$4,715,000 PAJARO/SUNNY MESA COMMUNITY SERVICES …cdiacdocs.sto.ca.gov/2007-0574.pdf · 45.000...

NEW ISSUE-BOOK-ENTRY-ONLY NOT RATED

(See "CONCLUDING INFORMATION-No Rating on the Bonds; Secondary Market" herein)

In the opinion of Robert M Haight, Scotts Valley, California, Bond Counsel, subject, however to certain qualifications described herein, under existing law. the interest on the Bonds is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, such interest is taken into account in determining certain income and earnings. In the further opinion of Bond Counsel. such interest is exempt from California personal income taxes. See "LEGAL MAITERS-Tax Exemption" herein.

COUNTY OF MONTEREY STATE OF CALIFORNIA

$4,715,000 PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT

VEGA MUTUAL WATER ASSESSMENT DISTRICT LIMITED OBLIGATION IMPROVEMENT BONDS, SERIES 2007-1

(Bank Qualified)

Dated: Date of Delivery Due: September 2 as shown on the Front Cover.

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

The Vega Mutual Water Assessment District Limited Obligation Improvement Bonds, Series 2007-1 (the "Bonds") are being issued by the Pajaro/Sunny Mesa Community Services District (the "District") put1luant to a Fiscal Agent Agreement, dated as of July 26, 2007 (the "Fiscal Agent Agreement"), by and between the District and Union Bank of California, N.A., as fiscal agent (the "Fiscal Agent") to: (i) finance the acquisition and construction costs of certain public water improvements serving property within Vega Mutual Water Assessment District (the '"'Assessment District"), (ii) pay costs related to the issuance of the Bonds, and (iii) make a deposit to a Reserve Fund.

The Bonds are being issued pursuant to provisions of the Improvement Bond Act of 1915, being Division l 0 of the California Streets and Highways Code (the "Bond Law"). The Bonds are payable from assessments levied pursuant to the Municipal Improvement Act of 1913 (Division 12 of the California Streets and Highways Code) (the "1913 Act"). See "SOURCES OF PAYMENT FOR THE BONDS" and "BONDHOLDERS' RISKS" herein. Interest on the Bonds is payable semiannually on March 2 and September 2 each year, commencing March 2, 2008 (each, an "Interest Payment Date"), until maturity or earlier redemption. The Bonds are subject to optional redemption, special mandatory redemption from surplus funds, special mandatory redemption from prepayments and mandatory sinking payment redemption as described herein. See "THE BONDS-Redemption" herein.

Maturity Date Se11tember 2

2009 2010 2011 2012 2013 2014 2015

MATURITY SCHEDULE Base CUSIPt 695797

Series 2007-1 Serial Bonds

Princil!al Interest Re-Offering Maturity Date Princil!al Interest Re-Offering Amount Rate Price CUSIP:t Se11tember2 Amount Rate Price $10,000 4.00% 100.000% AB6 2016 $60,000 4.60% 99.267%

20,000 4.IO I00.000 AC4 2017 70,000 4.70 99.208 25,000 4.20 100.000 ADZ 2018 75,000 4.80 99.152 30,000 4.30 I00.000 AE0 20[9 85,000 4.90 99.547 35,000 4.40 I00.000 AF7 2020 100,000 5.00 100.000 45.000 4.40 99.399 AG5 2021 110,000 5.00 99.697 50.000 4.50 99.331 AH3 2022 120,000 5.00 99.266

$815,000 - 5.00% Term Bond maturing September 2, 2027, Price 98.258% CUSIPt 696797AR1 $3,065,000 -5.00% Term Bond maturing September 2, 2037, Price 96.385% CUSIPt 696797AS9

CROCKER SECURITIES

CUSIP:t AJ9 AK6 AL4 AM2 ANO AP5 AQ3

The Bonds are offered when, as and if issued subject to the approval as to their legality by Robert M. Haight, Scotts Valley, California, Bond/Disclosure Counsel and certain other conditions. Certain legal matters will be passed on for the District by Marc J. Del Piero, the District's Counsel. It is anticipated that the Bonds in book-entry form will be available for delivery through the facilities of The Depository Trust Company, New York, New York on or about August 16, 2007.

The date of this Official Statement is August 7, 2007.

t CUSIP® A registered trademark of the American Bankers Association. Copyright © 1999-2007 Standard & Poor's, a Division of The McGraw-Hill Companies, [nc. All rights reserved. CUSIP® data herein is provided by Standard & Poor's CUSIP® Service Bureau and are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such numbers.

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

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

Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure by the District in any press release and in any oral statement made with the approval of an authorized officer of the District or any other entity described or referenced herein, the words or phrases "will likely result," "are expected to," "will continue," .. is anticipated;' "'estimate," "project," "forecast," "expect," "intend" and similar expressions identify "forward-looking statements." Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur.

Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material.

Limit of Offering. No dealer, broker, salesperson or other person has been authorized by the District to give any information or to make any representations in connection with the offer or sale of the Bonds other than those contained herein and if given or made, such other information or representation must not be relied upon as having been authorized by the District, the Underwriter or the Underwriter. 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 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

Involvement of Underwriter. The Underwriter has submitted the following statement 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.

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

Stabilization of Prices. In connection with this offering, the Underwriter may overallot or effect transactions that stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time.

The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower than the public offering prices set forth on the inside front cover page hereof and said public offering prices may be changed from time to time by the Underwriter. THE BONDS HA VE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXCEPTION FROM THE REGISTRATION REQUIREMENTS CONTAINED IN SUCH ACT. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT BOARD OF DIRECTORS

Donna Jean Brown, President Linda Sandoval, Vice-President

Hany Wiggins, Director Connie Easterling, Director

Joe Espinola, Director

DISTRICT STAFF

Joe Rosa, General Manager/District Secretary Kennedy/Jenks Consnltants, District Engineer

Marc J. Del Piero, District Counsel Harry Wiggins, Treasurer

Connie Easterling, Secretary of the Board Joe Espinola, Assistant Secretary of the Board

PROFESSIONAL SERVICES

Bond/Disclosure Counsel Robert M. Haight

Scotts Valley, California

Underwriter Crocker Securities, LLC Walnut Creek, California

Assessment Engineer Kennedy/Jenks Consultants

Palo Alto, California

Fiscal Agent Union Bank of California, N.A.

San Francisco, California

TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... ! THE lSSUER .............................................................................................................................. 1 THE ASSESSMENT DISTRICT ..................................................................................................... 2 SECURITY AND SOURCES OF REPAYMENT FOR THE BONDS ...................................................... 2 PURPOSE ................................................................................................................................. .3 PROPERTY VALUES ................................................................................................................. .3 TAX EXEMPTION ..................................................................................................................... .3 PROFESSIONALS INVOLVED IN THE OFFERING ......................................................................... .3 OFFERJNG OF THE BONDS ........................................................................................................ .4 INFORMATION CONCERNING THIS OFFICIAL STATEMENT ....................................................... .4

THE BONDS .................................................................................................................................. 5 GENERAL PROVISIONS ..............................••............................................................................. 5 TAX COVENANTS; BANK QUALIFIED ....................................................................................... 6

BOOK-ENTRY-ONLY SYSTEM .................................................................................................. 6 REDEMPTION ............................................................................................................................ 7 SCHEDULED DEBT SERVICE ON THE BONDS ............................................................................. 9

THE FINANCING PLAN ........................................................................................................... 10 ESTIMATED SOURCES AND USES OF FUNDS ........................................................................... 10 ESTIMATED IMPROVEMENT COSTS ......................................................................................... 10

THE ASSESSMENT DISTRICT ............................................................................................... 11 GENERAL·················································· ............................................................................. l l ASSESSED VALUES ................................................................................................................. 11 ASSESSED VALUE TO ASSESSMENT LIEN RATIOS .................................................................. 11 DELINQUENCIES ..............•••.•.........••............................................................••.........••.............. 12 DIRECT AND OVERLAPPING DEBT .......................................................................................... 13

METHOD AND FORMULA OF ASSESSMENT SPREAD ................................................... 15 GENERAL AND SPECIAL BENEFITS ......................................................................................... 15

APPORTIONMENT OF SPECIAL BENEFITS ................................................................................ 15

SOURCES OF PAYMENT FOR THE BONDS ....................................................................... 16 REPAYMENT OF THE BONDS ................................................................................................... 16 COVENANT TO COMMENCE FORECLOSURE PROCEEDINGS ..................................................... 17 RESERVE FUND ...................................................................................................................... 19

BONDHOLDERS' RISKS .......................................................................................................... 20 GENERAL ............................................................................................................................... 20 FORECLOSURE AND SALE PROCEEDINGS ................................................................................ 20 DEPLETION OF RESERVE FUND .............................................................................................. 21 VALUATION OF PROPERTY IN THE ASSESSMENT DISTRICT ..................................................... 21 FACTORS AFFECTING PARCEL VALUE AND AGGREGATE VALVES ......................................... 22

(i)

PREPAYMENT OF ASSESSMENTS ............................................................................................. 23 OTHER POSSIBLE CLAIMS UPON THE VALUE OF AN ASSESSMENT PARCEL ............................ 23 DIRECT AND OVERLAPPING INDEBTEDNESS ........................................................................... 24 BAKKRUPTCY PROCEEDINGS ................................................................................................. 24 PAYMENT OF THE ASSESSMENT NOT A PERSONAL OBLIGATION ............................................ 24 No DISTRICT OBLJGA TJON TO PAY DEBT SERVICE ................................................................ 25 Loss OF TAX EXEMPTION ...................................................................................................... 25 No ACCELERATION PROVISION .............................................................................................. 25 PROPOSITION 218; POSSIBLE FUTURE BALLOT INITIATIVES .................................................. 25

LEGAL MATTERS ..................................................................................................................... 26 ENFORCEABILITY OF REMEDIES ............................................................................................. 26 APPROVAL OF LEGAL PROCEEDINGS ...................................................................................... 26 TAX EXEMPTION .................................................................................................................... 27

ABSENCE OF LITIGATION ....................................................................................................... 27

CONCLUDING INFORMATION ............................................................................................. 28 No RATING ON THE BONDS; SECONDARY MARKET ............................................................... 28

UNDERWRITING ..................................................................................................................... 28

THE DISTRICT ENGINEER ....................................................................................................... 28

CONTINUING DISCLOSURE ..................................................................................................... 28

ADDITIONAL INFORMATION ................................................................................................... 29 REFERENCES .......................................................................................................................... 29 EXECUTION ............................................................................................................................ 29

APPENDIX A- SUMMARY OF FISCAL AGENT AGREEMENT ................................ A-1

APPENDIX B- FORM OF CONTINUING DISCLOSURE AGREEMENT ................... B-1

APPENDIX C - FORM OF BOND COUNSEL OPINION ................................................ C-1

APPENDIX D ASSESSMENT PARCEL LISTING ........................................................ D-1

APPENDIX E-DTC AND THE BOOK-ENTRY-ONLY SYSTEM ................................. E-1

(ii)

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OFFICIAL STATEMENT

$4,715,000 PAJARO/SUNNY MESA COMMUNTIY SERVICES DISTRICT

VEGA MUTUAL WATER ASSESSMENT DISTRICT LIMITED OBLIGATION IMPROVEMENT BONDS, SERIES 2007-1

This Official Statement which includes the cover page and appendices (the "Official Statement") is provided to furnish certain information concerning the sale of the Pajaro/Sunny Mesa Community Services District, Vega Mutual Water Assessment District Limited Obligation Improvement Bonds, Series 2007-1 (the "Bonds"), in the aggregate principal amount of $4,715,000.

INTRODUCTION

The description and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for the complete details of all terms and conditions. All statements herein are qualified in their entirety by reference to each document. All capitalized terms used in this Official Statement and not otherwise defined herein have the same meaning as in the Fiscal Agent Agreement (dejined below).

The Issuer

The Pajaro/Sunny Mesa Community Services District {the "District") was incorporated in 1983 pursuant to the Commnnity Services District Act as set forth in the Government Code of the State of California. The present District was formed in 1992 by consolidating the area formerly served by the Pajaro Fire District and the Sunny Mesa Mutual Water Company. It is located in the foothills of the Pajaro Valley which is adjacent to the City of Watsonville, California, and eighty (80) miles southeast of San Francisco, California, fifteen ( 15) miles north of Salinas, California. (See the Location Map above.)

The District is, among other things, empowered to provide park and street lighting services to the community of Pajaro/Sunny Mesa and to supply domestic water from its various facilities, which, as of July \, 2007, consisted of 1,017 connections.

The District has also experienced a steady increase in its Assessed Valuation of Land and Improvements over the last five (5) years as evidenced by the following table:

Year Land Improvements

2006-07 $181,514,029(!) $194,919 ,657(1)

2005-06 80,545,970 98,419,139

2004-05 73,925,538 98,303.376

2003-04 69,077,519 91,799,290

2002-03 62,266,212 84,213,419

(l) Increases due to several annexations of properties to the District during fiscal year 2005-06. Source: California Municipal Statistics

OFFICIAL STATEMENT PAJAROISUNNY MESA COMMUNITY SERVICES DISTRICT

Page I

Because the District is a Community Services District, organized and existing pursuant to the Government Code of the State of California (the "Act"), the legislature in adopting the Act, provided the District with, among other things, municipal power over water and sewer. Under the District's authority over water, property ovmers within the Vega Mutual Water Assessment District (the "Assessment District") requested the District to improve the water system within the Assessment District area and to provide futnre maintenance of said water system as a part of the District maintained water system. The District agreed to 0\"11 and maintain the Vega Mutual Water system as a part of its water system.

The Assessment District

The Assessment District, located in Monterey County, is comprised of 132 parcels of land, 113 parcels of which are developed with residential homes and the remaining 19 parcels are unimproved. As of August 7, 2007, one assessment has been prepaid in full and one assessment has been prepaid in part. Accordingly, as of the date hereof, all 132 parcels will secure the Bonds. (See "THE ASSESSMENT DISTRICT-General" herein.)

All of the proceedings of the District undertaken to form the Assessment District and to levy the assessments were undertaken under the Municipal Improvement Act of 1913 (Division 12 of the California Streets and Highways Code). For an additional description of the Assessment District, see "THE ASSESSMENT DISTRICT" herein.

Security and Sources of Repayment for the Bonds

The Bonds will be issued under the Fiscal Agent Agreement, dated as of July 26, 2007 (the "Fiscal Agent Agreement"), between the District and Union Bank of California, N.A., San Francisco, California, as fiscal agent (the "Fiscal Agent") (see "APPENDIX A-SUMMARY OF THE FISCAL AGENT AGREEMENT" herein) and pursuant to the Municipal Improvement Act of 1913 (Division 12 of the California Streets and Highways Code) (the "1913 Act") and the Improvement Bond Act of 1915 (Division 10 of the California Streets and Highways Code) (the "Bond Law") (collectively, the "Assessment Bond Law").

The Bonds are limited obligations of the District secured by a first lien on the unpaid assessments (the "Assessments") levied by the District on the parcels in the Assessment District with unpaid assessments (the "Assessment Parcels") pursuant to the Assessment Bond Law and the funds pledged therefor under the Fiscal Agent Agreement. Assessments levied on the property in the Assessment District are estimated to be sufficient, if paid timely, to pay the aggregate amount of the principal and interest on the Bonds. See "SOURCES OF PAYMENT FOR THE BONDS" and "BONDHOLDERS' RISKS" herein.

The District has covenanted to cause foreclosure proceedings to be commenced and prosecuted against Assessment Parcels with delinquent installments of Assessments under certain circumstances. For a more detailed description of the foreclosure covenant see "SOURCES OF PAYMENT FOR THE BONDSRepayment of the Bonds" and "-Covenant to Commence Foreclosure Proceedings."

The Bonds are limited obligations of the District payable solely from the proceeds of unpaid Assessments levied on the Assessment Parcels within the Assessment District and other funds pledged under the Fiscal Agent Agreement. The Bonds do not constitute a debt or liability of the State of California or of any political subdivision thereof, other than the District to the limited extent described herein.

OFFICIAL STATEMENT PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT

Page 2

The District shall only be obligated to pay the principal of the Bonds, and the interest thereon, from the funds described herein, and neither the faith and credit nor the taxing power of the District, the State of California or any of its political subdivisions is pledged to the payment of the principal of or the interest on the Bonds, except to the limited extent described herein. See "SOURCES OF PAYMENT FOR THE BONDS" and "BONDHOLDERS' RISKS" herein.

Purpose

Proceeds from the Bonds will be used to (i) finance the acquisition and construction costs of certain public water improvements of benefit to property within the Assessment District, (ii) pay costs related to the issuance of the Bonds, and (iii) make a deposit to a Reserve Fund (see "THE FINANCING PLAN-- Estimated Sources and Uses of Funds" herein).

Property Values

The District has relied on the assessed valuations of the Monterey County Assessor used for the purposes of general taxes for the valuations for all of the 132 Assessment Parcels (see "APPENDIX DASSESSMENT PARCEL LISTING") presented in this Official Statement, together with a summary of the assessed value to lien ratios (TABLE I). See "BONDHOLDERS' RISKS," "THE ASSESSMENT DISTRICT-Assessed Values," and "-Assessed Value to Assessment Lien Ratios" and "APPENDIX DAssessment Parcel Listing•• herein.

Tax Exemption

In the opinion of Robert M. Haight, Scotts Valley, California, Bond Counsel, subject, however to certain qualifications described herein, under existing law, the interest on the Bonds is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, such interest is taken into account in determining certain income and earnings. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. See "LEGAL MATTERS-Tax Exemption" herein.

Professionals Involved in the Offering

The legal proceedings relating to the issuance of the Bonds are subject to the approving opinion of Robert M. Haight, Scotts Valley, California, as Bond/Disclosure Counsel. Certain legal matters will be passed on for the District by Marc J. Del Piero, Attorney at Law, District's Counsel.

Union Bank of California, N.A., San Francisco, California, will serve as the fiscal agent, paying agent, registrar, authentication and transfer agent for the Bonds and perform the functions required of it under the Fiscal Agent Agreement for the payment of the principal of and interest and any premium on the Bonds and all activities related to the redemption of the Bonds.

Crocker Securities, LLC, Walnut Creek, California, will serve as Bond underwriter.

Payment of the fees of Bond/Disclosure Counsel, Fiscal Agent, the Underwriter and the Structural Advisor are contingent on the sale and delivery of the Bonds.


Page 3

Offering of the Bonds

Authority for Issuance. The Bonds are issued by the District pursuant to the Assessment Bond Law and Resolution No. 07-01-07 adopted by the Board of Directors on July 26, 2007 (the "Resolution"). A landowners' voter election within the Assessment District was held on June 26, 2007 and of the 133 eligible parcels whose owners' may cast votes, 75 parcels with a total assessment of $2,665,692 voted in favor of, and 7 parcels with a total assessment of $245,997 voted against, the issuance of the Bonds. The election passed by a favorable vote of 91.55% of the assessment amount voted. The Bonds are being sold to Crocker Securities, LLC (the "Underwriter"), pursuant to a Bond Purchase Agreement authorized by the Resolution.

Offering and Delivery of the Bonds. The Bonds are offered, when, as and if issued, subject to the approval as to their legality by Robert M. Haight, Scotts Valley, California, as Bond Counsel. It is anticipated that the Bonds, in book-entry form, will be available for delivery on or about August 16, 2007 through the facilities of The Depository Trust Company.

Information Concerning this Official Statement

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

Availability of Legal Documents. The summaries and references contained herein with respect to the Fiscal Agent Agreement and other statutes or documents do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute, and references to the Bonds are qualified in their entirety by reference to the form thereof included in the Fiscal Agent Agreement. Copies of the documents described herein are available for inspection during the period of initial offering of the Bonds at the offices of the Underwriter: Crocker Securities, LLC, 2999 Oak Road, Suite 230, Walnut Creek, California 94597, telephone (925) 941-1541. Copies of these documents may be obtained after delivery of the Bonds at the corporate trust office of the Fiscal Agent, Union Bank of California, N.A., 350 California Street, 11 th Floor, San Francisco, California 94104, telephone (415) 273-2514, or from the District through the District Secretary, 136 San Juan Road Watsonville, California 95076, telephone (831) 722-1389.


Page4

THE BONDS

General Provisions

Repayment of the Bonds. The Bonds will be dated the date of delivery thereof and will mature as set forth on the inside front cover page, and will be issued in denominations of $5,000 or any integral multiples thereof. Interest is payable on the Bonds at the rates per annum set forth on the inside front cover page hereof, payable on March 2, 2008 and on each September 2 and March 2 thereafter (the "Interest Payment Dates"). Interest with respect to the Bonds will be computed on the basis of a year consisting of 360 days and twelve 30-day months.

Interest on the Bonds shall be payable from the Interest Payment Date next preceding the date of authentication thereof unless (i) a Bond is authenticated and registered as of an Interest Payment Date, in which event it shall bear interest from such Interest Payment Date, (ii) a Bond is authenticated prior to the first Interest Payment Date, in which event it shall bear interest from the Date of Delivery,

Interest shall be paid in lawful money of the United States on each Interest Payment Date to the Persons in whose names the ownership of the Bonds is registered on the Registration Books at the close of business on the immediately preceding Record Date, except as provided below. Interest on any Bond which is not punctually paid or duly provided for on any Interest Payment Date shall be payable to the Person in whose name the ownership of such Bond is registered on the Registration Books at the close of business on a special Record Date to be established by the Fiscal Agent for the payment of such defaulted interest to be fixed by the Fiscal Agent, notice of which shall be given to such Owner by first class mail not less than ten days prior to such special Record Date, Interest shall be paid by check of the Fiscal Agent mailed by first class mail, postage prepaid, on each Interest Payment Date to the Bond Owners at their respective addresses shown on the Registration Books as of the close of business on the preceding Record Date; provided, however, that at the written request of the Owner of at least $1,000,000 in aggregate principal amount of Outstanding Bonds filed with the Fiscal Agent prior to any Record Date, interest on such Bonds shall be paid to such Owner on each succeeding Interest Payment Date (unless such request has been revoked in writing) by wire transfer of immediately available funds to an account in the United States designated in such written request.

The principal of the Bonds shall 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 Fiscal Agent. Payment of principal of any Bond shall be made only upon presentation and surrender of such Bond at the Office of the Fiscal Agent. See "Book-Entry-Only System" below.

Transfer or Exchange of Bonds. Any Bond may, in accordance with its terms, be transferred upon the Registration Books by the person in whose name it is registered, in person or by his 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 Fiscal Agent. Whenever any Bond or Bonds shall be surrendered for transfer, the District shall execute and the Fiscal Agent shall authenticate and shall deliver a new Bond or Bonds for a like aggregate principal amount, in any authorized denomination. The Fiscal Agent 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 Office of the Fiscal Agent for a like aggregate principal amount of Bonds of the same maturity of other authorized denominations. The District may charge a reasonable sum for each new Bond issued, and the Fiscal Agent shall require the payment by the Bond


Page 5

Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange.

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

Tax Covenants; Bank Qualified

(a) During the term of the Bonds, the Project will be used by the general public for potable water purposes consistent with the permissible scope of the District's authority.

(b) The District will make no use of moneys representing Project costs which will cause the Bonds, or any portion thereof, to be or become "arbitrage bonds" subject to federal income taxation by reason of Section 148(a) of the Internal Revenue Code of 1986, as amended (the "Code"). To that end, the District will comply with all requirements of said Section 148(a) and all regulations of the United States Department of the Treasury issued thereunder, to the extent that such requirements are, at the time, applicable and in effect.

(c) The District has designated the Bonds "Bank Qualified" for purposes of paragraph (3) of Section 265(b) of the Code and represents that not more than $10,000,000 aggregate principal amount of obligations the interest on which is excludable (under Section I 03(a) of the Code) from gross income for federal income tax purposes (excluding (i) private activity bonds, as defined in Section 141 of the Code, except qualified 501(c)(3) bonds defined in Section 145 of the Code and (ii) current refunding obligations to the extent the amount of the refunding obligation does not exceed the outstanding amount of the refunded obligation), including these Bonds, has been or will be issued by the District, including all subordinate entities of the District, during calendar year 2007.

Book-Entry-Only System

The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC' s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. Purchasers of beneficial interests in the Bonds will not receive physical certificates. For information on OTC and its book-entry system, see "APPENDIX E."

OFFICIAL ST A TEMENT PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT

Page6

Redemption

Optional Redemption. The Bonds matnring on or after September 2, 2009 are subject to optional redemption prior to maturity at the option of the District on any Interest Payment Date on or after March 2, 2008, as a whole or in part, in the principal amount of $5,000 or any integral multiple thereof, from amounts legally available to the District for this purpose, at a redemption price equal to the principal amount thereof to be redeemed, plus a premium ( expressed as a percentage of the principal amount of Bonds to be redeemed) together with accrued interest thereon to the date fixed for redemption as follows:

Redemption Dates

March 2, 2008 through March 2, 2013

September 2, 2013 and March 2, 2014 September 2, 2014 and March 2, 2015

Redemption Prices

103%

102%

101% September 2, 2015 and each Interest Payment Date thereafter 100%

In exercising its option to redeem, the District shall give the Fiscal Agent notice of its intention not less than 60 days in advance of the date of redemption.

For purposes of the selection of Bonds for redemption, the Bonds shall be selected for redemption among matnrities by the District (evidenced pursuant to a Written Certificate of the District delivered to the Fiscal Agent at least 60 days prior to the redemption date or such later date as shall be acceptable to the Fiscal Agent in its sole discretion) on such basis that the remaining Assessments, together with other available Revenues, will be sufficient on a timely basis to pay debt service on the Bonds.

Special Mandatory Redemption from Surplus Project Funds. The Bonds are subject to redemption prior to maturity on any Interest Payment Date on or after March 2, 2008 to and including March 2, 201 I in whole or in part, in the principal amount of $5,000 or any integral multiple thereof, and by lot, from unexpended Project Funds at a redemption price equal to the principal amount thereof to be redeemed, without premium, together with accrued interest thereon to the date fixed for redemption.

Special Mandatory Redemption from Prepayments. The Bonds are subject to redemption prior to matnrity on any Interest Payment Date on or after March 2, 2008 in whole or in part, in the principal amount of $5,000 or any integral multiple thereof, and by lot, from amounts received by the District as prepayments of unpaid Assessments at a redemption price equal to the principal amount thereof to be redeemed, plus a premium ( expressed as a percentage of the principal amount of Bonds to be redeemed) together with accrued interest thereon to the date fixed for redemption as follows:

Redemption Prices Redemption Dates

March 2, 2008 and thereafter As Provided for Optional Redemption

Mandatory Sinking Payment Redemption of Bonds. The Bonds matnring September 2, 2027, and September 2, 2037 (the "Term Bonds") are subject to mandatory redemption in part by lot from Sinking Fund Payments made by the District at a redemption price equal to the principal amount thereof to be redeemed, without premium, in the aggregate respective principal amounts as set forth in the following schedules; provided, however, if some but not all of the Term Bonds of a given maturity have been redeemed, the total amount of all futnre Sinking Fund Payments relating to such matnrity shall be reduced by the aggregate principal amount of Term Bonds of such maturity so redeemed, to be allocated


Page 7

among such Sinking Fund Payments on a pro rata basis integral multiples of $5,000 as detennined by the Fiscal Agent, notice of which detennination shall be given by the Fiscal Agent to the District.

SINKING PAYMENT SCHEDULE FOR TERM BONDS MATURING SEPTEMBER 2, 2027

Redemption Date Principal Se11tember 2 Amount

2023 $135,000 2024 $150,000

2025 $160,000 2026 $175,000 2027 $195,000

SINKING PAYMENT SCHEDULE FOR TERM BONDS MATURING SEPTEMBER 2, 2037

Redemption Date Principal Ser1tember 2 Amount

2028 $210,000

2029 $230,000

2030 $250,000 2031 $270,000 2032 $290,000

2033 $310,000 2034 $335,000 2035 $360,000 2036 $390,000 2037 $420,000

Notice of Redemption. While the Bonds are subject to DTC's book-entry system, the Fiscal Agent will be required to give notice of redemption only to DIC as provided in the letter of representations executed by the District and received and accepted by DIC. DIC and the Participants will have sole responsibility for providing any such notice of redemption to the beneficial owners of the Bonds to be redeemed. Any failure of DIC to notify any Participant, or any failure of Participants to notify the Beneficial Owner of any Bonds to be redeemed, of a notice of redemption or its content or effect will not affect the validity of the notice of redemption, or alter the effect of redemption.

The Fiscal Agent shall cause notice of any redemption to be mailed to the respective Owners of any Bonds designated for redemption at their addresses appearing on the Bond Register in the Principal Office of the Fiscal Agent. The Fiscal Agent shall also cause notice of redemption to be mailed to the Securities Depositories and to one or more of the Infonnation Services at least one day earlier than the giving of notice to the Owners as aforesaid; provided, however, such mailing to the Securities Depositories and Infonnation Services shall not be a condition precedent to such redemption and failure to so mail or of any person or entity to receive any such notice, or any defect in any notice of redemption, shall not affect the validity of the proceeding for the redemption of such Bonds. The District may direct the Fiscal Agent


Page 8

to rescind the notice of redemption if inadequate funds are on deposit in the Redemption Fund five (5) days prior to the redemption date.

Selection of Bonds for Redemption. The General Manager shall notify the Fiscal Agent of Bonds to be called for redemption upon prepayment of Assessments in amounts sufficient therefor, or whenever sufficient surplus funds are available. The Fiscal Agent shall select Bonds for retirement in such a way that the ratio of Outstanding Bonds to issued Bonds shall be approximately the same in each annual series insofar as possible. Within each annual series, the Fiscal Agent shall select Bonds for retirement by lot.

Scheduled Debt Service on the Bonds

The following is the scheduled annual Debt Service on the Bonds.

Bond Year Annual Debt Ending Principal Interest Service

September 2

2008 $244.029.22 $244.029.22 2009 $10.000.00 233,645.00 243,645.00 2010 20.000.00 233,245.00 253,245.00 20ll 25,000.00 232,425.00 257.425.00 2012 30,000.00 231,375.00 261,375.00 2013 35.000.00 230,085.00 265,085.00 2014 45,000.00 228,545.00 273,545.00 2015 50,000.00 226,565.00 276,565.00 2016 60.000.00 224,315.00 284,315.00 2017 70,000.00 221,555.00 291,555.00 2018 75,000.00 218,265.00 293,265.00 2019 85,000.00 214,665.00 299,665.00 2020 100,000.00 210,500.00 310.500.00 2021 l l 0.000.00 205,500.00 315,500.00 2022 120,000.00 200,000.00 320,000.00 2023 135,000.00 194,000.00 329,000.00 2024 150,000.00 187,250.00 337,250.00 2025 160,000.00 179,750.00 339.750.00 2026 175,000.00 171,750.00 346,750.00 2027 195.000.00 163,000.00 358,000.00 2028 210,000.00 153,250.00 363,250.00 2029 230,000.00 142,750.00 372,750.00 2030 250.000.00 131,250.00 381.250.00 2031 270,000.00 118,750.00 388,750.00 2032 290,000.00 105,250.00 395,250.00 2033 310,000.00 90,750.00 400,750.00 2034 335.000.00 75,250.00 410,250.00 2035 360,000.00 58,500.00 418.500.00 2036 390.000.00 40,500.00 430.500.00 2037 420,000.00 21,000.00 441,000.00


Pagc9

THE FINANCING PLAN

Estimated Sources and Uses of Funds

Under the provisions of the Fiscal Agent Agreement, the Fiscal Agent will receive the proceeds from the sale of the Bonds and will apply them as follows:

SOURCES:

Par Amonnt of Bond Proceeds: Less Discount: Cash Payments:

Total Sources:

USES:

Project Fund: Reserve Fund:111

Costs of Issuance Fund:121

Total Uses:

$4,715,000.00 (128,831.35)

38,873.96 $4,625,042.61

$3,994,352.00 329,602.17 301,088.44

$4,625,042.61

o) Bond proceeds to be deposited into the Reserve Fund, which equals the Reserve Requirement. Sec "SOURCES OF PAYMENT FOR THE BONDS-Reserve Fund."

(2) Costs of Issuance include Bond/Disclosure Counsel fee, Fiscal Agent fees, Underwriter fee, Assessment Engineer fee, Underwriter's discount, Structural Advisor fee, District Counsel fee, District administrative fee, printing costs and other miscellaneous costs of issuance.

Estimated Improvement Costs

The data shown below is the estimated costs of the water storage and distribution facilities (the "Facilities") contained in the Engineer's Report prepared by Kennedy/Jenks Consultants The Facilities consists of:

I. Utilization of and incorporation of the existing 175-gpm well serving the Vista Verde Subdivision and the 225-gpm well serving the Vega Mutual Water Company into the new water system.

2. Booster pumps to replace existing booster pumps at the Oak Leaf and Marlin Lane sites, water storage tanks located at the existing Andreas Tank and Kari Lane Tank sites, domestic waterline to be placed in Vega Road, and in appropriate locations to connect existing and proposed water facilities, , pressure reducing valves, fire hydrants, and associated appurtenances; and including any easements required for construction.

3. Water meters, meter boxes, and service lines within the public right-of-way.

4. Incorporation of miscellaneous existing facilities of the Vega Mutual Water Company.

5. The construction, acquisition, installation and improvement of all other work and facilities appurtenant to the above and necessary to complete the same.

The acquisition of all land, easements, facilities, and the construction and installation of all work auxiliary to any of the above and necessary to complete the same.


Page IO

THE ASSESSMENT DISTRICT

The information set forth herein regarding ownership of real property in the Assessment District and the property owners within the Assessment District was obtained through the District and others and has not heen independently verified. Neither the District, the Underwriter nor the Underwriter makes any representation as to the accuracy or completeness of any such information. This information has been included because it is considered relevant to an informed evaluation of the Assessment District. No assurance can be given that additional development within the Assessment District will occur, or that it will occur in a timely manner. The information should not he construed to suggest that the Bonds or the Assessments that will be used to pay the Bonds are personal obligations of the property owners within the Assessment District. The owners of property within the Assessment District will not he personally liable for payments of the Assessments to be applied to pay the principal of and interest on the Bonds.

General

At the time of formation, the Assessment District contained I 33 parcels, of which 19 were undeveloped and the remaining 114 were developed with one or more single-family homes. As of the date hereof, one assessment has been prepaid in full and one assessment has been prepaid in part. Accordingly, as of the date hereof, the Bonds will be secured by 132 parcels.

Assessed Values

For all Assessment Parcels, the County assessed valuation of the Assessment District is provided as an estimate for purposes of valuation. The County assessed valuation is derived from the fiscal year 2006-2007 County Assessor's records of assessed valuation of land and improvements. "APPENDIX D-ASSESSMENT PARCEL LISTING" contains a complete list of Assessment Parcels, 2006-2007 assessed values and estimated Assessment liens. The County's assessed valuation of land and improvements is based on the base year assessed value (which may or may not be reflective of the fair market value of the land and improvements) increased by a maximum of 2% a year each year thereafter, as allowed under Article XIIIA of the Constitution of the State of California. Therefore, the assessor's value typically does not accurately reflect the fair market value of the land and improvements, which may be higher or lower than the Assessor's value. Further, due to timing, the Assessor's value may not reflect the most recent sale price of a parcel or new construction on a parcel. The fair market value can only be established through the sale of the property or an M.A.!. appraisal of the property within the Assessment District. The District has not undertaken to obtain an M.A.!. appraisal of the property within the Assessment District. Also, see "-Assessed Value to Assessment Lien Ratios" below.

Investors must recognize the uncertainties with respect to the assessed values of the Assessment Parcels, since the Bonds are only secured by the Assessment Parcels. See "BONDIIOLDllRS' RISKS" herein.

Assessed Value to Assessment Lien Ratios

Assessed valuation to assessment lien ratios are derived by dividing the 2006-2007 fiscal year County Assessor's assessed valuation amount of land plus improvements, if any, by the unpaid assessments. For example, a 3: I ratio means that the assessed value is three times the total assessment lien amount.


Page 11

According to the County Assessor's Office, the aggregate assessed valuation of land and improvements of the 132 Assessment Parcels with unpaid assessments is $60,264,789 for fiscal year 2006-2007 and ratios range from 3.156:1 to 33.329:1. The total lien on the Assessment Parcels is $4,715,000. The aggregate value-to-lien ratio is 12.85:1. (See "APPENDIX D-ASSESSMENT PARCEL LISTING" herein.)

Potential purchasers of the Bonds should be aware that if an Assessment Parcel bears an Assessment in excess of its market value, then there might be little incentive for the owner of the Assessment Parcel to pay the assessment on such Assessment Parcel and little likelihood that such property would be purchased in a foreclosure sale. See "APPENDIX D--ASSESSMENT PARCEL LISTING" for various assessed value-to-lien ratios and "BONDHOLDERS' RISKS" describing risks relating to market values of Assessment Parcels.

TABLE I categorizes the assessed value-to-lien ratios for the Assessment Parcels.

TABLE 1

PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT VEGA MUTUAL WATER ASSESSMENT DISTRICT Limited Obligation Improvement Bonds, Series 2007-1

SUMMARY ASSESSED VALUE TO LIEN RA TIO AS OF AUGUST 7, 2007

Assessed Value to Lien Parcels

3:00 to 5:99:1 11

6:00 to I 0:99: I 47

11:00:1 and up 74

132

Bond Lien

$391,039.40

1,606,415.95

2,691,903.10

$4,689,358.45

Percentage of Total Lien

8.33

34.25

57.42

100.00

Source: Pajaro/Sunny Mesa Community Services District.

Delinquencies

Of the 132 parcels assessed, 11 parcels have real property tax delinquencies amounting to a total of $38,788.79. The collection of assessments is not subject to the "Teeter Plan" (which is the County's Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds, as provided for in Section 4701 et seq. of the California Revenue and Taxation Code). See "BONDHOLDERS' RISKSForeclosure and Sale Proceedings" for a further discussion with respect to delinquent assessment payments.


Page 12

TABLE 3 sets forth the parcels and amounts of tax delinquencies as of June l, 2007:

TABLE2

PAJAROISUNNY MESA COMMUNITY SERVICES DISTRICT VEGA MUTUAL WATER ASSESSMENT DISTRICT Limited Obligation Improvement Bonds, Series 2007-1

ACTIVE MONTEREY COUNTY REAL PROPERTY TAX DEFAULT STATUS

Diagram and Amount of Total Assessed Assessment

APN Unpaid Prior Value Land &

Number Taxes lmprovements

1-28 117-441-013 $ 551.83 $275,000

1-24 117-491-001 1,351.03 233,535

1-33 117-491-005 413.66 200,000

1-47 117-421-037 2,456.60 195,824

1-59 117-501-001 8,337.32 712,000

1-65 117-501-019 8,184.34 699,319

1-60 117-501-014 2,665.26 450,423

1-67 412-011-045 1,675.45 289,598

2-5 117-431-011 3,079.70 267,896

2-15 412-121-002 9,634.12 821,574

2-55 412-131-015 439.45 579,213

$38,788.76 $4,724,382

Source: County of Monterey Tax Collector

Direct and Overlapping Debt

Set forth below is the direct and overlapping debt report (the "Debt Report") prepared by California Municipal Statistics, Inc., as of July 1, 2007. The Debt Report is included for general information purposes only.

The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the Assessment District in whole or in part. Such long-term obligations are not payable from unpaid Assessments nor are they necessarily obligations secured by property within the Assessment District. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency.

Presently, the Assessment Parcels are subject to $869,963 of direct and overlapping tax and assessment debt and overlapping lease obligation debt, excluding the Bonds. To repay the direct and overlapping tax and assessment debt and overlapping lease obligation debt, the property owners of the land within the Assessment District must pay the annual Assessments and the general property tax levy.

In addition, other public agencies whose boundaries overlap those of the Assessment District could, without the consent of the District, and in certain cases without the consent of the owners of the land within the Assessment District, impose additional taxes or assessment liens on the real property within the Assessment District in order to finance public water improvements or services to be located or


Page 13

furnished inside of or outside of the Assessment District. The lien created on the real property within the Assessment District through the levy of such additional taxes or Assessments may be on parity with the lien of the Assessments. The imposition of additional liens on parity with the Assessments may reduce the ability or willingness of the property owners to pay the Assessments and increases the possibility that foreclosure proceeds, if any, will not be adequate to pay delinquent Assessments.

PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT VEGA MUTUAL WATER ASSESSMENT DISTRICT

LIMITED OBLIGATION IMPROVEMENT BONDS, SERIES 2007-1

DIRECT AND OVERLAPPING DEBT July 5, 2007

2006-07 Local Secured Assessed Valuation: $52,483,202

DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: Cabrillo Joint Community College District Pajaro Valley Joint Unified School District Pajaro-Sunny Mesa Community Services District

% Applicable 0.167% 0.462

Vega Mutual Water Assessment District 100. TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT

OVERLAPPING GENERAL FUND DEBT: Monterey County General Fund Obligations Monterey County Judgment Obligations Cabrillo Joint Community College District Certificates of Participation Pajaro Valley Joint Unified School District Certificates of Participation

TOTAL OVERLAPPING GENERAL FUND DEBT

COMBINED TOTAL DEBT

0.121 % 0.121 0.202 0.494

( 1) Excludes issue to be sold.

Debt 7/1/07 $304,625

270,916

--- (I) $575,541

$266,624 6,564 5,747

15 487 $294,422

$869,963 (2)

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

Ratios to 2006-07 Local Secured Assessed Valuation: Direct Debt ...................................................................... - % Total Direct and Overlapping Tax and Assessment Debt..1.10% Combined Total Debt ........................................................ 1.66%

STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/06: $0


Page 14

METHOD AND FORMULA OF ASSESSMENT SPREAD

Since the improvements are to be funded by the levying of assessments, the "Municipal Improvements Act of 1913" and Article XIIID of the State Constitution require that assessments must be based on the estimated special benefit that the properties receive from the works of improvement. In addition, Article XIIID, Section 4, of the State Constitution requires that a parcel's assessment may not exceed the reasonable cost of the proportional benefit conferred on that parcel. Section 4 provides that only special benefits are assessable and the local agency levying the assessment must separate the general benefits from the special benefits. It also requires that publicly owned property that benefits from the improvements be assessed.

Neither the Act nor the State Constitution specifies the method or formula that should be used to apportion the costs to properties in any special assessment district proceedings. The responsibility for recommending an apportionment of the costs to properties which specially benefit from the improvements rests with the Assessment Engineer, who is appointed for the purpose of making an analysis of the facts and determining the correct apportionment of the assessment obligation. In order to apportion the assessments to each parcel in direct proportion with the special and direct benefit which it will receive from the improvements, an analysis has been completed and is used as the basis for apportioning costs to each property within the Assessment District as explained below.

Based upon a review of the development conditions, an analysis of the special and direct benefit to be received by each parcel from the construction of the works or improvements, the Assessment Engineer has recommended the apportionment of costs as outlined below. After hearing all testimony and evidence presented at the public hearing and tabulating the assessment ballots previously mailed to all record owners of property within the Assessment District, the Board of Directors determined that the assessment spread was made in direct proportion to estimated special benefits received by each parcel within the Assessment District. A majority of ballots, weighted by the assessment amount, were in support of the Assessment District and the Board of Directors formed the Assessment District and levied the special assessment against the parcels therein.

The final election results were seventy-five (75) parcels representing an assessment of $2,665,692 voted "yes" and seven (7) parcels representing an assessment of$245,997 voted "no." The election passed by a 91.55% of the assessment amount that was voted.

General and Special Benefits

It has been determined by the Engineer that all water system improvements are a special benefit to the Assessment District, and that no general benefits are attributable to the existing Pajaro/Sunny Mesa Community Services District.

Apportionment of Special Benefits

Individual properties receive special benefits from the new water storage and distribution system. These benefits are associated with:

• Improved domestic potable water service • Improved exterior irrigation water supply • Improved fire protection • Improved ability to subdivide developable land


Page 15

The costs thereof were apportioned to each parcel based on (i) number of existing dwelling units on each parcel and (ii) acreage of each parcel.

Ninety percent (90%) of the total project cost, less the actual meter cost, was charged in proportion to the number of units to be served on a property. Ten percent (10%) of the total project cost, less the actual meter cost, was charged in proportion to the acreage of each parcel.

The cost of water meters will be charged to individual properties in conformance with the existing ordinances of the District. Project costs include all:

• Construction costs • District meter fees • Contingencies • Engineer fees • Legal fees • Preliminary expenses • Assessment District formation costs • Bond issuance costs

Many Assessment Parcels have unequal assessment liens. The property owners in the Assessment District will not be personally liable for payments of the Assessments. No assurance can be given that the present property owners will continue to hold an interest in the Assessment Parcels.

SOURCESOFPAYMENTFORTHEBONDS

Repayment of the Bonds

The Bonds are issued upon and are secured by the unpaid Assessments levied on the Assessment Parcels, together with interest on those Assessments. The unpaid Assessments together with interest thereon constitute a trust fund for the redemption and payment of the principal of and interest ( and any applicable premium) on the Bonds. All of the Bonds are secured by the monies in the Redemption Fund (including the Prepayment Account therein) and the Reserve Fund created under the Fiscal Agent Agreement. Principal of and interest on the Bonds are payable exclusively out of the Redemption Fund.

Although the unpaid Assessments constitute fixed liens on the Assessment Parcels, they are not personal indebtedness of the owners of the Assessment Parcels. Furthermore, there can be no assurance as to the willingness or ability of the property owners to pay the unpaid Assessments.

Collection of Assessments. The unpaid Assessments levied annually on the Assessment Parcels will be collected, together with interest on the declining balances, on the tax roll of the District on which general taxes on real property are collected, and the unpaid Assessments are payable and become delinquent at the same time and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do general taxes, and the Assessment Parcels are subject to the same provisions for sale and redemption as are properties for nonpayment of general taxes. The annual Assessment installments together with interest are to be paid into the Redemption Fund which will be used to pay the principal of and interest on the Bonds as they become due.

Limited Obligations. The obligations of the District under the Fiscal Agent Agreement and the Bonds are not general obligations of the District, but are limited obligations, payable solely from


Page 16

the Assessments and the funds pledged therefor under the Fiscal Agent Agreement. Neither the faith nor credit of the District nor of the State of California or any political subdivision thereof is pledged to the payment of the Bonds. The Bonds are not secured by the general taxing power of the District, the State or any political subdivision of the State.

The Bonds are "Limited Obligation Improvement Bonds" under Section 8769 of tbe Act and are payable solely from and secured solely by the Assessments and the amounts in the Redemption Fund and the Reserve Fund created under the Fiscal Agent Agreement. The District is not obligated to advance available surplus funds from the District treasury to cure any deficiency in the Redemption Fund.

Covenant to Commence Foreclosure Proceedings.

In the Fiscal Agent Agreement, the District has covenanted with and for the benefit of the owners of the Bonds that it within one hundred fifty (150) days following the due date of any delinquent installment of assessments securing the bonds to be issued, commence and thereafter diligently prosecute to completion a foreclosure action regarding such delinquent installment of assessment against parcels with delinquent assessments in excess of $2,000 by the October 1 following the close of each Fiscal Year in which assessments were due and will commence judicial foreclosure proceedings against all parcels with delinquent assessments by the October 1 following the close of each Fiscal Year in which it receives assessments in an amount which is less than 95% of the total assessment levied, and diligently pursue to completion such foreclosures.

The District will determine if any of the conditions described above exist and will notify the District Counsel of any such delinquencies. The District Counsel will commence, or cause to be commenced, such foreclosure proceedings, including collection actions preparatory to the filing of any complaint. The District Counsel is hereby authorized to employ outside counsel to conduct any such foreclosure proceedings.

Possibility of Foreclosure Delays. No assurances can be given that any real property subject to a judicial foreclosure sale will be sold or, if sold, that the proceeds of sale will be sufficient to pay any delinquent Assessment installment. If court foreclosure proceedings are necessary, there may be a delay in payments to the owner of the Bonds pending prosecution of the foreclosure proceedings and receipt by the District of the proceeds of the foreclosure sale. It is also possible that no bid for the purchase of the applicable property would be received at the foreclosure sale. See "BONDHOLDERS' RISKS-Foreclosure and Sale Proceedings."

Priority of Lien. Each Assessment (and any Assessment thereof) and each installment thereof, and any interest and penalties on each Assessment, constitute a lien against the Assessment Parcel on which it was imposed until it is paid. The lien is subordinate to all fixed special assessment liens imposed upon the same property prior to the date that the Assessments became a lien on the property assessed, but has priority over all private liens and over all fixed special assessment liens which may thereafter be created against the property. The lien is co-equal to and independent of the lien for general taxes and any special taxes levied under the Mello-Roos Community Facilities Act of 1982. The direct and overlapping debt of property within the Assessment District as of July 1, 2007 is shown under the heading "THE ASSESSMENT DISTRICT-Direct and Overlapping Debt."

Sales of Tax-Defaulted Property Generally. If foreclosure is deemed necessary, property securing delinquent Assessment installments which is not sold pursuant to the judicial foreclosure


Page 17

proceedings described above may be sold, subject to redemption by the property owner, in the same manner and to the same extent as real property sold for nonpayment of general District property taxes. On or before June 30 of the year in which such delinquency occurs, the property becomes tax-defaulted. This initiates a five-year period during which the property owner may redeem the property. At the end of the five-year period the property becomes subject to sale by the County Tax Collector. Except in certain circumstances, as provided in the Act, the purchaser at any such sale takes such property subject to all unpaid assessments, interest and penalties, costs, fees and other charges which are not satisfied by application of the sales proceeds and subject to all public improvement assessments which may have priority.

Delinquency Resulting in Ultimate or Temporary Loss on Bonds. If amounts in the Redemption Fund are temporarily insufficient to pay Bonds that have matured or past due interest, or the principal and interest on Bonds coming due during the current tax year, but it does not appear to the General Manager that there will be an ultimate loss to the owner of the Bonds, the General Manager will, pursuant to the Act, pay the principal of Bonds which have matured as presented and make interest payments on the Bonds when due as long as there are available funds in the Redemption Fund, in the following order of priority: All matured interest payments will be made before the principal of any other Bond is paid.

When funds become available for the payment of any Bond, which was not paid upon presentment, at the direction of the General Manager, the Fiscal Agent will notify the registered owner of such Bond by registered mail to present the Bond for payment. If the Bond is not presented for payment within ten days after the mailing of the notice, interest will cease to accrue on the Bond. If it appears to the General Manager that there is a danger of an ultimate loss accruing to the Bond owner for any reason, he or she is required pursuant to the Act to withhold payment on all matured Bonds and interest on all Bonds and report the facts to the Board of Directors so that the Board of Directors may take proper action to equitably protect the Bond owner.

Upon the receipt of such notification from the General Manager, the Board of Directors is required to fix a date for a hearing upon such notice. At the hearing the Board of Directors will determine whether in its judgment there will ultimately be insufficient money in the Redemption Fund to pay the principal of the unpaid Bonds and interest thereon.

If the Board of Directors determines that in its judgment there will ultimately be a shortage in the Redemption Fund to pay the principal of the unpaid Bonds and interest thereon ( an "Ultimate Default"), the Board of Directors will direct the General Manager to direct the Fiscal Agent to pay to the owner of all outstanding and unpaid Bonds such proportion thereof as the amount of funds on hand in the Redemption Fund bears to the total amount of the unpaid principal of the Bonds and interest which has accrued or will accrue thereon. Similar proportionate payments will thereafter be made periodically as monies come into the Redemption Fund.

Upon the determination by the Board of Directors that an Ultimate Default will occur, the General Manager will direct the Fiscal Agent to notify the Bond owner to surrender its Bonds to the Fiscal Agent for cancellation.

Upon cancellation of the Bonds, the Bond owner will be credited with the principal amount of the Bond so canceled. The Fiscal Agent will then pay by warrant the proportionate amount of principal and accrued interest due on the Bonds of the Bond owner as may be available from time to time out of the money in the Redemption Fund. Interest will cease on principal payments made from the date of such


Page 18

payment, but interest will continue to accrue on the unpaid principal at the rate specified on the Bonds until payment thereof is made. No premiums will be paid on payments of principal on Bonds made in advance of the maturity date thereon.

If Bonds are not surrendered for registration and payment, the General Manager will direct the Fiscal Agent to give notice to the Bond owner by registered mail, at the Bond owner's last address as shown on the registration books maintained by the Registrar, of the amount available for payment. Interest on such amount will cease to accrue as of ten days after the date of mailing of such notice.

If the Board of Directors determines that in its judgment there will not be an Ultimate Default, it will direct the General Manager to direct the Fiscal Agent to pay matured Bonds and interest as long as there is available money in the Redemption Fund.

Reserve Fund

The District will establish the Reserve Fund upon the issuance of the Bonds in an amount equal to $329,602.17 (the "Reserve Fund"), which is defined, as 100% of average annual Debt Service on the Bonds. See "THE FINANCING PLAN-Estimated Sources and Uses of Funds."

All amounts deposited in the Reserve Fund will be used and withdrawn by the Fiscal Agent solely for the purpose of making transfers to the Redemption Fund in the event of any deficiency at any time in the Redemption Fund of the amount then required for payment of the principal of, and interest and any premium on, the Bonds or, in accordance with the Resolution, for the purpose of redeeming Bonds from the Redemption Fund.

Whenever an Assessment is pre-paid in whole or in part, as provided in the Act, the Fiscal Agent will transfer from the Reserve Fund to the Redemption Fund an amount equal to the product of (a) the ratio of the original amount of the Assessment securing any Bonds so paid to the original amount of all Assessments securing any Bonds, times (b) the initial deposit to the Reserve Fund upon the issuance of the Bonds.

Whenever, on any Interest Payment Date, or on any other date as determined by the General Manager, the amount in the Reserve Fund exceeds the Reserve Requirement, the General Manager will direct the Fiscal Agent to ( except as otherwise provided in the Fiscal Agent Agreement for purposes of rebate) transfer on or before such Interest Payment Date an amount equal to the excess from the Reserve Fund to the Redemption Fund to be used in accordance with Part 16 of the Assessment Bond Law.

Whenever the balance in the Reserve Fund is sufficient to retire all the outstanding Bonds, whether by advance retirement or otherwise, collection of the principal and interest on the Assessments will be discontinued and the Reserve Fund will be liquidated by the Fiscal Agent in retirement of the outstanding Bonds. If the balance in the Reserve Fund at the time of liquidation exceeds the amount required to retire all of the outstanding Bonds, the excess will be transferred to the District to be used in accordance with the Assessment Bond Law.


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BONDHOLDERS' RISKS

General

BEFORE PURCHASING ANY OF THE BONDS, ALL PROSPECTIVE INVESTORS AND TIIEIR PROFESSIONAL ADVISORS SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING RISK FACTORS, WHICH ARE NOT MEANT TO BE AN EXHAUSTIVE LISTING OF ALL RISKS ASSOCIATED WITH THE PURCHASE OF THE BONDS. MOREOVER, THE ORDER OF PRESENTATION OF THE RISK FACTORS DOES NOT NECESSARILY REFLECT THE ORDER OF THEIR IMPORTANCE.

The purchase of the Bonds involves investment risk. If a risk factor materializes to a sufficient degree, it could delay or prevent payment of principal of and/or interest on the Bonds. Such risk factors include, but are not limited to, the following matters.

Debt service on the Bonds is payable from installment payments of principal and interest on unpaid Assessments on the Assessment Parcels. The principal of the Assessments is the aggregate of the amounts of the individual Assessments levied against the Assessment Parcels. The individual Assessment on a parcel will be paid in annual installments, together with interest on the unpaid balance, unless the unpaid balance is subsequently prepaid. The annual installments of principal and interest with respect to an Assessment Parcel will be collected on the District tax roll at the same time and in the same manner as general real property taxes are collected. The annual installments of principal and interest with the respect to all Assessment Parcels were, at the time of initial levy of the Assessments, equal in the aggregate to the annual debt service on the Bonds.

Foreclosure and Sale Proceedings

The Board of Directors is obligated under certain conditions to institute foreclosure and sale proceedings against Assessment Parcels which have delinquent assessment installments, and may do so in other circumstances even if not so obligated. However, the District has determined, because of the administrative costs involved, not to implement foreclosure proceedings unless and until the applicable delinquent amounts (including interest thereon) exceed certain thresholds. See "SOURCES OF PAYMENT FOR THE BONDS-Repayment of the Bonds-Covenant to Commence Foreclosure Proceedings" herein.

Foreclosure proceedings are instituted by the bringing of an action in the superior court of the County in which the Assessment Parcel lies, naming the owner and other interested persons as defendants. The action is prosecuted in the same manner as other civil actions. Upon judgment of foreclosure the Assessment Parcel may be offered for sale at a minimum price. The initially established minimum price will be sufficient to cover the amount of the delinquent installments and unpaid interest together with penalties, costs, fees and charges and the costs of execution and sale. The buyer in a foreclosure sale takes the parcel subject to the remaining assessment installments and regular taxes.

However, in the event an Assessment Parcel does not sell for the minimum price the court may modify its judgment and reduce or eliminate the minimum price. In order to do so, however, written notice of a hearing on the matter of reducing or eliminating the minimum price is required to be given to the owners of the Bonds.


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If at the hearing the court determines that such a sale will not result in an ultimate loss to the owners of the Bonds, or if the owners of 75% of the outstanding Bonds by principal amount consent and the sale will not result in an ultimate loss to the non-consenting owners of Bonds, the court may reduce or eliminate the minimum price at which an Assessment Parcel may be sold. Further, if the owners of 7 5% of the outstanding Bonds by principal amount consent, the court may reduce or eliminate the minimum price at which an Assessment Parcel may be sold even if sale below the minimum price will result in an ultimate loss to non-consenting owners of Bonds, provided that the court makes certain additional determinations specified by statute including the reasonable unavailability of any other remedy acceptable to the owners of 75% or more of the outstanding Bonds by principal amount. Upon sale of the Assessment Parcel for less than the minimum price the remaining unpaid balance of the assessment on the Assessment Parcel will be reduced by the difference between the minimum price and the sale price. By such a reduction the aggregate principal amount of the outstanding Bonds may further exceed the aggregate principal amount of the unpaid Assessments.

Depletion of Reserve Fund

Upon the issuance of the Bonds, the Reserve Fund will contain an amount equal to $329,602.17, the initial "Reserve Requirement." Whenever there are insufficient funds in the Revenue Fund to pay the next maturing installment of principal and interest on the Bonds, the amounts necessary to make up the deficiency, to the extent available, will be transferred from the Reserve Fund to the Redemption Fund.

Amounts so transferred will be reimbursed to the Reserve Fund if, and when, available from the payments of delinquent installments and from the proceeds of redemption or sale of delinquent parcels which caused the withdrawal.

The Reserve Requirement is subject to reduction if, and when, the unpaid balance of the Assessment on an Assessment Parcel is prepaid. Upon prepayment of an Assessment, there will be a mandatory redemption of the Bonds (see "THE BONDS-Redemption" herein). The Reserve Requirement will be reduced to the Reserve Requirement following such mandatory redemption. A reduction in the Reserve Requirement caused by prepayment of an assessment and the mandatory redemption of Bonds is a permanent reduction.

The Reserve Fund may be invested, and the investment earnings may be retained in the Reserve Fund, to the extent necessary to maintain the amount therein at the Reserve Requirement. No sources of funds other than such investment earnings and any recoveries of delinquent Assessments are available to replenish deficiencies in the Reserve Fund. Accordingly, there is no assurance that the amount in the Reserve Fund will, at any particular time, be sufficient to pay, when due, debt service on the Bonds nor that the Reserve Fund will be fully reimbursed for any amounts expended for debt service.

Valuation of Property in the Assessment District

The value of the land within the Assessment District is a critical factor in determining the investment quality of the Bonds. If there is a default in the payment of the Assessments, the District's only remedy is to commence foreclosure proceedings on the delinquent taxable property in an attempt to obtain funds to pay the delinquent Assessment.

Value-to-lien ratios have traditionally been used in land-secured bond issues as a measure of the "collateral" supporting the willingness of property owners to pay their special taxes and assessments (and, in effect, their general property taxes as well). The value-to-lien ratio is mathematically a fraction, the


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numerator of which is the value of the property (usually a market value as determined by an appraiser) and the denominator of which is the "lien" of the assessments or special taxes. A value-to-lien ratio should not, however, be viewed as a guarantee of credit-worthiness. Land values are more volatile in the early stages of a development, and are especially sensitive to economic cycles. A downturn of the economy may depress land values and hence the value-to-lien ratios, thereby increasing risk to investors and lenders. Further, the value-to-lien ratio cited for a bond issue is based on the aggregate value of all parcels in the Assessment District. Individual parcels in an assessment district may fall above or below the average, sometimes even below a 1:1 ratio. (With a ratio below 1:1, the land is worth less than the debt on it.) Although judicial foreclosure proceedings can be initiated rapidly, the process can take several years to complete, and the bankruptcy courts may impede the foreclosure action. Finally, local agencies may form overlapping community facilities districts or assessment districts. Debt issuance by another entity can dilute value-to-lien ratios. See "THE ASSESSMENT DISTRICT-Direct and Overlapping Debt."

The values shown in TABLE I and discussed under the heading "THE ASSESSMENT DISTRICT' and in "APPENDIX D--ASSESSMENT PARCEL LISTING" are based on the assessed values of property in the Assessment District derived from the 2006-2007 County Assessor's assessed valuation of land and improvements, which may or may not be reflective of such property's fair market value or what a property could be sold for at judicial foreclosure. Note particularly in this regard the subsections under this caption "BONDHOLDERS' RISKS" which discuss matters relating to value of a parcel and the discussions under the caption "THE ASSESSMENT DISTRICT" with respect to lien to value ratios within the Assessment District. The District has not undertaken to provide an appraisal of properties within the Assessment District.

Factors Affecting Parcel Value and Aggregate Values

Prospective purchasers of the Bonds should not assume that the land could be sold for its original sales price or its fair market value at a foreclosure sale for delinquent Assessments. The future value of the land can be expected to fluctuate due to many different, not fully predictable, real estate related investment risk factors, including, but not limited to: general tax law changes related to real estate, changes in competition, general area employment base changes, population changes, changes in real estate related interest rates affecting general purchasing power, changes in allowed zoning uses and density, natural disasters such as floods, earthquakes, fires, landslides, and similar factors.

The facts and circumstances concerning the values of the Assessment Parcels that are of importance are not confined to those relating to individual Assessment Parcel values because the Bonds are not individually secured by particular Assessment Parcels. The Bonds are secured by all of the unpaid Assessments on all of the Assessment Parcels within the Assessment District. Therefore factors which affect all of the Assessment Parcels should be considered. The following are some of the factors which may affect the market for and value of particular Assessment Parcels individually, as well as the market for and value of all Assessment Parcels.

Geologic, Topographic and Climatic Conditions. Values of Assessment Parcels can be adversely affected by a variety of natural events and conditions, including, without limitation geologic conditions such as earthquakes; topographic conditions such as earth movements and floods; and climatic conditions such as storms and wildfires. The possibility of the occurrence of some of these conditions and events has been taken into account to a limited extent in the design of the Assessment District's improvements and has been or will be taken into account to a limited extent in the designs of other public water improvements which may be approved by the District or other public agencies. Building codes require that some of these conditions be taken into account to a limited extent in the design of private improvements. Design criteria in any of these circumstances are established upon the basis of a variety of


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considerations and may change from time to time leaving previously designed improvements unaffected by more stringent subsequently established criteria. In general, design criteria, at the time of their establishment, reflect a balance between the present costs of protection and the future costs of lack of protection, based in part upon a present perception of the probability that the condition will occur and the seriousness of the condition should it occur. Also reflecting that balances are decisions not to impose design criteria at all. The District expects that one or more of these conditions may occur from time to time, and, even if design criteria do exist, such conditions may result in damage to property improvements. That damage may entail significant repair or replacement costs, and repair or replacement may never occur. Under any of these circumstances, the value of the Assessment Parcels could depreciate substantially notwithstanding the establishment of design criteria.

According to the Seismic Safety Element of the District's General Plan, the District is located in a seismically active region and buildings in the Assessment District could be impacted by a major earthquake originating from the numerous faults in the area. Seismic hazards encompass both potential surface rupture and ground shaking.

Legal Requirements. Other events which may affect the value of an Assessment Parcel include changes in the law or application of the law. Such changes may include, without limitation, local growth control initiatives, local utility connection moratoriums, and local application of statewide tax and governmental spending limitation measures. See "Proposition 218; Possible Future Ballot Initiatives" herein.

Prepayment of Assessments

There is rarely a uniform relationship between the relative value of Assessment Parcels and the proportionate share of debt service on the Bonds to be borne by such Assessment Parcels. One of the factors that may effect a significant change in the relationship between the aggregate Assessment Parcel values and the assessment is the prepayment before final bond maturity of the remaining balance of the Assessments on particular Assessment Parcels. Should the Assessments on Assessment Parcels having a relatively high ratio of assessed value to assessment be prepaid, the security for the Bonds, as evidenced by the ratio of the aggregate remaining Assessment Parcel values to the remaining outstanding Bonds, will be reduced.

Other Possible Claims Upon the Value ofan Assessment Parcel

The sufficiency of tax or foreclosure sale proceeds to cover delinquent amounts may also depend on the value of any prior or parity liens and similar claims. While the Assessments are secured by the Assessments Parcels, this security only extends to the value thereof that is not subject to priority and parity liens and similar claims relative to the Assessments.

Other governmental obligations, including taxes, assessments, special taxes or other charges, may be authorized and undertaken or issued in the future may become obligations of one or more of the Assessment Parcels and may be secured by liens on a parity with the liens of the Assessments securing the Bonds.

The lien of the Assessments is subordinate to all fixed special assessment liens previously imposed upon the parcels in the Assessment District, but has priority over all private liens and over all fixed special assessment liens which may thereafter be creased against the parcels in the Assessment District. This lien is co-equal to and independent of the lien of general property taxes and special taxes, including, without


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limitation, special taxes levied under the Mello-Roos Community Facilities Act of I 982 (being Chapter 2.5, Part I, Division 2, Title 5 of the Government Code of the State of California, whenever created against the property.

There are no fixed special assessment liens previously imposed upon the Assessment Parcels.

Direct and Overlapping Indebtedness

The ability of an owner of land within the Assessment District to pay Assessment Installments could be affected by the existence of other taxes and assessments imposed upon the Assessment Parcels. Presently, the sum of the direct and overlapping debt applicable to the property in the Assessment District is as detailed under the caption "THE ASSESSMENT DISTRICT-Direct and Overlapping Debt." In addition, the District and other public agencies whose boundaries overlap those of the Assessment District, (without the consent of the District), could, impose additional taxes or assessment liens on the property within the Assessment District in certain cases without the consent of the owners of the land within the Assessment District in order to finance public water improvements or services to be located or provided inside of or outside of such area. The lien created on the property within the Assessment District through the levy of such additional taxes or assessments may be on parity with the lien of the assessments.

The imposition of additional liens on a parity with the Assessments may reduce the ability or willingness of the landowners to pay the assessment installments and increases the possibility that foreclosure proceeds will not be adequate to pay delinquent assessment installments or the principal of and interest on the Bonds when due.

Bankruptcy Proceedings

Regardless of the priority of an Assessment securing the Bonds over non-governmental liens, the exercise by the District of the foreclosure and sale remedy or by the District of the tax sale remedy may be forestalled or delayed by bankruptcy, reorganization, insolvency or other similar proceedings affecting the owner of an Assessment Parcel or any other party claiming an interest in an Assessment Parcel. The federal bankruptcy laws provide for an automatic stay of foreclosure and sale or tax sale proceedings thereby delaying such proceedings perhaps for an extended period. Delay in exercise of remedies, especially if the owner owns Assessment Parcels the Assessments of which are significant or if bankruptcy proceedings are instituted with respect to a number of owners owning Assessment Parcels the Assessments of which are significant, may result in periodic assessment installment collections which may be insufficient to pay the debt service on the Bonds as it comes due. Further, should remedies be exercised under the bankruptcy law against the Assessment Parcels, payment of installments of the assessment may be subordinated to bankruptcy law priorities. Therefore, certain claims may have priority over the assessment lien; even though they would not were the bankruptcy law not applicable.

Payment of the Assessment Not a Personal Obligation

Under the Assessment Bond Law, the owners of Assessment Parcels are not personally liable for the payment of the Assessment or the Assessment Installments. Rather, an assessment is a lien only on an Assessment Parcel. Accordingly, if the value of an Assessment Parcel is not sufficient to fully secure the assessment on it, the District has no recourse against the owner under the Assessment Bond Law by which the assessment has been levied and the Bonds have been issued.


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No District Obligation to Pay Debt Service

IF ASSESSMENT INSTALLMENT COLLECTIONS ARE INSUFFICIENT, THE ONLY AMOUNTS AVAILABLE TO PAY DEBT SERVICE ON THE BONDS WILL BE THE AMOUNT ON DEPOSIT FROM TIME TO TIME IN THE RESERVE FUND, AND IF SO ADV AN CED WILL REDUCE THE RESERVE FUND BY THE AMOUNT OF THE FUNDS ADV AN CED. Notwithstanding the limited nature of the District's obligation, the District may, at its option and in its sole discretion, elect to advance available funds of the District in the amount of any delinquent Assessment installments to pay debt service on the Bonds. Should the District do so, it is entitled to reimbursement from the first proceeds of any payments of delinquent Assessment installments or the redemption or sale of delinquent Assessment Parcels.

OWNERS OF BONDS MAY NOT RELY UPON THE DISTRICT TO ADVANCE FUNDS TO PAY DEBT SERVICE ON THE BONDS FOLLOWING DEPLETION OF THE RESERVE FUND EVEN IF THE DISTRICT MAY HAVE PREVIOUSLY DONE SO OR MAY DO SO CONTEMPORANEOUSLY WITH RESPECT TO OTHER BONDS OR OBLIGATIONS.

Loss of Tax Exemption

As discussed in the section herein entitled "LEGAL MATTERS-Tax Exemption," interest on the Bonds could become includable in gross income for purposes of federal income taxation, retroactive to the date of issuance, as a result of acts or omissions of the District subsequent to issuance in violation of the District's covenants applicable to the Bonds. Should interest become ineluctable in gross income, the Bonds are not subject to redemption by reason thereof and may remain outstanding. The Bonds are subject to redemption for other reasons as discussed in the section herein entitled "THE BONDS-Redemption."

No Acceleration Provision

The Bonds do not contain a provision allowing for the acceleration of the Bonds in the event of a payment default or other default under the tenns of the Bonds or the Fiscal Agent Agreement.

Proposition 218; Possible Future Ballot Initiatives

Under the California Constitution, the power of initiative is reserved to the voters for the purpose of enacting statutes and constitutional amendments. Any such initiative may affect the collection of fees, taxes and other types of revenue by local agencies such as the District. Subject to overriding federal constitutional principles, such collection may be materially and adversely affected by voter-approved initiatives.

On August 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 propertyrelated fees and charges. Proposition 218 states that all taxes imposed by local governments shall be deemed to be either general taxes or special 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. (See "INTRODUCTION-Offering of the Bonds" herein.)


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Proposition 218 also provides that no tax, assessment, fee or charge shall 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 XJIIA 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, 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.

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 August 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 impairment of contracts.

The foregoing discussion of Proposition 218 should not be considered an exhaustive or authoritative treatment of the issues. The District does not expect to be in a position to control the consideration or disposition of these issues and cannot predict the timing or outcome of any judicial or legislative activity in this regard. Interim rulings, final decisions, legislative proposals and legislative enactments may all affect the impact of Proposition 218 on the Bonds as well as the market for the Bonds. Legislative and court calendar delays and other factors may prolong any uncertainty regarding the effects of Proposition 218.

Further, from time to time, other initiative measures may qualify for the State ballot pursuant to the State's constitutional initiative process and those measures could be adopted by California voters. The adoption of any such initiative might place limitations on the ability of the State, the District or other local districts to increase revenues or to increase appropriations or on the ability of the landowners to complete the development of the land within the Assessment District.

LEGAL MATTERS

Enforceability of Remedies

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

Approval of Legal Proceedings

Robert M. Haight, Scotts Valley, California, as Bond Counsel, will render an opinion which states that the Fiscal Agent Agreement and the Bonds are valid and binding obligations of the District and are


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enforceable in accordance with their terms. The legal opinions of Bond Counsel will be subject to the effect of bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights and to the exercise of judicial discretion in accordance with general principles of equity.

Certain legal matters will be passed on for the District by Marc J. Del Piero, District Counsel, and by Robert M. Haight, Scotts Valley, California, as Disclosure Counsel.

Fees payable to Bond/Disclosure Counsel are contingent upon the sale and delivery of the Bonds.

Tax Exemption

In the opinion of Robert M. Haight, Scotts Valley, California, Bond Counsel, subject, however, to the qualifications set forth below, under existing law, the interest on the Bonds is excluded from gross income for federal income tax purposes and such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, provided, however, that, for the purpose of computing the alternative minimum tax imposed on corporations ( as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings. The opinions described in the preceding sentence are subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds.

The District has designated the Bonds as "Bank Qualified." See "THE BONDS-Tax Covenants; Bank Qualified."

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

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

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

Absence of Litigation

To the knowledge of the District, there is not now known to be pending or threatened any litigation restraining or enjoining the execution or delivery of the Fiscal Agent Agreement, or the sale or delivery of the Bonds or in any manner questioning the proceedings and authority under which the Fiscal Agent Agreement is to be executed or delivered or the Bonds are to be delivered or affecting the validity thereof.


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CONCLUDING INFORMATION

No Rating on the Bonds; Secondary Market

The District has not made, and does not contemplate making, any application for a rating on the Bonds.

No such rating should be assumed based upon any other District rating that might be obtained. Prospective purchasers of the Bonds are required to make independent determinations as to the credit quality of the Bonds and their appropriateness as an investment. Should a Bondholder elect to sell a Bond prior to maturity, no representations or assurances can be made that a market will have been established or maintained for the purchase and sale of the Bonds. The Underwriter assumes no obligation to establish or maintain a market for the purchase and sale of the Bonds and is not obligated to repurchase any of the Bonds at the request of the holder thereof.

Underwriting

Crocker Securities, LLC (the "Underwriter") is offering the Bonds at the prices set forth on the inside front cover page hereof. The initial offering prices may be changed from time to time and concessions from the offering prices may be allowed to dealers, banks and others. The Underwriter purchased the Bonds at a price equal to $4,480,081.15, which amount represents the principal amount of the Bonds less an original issue discount of $128,831.35 and less the Underwriters' discount of $106,087.50. The Underwriter will pay certain of their expenses relating to the offering.

The District Engineer

The material contained in this Official Statement was prepared by the District with the assistance of the District Engineer. The information set forth herein has been obtained by the District from sources which are believed to be reliable, but such information is not guaranteed by the District Engineer as to accuracy or completeness, nor has it been independently verified.

Continuing Disclosure

The District will provide annually certain financial information and data relating to the Bonds and the Assessment District by not later than March I in each year commencing March I, 2008 (the "Annual Report"), and to provide notices of the occurrence of certain other enumerated events if deemed by the District to be material. The District will initially act as Dissemination Agent. The Annual Report will be filed by the Dissemination Agent with each Nationally Recognized Municipal Securities Information Repository certified by the Securities and Exchange Commission (the "Repositories") and a State repository, if any.

The notices of material events will be timely filed by the District with the Municipal Securities Rulemaking Board, the Repositories and a State repository, if any. The specific nature of the information to be contained in the Annual Report or the notices of material events and certain other terms of the continuing disclosure obligation are found in the fonn of the District's Disclosure Agreement attached in "APPENDIX B--FORM OF CONTINUING DISCLOSURE AGREEMENT." The District has never failed to comply in all material respects with any continuing disclosure undertaking with respect to Rule 15c2-


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12(b)(5) under the Securities Exchange Act of 1934 to provide reports or notices of certain events if material.

Additional Information

The summaries and references contained herein with respect to the Fiscal Agent Agreement, the Bonds, statutes and other documents, do not purport to be comprehensive or definitive and are qualified by reference to each such document or statute and references to the Bonds are qualified in their entirety by reference to the form hereof included in the Fiscal Agent Agreement. Copies of the Fiscal Agent Agreement are available for inspection during the period of initial offering on the Bonds at the offices of the Underwriter, Crocker Securities, LLC, 2999 Oak Road, Suite 230, Walnut Creek, California 94597, telephone (925) 941-1541. Copies of these documents may be obtained after delivery of the Bonds from the District through the District Secretary, 136 San Juan Road, Watsonville, California 95076, telephone (831) 722-1389.

References

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 District and the purchasers or Owners of any of the Bonds.

Execution

The execution of this Official Statement by the General Manager has been duly authorized by the PajarolSunny Mesa Community Services District.

PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT

By: Isl Joe Rosa General Manager


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APPENDIXA

SUMMARY OF FISCAL AGENT AGREEMENT

The following is a brief summary of certain provisions of the Fiscal Agent Agreement, as well as definitions of certain terms used therein and in this Official Statement. This summary is not intended to be definitive, and reference is made to the complete Fiscal Agent Agreement, a copy of which is available from the Fiscal Agent.

CERTAIN DEFINITIONS

''.Act" means the Municipal Improvement Act of 1913, as amended, being Division 12 of the California Streets and Highways Code.

"Agreement" means this Fiscal Agent Agreement, as it may be amended or supplemented from time to time by any Supplemental Agreement executed pursuant to the provisions of the Fiscal Agent Agreement.

"Assessment or Assessments" means the unpaid assessments levied within the Assessment District by the Board under the proceedings taken pursuant to the Act and Resolution of Intention for the purpose of paying Debt Service on the Bonds and any Parity Bonds.

"Assessment District" means the area within the District designated "Vega Mutual Water Assessment District" formed by the District under the Act and the Resolution of Intention, the boundaries of which are as shown in a map to the Fiscal Agent Agreement on file with the District Secretary.

"Auditor" means the auditor/controller or tax collector of the County of Monterey, or such other official of the County who is responsible for preparing real property tax bills.

"Authorized Investments" means any securities (other than those identified in paragraphs (a) and (d) of Section 53601 of the Government Code of the State) in which the District may legally invest funds subject to its control, pursuant to Article I, commencing with Section 53600, of Chapter 4 of Part 1 of Division 2 of Title 5 of the Government Code of the State, as now or hereafter amended, provided that such securities are acquired at Fair Market Value.

"Authorized Officer" means the General Manager, District Counsel, Board President or VicePresident, Secretary of the District, or their respective designees, or any other officer or employee authorized by the Board or by an Authorized Officer to undertake the action referenced in this Agreement as required to be undertaken by an Authorized Officer.

"Board" means the Board of Directors of the District.

"Bond or Bonds" means the bonds designated "Pajaro/Sunny Mesa Community Services District, Vega Mutual Water Assessment District, Limited Obligation Improvement Bonds, Series 2007-1" at any time Outstanding under this Agreement or any Supplemental Agreement.

OFFICIAL STATEMENT SUMMARY OF FISCAL AGENT AGREEMENT

Page A-1

"Bond Counsel" means any attorney or firm of attorneys acceptable to the District and nationally recognized for expertise in rendering opinions as to the legality and tax-exempt status of securities issued by public entities.

"Bond Date" means the dated date of the Bonds which is the Closing Date.

"Bond Law" means the Improvement Bond Act of 1915, as amended, being Division 10 of the California Streets and Highways Code.

"Bond Register" means the books maintained by the Fiscal Agent pursuant to Section 2.08 for the registration and transfer of ownership of the Bonds.

"Bond Year" means the twelve-month period beginning on September 2 in each year and ending on September 1 in the following year except that (i) the first Bond Year shall begin on the Closing Date and end on the next September 1, and (ii) the last Bond Year may end on a prior redemption date.

"Business Day" means any day other than (i) a Saturday or a Sunday or (ii) a day on which banking institutions in the state in which the Fiscal Agent has its principal corporate trust office are authorized or obligated by law or executive order to be closed.

"Closing Date" means the date upon which there is a physical delivery of the Bonds in exchange for the amount representing the purchase price of the Bonds by the Original Purchaser.

"Continuing Disclosure Agreement" shall mean that certain Continuing Disclosure Agreement executed by the District and dated the date of issuance and delivery of the Bonds, as originally executed and as it may be amended from time to time in accordance with the terms of the Fiscal Agent Agreement.

"Costs of Issuance" means items of expense payable or reimbursable directly or indirectly by the District and related to the authorization, sale and issuance of the Bonds, which items of expense shall include, but not be limited to, printing costs for the Bonds and the Official Statement, costs ofreproducing and binding documents, closing costs, appraisal costs, filing and recording fees, fees and expenses of the District and the Fiscal Agent, initial fees and charges of the Fiscal Agent including its first annual administration fee, expenses incurred by the District in connection with the formation of the Assessment District and the issuance of the Bonds, Bond (underwriter's) discount, legal fees and charges, including bond counsel, charges for execution, transportation and safekeeping of the Bonds and other costs, charges and fees in connection with the foregoing.

"Costs of Issuance Fund" means the fund designated "Pajaro/Sunny Mesa Community Services District, Vega Mutual Water Assessment District, Limited Obligation Improvement Bonds, Series 2007-1, Costs oflssuance Fund" established and administered under Section 4.02 of the Fiscal Agent Agreement.

"County" means the County of Monterey, California, and any successor thereto.

"Debt Service" means, for each Bond Year, the sum of (i) the interest due on the Outstanding Bonds in such Bond Year, assuming that the Outstanding Bonds are retired as scheduled, and (ii) the principal amount of the Outstanding Bonds and the Sinking Fund Payments due in such Bond Year.


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"District Counsel" means the District Counsel of the District or other designated counsel to the District with respect to the Assessment District.

"District Secretary" means the Secretary or Assistant Secretary of the District.

"DTC" means The Depository Trust Company, a New York Corporation and its successors and assigns.

"Fair Market Value" means the price at which a willing buyer would purchase the investment from a willing seller in a bona fide, arm's length transaction ( determined as of the date the contract to purchase or sell the investment becomes binding) if the investment is traded on an established securities market (within the meaning of section 1273 of the Tax Code) and, otherwise, the term "Fair Market Value" means the acquisition price in a bona fide arm's length transaction (as referenced above) if (i) the investment is a certificate of deposit that is acquired in accordance with applicable regulations under the Tax Code, (ii) the investment is an agreement with specifically negotiated withdrawal or reinvestment provisions and a specifically negotiated interest rate (for example, a guaranteed investment contract, a forward supply contract or other investment agreement) that is acquired in accordance with applicable regulations under the Tax Code, (iii) the investment is a United States Treasury Security-State and Local Government Series that is acquired in accordance with applicable regulations of the United States Bureau of Public Debt, or (iv) any commingled investment fund in which the District and related parties do not own more than a 10% beneficial interest therein if the return paid by the fund is without regard to the source of the investment.

"Federal Securities" means any of the following which are non-callable and which at the time of investment are legal investments under the laws of the State of California for funds held by the Fiscal Agent:

(i) direct general obligations of the United States of America (including obligations issued or held in book entry form on the books of the United States Department of the Treasury) and obligations, the payment of principal of and interest on which are directly or indirectly guaranteed by the United States of America, including, without limitation, such of the foregoing which are commonly referred to as stripped obligations and coupons; or

(ii) any of the following obligations of the following agencies of the United States of America: (a) direct obligations of the Export-Import Bank, (b) certificates of beneficial ownership issued by the Farmers Home Administration, (c) participation certificates issued by the General Services Administration (d) mortgage-backed bonds or pass-through obligations issued and guaranteed by the Government National Mortgage Association, (e) project notes issued by the United States Department of Housing and Urban Development, and (l) public housing notes and bonds guaranteed by the United States of America.

"Fiscal Agent" means the Fiscal Agent appointed by the District and acting as the registrar, transfer agent, paying and registration agent for the Bonds and as an independent fiscal agent with the duties and powers herein provided, its successors and assigns, and any other corporation or association which may at any time be substituted in its place, as provided in Section 7.01 of the Fiscal Agent Agreement.

"Fiscal Year" means the twelve-month period extending from July 1 in a calendar year to June 30 of the succeeding year, both dates inclusive.


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2008.

"General Manager" means the General Manager of the District or designee.

"Information Services" means:

(a) Financial Information, Inc.'s "Daily Called Bond Service," 30 Montgomery Street, 10th Floor, Jersey District, New Jersey 07302, Attention: Editor;

(b) Mergent/FIS, 5250 77 Center Drive, Suite 150, Charlotte, North Carolina, 28217, Attn: Called Bond Dept."; and

(c) Kenny S&P, 55 Water Street, 45th Floor, New York, New York 10041, Attention: Notification Department;

and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such services providing information with respect to called bonds as the District may designate in an Officer's Certificate delivered to the Fiscal Agent.

"Interest Payment Dates" means March 2 and September 2 of each year, commencing March 2,

"Maximum Annual Debt Service" means the largest Debt Service for any Bond Year after the calculation is made through the final maturity date of any Outstanding Bonds.

"Officer's Certificate·· means a written certificate of the District signed by an Authorized Officer of the District.

"Outstanding" when used as of any particular time with reference to Bonds, means, subject to the provisions of Section 8.04 of the Fiscal Agent Agreement, all Bonds except:

(i) Bonds theretofore canceled by the Fiscal Agent or surrendered to the Fiscal Agent for cancellation;

(ii) Bonds paid or deemed to have been paid within the meaning of Section 9.03; (iii) Bonds in lieu of or in substitution for which other Bonds shall have been authorized,

executed, issued and delivered by the District pursuant to this Agreement or any Supplemental Agreement.

"Original Purchaser" means the first purchaser of the Bonds from the District.

"Owner" or "Bond Owner" means the registered owner of any Outstanding Bond as shown on the Bond Register of the Fiscal Agent under Section 2.08 of the Fiscal Agent Agreement.

"Participating Underwriter" shall have the meaning ascribed thereto in the Continuing Disclosure Agreement.

"Prepayment Account" means the account within the Redemption Fund and designated "Pajaro/Sunny Mesa Community Services District, Vega Mutual Water Assessment District, Limited Obligation Improvement Bonds, Series 2007-1, Prepayment Account," established and administered under Section 4.04 of the Fiscal Agent Agreement.

"Principal Office" means the corporate trust office of the Fiscal Agent in San Francisco, California, located at such address as shall be specified in a written notice by the Fiscal Agent to the


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District under Section 9.06 of the Fiscal Agent Agreement or such other office of the Fiscal Agent designated for payment, transfer or exchange of the Bonds.

"Project" means the acquisitions and improvements described in the Resolution of Intention.

"Project Fund" means the fund designated "Pajaro/Sunny Mesa Community Services District, Vega Mutual Water Assessment District, Limited Obligation Improvement Bonds, Series 2007-1, Project Fund," established and administered under Section 4.03 of the Fiscal Agent Agreement.

"Record Date" means the fifteenth day of the calendar month immediately preceding the applicable Interest Payment Date.

"Redemption Fund" means the fund designated "Pajaro/Sunny Mesa Community Services District, Vega Mutual Water Assessment District, Limited Obligation Improvement Bonds, Series 2007-1, Redemption Fund," established and administered under Section 4.04 of the Fiscal Agent Agreement.

"Reserve Fund" means the fund designated "Pajaro/Sunny Mesa Community Services District, Vega Mutual Water Assessment District, Limited Obligation Improvement Bonds, Series 2007-1, Reserve Fund," established and administered under Section 4.05 of the Fiscal Agent Agreement.

"Reserve Requirement" means as of any date of calculation, an amount not to exceed I 00% of the average annual debt service on the Bonds.

"Resolution of Intention" means Resolution No. 04-05-07 adopted by the Board on April 26, 2007.

"Resolution of Issuance" means Resolution No. 07-01-07 adopted by the Board on July 26, 2007.

"Securities Depository" means The Depository Trust Company, 711 Stewart Avenue, Garden District, New York 11530, Fax- (516) 227-4039 or 4190; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses or such other securities depositories as the District may designate in an Officer's Certificate delivered to the Fiscal Agent.

"Sinking Fund Payments" means amounts specified in Section 2.03 of the Fiscal Agent Agreement to be paid by the District with respect to any term Bonds, as they may be adjusted pursuant to Section 2.03 of the Fiscal Agent Agreement.

"Supplemental Agreement" means an agreement the execution of which is authorized by a resolution which has been duly adopted by the Board under the Bond Law and which agreement is amendatory of or supplemental to this Agreement, but only if and to the extent that such agreement is specifically authorized hereunder.

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


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THE BONDS AND SECURITY FOR THE BONDS

Bond Terms

See the section in the main body of this Official Statement entitled "THE BONDS -General Provisions. "

Redemption

See the section in the main body of this Official Statement entitled "THE BONDS -Redemption. "

Registration, Transfer and Exchange

See the section in the main body of this Official Statement entitled "THE BONDS -General Provisions. "

Pledge: Limited Obligation

See the section in the main body of this Official Statement entitled "SOURCES OF PAYMENT FOR THE BONDS."

No Acceleration

The principal of the Bonds shall not be subject to acceleration under the Fiscal Agent Agreement. Nothing in the Fiscal Agent Agreement in any way prohibits the redemption of Bonds or the defeasance of the Bonds and discharge of the Fiscal Agent Agreement, all as set forth in the Fiscal Agent Agreement.

Deposits of Bond Proceeds

The proceeds of the purchase of the Bonds received from the Original Purchaser (net of all discounts) will be paid to the Fiscal Agent, who will deposit and transfer such proceeds on the Closing Date in the funds and accounts, and in the amounts, set forth in the Fiscal Agent Agreement.

Costs oflssuance Fund

Establishment of Costs of Issuance Fund. The Costs of Issuance Fund is established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent, to the credit of which a deposit shall be made as required by the Fiscal Agent Agreement. Moneys in the Costs of Issuance Fund shall be held by the Fiscal Agent for the benefit of the District and shall be disbursed as provided in the Fiscal Agent Agreement for the payment or reimbursement of Costs of Issuance.

Disbursement. Amounts in the Costs oflssuance Fund shall be disbursed by the Fiscal Agent from time to time upon receipt of an invoice from any party entitled to be paid from the Costs of Issuance Fund.

Investment. Moneys in the Costs of Issuance Fund shall be invested and deposited as required by the Fiscal Agent Agreement. Interest earnings and profits resulting from such investment shall be retained by the Fiscal Agent in the Costs of Issuance Fund to be used for the purposes of such fund.


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Closing of Fund. The Fiscal Agent shall maintain the Costs of Issuance Fund for a period of 90 days from the Closing Date and then the Fiscal Agent shall transfer any moneys remaining therein, including any investment earnings thereon, to the Project Fund and the Costs of Issuance Fund shall be closed.

Reserve Fund

Establishment and Use of Fund. See the section in the main body of this Official Statement entitled "SOURCES OF PAYMENT FOR THE BONDS-Reserve Fund. "

Transfer of Excess of Reserve Requirement. Whenever, on any Interest Payment Date, or on any other date as determined by the Fiscal Agent, the amount in the Reserve Fund exceeds the then applicable Reserve Requirement, the Fiscal Agent shall, except as otherwise provided in the Fiscal Agent Agreement for purposes of rebate, transfer on or before such Interest Payment Date an amount equal to the excess from the Reserve Fund to the Fiscal Agent for deposit in the Redemption Fund to be used in accordance with Part 16 of the Bond Law as directed in an appropriate Officer's Certificate.

Transfer When Balance Exceeds Outstanding Bonds. Whenever the balance in the Reserve Fund is sufficient to retire all the Outstanding Bonds, whether by advance retirement or otherwise, collection of the principal and interest on the Assessments shall be discontinued and the Reserve Fund liquidated by the Fiscal Agent in retirement of the Outstanding Bonds, as directed by an Officer's Certificate. In the event that the balance in the Reserve Fund at the time of liquidation exceeds the amount required to retire all of the Outstanding Bonds, the excess shall after payment of amounts due to the Fiscal Agent, be transferred to the District to be used in accordance with the Act and the Bond Law.

Transfer Upon Payment of Assessments. Whenever, after the issuance of the Bonds, an Assessment is paid, in whole or in part, as provided in the Bond Law, the Fiscal Agent shall transfer from the Reserve Fund to the Fiscal Agent for deposit in the Redemption Fund an amount equal to the product of the ratio of the original amount of the Assessment securing any Bonds so paid to the original amount of all unpaid Assessments securing any Bonds, times the initial Reserve Requirement.

Investment. Moneys in the Reserve Fund will be invested and deposited in accordance with the Fiscal Agent Agreement. Interest earnings and profits resulting from such investment shall be retained in the Reserve Fund to be used for the purposes thereof, subject to the provisions of the Fiscal Agent Agreement.

Project Fund

Establishment. The Project Fund is established under the Fiscal Agent Agreement as a separate fund to be held by the Fiscal Agent for the benefit of the District and to the credit of which fund deposits shall be made as required by the Fiscal Agent Agreement. Moneys in the Project Fund shall be disbursed, except as otherwise described below, for the payment or reimbursement of costs of the Project.

Procedure for Disbursement. Disbursements from the Project Fund shall be made by the Fiscal Agent upon receipt of an Officer's Certificate which shall:

(i) set forth the amount required to be disbursed, the purpose for which the disbursement is to be made, the person to which the disbursement is to be paid and state that such disbursement is a Project cost;


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(ii) certify that no portion of the amount then being requested to be disbursed was set forth in any Officers Certificate previously filed requesting disbursement.

Investment. Moneys in the Project Fund shall be invested as required by the Fiscal Agent Agreement. Interest earnings and profits from such investment shall be retained in the Project Fund to be used for the purposes of such fund.

Closing of Fund. Upon the filing of an Officer's Certificate stating that the Project has been completed and that all costs of the Project have been paid or are not required to be paid from the Project Fund, the Fiscal Agent shall transfer the amount, if any, remaining in the Project Fund as directed in such Officer's Certificate which directions shall direct that such funds be deposited into the Redemption Fund or be pursuant to the Resolution of Intention and to the applicable provisions of the Act and the Project Fund shall be closed.

COVENANTS

Collection of Assessments The District will comply with all requirements of the Act, the Bond Law and the Fiscal Agent Agreement so as to assure the timely collection of the Assessments, including without limitation, the enforcement of delinquent Assessments.

The Assessments as set forth on the list thereof on file with the General Manager together with the interest thereon, shall be payable in annual series corresponding in number and proportionate amount to the number of installments and principal amounts of the Bonds maturing or becoming subject to mandatory prior redemption. An annual proportion of each Assessment shall be payable in each Fiscal Year preceding the date of maturity or mandatory prior redemption date of each of the Bonds issued sufficient to pay the Bonds when due (including any Sinking Fund Payments thereon) and such proportion of each Assessment coming due in any year, together with the annual interest thereon, shall be payable in the same manner and at the same time and in the same installments as the general taxes on real property are payable, and become delinquent at the same times and in the same proportionate amounts and bear the same proportionate penalties and interest after delinquency as do the general taxes on real property. All sums received from the collection of the Assessments and of the interest and penalties thereon shall be transferred to the Fiscal Agent for deposit in the Redemption Fund.

The General Manager shall, before the final date on which the Auditor will accept the transmission of the Assessments for the parcels within the Assessment District for inclusion on the next tax roll, prepare or cause to be prepared, and shall transmit to the Auditor, such data as the Auditor requires to include the installments of the Assessments on the next secured tax roll. The General Manager is authorized under the Fiscal Agent Agreement to employ consultants to assist in computing the installments of the Assessments thereunder and in reconciling Assessments billed to amounts received as provided in the Fiscal Agent Agreement.

In addition to any amounts authorized pursuant to section 8682 of the Bond Law to be included with the annual amounts of installments as aforesaid, the District, pursuant to section 8682.1 of the Bond Law, may cause to be entered on the assessment roll on which taxes will next become due, opposite each lot or parcel ofland within the Assessment District in the manner set forth in said section 8682, each lot's pro rata share of the estimated annual expenses of the District in connection with the administrative duties thereof for the Bonds, including, but not limited to, the costs of registration, authentication, transfer and compliance with the provisions of the Fiscal Agent Agreement. Delinquent Assessments shall be subject to foreclosure pursuant to the Fiscal Agent Agreement.


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Enforcement of Delinquencies

See the section in the main body of this Official Statement entitled "SOURCES OF PAYMENT FOR THE BONDS-Covenant to Commence Foreclosure Proceedings. "

Punctual Payment

The District will punctually pay or cause to be paid the principal of (including Sinking Fund Payments), and interest and any premium on, the Bonds when and as due in strict conformity with the terms of the Fiscal Agent Agreement and any Supplemental Agreement, and it will faithfully observe and perform all of the conditions covenants and requirements of the Fiscal Agent Agreement and all Supplemental Agreements and of the Bonds.

Extension of Time for Payment

In order to prevent any accumulation of claims for interest after maturity, the District shall not, directly or indirectly, extend or consent to the extension of the time for the payment of any claim for interest on any of the Bonds and shall not, directly or indirectly, be a party to the approval of any such arrangement by purchasing or funding said claims for interest or in any other manner. In case any such claim for interest is extended or funded, whether or not with the consent of the District, such claim for interest so extended or funded shall not be entitled, in case of default under the Fiscal Agent Agreement, to the benefits of the Fiscal Agent Agreement, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest which shall not have so extended or funded.

Against Encumbrance

The District will not encumber, pledge or place any charge or lien upon any of the Assessments or other amounts pledged to the Bonds superior to or on a parity with the pledge and lien created in the Fiscal Agent Agreement for the benefit of the Bonds, or their Owners, except as permitted by the Fiscal Agent Agreement, the Act or the Bond Law.

Books and Accounts

The District will keep, or cause to be kept, proper books of record and accounts, separate from all other records and accounts of the District, in which complete and correct entries shall be made of all transactions relating to the Assessments and the application of amounts disbursed from the Project Fund, which records shall be subject to inspection by the Fiscal Agent upon reasonable prior notice on any Business Day.

Protection of Security and Rights of Owners

The District will preserve and protect the security of the Bonds and the rights of the Owners, and will warrant and defend their rights against all claims and demands of all persons. From and after the delivery of any of the Bonds by the District, the Bonds shall be incontestable by the District.


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Compliance with Law: Completion of Project

The District will comply with all applicable provisions of the Act and the Bond Law in completing the acquisition and construction of the Project; provided that the District shall have no obligation to advance any funds to complete the Project in excess of the amounts available therefor in the Project Fund.

Further Assurances

The District will adopt, make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Fiscal Agent Agreement, and for the better assuring and confirming unto the Owners of the rights and benefits provided in the Fiscal Agent Agreement.

Private Activity Bond Limitation

The District shall assure that the proceeds of the Bonds are not so used as to cause the Bonds to satisfy the private business tests of Section 141 (b) of the Tax Code or the private loan-financing test of Section 14l(c) of the Tax Code.

Federal Guarantee Prohibition

The District shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause any of the Bonds to be "federally guaranteed" within the meaning of Section 149(b) of the Tax Code.

Rebate Requirement

The District shall take any and all actions necessary to assure compliance with Section 148(f) of the Tax Code, relating to the rebate of excess investment earnings, if any, to the federal government, to the extent that such section is applicable to the Bonds.

No Arbitrage

The District shall not take, or permit or suffer to be taken by the General Manager, by the Fiscal Agent or otherwise, any action with respect to the proceeds of the Bonds which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the date of issuance of the Bonds would have caused the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Tax Code.

Yield of the Bonds

In determining the yield of the Bonds to comply with the Fiscal Agent Agreement, the District will take into account redemption (including premium, if any) in advance of maturity based on the reasonable expectations of the District, as of the date of delivery of the Bonds, regarding prepayments of Assessments and use of prepayments for redemption of the Bonds, without regard to whether or not prepayments are received or Bonds redeemed.

OFFICIAL ST A TEMENT SUMMARY OF FISCAL AGENT AGREEMENT

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Maintenance of Tax-Exemption

The District shall take all actions necessary to assure the exclusion of interest on the Bonds from the gross income of the Owners of the Bonds to the same extent as such interest is permitted to be excluded from gross income under the Tax Code as in effect on the date of issuance of the Bonds.

Continuing Disclosure

The District covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Certificate. Notwithstanding any other provision of the Fiscal Agent Agreement, failure of the District to comply with the Continuing Disclosure Certificate shall not be considered an event of default for the purposes of the Continuing Disclosure Certificate. However, the Fiscal Agent may (and, at the request of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Bonds, and upon receipt of indemnification reasonably acceptable to the Fiscal Agent, shall) or any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate to compel performance, including seeking mandate or specific performance by court order.

INVESTMENTS; LIABILITY OF THE DISTRJCT

Deposit and Investment of Moneys in Funds

Moneys in any fund or account created or established by the Fiscal Agent Agreement and held by the Fiscal Agent shall be invested by the Fiscal Agent in Authorized Investments, as directed pursuant to an Officer's Certificate filed with the Fiscal Agent at least two Business Days in advance of the making of such investments. The following shall apply to such investments:

(A) In the absence of any such Officer's Certificate, the Fiscal Agent shall invest any such moneys in Authorized Investments consisting of investments in a money market fund rated AAAm or AAAm-G or better by S&P, which may include funds for which the Fiscal Agent or its affiliates provide investment advisory or other management services, which by their terms mature prior to the date on which such moneys are required to be paid out under the Fiscal Agent Agreement. Obligations purchased, as an investment of moneys in any fund shall be deemed to be part of such fund or account, subject, however, to the requirements of the Fiscal Agent Agreement for transfer of interest earnings and profits resulting from investment of amounts in funds and accounts;

(B) The Fiscal Agent may act as principal or agent in the acquisition or disposition of any investment. The Fiscal Agent shall incur no liability for losses arising from any investments made pursuant to the Fiscal Agent Agreement;

(C) Subject in all respects to the provisions of arbitrage provisions of the Fiscal Agent Agreement, investments in any and all funds and accounts may at the discretion of the Fiscal Agent be commingled in a separate fund or funds for purposes of making, holding and disposing of investments, notwithstanding provisions herein for transfer to or holding in or to the credit of particular funds or accounts of amounts received or held by the Fiscal Agent under the Fiscal Agent Agreement, provided that the Fiscal Agent shall at all times account for such investments strictly in accordance with the funds and accounts to which they are credited and otherwise as provided in the Fiscal Agent Agreement;


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(D) The Fiscal Agent shall sell at the highest price reasonably obtainable, or present for redemption, any investment security whenever it shall be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund or account to which such investment security is credited and the Fiscal Agent shall not be liable or responsible for any loss resulting from the acquisition or disposition of such investment security in accordance herewith; and

(E) For funds held by the General Manager, the foregoing provisions shall also apply, except that an Officer's Certificate shall not be required. For such funds the General Manager shall keep records or accounts of all expenditures or disbursements therefrom which records shall be available for inspection during business hours on any Business Day upon prior written request.

Acquisition, Disposition and Valuation oflnvestments

Except as provided in the paragraph below, the District has covenanted in the Fiscal Agent Agreement that all investments of amounts deposited in any fund or account created by or pursuant to the Fiscal Agent Agreement, or otherwise containing gross proceeds of the Bonds ( within the meaning of section 148 of the Tax Code) shall be acquired, disposed of and valued (as of the date that valuation is required by the Fiscal Agent Agreement or the Tax Code) at Fair Market Value.

Investments in funds or accounts ( or portions thereof) that are subject to a yield restriction under applicable provisions of the Tax Code and (unless valuation is undertaken at least annually) investments in the Reserve Fund shall be valued by the District at their present value ( within the meaning of section 148 of the Tax Code).

Liability of District

General. The District shall not incur any responsibility in respect of the Bonds or the Fiscal Agent Agreement other than in connection with the duties or obligations explicitly therein or in the Bonds. The District shall not be liable to any Owner in connection with the performance of its duties under the Fiscal Agent Agreement, except for its own negligence or willful default. The District shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements of the Fiscal Agent in the Fiscal Agent Agreement or in any of the documents executed by the Fiscal Agent in connection with the Bonds, or as to the existence of a default or event of default thereunder.

Reliance. In the absence of bad faith, the District, including the General Manager, may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the District and confonning to the requirements of the Fiscal Agent Agreement. The District, including the General Manager, shall not be liable for any error of judgment made in good faith unless it shall be proved that it was negligent in ascertaining the pertinent facts.

No General Liability. No provision of the Fiscal Agent Agreement shall require the District to expend or risk its own general funds or otherwise incur any financial liability ( other than with respect to the foreclosure proceedings for delinquent Assessments and the payment of fees and costs of the Fiscal Agent) in the performance of any of its obligations under the Fiscal Agent Agreement, or in the exercise of any of its rights or powers.


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Owner of Bonds. The District shall not be bound to recognize any person as the Owner of a Bond unless and until such Bond is submitted for inspection, if required, and his title thereto satisfactorily established, if disputed.

Employment of Agents by District

In order to perform its duties and obligations under the Fiscal Agent Agreement, the District may employ such persons or entities, as it deems necessary or advisable. The District shall not be liable for any of the acts or omissions of such persons or entities employed by it in good faith under the Fiscal Agent Agreement, and shall be entitled to rely, and shall be fully protected in doing so, upon the opinions, calculations, determinations and directions of such persons or entities.

MODIFICATION OR AMENDMENT

Amendments Permitted

Amendments with Owner Consent. The Fiscal Agent Agreement and the rights and obligations of the District and of the Owners of the Bonds may be modified or amended at any time by a Supplemental Agreement pursuant to the affirmative vote at a meeting of Owners, or with the written consent without a meeting, of the Owners of at least 60% in aggregate principal amount of the Bonds then Outstanding, exclusive of Bonds disqualified as provided in the Fiscal Agent Agreement.

No such modification or amendment shall (i) extend the maturity of any Bond or reduce the interest rate thereon, or otherwise alter or impair the obligation of the District to pay the principal of, and the interest and any premium on, any Bond, without the express consent of the Owner of such Bond, or (ii) permit the creation by the District of any pledge or lien upon the Assessments superior to or on a parity with the pledge and lien created for the benefit of the Bonds ( except as otherwise permitted by the Act, the Resolution, the laws of the State of California or the Fiscal Agent Agreement), or reduce the percentage of Bonds required for the amendment of the Fiscal Agent Agreement.

Amendments Without Owner Consent. The Fiscal Agent Agreement and the rights and obligations of the District and of the Owners may also be modified or amended at any time by a Supplemental Agreement, without the consent of any Owners, only to the extent permitted by law and only for any one or more of the following purposes:

(i) to add to the covenants and agreements of the District in the Fiscal Agent Agreement, other covenants and agreements thereafter to be observed, or to limit or surrender any right or power reserved to or conferred upon the District in the Fiscal Agent Agreement;

(ii) to make modifications not adversely affecting any outstanding series of Bonds of the District in any material respect;

(iii) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained in the Fiscal Agent Agreement, or in regard to questions arising under the Fiscal Agent Agreement, as the District and the Fiscal Agent may deem necessary or desirable and not inconsistent with the Fiscal Agent Agreement, and which shall not adversely affect the rights of the Owners of the Bonds; or


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(iv) to make such additions, deletions or modifications as may be necessary or desirable to assure exclusion from gross income for federal income tax purposes of interest on the Bonds.

Fiscal Agent's Consent. Any amendment of the Fiscal Agent Agreement may not modify any of the rights or obligations of the Fiscal Agent without its written consent.

Owners' Meetings

The District may at any time call a meeting of the Owners. In such event the District is authorized to fix the time and place of said meeting and to provide for the giving of notice thereof and to fix and adopt rules and regulations for the conduct of said meeting.

Procedure for Amendment with Written Consent of Owners

The District and the Fiscal Agent may at any time adopt a Supplemental Agreement amending the provisions of the Bonds or of the Fiscal Agent Agreement or any Supplemental Agreement, to the extent that such amendment is permitted by the Fiscal Agent Agreement, to take effect when and as described in this section.

A copy of such Supplemental Agreement, together with a request to Owners for their consent thereto, shall be mailed by first class mail, by the Fiscal Agent, to each Owner of Bonds Outstanding, but failure to mail copies of such Supplemental Agreement and request shall not affect the validity of the Supplemental Agreement when assented to as described below.

Such Supplemental Agreement shall not become effective unless there shall be filed with the Fiscal Agent the written consents of the Owners of at least 60% in aggregate principal amount of the Bonds then Outstanding (exclusive of Bonds disqualified as provided in the Fiscal Agent Agreement) and a notice shall have been mailed as described below. Each such consent shall be effective only if accompanied by proof of ownership of the Bonds for which such consent is given, which proof shall be such as is permitted by the Fiscal Agent Agreement. Any such consent shall be binding upon the Owner of the Bonds giving such consent and on any subsequent Owner (whether or not such subsequent Owner has notice thereof) unless such consent is revoked in writing by the Owner giving such consent or a subsequent Owner by filing such revocation with the Fiscal Agent prior to the date when the notice described below has been mailed.

After the Owners of the required percentage of Bonds have filed their consents to the Supplemental Agreement, the District shall mail a notice to the Owners in the manner described below for the mailing of the Supplemental Agreement, stating in substance that the Supplemental Agreement has been consented to by the Owners of the required percentage of Bonds and will be effective as provided in this section (but failure to mail copies of said notice shall not affect the validity of the Supplemental Agreement or consents thereto). Proof of the mailing of such notice shall be filed with the Fiscal Agent. A record, consisting of the papers required by this provision to be filed with the Fiscal Agent, shall be proof of the matters therein stated until the contrary is proved. The Supplemental Agreement shall become effective upon the filing with the Fiscal Agent of the proof of mailing of such notice, and the Supplemental Agreement shall be deemed conclusively binding ( except as otherwise specifically provided in the Fiscal Agent Agreement) upon the District and the Owners of all Bonds at the expiration of 60 days after such filing, except in the event of a final decree of a court of competent jurisdiction setting aside such consent in a legal action or equitable proceeding for such purpose commenced within such 60-day period.


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Disqualified Bonds

Bonds owned or held for the account of the District, excepting any pension or retirement fund, shall not be deemed Outstanding for the purpose of any vote, consent or other action or any calculation of Outstanding Bonds provided for in the Fiscal Agent Agreement, and shall not be entitled to vote upon, consent to, or take any other action provided for in the Fiscal Agent Agreement.

Effect of Supplemental Agreement

From and after the time any Supplemental Agreement becomes effective under the Fiscal Agent Agreement, the Fiscal Agent Agreement shall be deemed to be modified and amended in accordance therewith, the respective rights, duties and obligations under the Fiscal Agent Ai,>reemcnt of the District and all Owners of Bonds Outstanding shall thereafter be determined, exercised and enforced under the Fiscal Agent Agreement subject in all respects to such modifications and amendments, and all the terms and conditions of any such Supplemental Agreement shall be deemed to be part of the terms and conditions of the Fiscal Agent Agreement for any and all purposes.

Endorsement or Replacement of Bonds Issued After Amendment

The District may determine that Bonds issued and delivered after the effective date of any action taken as provided in this provision of Fiscal Agent Agreement shall bear a notation, by endorsement or otherwise, in form approved by the District, as to such action. In that case, upon demand of the Owner of any Bond Outstanding at such effective date and upon presentation of his Bond for that purpose at the Principal Office of the Fiscal Agent or at such other office as the District may select and designate for that purpose, a suitable notation shall be made on such Bond. The District may determine that new Bonds, so modified as in the opinion of the District is necessary to conform to such Owners' action, shall be prepared, executed and delivered. In that case, upon demand of the Owner of any Bonds then Outstanding, such new Bonds shall be exchanged at the Principal Office of the Fiscal Agent without cost to any Owner, for Bonds then Outstanding, upon surrender of such Bonds.

Amendatozy Endorsement of Bonds

These provisions shall not prevent any Owner from accepting any amendment as to the particular Bonds held by him, provided that due notation thereof is made on such Bonds.

DISCHARGE OF AGREEMENT

If the District pays and discharges the entire indebtedness on all Bonds Outstanding in any one or more of the following ways:

(A) by paying or causing to be paid the principal of (including any Sinking Fund Payments) and interest and any premium on, all Bonds Outstanding, as and when the same become due and payable;

(B) by depositing with the Fiscal Agent, in trust, at or before maturity, money which, together with the amounts then on deposit in the funds and accounts provided for in the Redemption Fund and the Reserve Fund is fully sufficient to pay all Bonds Outstanding, including all principal, interest and redemption premiums; or


Page A-15

(C) by irrevocably depositing with the Fiscal Agent, in trust, cash and/or Federal Securities in such amount as the District shall determine, as confirmed by an independent certified public accountant, will, together with the interest to accrue thereon and moneys then on deposit in the fund and accounts provided for in the Redemption Fund and the Reserve Fund (to the extent invested in Federal Securities), be fully sufficient to pay and discharge the indebtedness on all Bonds (including all principal, Sinking Fund Payments, interest and applicable redemption premiums) at or before their respective maturity dates; If such Bonds are to be redeemed prior to the maturity thereof, and notice of such redemption shall have been given as in the Fiscal Agent Agreement provided or provision satisfactory to the Fiscal Agent shall have been made for the giving of such notice, then, at the election of the District, and notwithstanding that any Bonds have not been surrendered for payment, the pledge of the Assessments and other funds provided for in the Fiscal Agent Agreement and all other obligations of the District under the Fiscal Agent Agreement with respect to all Bonds Outstanding shall cease and terminate, except only the obligation of the District to pay or cause to be paid to the Owners of the Bonds not so surrendered and paid all sums due thereon, the obligation of the District to assure that no action is taken or failed to be taken if such action or failure adversely affects the exclusion of interest on the Bonds from gross income for federal income tax purposes, and all amounts owing to the Fiscal Agent pursuant to the Fiscal Agent Agreement; and thereafter Assessments shall not be payable to the Fiscal Agent. Notice of such election shall be filed with the Fiscal Agent. Any funds thereafter held by the Fiscal Agent upon payments of all fees and expenses of the Fiscal Agent, which are not required for said purpose, shall be paid over to the District to be used by the District as provided in the Act and the Bond Law.

Execution of Documents and Proof of Ownership by Owners

Any request, declaration, consent or other instrument which the Fiscal Agent Agreement may require or permit to be executed by Owners may be in one or more instruments of similar tenor, and shall be executed by Owners in person or by their attorneys appointed in writing.

Except as otherwise expressly provided in the Fiscal Agent Agreement, the fact and date of the execution by any Owner or his attorney of such request, declaration or other instrument, or of such writing appointing such attorney, may be proved by the certificate of any notary public or other officer authorized to take acknowledgments of deeds to be recorded in the state in which he purports to act, that the person signing such request, declaration or other instrument or writing acknowledged to him the execution thereof, or by an affidavit of a witness of such execution, duly sworn to before such notary public or other officer.

The ownership of registered Bonds and the amount, maturity, number and date of holding the same shall be proved by the registration books maintained by the Fiscal Agent under the Fiscal Agent Agreement.

Any consent, request, declaration or other instrument or writing of the Owner of any Bond shall bind all future Owners of such Bond in respect of anything done or suffered to be done by the District or the Fiscal Agent in good faith and in accordance therewith.


PageA-16

APPENDIXB

FORM OF CONTINUING DISCLOSURE AGREEMENT



CONTINUING DISCLOSURE AGREEMENT

(ISSUER)

This Continuing Disclosure Agreement (the "Disclosure Agreement"), dated as of this 26th day of July 2007, is executed and delivered by the Pajaro/Sunny Mesa Community Services District (the "Issuer"), acting on behalf of the Vega Mutual Water Assessment District (the "Assessment District"), and Union Bank of California, N.A., (the "Fiscal Agent"), in connection with the issuance of the Vega Mutual Water Assessment District of the Pajaro/Sunny Mesa Community Services District, Limited Obligation Improvement Bonds, Series 2007-1 (the "Bonds"), acting hereunder in its capacity as dissemination agent (the "Dissemination Agent"). The Bonds are being issued pursuant to Resolution No. 07-01-07 adopted by the Board of Directors of the Pajaro/Sunny Mesa Community Services District on July 26, 2007 (the "Resolution"). The Issuer and the Dissemination Agent covenant and agree as follow:

PURPOSE OF THE DISCLOSURE AGREEMENT.

Titls Disclosure Agreement is being executed and delivered by the Issuer and the Dissemination Agent for the benefit of the holders and beneficial owners of the Bonds and in order to assist the Participating Underwriter in complying with S.E.C. Rule 15c2-12(b)(5) promulgated under the Securities Exchange Act of 1934.

Definitions.

In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings when used herein:

"Annual Report" shall mean any Annual Report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

"Disclosure Representative " shall mean the General Manager of the Issuer or his or her designee, or such other officer or employee as the Issuer shall designate in writing to the Fiscal Agent from time to time.

"Dissemination Agent" shall mean Union Bank of California, N.A., acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Issuer and which has filed with the Fiscal Agent a written acceptance of such designation.

OFFICIAL STATEMENT CONTINUING DISCLOSURE AGREEMENT

Page B-1

"Listed Events" shall mean any of the events listed in Section 5(a) of this Disclosure Agreement.

"National Repository" shall mean any Nationally Recognized Municipal Securities Infonnation Repository for purposes of the Rule and recognized as such by the Securities and Exchange Commission.

"Participating Underwriter" shall mean any of the original underwriters of the Bonds required complying with the Rule in connection with offering of the Bonds.

"Repository" shall mean each National Repository and each State Repository.

"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 Repository" shall mean any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Ab>reement, there is no State Repository.

Provision of Annual Reports.

(a) The Issuer shall, or shall cause the Dissemination Agent to, not later than September 1 following the end of each fiscal year (June 30), commencing September 1, 2008, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other infonnation as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the Issuer may be submitted separately from the balance of the annual Report, and later than the date required above for the filing of the Annual Report if not available by that date. If the Issuer's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(!).

(b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for the providing of the Annual Report to Repositories, the Issuer shall provide the Annual Report to the Dissemination Agent and the Fiscal Agent (if the Fiscal Agent is not the Dissemination Agent). Ifby such date, the Fiscal Agent has not received a copy, of the Annual Report, the Fiscal Agent shall contact the Issuer and the Dissemination Agent to determine if the Issuer is in compliance with the first sentence of this subsection (b ).

( c) If the Fiscal Agent is unable to verify that an Annual Report has been provided to Repositories by the date required in subsection (a), the Fiscal Agent shall send a notice to the Municipal Securities Rulemaking Board in substantially the fonn attached as Exhibit A.

( d) The Dissemination Agent shall:

(1) detennine each year prior to the date for providing the Annual Report the name and address of each National Repository and each State Repository, if any; and

(2) file a report with the Issuer and (if the Dissemination Agent is not the Fiscal Agent) the Fiscal Agent certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided.


Page B-2

Content of Annual Reports.

The Issuer's Annual Report shall contain or incorporate by reference the following:

(a) Audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the Issuer'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 that used for the Issuer's audited financial statements, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. THE ISSUER'S ANNUAL FINANCIAL STATEMENTS ARE PROVIDED SOLELY TO COMPLY WITH THE SECURITIES EXCHANGE COMMISSION STAFF'S INTERPRETATION OF RULE 15C2-12. NO FUNDS OR ASSETS OF THE ISSUER ARE REQUIRED TO BE USED TO PAY DEBT SERVICE ON THE BONDS, AND THE ISSUER IS NOT OBLIGATED TO ADVANCE AVAILABLE FUNDS TO COVER ANY DELINQUENCIES. INVESTORS SHOULD NOT RELY ON THE FINANCIAL CONDITION OF THE ISSUER IN EVALUATING WHETHER TO BUY, HOLD OR SELL THE BONDS.

(b) Status of Bonds

(I) Principal amount of Bonds Outstanding. (2) Balance in the Project Fund. (3) Balance in Capitalized Interest Account. (4) Balance in the Reserve Fund.

( c) Assessment Collections

(1) Amount of special assessment levied and received in the prior fiscal year.

( d) Delinquency Information

(I) Total number and dollar amount of delinquencies in the payment of special assessments.

(2) Statement of whether district has fulfilled its covenants, within the time parameters established in the Resolution, to initiate judicial foreclosure proceedings upon delinquent properties.

(3) Identity of each delinquent taxpayer responsible for five percent (5%) or more of total special assessment levied, with the following information:

• County Assessor parcel number • assessed value of applicable properties • amount levied, amount delinquent by parcel number • status of foreclosure proceedings

(e) Land Values

(I) Total assessed value of all parcels subject to the special assessment.


Page B-3

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 Issuer or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The Issuer shall clearly identify each such other document so included by reference.

Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5, the Issuer 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. (2) Non-payment related defaults. (3) Unscheduled draws on debt service reserves reflecting financial difficulties. (4) Unscheduled draws on credit enhancements reflecting financial difficulties. (5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions or events affecting the tax-exempt status of the Bonds. (7) Modifications to rights of Bondholders. (8) Contingent or unscheduled bond calls. (9) Defeasance. (I 0) Release, substitution, or sale of property securing repayment of the Bonds. (11) Rating changes, if any.

(b) The Dissemination Agent shall, within one {I) Business Day of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and request that the Issuer promptly notify the Fiscal Agent in writing whether or not to report the event pursuant to subsection (f).

( c) Whenever the Issuer obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Dissemination Agent pursuant to subsection (b) or otherwise, the Issuer shall as soon as possible determine if such event would be material under applicable Federal securities law.

(d) If the Issuer has determined that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the Issuer shall promptly notify the Fiscal Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f).

( e) If in response to a request under subsection (b ), the Issuer determines that the Listed Event would not be material under applicable Federal securities law, the Issuer shall so notify the Fiscal Agent in v.Titing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f).

( f) If the Dissemination Agent has been instructed by the Issuer to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Municipal Securities Rulemaking Board and each Repository. Each notice of the occurrence of a Listed Event shall include the form of cover sheet attached as Exhibit B, completed with the appropriate information relating to the Bonds. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (a)(9) need not be given nnder this subsection any earlier than the notice (if any) of the nnderlying event is given to holders of affected Bonds pursuant to the Resolution.

OFFICIAL ST A TEMENT CONTINUING DISCLOSURE AGREEMENT

Page B-4

Termination of Reporting Obligation.

The Issuer's obligations under this Disclosure Agreement shall terminate upon 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 Issuer shall give notice of such termination in the same manner as for a Listed Event under Section 5(1).

Dissemination Agent.

The Issuer 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. If at any time there is not any other designated Dissemination Agent, the Fiscal Agent shall be the Dissemination Agent. The initial Dissemination Agent shall be Union Bank of California, N .A.

Amendment, Waiver.

Notwithstanding any other provision of this Disclosure Agreement, the Issuer and the Dissemination Agent may amend this Disclosure Agreement ( and the Dissemination Agent shall agree to any amendment so requested by the Issuer provided that it does not affect the rights or duties of the Dissemination Agent hereunder), and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

( c) the proposed amendment or waiver either (i) is approved by holders of the Bonds in the manner provided in the Resolution for amendments to the Resolution with the consent of Bondholders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds.

If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or fmancial information being provided.

If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the

OFFICIAL STATEMENT CONTINUfNG DISCLOSURE AGREEMENT

Page B-5

change in the accounting principles on the presentation of the financial infonnation, in order to provide infonnation to investors to enable them to evaluate the ability of the Issuer to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be sent to the Repositories in the same marmer as for a Listed Event under Section 5( f).

Additional Information.

Nothing in this Disclosure Agreement shall be deemed to prevent the Issuer from disseminating any other infonnation, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other infonnation in any Armual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Issuer chooses to include any infonnation in any Armual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the Issuer shall have no obligation under this Disclosure Agreement to update such information or include it in any future Armual Report or notice of occurrence of a Listed Event.

Default.

In the event of a failure of the Issuer or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Dissemination Agent may (and, at the request of any Participating Underwriter or the holders of at least 25% aggregate principal amount of Outstanding Bonds, shall), or any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific perfonnance by court order, to cause the Issuer or Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed a default under the Resolution, and the sole remedy under this Disclosure Agreement in the event of any failure of the Issuer or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel perfonnance.

Duties, Immunities and Liabilities of Fiscal Agent and Dissemination Agent.

The Dissemination Agent (if other than the Fiscal Agent or the Fiscal Agent in its Capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Issuer agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or perfonnance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the Issuer under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds, provided however, that the immunities and limitations on liability granted to the Fiscal Agent in Article VII of the Resolution and in the Fiscal Agent Agreement which provisions applicable and are incorporated herein by reference.

Beneficiaries.

This Disclosure Agreement shall inure solely to the benefit of the Issuer, the Fiscal Agent, the Dissemination Agent, 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.


Page B-6

Counterparts.

This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

IN WITNESS WHEREOF, the parties have executed this Disclosure Agreement on the date first written above in Watsonville, California.

PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT, for and on behalf of the VEGA MUTUAL WATER ASSESSMENf DISTRICT

By:------------------Joe Rosa, General Manager

UNION BANK OF CALIFORNIA, N.A., as Dissemination Agent

By:------------------Authorized Officer


Page B-7

Name oflssuer:

Name of Bond Issue:

Date ofissuance:

EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD

OF FAILURE TO FILE ANNUAL REPORT

Pajaro/Sunny Mesa Community Services District

Vega Mutual Water Assessment District of the Pajaro/Sunny Mesa Community Services District Limited Obligation Improvement Bonds, Series 2007-1

August I 6, 2007

NOTICE IS HEREBY GIVEN that the Pajaro/Sunny Mesa Community Services District has not provided an Annual Report with respect to the above named Bonds as required by Section 3 of the Continuing Disclosure Agreement approved by the Board of Directors of the Pajaro/Sunny Mesa Community Services District on July 26, 2007. The Issuer anticipates that the Annual Report will be filed by ___________ _

Dated:

UNION BANK OF CALIFORNIA, N.A., on behalf ofISSUER

By: ______________ _

Authorized Officer

OFFICIAL STATEMENT CONTINUING DISCLOSURE A GREEM ENT

Page B-8

EXHIBITS

Municipal Secondary Market Disclosure Information Cover Sheet

This cover sheet should be sent u.Jth all submissions mode to the Municipal Securities Ru!emaking: Ooant, Nationally Recognized Municifllll Securitle$ tnformation R.cposit-Orics,, and 1111y applicuble Stat¢ lnfunnation IlepoS:il,;iry, whether the filing is voluntary or made- pursuant lo Securities and Exchange Commission mle 1Sc2-12 or any analogous: state statute.

Ste WWW.s«.gov/info/munldptlfnrmslr.htm for list of curttnl Nll\lSJlb and Silk

IF THIS FIUNG RELATES TO A SINGJ.E BOND ISSUE: Provide name of bond issue eicactlY as it appearg on the cov1.-r of1ht" Official Statcrncat (pfca&e include ~me or state v.hcre i~uer is locatedr.

Provide ttine-dig1t CUSJP* numbers ifa'Viti!ablc. 10 whk-h the i11frum:ition rclittts:

IF THIS FILING RELATES TO ALL SECURITIES ISSUED BY THE ISSUER OR ALL SECURITIES OF A SPECIFIC CREDIT OR ISSUED UNDER A SINGLE INDENTURE: ruuer·s Name (please include name of state where l~$41cf is loca1cd): ________________ _

Other Obligated Pct.$0n's Name (ifany):---::-:-c------,---cc,--,-;-~---,,-------------{Exactly as 11'.a~"" w om.;i:d S.~nt Ctw,r}

Provide six-<Jigil CUSJP'" number(£), if available, of Issuer: ___________________ _

TYPE OF FILING: l-J Elecironic {number of pages attached) ______ _ Paper (number of pages 11.ltacbed) _____ _

ffinformation is also available on the Internet, give URL: ___________________ _


Page B-9

WHAT TYPE OF INFORMATION ARE YOU PROVIDING? iClte<kall that apply) A. _______________ Flnandal lflfonnadon and Operating Data punuant to Rule 1St2.J2

{flnllm"i:!ll 111Wl'IN,in ;ill!.! ;,,pe:niting ~U i;hoofjl tl(lt ~ fikd wtlb 11w MS RB.)

] Annuel

Semi-annual

,·. Q...,,.,ty

r~al PcriodCovettd: ____________________________ _

B. 1 7 Audited Financial Stateo:umts or CAFR punuaut to Ruic 15c1~12

FiscalPtrlodCovered: ------------·------------------

C. :0 Notke of a Mat.crial Event pursuant to Rule 15c2•12 (L"ll«k.u ~prnpnaitJ

l. r~, Principal and interest payment delinquern..ics

2. :; Non-payment rel111ctldefaults

l. f _; Unscheduled dr.tws on debt Sl-n•ic,; n:servc:, refiteling financial difficulties

4. L1 Unscheduled dmws on credit e11haT1ccmcnts reflecting financial difficuttks

5. Substitutiori of credit or liquidity providers.. or 1hcir failure to perf()rm

6. L::: Adverse: tax opinions QT events affecting lh<: lax-exempt status of the security

7. !... Modifications to !he rights of security holders

8. L Bond calls

9. r:~ Defeasanct::,

I 0. f l Release, :1ub:s1itutio11, or sale of property securing repayment of the i:ceuritia

! J. :__· Rating changes

D. f7 NotJce orFaUurc 10 Provide Annual f'luMndal lnformatioll as Required

E. s .. Other Secondary Market InforJru1tlon (Sp,~1fyJ: ____________________ _

( hereby r~present that I am authorized by the issuer or obligor or its agent to distribute th.is information

publldrr

hsuu/Filer Conhl(t; Name ___________________ Title _________________ _

Employer _________________________________ _

Addn,,, __________________ Cily _____ State __ Zip Code ____ _

Tek-phonc Fil.'< ________________ _

Email Address Js~ucr Web Site Address ___________ _


Page B-10

Dlsscmloatlon Agtru Contacl, Ir any: N- _________________ Title _______________ _

Employer _________________________________ _

Address, _________________ City _____ Staie __ ZipCode, ____ _

Telephone Fax, ________________ _

Enmit Addre1is Relationship to Issuer __________ _

Obligor Co• faet, if 11.nr, Name _________________ Tille _______________ _

Employer----------------------------------'"""=----------------- City _____ Staie __ ZipCode ____ _ TelephMe ________________ Fax ________________ _

Email Address _______________ ObligorWebsite Address _________ _

Investor Relations Contact. tr any:

Name _________________ Title _______________ _

Telephone Email Address ____________ _


Page B-11

APPENDIXC

FORM OF BOND COUNSEL OPINION

Law Of/ice of

ROBERT M. HAIGHT ATTORNEY AT LAW

Municipal Bond Counsel

August I 6, 2007

The Honorable Board of Directors Pajaro/Sunny Mesa Community Services District 136 San Juan Road Watsonville, California 95076

OPINION: $4,715,000

PAJARO/SUNNY MESA COMMUNITY SERVICES DISTRICT Vega Mutual Water Assessment District

Limited Obligation Improvement Bonds, Series 2007-1

Members of the Board:

We have acted as Bond Counsel in connection with the issuance by the Pajaro/Sunny Mesa Community Services District (the "District"), of the Vega Mutual Water Assessment District Limited Obligation Improvement Bonds, Series 2007-1, dated August 16, 2007, in the aggregate principal amount of $4,715,000 (the "Bonds"), under the Improvement Bond Act of 1915 being Division l O of the California Streets and Highways Code (the "Bond Law"), a Resolution of the District adopted July 26, 2007 (the "Resolution of Issuance") and a Fiscal Agent Agreement, dated as of July 26, 2007 (the "Fiscal Agent Agreement"), between the District and Union Bank of California, N.A., as fiscal agent. We have examined the law and such certified proceedings and other papers as we deem necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of the District contained in the Fiscal Agent Agreement, and in the certified proceedings and other certifications of public officials furnished to us, without undertaking to verify such facts by independent investigation.

Based upon our examination, we are of the opinion, under existing law, that:

1. The District is duly created and validly existing as a Community Services District and a public corporation of the State of California pursuant to the Government Code, with power to

OFFICIAL ST A TEM ENT FORM OF BOND COUNSEL OPINION

Page C-1

adopt the Resolution of Issuance and to create the Assessment District (as defined in the Fiscal Agent Agreement) and to enter into the Fiscal Agent Agreement, perform the agreements on its part contained therein, and issue the Bonds. The Assessment District has been duly and validly created.

2. The Resolution of Issuance has been duly adopted by the District and the Fiscal Agent Agreement has been duly approved by the District and constitutes a valid, legal and binding obligation of the District enforceable upon the District.

3. Pursuant to the Bond Law, the Fiscal Agent Agreement creates a valid lien on the funds pledged by the Fiscal Agent Agreement for the security of the Bonds, subject to any existing prior liens granted under the Bond Law.

4. The Bonds have been duly authorized, executed and delivered by the District and are valid and binding special obligations of the District, payable solely from the sources provided therefor in the Fiscal Agent Agreement.

5. The interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; it should be noted, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings. The opinions set forth in the preceding sentences are subject to the condition that the District comply with all requirements of the Tax Code that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Bonds in gross income for federal income tax purposes to be retroactive to the date of issuance of the Bonds. We express no opinion regarding other federal tax consequences arising with respect to the Bonds.

6. The District has designated the Bonds "Bank Qualified" for purposes of paragraph (3) of section 265(b) of the Internal Revenue Code.

7. The interest on the Bonds is exempt from personal income taxation imposed by the State of California.

The rights of the owners of the Bonds and the enforceability of the Bonds may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and may also be subject to the exercise of judicial discretion in appropriate cases.

Respectfully submitted,

ROBERT M. HAIGHT

OFFICIAL STATEMENT FORM OF BOND COUNSEL OPINION

Page C-2

APPENDIXD

ASSESSMENT PARCEL LISTING The following table contains the Assessment Parcels as of July 2007, The information

concerning the ownership was obtained from the County and other sources which are believed to be reliable, but such information is not guaranteed as to accuracy or completeness, nor has it been independently verified and is not to be construed as a representation by the Underwriter or the District.

Diagram & Assessment

Number

1-1 1-2 1-3 1-4 1-7 1-8 1-9 1-10 1-11 1-12 1-13 1-14 1-15 1-16 1-17 1-18 1-19 1-20 1-21 1-22 1-28 1-23 1-24 1-25 1-26 1-27 1-31 1-29 1-30 1-32



APN

117-581-005 117-581-004 117-421-057 117-421-053 117-441-003 117-441-004 117-441-018 117-441-019 117-441-020 117-441-021 117-441-006 117-441-026 117-441-028 117-441-025 117-441-024 117-441-023 117-441-030 117-441-029 117-491-015 117-491-016 117-441-013 117 -491-004 117-491-001 117-491-003 117-491-002 117-491-017 117-491-018 117-441-016 117-441-017 117-491-006

ASSESSMENT PARCEL LISTING

Valuation

Assessment Land Improvement Lien

$42,839.87 $167,991 $213,690 $43,490.62 $189,192 $342,595 $42,719.73 $204,470 $221,080 $37,630.90 $183,000 0 $38,855.28 $206,491 $11,470 $70,091.80 $37,144 $342,856 $34,069.78 $331,500 $331,500 $33,699.35 $306,000 $361,800 $33,699.35 $38 668 $236,332 $33,859.53 $331,500 $326,400 $42,899.94 $30,385 $444,615 $40,837.57 $205,220 $291,312 $33,749.41 $114 716 $258,056 $35,201.08 $140,585 $303,666 $35,201.08 $136,796 $169,131 $35,201.08 $357,000 $306,000 $35,201.08 $143,342 $139 946 $33,589.22 $43,009 $156,991 $35,551.48 $161,548 $182,146 $36,202.23 $137,660 $170,929 $34,930.77 $52,620 $222,380 $34,590.37 $194,582 $302,685 $33,218.80 $92,184 $141,351 $33,218.80 $40,616 $159,384 $33,218.80 $21.723 $178,277 $35,671.62 $264,955 $217,263 $35,261.15 $290,000 $290,000 $33,799.46 $134,961 $194,194 $33,599.23 $357 000 $300,900 $33 158,73 $121,289 $242,580

OFFICIAL STATEMENT ASSESSMENT PARCEL LISTING

Page D-1

Total

$381,681 $531,787 $425,550 $183,000 $217,961 $380,000 $663,000 $667,800 $275,000 $657,900 $475,000 $496,532 $372,772 $444,251 $305,927 $663,000 $283.288 $200,000 $343,694 $308,589 $275,000 $497,267 $233,535 $200,000 $200,000 $482,218 $580,000 $329,155 $657,900 $363,869

Value to Lien

8.909 12,228 9.961 4.863 5.610 5.421

19.460 19.816 8.160

19.430 11.072 12.159 11.045 12.620

8.691 18.835 8.048 5.954 9.668 8.524 7.873

14.376 7.030 6.021 6.021

13.518 16.449 9,738

19,581 10.974

Diagram & APN Assessment

Number

1-33 117 -491-005 1-38 117-491-021 1-34 117-491-013 1-39 117-491-022 1-40 117-491-061 1-41 117-491-062 1-35 117-491-019 1-42 117-491-063 1-36 117-491-020 1-43 117-491-064 1-46 117-491-060 1-47 117-421-037 1-37 117-491-011 1-44 117-491-059 1-48 117-421-039 1-45 117-491-058 1-49 117-421-040 1-50 117-421-043 1-51 117-421-044 1-52 117-421-045 1-59 117-501-001 1-58 117-501-002 1-57 117-501-003 1-56 117-501-004 1-55 117-501-005 1-54 117-501-006 1-53 117-501-016 1-65 117-501-019 1-64 117-501-010 1-63 117-501-011 1-62 117-501-012 1-61 117-501-013 1-60 117-501-014 1-66 117-422-009 1-69 117-431-015 1-68 117-431-014 1-70 117-431-016 1-71 117-431-004 1-67 412-011-045 2-1 117-431-005 2-2 117-431-006 2-3 117-431-009 2-4 117-431-010 2-5 117-431-011 2-6 117-431-012 2-7 117-431-008 2-8 412-171-001

Valuation


$33,098.66 $8,848 $191,152 $30,644.57 $275,000 0 $30,184.81 $290,000 0 $30,294.76 $275,000 0 $30,374.71 $275,000 0 $30,344.73 $275,000 0 $35,201.08 $55,755 $219,245 $30,364.72 $275,000 0 $30,134.84 $275,000 0 $30,414.69 $275,000 0 $30,374.71 $275,000 0 $33,198.77 $134,498 $61,326 $30,154.83 $275,000 0 $30,614.59 $290,000 0 $33,439.05 $51,001 $198,999 $30,604.59 $290,000 0 $33,419.03 $357,000 $346,800 $35,401.31 $331,500 $51,000 $34,199.93 $115,776 $131,300 $34,199.93 $120,451 $80,300 $33,699.35 $350,000 $362,000 $33,699.35 $306,000 $321,300 $33,899.58 $148,810 $152,692 $34,900.73 $136,809 $138,191 $34,219.95 $335 580 $306,000 $34,400.16 $84,035 $174,729 $33,233.21 $193,800 0 $43,300.40 $184,319 $515,000 $34,960.80 $331,500 $290,700 $34,470.24 $126,187 $180,106 $33,909.59 $264,955 $263,894 $34,520.29 $84,035 $150,569 $33,909.59 $238,459 $211,964 $40,727.44 $416,160 $218,484 $34,660.46 $18,938 $256,062 $33,699.35 $18,950 $231,050 $34,730.54 $18 938 $256,062 $36,502.58 $32,108 $257,892 $35,721.68 $123,943 $165,655 $36,082.09 $40,319 $249,681 $36,182.21 $14,393 $275,607 $33,989.68 $53,571 $221,429 $34,560.34 $84,035 $153,366 $33,919.60 $108,223 $159,673 $34,119.83 $149,133 $224,845 $40,216.85 $22,744 $467,256 $31,064.35 $410,000 0


Page D-2

Total Value to Lien

$200,000 6043 $275,000 8.974 $290,000 9.607 $275,000 9.077 $275,000 9054 $275,000 9.063 $275,000 7.812 $275,000 9.057 $275,000 9.126 $275,000 9.042 $275,000 9.054 $195,824 5.899 $275,000 9.120 $290,000 9.473 $250,000 7.476 $290,000 9.476 $703,800 21.060 $382,500 10.805 $247,076 7.224 $200,751 5.870 $712,000 21.128 $627,300 18.615 $301,502 8.894 $275,000 7.879 $641,580 18.749 $258,764 7.522 $193,800 5.832 $699,319 16.150 $622,200 17.797 $306,293 8.886 $528,849 15.596 $234,604 6.796 $450,423 13.283 $634,644 15.583 $275,000 7.934 $250,000 7.419 $275,000 7.918 $290,000 7.945 $289,598 8.107 $290,000 8.037 $290,000 8.015 $275,000 8.091 $237,401 6.869 $267,896 7.898 $373,978 10.961 $490,000 12.184 $410,000 13.198

Diagram & APN Assessment Number

2-12 412-171-005 2-11 412-011-031 2-14 412-011-032 2-15 412-121-002 2-16 412-121-001 2-17 412-121-003 2-18 412-121-005 2-19 412-121-011 2-20 412-121-004 2-21 412-121-012 2-22 412-121-010 2-23 412-121-009 2-24 412-121-008 2-42 412-131-001 2-47 412-131-008 2-48 412-131-007 2-49 412-131-006 2-43 412-131-002 2-44 412-131-003 2-46 412-131-005 2-45 412-131-004 2-58 412-151-002 2-59 412-151-006 2-57 412-151-003 2-60 412-151-007 2-61 412-151-013 2-62 412-151-008 2-65 412-151-015 2-56 412-151-017 2-50 412-131-009 2-51 412-131-010 2-52 412-131-016 2-55 412-131-015 2-54 412-131-013 2-53 412-131-017 2-9 412-171-002 2-10 412-171-003 2-13 412-171-004 2-25 412-161-004 2-26 412-161-003 2-27 412-161-002 2-28 412-161-001 2-30 412-161-005 2-31 412-161-006 2-32 412-161-007 2-38 412-161-009 2-39 412-161-008

Valuation


$47,625.65 $448,800 0 $37,703.96 $78,574 $129,111 $37,703.96 $71,342 $47,655 $43,650.80 $216 203 $605,371 $33,879.56 $151,950 $194,496 $34,970.81 $166,340 $319,735 $34,710.51 $270,660 $457,595 $34,870.70 $312,120 $390,150 $34,440.20 $317,947 $290,390 $33,839.51 $291,450 $360,338 $35,671.62 $184,009 $243,051 $35,161.03 $331,500 $379,950 $35,321.22 $408,000 $341,700 $48,936.89 $253 053 $433,005 $41,037.80 $215,399 $410,189 $34,960.80 $143,397 $309,739 $35,281.17 $130,579 $267,376 $36,923.06 $133,714 $322,480 $25,381.29 $275,541 $385,861 $36,372.43 $190,291 $222,004 $35,371.27 $238.459 $376,236 $35,861.84 $133,714 $163 496 $35,411.32 $211,964 $380,210 $36,062.07 $135,196 $158,548 $34,830.65 $204,575 $183,356 $34 720.52 $178,367 $313,494 $34,360.11 $146,208 $347,528 $34,880.71 $200,565 $168,215 $34,832.37 $168 702 0 $34,570.35 $157,455 $437,504 $35,581.52 $133,714 $200.574 $35,141.01 $145,871 $340,370 $36062.07 $168,702 $410,511 $34,870.70 $122,908 $463,223 $35,881.86 $139,793 $273,511 $35,341.24 $286,110 $8,600 $36,792.91 $57 120 $342,880 $42,709.72 $364,140 $174,300 $34,009.71 $391,074 $569,300 $28,765.56 $311,079 0 $29 525.16 $318,899 0 $35,060.92 $324,305 $675,637 $34,850.67 $351,330 $757,400 $34,189.91 $364,140 $676,260 $34,169.89 $408,000 $730,842 $33,859.53 $305,898 $360,300 $34,320.06 $325,278 $315,200


Page D-3

Total Value to Lien

$448,800 9.423 $207,685 5.508 $118,997 3.156 $821,574 18.822 $346,446 10.226 $486,075 13.899 $728,255 20.981 $702 270 20.139 $608,337 17.664 $651,788 19.261 $427,060 11.972 $711,450 20.234 $749,700 21.225 $686,058 14.019 $625,588 15.244 $453,136 12.961 $397,955 11.280 $456,194 12.355 $661,402 26.05 $412,295 11.335 $614,695 17.378 $297,210 8.288 $592,174 16.723 $293,744 8.146 $387 931 11.138 $491,861 14.166 $493,736 14.369 $368,780 10.573 $168,702 4.843 $594,959 17.210 $334,288 9.395 $486,241 13.837 $579,213 16.062 $586,131 16.809 $413,304 11.518 $294,710 8.339 $400,000 10.872 $538.440 12.607 $960,374 28.238 $311,079 10.814 $318,899 10.801 $999,942 28.520

$1,108,730 31.814 $1,040,400 30.430 $1,138,842 33.329

$666,198 19.675 $640,478 18.662

Diagram & APN Assessment

Number

2-33 412-161-013 2-34 412-161-016 2-40 412-161-011 2-41 412-161-012 2-35 412-161-014 2-36 412-161-015 2-67 412-161-010 1-72 117-431-001

TOTAL:

Valuation


$33,909.59 $370,937 $561,705 $33,939.63 $324,305 $405,381 $34,940.78 $231,554 $562,871 $34,380.13 $318,258 $430,000 $33,759.42 $364,140 $773,095 $33,789.45 $364,140 $602,911 $34,229.96 $251,888 $210,700 $68,710.21 $275,000

$4,689,358.45 $27,236,577 $33,028,212


Page D-4

Total Value to Lien

$932,642 27.504 $729,686 21.500 $794,425 22.736 $748,258 21.764

$1,137,235 33.686 $967,051 28.620 $462,588 13.514 $275,000 4002

$60,264,789 12.85

APPENDIXE

DTC AND THE BOOK-ENTRY-ONLY SYSTEM

THE INFORMATION IN THIS SECTION CONCERNING THE DEPOSITORY TRUST COMPANY, NEW YORK, NEW YORK ("OTC") AND DTC'S BOOK-ENTRY ONLY SYSTEM HAS BEEN OBTAINED FROM SOURCES THAT THE BOARD, THE STATE TREASURER THE REGENTS AND THE UNDERWRITERS BELIEVE TO BE RELIABLE, BUT THE BOARD, THE STATE TREASURER, THE REGENTS AND THE UNDERWRITERS TAKE NO RESPONSIBILITY FOR THE ACCURACY HEREOF. THE OWNERS SHOULD CONFIRM THE FOLLOWING INFORMATION WITH OTC OR THE OTC PARTICIPANTS (AS HEREINAFTER DEFINED). THE CURRENT "RULES" APPLICABLE TO OTC ARE ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION AND THE CURRENT "PROCEDURES" OF DTC TO BE FOLLOWED IN DEALING WITH DTC PARTICIPANTS ARE ON FILE WITH OTC.

OTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities in the name of Cede & Co. (OTC' s partnership nominee) or such other name as may be requested by an authorized representative of OTC. One fully registered Certificate will be issued for each maturity of the Bonds, in the aggregate principal amount of such maturity, and will be deposited with OTC.

OTC 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 17 A of the Securities Exchange Act of 1934, as amended. OTC holds securities that its participants ("Direct Participants") deposit with OTC. OTC also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Participants' accounts, thereby eliminating the need for physical movement of securities. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. OTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the OTC system is also available to others such as securities brokers and dealers, banks, and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"), The Rules applicable to DTC and its Direct and Indirect Participants are on file with the Securities and Exchange Commission. More information about OTC can be found at www.dtcc.com.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Owners will not receive written confirmation from OTC of their purchase, but Owners are expected to receive written confirmation 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

OFFICIAL STATEMENT OTC AND THE BOOK-ENTRY-ONLY SYSTEM

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http://www.dtcc.com

ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Owners. Owners will not receive Bonds representing their ownership interests in Bonds, except in the event that use of the book-entry only system for the Bonds is discontinued.

To facilitate subsequent transfers, all securities deposited by Direct Participants with OTC are registered in the name of DTC's partnership nominee, Cede & Co. (or such other name as requested by an authorized representative of OTC). The deposit of Bonds with OTC and their registration in the name of Cede & Co. do not effect any change in Ownership. OTC has no knowledge of the actual Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Certificate documents. Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Owners.

Conveyance of notices and other communications by OTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

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

Neither OTC nor Cede & Co. (or such other OTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with OTC' s Procedures. Under its usual procedures, OTC mails an omnibus proxy (the "Omnibus Proxy") to the Board 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 the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative ofDTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the State Treasurer on the payment date in accordance with their respective holdings shown on DTC's records. Payments by Direct and Indirect Participants to 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 Direct and Indirect Participant and not of OTC (or its nominee), the State Treasurer or the Board, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to OTC is the responsibility of the State Treasurer or the Board, disbursement of such payments to Direct Participants shall be the responsibility of OTC, and disbursement of such payments to the Owners shall be the responsibility of Direct and Indirect Participants.

OFFICIAL STATEMENT DTC AND THE BOOK-ENTRY-ONLY SYSTEM

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The Board and the State Treasurer may decide to discontinue use of the system of bookentry only transfers through DTC (or a successor securities depository). In that event, Certificate Bonds will be printed and delivered. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Board or the State Treasurer. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered.

SO LONG AS CEDE & CO. IS THE REGISTERED HOLDER OF THE CERTIFICATES, AS NOMINEE OF DTC, REFERENCES HEREIN TO THE OWNERS OR OWNERS OF THE CERTIFICATES (OTHER THAN UNDER THE CAPTION "TAX MATTERS" HEREIN) SHALL MEAN CEDE & CO. AND SHALL NOT MEAN THE OWNERS OF THE CERTIFICATES.

NONE OF THE STATE TREASURER, THE BOARD, THE REGENTS OR THE UNDERWRITERS HAS ANY RESPONSIBILITY OR OBLIGATION TO DTC DIRECT PARTICIPANTS, TO INDIRECT PARTICIPANTS, OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (I) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY DTC DIRECT PARTICIPANT, OR INDIRECT PARTICIPANT, (II) THE DELIVERY OF ANY NOTICE THAT IS PERMITTED OR REQUIRED TO BE GIVEN TO THE OWNERS OF THE CERTIFICATES UNDER THE TRUST AGREEMENT, (Ill) THE SELECTION BY DTC OR ANY DTC DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE CERTIFICATES, (IV) THE PAYMENT BY DTC OR ANY DTC DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OR REDEMPTION PREMIUM, IF ANY, OR INTEREST DUE WITH RESPECT TO THE CERTIFICATES, (V) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE REGISTERED HOLDER OF CERTIFICATES, OR (VI) ANY OTHER MATTER.

THE STATE TREASURER, SO LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE CERTIFICATES, WILL SEND ANY NOTICE OF REDEMPTION OR OTHER NOTICES ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY DTC DIRECT OR INDIRECT PARTICIPANT, OR OF ANY DTC DIRECT OR INDIRECT PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OR SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE REDEMPTION OF THE CERTIFICATES CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE.

OFFICIAL ST A TEMENT OTC AND THE BOOK-ENTRY-ONLY SYSTEM

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