NIVEL 1: Trabajo Fin de Máster .1 Datos Básicos del Nivel 1

The following section describes special considerations and risk factors that may affect the payment of and security for the Series 2020 Bonds. The following discussion is not meant to be an exhaustive list of all risks associated with the purchase of the Series 2020 Bonds and does not necessarily reflect the relative importance of the risk factors. Potential investors are advised to consider the following special factors, along with all other information in this Official Statement, in evaluating the Series 2020 Bonds. There can be no assurance that other risk factors will not become material in the future.

Constitutional Limitations on Rates and Charges

Proposition 218. On November 5, 1996, California voters approved Proposition 218, the so-called “Right to Vote on Taxes Act.” Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which

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affect the ability of local governments to levy and collect both existing and future taxes, assessments, and property-related fees and charges. Proposition 218, which generally became effective on November 6, 1996, changed, among other things, the procedure for the imposition of any new or increased property-related “fee” or “charge,” which is defined as “any levy other than an ad valorem tax, a special tax or an assessment, imposed by a local government upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property related service” (and referred to in this section as a “property-related fee or charge”).

On November 2, 2010, California voters approved Proposition 26, the so-called “Supermajority Vote to Pass New Taxes and Fees Act.” Section 1 of Proposition 26 declares that Proposition 26 is intended to limit the ability of the State Legislature and local government to circumvent existing restrictions on increasing taxes by defining the new or expanded taxes as “fees.” Proposition 26 amended Articles XIIIA and XIIIC of the State Constitution. The amendments to Article XIIIA limit the ability of the State Legislature to impose higher taxes (as defined in Proposition 26) without a two-thirds vote of the Legislature. Proposition 26's amendments to Article XIIIC broadly define “tax,” but specifically exclude, among other things:

• A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.

• A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.

• A charge imposed as a condition of property development.

• Assessments and property-related fees imposed in accordance with the provisions of Article XIII D.

Property-Related Fees and Charges. Under Article XIIID, before a local agency may impose or increase any property-related fee or charge, the entity must give written notice to the record owner of each parcel of land affected by that fee or charge. The local agency must then hold a hearing upon the proposed imposition or increase at least 45 days after the written notice is mailed, and, if a majority of the property owners of the identified parcels present written protests against the proposal, the local agency may not impose or increase the property-related fee or charge.

Further, under Article XIIID, revenues derived from a property-related fee or charge may not exceed the funds required to provide the “property-related service” and the entity may not use such fee or charge for any purpose other than that for which it imposed the fee or charge. The amount of a property-related fee or charge may not exceed the proportional cost of the service attributable to the parcel, and no property-related fee or charge may be imposed for a service unless that service is actually used by, or is immediately available to, the owner of the property in question.

Initiative Power. In addition, Article XIIIC states that “the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge. The power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments and neither the Legislature nor any local government charter shall impose a signature requirement higher than that applicable to statewide statutory initiatives.”

Judicial Interpretation of Articles XIIIC and XIIID. After Proposition 218 was enacted in 1996, appellate court cases and an Attorney General's opinion initially indicated that fees and charges levied for water and wastewater services would not be considered property-related fees and charges, and thus not subject to the requirements of Article XIIID regarding notice, hearing and protests in connection with any increase in the fees and charges being imposed. However, three recent cases have held that certain types of water and wastewater charges could be subject to the requirements of Article XIIID under certain circumstances.

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In Richmond v. Shasta Community Services District (2004) 32 Cal.4th 409, the California Supreme Court addressed the applicability of the notice, hearing and protest provisions of Article XIIID to certain charges related to water service. In Richmond, the Court held that capacity charges are not subject to Proposition 218. The Court also indicated in dictum that a fee for ongoing water service through an existing connection could, under certain circumstances, constitute a property-related fee and charge, with the result that a local government imposing such a fee and charge must comply with the notice, hearing and protest requirements of Article XIIID. In Howard Jarvis Taxpayers Association v. City of Fresno (2005) 127 Cal.App.4th 914, the California Court of Appeal, Fifth District, concluded that water, sewer and trash fees are property-related fees subject to Proposition 218, and a municipality must comply with Article XIIID before imposing or increasing such fees. The California Supreme Court denied the City of Fresno's petition for review of the Court of Appeal's decision on June 15, 2005.

In July 2006, the California Supreme Court, in Bighorn-Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205, addressed the validity of a local voter initiative measure that would have (a) reduced a water agency's rates for water consumption (and other water charges), and (b) required the water agency to obtain voter approval before increasing any existing water rate, fee, or charge, or imposing any new water rate, fee, or charge. The court adopted the position indicated by its statement in Richmond that a public water agency's charges for ongoing water delivery are “fees and charges” within the meaning of Article XIIID, and went on to hold that charges for ongoing water delivery are also “fees” within the meaning of Article XIIIC's mandate that the initiative power of the electorate cannot be prohibited or limited in matters of reducing or repealing any local tax, assessment, fee or charge. Therefore, the court held, Article XIIIC authorizes local voters to adopt an initiative measure that would reduce or repeal a public agency's water rates and other water delivery charges. (However, the court ultimately ruled in favor of the water agency and held that the entire initiative measure was invalid on the grounds that the second part of the initiative measure, which would have subjected future water rate increases to prior voter approval, was not supported by Article XIIIC and was therefore invalid.)

The court in Bighorn specifically noted that it was not holding that the initiative power is free of all limitations; the court stated that it was not determining whether the electorate's initiative power is subject to the statutory provision requiring that water service charges be set at a level that will pay for operating expenses, provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due.

On August 3, 2020, the California Supreme Court issued an opinion in Wilde v. City of Dunsmuir (Cal S. Ct. S252915) holding that local legislation measures setting water and other utility rates are not subject to challenge by referendum. Referendum allows voters to approve or reject laws before the laws take effect (and is distinct from the protest procedure under Proposition 218 and the legal process for initiative measures).

Conclusion. It is not possible to predict how courts will further interpret Article XIIIC and Article XIIID in future judicial decisions and what, if any, further implementing legislation will be enacted.

Under the Bighorn case, local voters could adopt an initiative measure that reduces or repeals the City’s rates and charges, though it is not clear whether (and California courts have not decided whether) any such reduction or repeal by initiative would be enforceable in a situation in which such rates and charges are pledged to the repayment of bonds or other indebtedness, as is the case with respect to the Bonds.

The City’s current sewer rates were approved by the Board on July 21, 2016 and ratified by the City Council on August 15, 2016. Before approving the rates, the City sent notices to property owners at least 45 days prior to a protest hearing. The City will continue to comply with the provisions of Proposition 218 in connection with future rate increases.

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There can be no assurance that the courts will not further interpret, or the voters will not amend, Article XIIIC and Article XIIID to limit the ability of local agencies to impose, levy, charge and collect increased fees and charges for wastewater, or to call into question previously adopted wastewater rate increases.

Additionally, in the event the City fails to comply with its covenants under the Indenture, including its covenants to generate adequate System Net Revenues or to pay debt service due on the Bonds, there can be no assurance that the City will be able to increase rates and charges if a majority of the property owners of the identified parcels submit written protests against the proposal.

Revenues; Rate Covenant

System Net Revenues are dependent upon the demand for sewer services, which can be affected by population factors, concentration of demand, more stringent regulation, or problems with the City’s collection and treatment facilities. There can be no assurance that demand will be consistent with the levels contemplated in this Official Statement. A decrease in the demand for services could require an increase in rates or charges in order to comply with the rate covenant. The City’s ability to meet its rate covenant is dependent upon its capacity to increase rates without driving down demand to a level insufficient to meet debt service on the Series 2020 Bonds and other Parity Debt.

Enterprise Expenses

There can be no assurance that expenses of the City will be consistent with the levels contemplated in this Official Statement. Changes in technology, changes in treatment standards and increases in the cost of operation or other expenses could require increases in rates or charges in order to comply with the rate covenant in the Indenture. Such rate increases could drive down demand for related services or otherwise increase the possibility of nonpayment of the Series 2020 Bonds.

Existing and Future Parity Debt

The payment of principal of and interest on the Series 2020 Bonds, along with debt service on other Parity Debt, are payable solely from and secured solely by a pledge of System Net Revenues under the Indenture, together with amounts on deposit in certain funds and accounts held by the Trustee. As described in “SECURITY FOR THE SERIES 2020 BONDS - Issuance of Bonds and Parity Debt” above, the Indenture permits the City to issue additional Parity Debt that would be payable from System Net Revenues on a parity with the payment of debt service on the Series 2020 Bonds and other parity obligations. No assurance can be made that System Net Revenues, estimated or otherwise, will be realized in an amount sufficient to pay the principal of and interest on the Series 2020 Bonds and other Parity Debt. The realization of future System Net Revenues is subject to, among other things, the capabilities of management of the City, the ability of the City to provide sewer collection, treatment, and disposal services to its customers, and the ability of the City to establish and maintain charges sufficient to provide the required debt service coverage and to pay for operating and maintenance expenses.

Among other matters, general and local economic conditions and changes in law and government regulations (including initiatives and moratoriums on growth) could adversely affect the amount of System Revenues realized by the City and ultimately the ability of the City to pay principal of and interest on the Series 2020 Bonds and Parity Debt.

Change in Law

In addition to the other limitations described herein, the State electorate or the California State Legislature could adopt a constitutional or legislative property tax decrease or an initiative with the effect of reducing revenues payable to or collected by the City. There is no assurance that the State electorate or the California State Legislature will not at some future time approve additional limitations that could have the effect of reducing the System Net Revenues and adversely affecting the security of the Series 2020 Bonds.

42 Loss of Tax Exemption

As discussed in this Official Statement under the caption “TAX MATTERS – The Series 2020A Bonds,” interest on the Series 2020A Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date the Series 2020A Bonds were issued, as a result of future acts or omissions of the City in violation of their respective covenants in the Indenture. Should such an event of taxability occur, the Series 2020A Bonds are not subject to a special redemption and will remain outstanding until maturity or until prepaid under one of the other redemption provisions contained in the Indenture.

IRS Audit of Tax-Exempt Issues

The IRS has initiated an expanded program for the auditing of tax-exempt issues, including both random and targeted audits. It is possible that the Series 2020A Bonds will be selected for audit by the IRS. It is also possible that the market value of the Series 2020A Bonds might be affected as a result of such an audit of the Series 2020A Bonds (or by an audit of similar obligations).

Regulatory Compliance

The City’s water and wastewater system operations are subject to numerous environmental regulations enforced by multiple governmental entities. Programs are in place for compliance with drinking water regulations, water discharge regulations, underground and aboveground fuel storage tank regulations, hazardous materials management plans, hazardous waste regulations, air quality permitting requirements, wastewater discharge limitations, and employee safety issues relating to hazardous materials and other conditions. The City expects environmental regulation to increase, resulting in higher capital and operating costs in the future, which may have a material effect on the finances of the System.

COVID-19

COVID-19, a respiratory disease caused by a novel strain of coronavirus, has spread around the world, including in the State. The World Health Organization has declared it a pandemic and, since the Centers for Disease Control and Prevention confirmed the spread of the disease to the United States in February 2020, federal and state governments have declared a state of emergency. The rapid spread of COVID-19 has altered the behavior of people and businesses in a manner that is resulting in significant negative effects on global, federal, state, and local economies and presents unique challenges. Nearly all industries and businesses, have encountered and expect to further encounter significant disruption in their operations and the resulting deterioration of their financial condition. COVID-19 developments and related governmental and regulatory responses are rapidly changing.

The COVID-19 pandemic has resulted in substantial volatility in global financial markets, U.S. domestic debt and equity capital markets, travel and commerce generally. State and national economies continue to be materially adversely impacted by the COVID-19 pandemic, which may materially adversely impact the operations and financial condition of the City. Financial results, generally, and liquidity, in particular, may be materially diminished.

While the City’s overall finances have been materially and adversely impacted by the COVID-19 pandemic, to date the finances and operations of the System have not been materially adversely impacted. Because of the evolving nature of the COVID-19 pandemic and the uncertainty of its duration, the ultimate impact of the pandemic on the City and the System’s financial condition and operations cannot be predicted at this time.

43 Climate Change

The issue of climate change has become an important factor in water resources planning in the State, and it is being considered during planning for water supplies and systems. Many studies cite evidence that increasing concentrations of greenhouse gases have caused and will continue to cause a rise in temperatures around the world, which will result in a wide range of changes in climate patterns. Moreover, many of these studies cite evidence that a warming trend occurred during the latter part of the 20th century and will likely continue through the 21st century. These changes could have a direct effect on water resources in the State of California, and numerous studies on climate and water in the State of California have been conducted to determine the potential impacts. Based on these studies, global warming could result in the following types of water resources impacts in the State of California, including impacts on water supplies and systems:

• Sea level rise and an increase in saltwater intrusion into groundwater,

• _{Changes in the timing, intensity, and variability of precipitation, and an increased amount of} precipitation falling as rain instead of as snow,

• Reductions in the average annual snowpack due to a rise in the snowline and a shallower snowpack in the low- and medium-elevation zones, and a shift in snowmelt runoff to earlier in the year,

• _{Long-term changes in watershed vegetation and increased incidence of wildfires that could} affect water quality,

• _{Increased water temperatures with accompanying adverse effects on some fisheries,} • Increases in evaporation and concomitant increased irrigation need, and

• Changes in urban and agricultural water demand.

Other than the general trends listed above, there is no specific information on exactly how global warming will quantitatively affect water supplies with respect to the City or customer water conservation. However, there can be no assurance that climate change will not affect the City’s water sources or customer demand.

Cybersecurity

The City, like many other large public and private entities, relies on a large and complex technology environment to conduct its operations, and faces multiple cybersecurity threats including, but not limited to, hacking, viruses, malware and other attacks on its computing and other digital networks and systems (collectively, “Systems Technology”). As a recipient and provider of personal, private, or sensitive information, the City can be subject to cybersecurity incidents that can result in adverse consequences to the City’s Systems Technology.

Cybersecurity incidents could result from unintentional events, or from deliberate attacks by