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8C Page 4 Competitive Sale As were the 2005 and 2006 bonds, the 2007 bonds will be offered for sale in an auction format, referred to as a competitive sale. Competitive sales are generally thought to result in the lower interest costs for high credit quality bond issues with straightforvvard redemption, amortization, and interest rate features. The proposed PFA bonds will meet these tests. Such bonds are easily marketed and attract widespread investor interest. Two weeks prior to the sale the City will advertise the bond issue and distribute the preliminary official statement and official notice of sale to all of the major bond underwriting firms in the country. A number of those firms will bid on the bonds, either alone or in syndicates on the sale date. The winner will then reoffer the bonds to the public and institutional investors via its distribution system. Bond Documents A description of the bond documents can be found in Attachment 3. The indenture of trust, the installment purchase contract, the official notice of sale, and the continuing disclosure certificate are available in the City Clerk's Department for your review. The preliminary official statement is included in this package as Attachment 4 for your review. Next Steps Staff expects to sell bonds on May 15, 2007. The first debt service payment will be in August, and no FY 2006/07 budget amendment will be necessary for the debt service. A budget amendment, however, will be presented to Council at a later date this fiscal year to appropriate the bond proceeds. Fiscal Impact This bond issue will raise approximately $15.5 million for recycled water project expenditures and encumbrances to be made over the next 24 months. No additional bond sales are expected to be needed for Phase 1 of the project. Debt service on the 2005 and 2006 bonds is approximately $3.7 million annually. Debt service on the 2007 bonds is expected to be approximately $.950 million annually. The City will covenant in the installment purchase contract to maintain net operating revenues (total revenues less operating expenses excluding depreciation, "Net Revenues") in an amount that is at least 120% of debt service. Rate increases as detailed in the Financing Plan Update (Attachment 5) will be necessary to satisfy this rate covenant, meet increased operating costs (due in substantial part to projected increases in the cost of water purchases), provide $2 million for the repair and replacement of existing infrastructure, and otherwise maintain the enterprise on a sound financial footing. The issuance of these bonds will require a 10% increase in water rates in FY 2007/08. Alternative The Council may reject staff's recommendation to sell bonds to fund continuing construction expenditures associated with the recycled water project. In such event, 4