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State Budget Defidt -ERAF In connection with its approval of the budget for the 1992 -93, 1993 -94 and 1994 -95 fiscal years, the State Legislature enacte2 legislation which, among other things, reallocated funds &Lm redevelopment agencies to schc.ol districts -by shifting a portion of each agency's tax increment, net of amounts due to other taxhig agencies, to school districts for such fiscal years for deposit in the Education Revenue Augmentation Fund ("ERAF). The amount required to be paid by a redevelopment agency under such legislation was apportioned among all of its redevelopment project areas on a collective basis, and was not allocated separately to individual project areas. Faced with a projected $23.6 billion budget gap for fiscal year 2002- 03, the State Legislature adopted and sent to the Governor of the State as urgency legislation, AB 1768 requiring redevelopment agencies to pay into ERAF in fiscal year 2002 -03 an aggregate amount of $75 million. The Agency paid into ERAF in fiscal year 2002 -03 the amount of $197,371 as its share of such $75 million See "STATUTORY MWATIONS ON TAX REVENUES." The State of California is currently experiencing severe financial and budgetary stress, the result of which is an approximate $38.2 billion State General Fund deficit for fiscal year 2003 -04 at the time the State budget was being prepared. To help dose the deficit the Governor proposed that the school district share of property tax revenue resulting from growth in assessed value in redevelopment project areas, which is currently retained by redevelopment agencies, be shifted to schools beginning at the level of $250 million of tax increment in fiscal year 2003 -04, and increasing to the full amount of diverted property taxes over time (the School District Shift "). Within the Project Area approximately 55% of the Agency's tax increment is derived from portions of the roll attributable to school district taxes levied within the Project Area. On August 2, 2003, Governor Davis signed the 2003 -04 Budget into law. Both the State Senate and the State Assembly passed separate bills requiring redevelopment agencies to make ERAF payments, with the Senate bill requiring redevelopment agencies to shift $250 million of redevelopment agency funds to the ERAF in 2003 -04, and the Assembly bill requiring an ERAF shift in 2003 -04 equal to $135 million of tax increment. Both bills are silent with respect to ERAF shifts in future years. The State Senate and the State Assembly have reached agreement on the amount of the ERAF payment at the $135 million level and the governor is expected to sign ERAF legislation with this amount for 2003 -04 into law. A budget deficit is expected to arise in one or more future years and the potential impact of future legislation could be material to the Agency and its ability to conduct its redevelopment activities. The Agency cannot predict whether the State Legislature will enact legislation requiring shifts of tax increment revenues to the State and /or to schools, whether through an arrangement similar to ERAF or by any other arrangement in future years and if so, whether the shift will apply only to tax increment revenues which are not required to be deposited in a redevelopment agency's low and moderate income housing fund or will apply also to amounts required to be deposited in a redevelopment agency's low and moderate income housing fund, or whether any future shifts in revenue would be limited or affected (such as by an offset of amounts required to be shifted) by pre - existing agreements between redevelopment agencies and school districts, community college districts and county superintendents of schools. Accordingly, the Agency is not able to predict the effect, if arty, such a shift, if enacted, would have on future Tax Revenues. Seismic Considerations The City and the Project Area, like many other California communities, may be subject to unpredictable seismic activity. There is no evidence that a ground surface rupture will occur 15-