 (13,297) Other — 25,773 — — 25,773 25,773

Total revenues 7,224,000 6,010,200 — — 6,010,200 (1,213,800)

Expenditures:General government:

Salaries 119 126 30 798 30 798 88 328

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenditures and Changes inFund Balance (Deficit) – Budget and Actual (Non-GAAP Basis)

Disaster Relief Special Revenue Fund

Salaries 119,126 30,798 — — 30,798 88,328Supplies 21,400 20,749 — — 20,749 651

Total general government 140,526 51,547 — — 51,547 88,979

General Services:Capital improvement 10,469,387 5,973,724 — 743,605 6,717,329 3,752,058

Total general services 10,469,387 5,973,724 — 743,605 6,717,329 3,752,058

Total expenditures 10,609,913 6,025,271 — 743,605 6,768,876 3,841,037

Net change in fund balance (3,385,913) (15,071) — (743,605) (758,676) 2,627,237

Fund deficit at beginning of year (5,806,910) (5,806,910) — — (5,806,910) —

Fund balance (deficit) at end of year ( 9,192,823) $ (5,821,981) — (743,605) (6,565,586) 2,627,237

* No encumbrances were outstanding at June 30, 2007.

97

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

Revenues:Other taxes 100,000 $ 381,320 — — 381,320 281,320 Investment income 240,000 373,448 — — 373,448 133,448 Other — 100,000 — — 100,000 100,000

Total revenues 340,000 854,768 — — 854,768 514,768

(TORCA) Special Revenue Fund

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Tenant Ownership Rights Charter Amendment

Total revenues 340,000 854,768 854,768 514,768

Expenditures:Housing and community development:

Supplies 8,729 8,729 — — 8,729 — Capital improvement 7,381,177 187,685 — 2,906,022 3,093,707 4,287,470

Total housing and community development 7,389,906 196,414 — 2,906,022 3,102,436 4,287,470

Excess (deficiency) of revenuesover (under) expenditures (7,049,906) 658,354 — (2,906,022) (2,247,668) 4,802,238

Other financing (uses) – transfers out (70,530) (28,506) — — (28,506) 42,024

Net change in fund balance (7,120,436) 629,848 — (2,906,022) (2,276,174) 4,844,262

Fund balance at beginning of year 16,924,670 16,924,670 — — 16,924,670 —

Fund balance at end of year 9,804,234 $ 17,554,518 — (2,906,022) 14,648,496 4,844,262

* No encumbrances were outstanding at June 30, 2007.

98

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

RevenuesIntergovernmental 2,694,970 $ 1,731,516 — — 1,731,516 (963,454) Investment income 45,000 50,322 — — 50,322 5,322

Total revenues 2,739,970 1,781,838 — — 1,781,838 (958,132)

Expenditures:General Services:

Capital improvement 2,307,485 670,225 — 1,360,208 2,030,433 277,052 Total general services 2,307,485 670,225 — 1,360,208 2,030,433 277,052

(CDBG) Special Revenue Fund

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Schedule of Revenues, Expenditures and Changes inFund Balance – Budget and Actual (Non-GAAP Basis)

Community Development Block Grant

Cultural and recreation services:Capital improvement 34,833 34,833 — — 34,833 —

Total cultural and recreation services 34,833 34,833 — — 34,833 —

Housing and community development:Supplies 3,433 3,433 — — 3,433 — Capital improvement 1,295,185 952,122 — 291,990 1,244,112 51,073

Total housing and community development 1,298,618 955,555 — 291,990 1,247,545 51,073

Total expenditures 3,640,936 1,660,613 — 1,652,198 3,312,811 328,125

Excess (deficiency) of revenues over (under) expenditures (900,966) 121,225 — (1,652,198) (1,530,973) (630,007)

Other financing (uses) – transfers out (1,437,979) (1,144,775) — — (1,144,775) 293,204

Net change in fund balance (2,338,945) (1,023,550) — (1,652,198) (2,675,748) (336,803)

Fund balance at beginning of year 14,742,852 14,742,852 — — 14,742,852 —

Fund balance at end of year 12,403,907 $ 13,719,302 — (1,652,198) 12,067,104 (336,803)

* No encumbrances were outstanding at June 30, 2007.

99

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures encumbrances basis (negative)

Revenues:Other taxes 2,358,434 $ 2,368,839 — — 2,368,839 10,405 Intergovernmental 6,504,301 6,591,277 — — 6,591,277 86,976 Investment income 400,000 592,491 — — 592,491 192,491 Other 14,402,500 6,970,410 — — 6,970,410 (7,432,090)

Total revenues 23,665,235 16,523,017 — — 16,523,017 (7,142,218)

Expenditures:General government:

Capital improvement 5,629,029 — — — — 5,629,029 Total general government 5,629,029 — — — — 5,629,029

Public safety: Salaries 129,033 90,740 — — 90,740 38,293 Supplies 534,064 102,991 — 9,965 112,956 421,108 Capital outlay 236,418 33,902 13,831 — 20,071 216,347 Capital improvement 1,349,473 13,289 — — 13,289 1,336,184

Total public safety 2,248,988 240,922 13,831 9,965 237,056 2,011,932

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance (Deficit) – Budget and Actual (Non-GAAP Basis)Miscellaneous Grants Special Revenue Fund

Total public safety 2,248,988 240,922 13,831 9,965 237,056 2,011,932

General services: Environmental and public works management

Supplies 520,424 239,279 — — 239,279 281,145 Capital improvement 16,201,449 4,630,047 — 4,501,056 9,131,103 7,070,346

Total general services 16,721,873 4,869,326 — 4,501,056 9,370,382 7,351,491

Cultural and recreation services: Communiy and cultural services

Supplies 231,708 204,841 — — 204,841 26,867 Capital improvement 25,594,044 9,849,368 — 15,012,150 24,861,518 732,526

Total cultural and recreation services 25,825,752 10,054,209 — 15,012,150 25,066,359 759,393

Library:Supplies 25,448 25,180 — 256 25,436 12

Total library 25,448 25,180 — 256 25,436 12

Housing and community development: Supplies 180,577 51,932 — 128,645 180,577 — Capital improvement 2,560,225 315,451 — 68,646 384,097 2,176,128

Total housing and community development 2,740,802 367,383 — 197,291 564,674 2,176,128

Total expenditures 53,191,892 15,557,020 13,831 19,720,718 35,263,907 17,927,985

Excess (deficiency) of revenuesover (under) expenditures (29,526,657) 965,997 (13,831) (19,720,718) (18,740,890) 10,785,767

Other financing (uses) – transfers out (3,338,406) (2,130,290) — — (2,130,290) 1,208,116

Net change in fund balance (32,865,063) (1,164,293) (13,831) (19,720,718) (20,871,180) 11,993,883

Fund balance at beginning of year 19,676,905 19,676,905 — — 19,676,905 —

Fund balance (deficit) at end of year (13,188,158) $ 18,512,612 (13,831) (19,720,718) (1,194,275) 11,993,883

100

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

Revenues:Intergovernmental 176,000 $ 175,223 — — 175,223 (777) Investment income 6,000 12,826 — — 12,826 6,826

Total revenues 182,000 188,049 — — 188,049 6,049

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Citizens Option for Public Safety Special Revenue Fund

Expenditures:Public safety:

Capital improvement 409,919 178,852 — 36,868 215,720 194,199

Total expenditures 409,919 178,852 — 36,868 215,720 194,199

Net change in fund balance (227,919) 9,197 — (36,868) (27,671) 200,248

Fund balance at beginning of year 234,818 234,818 — — 234,818 —

Fund balance at end of year 6,899$ 244,015 — (36,868) 207,147 200,248

* No encumbrances were outstanding at June 30, 2007.

101

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures encumbrances basis (negative)

Revenues:Charges for services 4,106,280 $ 4,122,208 — — 4,122,208 15,928 Investment income 137,000 152,313 — — 152,313 15,313 Other 4,000 2,376 — — 2,376 (1,624)

Total revenues 4,247,280 4,276,897 — — 4,276,897 29,617

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Rent Control Special Revenue Fund

Expenditures:Housing and community development:

Rent controlSalaries 3,646,275 3,488,617 — — 3,488,617 157,658 Supplies 754,350 650,081 10,500 11,252 650,833 103,517 Capital outlay 58,600 22,366 — — 22,366 36,234

Total housing and community development 4,459,225 4,161,064 10,500 11,252 4,161,816 297,409

Net change in fund balance (211,945) 115,833 (10,500) (11,252) 115,081 327,026

Fund balance at beginning of year 1,588,190 1,588,190 — — 1,588,190 —

Fund balance at end of year 1,376,245 $ 1,704,023 (10,500) (11,252) 1,703,271 327,026

102

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances* basis (negative)

Revenues:Intergovernmental 252,000 $ 560,418 — — 560,418 308,418 Investment income 10,000 12,259 — — 12,259 2,259

Total revenues 262,000 572,677 — — 572,677 310,677

Expenditures:General services:

Supplies 2,300 2,385 — — 2,385 (85)

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Air Quality Management District (AQMD) Special Revenue Fund

pp , , , ( )Capital improvement 753,156 640,906 — — 640,906 112,250

Total general services 755,456 643,291 — — 643,291 112,165

Total expenditures 755,456 643,291 — — 643,291 112,165

Net change in fund balance (493,456) (70,614) — — (70,614) 422,842

Fund balance at beginning of year 254,372 254,372 — — 254,372 —

Fund balance (deficit) at end of year (239,084) $ 183,758 — — 183,758 422,842

* No encumbrances were outstanding at June 30, 2007 and 2008.

103

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances* basis (negative)

Revenues:Other taxes 32,000 $ 50,312 — — 50,312 18,312 Investment income 6,300 9,350 — — 9,350 3,050

Total revenues 38,300 59,662 — — 59,662 21,362

Expenditures:

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Parks and Recreation Special Revenue Fund

Cultural and recreation:Capital improvement 171,000 247 — — 247 170,753

Total cultural and recreation 171,000 247 — — 247 170,753

Net change in fund balance (132,700) 59,415 — — 59,415 192,115

Fund balance at beginning of year 198,117 198,117 — — 198,117 —

Fund balance at end of year 65,417 $ 257,532 — — 257,532 192,115

* No encumbrances were outstanding at June 30, 2007 and 2008.

104

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

Revenues:Intergovernmental 1,670,000 $ 1,213,419 — — 1,213,419 (456,581) Investment income 95,000 71,191 — — 71,191 (23,809) Rental income 15,400 19,223 — — 19,223 3,823

Total revenues 1,780,400 1,303,833 — — 1,303,833 (476,567)

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Gas Tax Special Revenue Fund

Expenditures:General services:

Supplies 4,300 4,067 — — 4,067 233 Capital improvements 1,600,000 772,552 — 814,943 1,587,495 12,505

Total general services 1,604,300 776,619 — 814,943 1,591,562 12,738

Excess (deficiency) of revenuesover (under) expenditures 176,100 527,214 — (814,943) (287,729) (463,829)

Other financing (uses) – transfers out (2,350,565) (1,897,807) — — (1,897,807) 452,758

Net change in fund balance (2,174,465) (1,370,593) — (814,943) (2,185,536) (11,071)

Fund balance at beginning of year 2,882,625 2,882,625 — — 2,882,625 —

Fund balance at end of year 708,160 $ 1,512,032 — (814,943) 697,089 (11,071)

* No encumbrances were outstanding at June 30, 2007.

105

Totalnonmajor

Low/mod Ocean Park capitalCapital Housing Redevelopment projectsProjects Projects Project funds

Cash and investments 18,058,256 $ 17,761,569 4,786,367 40,606,192 Receivables (net, where applicable, of

allowances for uncollectibles):Notes — 16,732,026 2,395,726 19,127,752 Property tax — 1,023,842 38,408 1,062,250 Interest — 147,159 57,636 204,795

Cash with fiscal agent — 113,471 551,691 665,162

Total assets 18,058,256 $ 35,778,067 7,829,828 61,666,151

Liabilities:

Assets

Liabilities andFund Balances

CITY OF SANTA MONICA, CALIFORNIA Combining Balance Sheet

Nonmajor Capital Projects FundsJune 30, 2008

Liabilities:Accounts payable 45,886 $ 80,854 — 126,740 Advances from other funds — — 6,371,075 6,371,075

Total liabilities 45,886 80,854 6,371,075 6,497,815

Fund balances:Reserved 17,992,370 31,497,564 6,267,655 55,757,589 Undesignated 20,000 4,199,649 (4,808,902) (589,253)

Total fund balances 18,012,370 35,697,213 1,458,753 55,168,336 Total liabilities and fund

balances 18,058,256 $ 35,778,067 7,829,828 61,666,151

106

Totalnonmajor

Low/mod Ocean Park capitalCapital Housing Redevelopment projectsProjects Projects Project funds

Revenues:Incremental property taxes — $ 13,110,428 3,058,525 16,168,953 Investment income — 471,381 222,289 693,670 Other — 109,869 12,629 122,498

Total revenues — 13,691,678 3,293,443 16,985,121

Expenditures:Current:

General Services 477,830 — — 477,830 Housing and community development — 2,999,524 1,620,354 4,619,878

Debt service expenditures:Interest — — 307,427 307,427

Total expenditures 477,830 2,999,524 1,927,781 5,405,135

Excess (deficiency) of revenues

Nonmajor Capital Projects FundsYear ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIACombining Statement of Revenues, Expenditures and

Changes in Fund Balances

Excess (deficiency) of revenuesover (under) expenditures (477,830) 10,692,154 1,365,662 11,579,986

Other financing sources (uses):Transfers in 18,490,200 — — 18,490,200 Transfers out — (1,607,531) (1,499,608) (3,107,139)

Total other financing (uses) 18,490,200 (1,607,531) (1,499,608) 15,383,061

Net change in fund balances 18,012,370 9,084,623 (133,946) 26,963,047

Fund balances at beginning of year — 26,612,590 1,592,699 28,205,289

Fund balances at end of year 18,012,370$ 35,697,213 1,458,753 55,168,336

107

Less2006-2007 Plus Actual, Variance –

Original Final encumbered 2007-2008 budgetary positivebudget budget Actual expenditures* encumbrances basis (negative)

Revenues:Incremental property taxes 1,034,663 $ 1,034,663 1,168,638 — — 1,168,638 133,975 Investment income 58,000 58,000 63,584 — — 63,584 5,584 Rental income 1,340,320 1,340,320 1,220,200 — — 1,220,200 (120,120) Other income — — 1,450,143 — — 1,450,143 1,450,143

Total project revenues 2,432,983 2,432,983 3,902,565 — — 3,902,565 1,469,582

Expenditures:Housing and community development:

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance (Deficit) – Budget and Actual (Non-GAAP Basis)Downtown Redevelopment Project Capital Projects Fund (Major Fund)

Supplies 632,477 632,477 618,553 — — 618,553 13,924 Capital improvements 1,400,000 1,950,994 137,548 — 249,771 387,319 1,563,675

Total housing and community development 2,032,477 2,583,471 756,101 — 249,771 1,005,872 1,577,599

Debt service expenditures – interest 354,867 354,867 861,972 — — 861,972 (507,105)

Total project expenditures 2,387,344 2,938,338 1,618,073 — 249,771 1,867,844 1,070,494

Excess (deficiency) of revenuesover (under) expenditures 45,639 (505,355) 2,284,492 — (249,771) 2,034,721 2,540,076

Other financing (uses): Transfers out (1,465,353) (1,465,353) (1,465,353) — — (1,465,353) —

Net change in fund balance (1,419,714) (1,970,708) 819,139 — (249,771) 569,368 2,540,076

Fund deficit at beginning of year (15,870,048) (15,870,048) (15,870,048) — — (15,870,048) —

Fund deficit at end of year (17,289,762) $ (17,840,756) (15,050,909) — (249,771) (15,300,680) 2,540,076

* No encumbrances were outstanding at June 30, 2007.

108

Less2006-2007 Plus Actual, Variance –

Original Final encumbered 2007-2008 budgetary positivebudget budget Actual expenditures* encumbrances basis (negative)

Revenues:Incremental property taxes 41,852,000 $ 44,139,200 48,810,455 — — 48,810,455 4,671,255 Investment income 1,505,000 1,505,000 2,043,715 — — 2,043,715 538,715 Other 100,000 100,000 133,039 — — 133,039 33,039

Total project revenues 43,457,000 45,744,200 50,987,209 — — 50,987,209 5,243,009

Expenditures:Housing and community development:

Payment of property tax increment 11,724,000 14,244,852 14,244,852 — — 14,244,852 — Supplies 1 244 919 1 244 919 1 237 050 — — 1 237 050 7 869

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Earthquake Recovery Redevelopment Project Capital Projects Fund

Supplies 1,244,919 1,244,919 1,237,050 1,237,050 7,869Capital improvements 19,789,300 75,845,144 46,222,371 — 11,395,426 57,617,797 18,227,347

Total project expenditures 32,758,219 91,334,915 61,704,273 — 11,395,426 73,099,699 18,235,216

Excess (deficiency) of revenuesover (under) expenditures 10,698,781 (45,590,715) (10,717,064) — (11,395,426) (22,112,490) 23,478,225

Other financing (uses):Transfers out (9,303,823) (9,553,823) (9,381,849) — — (9,381,849) 171,974

Net change in fund balance 1,394,958 (55,144,538) (20,098,913) — (11,395,426) (31,494,339) 23,650,199

Fund balance at beginning of year, as restated (note 4) 68,209,579 68,209,579 68,209,579 — — 68,209,579 —

Fund balance at end of year 69,604,537$ 13,065,041 48,110,666 — (11,395,426) 36,715,240 23,650,199

* No encumbrances were outstanding at June 30, 2007.

109

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

Revenues:

Total revenues — $ — — — — —

Expenditures:General government:

Capital improvement 6,000,000 — — — — 6,000,000

Total general government 6,000,000 — — — — 6,000,000

P bli f t

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Capital Projects Special Revenue Fund

Public safety:Capital improvement 1,554,400 — — — — 1,554,400

Total public safety 1,554,400 — — — — 1,554,400

General services: Capital improvement 9,724,000 477,830 — 3,294,164 3,771,994 5,952,006

Total general services 9,724,000 477,830 — 3,294,164 3,771,994 5,952,006

Cultural and recreation services:Capital improvement 1,191,800 — — — — 1,191,800

Total cultural and recreation services 1,191,800 — — — — 1,191,800

Total expenditures 18,470,200 477,830 — 3,294,164 3,771,994 14,698,206

Excess (deficiency) of revenues over(under) expenditures (18,470,200) (477,830) — (3,294,164) (3,771,994) (14,698,206)

Other financing (uses) – transfers in 18,490,200 18,490,200 — — 18,490,200 —

Net change in fund balance 20,000 18,012,370 — (3,294,164) 14,718,206 (14,698,206)

Fund balance at beginning of year — — — — — —

Fund balance at end of year 20,000 $ 18,012,370 — (3,294,164) 14,718,206 (14,698,206)

* No encumbrances were outstanding at June 30, 2007.

110

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

Revenues:Incremental property taxes 12,034,466 $ 13,110,428 — — 13,110,428 1,075,962 Investment income 315,000 471,381 — — 471,381 156,381 Other income — 109,869 — — 109,869 109,869

Total project revenues 12,349,466 13,691,678 — — 13,691,678 1,342,212

Expenditures:Housing and community development:

C it l i t 69 875 282 2 999 524 7 109 456 10 108 980 59 766 302

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance – Budget and Actual (Non-GAAP Basis)Low/Moderate Housing Capital Projects Fund

Capital improvements 69,875,282 2,999,524 — 7,109,456 10,108,980 59,766,302

Total project expenditures 69,875,282 2,999,524 — 7,109,456 10,108,980 59,766,302

Excess (deficiency) of revenuesover (under) expenditures (57,525,816) 10,692,154 — (7,109,456) 3,582,698 61,108,514

Other financing sources (uses):Transfers out (2,725,529) (1,607,531) — — (1,607,531) 1,117,998

Net change in fund balance (60,251,345) 9,084,623 — (7,109,456) 1,975,167 62,226,512

Fund balance at beginning of year 26,612,590 26,612,590 — — 26,612,590 —

Fund balance (deficit) at end of year (33,638,755) $ 35,697,213 — (7,109,456) 28,587,757 62,226,512

* No encumbrances were outstanding at June 30, 2007.

111

Less2006-2007 Plus Actual, Variance –

encumbered 2007-2008 budgetary positiveBudget Actual expenditures* encumbrances basis (negative)

Revenues:Incremental property taxes 2,964,000 $ 3,058,525 — — 3,058,525 94,525 Investment income 75,000 222,289 — — 222,289 147,289 Other — 12,629 — — 12,629 12,629

Total project revenues 3,039,000 3,293,443 — — 3,293,443 254,443

Expenditures:Housing and community development:

Supplies 135 737 125 295 125 295 10 442

Year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIASchedule of Revenues, Expenditures and Changes in

Fund Balance (Deficit) – Budget and Actual (Non-GAAP Basis)Ocean Park Redevelopment Project Capital Projects Fund

Supplies 135,737 125,295 — — 125,295 10,442Capital improvements 5,366,990 1,495,059 — 759,403 2,254,462 3,112,528

Total housing and community development 5,502,727 1,620,354 — 759,403 2,379,757 3,122,970

Debt service expenditures – interest 99,370 307,427 — — 307,427 (208,057)

Total project expenditures 5,602,097 1,927,781 — 759,403 2,687,184 2,914,913

Excess (deficiency) of revenuesover (under) expenditures (2,563,097) 1,365,662 — (759,403) 606,259 3,169,356

Other financing (uses):Transfers out (1,499,608) (1,499,608) — — (1,499,608) —

Net change in fund balance (4,062,705) (133,946) — (759,403) (893,349) 3,169,356

Fund balance at beginning of year 1,592,699 1,592,699 — — 1,592,699 —

Fund balance (deficit) at end of year (2,470,006) $ 1,458,753 — (759,403) 699,350 3,169,356

* No encumbrances were outstanding at June 30, 2007.

112

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113

Totalnonmajor

Redevelopment debt serviceAssets City Agency funds

Cash with fiscal agent 11,631,847 $ 7,321,318 18,953,165

Total assets 11,631,847 $ 7,321,318 18,953,165

Liabilities andFund Balances

Fund balances :Reserved - debt service 11,631,847 $ 7,321,318 18,953,165

Total fund balances 11,631,847 7,321,318 18,953,165

June 30, 2008

CITY OF SANTA MONICA, CALIFORNIACombining Balance Sheet

Nonmajor Debt Service Funds

Total liabilities and fundbalances 11,631,847 $ 7,321,318 18,953,165

114

Totalnonmajor

Redevelopment debt serviceCity Agency funds

Revenues - investment income 215,420 $ 110,221 325,641

Expenditures:Principal 4,450,000 3,625,000 8,075,000 Interest 4,127,155 3,645,278 7,772,433

Total expenditures 8,577,155 7,270,278 15,847,433

Deficiency of revenues under expenditures (8,361,735) (7,160,057) (15,521,792)

Nonmajor Debt Service Funds

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIACombining Statement of Revenues, Expenditures and

Changes in Fund Balances

Other financing sources - transfers in 8,434,200 7,293,357 15,727,557

Net change in fund balance 72,465 133,300 205,765

Fund balances at beginning of year 11,559,382 7,188,018 18,747,400

Fund balances at end of year 11,631,847$ 7,321,318 18,953,165

115

TotalCemetery Mausoleum nonmajorPerpetual Perpetual permanent

Assets Care Care funds

Cash and investments 5,676 $ 7,627 13,303 Receivables (net, where applicable, of

allowances for uncollectibles):Accounts 244 1,465 1,709

Cash with fiscal agent 6,995,086 716,140 7,711,226

Total assets 7,001,006 $ 725,232 7,726,238

Fund Balances

Fund balances:

June 30, 2008

CITY OF SANTA MONICA, CALIFORNIACombining Balance Sheet

Nonmajor Permanent Funds

Fund balances:Reserved for perpetual care 7,001,006 725,232 7,726,238

Total fund balances 7,001,006 $ 725,232 7,726,238

116

TotalCemetery Mausoleum nonmajorPerpetual Perpetual permanent

Care Care funds

Revenues:Charges for services 57,453 $ 30,223 87,676 Investment income (513,937) (53,255) (567,192)

Total revenues (456,484) (23,032) (479,516)

Other financing (uses) - transfers out (300,256) (29,420) (329,676)

Net change in fund balance (756,740) (52,452) (809,192)

Fund balances at beginning of year 7,757,746 777,684 8,535,430

Fund balances at end of year 7,001,006$ 725,232 $ 7,726,238 $

Nonmajor Permanent Funds

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIACombining Statement of Revenues, Expenditures and

Changes in Fund Balances

117

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118

CITY OF SANTA MONICA, CALIFORNIA

Nonmajor Enterprise Fund Financial Statements

Enterprise Funds are used to account for operations that are financed and operated in a manner similar to private business enterprises (a) where the intent is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges, or (b) where the City has decided that periodic determination of revenues earned, expenses incurred and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes.

Water Fund – To account for revenues and expenses of providing water service to the citizens of the City.

Solid Waste Management – To account for revenues and expenses of operating the City's refuse collection, street sweeping and cleaning, and recycling programs.

Pier Fund – To account for revenues and expenses connected with management and development of the Santa Monica Pier.

Civic Auditorium Fund – To account for revenues and expenses connected with management of the Santa Monica Civic Auditorium.

Airport Fund – To account for revenues and expenses connected with management of the Santa Monica Municipal Airport.

Stormwater Management Fund – To account for revenues and expenses associated with storm water management.

Cemetery Fund – To account for revenues and expenses associated with operation of Woodlawn Cemetery.

Special Aviation Fund – To account for revenues and expenses associated with aviation-related State funds provided to the City.

Parking Authority Fund – To account for revenues and expenses associated with operating the various parking structures and parking lots owned by the City Parking Authority.

119

Totalnonmajor

Solid Civic Special Parking enterpriseAssets Water Waste Pier Auditorium Airport Stormwater Cemetery Aviation Authority funds

Current assets:Cash and investments 16,719,809 $ 1,580,198 7,054,171 2,414,294 419,678 239,951 230,596 237,302 11,341,653 40,237,652 Restricted cash and investments 278,008 6,665,999 293,759 151,853 2,633,478 — — — — 10,023,097 Receivables (net, where applicable, of

allowances for uncollectibles):Accounts 2,510,917 2,939,437 21,143 8,949 198,031 32,158 103,242 — — 5,813,877 Interest 188,051 101,165 89,258 34,720 33,442 16,234 3,118 2,455 134,275 602,718

Inventory 421,049 — — — — — — — — 421,049 Prepaids 7,510 — — — — — — — — 7,510

Total current assets 20,125,344 11,286,799 7,458,331 2,609,816 3,284,629 288,343 336,956 239,757 11,475,928 57,105,903

Noncurrent assets:Restricted cash and investments 931,501 — — — — 81,924 — — 300,000 1,313,425 Capital assets:

Land 21,006 — — — 8 — 4 — 8,338,700 8,359,718

CITY OF SANTA MONICA, CALIFORNIAStatement of Net Assets

Nonmajor Enterprise FundsJune 30, 2008

, , , , ,Buildings 1,728,130 298,198 2,242,457 5,657,651 8,018,907 — 1,499,450 — 1,674,714 21,119,507 Improvements other than buildings 992,137 173,736 4,750,699 430,780 12,558,166 146,690 204,936 509,940 169,306 19,936,390 Machinery and equipment 2,025,330 554,160 289,427 1,892,403 478,617 35,750 166,155 275,000 7,237 5,724,079Infrastructure 36,436,832 — 8,213,438 — — 10,403,980 — — 55,054,250 Construction in progress 243,026 658,545 396,890 329,530 — 68,929 190,747 — 26,857 1,914,524

41,446,461 1,684,639 15,892,911 8,310,364 21,055,698 10,655,349 2,061,292 784,940 10,216,814 112,108,468Less accumulated depreciation (20,718,624) (853,954) (9,159,478) (4,908,844) (13,311,594) (1,744,046) (1,078,291) (756,036) (965,588) (53,496,455)

Net capital assets 20,727,837 830,685 6,733,433 3,401,520 7,744,104 8,911,303 983,001 28,904 9,251,226 58,612,013

Total noncurrent assets 21,659,338 830,685 6,733,433 3,401,520 7,744,104 8,993,227 983,001 28,904 9,551,226 59,925,438

Total assets 41,784,682 $ 12,117,484 14,191,764 6,011,336 11,028,733 9,281,570 1,319,957 268,661 21,027,154 117,031,341

(Continued)

120

Totalnonmajor

Solid Civic Special Parking enterpriseLiabilities Water Waste Pier Auditorium Airport Stormwater Cemetery Aviation Authority funds s

Current liabilities:Accounts payable 1,624,528 $ 418,804 187,886 79,385 360,180 19,851 85,990 — 40,711 2,817,335 Accrued liabilities 311,198 380,916 54,354 164,501 89,182 — 41,948 — — 1,042,099 Contracts payable (retained percentage) 48,338 — 16,083 26,620 — — — — — 91,041 Interest payable — — — — — 28,570 — — — 28,570 Current portion of long-term obligations — — — — 22,218 237,612 — — — 259,830 Liabilities payable from restricted assets -

deposits 278,008 6,665,999 293,759 226,420 382,744 — — — — 7,846,930

Total current liabilities 2,262,072 7,465,719 552,082 496,926 854,324 286,033 127,938 — 40,711 12,085,805

Noncurrent liabilities:Accrued liabilities 210,231 178,942 50,913 20,804 30,277 — 20,226 — — 511,393 Advances from other funds — — — — 8,999,488 — 2,943,366 — — 11,942,854 Long-term obligations, net of current portion — — — — 44,435 3,058,973 — — — 3,103,408

CITY OF SANTA MONICA, CALIFORNIAStatement of Net Assets, Continued

June 30, 2008Nonmajor Enterprise Funds

Total noncurrent liabilities 210,231 178,942 50,913 20,804 9,074,200 3,058,973 2,963,592 — — 15,557,655

Total liabilities 2,472,303 7,644,661 602,995 517,730 9,928,524 3,345,006 3,091,530 — 40,711 27,643,460

Invested in capital assets, net of related debt 20,727,837 830,685 6,733,433 3,401,520 7,677,451 5,614,718 983,001 28,904 9,251,226 55,248,775 Unrestricted 18,584,542 3,642,138 6,855,336 2,092,086 (6,577,242) 321,846 (2,754,574) 239,757 11,735,217 34,139,106

Total net assets 39,312,379$ 4,472,823 13,588,769 5,493,606 1,100,209 5,936,564 (1,771,573) 268,661 20,986,443 89,387,881

Net Assets

121

Totalnonmajor

Solid Civic Special Parking enterpriseWater Waste Pier Auditorium Airport Stormwater Cemetery Aviation Authority funds

Operating revenues: Charges for services 16,130,044 $ 18,842,702 3,107,349 3,117,033 4,279,268 1,301,350 1,080,532 — 145,600 48,003,878

Operating expenses:Personnel services 4,863,440 7,160,198 1,356,673 2,432,764 1,175,175 — 604,634 — 850 17,593,734 Administrative indirect 1,181,721 738,677 379,790 170,063 647,113 3,352 177,114 — — 3,297,830 Contractual services 399,310 3,468,113 1,071,015 58,979 379,291 — 339,113 — — 5,715,821 Repairs and maintenance 224,612 2,518,673 271,050 94,250 349,146 — 71,164 — — 3,528,895 Materials and supplies 2,911,323 2,649,088 641,357 425,370 754,553 37,632 324,845 — 315,924 8,060,092Utilities 440,549 51,161 142,442 163,318 138,325 — 71,651 — — 1,007,446 Water purchases 3,950,104 — — — — — — — — 3,950,104 Casualty, property and liability costs 137,200 311,866 127,000 105,500 82,000 — 36,800 — — 800,366 Depreciation 1,095,289 9,463 329,220 284,427 565,300 284,130 100,525 18,333 32,071 2,718,758 Other 438,237 1,293,233 566,685 11,612 866,889 59,844 6,457 — 731 3,243,688

Total operating expenses 15,641,785 18,200,472 4,885,232 3,746,283 4,957,792 384,958 1,732,303 18,333 349,576 49,916,734 Operating income (loss) 488,259 642,230 (1,777,883) (629,250) (678,524) 916,392 (651,771) (18,333) (203,976) (1,912,856)

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Statement of Revenues, Expenses and Changes in Fund Net AssetsNonmajor Enterprise Funds

Operating income (loss) 488,259 642,230 (1,777,883) (629,250) (678,524) 916,392 (651,771) (18,333) (203,976) (1,912,856)

Nonoperating revenues (expenses):Investment income 720,789 371,672 318,341 129,570 121,659 41,322 8,398 9,358 469,069 2,190,178 Interest expense (2,547) — — — (246,062) (89,725) — — — (338,334) Loss on disposal of capital assets (49,473) (5,995) (55,867) — (42,784) — — — — (154,119) Other 316,699 457,334 44,710 — 210,921 247,310 — — — 1,276,974

Total nonoperating revenues 985,468 823,011 307,184 129,570 43,734 198,907 8,398 9,358 469,069 2,974,699Income (loss) before capital

contributions and transfers 1,473,727 1,465,241 (1,470,699) (499,680) (634,790) 1,115,299 (643,373) (8,975) 265,093 1,061,843

Capital Contributions - cash 440,000 — — — — — — — — 440,000 Transfers in 249,404 39,506 840,134 16,667 53,556 2,595 332,762 — 3,670,150 5,204,774 Transfers out (1,208,845) (699,300) (12,500) — (16,200) (1,725,729) — — (2,779,790) (6,442,364)

Change in net assets 954,286 805,447 (643,065) (483,013) (597,434) (607,835) (310,611) (8,975) 1,155,453 264,253Total net assets (deficit)

at beginning of year 38,358,093 3,667,376 14,231,834 5,976,619 1,697,643 6,544,399 (1,460,962) 277,636 19,830,990 89,123,628 Total net assets (deficit)

at end of year 39,312,379 $ 4,472,823 13,588,769 5,493,606 1,100,209 5,936,564 (1,771,573) 268,661 20,986,443 89,387,881

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Totalnonmajor

Solid Civic Special Parking enterpriseWater Waste Pier Auditorium Airport Stormwater Cemetery Aviation Authority funds

Cash flows from operating activities:Cash received from customers 16,073,483$ 18,842,308 3,103,769 3,340,119 4,273,150 1,409,224 1,170,525 — 145,600 48,358,178 Cash payments for materials and services (9,639,997) (10,594,501) (3,415,784) (1,292,428) (3,079,042) (152,985) (948,722) — (281,127) (29,404,586) Cash payments to employees for services (4,938,672) (7,284,705) (1,481,051) (2,399,474) (1,155,845) — (620,462) — (849) (17,881,058) Other revenue received 316,699 457,333 44,708 — 210,922 247,311 — — — 1,276,973

Net cash provided by (used in) operating activities 1,811,513 1,420,435 (1,748,358) (351,783) 249,185 1,503,550 (398,659) — (136,376) 2,349,507

Cash flows from noncapital financing activities:Repayment of advances made to other funds — — — — (48,000) — — — — (48,000) Transfers in 249,404 39,506 840,134 16,667 53,556 2,595 332,762 — 3,670,150 5,204,774 Transfers out (1,208,845) (699,300) (12,500) — (16,200) (1,725,729) — — (2,779,790) (6,442,364)

Net cash provided by (used in) noncapital financing activities (959,441) (659,794) 827,634 16,667 (10,644) (1,723,134) 332,762 — 890,360 (1,285,590)

For the fiscal year ended June 30, 2008

CITY OF SANTA MONICA, CALIFORNIA

Nonmajor Enterprise FundsStatement of Cash Flows

Cash flows from capital and related financing activities:

Capital contributions received 440,000 — — — — — — — — 440,000 Acquisition and construction of capital assets (422,639) (95,939) (207,352) (451,392) (20,426) (863,828) (153,994) — (3,000,000) (5,215,570) Reduction in long-term obligations — — — — (442,218) (231,590) — — — (673,808) Advances from other funds — — — — — — 112,266 — — 112,266 Interest paid on long-term obligations (2,547) — — — (257,822) (91,733) — — — (352,102)

Net cash (used in) capital and related financing

14,814 (95,939) (207,352) (451,392) (720,466) (1,187,151) (41,728) — (3,000,000) (5,689,214) Cash flows from investing activities:

Interest on investments 622,357 330,581 303,037 126,583 117,952 41,321 10,296 8,782 439,650 2,000,559Net cash provided by investing

activities 622,357 330,581 303,037 126,583 117,952 41,321 10,296 8,782 439,650 2,000,559 Net increase (decrease) in cash and

cash equivalents 1,489,243 995,283 (825,039) (659,925) (363,973) (1,365,414) (97,329) 8,782 (1,806,366) (2,624,738) Cash and cash equivalents at beginning of year 16,440,075 7,250,914 8,172,969 3,226,072 3,417,129 1,687,289 327,925 228,520 13,448,019 54,198,912

Cash and cash equivalents at end of year 17,929,318$ 8,246,197 7,347,930 2,566,147 3,053,156 321,875 230,596 237,302 11,641,653 51,574,174

Cash and investments 16,719,809 $ 1,580,198 7,054,171 2,414,294 419,678 239,951 230,596 237,302 11,341,653 40,237,652 Restricted cash and investments 1,209,509 6,665,999 293,759 151,853 2,633,478 81,924 — — 300,000 11,336,522

Total cash and cash equivalents 17,929,318 $ 8,246,197 7,347,930 2,566,147 3,053,156 321,875 230,596 237,302 11,641,653 51,574,174

(Continued)

123

Totalnonmajor

Solid Civic Special Parking enterpriseWater Waste Pier Auditorium Airport Stormwater Cemetery Aviation Authority funds

Reconciliation of operating income (loss) to net cash provided by (used in) operating activities:

Operating income (loss) 488,259 $ 642,230 (1,777,883) (629,250) (678,524) 916,392 (651,771) (18,333) (203,976) (1,912,856)

Adjustments to reconcile operating income (loss) to net cash provided by (used in)operating activities:

Add depreciation 1,095,289 9,463 329,220 284,427 565,300 284,130 100,525 18,333 32,071 2,718,758 Change in assets and liabilities:

(Increase) decrease in accounts receivable (56,561) (394) (3,580) (3,334) (6,118) 107,874 89,993 — — 127,880 (Increase) in prepaids (945) — — — — — — — — (945) (Increase) in inventory (45,083) — — — — — — — — (45,083) Increase (decrease) in accounts

payable 323,270 3,454 (3,403) 61,627 128,066 (52,156) 78,422 — 35,529 574,809

CITY OF SANTA MONICA, CALIFORNIAStatement of Cash Flows

Nonmajor Enterprise Funds, ContinuedFor the fiscal year ended June 30, 2008

(Decrease) in accrued current liabilities (61,657) (98,426) (98,743) 24,592 12,912 — (11,304) — — (232,626)

Increase (decrease) in deposits 148,386 432,856 19,078 (20,717) 10,209 — — — — 589,812 Increase (decrease) in contracts

payable (382,569) — (232,121) (77,827) — — — — — (692,517) Increase in accrued

noncurrent liabilities (13,575) (26,082) (25,636) 8,699 6,419 — (4,524) — — (54,699) Other nonoperating revenue received 316,699 457,334 44,710 — 210,921 247,310 — — — 1,276,974

Total adjustments 1,323,254 778,205 29,525 277,467 927,709 587,158 253,112 18,333 67,600 4,262,363 Net cash provided by (used in) operating activities 1,811,513$ 1,420,435 (1,748,358) (351,783) 249,185 1,503,550 (398,659) — (136,376) 2,349,507

There were no significant noncash capital financing or investing activities for the year ended June 30, 2008.

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CITY OF SANTA MONICA, CALIFORNIA

Internal Service Fund Financial Statements

Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the City or to other governments, on a cost-reimbursement basis.

Vehicle Management Fund – To account for user charges from other funds and expenses related to the replacement, maintenance and the fueling of various City vehicles, including specialized mechanical equipment.

Information Technology Replacement and Services – To account for user charges from other funds and expenses related to replacement of computer equipment.

Self-Insurance, Comprehensive Fund – To account for user charges from other funds and expenses related to the administration and payment of general liability claims.

Self-Insurance, Bus Fund – To account for user charges from the Big Blue Bus Fund and expenses related to the administration and payment of municipal bus lines liability claims.

Self-Insurance, Auto Fund – To account for user charges from other funds and expenses related to the administration and payment of automobile liability claims.

Self-Insurance, Workers' Compensation Fund – To account for user charges from other funds and expenses related to the administration and payment of workers' compensation claims.

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Information TotalTechnology Self-Insurance Self-Insurance internal

Vehicle Replacement Compre- Self-Insurance Self-Insurance Workers’ serviceAssets Management and Services hensive Bus Auto Compensation funds

Current assets:Cash and investments 26,117,277 $ 4,587,608 7,383,425 2,180,484 1,682,238 25,130,456 67,081,488 Receivables:

Accounts 77,208 1,931 3,473 — — 17 82,629 Interest 224,472 44,352 68,254 25,334 17,130 261,455 640,997

Inventory 67,471 — — — — — 67,471 Prepaids — — 16,192 — — 10,104 26,296

Total current assets 26,486,428 4,633,891 7,471,344 2,205,818 1,699,368 25,402,032 67,898,881

Noncurrent assets:Capital assets:

Machinery and equipment 30 626 198 1 523 905 2 849 7 386 919 10 065 32 171 322

CITY OF SANTA MONICA, CALIFORNIAStatement of Net Assets

All Internal Service FundsJune 30, 2008

Machinery and equipment 30,626,198 1,523,905 2,849 7,386 919 10,065 32,171,322Less accumulated depreciation (17,509,054) (898,450) (2,849) (7,386) (919) (10,065) (18,428,723)

Net capital assets 13,117,144 625,455 — — — — 13,742,599

Total assets 39,603,572 5,259,346 7,471,344 2,205,818 1,699,368 25,402,032 81,641,480 Liabilities

Current liabilities:Accounts payable 258,261 124,485 7,862 23,211 17,812 39,411 471,042 Accrued liabilities 129,294 — — — — 129,639 258,933 Claims payable — — 1,523,291 455,605 89,994 4,224,579 6,293,469

Total current liabilities 387,555 124,485 1,531,153 478,816 107,806 4,393,629 7,023,444

Noncurrent liabilities:Accrued liabilities 44,363 — — — — 84,103 128,466 Claims payable — — 2,722,680 1,485,033 145,261 16,410,608 20,763,582

Total noncurrent liabilities 44,363 — 2,722,680 1,485,033 145,261 16,494,711 20,892,048 Total liabilities 431,918 124,485 4,253,833 1,963,849 253,067 20,888,340 27,915,492

Net assets

Net assets Invested in capital assets 13,117,144 625,455 — — — — 13,742,599 Unrestricted 26,054,510 4,509,406 3,217,511 241,969 1,446,301 4,513,692 39,983,389

Total net assets 39,171,654 $ 5,134,861 3,217,511 241,969 1,446,301 4,513,692 53,725,988

126

Information TotalTechnology Self-Insurance Self-Insurance internal

Vehicle Replacement Compre- Self-Insurance Self-Insurance Workers’ serviceManagement and Services hensive Bus Auto Compensation funds

Operating revenues – charges for services 10,873,750 $ 1,827,994 10,133,569 1,592,500 758,766 6,254,293 31,440,872

Operating expenses:Personnel services 2,349,849 — — — — 1,390,868 3,740,717 Administrative indirect 492,718 — — — — — 492,718 Contractual services 32,135 — — — — — 32,135 Repairs and maintenance 1,827,392 — — — — — 1,827,392 Materials and supplies 398,994 1,084,015 — — — 20,748 1,503,757 Utilities 67,908 — — — — 1,828 69,736 Casualty and liabilities 48,600 — — — — — 48,600 Claims expense, net of claims reserve

adjustments 1 066 404 833 433 433 613 5 250 191 7 583 641

CITY OF SANTA MONICA, CALIFORNIAStatement of Revenues, Expenses and

Changes in Fund Net AssetsAll Internal Service FundsYear ended June 30, 2008

adjustments — — 1,066,404 833,433 433,613 5,250,191 7,583,641Insurance and bonds — — 2,707,502 258,201 4,615 339,451 3,309,769 Miscellaneous fees and costs 454,679 — 438,471 75,552 56,270 222,715 1,247,687 Administrative fees — — 2,025 — — 158,666 160,691 Depreciation 2,173,366 254,249 — — — — 2,427,615

Total operating expenses 7,845,641 1,338,264 4,214,402 1,167,186 494,498 7,384,467 22,444,458

Operating income (loss) 3,028,109 489,730 5,919,167 425,314 264,268 (1,130,174) 8,996,414

Nonoperating revenues:Investment income 826,120 169,804 92,780 67,282 64,004 998,455 2,218,445 Gain or (loss) on disposal of capital assets 25,876 (1) — — — (2,975) 22,900 Other revenue — — — — — 656 656

Total nonoperating revenues 851,996 169,803 92,780 67,282 64,004 996,136 2,242,001 Income (loss) before operating

transfers 3,880,105 659,533 6,011,947 492,596 328,272 (134,038) 11,238,415

Transfers in 12,346 — — — — 665,406 677,752 Transfers out — — (305,000) (257,000) (96,000) — (658,000)

Change in net assets 3,892,451 659,533 5,706,947 235,596 232,272 531,368 11,258,167

Net assets at beginning of year, 35,279,203 4,475,328 (2,489,436) 6,373 1,214,029 3,982,324 42,467,821

Total net assets at end of year 39,171,654 $ 5,134,861 3,217,511 241,969 1,446,301 4,513,692 53,725,988

127

Information TotalTechnology Self-Insurance Self-Insurance internal

Vehicle Replacement Compre- Self-Insurance Self-Insurance Workers’ serviceManagement and Services hensive Bus Auto Compensation funds

Cash flows from operating activities:Cash received from customers 11,829,255 $ 1,826,063 10,133,569 1,923,662 758,766 6,254,276 32,725,591 Cash payments for materials and services (3,196,937) (1,054,149) (10,448,748) (312,480) (79,148) (717,047) (15,808,509)Cash payments for claims and related expenses — — (1,913,277) (421,913) (452,816) (5,315,942) (8,103,948) Cash payments to employees for services (2,349,849) — — — — (1,371,518) (3,721,367) Other nonoperating revenue received — — — — — 656 656

Net cash provided by (used in) operating activities 6,282,469 771,914 (2,228,456) 1,189,269 226,802 (1,149,575) 5,092,423

Cash flows from noncapital financing activities:Transfers in 12,346 — — — — 665,406 677,752 Transfers out — — (305,000) (257,000) (96,000) — (658,000)

Net cash provided by (used in) noncapital financing activities 12,346 — (305,000) (257,000) (96,000) 665,406 19,752

Cash flows from capital and related financing activities:Acquisition and construction of capital assets (4,609,826) — — — — — (4,609,826)

CITY OF SANTA MONICA, CALIFORNIAStatement of Cash Flows

All Internal Service FundsFor the fiscal year ended June 30, 2008

Proceeds from sale of capital assets 216,619 (198,627) — — — — 17,992

Net cash used in capital and related financing activities (4,393,207) (198,627) — — — — (4,591,834)

Cash flows from investing activities – interest on investments 781,619 157,030 97,920 67,282 61,238 946,374 2,111,463

Net increase (decrease) in cash and cash equivalents 2,683,227 730,317 (2,435,536) 999,551 192,040 462,205 2,631,804

Cash and cash equivalents at beginning of year 23,434,050 3,857,291 9,818,961 1,180,933 1,490,198 24,668,251 64,449,684

Cash and cash equivalents at end of year 26,117,277$ 4,587,608 7,383,425 2,180,484 1,682,238 25,130,456 67,081,488

Cash and investments 26,117,277 4,587,608 7,383,425 2,180,484 1,682,238 25,130,456 67,081,488 Total cash and cash equivalents 26,117,277 4,587,608 7,383,425 2,180,484 1,682,238 25,130,456 67,081,488

Reconciliation of operating income (loss) to net cash provided by (used in) operating activities:

Operating income (loss) 3,028,109 $ 489,730 5,919,167 425,314 264,268 (1,130,174) 8,996,414

Adjustments to reconcile operating income (loss) to net cash provided by (used in) operating activities:

Add depreciation 2,173,366 254,249 — — — — 2,427,615 Change in assets and liabilities:

(Increase) in accounts receivable 955,505 (1,931) — 331,162 — (17) 1,284,719 (Increase) in prepaids — — (16,192) — — (458) (16,650) Decrease in inventories (19,843) — — — — — (19,843) Increase (decrease) in accounts payable 107,602 29,866 (7,300,750) 21,273 (18,263) 26,819 (7,133,453) Increase in accrued liabilities 37,730 — — — — 19,350 57,080 (Decrease) in claims payable — — (830,681) 411,520 (19,203) (65,751) (504,115)

Other nonoperating revenue received — — — — — 656 656

Total adjustments 3,254,360 282,184 (8,147,623) 763,955 (37,466) (19,401) (3,903,991)

Net cash provided by (used in) operating activities 6,282,469 $ 771,914 (2,228,456) 1,189,269 226,802 (1,149,575) 5,092,423

There were no significant noncash capital financing or investing activities for the year ended June 30, 2008.

128

CITY OF SANTA MONICA, CALIFORNIA

Fiduciary Fund Financial Statements

Agency Funds are custodial in nature and used to receive and disburse funds for an entity/individual, which is not part of the City.

General Trust Fund - To account for funds given to the City for restricted purposes whereby the City is only acting as a pass-through agent.

Street Light Fund - To account for all receipts and disbursements associated with 1911 Act Street Light Assessment Bonds.

129

Agency FundsGeneral Street

Trust Light Totals

Restricted cash and investments 3,756,215 $ 4,815 3,761,030 Accounts receivable 26,485 — 26,485

Total assets 3,782,700 $ 4,815 3,787,515

Accounts payable and accrued liabilities 3,782,700 $ 4,815 3,787,515 Total liabilities 3,782,700 $ 4,815 3,787,515

Fiduciary FundsJune 30, 2008

Combining Statement of Fiduciary Assets and LiabilitiesCITY OF SANTA MONICA, CALIFORNIA

130

Year ended Year endedJune 30, 2007 Additions Reductions June 30, 2008

Agency Funds:General TrustAssets:

Restricted cash and investments 2,415,053 $ 59,789,707 58,448,545 3,756,215 Accounts receivable 8,414 239,897 221,826 26,485

Total assets 2,423,467 $ 60,029,604 58,670,371 3,782,700

Liabilities:

Accounts payable 2,423,467 $ 66,790,692 65,431,459 3,782,700

Total liabilities 2,423,467 $ 66,790,692 65,431,459 3,782,700

Street LightAssets:

CITY OF SANTA MONICA, CALIFORNIACombining Statement of Changes in Fiduciary Assets and Liabilities

Fiduciary FundsFor the fiscal year ended June 30, 2008

Restricted cash and investments 4,395 $ 129,972 129,552 4,815

Total assets 4,395 $ 129,972 129,552 4,815

Liabilities:Accounts payable 4,395 $ 259,868 259,448 4,815

Total liabilities 4,395 $ 259,868 259,448 4,815

Total Fiduciary FundsAssets:

Restricted cash and investments 2,419,448 $ 59,919,679 58,578,097 3,761,030 Accounts Receivable 8,414 239,897 221,826 26,485

Total assets 2,427,862 $ 60,159,576 58,799,923 3,787,515

Liabilities:Accounts payable 2,427,862 $ 67,050,560 65,690,907 3,787,515

Total liabilities 2,427,862 $ 67,050,560 65,690,907 3,787,515

131

C-1

APPENDIX C

PROPOSED FORM OF BOND COUNSEL OPINION

[Date of Delivery]

Santa Monica Public Financing Authority 1685 Main Street Santa Monica, California 90401

Santa Monica Public Financing Authority Lease Revenue Refunding Bonds, Series 2009

Ladies and Gentlemen:

(Public Safety Facility Project)

We have acted as bond counsel in connection with the issuance by the Santa Monica Public Financing Authority (the “Authority”) of the Santa Monica Public Financing Authority Lease Revenue Refunding Bonds, Series 2009 (Public Safety Facility Project) (the “Bonds”) in the aggregate principal amount of $9,155,000. In such connection, we have reviewed the Indenture, dated as of September 1, 1999, by and among The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), the Authority and the City of Santa Monica (the “City”), as amended and supplemented by the First Supplemental Indenture, dated as of January 1, 2002, as further amended by the Second Supplemental Indenture, dated as of December 1, 2009, by and among the Trustee, the Authority and the City (as so amended and supplemented, the “Indenture”), the Lease Agreement, dated as of September 1, 1999, by and between the City and the Authority, as amended and supplemented by the First Amendment to Lease Agreement, dated as of January 1, 2002, as further supplemented by the Second Amendment to Lease Agreement dated as of December 1, 2009, by and between the City and the Authority (as so amended and supplemented, the “Lease Agreement”), the Ground Lease, dated as of September 1, 1999, by and between the City and the Authority (the “Ground Lease”), the Assignment Agreement, dated as of September 1, 1999, by and between the Authority and the Trustee, as amended and supplemented by the First Amendment to Assignment Agreement, dated as of January 1, 2002, as further amended by the Second Amendment to Assignment Agreement dated as of December 1, 2009, by and between the Authority and the Trustee (as so amended and supplemented, the “Assignment Agreement”), the Tax Certificate of the Authority and the City, dated as of the date hereof (the “Tax Certificate”), opinions of counsel to the Authority, the City and the Trustee, certificates of the Authority, the City and the Trustee and others and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.

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 Base Rental Payments in accordance with the terms of the Lease Agreement is a valid and binding obligation payable from the funds of the City lawfully available therefore, except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights, by equitable principles, by the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against municipalities in the State of California. The obligation of the City to make Base Rental 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

C-2

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 Agreement and the Indenture have been duly authorized, executed and delivered by the City and the Authority and constitute valid and legally binding agreements of the City and the Authority enforceable against the City and the Authority in accordance with their terms, except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights, by equitable principles, by the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against municipalities in the State of California, except that we express no opinion as to any provisions in the Lease Agreement or the Indenture with respect to indemnification, penalty, contribution, choice of law, choice of forum or waiver.

(3) Under existing statutes, regulations, rulings and judicial decisions, interest (and original issue discount) on the Bonds 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 and corporations; however, it should be noted that, with respect to corporations, interest on the Bonds may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations.

(4) Interest (and original issue discount) on the Bonds is exempt from personal income taxes imposed in the State of California.

(5) The difference between the issue price of a Bond (the first price at which a substantial amount of the Bonds of a maturity are to be sold to the public) and the stated redemption price at maturity with respect to such Bonds constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Bond owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Bond owner will increase the Bond owner’s basis in the applicable Bond. Original issue discount that accrues to a Bond 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 or corporations (as described in paragraph 3 above) and is exempt from State of California personal income tax.

(6) The amount by which a Bond owner’s original basis for determining loss on sale or exchange in a Bond (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Bond premium, which must be amortized under Section 171 of the Code; such amortizable Bond premium reduces the Bond owner’s basis in the applicable Bond (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 amortization of Bond premium may result in a Bond owner realizing a taxable gain when a Bond is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Bond to the owner.

The opinions expressed in paragraphs (3) and (5) are subject to the condition that the City and the Authority comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to the delivery of the Bonds 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 discount) with respect to the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The City and the Authority have covenanted to comply with all such requirements.

Except as expressly set forth in paragraphs (3), (4), (5) and (6) we express no opinion regarding any tax consequences with respect to the Bonds.

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Certain agreements, requirements and procedures contained or referred to in the Indenture, the Tax Certificate executed by the City and the Authority and other documents related to the Bonds 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 exclusion from gross income for federal income tax purposes of interest (and original issue discount) due with respect to any Bond if any such action is taken or omitted based upon the advice 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 Agreement, the Ground Lease 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.

We are admitted to the practice of law only in the State of California and our opinion is 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. 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 Bonds 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 Bonds and expressly disclaim any duty to advise the owners of the Bonds with respect to matters contained in the Official Statement.

Respectfully submitted,

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APPENDIX D

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate, dated as of December 1, 2009 (the “Disclosure Certificate”) is executed and delivered by the City of Santa Monica (the “City”) in connection with the execution and delivery of the Santa Monica Public Financing Authority’s (the “Authority”) $9,155,000 Lease Revenue Refunding Bonds, Series 2009 (Public Safety Facility Project) (the “Bonds”).

WHEREAS, the Bonds are being issued pursuant to an Indenture, dated as of September 1, 1999 (the “Original Indenture”), as amended by a First Supplemental Indenture, dated as of January 1, 2002, and by a Second Supplemental Indenture, dated as of December 1, 2009 (as so amended, the “Indenture”), by and among the Authority, the City and the Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”).

WHEREAS, the Bonds are payable from the base rental payments to be made by the City under the Lease Agreement, dated as of September 1, 1999 (the “Original Lease Agreement”), as amended by a First Amendment to Lease Agreement, dated as of January 1, 2002, and by a Second Amendment to Lease Agreement, dated as of December 1, 2009 (as so amended, the “Lease Agreement”), between the City, as lessee, and the Authority, as lessor; and

WHEREAS, this Disclosure Certificate is being executed and delivered by the City for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriter in complying with the Rule (defined below).

NOW, THEREFORE, the City covenants as follows:

SECTION 1. Definitions.

“Annual Report” shall mean any Comprehensive Annual Financial Report provided by the City pursuant to, and as described in, Sections 2 and 3 of this Disclosure Agreement.

In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

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

“Disclosure Representative” shall mean the City Manager of the City, the Finance Director 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 mean the City, or any successor Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation.

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

“Official Statement” shall mean the Official Statement relating to the Bonds, dated December 3, 2009.

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

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“Repository” shall mean the Municipal Securities 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 2. 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 each April 1 of each year commencing April 1, 2010, provide to the Repository an Annual Report which is consistent with the requirements of Section 3 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 3 of this Disclosure Agreement;

.

provided

(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), the City shall send a notice to the Repository in substantially the form attached as Exhibit A.

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 4(c).

(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 Agreement and stating the date it was provided.

SECTION 3. Content of Annual Reports

(a) The City’s audited financial statements, 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.

. The City’s Annual Report shall contain or include by reference the following:

(b) To the extent not contained in the audited financial statements filed pursuant to the preceding subsection (a) by the date required by Section 4 hereof, updates of Tables entitled City of Santa Monica Net Debt (as of June 30, 2009) and the then current fiscal year budget in substantially the form set forth in the Official Statement.

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is

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a final official statement, it must be available from the Municipal Securities Rulemaking Board. The City shall clearly identify each such other document so included by reference.

SECTION 4. 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 Bonds, if material:

.

(i) Principal and interest payment delinquencies.

(ii) Non-payment related defaults.

(iii) Modifications to rights of Bond holders.

(iv) Optional, contingent or unscheduled bond calls.

(v) Defeasances.

(vi) Rating changes.

(vii) Adverse tax opinions or events affecting the tax-exempt status of the Bonds.

(viii) Unscheduled draws on the debt service reserves reflecting financial difficulties.

(ix) Unscheduled draws on the credit enhancements reflecting financial difficulties.

(x) Substitution of the credit or liquidity providers or their failure to perform.

(xi) Release, substitution or sale of property securing repayment of the Bonds.

(b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall as soon as possible determine if such event would be material under applicable federal securities laws.

(c) If the City determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the City shall promptly file a notice of such occurrence with the Repositories. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(iv) and (v) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Indenture.

SECTION 5. Termination of Reporting Obligation

SECTION 6.

. The City’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under Section 4(c).

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 Agreement, and may discharge any such Dissemination Agent, with or without 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 Agreement. The Dissemination Agent may resign by providing thirty days written notice to the City and 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

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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 7. Amendment; Waiver

SECTION 8.

. Notwithstanding any other provision of this Disclosure Agreement, the City may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that, in the opinion of nationally recognized bond counsel, such amendment or waiver is permitted by the Rule; provided, the Dissemination Agent shall have first consented to any amendment that modifies or increases its duties or obligations hereunder. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the City shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the City. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 4(c), and (ii) the Annual Report for the year in which the change is made shall present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

Additional Information

SECTION 9.

. Nothing in this Disclosure Agreement shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the City shall have no obligation under this Bond to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Default

No Bond 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.

. In the event of a failure of the City to comply with any provision of this Disclosure Agreement, any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the City to comply with this Disclosure Agreement shall be an action to compel performance.

SECTION 10. 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 Bond 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 Bonds.

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SECTION 11. Beneficiaries

CITY OF SANTA MONICA

. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, if any, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

By: P. Lamont Ewell, City Manager

ATTEST:

Maria M. Stewart, City Clerk

APPROVED AS TO FORM:

Marsha Jones Moutrie, City Attorney

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EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Santa Monica Public Financing Authority

Name of Issue: Santa Monica Public Financing Authority Lease Revenue Refunding Bonds, Series 2009 (Public Safety Facility Project)

Date of Issuance: December 16, 2009

NOTICE IS HEREBY GIVEN that the City of Santa Monica (the “City”) has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Certificate, dated as of December 1, 2009, executed by the City. [The City anticipates that the Annual Report will be filed by __________.]

Dated: __________

CITY OF SANTA MONICA

By:

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APPENDIX E

BOOK-ENTRY ONLY SYSTEM

The information in this section concerning DTC and DTC’s book-entry only system has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the completeness or accuracy thereof. The following description of the procedures and record keeping with respect to beneficial ownership interests in the Series 2009 Bonds, payment of principal, premium, if any, accreted value and interest on the Series 2009 Bonds to DTC Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the Series 2009 Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC.

1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Series 2009 Bonds (the “Securities”). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each maturity of the Securities in the aggregate principal amount of such maturity, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue.

2. DTC, the world’s largest 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 provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

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

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Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued.

4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities 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 Securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities 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.

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

7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Principal, redemption price and interest payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Authority or the Paying Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Paying Agent, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption price and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. If applicable, a Beneficial Owner shall give notice to elect to have its Securities purchased or tendered, through its Participant, to tender/remarketing agent, and shall effect delivery of such Securities by causing the Direct Participant to transfer the Participant’s interest in the Securities, on DTC’s records, to tender/remarketing gent. The requirement for physical delivery of Securities in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Securities are transferred by Direct Participants on DTC’s records and followed by a book-entry credit of tendered Securities to tender/remarketing agent’s DTC account.

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10. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to the Authority or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

11. The Authority may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.

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