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AGENDA ORO VALLEY TOWN COUNCIL STUDY SESSION November 1, 1999 Oro Valley Town Council Chambers 11,000 N. La Canada Drive Oro Valley, Arizona STUDY SESSION —AT OR AFTER 6:00 P.M. CALL TO ORDER ROLL CALL 1. Discussion regarding Alternative Water Resource Recommendations 2. Discussion regarding Water System Commercial Readiness Program Recommendations ADJOURNMENT A packet of agenda materials as listed above is available for public inspection at least 24 hours prior to the Council meeting in the office of the Town Clerk between the hours of 8:30 a.m. — 5:00 p.m. The Town of Oro Valley complies with the Americans with Disabilities Act (ADA). If any person with a disability needs any type of accommodation, please notify Kathryn Cuvelier, Town Clerk, at 297-2591. POSTED: 10-29-99 4:30 p.m. lh TOWN OF ORO VALLEY 1 COUNCIL COMMUNICATION STUDY SESSION MEETING DATE: November 1, 1999 TO: HONORABLE MAYOR AND COUNCIL FROM: David Hook, P.E., Water Utility Director SUBJECT: RENEWABLE WATER RESOURCE PRIORITY LIST WATER UTILITY COMMISSION RECOMMENDATION SUMMARY: On October 11, 1999 at a special Water Utility Commission meeting the Renewable Water Resources subcommittee submitted a recommendation that a Central Arizona Project water option be given preferred status at this time as the potential source of renewable water supplies for golf course irrigation. As background, the Oro Valley Water Utility and the Mayor and Council met in a joint study session on October 1998 to discuss alternative renewable water resource options. At that time, a consensus was reached that the Pima County option (Ina Road Reclaimed System) would be appropriate for preferred status and were anticipating further analysis of the final report that was being prepared on the feasibility of the project. The report final completion date was projected to be February1999. Representatives from Pima County presented their preli� 'rn�l-y findings at an April 1999 studession with the Oro Valley Town Council, the Marana Town Council and the Metropolitan Domestic Water Improvement District Board of Directors. Pima County distributed draft copies of the executive summary of the Pima County at that meeting. The final report has not been issued as of this writing. At their regular meeting in May 1999, the Water Utility Commission voted to revisit the various options available to the Town since delivery of the Pima County report was delayed and that particular option may no longer be the most viable option for the Town. At their June meeting, the Commission voted to form a Renewable Water Resources subcommittee to re-evaluate the options that were considered at the October 1998 meetings. Through early October, the Renewable Water Resources subcommittee met regularly (weekly or bi- weekly) since their first meeting on July 7, 1999. The 4 options analyzed are: Construction of an Oro Valley wastewater reclamation facility to provide reclaimed water for golf courses; construction of a transmission pipeline to convey Central Arizona Project water to Oro Valley; participating with Pima County to receive reclaimed wastewater via a conveyance system to Oro Valley; and contract with the City of Tucson to receive reclaimed wastewater and construct a conveyance system to Oro Valley. Y The discussions then moved into more technical areas. The subcommittee worked with WestLand Resources, asking themselves many in-depth questions to gain insight into the complex issues associated with each of the four main options. WestLand Resources has provided feedback through research into the details of the elements of each of the options (i.e., capacities, costs, compatibility, and comparability). TOWN OF ORO VALLEY COUNCIL COMMUNICATION Page 2 of 4 The subcommittee did reach consensus that factors other than cost and time should be a part of the decision making process and proceeded to rank the factors by order of importance. The seven factors are listed as column headings on Attachment A, Alternative water resources issues matrix. The subcommittee looked at the evaluation factors for each of the projects and developed the bullet points contained in each of the cells on the issues matrix. In particular, the subcommittee felt strongly that factors affecting Oro Valley's ability to control the development and outcome of the process was important to the decision making process, given the urgency of implementation of renewable supplies for golf course irrigation. Fatal flaws were also considered to be very important to the subcommittee because of the need for a reality check on issues that would have the ability to kill the viability of that option. Schedule was developed in two components, one over which the Town would exert influence, and one that was more subject to outside influence. Multipurpose opportunities was used to identify other issues outside of golf course irrigation that would come into play with consideration of that option. Recharge was used to clarify the economy of scale opportunities, where supplies would exceed short- term demand. Finance impacts was used to weigh considerations related to the burden of bonding projects of the magnitude of those being evaluated. The cost factors were developed with much discussion and analysis. Significant effort was expended in creating, as much as possible, an 'apples-to-apples' comparison between the projects. To achieve this comparison, the costs for the various elements of each project were analyzed separately and appropriate adjustments were made to the data and information available. For instance, two of the options had volumes sufficient only for golf course demand, thus introducing the possibility of volumes much greater than golf course demand and requiring groundwater recharge to benefit from economies of scale. The interest rate and financing term was standardized at 5.5% for 20 years instead of the differing rates and terms used in other studies from which the subcommittee drew information. The end result of the cost analysis is presented on the issues matrix. The analysis is presented as two costs for each project, one if developed with capacity for golf courses only (the prime objective at this point) and one if developed at full capacity (providing flexibility for the future while taking advantage of economies of scale). The major elements of each project are summarized in Attachment A and Attachment B (Table A, full capacity and Table B, golf course only, respectively). The backup material detailing the calculation of the costs used in the subcommittee's analysis is available for review upon request. The physical delivery infrastructure required for the alternative options have been incorporated into the OVWU Water Master Plan. The Master Plan includes projected water service via direct C.A.P. delivery, recharge and recovery, and assuming the golf courses will be served by renewable sources. TOWN OF ORO VALLEY COUNCIL COMMUNICATION Page 3 of 4 FISCAL IMPACT: The fiscal impact of the recommended C.A.P. option for golf course irrigation is estimated to be approximately $30 million. This estimate includes preliminary planning, engineering design, legal fees, land acquisition, environmental clearance, permitting and construction. Amortization of this cost and adding O&M costs equates to the $892 per acre-foot as shown on the issues matrix. If reverse osmosis for direct delivery and recharge were added in the future, it is estimated that an additional $54 million would be required, raising the unit cost for a full capacity system to the $1,334 per acre-foot as shown on the issues matrix. If conventional treatment (or some combination of conventional and membrane filtration) for direct delivery were added in the future, the additional capital required and unit cost would be something less than $54 million and $1334/acre-foot, respectively. These hybrid alternative can be discussed in greater detail once the specific components have been identified. Neither the subcommittee or the Commission analyzed specific financing alternatives. It has been discussed that some form of long term debt would be required and that the debt service should be borne by all the beneficiaries of the implemented project. The determination of the appropriate financing alternative was expected to be a part of the subsequent activities of staff should the C.A.P. option be given preferred status at this time. RECOMMENDATIONS OF THE WATER UTILITY COMMISSION The Water Utility Commission agreed with the subcommittee and supports selection of the C.A.P. option for preferred status. At it's 10-11-99 meeting, the Commission moved "to accept the recommendation of the subcommittee to give preferred status to the C.A.P. option for golf course irrigation." The Commission further moved "that the Commission forward on to Mayor and Council a favorable recommendation regarding the C.A.P. option as well as a recommendation that a study session be held to discuss the complex issues of this matter." This recommendation is based on the presentation of information in the issues matrix where cost is nearly equal to that of the lowest cost option and where the rest of the criteria are generally more favorable than for the other projects. Specifically, the C.A.P. option appears to be the quickest to implement, provides for the greatest amount of control to the Town and allows for the possibility of partnering with Marana, MDWID and/or the Bureau of Reclamation on all or part of the project. Additionally, this option is adaptable to long range considerations, including recharge in the Big Wash and CDO Wash, local treatment for direct delivery as well as those being studied by the Bureau of the Reclamation in the SARWMS involving regional treatment of C.A.P. TOWN OF ORO VALLEY COUNCIL COMNIUNICATION Page 4 of 4 RECOMMENDATIONS OF STAFF: Staff stands with the subcommittee and the Water Utility Commission and supports selection of the C.A.P. option for preferred status. Further, staff recommends that Mayor and Council provide specific direction regarding the choice of which option is to be given preferred status as well as any specific direction regarding the subsequent follow-up that staff will be undertaking. ATTACHMENTS: A. Alternative water sources issue matrix (dated September 24, 1999). B. Table 1. C. Table 2. SUGGESTED MOTION: No action of the Mayor and Council is required at this time. 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O 0 '0 a) co O +-+ -4-, +- ` > a) ,. c� +-, ct a) a) -° .O ..O Rv ,�,� � >, cn cC3 �-� tat) U v.. (� r-•+ ,�%�� = .— cl -, = cd rizi — 0 rd i_.4 .. :-..--1 •�' CCS b a) a) TOWN OF ORO VALLEY STUDY SESSION COUNCIL COMMUNICATION MEETING DATE: November 1, 1999 TO: HONORABLE MAYOR AND COUNCIL FROM: David G. Hook, Water Utility Director SUBJECT: COMMERCIAL READINESS PROGRAM- PHASE 2 SUMMARY: In August 1997, the Town Council approved the initial Commercial Readiness Program (CRP). The CRP allowed the utility to construct the necessary infrastructure to provide fire flow for anticipated commercial projects located in specific corridors within Oro Valley on an accelerated time schedule. The program further allowed the Utility to borrow funds from the General Fund, to be used in conjunction with revenues received from rates and connection fees, in order to finance the required infrastructure. Since that time, the water utility has spent approximately $2.0 million of the $2.8 million budget, to construct potable water reservoirs, booster stations, wells and water mains. This infrastructure enabled the utility to provide water service and fire flow to commercial developments including Target, The Home Depot and the Holiday Inn Express. These improvements have also enhanced the service capability of many residential customers. Due to changes in the location of projected commercial development, the initial CRP was revised in early 1999 by Mayor and Council to include infrastructure to the proposed resort in Rancho Vistoso Neighborhood 11. A portion of this infrastructure is the remaining $800,000 that has not yet been expended under the initial CRP. These expenses have been included in the proposed CRP - Phase 2. Recent meetings with Mr. Jeff Weir, the Town's Economic Development Administrator, have revealed that there continues to be substantial interest in commercial development in Oro Valley. Several new prospective commercial developments are proposed in the near future. These projects contain facilities that consist of high- tech medical research and manufacturing facilities, resort hotels, and commercial plazas that include theaters and office space. These projects have been identified in Table 2 of Attachment A. The infrastructure projected in Attachment A is based upon preliminary results generated from demand projections from the Potable Water Master Plan currently under revision. All infrastructure proposed within Phase 2 of Commercial Readiness is consistent with the Potable Water Master Plan. As with the initial CRP, these projects will have notable economic impact to the Town. The most significant issue critical to commercial development is system capacity for fire flow. The quantity and types of proposed commercial development will have a significant impact on the critical path with which the Utility needs to plan the installation of infrastructure. Some of the proposed development may be delayed or cancelled if the water infrastructure is not in place to meet potable and fire flow demands. The specific infrastructure, related cost estimates, and estimated time of completion have been identified in Table 1 of Attachment A. It is important to understand that most improvements constructed for commercial fire flow will also enhance system reliability and pressure for the existing and future residential customers. This is demonstrated in Exhibits 1 — 5 of Attachment A. As a result, it is staff's opinion that revenue received from rates is an appropriate source of funding for some of the infrastructure. Likewise, revenue received from connection fees will be a source of funding for growth related infrastructure. However, additional financing will be required to fund the proposed infrastructure. Financing options have been detailed in Attachment B, Fiscal Impact Summary. Staff has discussed finance issues with David Andrews, the Town's Finance Director. Attachment C is the funding analysis prepared by Mr. Andrews that relates to financing issues for theJro ro osed projects. p p p TOWN OF ORO VALLEY COMMISSION COMMUNICATION Page 2 of 2 FISCAL IMPACT: See Attachment 2, Fiscal Impact Summary for a detailed discussion of the fiscal impact of each of the options. Option D will certainly require the current development paid impact fee to be adjusted to support the debt service associated with the proposed program. Rates will probably not be directly affected. Prior to formal action of Mayor and Council regarding the approval of the Commercial Readiness Program - Phase 2, staff will undertake an analysis of the specific impact of the option in order to ascertain the adjustments required. ATTACHMENTS: A. Phase 2 Commercial Readiness Alternatives (with Exhibits 1 through 5 and Tables 1 through 2). B. Financial Impact Summary. C. Commercial Readiness Improvements Funding Analysis, D. Andrews memo of 9-14-99. RECOMMENDATIONS OF WATER UTILITY COMMISSION: The Water Utility Commission, at a Special Session regarding Phase 2 of Commercial Readiness, unanimously recommended Option D as the preferred alternative with utilization of an Municipal Property Corporation bond to finance the program. The Water Utility Commission requested that Mayor and Council also consider allocating funds from the Town's General Fund, as an economic development grant, due to the overall positive impact of the improvements on the Town. This grant could be applied to a portion of the proposed Phase 2 improvements or it could be applied toward the loan balance owed by the Connection Fee Fund to the General Fund related to Phase 1 improvements. RECOMMENDATIONS OF STAFF: Staff supports implementation of Phase 2 of the Commercial Readiness Program Option D. In addition, staff supports financing of the proposed infrastructure via a Municipal Property Corporation (MPC) Bond. Staff recommends that the costs and debt service of the said bond be repaid by developers through connection fees, and by existing customers(through rates)who indirectly benefit from the improvements. Due to the importance of effectively addressing inquiries made to the Economic Development Administrator and the Community Development Department regarding potential new commercial developments, staff respectfully recommends that Mayor and Council provide specific direction at a forthcoming regular session regarding the implementation of the proposed Commercial Readiness Program -Phase 2. SUGGESTED MOTION: No action of the Mayor and Council is required at this time. -C- og‘ C". "4.a.� . .- b tility Director AtiALA / Aleit 41 .‘ own Manager ATTACHMENT "B" FISCAL IMPACT SUMMARY ORO VALLEY WATER UTILITY 9-22-99 PHASE II COMMERCIAL READINESS ALTERNATIVES DISCUSSION OPTION A: This option includes infrastructure for the Ventana Medical project. Other beneficiaries of the proposed infrastructure include Rancho Vistoso Neighborhood 3, Woodburne Elementary School, development along the Oracle Road Corridor as well as future and existing residential customers, etc. listed and graphically illustrated on the exhibits included in the Phase II Commercial Readiness Alternatives. Based on discussions with the Economic Development Director and staff in the Community Development Department, the Ventana project is imminent. Therefore, the identified infrastructure needs to be timely constructed to facilitate completion of the project. The engineer's estimate of probable construction costs totals $3,219,000 of which$1,300,000 has already been included in the approved budget for FY 99-00. In keeping with the Town's policy that "development pays for itself", it is staff's recommendation that the developer be required to front the $2,191,000 in costs that exceed those included in the budget. Should the developer agree to front the costs, the Town would agree to some form of reimbursement over a specified period of time. It is anticipated that reimbursement will come from both the Enterprise Fund and the Connection Fee Fund on a pro-rata basis. The proportionate amount to be paid from each Fund will be based on the benefit received by 1) existing customers and 2) growth related development driving the need for the infrastructure. The anticipated benefits will be determined on a per project, per zone basis. If the Town Council decides that the economic benefits of the project are sufficient to warrant the Town streamlining and or accelerating the process of constructing the required infrastructure, then staff would support a loan from the General Fund. Debt service on a loan from the General Fund would also be split proportionately between the Enterprise Fund and the Connection Fee Fund. OPTION B: This option includes proposed infrastructure in Option A plus proposed infrastructure for the Radison Resort. Other beneficiaries include all of those listed in Option A,the Vistoso Highlands Clubhouse, future and existing residential customers and existing commercial customers, etc. listed and graphically illustrated on the exhibits included in the Phase II Commercial Readiness Alternatives. Based on discussions with the Economic Development Director and staff in the Community Development Department, the Ventana and Radison projects are imminent. Therefore, the identified infrastructure needs to be timely constructed to facilitate completion of the projects. The engineer's estimate of probable construction costs totals $4,054,000 of which $1,863,000 has already been included in the approved budget for FY 99-00. The financing recommendations are the same as Option A. OPTION C: This option includes proposed infrastructure in Options A & B plus proposed infrastructure for the Ritz Resort. Other beneficiaries of the infrastructure include those listed in Options A & B, the Stone Canyon Clubhouse and future and existing residential customers, etc. listed and graphically illustrated on the exhibits included in the Phase II Commercial Readiness Alternatives. The engineer's estimate of probable construction costs for this option totals $5,484,000 of which$2,160,000 has been included in the approved budget for FY 99-00. Based on discussions with the Economic Development Director, staff is unsure of the reality of this project. The project continues to be "on again— off again". Therefore, staff does not recommend that this project be included in the Phase II Commercial Readiness Program. However, should this option be selected, the financing recommendations are the same as Option A. OPTION D: This option includes proposed infrastructure in Options A, B & C plus proposed infrastructure for the Steam Pump Ranch complex, Northwest Urgent Care, Rancho Vistoso Neighborhood 3 South, Rancho Vistoso Neighborhood 4 Power Center, High Tech Manufacturers, existing and future residential customers, etc. listed and graphically illustrated on the exhibits included in the Phase II Commercial readiness alternatives. The engineer's estimate of probable construction costs for all infrastructure totals $8,981,000 of which $2,240,000 has been included in the approved budget for FY 99-00. Because this option contains numerous projects that are either uncertain or distant, staff does not recommend all proposed infrastructure to be included in the Phase II Commercial Readiness Program. However, should this option be selected, staff recommends that financing of the$6,741,000 be accomplished by the issuance of MPC revenue bonds. FISCAL IMPACT SUMMARY ORO VALLEY WATER UTILITY 9-22-99 PHASE II COMMERCIAL READINESS ALTERNATIVES EXPENDITURES OPTIONS DEVELOPMENT A B C D VENTANA MEDICAL 3,219,000 3,219,000 3,219,000 3,219,000 RADISON RESORT N/A 835,000 835,000 835,000 RITZ RESORT N/A N/A 1,430,000 1,430,000 STEAMPUMP RANCH, ET AL NA/ N/A N/A 3,497,000 TOTAL EXPENDITURES: 3,219,000 4,054,000 5,484,000 8,981,000 LESS EXISTING BUDGET: -1,300,000 -1,863,000 -2,160,000 -2,240,000 NEW EXPENDITURES: 1,919,000 2,191,000 3,324,000 6,741,000 FOOTNOTE: COSTS ARE DETAILED IN ATTACHEMENT 1: PHASE II COMMERCIAL READINESS ALTERNATIVES, TABLE 2 FISCAL IMPACT SUMMARY ORO VALLEY WATER UTILITY 9-22-99 PHASE II COMMERCIAL READINESS ALTERNATIVES REVENUES OPTIONS SOURCE A B C D 1. EXISTING BUDGETS (AS APPROVED) ENTERPRISE FUND (1) 650,000 900,000 900,000 980,000 CONNECTION FEE FUND (1) 650,000 963,000 1,260,000 1,260,000 2. EXISTING BUDGETS (REALLOCATE FUNDS) ENTERPRISE FUND (2) 150,000 150,000 150,000 150,000 CONNECTION FEE FUND (2) 0 0 0 0 3. EXISTING BUDGETS (REALLOCATE CONTINGENCY) ENTERPRISE FUND (3) 0 0 0 0 CONNECTION FEE FUND (4) 250,000 250,000 250,000 250,000 4. FUTURE CAPITAL BUDGET(DURING PH.2 CONST.) ENTERPRISE FUND (5) 0 0 0 800,000 CONNECTION FEE FUND (5) 0 0 0 0 5. LIQUIDATE BOND RESERVE FUND (6) 0 0 0 0 6. FINANCING VIA BORROWING (7) 1,519,000 1,791,000 2,924,000 5,541,000 REPAY FROM ENTERPRISE FUND (8) TBP (10) TBP TBP TBP REPAY FROM CONNECTION FEE FUND (9) TBP TBP TBP TBP TOTAL REVENUES 3,219,000 4,054,000 5,484,000 8,981,000 FISCAL IMPACT SUMMARY ORO VALLEY WATER UTILITY 9-22-99 PHASE II COMMERCIAL READINESS ALTERNATIVES FOOTNOTES 1. BOTH THE ENTERPRISE FUND &THE CONNECTION FEE FUND APPROVED BUDGETS INCLUDE FUNDS FOR IDENTIFIED PROJECTS. 2. THE ENTERPRISE FUND APPROVED BUDGET IDENTIFIES PROJECTS FOR OV#1 IMPROVEMENTS THAT WILL BE FUNDED FROM BOND PROCEEDS. AS A RESULT, THESE FUNDS ARE ELIGIBLE FOR REALLOCATION TO OTHER PROJECTS. STAFF DOES NOT SUPPORT DEFERRING ANY OTHER PROJECT FUNDS IN EITHER THE ENTERPRISE FUND OR THE CONNECTION FEE FUND. 3. STAFF CONCURS WITH THE FINANCE DIRECTOR IN HIS RECOMMENDATION TO NOT ALLOW THE CASH BALANCE TO DROP BELOW $1 MILLION. BASED ON THE PROJECTED CASH BALANCE AT 7-1-00 (AFTER DEBT SVC. DUE 7-1-00)THERE WILL BE MINIMAL CASH AVAILABLE. 4. ADDITIONAL CASH CARRYFOWARD CREATES AN INCREASED CONTINGENCY AMOUNT THAT CAN BE REALLOCATED TO IDENTIFIED PROJECTS. 5. SOME FUNDING HAS BEEN PROPOSED FOR RELATED PROJECTS FOR YEAR 2 OF THE 5 YEAR C.I.P. IN THE ENTERPRISE FUND WITH NOTHING PROPOSED IN THE CONNECTION FEE FUND. 6. STAFF DOES NOT SUPPORT LIQUIDATION OF THE BOND RESERVE FUND BECAUSE OF THE ADVERSE COSTS AND IMPACTS TO THE 1996 MPC BOND ISSUE. 7. BORROWING MAY COME FROM 1 SOURCE OR FROM A COMBINATION OF SEVERAL SOURCES: DEVELOPER FINANCED, LOAN FROM THE GENERAL FUND OR MPC REVENUE BONDS. 8. REPAYMENT FROM ENTERPRISE FUND IS APPROPRIATE BECAUSE EXISTING CUSTOMERS WILL BENEFIT FROM INFRASTRUCTURE. 9. REPAYMENT FROM CONNECTION FEE FUND IS APPROPRIATE BECAUSE INFRASTRUCTURE IS GROWTH RELATED. 10. TO BE PROPOSED. FISCAL IMPACT SUMMARY ORO VALLEY WATER UTILITY 9-22-99 PHASE II COMMERCIAL READINESS ALTERNATIVES EXPENDITURES OPTIONS DEVELOPMENT A B C D VENTANA MEDICAL 3,219,000 3,219,000 3,219,000 3,219,000 RADISON RESORT N/A 835,000 835,000 835,000 RITZ RESORT N/A N/A 1,430,000 1,430,000 STEAMPUMP RANCH, ET AL NA/ N/A N/A 3,497,000 TOTAL EXPENDITURES: 3,219,000 4,054,000 5,484,000 8,981,000 LESS EXISTING APROVED BUDGET: -1,300,000 -1,863,000 -2,160,000 -2,240,000 NEW EXPENDITURES: 1,919,000 2,191,000 3,324,000 6,741,000 FOOTNOTE: COSTS ARE DETAILED IN ATTACHEMENT 1: PHASE II COMMERCIAL READINESS ALTERNATIVES, TABLE 2 ATTACHMENT "C" 1416 ls at7,14 MEMORANDUM REPTO: David Hook, Water Utility Director aRC aroSalle FROM: David Andrews, Finance Director mitertltit; y ty DATE: September 14, 1999 eoeszsc� SUBJ: Commercial Readiness Improvements Funding Analysis Pursuant to our meeting with the Town Manager, I have reviewed the financial status of the water utility enterprise fund and connection fees fund. The purpose of the analysis is to explore funding alternatives for commercial readiness improvements regarding the Radisson and Ventana Medical Systems developments as well as other commercial developments. Oro Valley Water Utility Fund The cash flow statement for FY 1999-2000 has been updated and is included as an attachment to this memorandum. A cash balance of$2,248,532 is projected as of June 30, 2000. However, $1,186,000 in debt service payments are due July 1, 2000. I would not recommend that cash balances drop below $1M. After the July 1 payment, cash balances are estimated to be approximately $1,062,532. With respect to commercial readiness funding from this funding source, I would recommend looking at the possibility of delaying some existing budgeted projects and substituting commercial readiness improvements. It should also be noted that the budgeted capital outlay figure of$3,167,450 includes approximately $150,000 in OVWID projects. These projects may qualify for existing bond funding which has a cash balance of$1,133,660. Those available bond funds are not included in the attached cash projections. Oro Valley Water Connection Fees Fund Approximately $318,619 of additional funds may be available for project improvements. The cash carryforward of$940,909 is $197,606 better than the budgeted figure of $743,303. This additional cash carryforward along with the contingency amount of $121,013 may provide the additional $318,619 figure that was mentioned. However, if there were projects in FY 1998-99 that were not completed, some of the $318,619 may be obligated to complete those projects. Liquidation of Series 1996 MPC Bond Reserve Fund In April 1996 the Town issued $28.4M in bonds for the Oro Valley Water Utility Fund including $1,970,000 that is invested with a trustee as a debt service reserve fund. In December 1999, the Town's financial advisors indicated that the debt service reserve fund could be liquidated and replaced with a surety policy. The approximate cost of liquidation would be $100,000 and the remaining $1,870,000 could be used for project improvements. The disadvantages to liquidation include the following: • Loss of approximately $90,000 in annual interest income earned on the reserve fund investment. • Loss of$1,970,000 in principal which is scheduled to be applied to the final bond payment which is due on July 1, 2026. The loss of interest income should not significantly impact the utility as revenues have historically exceeded expenditures by an amount greater than the $90,000 figure. With respect to principal replacement, amortization of the $1,970,000 over 26 years (the approximate remaining life of the bonds) equals approximately $76,000 annually. General Fund Loan to Connection Fees Fund Upon Council approval, the General Fund executed a loan to the Oro Valley Water Connection Fees Fund in an amount of$558,000 on June 1, 1998. The loan was executed over a ten year period with annual debt service payments of approximately $73,290. The fund has made its debt service payments to the General Fund since that time. Another loan may be an option to explore. For FY 1998-99, the General Fund cash carryforward came in at $622,155 better than expected. This would increase the General Fund contingency by that same amount to an estimate of$6,453,841. The Town's budgetary policy requires a minimum balance of approximately $3.2M for FY 1999-2000. The remainder could possibly be used for a loan but may be in competition with other General Fund projects such as library construction and land acquisition. However, these two specific projects have been budgeted to be financed via loans although some amount of cash financing may be a viable option. Line Extension Agreements As discussed at our meeting, line extension agreements between the Town and developers may be a viable option to fund improvements. The advantages would be that there would be no cost to the Town for improvements and that the improvements could be put in place concurrently with the project's actual timeframe. Municipal Property Corporation Water Connection Fee Revenue Bonds The Town's financial advisors have provided me with a copy of similarly captioned bonds issued by the Town of Gilbert in 1997. I have included select copies of pages from that official statement for your information. The attractiveness of this financing mechanism is that connection fee are pledged to repay the bonds. However, water system revenues would be a subordinate pledge. The Town would not have to pledge it excise sales and state shared taxes, which would be a big plus. The downside is that the interest rate would probably be somewhere between 6.5% and 8% due to the higher level of investor risk (payment is growth dependent). However, the cost of borrowing can be passed on to the developer through the connection fee itself. Please give me a call when you have an opportunity to discuss. CC: Chuck Sweet, Town Manager Jeff Weir, Economic Development Administrator Town of Oro Valley Oro Valley Water Utility Fund Cash Projections Cash Balance @ 7/1/99 +4,375,011 + Revenues +5,627,000 - Personnel -892,339 - O&M -1,695,891 - Debt Service: 1996 MPC Interest -1,473,925 1996 MPC Pricipal -350,000 1999 MPC Interest -116,444 1999 MPC Principal -45,000 Lease Purchase Agreement -12,430 -Capital Outlay -3,167,450 Estimated Cash Balance @ 6/30/00 +2,248,532 July 1, 2000 debt service payments -1,186,000 Balance after debt service payments 1,062,532 Date: 09/13/99 Time: 10:53am TC.WN OF ORO VALLEY Page: 1 As of: 06/30/99 Balance Fund: 605 ORO VALLEY WATER UTILITY Assets 01) (a x3 7a.,3‘,./ t � ,Z�000 - tfl 008.000 PETTY CASH 200.00 r ,1 010.000 LGIP INVESTMENTS 2,729,037.74 * 3-7 • 013.000 CASH WITH FISCAL AGENT 2,183,445.16 015.000 CASH - PROJECT IMPROVEMENTS 291,565.96`/l q(,f.M MSC 015.001 CASH PROJ IMPROV - SERIES 1999 1,133,660.00- /955 CA/1-'2D/ H ^d1 016.000 REST CASH FUTURE DEBT SERVICE 1,970,000.00- ,\ `4 S p T 016.001 REST CASH FUTURE D.S.-SER 1999 317,940.00.- �'�� �J��v< UUtolf 049.000 ACCOUNTS RECEIVABLE 418,135.43 050.000 MISC OTHER RECEIVABLES 262,433.00 055.000 INTEREST RECEIVABLE 22,272.33 057.000 LAND 51,6-8 058.000 STRUCTURES & IMPROVEMENTS 98,596.63 059.000 WELLS AND SPRINGS 2,374,494.88 060.000 DISTRIBUTION RESERVOIRS/STAND 1,071,377.21 061.000 TRANSMISSION & DIST MAINS 18,139,643.27 062.000 SERVICES 1,918,032.73 063.000 METERS 805,429.88 064.000 HYDRANTS 1,117,414.51 065.000 EQUIPMENT 198,180.06 066.000 ELECTRIC PUMPING EQUIPMENT 2,175,494.24 067.000 TRANSPORTATION EQUIPMENT 333,346.38 068.000 CONSTRUCTION IN PROGRESS 623,954.57 072.000 TELEMETRY 5,575.50 083.000 ISSUANCE COSTS 920,263.06 083.001 ISSUANCE COSTS-SERIES 1999 103,338.46 084.000 ACCUMULATED DEPRECIATION -3,589,495.59 085.000 ACCUMULATED AMORIZATION -92,540.88 35,583,485.47 Total Assets 35,583,485.47 ====== Liabilities 201.000 ACCOUNTS PAYABLE 518,220.34 202.000 ACCRUED SALARIES PAYABLE 17,925.12 205.000 SOCIAL SECURITY PAYABLE 1,334.61 207.000 DEF COMP CONT PAYABLE 1,022.82 215.000 ACCRUED COMP TIME PAYABLE 1,669.73 216.000 ACCRUED VACATION PAYABLE 14,515.97 231.000 SECURITY DEPOSITS-CUSTOMER (1-09,378.7,0 232.000 SUPERFUND TAX PAYABLE 1,116.61 233.000 SALES TAX PAYABLE 4,071.84 234.000 ORIGINAL ISSUE DISCOUNT -368,321.04 234.001 ORIG. ISSUE DISC.-SERIES 1999 -48,816.95 244.000 UNCLAIMED PROPERTY PAYABLE 445.66 246.000 LEASE PURCHASE AGREEMENTS 23,171.98 251.000 BONDS PAYABLE 27,625,000.00 251.001 BONDS PAYABLE-SERIES 1999 3,235,000.00 252.000 BONDS PAYABLE-CURRENT 350,000.00 266.000 INTEREST PAYABLE 740,550.07 266.001 ACCRUED INT. PAY.-SERIES 1999 9,467.69 32,235,756.19 Total Liabilities 32,235,756.19 Reserves/Balances 290.000 FUND BALANCE 1,117,893.83 292.000 CONTRIBUTED CAPITAL 801,624.83 293.000 CONTRIBUTED CAPITAL - LEA 1,534,244.70 294.000 RESERVED-UNEMPLOYMENT 8,146.10 298.000 CHANGE IN FUND BALANCE -114,180.18 3,347,729.28 Total Reserves/Balances 3,347,729.28 Date: 09/13/99 Time: 10:53am TO-N OF ORO VALLEY Page: 2 As of: 06/30/99 Balance Fund: 605 ORO VALLEY WATER UTILITY Total Liabilities & Balances 35,583,485.47 Date: 09/13/99 Time: 10:53am TOWN OF O1,0 VALLEY Page: 1 As of: 06/30/99 Balance Fund: 316 OV WATER CONNECTION FEES Assets 010.000 LGIP INVESTMENTS 940,909.46 017.000 CASH HOOK UP FEES 4,632.45 055.000 INTEREST RECEIVABLE 3,338.05 948,879.96 Total Assets 948,879.96 Liabilities 219.000 DEPOSITS PAY 4,632.45 245.000 ADVANCE PAYABLE TO GENERAL FD 514,814.59 519,447.04 Total Liabilities 519,447.04 Reserves/Balances 290.000 FUND BALANCE 124,465.64 298.000 CHANGE IN FUND BALANCE 304,967.28 429,432.92 Total Reserves/Balances 429,432.92 Total Liabilities & Balances 948,879.96 OFFICIAL STATEMENT DATED APRIL 1, 1997 NEW ISSUE NOT RATED In the opinion of O'Connor,Cavanagh,Anderson,Killingsworth&Beshears,P.A.,Bond Counsel,assuming compliance with certain covenants,interest on the Bonds is not,under current law,includable in gross income of the owners thereof for federal income tax purposes and therefore is exempt from present federal income taxation,except to the extent taken into account for the corporate environmental,foreign branch profits and alternative minimum taxes as more fully discussed under the heading"TAX EXEMPTION"herein,and is exempt from present Arizona income taxation. Interest on the Bonds will not be treated as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations. $24,890,000 TOWN OF GILBERT, ARIZONA WATER RESOURCES MUNICIPAL PROPERTY CORPORATION WASTEWATER CONNECTION DEVELOPMENT FEE AND SUBORDINATE LIEN WATER AND WASTEWATER SYSTEM REVENUE BONDS, SERIES 1997 Dated: April 1,1997 Due: April 1,as shown herein The Town of Gilbert,Arizona Water Resources Municipal Property Corporation Wastewater Connection Development Fee and Subordinate Lien Water and Wastewater System Revenue Bonds,Series 1997(the"Bonds")are issued for the purpose of providing funds for certain improvements to the combined water and wastewater system of the Town of Gilbert,Arizona(the"Town"),and to pay all expenses properly incidental thereto and to the issuance and sale of the Bonds. See"THE PROJECT'herein. The principal of and interest on the Bonds are payable from rental payments to be paid by the Town to the Town of Gilbert,Arizona Water Resources Municipal Property Corporation(the"Corporation")pursuant to a Town Lease,dated as of April 1,1997(the"Town Lease"),by and between the Town and the Corporation.The payment of the rental payments will be made from certain wastewater connection development fees and revenues to be derived from the operation of the water and wastewater system of the Town(the"System")and is secured by a(1)senior ledge of such wastewater connection development fees and(2)a subordinate pledge of such revenues to be derived frorruhe.aperation o t e System. Sue'i revenues to be derived from the operation of the System are subject to a senior ple ge to secure certain outstanding water and wastewater system revenue bonds of the Town and certain obligations which may hereafter be issued on a parity therewith. Such connection development fees and revenues to be derived from the operation of the System pledged to the rental payments from which the Bonds are payable and secured have been pledged on a parity basis to certain outstanding connection development fee and water and wastewater system revenue bonds of the Town. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS"herein.The Bonds are special obligations of the Corporation payable solely from the sources herein described.The Bonds are not general obligations of the Corporation,the Town,the State of Arizona or any political subdivision thereof and do not constitute a debt or a pledge of the full faith and credit of the Corporation,the Town,the State of Arizona or any political subdivision thereof. The Corporation has no taxing power. INVESTMENT IN THE BONDS INVOLVES CERTAIN RISKS. SEE"BONDHOLDERS'RISKS"HEREIN FOR A DISCUSSION OF SPECIAL FACTORS WHICH SHOULD BE CONSIDERED, IN ADDITION TO OTHER MATTERS SET FORTH HEREIN, IN CONSIDERING AN INVESTMENT IN THE BONDS. The Bonds are subject to optional redemption prior to maturity. Under certain circumstances,the hereinabove described connection development fees may be accumulated and applied to redeem the Bonds on the earliest applicable redemption date. See"THE BONDS--Redemption." Interest on the Bonds will accrue from April 1,1997,and(except that due at maturity or prior redemption)is payable April 1 and October 1 of each year,commencing October 1,1997,until maturity or redemption prior to maturity,and will be payable by check or draft mailed to the registered owners of the Bonds as shown on the registration books maintained by Norwest Bank Arizona,N.A.,in Phoenix,Arizona(the"Trustee")at the address appearing therein at the close of business on the fifteenth day of the calendar month next preceding each interest payment date. Principal of the Bonds(plus interest due at maturity or prior redemption)will be payable upon presentation and surrender at the designated principal corporate trust office in Phoenix,Arizona,of the Trustee. The Bonds will be issued in fully registered form in the denomination of$5,000 or any integral multiple thereof. See"THE BONDS-Terms of the Bonds--Generally." MATURITY SCHEDULE $2,700,000 6.125% Term Bond,Maturing April 1,2002 4,300,000 6.625% Term Bond,Maturing April 1,2007 5,500,000 6.875% Term Bond,Maturing April 1,2012 6,000,000 6.875% Term Bond,Maturing April 1,2014 6,390,000 6.875°/a Term Bond,Maturing April 1,2016 All Bonds Priced at 100% (Plus interest accrued from April 1,1997) The Bonds are offered when,as and if issued and received by Peacock,Hislop,Staley Sr Given,Inc.(the"Underwriter"),and subject to the approving opinion of O'Connor,Cavanagh,Anderson,Killingsworth&Beshears,P.A.,Bond Counsel,as to validity and tax exemption. In addition,certain legal matters will be passed upon for the Underwriter by Squire,Sanders&Dempsey L.L.P. It is expected that the Bonds will be available for delivery in definitive form in Phoenix,Arizona,on or about April 24,1997. 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. PEACOCK, HISLOP, STALEY & GIVEN, INC. OFFICIAL STATEMENT $24,890,000 TOWN OF GILBERT, ARIZONA WATER RESOURCES MUNICIPAL PROPERTY CORPORATION WASTEWATER CONNECTION DEVELOPMENT FEE AND SUBORDINATE LIEN WATER AND WASTEWATER SYSTEM REVENUE BONDS, SERIES 1997 INTRODUCTORY STATEMENT This Official Statement, which includes the cover page and the appendices hereto, has been prepared in connection with the original issuance by the Town of Gilbert, Arizona Water Resources Municipal Property Corporation (the "Corporation") of the Wastewater Connection Development Fee and Subordinate Lien Water and Wastewater System Revenue Bonds, Series 1997 (the "Bonds"), identified on the cover page hereof. FOR THE DEFINITION OF CAPITALIZED TERMS NOT DEFINED IN THE TEXT HEREOF, SEE "APPENDIX D: SUMMARIES OF LEGAL DOCUMENTS - DEFINITIONS OF CERTAIN TERMS." FOR SUMMARIES OF THE HEREINAFTER REFERRED TO GROUND LEASE, TOWN LEASE AND INDENTURE, SEE "APPENDIX D: SUMMARIES OF LEGAL DOCUMENTS." References to provisions of Arizona law, whether codified in the Arizona Revised Statutes (the "Arizona Revised Statutes"), or uncodified, or of the Arizona Constitution (the "Arizona Constitution"), are references to those current provisions. Those provisions may be amended,repealed or supplemented. THE PROJECT The Bonds are issued for the purpose of providing funds in addition to the Town's contribution for three major improvements (collectively, the "Project") to the wastewater collection and treatment portion of the combined water treatment and distribution and wastewater collection and treatment system (the "System") of the Town. See "THE SYSTEM" herein. The first improvement is the acquisition of the existing Neely Wastewater Reclamation Plant (the "Neely Plant") and thereafter the construction of a 3 million gallon per day expansion. This plant has a licensed treatment capacity of 5.5 million gallons average daily flow and is approaching capacity. The expansion is under design,and is scheduled for completion by the end of calendar year 1997. The second improvement provides for the acquisition of land located at Greenfield and Guadalupe Roads to construct groundwater recharge facilities for effluent from the Neely Plant. The Town has no natural outfall facilities by which to dispose of treated effluent. However, the Town has pioneered the process of percolation recharge and injection recharge of treated effluent into the ground water table as a form of "water banking." This is in addition to the effluent reuse water system which is used to irrigate large parks, open spaces and golf courses in the community. This site is planned to provide 4 million gallons per day of recharge capacity once it is fully developed. The third improvement provides for acquisition of land and construction of headworks facilities, a pumping station and a transmission main at the future Southeast Area Wastewater Reclamation Facility. This project is a joint venture between the Town and the City of Mesa, Arizona ("Mesa"). The site will ultimately be developed for a 43 million gallon average daily flow facility, with the Town participating in 17 million gallons of that ultimate capacity pursuant to an intergovernmental 1 agreement with Mesa. This initial phase of development will create 2.2 million gallons of capacity for the Town and will use the constructed improvements to transport the collected wastewater to a facility of Mesa located near Power Road and Baseline for interim treatment. The intergovernmental agreement with Mesa is in final negotiation regarding the Town's obligations and payments. The land has already been acquired. THE BONDS Terms of the Bonds Generally The Bonds are being issued by the Corporation pursuant to a Trust Indenture, dated as of April 1, 1997 (the "Indenture"), from the Corporation to Norwest Bank Arizona, N.A., as trustee (the "Trustee"), will be dated as of April 1, 1997, will bear interest from such date payable on each April 1 and October 1 thereafter commencing October 1, 1997 (each an "Interest Payment Date"), until maturity or prior redemption and will mature on the dates and in the principal amounts and bear interest at the rates set forth on the cover page of this Official Statement. The principal of the Bonds (and any interest due as of any principal maturity or redemption date) will be payable upon presentation and surrender at the designated principal corporate trust office in Phoenix, Arizona, of the Trustee as initial registrar and paying agent. Interest on the Bonds (except defaulted interest, if any, and other than interest due as of any principal maturity or redemption date) will be payable by check or draft mailed to the registered owners of the Bonds as shown on the registration books maintained by the Trustee at the address appearing therein at the close of business on the 15th day of the calendar month next preceding each Interest Payment Date. (With respect to the removal or resignation of the Trustee and appointment of successors and the appointment of registrars and paying agents, reference is hereby made to the Indenture in its entirety.) The Bonds will be delivered in fully-registered form and are issued in denominations of$5,000 or any integral multiple thereof within a maturity. Redemption The Bonds maturing on April 1 of the following years are subject to redemption, in whole or in part on any Interest Payment Date, in order of maturity of the Bonds and by lot or in such other manner which the Trustee deems fair within a maturity, on or after the following dates, at a redemption price equal to the principal amount of each Bond to be redeemed,plus interest accrued to the date of redemption: Earliest Maturity Redemption Year Date 2002 April 1, 1998 2007 October 1, 1998 2012 October 1,1999 2014 October 1,2000 2016 October 1,2001 It is the intention of the Town to retire the Bonds as quickly as available funds will permit. As the Connection Development Fees are collected, they will be deposited into the Subordinate Lien Obligations Fund established pursuant to the Town Bond Resolution. In addition Net Revenues not 2 required for the Senior Lien Obligations may also be deposited in said Fund. The Town may also use monies not pledged for the Bonds to accomplish this result. For a description of the redemption and defeasance mechanisms through which this result will be achieved, see "SUMMARIES OF LEGAL DOCUMENTS - Summary of Certain Provisions of the Town Lease -- Refinancing, Refunding and Redemption" in Appendix D. In the case of a partial redemption of Bonds when Bonds of denominations greater than $5,000 are then outstanding, each $5,000 unit of face value of principal thereof will be treated as though it were a separate Bond of the denomination of $5,000. If it is determined that one or more, but not all of the $5,000 units of face value represented by a Bond are to be redeemed, then upon notice of redemption of a $5,000 unit or units, the Owner of that Bond is required to surrender the Bond to the Trustee (1) for payment of the redemption price of the $5,000 unit or units of face value to be redeemed (including without limitation, the interest accrued to the date fixed for redemption) and (2) for issuance, without charge to the Owner thereof, of a new Bond or Bonds, of any authorized enomination or denominations in an aggregate principal amount equal to the unmatured and unredeemed portion of,and bearing interest at the same rate and maturing on the same date as, the Bond surrendered. Notice of Redemption The notice of redemption of the Bonds will identify (i) by designation, letters, numbers or other distinguishing marks, the Bonds or portions thereof to be redeemed, (ii) the redemption price to be paid, (iii) the date fixed for redemption, and (iv) the place or places where the amounts due upon redemption are payable. The notice will be given by the Trustee on behalf of the Corporation by mailing a copy of the redemption notice by first class mail, postage prepaid,not more than 45 nor less than 30 days prior to the date fixed for redemption, to the Owner of each Bond subject to redemption in whole or in part at the address of the Owner shown on the registration books for the Bonds on the 15th day preceding that mailing; provided, that failure to receive notice by mailing, or any defect in that notice, as to any Bond will not affect the validity of the proceedings for the redemption of any other Bond. Transfer and Exchange The Trustee will initially perform the duties of Bond Registrar and will accordingly maintain the books of the Corporation for the registration of ownership of each Bond as provided in the Indenture. The Bonds may be transferred on the registration books for the Bonds upon presentation and surrender thereof to the Trustee of the Bond to be transferred at the designated corporate trust office thereof in Phoenix, Arizona, together with an assignment duly executed by the Owner of the Bond to be transferred or his attorney-in-fact. No transfer of any Bond will be effective until entered on the registration books for the Bonds. In all cases upon the transfer of a Bond, the Trustee will enter the transfer of ownership in the registration books and will authenticate and deliver, in the name of the transferee or transferees, a new fully registered Bond or Bonds of authorized denominations for the aggregate principal amount which the Owner is entitled to receive at the earliest practicable time in accordance with the provisions of the Indenture. The Owner of one or more Bonds may,upon request,and upon the surrender to the Trustee of such Bonds, exchange such Bonds for Bonds of other authorized denominations of the same maturity and interest rate, together aggregating the same principal amount as the Bonds so surrendered. The Trustee will charge the Owner of such Bond, for every such transfer or exchange of a Bond, an amount sufficient to reimburse them for any tax, governmental fee or other charge required to be paid with respect to such transfer and will require that such charge be paid before any such new Bond will be 3 delivered. The Owner of any Bond will be required to pay any expenses incurred in connection with the replacement of a mutilated, lost, stolen or destroyed Bond. Neither the Corporation nor the Trustee will be required to make any exchange or transfer of a Bond during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Bonds and ending at the close of business on the day of such mailing or to transfer or exchange any Bond selected for redemption, in whole or in part, within 90 days following such mailing. SECURITY FOR AND SOURCES OF PAYMENT OF THE BONDS Generally The Town and the Corporation will enter into a Ground Lease, dated as of April 1, 1997 (the "Ground Lease"), pursuant to which the Town will lease to the Corporation certain real property (the "Real Property") upon which portions of the Project will be located. The Real Property leased to the Corporation pursuant to the Ground Lease together with the improvements already or to be constructed thereon will then be leased back to the Town by the Corporation pursuant to a Town Lease, dated as of April 1, 1997 (the "Town Lease"). Pursuant to the Town Lease, the Town, as agent for the Corporation, will acquire, construct, equip and otherwise provide for the Project pursuant to the specifications of the Town. Pursuant to the Town Lease, the Town will pay to the Trustee, as assignee of the Corporation, rental payments for the Real Property and the Project which will be sufficient to meet the principal and interest requirements of the Bonds and the defeasance requirements described above, as well as all taxes, charges and expenses imposed upon the Corporation and its property, operations or income, with respect to the Real Property and the Project. The Town will make all such rental payments from the Connection Development Fees at the same time as making all payments with respect to the Town Bonds. The rental payments due under the Town Lease include amounts for the early redemption and defeasance of the Bonds. To the extent the Town needs to use the Net Revenues of the System to meet its obligations under the Town Lease for principal and interest but not defeasances with respect to the Bonds, it may do so only after making all payments due with respect to the Senior Lien Obligations. See "SECURITY FOR AND SOURCES OF PAYMENT OF THE BONDS -- Senior Lien Obligations." While the pledge is subordinate, if the Town did not raise Connection Development Fees as described below, or if such fees whether or not raised were insufficient to pay debt service on the Bonds (excluding defeasances), the Trustee can compel the Town to increase the rates, fees and charges comprising the Net Revenues to whatever level is necessary to provide for the payment of the Bonds after making all payments due with respect to the Senior Lien Obligations. The Town may, at the sole option of the Town, make such rental payments from its other funds as permitted by law and as the Town determines from time to time, but the Corporation has acknowledged that it has no claim to such other funds. The rental payments described above are payable only from amounts on deposit in the Subordinate Lien Obligations Fund established pursuant to the Town Bond Resolution. Pursuant to the Town Bond Resolution, after deposit of all of the Connection Development Fees to such fund monthly by the Town, Net Revenues, remaining after all required deposits pursuant to the Senior Lien Obligations Resolution, (as described hereinbelow under the heading "SECURITY FOR AND SOURCES OF PAYMENT OF THE BONDS - Senior Lien Obligations") will be deposited, if necessary, in an amount fully sufficient together with such Connection Development Fees to pay the current debt service requirements of the Town Bonds and the rental payments (other than for defeasance) due pursuant to the Town Lease. Thereafter, the Town is to cause moneys in the Subordinate Lien Obligations Fund to be deposited with the paying agent for the Town Bonds and the Trustee for the Bonds in an amount sufficient and available to pay when due the debt service on the Town Bonds and the rental payments due pursuant to the Town Lease. 4 The Connection Development Fees and the Net Revenues are pledged by the Town pursuant to the Town Lease and the Town Bond Resolution, such pledge being a senior pledge of the Connection Development Fees and a pledge of the Net Revenues subordinate to the pledge thereof for the Senior Lien Obligations. The Town will establish and maintain schedules of rates, fees, and charges for all services supplied by the System, including, to the extent permitted by applicable law, the Connection Development Fees (which are not System Revenues and are therefore not subject to the pledge of Net Revenues for the Senior Lien Obligations), fully sufficient at all times, after making reasonable allowance for contingencies and errors in estimates, (1) to pay the Operation and Maintenance Expenses and (2) to make deposits required by the applicable sections of the Senior Lien Obligations Resolution as modified by the Town Bond Resolution. Specifically, with respect to establishing and maintaining the Connection Development Fees as hereinabove provided, the Town will not at any time decrease the dollar amount collected per Equivalent Residential Unit and will, once a "New Amount Per Equivalent Residential Unit" is determined as hereinafter described, increase the dollar amount collected per Equivalent Residential Unit as necessary as follows: (1) (a) (i) By May 1 and November 1 of each year commencing May 1, 1998, the Town will determine the Annual Amount for the period ending on the immediately preceding March 31 or September 30, respectively. (ii) If any such Annual Amount is less than the lesser of(1) 1,584 or (2) the lowest of any of the previously determined Annual Amounts which is less than 1,584, the Town will determine a "New Amount Per Equivalent Residential Unit" (rounded up to the next whole dollar amount) by dividing the corresponding Remaining Estimated Required Debt Service by the corresponding Remaining Available Equivalent Residential Units. (2) (a) By March 1, 1999, and thereafter within not more than three years after such date and thereafter within not more than every three years after such date until none of the Town Bonds or the Bonds are outstanding, the Town will provide for the preparation of a Study of Remaining Capacity. (b) The Remaining Available Equivalent Residential Units established by any Study of Remaining Capacity will be utilized in the next corresponding determination pursuant to paragraph (1) (a) (ii). (3) Within 30 days after the determination of a New Amount Per Equivalent Residential Unit pursuant to paragraph (1) (a) (ii), the Town will cause either (a) the payment or defeasance of the Town Bonds and the Bonds (including by applying Net Revenues, if available, or other legally available amounts) in amounts sufficient to not require the establishment of such New Amount Per Equivalent Residential Unit or (b) the establishment, in not more than 120 days thereafter (unless a longer period is necessary pursuant to then applicable law and then in such case as soon as reasonably possible pursuant thereto), of such New Amount Per Equivalent Residential Unit as the amount collected with respect to the Connection Development Fees thereafter. The Town will concurrently cause an independent certified public accountant or firm of certified public accountants to re-determine and certify in writing each of the determinations made by the Town pursuant to paragraph (1) (a) and, at the time of the next succeeding re-determination, to certify that any New Amount Per Equivalent Residential Unit that should have been established as a result of the preceding determination by the Town pursuant to paragraph (1) (a) (ii), if any, has been established by the Town. If such New Amount Per Equivalent Residential Unit that should have been established pursuant to paragraph (a) (ii) has not been timely established, such accountant will be required to provide immediate written notice of such failure to the Town and the Trustee. 5 THE BONDS AND THE RENTAL PAYMENTS PURSUANT TO THE TOWN LEASE DO NOT CONSTITUTE AN INDEBTEDNESS OR GENERAL OBLIGATION OF THE TOWN, NOR SHALL THE TOWN BE LIABLE FOR THE PAYMENT FROM AD VALOREM TAXES OF THE RENTAL PAYMENTS OR PRINCIPAL OF AND INTEREST ON THE BONDS. PURSUANT TO THE INDENTURE, THE BONDS WILL BE SPECIAL OBLIGATIONS OF THE CORPORATION AND THE BOND SERVICE CHARGES THEREON SHALL BE PAYABLE SOLELY FROM THE RENTAL PAYMENTS MADE PURSUANT TO THE TOWN LEASE. THE BONDS DO NOT AND SHALL NOT REPRESENT OR CONSTITUTE A DEBT OR A DIRECT OR INDIRECT PLEDGE OF THE FULL FAITH AND CREDIT OF THE TOWN OR OF THE STATE OR OF ANY POLITICAL SUBDIVISION, MUNICIPALITY OR OTHER AGENCY THEREOF. THE CORPORATION HAS NO TAXING POWER. Senior Lien Obligations The Senior Lien Obligations have been or will be issued on a senior lien basis with respect to the Net Revenues pursuant to the Senior Lien Obligations Resolution. It is currently planned that during the next year the Town will issue up to $3,000,000 principal amount of Additional Parity Lien Bonds for a water reuse line between existing facilities of the System. Pursuant to the Senior Lien Obligations Resolution, the Town is to establish and maintain schedules of rates, fees and charges for all services supplied by the System fully sufficient at all times, after making reasonable allowance for contingencies and errors in estimates, (1) to pay the Operation and Maintenance Expenses of the System and (2) to produce an aggregate amount of Net Revenues in each fiscal year of the Town equal to one hundred twenty-five percent (125%) of the aggregate of the debt service payable on the Town Series 1992 Bonds and any Additional Parity Lien Bonds in such fiscal year • of the Town. As long as any of the Town Series 1992 Bonds, Additional Parity Lien Bonds or Additional Parity Lien Obligations are outstanding and unpaid, the System Revenues are to be deposited, as collected, and held in the custody of the Town. Such amounts are to disbursed monthly in the following order of priority: (1) First from month to month for the payment of the Operation and Maintenance Expenses. (2) After the transfer to pay the Operation and Maintenance Expenses, next to set aside money fully sufficient to pay the current debt service requirements of the Town Series 1992 Bonds, Additional Parity Lien Bonds and Additional Parity Lien Obligations on the applicable January 1 and July 1. (3) After the transfers to pay the Operation and Maintenance Expenses and such debt service,next to deposit the amount required to maintain a reserve fund in an amount equal to the reserve requirement for the Town Series 1992 Bonds and the Additional Parity Lien Bonds. Money in such reserve fund is to be used solely for the payment of interest or principal on the Town Series 1992 Bonds or Additional Parity Lien Bonds or obligations from which Additional Parity Lien Obligations are to be paid and as to which there would otherwise be default in such payment. (4) Next to set aside money fully sufficient to pay costs of an agreement for a reserve fund credit instrument for the Town Series 1992 Bonds and for any future agreement for any such instrument for Additional Parity Lien Bonds or Additional Parity Lien Obligations. (5) Finally to deposit into a fund designated as the "Replacement and Extension Fund" an amount equal to one-twelfth (1/12th) of two percent (1/12th of 2%) of the System Revenues during the preceding fiscal year of the Town, provided that no such deposits need be made into the Replacement and Extension Fund at such time or times if there is on deposit in such fund an amount at least equal to two percent (2%) of the value of all tangible assets of the System, as shown on the most recent audited balance sheet of the System. Money in such fund is to be used for making 6 extraordinary repairs or replacements to the System which are necessary to keep the System in operating condition and for the making of which provision has not been made in the annual budget and money is not available as a maintenance and operation expense or for paying the cost of constructing improvements or extensions to the System which will either enhance its revenue- producing capacity or provide a higher degree of service. The Senior Lien Obligations Resolution provides that Additional Parity Lien Bonds and Additional Parity Lien Obligations may be issued by the Town,but only as provided in the Senior Lien Obligations Resolution or in any agreement relating to Additional Parity Lien Obligations and only for the purposes of obtaining funds to make improvements and expansions to the existing System, to purchase capacity rights in sewage treatment plant facilities owned by other political subdivisions of the State, to acquire existing property, plant and equipment, land, rights in land and water rights for the System, to provide reasonable reserves for the Additional Parity Lien Bonds or Additional Parity Lien Obligations, including capitalization of interest and a reserve fund for the Additional Parity Lien Bonds or Additional Parity Lien Obligations, to refund the Town Series 1992 Bonds, Additional Parity Lien Bonds and Additional Parity Lien Obligations or to refund other bonds of the Town, whether revenue bonds,general obligation bonds or other bonds or obligations,issued to provide funds to construct or acquire existing property, plant and equipment, additions, extensions, improvements, expansions or replacements to the System. The Senior Lien Obligations Resolution further provides that for such bonds or obligations to be issued, the Net Revenues for the last full fiscal year of the Town immediately preceding the issuance of such Additional Parity Lien Bonds or Additional Parity Lien Obligations (with certain adjustments as permitted by the Senior Lien Obligations Resolution) must have been (i) not less than one hundred twenty-five percent (125%) of the highest year's debt service, calculated with regard to the highest rate of interest to be borne on all of the Town Series 1992 Bonds, Additional Parity Lien Bonds and Additional Parity Lien Obligations then outstanding and on the Additional Parity Lien Bonds or the Additional Parity Lien Obligations to be issued and (ii) not less than one hundred percent (100%) of the aggregate of costs then due and owing with respect to the reserve fund credit instrument for the Town Series 1992 Bonds. Parity Lien Obligations The Town Bonds have been issued on a parity with the obligation of the Town to make rental payments pursuant to the Town Lease with respect to the Bonds. The Town may not issue or cause to be issued additional obligations on a parity with the Town Bonds or its obligations pursuant to the Town Lease. BONDHOLDERS'RISKS INVESTMENT IN THE BONDS INVOLVES CERTAIN RISKS. THE RELATIVELY HIGH INTEREST RATES BORNE BY THE BONDS (AS COMPARED TO PREVAILING RATES OF BONDS THAT ARE GENERALLY MORE SECURE) IS INTENDED TO COMPENSATE THE INVESTOR FOR SUCH RISKS. ANYONE CONSIDERING INVESTMENT IN THE BONDS SHOULD EXAMINE CAREFULLY THIS OFFICIAL STATEMENT, INCLUDING THE APPENDICES HERETO. Limited Source and Security for Payment of the Bonds The Bonds are payable only from (i) revenues and receipts derived by the Corporation from rental payments made by the Town pursuant to the Town Lease which payments are secured by a senior pledge of the Connection Development Fees and a subordinate pledge of the Net Revenues. If there are insufficient funds available to pay the principal of and interest on the Bonds because the amount of the Connection Development Fees and the Net Revenues are insufficient for such purposes, the Trustee, 7 among other things, may, pursuant to the limited provisions of the Indenture, enforce the Town's covenants to increase the Connection Development Fees and System Revenues to whatever level is required to meet the Town's obligations under the Town Lease or to take possession of the Project and relet it to another operator of the facilities constituting the Project. There can be no assurance that proceeds of a reletting of the leasehold of the Town in the Project would be sufficient to pay the Bonds or that the leasehold of the Town in the real property constituting the Project could be relet within a reasonable amount of time or at all. SEE "SECURITY FOR AND SOURCES OF PAYMENT OF THE BONDS" HEREIN. THE OBLIGATION OF THE TOWN TO MAKE ANY SUCH PAYMENTS PURSUANT TO THE TOWN LEASE ARE NON-RECOURSE AGAINST THE GENERAL REVENUES OF THE TOWN. THERE CAN BE NO ASSURANCE THAT A SUFFICIENT AMOUNT OF CONNECTION DEVELOPMENT FEES WILL BE COLLECTED EACH YEAR WHILE THE BONDS ARE OUTSTANDING TO ASSURE PAYMENT OF THE PRINCIPAL OF AND INTEREST ON THE BONDS. NO APPRAISAL HAS BEEN OBTAINED WITH RESPECT TO THE VALUE NOW OR IN THE FUTURE OF THE LEASEHOLD OF THE CORPORATION IN THE REAL PROPERTY CONSTITUTING THE PROJECT. NEITHER THE INDENTURE NOR THE TOWN LEASE IMPOSES ANY GENERAL OBLIGATION OR LIABILITY UPON THE CORPORATION OR THE TOWN TO PAY THE PRINCIPAL OF OR INTEREST ON THE BONDS. SEE "SECURITY FOR AND SOURCES OF PAYMENT OF THE BONDS" HEREIN. Failure to Increase the Amount of the Connection Development Fees The Town has agreed in the Town Lease to increase the amount per Equivalent Residential Unit charged with respect to the Connection Development Fees if the rate of new connections to the System does not meet the projections upon which the payment of the debt service on the Bonds is dependent. SEE "SECURITY FOR AND SOURCES OF PAYMENT OF THE BONDS" HEREIN. The amount charged per Equivalent Residential Unit with respect to the Connection Development Fees is only a portion of the total amount charged by the Town upon the issuance by it of a building permit. No assurance may be given that the Town will not increase other charges included in the amount charged for a building permit, making that amount materially greater than it now is and discouraging the Town from increasing the amount per Equivalent Residential Unit charged with respect to Connection Development Fees in accordance with the terms of the Town Lease in order to keep the total amount of the Town's charge for a building permit from materially detracting from the desirability of the Town as a place within which to build. If the Town does not provide for such increases with respect to the Connection Development Fees under such circumstances, it would be unlikely that sufficient funds would otherwise be available to pay the principal of and interest on the Bonds. Accordingly the Town has agreed in the Town Lease that its covenant to increase the amount per Equivalent Residential Unit collected with respect to Connection Development Fees when required may be enforced by a special action in the nature of mandamus instituted either by the Corporation or the Trustee acting pursuant to the assignment of the Town Lease to the Trustee for the benefit of the Bondholders and the limitations contained in the Indenture. See "BONDHOLDERS' RISKS - Limited Source and Security for Payment of the Bonds" herein. Factors Affecting Development The long-term availability of finished lots suitable for the construction of homes and other structures in the Town depends on many factors. Such availability may be affected by changes in general economic conditions, fluctuations in land prices both locally and nationally, availability of water and other utilities necessary for development, changes in the income tax treatment of land ownership, changes in the availability of borrowed funds and numerous other factors. In addition, land development operations are subject to comprehensive federal, State and local regulation. Approval is required from various agencies in connection with the layout and design of developments, the nature and extent of 8 improvements, the availability of an assured water supply, construction activity, land use, zoning, school and health requirements and many other matters. In response to an anticipated capital fund shortage in Gilbert Unified School District No. 41 of a MaricoP County,, Arizona (the "School District"), the School District providing for the educational needs of most of the children in the Town, the Town Council established a moratorium on the rezoning of land for residential development effective October 24, 1996, for a period of 270 days with the right to extend the moratorium for an additional 90 days. The electors of the School District approved a capital override tax levy on March 11, 1997, to address the School District's capital fund shortage. There can be no assurance that such moratorium will be lifted as a result of such tax levy approval. Even if such moratorium is not lifted, however, the moratorium does not affect the issuance of building permits on land which is currently zoned residential or as to which applications for residential zoning were pending as of October 24, 1996, or commercial, governmental, school,church or industrial permits. Town staff estimates that as of March 1, 1997, current residential zoning and residential zoning • applications not subject to the moratorium would support approximately 24,875 additional residential connections to the System, which is sufficient to retire the Bonds, assuming that the daily discharge from an average residential unit does not materially change over the life of the Bonds, that such connections are made at the existing charge per Equivalent Residential Unit and that such connections are made at the rate of at least 1,584 Equivalent Residential Units per year which is less than the 1,767 average annual rate since 1987 and the 2,305 average annual rate since 1992. See "BONDHOLDERS' RISKS - Project Capacity Limitations" below. In areas of rapid growth, such as has occurred in the Town, public/political attitudes toward growth are subject to shifts from support for growth to opposition to growth. Prior to the passage of the school District's tax levy override, segments of the Town's population were expressing opposition to growth. Some observers say that with the addition of the new council members elected on March 11, 1997, a majority of council is now opposed to growth at the recent rate. Although growth cannot be prevented, no assurances can be given that the Town Council as now to be constituted or a future,Town Council will not delay and defer action required for continued growth. Such action by the Town Council as now to be constituted or a future Town Council could have a material adverse impact on the ability of the Town to pay its obligations under the Town Lease. Absence of Statutory Authorization for Pledge of the Connection Development Fee Since the Arizona Legislature has not specifically authorized the pledge of the Connection Development Fees the contracts clause of the United States Constitution will not be available to preserve the pledge of those fees if the Arizona Legislature were to repeal the Town's authority to establish and collect the Connection Development Fees. The use of development fees such as the Connection Development Fees is widespread in Arizona and it is considered unlikely by the Town that the Arizona Legislature would pass such a repeal. However, no assurance can be given that such a repeal will not occur. Since the Town is a non-charter municipal corporation, the Town's ability to find alternative revenue sources for payment of the rental payment due pursuant to the Town Lease is limited. In such a situation,Bondholders would need to look to the Net Revenues of the System for payment. 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