OFFICIAL STATEMENT NEW ISSUE-BOOK ENTRY ONLY RATING:

STANDARD & POOR'S: SP-1+ (See "RATING" herein.)

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other things, the accuracy of certain representation and compliance with certain covenants, interest on the Notes is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Notes is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings in calculating federal corporate alternative minimum taxable income. Bond Counsel ex­presses no opinion regarding other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Notes. See "TAX EXEMPTION' herein.

$55,000,000 COUNTY OF SANTA BARBARA, CALIFORNIA

2004-2005 TAX AND REVENUE ANTICIPATION NOTES SERIES A

Dated: July 1, 2004 Due: July 26, 2005 The County of Santa Barbara, California (the "County") 2004-2005 Tax and Revenue Anticipation Notes, Series A (the "Notes") will be issued as fully registered Notes and, when issued, will be registered in the name of and held by Cede & Co., as nominee for The Depository Trust Company ("DTC"). Ownership interest in the Notes may be purchased in book-entry form only in denominations of $5,000 or any integral multiple thereof. So long as DTC or its nominee, Cede & Co., is the registered owner of the Notes, payments of principal of and interest on the Notes will be made directly to DTC or its nominee, Cede & Co., which will remit such payments to the DTC Participants, which will in turn remit such payments to the beneficial owners of the Notes. See "THE NOTES-Book-Entry-Only System" herein. The Notes are not subject to redemption prior to maturity.

The Notes will be issued in an aggregate principal amount of $55,000,000 on July 1, 2004 and will mature on July 26, 2005. The rate of interest and offering price or yield for the Notes are shown below. Interest on the Notes will be payable on July 1, 2005 and at maturity.

Principal Amount $55,000,000

Interest Rate 3.00%

Yield 1.56%

Under certain circumstances, as described further herein, the County may issue in fiscal year 2004-2005 an additional series of 2004-2005 Tax and Revenue Anticipation Notes (the "Notes of Series B") in an amount not to exceed $15,000,000 (collectively, the Notes and the Notes of Series B are the "2004 Notes" or the "2004-2005 Notes"). See "THE NOTES-General Provisions" herein. The purpose of the note program is to finance, in part, the County's general fund cash flow requirements during the 2004-2005 fiscal year. In accordance with California law, the Notes are general obligations of the County, solely payable as to both principal and interest from taxes, income, revenue, cash receipts and other moneys of the County attributable solely to the fiscal year 2004-2005 and legally available for payment thereof. The principal of and interest on the Notes constitutes a first lien on the amounts pledged, and to the extent not paid from such pledged monies, are payable from any other lawfully available monies of the County. This cover page is for reference only. Investors must read the entire Official Statement in order to obtain information essential to the making of an informed investment decision. The Notes will be offered when, as and if issued and received by the Underwriter, subject to the approval of validity by Orrick, Herrington & Sutcliffe LLP, Bond Counsel. Certain other legal matters will be passed upon for the County by County Counsel and for the Underwriter by Fulbright & Jaworski L.L.P., Los Angeles, California. The Notes, in definitive form, will be available for delivery through the facilities of DTC on or about July 1, 2004 in New

York, New York. Banc of America Securities LLC

Dated: June 24, 2004

No dealer, broker, salesperson or other person has been authorized by the County or the Underwriter to give any information or to make any representations 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 County 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 Notes by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

This Official Statement is not to be construed as a contract with the purchasers of the Notes. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts.

The information set forth herein has been obtained from official sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriter. 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 County since the date hereof. This Official Statement is submitted in connection with the sale of the Notes referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the County.

The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

The Notes have not been registered under the Securities Act of 1933, in reliance upon an exemption contained in such Act. The Notes have not been registered under the securities laws of any state.

IN CONNECTION WITH THIS INITIAL OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES 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 NOTES TO CERTAIN DEALERS AND BANKS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICE STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

z

r- d".3

Lf') !--V) er� t. •. n C)

U.l-

Ci :I:

..a: �: �: ... -·�1.....,.J

t �. .. ��u

0,l

�� ') >-. . . I

. \• .. or: __ , :::::i(:: -_;,

-) �1'� ....:r o> CJ ri

COUNTY OF SANTA BARBARA

Joseph Centeno, Chair Susan Rose, Vice Chair Naomi Schwartz Gail Marshall Joni L. Gray

Michael F. Brown Bernice James Harry Hagen Stacey Matson Robert W. Geis Theo Fallati Stephen Shane Stark Jennifer Christensen

BOARD OF SUPERVISORS

Fifth District Second District

First District Third District

Fourth District

COUNTY OFFICIALS County Administrator

Treasurer-Tax Collector Assistant Treasurer-Tax Collector

UNDERWRITER Banc of America Securities LLC

Los Angeles, California

BOND COUNSEL

Treasury Finance Chief Auditor-Controller

Chief Deputy Controller County Counsel

Deputy County Counsel

./

Orrick, Herrington & Sutcliffe LLP / San Francisco, California

This page intentionally left blank

TABLE OF CONTENTS

Section

INTRODUCTION ....................................................................................................................................... 1 Continuing Disclosure .............................................................................................................................. 1

COUNTY OF SANTA BARBARA 2004-2005 SHORT-TERM FINANCING PROGRAM .......•....... 2

THE NOTES ................................................................................................................................................ 2 General Provisions ......................................................... . ......................................................................... 2 Book-Entry-Only Systeni ........................................................................................................................... 2 Authority for Issuance . . . ... . ... .. .. . .. . .. ...... . . . . . .. .......... . .. . . .. . ... ... . ........ . .. ... ... .. . . . . . .... .... . . . ... .. . .... .. . . .. . . . . . .... ... . .... . 2 Purpose of Issue .... . ... . . . .... . . . . . ... ..... ..... .. . .. . . . . . ... . . . . ... .. ... ........ ..... .. ...... ..... .... ..... . . .. .. . .. . .... .. . ... ......... ... .. .... .. .. . 2 Security for the 2004-2005 Notes . .... . ............. .. . .. ........ .. . . ... .... .. .. . .. . . ... .. . ........ .. .. ... . . . .. .... .. .... . .... . . .. .... . . . ...... 3 Investment of Note Proceeds and Repayment Account .......... . . . . . . . . .... .. . . ...... . ..... .. . ...... .. .. . .. . . . . ... .. . ... . ... ... . .. 4

AVAILABLE SOURCES OF PAYMENT ............................................................................................... 4 Intrafitnd Borrowing and Cash Flow ........................................................................................................ 5

TAX MATTERS ......................................................................................................................................... 8

LEGAL MATTERS .................................................................................................................................... 9

RISK FACTORS ....................................................................................................................................... 10 State Funding of Counties . . ....... . . ... . .. ....... .. .. .......... . . .. .. . .. . ...... .... ... . . . . . . ........ . . . ...... . . . .... .... .. ..... . . . . ... ...... . .. . JO

LEGALITY FOR INVESTMENT IN CALIFORNIA .......................................................................... 10

RATING ..................................................................................................................................................... 10

LITIGATION ............................................................................................................................................ 10

UNDERWRITING .................................................................................................................................... 10

ADDITIONAL INFORMATION ............................................................................................................ 11

OFFICIAL STATEMENT CERTIFICATION ...................................................................................... 11

Appendix

COUNTY FINANCIAL AND DEMOGRAPHIC INFORMATION ................................................. A-1

FORM OF LEGAL OPINION .............................................................................................................. B-1

COUNTY AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2002-2003 ................... C-1

STATEMENT OF INVESTMENT POLICY ....................................................................................... D-1

FORM OF CONTINUING DISCLOSURE CERTIFICATE ............................................................. E-1

BOOK-ENTRY ONLY SYSTEM ......................................................................................................... F-1

This page intentionally left blank

OFFICIAL STATEMENT $55,000,000

COUNTY OF SANTA BARBARA, CALIFORNIA 2004-2005 TAX AND REVENUE ANTICIPATION NOTES

SERIES A

INTRODUCTION

This Official Statement, including the cover page and Appendices, provides certain information concerning the sale and delivery of the 2004-2005 Tax and Revenue Anticipation Notes, Series A (the "Notes") of the County of Santa Barbara, California (the "County"). The Notes are general obligations of the County, but are payable only out of taxes, income, revenue, cash receipts and other moneys of the County received for the general fund of the County during or attributable to fiscal year 2004-2005 (July 1, 2004 through June 30, 2005) and which are generally available for the payment of current expenses and other obligations of the County. The County's 2004-2005 short-term financing program provides for the issuance of $55,000,000 of the Notes on July 1, 2004, and for the issuance of an additional series of 2004-2005 Tax and Revenue Anticipation Notes (the "Notes of Series B") on or before December 15, 2004 in an amount not to exceed $15,000,000 (collectively, the Notes and the Notes of Series B are referred to herein as the "2004 Notes" or "2004-2005 Notes").

The Notes are being issued to finance, in part, the County's general fund cash flow requirements during the 2004-2005 fiscal year. The proceeds received from the sale of the Notes will allow the County to cover periods of deficits resulting from an uneven flow of revenues. County general fund expenditures tend to occur in relatively level amounts throughout the year, while receipts follow an uneven pattern. Cash receipts from secured property tax installment payments primarily occur in December and April, while payments from other government agencies occur at irregular intervals. As a result, the general fund's cash balance shows a deficit during parts of the fiscal year. The Notes are intended to finance such cashflow deficits.

Brief descriptions of the Notes, the security and sources of payment for the Notes, the County and its financial status follow. Such descriptions do not purport to be comprehensive or definitive. All references herein to various documents, including the Resolution (as defined below), are qualified in their entirety by reference to the forms thereof, all of which are available for inspection at the offices of the County.

Continuing Disclosure

The County will provide notice, during the time the Notes are outstanding, of the occurrence of certain enumerated events, if material. The specific nature of the information to be contained in the notices of material events and certain other terms of the continuing disclosure obligation are included herein under the caption "APPENDIX E - FORM OF CONTINUING DISCLOSURE CERTIFICATE." These covenants have been made in order to assist the Underwriter in complying with S.E.C. Rule 15c2-l 2(b )( 5). The County has never failed to comply in all material respects with any previous undertaking with regard to said Rule to provide annual reports or notices of material events.

1

COUNTY OF SANTA BARBARA 2004-2005 SHORT-TERM FINANCING PROGRAM

, A) The Notes will be secured by a pledge of certain taxes, income, revenue, cash receipts and other /; Y moneys of the County received for the general :fiwd.o.f the County during or attributable to the 2004-2005 � fiscal year and which are generallyavailable for the payment of current expenses and other obligations of

f

the County. See "THE NOTES-Security for the 2004-2005 Notes" herein. The Resolution of the Board of Supervisors of the County of Santa Barbara (the "Board") captioned "In the M atter of Providing for the Borrowing of Funds for Fiscal Year 2004-2005 and the Issuance and Sale of County of Santa Barbara, California, 2004-2005 Tax and Revenue Anticipation Notes therefor," which was adopted on M ay 25, 2004, (the "Resolution"), provides for the borrowing of funds for fiscal year 2004-2005 through the issuance and sale of the 2004 Notes.

THE NOTES

General Provisions

The Notes will be executed and delivered in fully registered form (without coupons) in denominations of $5, 000 or integral multiples thereof. Principal of and interest on the Notes are payable in lawful money of the United States of America. Principal and interest are payable by the County to the registered owner of the Notes, Cede & Co., as nominee of the Depository Trust Company ("DTC") in New York, New York (see "Book-Entry-Only System" below). The Notes will mature on July 26, 2005. Interest on the Notes will be payable on July 1, 2005 and at maturity, computed on the basis of a 360-day year comprising twelve 30-day months.

The Resolution authorizes the County to issue in fiscal year 2004-2005 the Notes of Series B in an amount not to exceed $15,000,000. The Notes of Series B, if issued, will be issued on or before December 15, 2004, and shall mature (without option of prior redemption) on a date within thirteen months after the date of original issuance of the Notes of Series B and will be secured ratably with the Notes. See "THE NOTES-Security for the 2004-2005 Notes" herein.

Book-Entry-Only System

The Certificates will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the Certificates. Owners will not receive physical certificates representing their ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. See "THE CERTIFICATES-General Provisions" and "APPENDIX F-BOOK-ENTRY ONLY SYSTEM." In the event that the book-entry only system described in APPENDIX F is no longer used with respect to the Certificates, the Certificates will be registered in accordance with the Trust Agreement described herein. See "APPENDIX F - BOOK - ENTRY ONLY SYSTEM - Discontinuation of Book-Entry Only System; Payment to Beneficial Owners."

Authority for Issuance

The Notes are issued under the authority of Article 7.6, Chapter 4, Part 1, Division 2, Title 5 (commencing with Section 53850) of the California Government Code (the "Act") and pursuant to the Resolution.

Purpose of Issue

�

Issuance of the Notes will provide moneys for fiscal year 2004-2005 County general fund ' expenditures, including current expenses, capital expenditures and to discharge other obligations or tdebtedness of the County.

.}

,;J­G'<--'

2

Security for the 2004-2005 Notes

The principal amount of the 2004-2005 Notes, together with the interest thereon, shall be payable from taxes, income, revenue, cash receipts and other moneys that are received by the County for the general fund of the County during or attributable to fiscal year 2004-2005 and that are generally available for the payment of current expenses and other obligations of the County (the "Unrestricted Revenues").

As security for the payment of the principal of and interest on the 2004-2005 Notes, the County pledges to deposit in trust in a restricted cash account within the general fund of the County designated as the "2004-2005 Tax and Revenue Anticipation Note Repayment Account" (the "Repayment Account"): (i) from the first Unrestricted Revenues received by the County during the period commencing on December 20, 2004, and ending on January 31, 2005 (a "Pledge Period") an amount equal to fifty percent (50%) of the principal amount of the 2004-2005 Notes issued and (ii) from the first Unrestricted Revenues received by the County during the period commencing on April 21, 2005, and ending on May 31, 2005, (also a "Pledge Period") an amount that, together with the amount on deposit in the Repayment Account (net of earnings on moneys thereon), will be sufficient to pay the principal of and interest on the 2004-2005 Notes at maturity. The amounts pledged by the County for deposit into the Repayment Account from the Unrestricted Revenues received during each indicated Pledge Period are herein called the "Pledged Revenues."

In the event that there have been insufficient Unrestricted Revenues received by the County by the third business day prior to the end of any such Pledge Period to permit the deposit into the Repayment Account of the full amount of the Pledged Revenues required to be deposited with respect to such Pledge Period, then the amount of any deficiency in the Repayment Account shall be satisfied and made up from any other moneys of the County lawfully available for the payment of the principal of the 2004-2005 Notes and the interest thereon (all as provided in the Act) (the "Other Pledged Moneys") on such date or thereafter on a daily basis, when and as such Pledged Revenues and Other Pledged Moneys are received by the County.

The Pledged Revenues with respect to the Pledge Period in which received shall be deposited by the Treasurer-Tax Collector of the County in the Repayment Account commencing the third business day of each respective Pledge Period, and thereafter at intervals of no more than every five business days, and applied as directed in the Resolution; and the Other Pledged Moneys, if any, shall be deposited by the Treasurer in the Repayment Account on the third business day prior to the end of such Pledge Period, and on each business day thereafter, until the full amount of the moneys required for repayment has been so deposited in the Repayment Account; provided that, if on the date that is six months from the date of issuance of the Notes, amounts deposited in the County general fund attributed to the sale of the Notes and, if issued, the Notes of Series B have not been withdrawn previously as required by the requirements of the Resolution, the amounts to be deposited in the Repayment Account during the Pledge Period in which received shall be deposited as soon as received. The principal of and interest on the 2004-2005 Notes shall constitute a first lien and charge on, and shall be payable from, moneys in the Repayment Account.

The Treasurer shall use the moneys in the Repayment Account on the interest payment date and maturity date of the 2004-2005 Notes to pay the principal of and interest on the 2004-2005 Notes. If on the maturity date of the Notes there are insufficient moneys in the Repayment Account to pay the principal of and interest on all the 2004-2005 Notes, the moneys in the Repayment Account shall be allocated on a pro rata basis to the principal of and interest on the Notes and the Notes of Series B, respectively. Any moneys remaining in the Repayment Account after such payment, or after provision for such payment has been made, shall be transferred to the general fund of the County.

The United States Court of Appeals for the Ninth Circuit has not decided whether a County that has filed for bankruptcy would be required to set aside revenues pledged under the note resolution following bankruptcy. Because the Treasurer is in possession of the taxes and other revenues that will be

3

set aside to pay the Notes and may invest these funds in the pooled investment fund, should the County go into bankruptcy, a court might hold that the owners of the Notes do not have a valid lien on the Pledged Revenues, the Other Pledged Money or amounts on deposit in the Repayment Account. In that case, unless the Note owners could "trace" the funds, the Note owners would be merely unsecured creditors of the County. There can be no assurance that the holders could successfully so "trace" the pledged taxes and other revenues. Investment of Note Proceeds and Repayment Account

Proceeds of the Notes deposited in the County general fund and moneys in the Repayment Account may be invested as permitted by Section 53601 of the California Government Code and according to the Treasurer and Tax-Collector's Investment Policy, except that no moneys shall be invested in reverse repurchase agreements, and no such investments shall have a maturity date later than the maturity date of the 2004 Notes to be paid from such investments. Alternatively, proceeds of the Notes may be deposited in an account entitled the "Note Proceeds Account" within the County general fund. Moneys in the Note Proceeds Account and the Repayment Account may also be invested in the following additional permitted investments: investment agreements with or the obligations of which are guaranteed by (a) a domestic bank, financial institution or insurance company with the financial capacity to honor its senior obligations of which is rated at least "AA" by Standard & Poor's; or (b) a foreign bank, the long­term debt of which is rated at least "AA" by Standard & Poor's (a "Qualified Provider"); provided, that the investment agreement shall provide that if during its term the provider's (or, if guaranteed, the guarantor's) rating by Standard & Poor's falls below "AA-", the provider must within 10 days assign the investment agreement to a Qualified Provider reasonably acceptable to the County or collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider's books) to the County or a third party acting solely as agent therefor, United States Treasury Obligations that are free and clear of any third-party liens or claims at sufficient collateral levels to maintain the highest short-term rating on the Notes.

The proceeds of any such investments from moneys in the Repayment Account shall be retained in the Repayment Account until payment of principal and interest ( or provision therefor) has been made in full, at which time any excess amount shall be transferred to the general fund of the County. See "AVAILABLE SOURCES OF PAYMENT", "APPENDIX A-COUNTY FINANCIAL AND DEMOGRAPHIC INFORMATION-County Treasurer's Investment Pool" and "APPENDIX D­STATEMENT OF INVESTMENT POLICY."

AVAILABLE SOURCES OF PAYMENT

The Notes, in accordance with California law, are general obligations of the County, but are payable only out of the taxes, income, revenue, cash receipts and other moneys of the County received for the general fun<;!2f the County during or attributable to the fiscal year 2004-2005 and legally available for payment thereof. The County may, under existing law, issue securities, such as the Notes, only if the principal thereof and interest thereon will not exceed 85 percent of the estimated uncollected moneys available for the payment of such securities.

A 1978 change in the Constitution of the State of California substantially limited the County's ability to levy ad valorem taxes. However, California counties now are permitted by State law under SB 2557 to impose certain fees to raise general revenue. The estimated amount needed to repay the Notes and the interest thereon is approximately $56.79 million. The County estimates that the moneys available for payment of the Notes will be in excess of $314.46 million as indicated in the following table.

4

ESTIMATED REVENUE AVAILABLE FOR PAYMENT OF 2004-2005

TAX AND REVENUE ANTICIPATION NOTES Estimated-Unrestricted Available Fund Balance at June 30, 2004 Taxes Licenses, permits and franchises F ines, forfeitures and penalties Use of money and property Intergovernmental Revenues Charges for current services Miscellaneous Other F inancing Sources

Total

Source: County Auditor-Controller

Intrafund Borrowing and Cash Flow

$ 3,437 ,000 1 05 ,087, 000 1 4, 1 28,000 3,994,000 3,223,000

75 ,746 ,000 62, 848,000

872,000 45,1 24,000

31 4.459 000

County general fund expenditures tend to occur in relatively level amounts throughout the fiscal year. Conversely, receipts have followed an uneven pattern primarily as a result of secured property tax installment payment dates in December and April and as a result of delays and uneven payments from other government agencies, the two largest sources of County revenues.

In addition to issuing short-term notes, the County has occasionally used, when necessary, legally permitted "intrafund" borrowing (borrowing against certain of the County's own funds) to cover temporary cash needs. In fiscal year 2003-2004, the County will use such intrafund borrowing to fund the financing of an estimated $7. 4 million of net property tax advances made by the County to local agencies pursuant to the Teeter Plan. See "APPENDIX A-COU NTY FINANCIAL AND DEMOGRAPHIC INF ORMATION-Property Tax Levies and Collections; Teeter Plan" herein.

In fiscal year 2004-2005 , the County will again use intrafund borrowing and the Notes to comprise a funding cycle for the financing of an estimated $7 .0 million of net property tax advances made by the County to local agencies pursuant to the Teeter Plan. Initially, the County will use proceeds of the Notes and intrafund borrowing to finance the estimated $6.0 million of net Teeter Plan advances relating to 1995-1 996 through 2003-2004 delinquencies, while subsequently the County will use intrafund borrowing to cover any temporary cash shortfalls subsequent to when repayment accounts for the Notes are set aside in April 2005 . The intrafund borrowing will be repaid, in part, when the County issues its 2005-2006 Tax and Revenue Anticipation Notes in early July 2005 . The County expects to repeat the funding cycle in subsequent fiscal years until sufficient tax delinquencies and fines have been collected to finance future Teeter Plan advances or until an alternative funding mechanism is implemented.

The Auditor-Controller has prepared the accompanying General Fund Cash Flow Analysis for the fiscal year 2003-2004 and a proj ected cash flow for fiscal year 2004-2005 . The projected cash flow for 2004-2005 was prepared based on the current infonnation available. In the cash flows, in order to reflect the County's participation in the Teeter Plan, the Auditor-Controller has listed the proceeds and distributions pertaining to the Teeter Plan as line items under the Apportioned Tax Resources Fund (the "ATRF") subheading in the respective "Receipts" and "Disbursements" headings. In June of each fiscal year, the County advances funds to complete the 1 00% distribution of that fiscal year's tax levy. Subsequently, the County collects the delinquent taxes and their attributable penalties and interest over a period of several fiscal years. As the County collects these payments, it makes payments on the associated borrowed funds. Although ATRF proceeds are detailed in these cash flows, the pledged funds for the repayment of the Notes will come solely from unrestricted monies of the general fund.

5

Accounting Period Ending

BEGINNING BALANCE

RECEIPTS: GENERAL FUND:

Taxes Licenses, Permits, Franchises Fines, Forfeitures & Penalties Use of Money and Property Intergovernmental - State Intergovernmental - Federal I ntergovernmental - Other Charges for Services Miscellaneous Revenue Operating Transfers In Loan/Advance Collections TRAN Proceeds

GENERAL FUND TOTAL ATRF:

Loan 93/4 & Subsequent Collections 92/3 & Prior Collections 93/4 & Subsequen

TEETER PLAN TOT AL COMBINED TOTAL

DISBURSEMENTS: GENERAL FUND:

Salaries and Benefits

1(

Retirement Contribution Health & Gen Liability lnsuran Workers' Compensation Services and Supplies Other Charges Operating Transfers Out Fixed Assets TRAN Principal TRAN Interest Loans and Advances

GENERAL FUND TOTAL ATRF:

Loan Repay 92/3 & Prior Loan Repay 93/4 & Subseque Distributions to Locals

TEETER PLAN TOTAL COMBINED TOTAL

ENDING BALANCE

COUNTY OF SANTA BARBARA, CALIFORNIA GENERAL, APPORTIONED TAX RESOURCE (ATRF) AND TOBACCO SETTLEMENT FUNDS CASH FLOW IN FISCAL YEAR 2003-04

ACTUAL THRU APRIL

Julv Auqust September

32,293,326 23,387,807 1 8,549,337

2,227,770 1 ,080 ,154 1 ,534,971 1 ,060,0 1 6 1 ,023,278 903,060

1 36,735 36,590 76,298 1 ,333,350 91 ,680 328,959 4,801 ,594 4,367,084 3,430,344 1 ,418 ,926 1 ,748,496 1 , 1 73 ,995

1 60,080 9,2 19 1 1 ,3 13 1 ,669,5 1 9 5,361 ,529 6,986,359

29,388 53,938 41 8,869 1 ,487,750 1 ,488, 1 62 1 ,766,278 5,374,441 3,058,487 2,771 ,353

45,000,000 0 0

64,699,569 1 8 ,31 8,617 1 9,40 1 ,799

2,035,630 3,437,836 2,035,630 0 3,437,836

66,735, 1 99 1 8,3 18,617 22,839,635

1 9,747,303 1 1 ,932,660 1 1 ,982,441 22,000,000 0 0

9,000,000 0 0 7,500,000 0 0

3,094,384 2,929,861 3,712,573 975,707 1 ,603,607 887,863

3,643,235 3 ,946,501 3,796,771 23,994 31 ,786 77,722

0 0 0 0 0 0

2,593,268 2,712,672 4,284,836 68,577,891 23,1 57,087 24,742,206

7,062,827 3,437,836

7,062,827 0 3,437,836 75,640,718 23, 157,087 28,180,042

23,387,807 1 8,549,337 1 3,208,930

October

13,208,930

1 0,305,291 1 ,0 1 9,661

352,620 540,269

2,992,738 1 , 1 10,426

893 4 , 191 ,3 17

1 60 , 139 1 ,609,61 8 4,440,338

0 26,723,31 0

0 26,723 ,310

1 1 ,840,61 1 0 0 0

2,933,479 925,666

4,299,946 46,890

0 0

6,767,028 26,813,620

0 26,813 ,620

1 3, 1 18,620

November

13, 1 1 8,620

9,994,364 801 ,21 3 257,107

96,664 4,446,281

52,606 6,461

2,639,844 1 27, 135

1 ,488,274 6,41 3,397

0 26,323,346

0 26,323,346

12,357,574 0 0 0

3 ,144,898 1 ,670,971 4,801 ,383

33,074 0 0

7,486,403 29,494,303

0 29,494,303

9,947,663

December

9,947,663

31 ,498,252 1 ,256,948 1 ,053,021

351 , 168 3,933,663 1 ,308,059

6 1 2 7,122,739

225,669 2,589, 155 7,450,91 1

0 56,790 , 197

0 56,790,197

18 , 132,049 0 0 0

3,882,235 785,340

4,680,456 21 ,628

0 0

9,922,906 37,424,6 14

0 37,424,61 4

29,3 1 3,246

6

January February March April Mav

29,31 3,246 8,739 , 130 3,560,459 1 ,062,034 1 3 ,803,003

2,897,775 1 ,466,797 1 ,694,546 32,453,831 1 ,840,000 915,41 8 932,520 1 ,297,424 2,146,799 1 ,279,000 309, 1 1 7 9,592 289,81 1 1 , 1 97,655 221 ,000 438,717 46,684 228,283 761 ,581 31 ,000

5,443,851 7,050 ,140 4,374,461 6,973,041 5,404,000 686,482 94,676 216,371 1 ,789,657 730,000

74, 183 1 ,387 1 ,951 1 3,619 13,000 3,892,470 2,629,290 8,350, 1 34 6 ,397,375 6,268,000

1 19,572 67,282 1 94,846 4,384,992 98,000 9,504,066 1 ,487,524 1 ,835,203 1 ,5 10,774 1 1 ,713,000

1 0, 1 70,145 8,926,876 7,464,950 8,731 ,846 8,000,000 0 0 0 0 0

34,451 ,796 22,71 2,768 25,947,980 66,361 , 1 70 35,597,000

1 , 1 22,765 955,369 1 , 1 22,765 0 0 955,369 0

35,574,561 22,71 2,768 25,947,980 67,316,539 35,597,000

1 1 ,999,065 1 1 ,873,398 1 1 ,860,71 9 1 2,099,894 1 2,000,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

2,724,093 2,909, 196 3,1 68,852 3,320,254 3,785,000 1 ,51 0,792 1 ,765,767 962,005 1 ,385,422 1 ,659,000 6,472,602 3,773,783 4,470,680 5,438,690 3,523,000

1 37,795 95,019 74 ,361 22 ,618 84,000 22,500,000 0 0 22,500,000 0

478,356 0 0 478,356 0 9,203,209 7,474,276 7,909,788 8,374,967 7,758,000

55,025,91 2 27,891 ,439 28,446,405 53,620,201 28,809,000

1 , 1 22,765 955,369

1 , 1 22,765 0 0 955,369 0 56,148,677 27,891 ,439 28,446,405 54,575,570 28,809,000

8,739,130 3,560,459 1 ,062,034 13,803,003 20,591 ,003

June

Total 20,591 ,003

2,982,000 99,975,751 1 ,665,000 14,300,337

351 ,000 4,290,546 17,000 4,265,355

6,309,000 59,526, 1 97 1 , 1 1 8,000 1 1 ,447,694

14,000 306,71 8 6,460,000 61 ,968,576

1 08,000 5,987,830 1 ,948,000 38,427,804 8,500,000 8 1 ,302,744

0 45,000,000 29,472,000 426,799,552

1 3,384,000 13 ,384,000 0

7,551 ,600 1 3,384,000 20,935,600 42,856,000 447,735, 1 52

12,000,000 1 57,825,714 0 22,000,000 0 9,000,000 0 7,500,000

4,034,000 39,638,825 1 ,660,000 1 5,792, 140 4,392,000 53,239,047

1 84,000 832,887 0 45,000,000 0 956,712

7,975,000 82,462,353 30,245,000 434,247,678

0 12,578,797

7,400,000 7,400,000 7,400,000 1 9,978,797

37,645,000 454,226,475

25,802,003

Accounting Period Ending

BEGINNING BALANCE

RECEIPTS:

GENERAL FUND: Taxes Licenses, Permits, Franchises Fines, Forfeitures & Penalties Use of Money and Property

Intergovernmental - State

Intergovernmental - Federal Intergovernmental - Other

Charges for Services

Miscellaneous Revenue Operating Transfers In

Loan/Advance Collections TRAN Proceeds

GENERAL FUND TOTAL

ATRF:

Loan 93/4 & Subsequent Collections 92/3 & Prior

Collections 93/4 & Subsequen TEETER PLAN TOTAL

COMBINED TOTAL

DISBURSEMENTS:

GENERAL FUND:

Salaries and Benefits Retirement Contribution Health & Gen Liability lnsuran Workers' Compensation

Services and Supplies Other Charges

Operating Transfers Out

Fixed Assets TRAN Principal

TRAN Interest Loans and Advances

GENERAL FUND TOTAL ATRF:

(

Loan Repay 92/3 & Prior

Loan Repay 93/4 & Subseque Distributions to Locals

,r

TEETER PLAN TOT AL

COMBINED TOTAL

ENDING BALANCE

, - 1 ,v...,1--v I L-LJ """-' "'"-• ,r-l�, , II I - · ' I , _ 1 ,_'"" I I u, 1 ,- - - - · , ...... _ \' �· • " J • �· .. ....... • - -· ·- .,,.. """ - - • , --· · · -· � • • -· · - - -· - - · , . -- • • ·

July August September October November December January February March

25,802,000 1 9,957,307 1 3,987,307 6,281 ,307 6,630,307 4,1 15,307 30,495,307 1 1 ,81 3,307 5,471 ,307

2 , 153,000 947,000 1 ,425,000 1 1 ,636,000 1 1 ,3 1 0,000 34,894,000 3,165,000 1 ,541 ,000 1 ,780,000

1 ,045,000 1 ,009,000 890,000 1 ,005,000 790,000 1 ,239,000 903,000 91 9,000 1 ,279,000 1 27,000 34,000 7 1 ,000 329,000 240,000 981 ,000 288,000 9,000 270,000

1 ,577,000 72,000 264,000 463,000 76,000 272,000 386,000 37,000 1 14,000

4,428,000 3,937,000 2,878,000 2,383,000 4,027,000 3,447,000 12 , 154,000 6,970,000 3,945,000

1 , 172,000 1 ,444,000 969,000 91 7,000 43,000 1 ,080,000 567,000 78,000 1 79,000

67,000 4,000 5,000 0 3,000 0 31 ,000 1 ,000 1 ,000

1 ,693,000 5,438,000 7,086,000 4,251 ,000 2,677,000 7,224,000 3,948,000 2,667,000 8,469,000

15 ,000 27,000 21 1 ,000 59,000 64,000 1 14 ,000 60,000 34,000 98,000

1 ,895,000 1 ,895,000 2,250,000 2,050,000 1 ,896,000 3,298,000 10,1 05,000 1 ,895,000 2,337,000

5,394,000 3,070,000 2,782,000 5,457,000 7,437,000 9,479,000 1 0,208,000 8,960,000 7,993,000

55 ,000,000 0 0 0 0 0 0 0 0

74,566,000 1 7,877,000 18 ,831 ,000 28,550,000 28,563,000 62,028,000 41 ,81 5,000 23, 1 1 1 ,000 26,465,000

4,000 3,000 2,000 2,000,000 1 ,888,000 1 ,466,000 1 , 144,000

2,000,000 0 1 ,892,000 0 0 1 ,469,000 0 1 , 146,000 0

76,566,000 1 7,877,000 20,723,000 28,550,000 28,563,000 63,497,000 4 1 ,81 5,000 24,257,000 26,465,000

1 9,979,000 1 2,677,000 12 ,730,000 12,579,000 13 , 128,000 1 9,263,000 1 2,747,000 12,614,000 1 2,600,000

25,000,000 0 0 0 0 0 0 0 0

9,600,000 0 0 0 0 0 0 0 0

9,000,000 0 0 0 0 0 0 0 0

3,095,000 2,931 ,000 3,722,000 2,995,000 3 , 122,000 3,892,000 2,784,000 2,885,000 3 ,166,000

857,000 1 ,409,000 780,000 813,000 1 ,441 ,000 690,000 1 ,294,000 1 ,581 ,000 845,000

3,767,000 4,081 ,000 3,926,000 4,999,000 4,872,000 3,872,000 6,912 ,000 3,789,000 4,609,000

32,000 42,000 103,000 62,000 44,000 29,000 1 82,000 1 25,000 98,000

0 0 0 0 0 0 27,500,000 0 0

0 0 0 0 0 0 894,000 0 0

2,588,000 2,707,000 5,276,000 6,753,000 8,471 ,000 7,902,000 8 , 184,000 8,459,000 7,393,000

73,91 8,000 23,847,000 26,537,000 28,201 ,000 31 ,078,000 35,648,000 60,497,000 29,453,000 28,71 1 ,000

4,000 3,000 2,000

8,492,693 1 ,888,000 1 ,466,000 1 , 144 ,000

8,492,693 0 1 ,892,000 0 0 1 ,469,000 0 1 ,1 46,000 0

82,410,693 23,847,000 28,429,000 28,201 ,000 31 ,078,000 37,1 1 7,000 60,497,000 30,599,000 28,71 1 ,000

1 9,957,307 1 3,987,307 6,281 ,307 6,630,307 4,1 1 5,307 30,495,307 1 1 ,81 3,307 5,471 ,307 3,225,307

7

April May June

Total

3,225,307 9,368,307 20,049,307

32,085,000 1 ,932,000 2,1 32,000 105,000,000

2, 1 1 7,000 1 ,261 ,000 1 ,643,000 14, 100,000 1 , 1 1 6,000 206,000 328,000 3,999,000

644,000 24,000 1 3,000 3,942,000 7,883,000 1 1 , 109,000 5,004,000 68,165,000

1 ,478,000 603,000 923,000 9,453,000

6,000 5,000 5,000 1 28,000

6,488,000 6,357,000 6,551 ,000 62,849,000

4,381 ,000 49,000 54,000 5,1 66,000

1 ,924,000 10,098,000 2,481 ,000 42, 124,000

7,764,000 7,528,000 7,528 ,000 83,600,000

0 0 0 55,000,000

65,886,000 39,172,000 26,662,000 453,526,000

12,777,000 12,777,000

1 ,000 1 0,000

722,000 7,220,000 723,000 0 1 2,777,000 20,007,000

66,609,000 39, 1 72,000 39,439,000 473,533,000

12,854,000 12,748,000 1 2,748,000 1 66,667,000

0 0 0 25,000,000

0 0 0 9,600,000

0 0 0 9,000,000

3,386,000 3 ,786,000 4, 121 ,000 39,885,000

1 ,204,000 1 ,457,000 1 ,459,000 13 ,830,000

5,517 ,000 3,643,000 5,375,000 55,362,000

30,000 1 1 1 ,000 242,000 1 , 100,000

27,500,000 0 0 55,000,000

894,000 0 0 1 ,788,000 8,358,000 6,746,000 6,963,000 79,800,000

59,743,000 28,491 ,000 30,908,000 457,032,000

1 ,000 10 ,000

722,000 1 3 ,712 ,693

7 ,000,000 7,000,000

723,000 0 7,000,000 20,722,693

60,466,000 28,491 ,000 37,908,000 477,754,693

9,368,307 20,049,307 21 ,580,307

TAX MATTERS

In the opinion of Orrick, Herrington & Sutcl iffe LLP ("Bond Counsel"), based upon an analysis of existing laws, regulations, rul ings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Notes is

,excluded from gross income for federal-income tax purposes under Section 1 03 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes, Bond Counsel is of the further opinion that interest on the Notes is not a specific preference item for purposes of the federal individual or corporate al ternative minimu�taxes, al though Bond Counsel observes that such interest is included in adj usted current earnings when calculating corporate al ternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in "APPENDIX B - FORM OF LEGAL OPINION" hereto.

Notes purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturi ty ( or, in some cases, at their earl ier call date) ("Premium Notes") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of Notes, l ike the Premium Notes, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner' s basis in a Premium Note, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Notes should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Notes. The County has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Notes will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Notes being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Notes. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine ( or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel's attention after the date of issuance of the Notes may adversely affect the value of, or the tax status of interest on, the Notes.

One of the covenants of the County referred to above requires the County to reasonably and prudently calculate the amount, if any, of excess investment earnings on the proceeds of the Notes which must be rebated to the United States, to set aside from lawfully available sources sufficient moneys to pay such amounts and to otherwise do all things necessary and within its power and authority to assure that interest on the Notes is excluded from gross income for federal income tax purposes. Under the Code, if the County spends 100% of the proceeds of the Notes within six months after issuance, there is no requirement that there be a rebate of investment profi ts in order for interest on the Notes to be excluded from gross income for federal income tax purposes. The Code also provides that such proceeds are not deemed spent until all other available moneys (less a reasonable working capital reserve) are spent. The County expects to satisfy this expenditure test or, if it fails to do so, to make any required rebate payments from moneys received or accrued during to the 2004-2005 fiscal year. To the extent that any rebate cannot be paid from such moneys, the law of California is unclear as to whether such covenant would require the County to pay any such rebate. This would be an issue only if it were determined that the County' s calculations of expenditures of Note proceeds or of rebatable arbitrage profits, if any, were incorrect.

Certain requirements and procedures contained or referred to in the Resolution, the Tax Certificate, and other relevant documents may be changed and certain actions (including, without l imitation, defeasance of the Notes) may be taken or omitted under the circumstances and subject to the

8

terms and conditions set forth in such documents. Bond Counsel expresses no opinion as to any Note or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of bond counsel other than Orrick, Herrington & Sutcliffe LLP.

Although Bond Counsel is of the opinion that interest on the Notes is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Notes may otherwise affect a Beneficial Owner's federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner's other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

Future legislation, if enacted into law, or clarification of the Code may cause interest on the Notes to be subject, directly or indirectly, to federal income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the Notes. Prospective purchasers of the Notes should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no opinion.

The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel's judgment as to the proper treatment of the Notes for federal income tax purposes. It is not binding on the Internal Revenue Service ("IRS") or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the County, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS . The County has covenanted, however, to comply with the requirements of the Code.

Bond Counsel' s engagement with respect to the Notes ends with the issuance of the Notes, and, unless separately engaged, Bond Counsel is not obligated to defend the County or the Beneficial Owners regarding the tax-exempt status of the Notes in the event of an audit examination by the IRS. Under current procedures, parties other than the County and its appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt Notes is difficult, obtaining an independent review of IRS positions with which the County legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Notes for audit, or the course or result of such audit, or an audit of Notes presenting similar tax issues may affect the market price for, or the marketability of, the Notes, and may cause the County or the Beneficial Owners to incur significant expense.

LEGAL MATTERS

The validity of the Notes and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel. A complete copy of the proposed form of Bond Counsel opinion is contained in "APPENDIX B -FORM OF LEGAL OPINION" hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Underwriters' Counsel takes no responsibility for the accuracy, completeness or fairness of this Official Statement.

9

RISK FACTORS

State Funding of Counties

The County receives a significant portion of its funding from subventions by the State. As a result, decreases in the revenues received by the State can affect subventions made by the State to the County and other counties in the State. The potential impact of State budget actions on the County in particular, and other counties in the State generally, in future fiscal years is uncertain at th is time. For a discussion of the potential impact of State budget actions for fiscal year 2003 -2004 on the County in particular, and other counties in the State generally, see APPENDIX A - COUNTY FINANCIAL AND DEMOGRAPHIC INFORMATION "County F inancial Information - State Budget Acts."

LEGALITY FOR INVESTMENT IN CALIFORNIA

Under provisions of the California Financial Code, the Notes are legal investments for commercial banks in the State to the extent that the Notes, in the informed opinion of the investor bank, are prudent for the investment of funds of its depositors and under provisions of the California Government Code, are eligible to secure deposits of public moneys in the State.

RATING

The County has obtained a rating of "SP-1 +" on the Notes from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"). Certain information was supplied by the County to the rating agency to be considered in evaluating the Notes. The rating issued reflects only the views of the rating agency, and any explanation of the significance of such rating should be obtained from the rating agency at Standard & Poor's, 55 Water Street, New York, NY 10041. There is no assurance that any rating will be retained for any given period of time or that the same will not be revised downward or withdrawn entirely by the rating agency if, in its j udgment, circumstances so warrant. The County undertakes no responsibility either to bring to the attention of the owners of any Notes any downward revision or withdrawal of any rating obtained or to oppose any such revision or withdrawal. Any such downward revision or withdrawal of the rating obtained may have an adverse effect on the market price of the Notes.

LITIGATION

No litigation is pending or threatened concerning the validity of the Notes, and a certificate of the County Counsel to that effect will be furnished to the purchaser at the time of the original delivery of the Notes. The County is not aware of any litigation pending or threatened questioning the political existence of the County or contesting the County's ability to issue and retire the Notes.

There are a number of lawsuits and claims pending against the County. The aggregate amount of the uninsured liabilities of the County and the timing of any anticipated payments that may result from judgments and claims will not, in the opinion of the County Auditor-Controller after consultation with County Counsel, impair the County's ability to repay the Notes.

UNDERWRITING

The Notes are being purchased for public offering by Banc of America Securities LLC (the "Underwriter"). The Underwriter has agreed to purchase the Notes for an aggregate price of the principal amount of $55,000,000 plus a premium of $83 2,700 and less an underwriter's discount of $74,770 for a total of $55,757,93 0. The Underwriter will purchase all of the Notes if any are purchased. The obligation to make such purchase is subj ect to certain terms and conditions as set forth in the Contract of Purchase.

10

ADDITIONAL INFORMATION

The purpose of this Official Statement is to supply information to prospective buyers of the Notes. Summaries and explanations of the Notes, the Resolution and of statutes and documents contained herein do not purport to be complete, and reference is made to said documents and statutes for full and complete statement of their provisions.

The County regularly prepares a variety of reports, including audits, budgets and related documents, as well as certain monthly activity reports. Any owner of a Note may obtain a copy of any such report, as available, from the County Auditor/Controller's office at 105 East Anapamu Street, Room 1 09, Santa Barbara, CA 93 10 1 .

All data contained herein have been taken or constructed from County records and other sources. Appropriate County officials, acting in their official capacity, have reviewed this Official Statement and have determined that as of the date hereof the information contained herein is, to the best of their knowledge and belief, true and correct in all material respects and does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein, in light of the circumstances under which they are made, not misleading. An appropriate County official will execute a certificate to this effect upon delivery of the Notes. This Official Statement and its distribution have been duly authorized and approved by the Board of Supervisors.

OFFICIAL STATEMENT CERTIFICATION

As of its date this Official Statement is true to the best knowledge of the County, is complete and correct in all material respects, and does not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements in this Official Statement, in light of the circumstances under which they are made, not misleading.

The execution and delivery of this Official Statement by the Treasurer-Tax Collector of the County of Santa Barbara has been duly authorized by the County.

SANTA BARBARA COUNTY, CALIFORNIA

By: Isl Bernice James Treasurer-Tax Collector

11

This page intentionally left blank

APPENDIX A

County Financial and Demographic Information

This page intentionally left blank

APPENDIX A

COUNTY FINANCIAL AND DEMOGRAPHIC INFORMATION

TABLE OF CONTENTS

GENERAL INFORMATION .................................................................................................................... 1 County Powers . . . . . . . . . . . . . . . . . . . . . . ..... . . . . . . . . . . . . . . . .. . . . . . . . . . .. . .. . .. . . . . ... . . . . . . ...... . . . . . .. . . . .. . . . ... .. . .. . . . . . . . . .. . . . . . . .. . .. . . . . . . . . . . . .. . 1 Petition to Split the County and Form a New County .......... . . . . .............. . . . ... ......... . . ........ . ......... . . .. . . ....... . . . I Administration and Management . . . . ... .... . . . . ........ . . . ............. . . . . . . . . .... . .... . ................. . . . . . . . ......... . . . . . . .. . ....... . . .. 2 County Employees and Labor Relations . .. ....... . .. .. . . . ...... . . .. . . . . .............. . . . . . ......... . . . .. . . ............. . . . . . ... .... .... . . . 3

COUNTY FINANCIAL INFORMATION ............................................................................................... 3 State Budget Acts . . .... . . . . ... . . . . . . . . . . . . . . . . . . . . . .... ....... . . . . . . . ....... . . . . ... ....... ... . . . . . . . . ...... . ... . . . . . . . . . ...... . .. . ... . . . . . . . . . . . . . . . . . . 3 County Budget Process .. . . .. . . . .. . . . .. . . . . . . . . .... . .. .. . .. . . . . . . . . .. . . . . . . ... . . ... . . . . . . . . . .. . . . .. . . . . ... . . . . . . .. . . . . . . . . . . . . . . . . . . . . ... . ... . . . .. .. 8 Financial Statements . . . . . .......... . . . . . . . ........... ...... . . . ...... . . .... . .... . ..... . . . . . . . . . . . . ... .... . .. . .. . ............ . . . . . . ............ . . . . . . 11 Source: County of Santa Barbara General Purpose Financial Statements, ending June 30, 1999, 2000, 2001, 2002, and 2003 . . . . . 12 Property Valuation .................. . . . . . ................. . . . ........... . . . ..... ........ . . . .. . . .. . . ......... . . ..... . . . ..... . . . . . . . . . .... . .... ....... 13 Property Tax Levies and Collections; Teeter Plan .. .. . ............. . . . . . . . ............ . . . .. . . . . . ...... . . . . . . . . . ... ........... . . ... 14 Historical Tax Inj'ormation .. . . . . . . . ............. .... . . . .. . ... . . ....... ......... . . . . . . . . . . .... . .... . .... . . . . . . . . . . . . . . . . . . ... . . . . . . . ... . . . . . .. . . 15 Largest Property Taxpayers ..... . ........ . .. . ........ ....... . . .. . . . . .. . .............. . ............ . . . ... . . ....... . . . . . ..... . . .......... . . . . .... 15 Other Taxes and Revenues .. . . ..... .................. . . . ........ .................... ................ . ... ............. ..... . . . ...... . . . .. . . . . . ... 16 Revenues and Expenditure Trends ............. . . . . ...... . . . . . ............. . . . . . . . . .......... . . . . .. . . . ........... . ... . . .......... . . . . . . ..... 1 7 County Employee Retirement Plan and Deferred Compensation Plan .... . ... . . .......... . . . . . .... . . . . .. . .. . ... . . . . . . . . 1 7

DEBT AND OTHER FINANCIAL OBLIGATIONS OF THE COUNTY .......................................... 19 Debt Authorization . ...... ... ... . . . ... ................ .. . . . . ....... . . . . ... ............. . . .............. . . . . . . . . . . ..... . . . . . . . . . ........ . . . . . . ........ 19 Long-Term Obligations of the County . . . . ......... ..... . . . . . . . . ..... .... .. . .. . .. . . .. ...... . . . . . ... ....... . . ... .. . . .. . ........ . . . . . . . .... . 19 Payment Schedule for Certain Long-Term Obligations of the County ... . . . . . . . .. . ..... . . . .. . . . . .............. . . . . . ... . . 19 Future Financings . . .......... . . . . . . . . ........... . . . . .... . ...... . . ........ ..... . . . . . . .......... . ... ..... . ... .......... ... . ........ .. . . . . . . . . . . . . ..... 20 Direct and Overlapping Bonded Debt ...... . . . . . .... . . . ...... . . .......................... . . . ........... . . ... . . . . . ..... . . . . . . . . . . . . ... . . . . 20

COUNTY TREASURER'S INVESTMENT POOL .............................................................................. 21

CONSTITUTIONAL AND STATUTORY LIMITS ON TAXES AND APPROPRIATIONS .......... 23 Article XIIIA of the State Constitution ..... ....... . ... . . . . . . ...... . . . . . . ............ . . . . . . . . . ... ........... . . . ......... . . . . . .. . . . . ....... . 2 3 Article XIIIB of the State Constitution ..... . .... ... . .. . . . . . ...... . . . . . . . . ...... . .......... . . . ........... . . . . . . . ..... . . . . . . . . . . . ........... 24 Articles XIIIC and XIIID of the State Constitution ....... ............. . . . . ..... . . . . . . ......... . . . . . ... ......... . . ........ ...... . . .. 25 Future Initiatives .. . . ..... . . . . . ......... . .... . . . . ..... . . ......... . . .......... . . .. . . .. . ....... . . ................... . . . . . ..... ...... . . . . . . .......... .... 26

COUNTY DEMOGRAPHIC INFORMATION .................................................................................... 26 Population ..... . . ............... . . . . ........... . . . ... ...... . . ..... . . . ............ . . . . . . . ........ . ... . . . . . ........... . ... . . ....... . . . . ............... . . . . . 26 Industry and Employment . ...... . . . . . . . . ............ . . .. . .. ........... . .......... ... . . . .................... . . . .... .......... . . . . . .... ........ ... 26 Commercial Activity ......... ..... . . . . . ............. . ...................... . . ........... . . . . . . . .. ........... . . . . ..... . ....... . . . . . . . .... . .... . . . . ... 28 Constn1ction Activity ............... . . . . . ........... ..... ... . . ............. ... .......... . . . .. . . . . . ......... . . ............. . . ..... .... .. . . . .... . . .... 2 9 Personal Income .... . . . ..... ........... . . . . ......... . . ..... .... ........... .. .. . . ....... .. . . ...... ........... . . . ... . ... ............. ....... . . ..... . . . . 30

This page intentionally left blank

APPENDIX A

COUNTY FINANCIAL AND DEMOGRAPHIC INFORMATION

GENERAL INFORMATION

Santa Barbara County, located approximately 100 miles north of Los Angeles and 300 miles south of San Francisco, was established by an act of the State legislature on February 1 8, 1 850. The County occupies an area of 2, 774 square miles, of which one-third is located in the Los Padres National Forest. There are eight incorporated cities located wholly or partially within the County: Santa Barbara, Santa Maria, Lompoc, Carpinteria, Guadalupe, Solvang, Buellton, and Goleta.

On November 6, 200 1 , residents of a portion of the Goleta Valley voted to incorporate into the new City of Goleta which was incorporated on February 1 , 2002. The County has entered into a revenue­neutrality agreement with the new City and does not expect the incorporation to have a material impact on the finances or service obligations of the County.

The largest employment categories in the County include government, services, wholesale and retail trade, and manufacturing. The mild climate, picturesque coastline, scenic mountains and numerous state parks and beaches have made the County a popular recreational area.

County Powers

The County is a general law county and political subdivision of the State of California and its rights, powers, privileges, authority, functions and duties are established by the constitution and laws of the State. The County is divided into five districts on the basis of registered voters and population, as required by State statute. Supervisors are elected from each district by the voters of the district to serve staggered four-year terms. The Chairman is elected by and from members of the Board. The Board exercises the powers of the County.

Petition to Split the County and Form a New County

Supporters of the movement to split the County of Santa Barbara and form Mission County circulated a petition to place the issue on the ballot for voter approval. Between April 2003 and September 30, 2003, county split advocates were required to gather enough signatures from qualified voter on the petition to form a new county in order to proceed with the proposed county formation. Pursuant to Government Code Section 23321 (b), petitioners must equal in number not less than 25 percent of the number of electors within the territory of the proposed new county as of the date of the last preceding election for governor.

The petition was turned in to Clerk on November 12, 2003 , within the requisite 60-day period. The County Clerk had 30 days, or until December 1 2, 2003, to complete a review of the petition. The County Clerk completed the review of the petition on December 12, 2003, and determined that the petition contained the requisite number of signatures and met the additional requirements for qualification. Thus the petition was deemed sufficient.

A-1

Since the county split supporters have obtained the requisite signatures, a County Formation Review Commission will be established according to the provisions of Government Code Section 23331. The Governor has appointed five commissioners - two from the proposed new county, two from the territory that will remain as the County of Santa Barbara, and one appointee from outside of both areas. The Mission County Formation Commission members are: former Santa Barbara Mayor Harriet Miller; Montecito resident and retired airline executive Ted Tedesco; Santa Maria resident and 5th District Planning Commissioner Jack Boysen; former Solvang City Councilwoman June Christensen; and former an Luis Obispo County Assessor Dick Frank. The Commission will determine the terms and conditions of county formation, including the allocation of debt between the newly formed county and Santa Barbara County. The formation election will occur at a general election according to statutory timing requirements, most likely in the year 2006. A majority of voters in the proposed new county and in the whole County must approve the county split.

The last county formation petition registered in Santa Barbara County occurred in 1977. On July 24, 1977, a petition to split the County of Santa Barbara and form a new county (Los Padres County) was filed with the Clerk of the Board. The resulting 1978 County Formation Review Commission produced a detailed Final Report, dated June 26, 1978, analyzing the probable effects of creating the new county. The county split proposal was placed on the November 1978 ballot but failed to receive sufficient voter support to trigger formation of Los Padres County.

Administration and Management

County officials oversee the County' s daily operations. County administration includes 17 officials appointed by the Board of Supervisors (the "Board") and six officials elected by county-wide vote, including the Treasurer/Tax Collector/Public Administrator, the Auditor-Controller, the Assessor/County Clerk-Recorder, the District Attorney, the Superintendent of Schools, and the Sheriff. Many boards, commissions and committees assist the Board and County officials.

The background and experience of selected administrative personnel and elected officials most directly involved with the issuance of the Certificates are summarized below.

County Treasurer-Tax Collector - The County Treasurer - Tax Collector -Public Guardian -Public Administrator is elected by voters of the County to a four-year term. Bernice James was elected by the voters in 2002 and assumed office in January 2003 . Ms. James received a bachelor' s degree in business administration from the University of Arizona. She has served in County government for more than 24 years, including almost eight years as Assistant County Treasurer-Tax Collector-Pub lic Administrator.

Auditor-Controller -The County Auditor-Controller is elected by the voters of the County to a four-year term. Robert W. Geis was elected Auditor-Controller in 1990 and assumed his office in January 1991. Mr. Geis, a certified public accountant and certified public finance officer, received a bachelor' s degree in business administration from Ohio State University. Mr. Geis has served in County government for more than 21 years, including five years as Assistant County Treasurer. Prior to such time, Mr. Geis was a corporate internal auditor.

County Administrator - The County Administrator, Michael F. Brown, is appointed by the Board and exercises overall responsibility for sound and effective management of County Government pursuant to Board policy. Mr. Brown holds a bachelor' s degree in Government and Regional Economics from the California State University at Northridge and a master's degree in Public Administration with an emphasis on Municipal Finance from the University of Texas at

A-2

Austin. Mr. Brown' s more than 31 years of local government experience includes service as City Manager of Tucson, Arizona, City Manager of Berkeley, Cal ifornia, Deputy City Manager and Budget Director of Hartford, Connecticut, and First Deputy Commissioner of the Connecticut Department of Housing. Mr. Brown has received numerous awards including the Carolyn Kean Memorial Award of the International City Management Association, the Publ ic Technology, Inc. Achievement Award for Geobased Data Systems and an honorary doctorate in Public Administration from Tucson University.

County Counsel - The County Counsel is appointed by the Board for a four-year term. Stephen Shane Stark was fi rst appointed County Counsel in April 1994. Mr. Stark graduated from the George Washington University Law School in 19 68. He came to Santa Barbara County in 1987, serving as Chief Deputy County Counsel before his current appointment. His prior positions include Assistant Corporate Counsel for the District of Columbia and Assistant City Attorney for the City of Santa Monica.

County Employees and Labor Relations

As of April 1, 2004, the County employed 4,193 full-time equivalent employees. The County provides certain health insurance, life insurance, disability and retirement benefits to its employees. For additional infonnation regarding the retirement pl an, see "COUNTY FINANCIAL INFORMATION­County Employee Retirement Plan and Deferred Compensation Plan."

There are currently nine operating labor organizations that represent County employees. The County currently has signed Memoranda of Understanding with all nine of those groups that are effective, in each case, through at least October 10, 2004.

COUNTY FINANCIAL INFORMATION

Following is a description of the County' s financial information, including State budget acts that affect the County' s finances, funding for County services, the County' s General Fund Balance Sheet, the County's Combined Statement of Revenues and Expenditures, the County' s budget process and adopted budget, the County's major revenues and expenditures, and certain other financial infonnation.

State Budget Acts

The following information concerning the State' s 2003-2004 fiscal year budget and 2004-2005 fiscal year budget has been obtained from publicly available infonnation which the County believes to be reliable; however, the County takes no responsibil ity as to the accuracy or completeness thereof and has not independently verified such information.

State budget decisions have a profound impact on the County because the County is the provider of many State-mandated services. Cal ifornia counties are political subdivisions of the State and have a much closer economic tie to the State than that of other governmental entities.

The Governor and the Legislature have repeatedly demonstrated their will ingness to involve local government funding in solving state-level budget problems. The property tax shifts of 1992 and 1993, resul ting in the creation of the Educational Revenue Augmentation Fund ("ERAF") is the best example, but the "real ignment" of human service programs in the early 1990s also involved cost and risk shifts from the State to counties and had a significant negative fiscal impact on counties for several years after inception.

A-3

State Budget for Fiscal Year 2003-2004.

The final 2003-2004 State Budget (the "2003-2004 Budget") was signed into law by Governor Davis on August 2, 2003. According to the Legislative Analyst' s Office, the 2003-2004 Budget assumed fi scal year 2003-2004 revenues of $72.8 bill ion, expenditures of $70.8 billion, and a year-end reserve of $2 bill ion and also provided for the issuance of a deficit-financing bond to offset the $10.7 billion 2002-2003 fiscal year-end deficit. The 2003-2004 Budget provided for repayment of the bond financing from existing resources and through a multi-stage shift of sales and property tax revenues. Other prescribed borrowings included pension obligation bonds and tobacco securitization bonds. The 2003-2004 Budget also addressed the budget shortfall through a combination of program savings, borrowing, new revenues, funding shifts and deferrals. Program savings were to be achieved through reductions in education, suspensions of social services cost-of-living adj ustments, selected Medi-Cal provider rate reductions and employee compensation savings. Some reductions in higher education, trial courts and resources were offset by higher fees. The 2003-2004 Budget also rel ied on an increase in vehicle license fees and the issuance of deficit bonds secured by a sales tax increase and a tax swap between local governments and the State, among other things, to close the proj ected $38 bill ion deficit. The 2003-2004 Budget also relied on $2.2 billion in new federal funds to cover State costs during the 2002-2003 and 2003-2004 fiscal years.

Proposed Governor's Budget for Fiscal Year 2004-2005.

Governor Schwarzenegger announced his proposed 2004-2005 State Budget (the "Proposed 2004-2005 Budget") on January 9, 2004, addressing an accumulated State debt of $22.1 bill ion and projecting a State Budget shortfall totaling approximately $14 billion in fiscal year 2004-2005. The Governor' s proposed economic recovery plan includes the California Economic Recovery Bond Act which was approved by California voters at the March 2, 2004 statewide election, and authorizes the issuance of up to $15 bill ion in State bonds to finance the negative General Fund reserve balance and other General Fund obl igations undertaken prior to June 30, 2004.

Sign ificant features of the Proposed 2004-2005 Budget relating to local governments include the following:

Vehicle License Fee Reimbursement - The Proposed 2004-2005 Budget includes full reimbursement to local governments for the vehicle l icense fee offset program, totaling approximately $4. 1 b illion for fiscal year 2004-2005. In fiscal year 2003-2004, local governments' vehicle license fees were reduced by $1.3 billion due to the time lag necessary to implement higher fees when the offset was eliminated on June 20, 2003. State law requires that this gap be cl osed by other funding no later than the 2006-2007 fiscal year.

Shift of Property Taxes From Local Governments to Education - The continuation of the fiscal year 2003-2004 gap level of reduction mentioned above would occur in the form of a $1.3 bil lion property tax shift from local governments to the Educational Revenue Augmentation Fund ("ERAF") in order to decrease the State' s General Fund Proposition 98 obligation.

Public Safety - The Proposed 2004-2005 Budget contains approximately $450 mill ion for public safety including the following major programs: Citizens' Option for Public Safety and Juvenile Justice Crime Prevention Programs, 9 11 Emergency Services, aid to local agencies for repair and restoration of public real property damaged by disasters, local peace officer training assistance expenditures, War on

A-4

Methamphetamine Program, the Vertical Prosecution Block Grant and payments to counties for the costs of homicide trials.

Health and Human Services Programs - The Proposed 2004-2005 Budge t provides assistance to local governments for various health and human services programs totaling approximately $5 bill ion, with $4 bill ion of this amount provided to counties to support heal th, mental heal th and social services programs through State-Local realignment. The remaining $1 billion is provided to counties for specific heal thcare, social services, public heal th activities, HNI AIDs programs and county oversight functions.

Transportation - In addition to significant federal fund sources, the Proposed 2004-2005 Budget contains approximately $53 5 million in State funds for transportation purposes that directly benefit local programs including State Highway Account funds budgeted as Capital Outlay, State Highway Account budgeted as Local Assistance, State transit assistance program, Proposition 116 Bond Program, bicycle transportation grants, planning grants and airport grants and loans.

Resources and Environmental Protection -The Proposed 2004-2005 Budget provides assistance totaling approximately $204 million for the following major programs: Publ ic Small Craft Harbor Planning and Construction Loans, loans to local agencies from the State Water Pollution Control Revolving Fund, Lining of the All-American Canal , local assistance to County Agricultural Commissioners for pesticide enforcement and the restricted materials use permit program, assistance to local air pollution control distric ts for enforcement and compl iance ac tivities, Launching Facilitie s Grants, entitlement grants for establishing and maintaining used oil and filte r collection and information programs, the cleanup of clandestine drug l aboratories, Boating Safety and Enforcement, grants to local entities for local solid waste enforcement and the clean-up of sol id waste sites where the responsible party is unknown or unable to pay for timely remediation.

Housing and Community Development - The Proposed 2004-2005 Budget contains approximately $23 5 mill ion for programs to assist in the creation, rehabil itation and purchase of affordable housing, including the following major programs: HOME Investment Partnerships Program, Community Development Block Grant, Jobs-Housing/Workforce, Building Equity and Growth in Neighborhoods, CalHome program, Farmworker Housing, California Infrastructure and Economic Development Bank and the Office of Migrant Services.

Public Libraries - The Proposed 2004-2005 Budget provides $160 mill ion in assistance to libraries, including the following maj or programs: the California Cultural and Historical Endowment, the Public Library Foundation, the Direct Loan and Interl ibrary Loan program and the Cal ifornia Engl ish Acquisition and Literacy Program.

Other Funding -The Proposed 2004-2005 Budget provides $60 mill ion for grants to county assessors for property tax administration and $55.2 mill ion for pest detection and eradication. The County cannot predic t the effect that the general economic conditions within the State and the State 's current and future budgetary problems may have on the County 's budgets or operations.

May Revision to 2004-2005 Budget.

On May 13 , 2004, the Governor released the May Revision to the Proposed 2004-2005 Budget (the "May Revision"). The May Revision assumes an approximate $3 .6 bill ion increase in revenues consisting of: tax shelter amnesty proceeds ($1.3 billion), accounting changes resul ting in accrual of additional revenues ($1 bill ion) and increases in revenue forecasts for fiscal years 2003 -2004 and 2004-2005 ($1.3 billion). The net effect is an increase in the reserve at the end of fiscal year 2004-2005, from

A-5

the $63 5 million projected in the Proposed 2004-2005 Budget to the $998 million proj ected in the May Revision. However, pressures on the General Fund have also increased primarily due to caseload increases, an increase in the Proposition 98 guarantee, and court cases resul ting in a continuing structural budget problem that will require additional ongoing budget solutions. Accordingly, the May Revision projects the State General Fund revenues for fiscal year 2004-2005 to be approximately $76.7 billion, an increase over the current fiscal year of 2.8 percent and State General Fund expenditures to be approximately $77.6 bill ion, a decrease over the current fiscal year ofO.l percent.

Personal income tax revenue forecasts have increased by $949 million in fiscal year 2003 -2004 from the $3 5.1 bill ion forecast in the Proposed 2004-2005 Budget and increased by $559 mill ion in fiscal year 2004-2005 from the $38 bill ion forecast in the Proposed 2004-2005 Budget. This forecast is due, in part, to the stock market recovery that began in mid-2003 . Sales and use tax revenue forecasts are reduced by $1 05 mill ion in fiscal year 2003 -2004 from the $23 .7 billion forecast in the Proposed 2004-2005 Budget and by $4 17 mill ion in fiscal year 2004-2005 from the $25 bill ion forecasted in the Proposed 2004-2005 Budget.

The Proposed 2004-2005 Budget identified an operating deficit of $14 bill ion and a proj ected year-end deficit of over $26 billion. On March 2, 2004, California voters approved Proposition 57, a bond act authorizing issuance of up to $1 5 billion of Economic Recovery Bonds to fund the accumulated State budget deficit. To repay these bonds, a new one-quarter cent sal es tax will become effective July 1 , 2004. This sales tax will automatically cease as soon as the bonds are repaid. The total base statewide sales tax will remain at 7.25 percent because the local portion of the sales tax will decrease on July 1 , 2004. Revenues from the one-quarter cent sales tax are estimated at $1 .13 6 bill ion in fiscal year 2004-2005, and approximately $1 .3 bill ion annually thereafter. To eliminate the deficit and create a small reserve, the Proposed 2004-2005 Budget proposed $1 2.3 bill ion in proceeds from Economic Recovery Bonds and $14.6 bill ion in various other solutions.

A-6

The May Revision relies on an agreement with representatives from local government (the "Local Government Agreement"). The Local Government Agreement replaces the proposal in the Proposed 2004-2005 Budget to permanently shift $ 1 .3 billon in local property taxes from counties, cities, special districts and redevelopment agencies to the Education Revenue Augmentation Fund ("ERAF"). The proposed $ 1 .3 billion shift will be replaced by a Vehicle License Fee ("VLF")/property tax swap. Specifically, the Local Government Agreement reduces the VLF rate from 2% to 0.65%. This reduction in VLF to cities and counties will be replaced by an increase in the amount of property tax received by the cities and counties. However, in fiscal years 2004-2005 and 2005-2006, the State will not provide the full amount of property taxes to the cities and counties. Under the Local Government Agreement, the State will retain $700 million, comprised of $350 million from counties and $350 million from cities in fiscal years 2004-2005 and 2005-2006. Further, in fiscal years 2004-2005 and 2005-2006, the Local Government Agreement provides that special districts will contribute $350 million in property taxes and redevelopment agencies will contribute $250 million in property tax revenues. The Local Government Agreement provides that in fiscal year 2006-2007, the State would repay the $ 1 .3 billion.

In addition, the Local Government Agreement includes an agreement to propose a constitutional amendment to protect local governments' property tax, sales tax, and vehicle license fee revenues in future years. Also, the non-education mandate process will be reformed by accelerating the mandate determination process and providing for the repeal of unfunded mandates. Under this proposal, within one year of the filing of a mandate claim by local governments, a statewide estimate of cost would have to be prepared. If this cost estimate is not fully funded in the subsequent State Budget, the mandate would be repealed. Also, the existing mandate debt would be repaid to local governments over five years, beginning in 2006-2007.

Trial Court Funding and Trial Court Facilities.

The Lockyer-Isenberg Trial Court Funding Act (AB 233) provides that court operations are to be funded by the state, rather than primarily by the counties, as they had been prior to the enactment of the act; the counties continue to contribute to trial court funding through maintenance-of-effort obligations. Counties, however, continue to bear primary responsibility for trial court facilities.

The Trial Court Facilities Act of 2002 (SB 1732) was approved on September 29, 2002. The bill would provide for the transfer of the responsibility of a county to provide necessary and suitable court facilities by authorizing the transfer of that responsibility from a county to the Judicial Council pursuant to an agreement to be negotiated between a county and the Judicial Council, as specified, between July 1 , 2003, and June 30, 2007. Possible fiscal impacts include transfer of title of certain county court facilities to the State of California, coupled with a transfer of responsibility for maintenance and other costs associated with the transferred property. Although the fiscal responsibility for maintaining facilities will shift from the counties to the State, counties will still be required to make annual "maintenance of effort" payments, which will be based on historical facilities operations costs.

Timely State Action.

The timing of State Budget actions may negatively impact the ability of the County to adjust to State budget actions. The Legislature very rarely sends a budget to the governor by the statutory June 15th deadline. In the past decade, the State Budget has been adopted as late as early September on two separate occasions, including the budget for the current fiscal year. When the State Budget is adopted well after the official deadlines, the County's own budget decision making process becomes compressed. Adjustments to correspond to State actions may come well after the start of the fiscal year. Given the magnitude of the State's current budget crises, and the large level of State funding in the

A-7

County budget, the County may have to make corrective budget actions after it has adopted its budget for the upcoming fiscal year.

In June 1998, a complaint was filed in Los Angeles County Superior Court in the case of White v. Davis challenging the authority of the State Controller to make payments in the absence of a final, approved State Budget. The Superior Court judge issued a preliminary injunction preventing the State Controller from making payments including those made pursuant to continuing appropriations prior to the enactment of the State's annual budget. As permitted by the State Constitution, the Legislature immediately enacted and the Governor signed an emergency appropriations bill that allowed continued payment of various State obligations, including debt service, and the injunction was stayed by the California Court of Appeal, pending its decision. On May 29, 2002, the California Court of Appeal issued its opinion, upholding the Controller's authority to make payments pursuant to continuous appropriations in the absence of a State budget. The California Supreme Court granted the Controller's Petition for Review on a procedural issue unrelated to continuous appropriations and on the substantive question of state employee salaries during a budget impasse, and also stayed the trial court's injunction. On May 1 , 2003, the California Supreme Court issued its opinion upholding the Controller's authority to make payments essential to State services, including when payment is authorized by certain self­executing provisions of the California Constitution (which includes Proposition 98 payments of that portion of state excess revenues transferred to the State School Fund for the support of school and community colleges under article XVI, section 8.5 of the California Constitution), in the absence of a State Budget. The Court also remanded the preliminary injunction issue to the Court of Appeal with instructions to set aside the preliminary injunction in its entirety.

The County cannot predict whether the State will continue to encounter budgetary difficulties in the current or future fiscal years. The County also cannot predict the final outcome of State budget negotiations, the impact future State Budgets will have on County finances and operations or what actions the State Legislature and the Governor may take to respond to changing State revenues and expenditures. Current and future State Budgets will be affected by national and State economic conditions and other factors which the County cannot control.

Future State Budgets.

The County cannot predict the final outcome of further State budget negotiations, the impact that such budgets will have on its finances and operations or what actions will be taken in the future by the State Legislature and Governor to deal with changing State revenues and expenditures. Current and future State budgets will be affected by national and State economic conditions and other factors, including the current economic downturn, over which the County has no control .

County Budget Process

The County is required by State law to adopt on or before August 31 each year a fiscal line item budget setting forth estimated expenditures, revenues, and fund balances available so that appropriations during the next Fiscal Year will not exceed available financing. However, the County may, by resolution, extend on a permanent basis or for a limited period, the date from August 31 to October 2.

First, upon release of the Governor's Proposed Budget in January, the County Administrator prepares a preliminary forecast of the County's budget based on current year expenditures, the assumptions and projections contained in the Governor's Proposed Budget and other projected revenue trends.

A-8

Second, the County Administrator presents the County's Proposed Budget to the Board of Supervisors. Absent the adoption of a final County budget by June 30, the current existing budget is continued into the new Fiscal Year until a final budget is adopted.

Third, between January and the time the State adopts its own budget, legally due no later than June 15, representatives of the County Administrator monitor, review and analyze the State budget and all adjustments made by the State legislature. Upon adoption of the final State budget, the County Administrator recommends revisions to the County' s Proposed Budget to align County expenditures with approved State revenue. After conducting public hearings and deliberating the details of the budget, the Board of Supervisors adopts the County' s final budget by August 31, or by October 2 if the Board of Supervisors has adopted a resolution to extend the deadline.

The fiscal year 2002-2003 County budget was adopted on June 14, 2002. The fiscal year 2003-2004 County Budget was adopted on June 7, 2003. The Auditor-Controller is responsible for controlling expenditures within budgeted appropriations.

In order to ensure that the budget remains in balance throughout the Fiscal Year, the County Administrator monitors actual expenditures and revenue receipts each month. In the event of a projected year-end deficit, steps are taken, in accordance with the State Constitution, to reduce expenditures. On a quarterly basis, the Auditor-Controller' s and County Administrator's staff prepares a report that details the activity within each budget category and provides summary information on the status of the budget. Actions that are necessary to ensure a healthy budget status at the end of the Fiscal Year are recommended in the quarterly budget status reports. Other items which have major fiscal impacts are also reviewed quarterly. The County' s ability to increase its revenues is limited by State laws that prohibit the imposition of fees to raise general revenue, except to recover the cost of regulation or provisions of services. See "CONSTITUTIONAL AND STATUTORY LIMITS ONTAXES AND APPROPRIATIONS."

The table on the following page provides a summary of the 2003-2004 Adopted Budget and 2003-2004 Revised Budget as of April 30, 2004 for the general fund. In addition, the table also provides a summary of the proposed 2004-2005 Budget. Since the 1996-1997 fiscal year, the County has scheduled its budget hearings in mid-June and adopted a budget prior to the beginning of the fiscal year. The County expects to hold budget hearings in June and have an adopted 2004-2005 budget in place by July l , 2004.

A-9

COUNTY OF SANTA BARBARA ADOPTED AND REVISED GENERAL FUND BUDGET FOR FISCAL YEAR 2003-2004

AND PROPOSED BUDGET FOR FISCAL YEAR 2004-2005<1>

EXPENDITURE APPROPRIATIONS: Policy & Executive Law & Justice Public Safety Heal th & Publ ic Assistance Community Resources & Publ ic Facilities Support Services Operating/Equity Transfers Transfers to Debt Service Provisions for Reserves Provisions for Designations General County Programs

Total

AVAILABLE FUNDS: Fund Balance Available Taxes Licenses, Permits and Franchises Fines Forfeitures, and Penalties Use of Money and Property Intergovernmental Revenue-State Intergovernmental Revenues-Federal Intergovernmental Revenue-Other Charges for Services Other Financing Sources Miscellaneous Revenue Changes to Reserves Changes to Design ations

Total Available Funds

(l) Totals may not add due to rounding. '2> As of April 30, 2004 (3l Subject to revision.

Source: County Auditor-Controller.

Adopted 2003-2004 Budget

$1 1 ,024,949 55,048,069

1 05,490,034 2,294,513

36,731 ,941 41 ,894,936 45,700,933 4,293, 831

879,454 1 5,336,924

6,31 0,797 $325.006 381

$1 2,049, 601 99,138,888 13,283,51 1 3,807,684 3,671 ,426

64,753,206 9,798,426

291 , 517 62,999,133 42,966, 1 9 6

1 ,537,085 0

1 0,709,708 $325.006 381

A-1 0

Revised Proposed 2003-2004 2004-2005 Budget<2l Budget(3>

$1 0,848,861 $1 1 ,1 54,393 54,969 ,338 54,565,1 29

1 05,51 8,956 1 1 2,251 ,59 6 2,294,513 2,231 ,327

36,642,893 35,455,691 41 ,699,525 42,842,81 6 46,909 ,072 48,283,232 4,299,927 3,747 ,442 1 ,417,839 21 1 ,200

1 1 ,449 , 1 05 9 ,51 9 , 622 6,301,880 4,605,51 2

$322.351.909 $324.867.960

$1 2,049,601 $3,436,767 99,027 , 1 40 1 05,087 , 198 13,303, 51 1 1 4,1 28,445 4,097, 072 3,998,882 3,624,867 3,233,324

57,537,326 66, 1 64,993 1 0,348,987 9 ,452,742

291 ,517 1 28,1 65 62,756,272 62,847,931 43,946,027 45, 1 23,807

1 ,758,431 872,523 245,344 55,496

13,365,81 4 1 0,337,689 $322 351,909 $324.867,962

Financial Statements

The County's general purpose financial statements include the activities of the various funds and account groups for which the Board has effective oversight responsibility. This responsibility includes, but is not limited to, the authority to govern, manage, approve budgets, and assume fiscal accountability.

Activities of the school districts, and certain special districts, all administered by boards separate from or independent of, the Board, are not included. The Board has no authority to govern, manage, approve budgets, assume fiscal accountability, establish revenue limits, or appropriate surplus funds available in these entities. However, assets held in trust by the County Treasurer's Investment Pool for these entities are included in the fiduciary fund category.

The Board is required by State statute to ensure that the financial statements of the County are audited by an independent accounting firm annually each fiscal year. The County 's goal is to submit the audited financial statements for each fiscal year to the Board by August 3 1 of the following fiscal year and to the State Controller within 30 days thereafter. Excerpts from the County's fiscal year 2002-2003 audited basic financial statements, which include the report thereon issued by KPMG Peat Marwick LLP, Certified Public Accountants, are attached to this Official Statement as "APPENDIX C- COUNTY AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2002-2003". These financial statements were prepared using the new financial reporting model in accordance with Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements and Management' s Discussion and Analysis - For State and Local Governments. In order to assess the general financial status of the County, prospective investors in the Notes should review Appendix C in its entirety.

A-1 1

COUNTY OF SANTA BARBARA GENERAL FUND

COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES

Fiscal Years Ended June 30, 1999 through 2003 (Dollar Amounts in Thousands)

Revenues: Taxes Licenses, Permits and Franchises Fines, Forfeits and Penalties Revenues from Use of Money and Property Intergovernmental Revenues Charges for Services Other Revenues

Total Revenues

Expenditures: Current:

General Government Public Protection Public Ways and Facilities Health and Sanitation Public Assistance Education Recreation and Cultural Services

Debt Service: Principal Interest

Capital Outlay Total Expenditures

Excess (Deficiency) of Revenues Over (Under) Expenditures

Other Financing Sources (Uses): Operating Transfers from Other Funds Operating Transfers to Other Funds Proceeds from Long Term Debt Proceeds from Sale of Fixed Assets

Total Other Financing Sources (Uses)

Excess (Deficiency) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses

Fund balances, Beginning of Year Residual Equity Transfers in (Out) Fund Balances, End of Year

1998-1999

$74,6 16 9,625 3,534 6,523

71 ,881 38,778

1.866 $206,823

$35,724 1 35,990

896 123

4,406 2,232 6,393

49 3,576 1,360

$190,749

$16,074

$34,452 (44,875)

0 22

($ 10,401)

$5,673 22, 1 16

(633) $27.156

1999-2000

$81 ,978 9,924 3 ,047 6,225

8 1 ,96 1 41 ,841

1 976 $226,952

$40,536 1 50,552

953 272

4,755 2,386 6,765

52 3,137 2,546

$21 1 ,954

$14,998

$38,451 (49,579)

1 ,069 16

($10,043)

$4,955 27, 156

(33 1) $31 780

2000-2001

$89,665 12,01 1 2,932 9,05 1

80,559 45,898 2,157

$242,273

$43, 1 13 149,804

977 2,073 4,678 2,5 18 7,294

300 3, 143 2,155

$216,055

$26,2 18

$37,560 (5 1 ,566)

6

($14,000)

$12,228 3 1 ,780

(324) $43 674

2001-2002

$94,447 13,134 5,806 5,63 1

77,412 51 ,75 1 3.399

$25 1 ,580

$47,2 19 161 ,45 1

1 ,535 2,277 5,338 2,691 8,077

541 1,871 2,433

$233,433

$ 18, 147

$40,960 (54,632)

165 0

($13,507)

$4,640 44,33 1(!)

$48 971

2002-2003

$92,567 1 1 ,859 6,978 4,249

74,91 8 58,988

1.726 $25 1 ,285

$48,285 169,932

2,064 1 ,476 5,132 2,644 8,164

5 10 1 ,487 1.002

$240,696

$ 10,589

39,044 (49,036)

0 ----1illi

($9,884)

$705 48,97 1

$49 676

(JJ Restated in compliance with Governmental Accounting Standards Board Pronouncement #34 (GASB 34) to include assets previously recorded in agency funds.

Source: County of Santa Barbara General Purpose Financial Statements, ending June 30, 1999, 2000, 2001, 2002, and 2003

A-12

Property Valuation

Under Article XIIIA of the State Constitution, property acquired prior to 1975 is valued at 1 00% of its full market value as of March 1 , 1975. This value then becomes the base year value and can only be increased each year by the appropriate CPI factor or a maximum of two percent per year. A change in the base year value can only occur when there is a change in ownership or new construction. Only the market value of new construction can be added to the base year value. By July 1 of each year the County Assessor delivers the new year assessment roll to the County Auditor-Controller.

Historical Assessed Valuation. Total assessed valuation of property in the County has increased from approximately $28. 7 billion in fiscal year 1 998-1999 to approximately $41 .3 billion in fiscal year 2003-2004, as shown in the following table:

Assessed Valuation, Santa Barbara County 1998-2004

Fiscal Year 1 998-1999 1 999-2000 2000-2001 2001 -2002 2002-2003 2003-2004

(!) Includes Homeowners' Property Tax Relief.

Source: County Clerk-Recorder-Assessor.

(in thousands)

Total Assessed

Valuation<' > $28,701 ,222 30,434,036 33,008,003 35,874,550 38,604,485 41 ,267,857

Percent Increase

(Decrease) 6.0% 6.0 8.5 8.7 7.6 6.9

Appeals. There have been 490 cases filed for fiscal year 2003-2004 on all property types, from July 2003 to May 2004, with a total value difference (the difference between the assessed roll value and the applicants' opinion of value) of approximately $41 l million. For fiscal year 2002-2003, there were 522 new Assessment Appeals filed on all property types, from July 2002 to June 2003, with an appeals valuation difference of approximately $1 . 65 billion. The County has successfully resolved 674 of these appeals as of May 4, 2004 and has reduced the appeal value difference to approximately $475 million; thus, approximately 77% of the value difference has been resolved. This difference represents 1 .2% of the total Countywide valuation.

A sign ificant portion of the resolved value difference is accounted for by a relatively small number of high value petroleum, hotel, and defense industry appeals. In the past fiscal year, the County successfully resolved the Exxon Las Flores Canyon Oil and Gas Processing Facility, the POPCO Gas Processing Facility, and the Bacara Resort & Spa appeals. Although the Assessment Appeals Board has issued final decisions for appeals brought by the owner of the Biltmore Hotel, the applicant has filed an action in Superior Court challenging the Assessment Appeals Board decisions for tax years 1 995-1996 through 2001-2002, inclusive. The Biltmore has also filed new applications with the County for tax years 2002-2003 and 2003-2004. In the current fiscal year, the County has successfully resolved outstanding assessment appeals by Boeing-McDonnell Douglas for fiscal years 1 999-2000 through 2002-2003. Additional applications for fiscal year 2003-2004 are currently pending for Boeing-McDonnell Douglas.

A- 13

Property Tax Levies and Collections; Teeter Plan

Taxes are levied for each fiscal year on the assessable value of taxable real and personal property which is situated in the County as of the preceding January 1 . For assessment and collection purposes property is classified as "secured," "unsecured," or "supplemental," and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll having a tax lien which is sufficient to secure payment of the taxes. Other property is assessed on the "unsecured roll" except those properties classified as "supplemental," which include property on which construction has been completed or for which a change of ownership has occurred during the fiscal year.

Property taxes on the secured roll are due in two installments, on November 1 and February 1 of the fiscal year. If unpaid, such taxes become delinquent on December 10 and April 10, respectively. A ten percent penalty attaches to any delinquent payment and a $ 10 cost on the second installment delin­quency. In addition, property on the secured roll on which property taxes are delinquent is defaulted to the State on or about June 30, of each fiscal year. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus penalty of 1 .5% per month to the time of payment and a $ 1 5 redemption fee. If taxes are unpaid for a period of five years or more, the property is subject to sale by the County Tax Collector. Property taxes on the supplemental roll are due m accordance with the provisions for payment set forth in the California Revenue and Taxation Code.

Property taxes on the unsecured rolls are due as of the January 1 lien date and become delinquent if unpaid on August 3 1 . The ten percent penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1 .5% per month begins to accrue beginning November 1 of the fiscal year. The taxing authority has four ways of collecting unsecured personal property taxes: ( 1 ) a civil action against the taxpayer; (2) filing a certificate in the Office of the County Clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recordation by the County Recorder' s office; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee.

In the 1 993- 1 994 fiscal year, the County opted into an alternative tax distribution method referred to as the "Teeter Plan." This method allows for a 100% distribution of the current tax levy as compared to the previous method where only the current levy minus delinquencies was distributed. This results in the general fund receiving distributions of approximately 50-55% in December, 40-45% in April and the remaining 5% in June of each year. This method also provides that all of the delinquent penalties and redemption penalties of the other entities within the County now accrue to the general fund.

A-14

Historical Tax Information

The following table, based on information compiled by the County, provides a summary of certain information regarding property tax collections for the County.

Summary of Full Cash Value and Collections County of Santa Barbara

Fiscal Years 1993-1994 Through 2003-2004

Secured and Secured and Percent Full Unsecured Unsecured Collections Currently

F iscal Year Cash Value 1993 -1994 $24, 107,963 ,777 1994-1995 24,3 80, 619,716 1995-1996 24, 898,062,215 199 6-1997 25, 613,476, 160 1997-1998 26, 637,63 8,761 1998-1999 28,267,3 50,073 1999-2000 29,998,570,737 2000-2001 32,563,403 ,770 2001-2002 3 5, 432,572,839 2002-2003 3 8,159, 103 ,989 2003 -2004 40, 821, 655, 223

( I J As of April 16, 2004.

Source: County Auditor-Controller.

Largest Property Taxpayers

Property Taxes $48, 43 4, 579

49,743,703 50,749,728 52,457,789 54,717, 845 58,219, 847 62, 166,392 67,3 41,418 73 ,048, 807 77,3 56,3 82 83 3 45 076(!) ' ,

Current Year' s $46,568,961

47, 571,575 49,761, 157 51, 633 ,595 53 ,954,903 57, 490, 593 61,006,393 66, 129,225 71,987,3 20 76, 199, 605 80 550 290(1) ' ,

Collected 96.1% 95.6 98.1 98.4 98.6 98.7 98. 1 98.2 98. 5 98.5 9 6. 6

The ten largest property taxpayers in the County, a s shown on the fiscal year 2003 -2004 secured tax roll, and the approximate amounts of their property tax payments for all taxing j urisdictions within the County, are shown below. These ten largest property taxpayers represent approximately 4.2% of the County' s 2003 -2004 total property taxes billed.

TEN LARGEST PROPERTY TAXPAYERS County of Santa Barbara

Company Exxon Corporation Verizon California Inc. 1260 BB Property, LLC (Biltmore Resort) Southern California Gas Co. HT-Santa Barbara Inc. (Bacara Resort) Pacific Offshore Pipeline Co. Southern California Edison Co. Redevelopment Agency/City of Santa Barbara Fess Parker Doubletree Hotel Pacific Gas & Electric Co.

Source: County Treasurer-Tax Collector.

A-15

Total Tax Levy for 2003 -2004 $4,374,512

2,23 6,771 1,805,974 1, 614,762 1,580,373 1, 120,471

858,83 0 818,258 738,3 20 712,493

Percentage of Total Tax Levy

1. 15% 0.58 0.47 0.43 0.42 0.3 0 0.23 0.22 0.20 0.19

Other Taxes and Revenues

In addition to aid from the State and Federal Government and ad valorem property tax revenues described above, the County has a number of other tax and revenue resources.

Sales Tax. The State collects and rebates to the County a one percent tax on retail transactions within unincorporated areas of the County. An additional sales tax of 1/2 of 1 percent is subvened to the County on a population based formula pursuant to realignment and revenue transfers enacted by the State in fiscal year 1 991 - 1992. In addition, a State constitutional amendment, Proposition 1 72, was approved by the electorate in a special Statewide election in November 1 993 to permanently extend a 1/2 of 1 percent sales tax for counties and cities for public safety purposes. In 2003-2004, the County budgeted $54.5 million in revenues from such source.

Property Transfer Tax. A tax on the transfer of real property recorded in the County is authorized by the State Revenue and Taxation Code and local ordinance. The transfer of real property tax is $ 1 . 1 0 per $ 1 ,000 in the County, with 50 percent of the tax shared with the cities in the incorporated areas of the County.

Transient Occupancy Tax. A transient occupancy tax is levied on the charge for renting any hotel or motel accommodations within unincorporated areas of the County. The transient occupancy tax rate is 10%.

Licenses and Permits. License and permit revenues are received by the County from the licensing of animals and certain businesses within the County and the issuance of building permits.

Fines, Forfeitures and Penalties. These revenues are generated from penalties associated with delinquent property tax payments.

Use of Money and Property. These revenues include the interest earned on bank deposits and other investments, as well as gains and losses on the sale of securities and investments.

Charges for Current Services. These revenues include assessment and tax collection fees, booking fees, court fees and costs, sanitation services fees and park and recreation fees.

Tobacco Litigation. In late 1 998, the State signed a settlement agreement with the four major cigarette manufacturers. The State agreed to drop its lawsuit and not to sue in the future. Tobacco manufacturers agreed to billions of dollars in payments and restrictions in marketing activities. Under the settlement agreement, the tobacco manufacturers agreed to pay California governments a total of approximately $22 billion over a period of 25 years. Beyond 2025, payments of approximately $ 1 billion per year will continue in perpetuity. Under the settlement, half of the moneys will be paid to the State and half to local governments (all counties and the cities of San Diego, Los Angeles, San Francisco and San Jose).

The specific amount to be received by the State and local governments is subject to adjustment. Details in the settlement agreement allow reduction of the tobacco companies' payments because of certain types of federal legislation, or decreases in cigarette sales. Settlement payments can increase due to inflation or increases in cigarette sales. The "first annual" payment, received in April 2000, was 13.8% lower than the base settlement amount due to reduced sales. Future payment estimates have been reduced by a similar percentage. In the event that any of the tobacco companies goes into bankruptcy, the State could seek to terminate the agreement with respect to those companies filing bankruptcy actions, thereby

A-16

reinstating all claims against those companies. The State may then pursue those claims in the bankruptcy litigation, or as otherwise provided by law. Also, several parties have brought a lawsuit challenging the settlement and seeking damages.

The County received $5.03 million in tobacco settlement moneys in fiscal year 2002-2003 and estimates that it will receive approximately $4.28 million in fiscal year 2003-2004 and $4.29 million in 2004-2005. For the first twelve years that tobacco settlement moneys are received, the County has and will set aside 20% of those moneys in an endowment fund to respond to medical and health care needs. For the 2002-2003 fiscal year, the endowment fund received $ 1 ,006,000.

County Loan Program. Recognizing the fiscal strains facing counties and the State interest in a well-administered property tax system, the Legislature created the State-County Property Tax Administration Loan Program by enacting Chapter 914, Statutes of 1 995 (AB 8 18, Vasconcellos). This program was later extended through 2001 -2002 by Chapter 602, Statutes of 2000 (AB 1036, Wesson). On October 4, 2001 , the Governor signed AB 589 into law to extend the program through 2006-2007. Under AB 589, the County is still eligible for the same maximum amount, but as a grant, not a loan. The legislation appropriates a specified maximum amount each year for grants to the eligible 58 counties for additional spending on property tax administration. The State Department of Finance is responsible for administering the program and determining the maximum amount available upon application by each county and upon satisfaction of certain conditions. The County is eligible to receive a maximum grant amount of $926,8 1 7.

To date, the program has been relatively successful. By both increasing property tax revenues to governments and helping to ensure that taxpayers receive a fair assessment, the program has strengthened the property tax administration system. Work backlogs in most counties have been significantly reduced.

Revenues and Expenditure Trends

State and federally mandated expenditures in justice, health and welfare have grown at a greater rate than the County's discretionary general purpose revenues over the last several years. At the same time, decreased State revenues have resulted in fewer State funds being available to the County. The result has been that the County has increased its contribution to maintain mandated services while optional local services have been reduced. The Board has responded to this trend in part by instituting measures to improve management, thereby reducing costs and increasing productivity and maintaining services with diminished funding.

The County is implementing a number of programs to reduce costs, maximize revenues (such as through collection of prisoner booking and property tax administration fees) and maintain sound business practices. Included in these efforts have been the establishment of departmental goals and objectives, performance measures, productivity improvement efforts and increased emphasis on employee training and automation.

County Employee Retirement Plan and Deferred Compensation Plan

Employee Retirement Plan. The Santa Barbara County Employees' Retirement Association was organized under the provisions of the 1937 County Employees Retirement law on January 1 , 1 944. Members include all full-time employees and some part-time employees of the County, as well as employees of nine local independent districts. Currently, new members participate in one of two contributory retirement plans, one for general members and one for safety members. Employer contribution rates required to fund defined benefits under the Plans, including benefits attributable to past

A- 17

service, are established by an independent actuary using the "entry age nonnal" cost method. Such contribution rates are approved by the Board of Retirement and ratified by the Board. As of June 30, 2003 there were 38 employees in a non-contributory plan for general members. This plan is closed and not available to new employees. The retirement system is governed and controlled by a separate Board of Retirement. However, some decisions made by the Board of Retirement are subject to ratification by the County Board of Supervisors.

County contributions to the Plans for the fiscal year 2002-03 totaled $33,799, 1 66. Employee contributions totaled $12,796,575. Employee contributions are refundable upon termination. Plan I members gain nonrevocable rights to receive benefits attributable to County contributions after five years of continuous service, provided they have not withdrawn their contributions and are otherwise eligible to retire. Plan II members gain similar rights to receive benefits after ten years of continuous service.

Contribution rates for fiscal year 2003-04 were based on an actuarial valuation as of December 3 1 , 2002. Rates for the 2004-05 fiscal year will be based on the actuarial valuation for June 30, 2003. As of June 30, 2003, the total pension accrued liability was $ 1,455,000,000 and the actual value of assets was $ 1 ,347,000,000. (Actuarial assumptions reflected in the valuation include an effective rate of return of 8.1 6%, an inflation rate assumption of 4.5%, and a total salary scale assumption of 5.5%). The net unfounded liability (currently $ 1 08, 199,000) is amortized over a 15-year period from the date when each new net unfunded liability is first recognized, and the County's contribution rate is revised accordingly.

Deferred Compensation Plan. The County offers three deferred compensation plans: Santa Barbara County Supplemental Retirement Plan

The Santa Barbara County Supplemental Retirement Plan is an employer discretionary, defined contribution plan established and governed under Internal Revenue Code Section 40 1 (a). Employer only annual contributions are calculated based upon a percentage of employee compensation under annual agreements with employee bargaining groups and unions. This plan is administered through a third-party administrator and is available to all employee groups. The County does not perform the investing function and has no fiduciary accountability for this plan. The County's actual contributions for the current year and each of the two preceding years are as follows:

Fiscal Year Ending 6/30/200 1 6/30/2002 6/30/2003

Contributions $ 82,996

130,820 136, 176

County of Santa Barbara Employee Contribution Deferred Compensation Plan

The County offers to its employees an optional deferred compensation plan created in accordance with Section 457 of the Internal Revenue Code. This plan is available to substantially all employees and allows participants to defer a portion of their current income until future years up to a maximum of $ 13,000 (in whole dollars), so as to shelter such funds and earnings from state and federal taxation until withdrawal. The deferred compensation is not available to participants until termination, retirement, death, or unforeseeable emergency. This plan is administered through a third-party administrator. The County does not perform the investing function and has no fiduciary accountability for this plan.

A- 18

County of Santa Barbara Social Security Compliance Deferred Compensation Plan

The Social Security Compliance Deferred Compensation Plan is a supplemental retirement program util ized by the County in lieu of payments to Social Security (FICA), governed under Internal Revenue Code Sections 3 121 and 457. Enrollment in this plan is mandatory for contract, extra-help, seasonal and temporary employees. Employees enrolled in the regular retirement system are not eligible for this plan. Based upon the employee' s gross compensation, the employee' s deferral, on a before-tax basis, equals 6.0% and the County' s contribution equals 1. 5% for a combined total of 7.5%. This plan is administered through a third-party administrator and is available to all employee groups. The County does not perform the investing function and has no fiduciary accountability for this plan.

The County' s actual contributions for each of the three preceding years are as follows:

Fiscal Year Ending 6/3 0/2001 6/3 0/2002 6/3 0/2003

Contributions $ 93,43 6

95,424 99,889

DEBT AND OTHER FINANCIAL OBLIGATIONS OF THE COUNTY

Debt Authorization

The County is empowered to borrow, incur general obl igation debt and issue bonds, warrants and certain other obligations in accordance with State statutes. General obl igation bonds may be issued pursuant to a resolution, but first must be authorized at a general or special election at which the question of their issuance is approved by two-thirds of the County' s registered electors voting thereon. The total outstanding general obligation debt of the County is also l imited by its appropriations limit as described in "CONSTITUTIONAL AND STATUTORY LIMITS ON TAXES AND APPROPRIATIONS-Article XIIIB of the State Constitution." As of the date of this Official Statement, the County had no outstanding general obligation debt.

The purposes for which the County may incur general obligation indebtedness are for the acquisition and improvements of real property. In addition, the County may issue general obligation bonds for the purpose of exchanging such bonds for outstanding County warrants, or using the proceeds of the sale of such bonds to prepay or purchase warrants not exchanged.

Long-Term Obligations of the County

The County has various long-term obligations, as described in "APPENDIX C-COU NTY AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2002-2003 ." As of June 30 2003, these obl igations, which include certificates of participation, capitalized leases, compensated absences, internal services funds, contingent l itigation liabilities and enterprise funds totaled $163 ,266,000 (also see " Direct and Overlapping Bonded Debt" under this caption).

Payment Schedule for Certain Long-Term Obligations of the County

The following schedule shows the total annual payments (including both principal and interest) and total payments (less interest) due beginning fiscal year 2003 -2004 through maturity on the long-term debt outstanding described in "APPENDIX C-COUNTY AUDITED FINANCIAL STATEMENTS

A-19

FOR FISCAL YEAR 2002-2003" (excluding compensated absences and contingent liabilities), assuming that all annual appropriations are made to pay the outstanding amounts when due.

Since June 30, 2003, the County issued its 2004 Certificates of Participation, which currently refunded the County' s 1 994 Certificates of Participation and provided new money proceeds. All of the 2004 Certificates of Participation are currently outstanding.

General Long-Term Obligations As of June 30, 2003

(in thousands)

Certificates of Capitalized Other Long Fiscal Year Ending June 30 ParticiQation°) Leases Term Debt Total

2004 $8,468 $690 $297 $9 ,455 2005 8,747 429 297 9,473 2006 8,357 31 1 297 8,9 65 2007 8,396 271 222 8, 889

2008 and thereafter 59, 073 939 11 60,023 Less: amount representing interest (25,181) (479) ill} (25,676)

TOTAL $67.860 llJ,§1 � $71.129

(I) Exclusive of2004 Certificates of Participation. Includes certain amounts refunded by 2004 Certificates of Participation. Source: County Auditor - Controller.

Future Financings

The County will from time to time finance its capital expenditures but nothing is currently planned which would result in new debt service for the upcoming fiscal year.

Direct and Overlapping Bonded Debt

The following table shows the total estimated outstanding indebtedness as of June 1, 2004 for the various governmental entities located wholly or partially within the County which have the power to incur bonded indebtedness. Because no single parcel of property located within the County' s boundaries is located within every entity shown on the table, the table is not indicative of the actual or potential tax burden upon any single parcel of property located within the County' s boundaries.

Although the County has attempted to obtain accurate information as to the outstanding debt of the governmental entities that overlap the County, it does not warrant the completeness or accuracy of the information shown in the table.

A-20

SANTA BARBARA COUNTY DIRECT AND OVERLAPPING BONDED DEBT

(As of June 1, 2004)

2003-04 Assessed Valuation: Redevelopment Incremental Valuation: Adjusted Assessed Valuation:

$41,264,763,838 (includes unitary utility valuation) 1 ,975,902,838

$39,288,861 ,000

OVERLAPPING TAX AND ASSESSMENT DEBT: High School Districts Unified School Districts Goleta Union School District Orcutt School District Santa Barbara School District Other School Districts City of Guadalupe Carpinteria Sanitary District, I.D. No. 1 Santa Ynez River Water Conservation District, I.D. No. I Solvang Assessment District No. 90-1 Special District 1 9 1 5 Act Bonds TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT

DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT:

Santa Barbara County General Fund Obligations Allan Hancock Joint Community College District Certificates of Participation Santa Maria Joint Union High School District Certificates of Participation Santa Maria-Bonita School District Certificates of Participation Buellton School District Certificates of Participation Other School District Certificates of Participation City of Carpinteria Certificates of Participation City of Santa Barbara Certificates of Participation City of Santa Maria General Fund Obligations

City of Solvang General Fund Obligations Carpinteria Sanitary District General Fund Obligations Santa Maria Cemetery District Certificates of Participation TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT

Less: Carpinteria Sanitary District ( 100% self-supporting) TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT

GROSS COMBINED TOTAL DEBT NET COMBINED TOTAL DEBT

(1) Excludes tax and revenue anticipation notes.

% Applicable 99.997-1 00.%

100. 100. 100. 1 00. 100. 1 00. 100. 1 00. 100. 100.

100. % 99.662 99.997 99.996

100. 100. 100. 100. 100.

100. 1 00. 100._

Debt 6/1/04 $ 53,569, 1 19

33,630,000 23,81 0,000 14,320,000 19,225,000 1 9,535,000

32,500 50,000

1 ,270,000

1 52,625 1,650,000

$1 67,244,244

$ 65,810,000 (1) 5,386,731 2,389,928

1 4,404,424 4,045,000 2,574,552 1 ,775,000 5,645,000

22, 140,000

1 ,420,000 17,245,000 1.580,000

$144,415,635 1 7,245,000

$127,170,635

$3 1 1 ,659,879 (2) $294,414,879

(2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds, non-bonded capital lease obligations and state contractual obligations within the Department of Water Resources.

Ratios to 2003-04 Assessed Valuation: Total Overlapping Tax and Assessment Debt . . . . . . . . . . .. . . . . 0.41 %

Ratios to Adjusted Assessed Valuation:

Combined Direct Debt ($65,810,000) ......................... 0.17% Gross Combined Total Debt.. . . . . . . . . . . . . . . . .. . ..... . . . . .. . . . . . . . . . .. . 0.79% Net Combined Total Debt . . . . . . . . . . . . . . . .. . .. . . . . . . . . . . .. . . . . . . . . . . . . . . 0.75%

STATE SCHOOL BUILDING AID REPAYABLE AS OF 6/30/03: $21 , 193

COUNTY TREASURER'S INVESTMENT POOL

The County Treasurer manages, in accordance with California Government Code Section 53600 et seq., funds deposited in the County Treasury by the County, all County school districts, various special

A-2 1

districts, and some cities within the County. State law requires that all moneys of the County, school districts and certain special districts be held in the County by the County Treasurer. The County Treasurer accepts funds only from agencies located within the County. There are currently 5 1 participants in the pool, the largest being the schools, representing in aggregate 50% of the pool. The moneys on deposit are predominantly derived from local government revenues consisting of property taxes, State and Federal funding and other fees and charges.

As of March 3 1 , 2004, the composition, carrying amount and market value of the County's investments were as follows:

SANTA BARBARA COUNTY INVESTMENT POOL

Summary of Assets Held

Commercial Paper Government Agency Bond Corporate Bonds and Notes Local Agency Investment Fund

TOTAL

Principal Value $304,965,000 396,207,000

14,500,000 40,000,000

$755.672.000

Market Value $304,4 14,422

397,546,609 14,545, 1 1 5 40,000,000

$756.506,146

The composition and value of investments under management in the County pool will vary from time to time depending on cash flow needs of the County and public agencies invested in the pool, maturity or sale of investments, purchase of new securities, and due to fluctuations in interest rates generally.

As reflected in the table above, as of March 3 1 , 2004, the principal value and market value of investments credited to the pool were $755,672,000 and $756,506, 146 million, respectively. As of March 3 1 , 2004, the pool included approximately $ 1 8,606,684 in cash or cash equivalents ( cash and investments available or maturing within 90 days), which represents the pool's liquidity excluding anticipated property tax collections. As of March 3 1 , 2004, the dollar weighted average portfolio maturity of the pool was 6 1 3 days. There have not been any unanticipated or unusual withdrawals from the pool in the last six months. County management believes the liquidity in the portfolio is adequate to meet expected cash flow requirements and preclude the County from the need to sell investments at below carrying value. However, the County has in the past and may in the future elect to sell securities below carrying value, issue short-term debt to fund cash flow needs, and take other actions as the Treasurer may deem warranted by prudent fiscal management.

At the discretion of the County Treasurer, pooled investments may be established as follows:

1 . General Investment Pool - Investments purchased from all of the pooled surplus funds belonging to the County, School Districts, Special Districts, Special Fund Departments and other Trust or Special Funds that are to share the earnings and profits proportionally. Investments in this pool are limited to a maturity of five years.

2 . Direct Investment Pool - Investments purchased from certain funds belonging to the County, School Districts, Special Districts, Special Fund Departments and other Trust or Special Funds that the earnings and profits are not shared, but credited to the specific investor fund. Investments in this pool can include securities with maturities over five years.

A-22

The County Treasurer's policy currently permits investments in repurchase agreements with maturities not to exceed one year, and permits reverse repurchase agreements with maturities not to exceed 92 days. However, the County Treasurer at her sole discretion can at any time amend its investment policy. However, the County Treasurer does not currently plan to amend its investment policy. The County Treasurer's Policy was last updated in January 2004.

For further information regarding the County's existing pool, see Note 5 to the audited financial statements in "APPENDIX C-COUNTY AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR 2002-2003 " and "APPENDIX D-STATEMENT OF INVESTMENT POLICY".

CONSTITUTIONAL AND STATUTORY LIMITS ON TAXES AND APPROPRIATIONS

Article XIIIA of the State Constitution

Section l (a) of Article XIIIA of the Constitution of the State of California (the "State" ) limits the maximum ad valorem tax on real property to one percent of full cash value (as defined in section 2), to be collected by the counties and apportioned according to law. Section l (b) of Article XIIIA provides that the one percent limitation does not apply to ad valorem taxes to pay interest or redemption charges on ( 1 ) indebtedness approved by the voters prior to July 1 , 1 978 or (2) any bonded indebtedness for the acquisition or improvement of real property approved on or after July 1 , 1978, by two-thirds of the votes cast by the voters voting on the proposition. Section 2 of Article XIIIA defines "full cash value" to mean the county assessor's valuation of real property as shown on the 1975-1 976 tax bill under "full cash value" or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1 975 assessment. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed two percent per year, or reduction in the consumer price index or comparable data, or reduced in the event of declining property value caused by damage, destruction or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that notwithstanding any other law, local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above.

The voters of the State subsequently approved various measures which further amended Article XIIIA. One such amendment generally provides that the purchase or transfer of (i) real property between spouses or (ii) the principal residence and the first $ 1 ,000,000 of the full cash value of other real property between parents and children, do not constitute a "purchase" or "change of ownership" triggering reassessment under Article XIIIA. This amendment could serve to reduce the property tax revenues of the County. Other amendments permitted the State Legislature to allow persons over 55 or "severely disabled homeowners" who sell their residence and buy or build another of equal or lesser value within two years in the same county, to transfer the old residence's assessed value to the new residence.

In the November 1 990 election, the voters approved the amendment of Article XIIIA to permit the State Legislature to exclude from the definition of "new construction" seismic retrofitting improve­ments or improvements utilizing earthquake hazard mitigation technologies constructed or installed in existing buildings after November 6, 1 990.

Article XIIIA has also been amended to permit reduction of the "full cash value" base in the event of declining property values caused by damage, destruction or other factors, provided that there would be no increase in the "full cash value" base in the event of reconstruction of property damaged or destroyed in a disaster. Because of the recent decrease in property values in certain areas of the State, certain counties have reviewed and reduced the assessed values of certain properties within those counties. See "COUNTY FINANCIAL INFORMATION-Property Valuation-Historical Assessed Valuation" herein.

A-23

Article XIIIA Litigation. On April 1 8, 2003 , the Orange County Superior Court entered a final judgment in the Bezaire v. County of Orange case (also known as the "Prop. 13" or "2% Case") holding that the Orange County Assessor (the "Assessor") had violated the 2% maximum annual inflation adjustment limit of Article XIIIA of the California Constitution when the Assessor attempted to compensate for the failure to increase the taxable value of a single family residential property the previous year when the market value of the property declined below its taxable value, by increasing the assessed value by 4% the following year. The Assessor established the 4% value increase by attempting to recapture two years of inflation adjustments. The State Board of Equalization had approved this methodology for increasing assessed values in similar circumstances, and in 2002, two other local courts (Los Angeles and San Diego) ruled differently than Orange County on the same issue, affirming the latter practice.

The Superior Court had ruled in favor of a motion to restate the complaint as a class action, whose members consisted of those Orange County taxpayers whose property assessments rose more than 2% due to the cumulative effect of current assessments with those of previous years. If upheld on appeai, the class action suit could have resulted in the return in excess of $500 million to taxpayers in Orange County. In June 2003 the Orange County Assessor and the Tax Collector in conjunction with the County of Orange, filed an appeal to the Court of Appeal of the State of California, Fourth District, Division Three. On March 26, 2004, the Court of Appeal reversed the lower court, entering judgment in favor of Orange County, finding that the trial court erred in ruling that assessments are always limited to no more than 2% of the previous year' s assessment. The Court of Appeal ruled that the base on which the inflation factor is figured remains that of the original purchase price ( or assessment at time of genuine new construction), not any reduced base resulting from a reassessment in the wake of declining property values. On May 5, 2004, the Respondent filed a petition to the California Supreme Court for a review of the decision published by the Court of Appeal. The California Supreme Court is expected to issue its decision to accept or deny this petition for review by early August 2004.

The County is unable to predict what effect, if any, further review by the courts might have on assessed values of property within the County.

Article XIIIB of the State Constitution

Article XIIIB of the State Constitution limits the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted for changes in the cost of living, population and services rendered by the governmental entity. The "base year" for establishing such appropriation limit is the 1978- 1 979 fiscal year, and the limit is to be adjusted annually to reflect changes in population, consumer prices and certain increases in the cost of services provided by these public agencies.

Appropriations subject to Article XIIIB include generally authorizations to expend the proceeds of taxes levied by or for an entity of local government and the proceeds of State subventions, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to an entity of government from (1) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (2) the investment of tax revenues. Article XIIIB includes a requirement that if an entity' s revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years.

A-24

Article XIIIB does not limit the appropriation of moneys to pay debt service on indebtedness existing or authorized as of January 1, 1979 , or bonded indebtedness subsequently approved by the voters . Furthermore, in 1990, Article XIIIB was amended to exclude from the appropriations limit "all qualified capital outlay projects , as defined by the Legislature" from proceeds of taxes. The Legislature has defined "qualified capital out lay project" to mean a fixed asset (including land and construction) with a useful life of ten or more years and a value which equals or exceeds $100,000. As a result of this amendment, the appropriations to pay the lease payments on the County' s long-term general fund lease obligations are general ly excluded from the County's appropriations limit.

The County's appropriation limit for the fiscal year ended June 30, 2001 was $383 million, for which expenditures subject to appropriation limitation were $103 million.

Articles XIIIC and XIIID of the State Constitution

On November 5, 1996, the voters of the State approved Proposition 218, known as the "Right to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the California Constitution and contained a number of interrelated provisions affecting the ability of the County to levy and collect both existing and future taxes, assessments , fees and charges. The interpretation and application of Proposition 218 will ultimately be determined by the courts with respect to a number of the matters discuss ed below, and it is not possibl e at this time to predict with certainty the outcome of such determination.

Article XIIIC requires that all new local taxes be submi tted to the electorate before they become effective. Taxes for general governmental purposes of the County require a majority vote and taxes for s pecific purposes, even if deposited in the County's general fund, require a two-thirds vote. Further, any general purpose tax which the County imposed, extended or increased without voter approval after December 31, 199 4 may continue to be imposed only i f approved by a majority vote in an election which must be held within two years of November 5, 199 6. The County believes that no existing County imposed taxes deposited into its general fund will be affected by the voter approval requirements of Proposition 218. The voter approval requirements of Proposition 218 reduce the flexibility of the County to raise revenues for the general fund, and no assurance can be given that the County will be able to impose, extend or i ncrease such taxes in the future to meet increased expenditure needs.

Article XIIID also adds several provisions making it generally more difficult for local agencies to levy and maintain fees, charges , and assessments for municipal services and programs. These provisions include, among other things , (i ) a prohibiti on against assessments which exceed the reasonable cost of the proportional special benefit conferred on a parcel, (ii) a requirement that assessments must confer a "special benefit," as defined in Article XIIID, over and above any general benefits conferred, (iii) a majority protest procedure for assessments which involves the mailing of notice and a bal lot to the record owner of each affected parcel , a public hearing and the tabulation of ballots weighted according to the proportional financial obligation of the affected party, and (iv) a prohibition against fees and charges which are used for general governmental services, i ncluding police, fire or library services, where the s ervi ce is available to the public at large in substantially the s ame manner as it is to property owners. The County believes that $200,000 in assessment proceeds deposited annually in the general fund to reimburse the general fund for debt service on previously issued certificates of participation may be affected by the requi rements of Article XIIID. In the event that such assessment proceeds cease to be avai lable, the County will be required to pay such debt service from other general fund revenues. The County is unable to predict whether or not in the future it wi ll be able to continue all existing services and programs funded by fees, charges and assessments in light of Proposition 218 or, if these services and

A-25

programs are continued, what amounts (if any) would be used from the County's general fund to continue to support these activities.

Article XIIIC also removes limitations on the initiative power in matters of reducing or repealing local taxes, assessments, fees or charges. No assurance can be given that the voters of the County will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges currently comprising a substantial part of the County's general fund.

Future Initiatives

Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID and Proposition 39 were each adopted as measures that qualified for the ballot pursuant to California's initiative process. From time to time other initiative measures could be adopted, further affecting County revenues or the County' s ability to expend revenues.

COUNTY DEMOGRAPHIC INFORMATION

Population

The population of the County, as of January 1 , 2004, was estimated to be 414,800. The table following shows population information for the County and the incorporated cities within the County.

POPULATION County of Santa Barbara (I)

April 1, April 1, April 1, January 1, January 1 , January 1 , January 1 , 1970 1980 1990 2000 2001 2002 2003

Santa Barbara City 70,2 15 74,4 14 85,571 93,300 90,100 90,300 90,500 Santa Maria 32,749 39,685 6 1 ,284 78,600 78,600 80,200 82, 100 Lompoc 25,284 26,267 37,649 4 1 ,750 41 ,500 4 1 ,500 4 1 ,850 Carpinteria 6,982 10,835 13,747 14,350 14,350 14,350 14,400 Guadalupe 3,145 3,629 5,479 5,700 5,875 6,075 6,275 Solvang'2J 4,741 5,375 5,400 5,425 5,450 Buellton<2J 3,860 3,920 3,970 4,2 10 Goleta<2J 30,800 Unincorporatel3) 125 949 143,864 161,137 160,600 163,400 1 64,400 1 34,700 Total for County 264 324 298 694 � 403 500 � � 410 300

(IJ Totals may not add due to independent rounding. (Z) Solvang was incorporated in 1985; Buellton was incorporated in 1992; Goleta was incorporated in 2002. (3J Includes Goleta, up to January 1, 2002, which was incorporated in 2002.

Sources: U.S. Census for 1970, 1980 and 1 990; California Department of Finance for 2000 through 2004.

Industry and Employment

January I , 2004

90,500 85,300 42,250 14,350 6,300 5,425 4,460

30,850 135,365 �

The largest employment categories in the County include services, wholesale and retail trade, government, and manufacturing.

Between 1 999 and 2003 , the County has had lower annual average unemployment rates than the State, and the national rates. The following table shows the estimated average annual employment and

A-26

unemployment of the resident labor force (the number of j obs held by the County' s residents, not the number of j obs located in the County).

LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT Yearly Average for Years 1999 through 2003

Labor Civilian Year and Area Force Employment Unemployment

1 999 Santa Barbara County 1 99, 1 00 191 ,400 7,700 California 1 6,375,500 1 5,522,3 00 853,300 United States 139,368,000 1 33,488,000 5,880,000

2000<1 )

Santa Barbara County 201 ,900 1 94,500 7,400 California 1 6,892,000 1 6,056,500 835,500 United States 142,583,000 136,891 ,000 5,692,000

2001 Santa Barbara County 201 ,400 1 94,400 7,000 California 17, 1 7 1 ,600 1 6,249, 1 00 922,500 United States 143,734,000 136,933,000 6,801

2002 Santa Barbara County 204,000 195,400 8,600 California 1 7,375,800 1 6,24 1 ,900 1 , 160,900 United States 144,863,000 136,485,000 8,378,000

2003 Santa Barbara County 209,000 200,600 8,400 California 17,460,000 16,282,700 1 , 1 77,300 United States 146,700,000 1 38,300,000 8,400,000

Unemployment Rate

3.9% 5.2 4.2

3.7% 4.9 4.0

3.5% 5.4 4.7

4.2% 6.7 5.8

4.0% 6.7 5.7

<1 > Effective with the release of January 2003 data from the State of Employment Development Department in February 2003, labor force data for all areas in California have been revised back to January 2000. This revision is the result of incorporation of the 2000 Census population controls at the State level and changes in methodology. Therefore, data for years prior to 2000 are not comparable with data for 2000 and later years.

Sources: State Employment Development Department, March 2003 Benchmark. U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

A-27

EMPLOYMENT BY INDUSTRY GROUP County of Santa Barbara

For Years 1999 through 2003

TYI1e ofEm2loYffient 1 999 2000 2001 2002 2003 Agriculture 15 ,300 14,900 13 ,800 14,400 18,500 Non-Agriculture

Construction and Mining 9,200 9,300 9,600 8,900 9,200 Manufacturing 1 5,300 1 5,900 1 5, 100 13 ,400 1 3,600 Transportation and Public Utilities 2,900 2,900 3,000 2,800 2,900 Information 4, 100 4,300 4,500 4, 100 4,1 00 Wholesale Trade 4,900 5,200 5,400 5,000 4,300 Retail Trade 20,700 21 ,000 20,200 20,300 19,900 Finance, Insurance and Real Estate 8 , 100 8,400 8,800 8,900 8,400 Services 6 1 ,800 65,000 65,200 66,700 67,500 Government 32,400 32,800 34.500 35,600 35,600

TOTAL AGRICULTURAL AND 174!600 1 79,50Q 1 79,80Q 172!900 184!000 NON-AGRICULTURAL:

Source: State Employment Development Department, Labor Market Information Division. March 2003 Benchmark. Note: Totals may not add due to independent rounding.

The single largest employer in the County is, collectively, the school districts. The following table indicates the major employers in the County.

EmQloyer

MAJOR EMPLOYERS County of Santa Barbara

April 2004

1 University of California, Santa Barbara 2 Vandenberg Air Force Base 3 County of Santa Barbara 4 Santa Barbara Cottage Hospital 5 Santa Barbara City College 6 Raytheon Electronic Systems 7 Santa Barbara Elementary and High School District 8 Santa Barbara School District Administration 9 Santa Maria-Bonita Schools 1 0 Lompoc Unified School District

Source: UCSB Economic Forecast Project. The 2004 Santa Barbara County Economic Outlook.

Commercial Activity

Approximate Number of Employees

9,678 4,897 4, 140 2,562 2, 1 1 1 1 ,939 1 ,803 1 ,706 1 ,632 1 ,534

Commercial activity is an important contributor to Santa Barbara County's economy. From 1 998 to 2002, taxable retail sales rose 1 3 1 %. The following table shows the County's taxable transactions for 1998 through 2002.

A-28

TRADE OUTLETS AND TAXABLE RETAIL SALES County of Santa Barbara

For Years 1998 through 2002 (in thousands)

1 998 1 999 2000 2001 2002 Apparel Stores $ 1 1 8,5 15 $ 1 1 9,1 1 0 $ 120,060 $124,622 $ 140,283 General Merchandise Stores 512,465 592,222 625,240 639,178 644,567 Specialty Stores 38 1 , 1 53 42 1 ,246 458,685 472,760 475,396 Food Stores 220,397 225,464 228,770 234,566 242,403 Eating and Drinking Places 4 17,3 1 1 445,353 483,788 5 1 1 ,5 12 533,792 Household <2) 130,939 1 39,425 17 1 ,794 1 60,469 1 74,005 Building Materials 262, 136 32 1 , 1 57 349,908 379,436 393, 139 Service Stations 1 94,66 1 223, 149 250,606 255,122 260,643 Automotive 445,592 496,693 559,07 1 622,704 684,029 All Other Retail Stores 162,256 1 69,670 1 75,1 56 1 78,288 1 79,480

Total Retail Outlets 2,845,425 3 , 153,459 3 ,423,078 3,578,657 3,727,737

Business and Personal Services 234,326 247,074 258,071 249,530 244,778 All Other Outlets 944,529 1 ,025,999 1,142,1 14 1 , 1 8 1 ,666 1,095,91 5

Total All Outlets $4.Q24,28Q $4.426,5;32 $4.823,263 $5.0Q9.853 $5.Q68,430 Total Sales Tax Permits 13 ,578 1 3,5 1 9 13 ,278 1 3,38 1 13 ,4 19

(I) Totals may not be precise due to independent rounding. <2) In 2000, the State Board of Equalization renamed the "Home Furnishings and Appliances" to "Household".

Source: State Board of Equalization, Taxable Sales in California (Sales & Use Tax).

Construction Activity

Residential building permits issued in the County during the last five years exceed $ 1 .09 million in valuation. The following is a building permit valuation summary for 1999 through 2003 .

BUILDING PERMIT VALUATION

Residential Valuation (in OOOs) Single Units Multi-Dwelling Units

TOTAL

New Housing Units Single Units Multi-Dwelling Units TOTAL

County of Santa Barbara For Years 1999 through 2003

1 999

$ 1 50,5 1 5 9,225

$159.740

652 ___fil

739

2000

$ 162,208 1 5,433

$177 640

733 ___lU

888

2001

$ 1 95,876 12,527

$208,403

868 --111

979

Source: Economic Sciences Corporation, "California Building Permit Activity."

A-29

2002 2003

$ 198,686 $240,225 68,832 44,080

$267.5 18 $284.305

905 1 .034 743 376

1.648 1,410

Personal Income

The following table summarizes the total effective buying income and the median househol d effective buying income for the County, the State and the nation over the past five years.

Year and Area

1998 Santa Barbara County Cal ifornia United States

1999 Santa Barbara County Cal ifornia United States

2000 Santa Barbara County Cal ifornia United States

2001 Santa Barbara County Cal ifornia United States

2002 Santa Barbara County California United States

(!) In thousands (OOOs)

PERSONAL INCOME For Years 1998 through 2002

Total Effective Buying Income<1J

$6,908,719 551,999 ,317

4,621,491,738

$7,240,915 590,376,663

4,877, 786,658

$7,743,500 652, 190,282

5,230,824,904

$7,412,996 650,521,407

5,303,481,498

$7,597,949 647,879 ,427

5,340,682,818

Median Household Effective Buying Income

$36, 400 37,091 35,377

$39,515 39,492 37,233

$43,415 44,464 39 , 129

$41, 440 43,532 38,365

$41,782 42,484 38,035

Source: Sales & Marketing Management "Survey of Buying Power" issue, 1998-2003.

A-30

APPENDIX B

Form of Legal Opinion

This page intentionally left blank

Board of Supervisors County of Santa Barbara Santa Barbara, California

Ladies and Gentlemen:

[closing date]

County of Santa Barbar�, California 2004-2005 Tax and Revenue Anticipation Notes Series A

(Final Opinion)

We have acted as bond counsel in connection with the issuance by the County of Santa Barbara (the "County") of $55,000,000 aggregate principal amount of notes, issued pursuant to and by authority of a resolution of the Board of Supervisors of tl1e County adopted on May 25, 2004 (the "Resolution"), under and by authority of Article 7.6, Chapter 4, Part 1, Division 2, Title 5 ( commencing with Section 53850) of the California Government Code, and designated "County of Santa Barbara, California, 2004-2005 Tax and Revenue Anticipation Notes, Series A" (the "Notes") .

In such connection, we have reviewed the Resolution, the Tax Certificate of the County, dated the date hereof (the "Tax Certificate"), an opinion of counsel to the County, certificates of the County and others and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein.

Certain agreements, requirements and procedures contained or referred to in the Resolution, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Notes) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to any Note or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than ourselves.

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Our engagement with respect to the Notes has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) . We have assumed, without undertaking to verify,

DOCSSF 1:750998.1

the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinion, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained m the Resolution and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause mterest on the Notes to be included m gross income for federal mcome tax purposes. We call attention to the fact that the rights and obligations under the Notes, the Resolution and the Tax Certificate and their enforceability may be subject to bankruptcy, msolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against counties in the State of California. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum or waiver provisions contained in the foregoing documents. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Notes and express no opinion with respect thereto.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

1 . The Notes constitute the valid and binding obligations of the County. The principal of and interest on the Notes are payable from the first moneys received by the County from the Pledged Revenues (as that term is defined in the Resolution), and to the extent not so paid, are payable from any other moneys of the County lawfully available therefor.

2. Interest on the Notes is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the Notes is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that interest on the Notes is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Notes.

Faithfully yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

per

DOCSSFl:750998.1 2

APPENDIX C

County Audited Financial Statements for Fiscal Year 2002-2003

This page intentionally left blank

1111

' ti tl•) r:.r:mndct (i!J �1'�'\hl\,�""t pm;. tl:(P!'ltlHJi:.1JUt .:,HH tlptw WU t)lp- �},'',\ ·;.u)t}mUto_iUf; £Llt:)H..l-lH�'l}lhini

m'Hffntl<l·�;od pm: �H-!{H..)Jtl�rn:-.w ff s.yo1..p:)iu ;):qt }UJ.W.Jti'-tumt ;v :s:&tttnhH .,nc.m.,mm p�)<::}9Jnj q_,"'.'-:tlf,Y<; 'e;4;np;)JilJ/ rnwnq u1tn1:l,"} p.:,qdtht ;),\tH{ :1;\\ pJtO\ t �p • .mpm!JS

"l'·lT'.<>'lJ\' l�ln};)!U!..U�.''lCHJ J:l:) 31..? µ..1nnh;ll un!}�l.HfiJU! ,\JtmDW,"ljtfdn<.; <;t Hh'! ¥VlJH1:)��w pn,t.tZH�J ;���i:q .1lp _Fl uwt p.J mtb.J:1 u �0'U �a 9( t(ffnv·f4! t H '-'.lStitl U(I. 11:;:N,.;p�,uc pl!� U(JESS!lJilp "\1iJ;All.A1iHJU�1

�;..�n:::i� p.;}1Ht/� .• np lH pintki)t�cr !fp:tr�1-:.:.r-.1?i -.-.J1,h:1m 1d tlmsuniu�·n! 'qlf.,-V>, �'jl i�'.JUU I"" ',;:lJ!,\ l"l, 'li)!'l"ll

-101 ;\\fl pua J<>�J�!F tt:i:n.1�un m 1;J!itn:q;,, J-�,n,}Jt.hi:1; .�{t ;m\• "'fW"l?

·i:J;t�\J�n U)Ul.:S �(> �l Jti- uom::u.MQ;�n pwv n-wun:tu�j .;)l\l rmi t/H�.� ·--.;:,:q1�tv,c :td,-'\1 -�.;s:..�1�;�riq .AH ·'=-Jl:)t\n.:iu. p..,�iu.;:rtuuJJ.\or, �"-'tg Ju uonrs1.JU t1Jr::HJm1�; .:tqi 's.p;1:�k#1 P'-H,'.!;l..-'.'Hl w� rn �Jpn\� 1n:y;;.,:,11J .:J: .. 11qc t}} pJ)i.,�_F}l 'tRL'�a�w.�)� tm :,m�u�t oqi +uottBt:b JfH} tit

!!p;·n� i'.ti{J; inv ;'}\,JtFlt:j 1,\\ H�iiitUJ:c'!''-�l d tll,) Ht;;.w�-, ' ;l���u,-itt.nr,,_n .�,;.� -1t•l':Hl :-.)�1!�Uq-o:.1 tm�)VW�i...; pi.u-<: f-!4"<l"i ,;,,1,h�!!wl i,,,,.,n, ,:•:;i,

l� ,�p-U\tUd ·)� u,,,,\ ".):g

�-Y\� �q,m� t�v ··,�t:�·u:.nn� P"L'il.H"un ;]qJ m ;1t;;Hfblfipt1p pm: �1WH)H)1\ ;;qi ,):.1t9pl.\� ')t�r.,1 r'-...;�l H: UI} ' ;faH}HPJ"'.i,'< 1,�jmptn Hp-m; UV '1i%)HJ:0!t:b:flUJ f"nJ.:Hf.lli t�� :ltU:f ,1=1W ..;.}lL:N.HZqq� j'tL}U.CWJ .JJP i-�pq "'' n,�iq1:: -1 ."-w;-.m�1�t Jj4tnr,��t�.J. Wtlqn t�i: ;tptt-!t ;::i-qi m ... i(J_JJ: ;:;J put ur:;d �-"''� rmg, :.i 11nh�1.i 1$f.fi'.�put--t� ,Y'.'t),{1 L ',.;...);1�1s p,1)tt.in :)i(t Jt\ p.:t'-i�j(j: l-�H\H)dUU), ) ;}�li ,\q t)J!�'it.t 1 1-p ,qmnt;_)� �mnpnv JU-.}sa.o�',n!J ?H p�1UWi-Ut1� "'-'"!!?Ht.: p:1 1�sr:tHJ ni .Jp11t:1qddi� .._ptrpuqfi �')-y;l pur. �-:::iu�>HJ\f )0 :-;-.:t1tlS p;H�:n ;��F u; p,,.HJ-e<:�:n� <\ffUJ.�: .. 1* •;pn�punx: /:urnpnr ipLt� .;l;)Ut�pl0-.1,)l'. m )tpm; i��H p.:,pnpuo;) JA\

'Hplrn .lth"\ H�I p:r,a:-q �1U#{U¢W1� tcr:riJr.tr�i �.aqi lW 'iUOpJ�do ��;-::ud\'# i'I} °'+! >\.1�?{l!'iUv<J�JJ Jt1(} ·mh)!.U#ntU!..-"1.Lt c\,, .'\1rnht; ) .1tttJt) ,'\'npqWUO·d:>,�J .)tV ,,,rn 5)U;}: .. U,Jltl� p:tnrnt,1!) :,}�H.tJ, J:<1�i.)}<ltJJ Jn :.11tlt:l ;tp La p-:,w�tt 1'-t". sm�m�rtt<: -�1;sni1 1

0 \tun�\) tnp ."'q ltium0 ,,101,\lJ,iJ!IM

i;',)�qi, ·ro�JZ ·nt .:11 rtif p<ipn...1 .m;:,,\ �;�n m;1 r,mr Jn �o �1m� 1q-c�} �1;Ut1qn.1n �nms J �' �if; }i) U(HF�Ul ,h'�fU! ptrtlJ -:°hm.ucm�t �i�Jf.iitl .. nl} pUt! 'punt 11.J(t,�U tpu:J '�tHAn.:nJ .;_x!,(�""W,:"HH-Sn-4 .1q1 <���m1,,;rm ;cm:,nmr:>tn:ir �t(i Ji) �gi;)tu.:mns p!1�uctuJ �uL'\1-u�iJ-tn,)�·:'"' �tt p.:mpmt �tdlif.. ;;.,\.\

:n�Wi.!J 1 !U,) �uJmpqJ �mt:>:;Jil iumt:J.) Sh"!S!Al,:,.JnsJ9 prrn,u �qUN!!Oi ! ;)tLL

NOlL:J:ilS 'IVI:JNVNI�

In uctt1rihi.w:1,.� \\ ith (fuvr,1.rnmt.tnt Amlftlfl){ St.tmf,trJs� Wt' hr;;,.',e uh.(8 i\))tH,�t:t � n�pt;1n OOtsti:i A1ig11�:r $, 2:tm3 cm nui' t1)w,-u:l�tp.1tii)n of tht:- imi"'tna! i'01llI:r.i n\'{T finandaJ :;,,nJ -on om test, of it:i curnpli;mcc with c,:r..iiu ,,f l;,w:,. ri:i;uhHions. ,<1n1,.;ct}, gr.ml>, Tmit report is ;1n inH:�r;1! p;u-t of .'..\n �mlil JXffi)ntlE:d in ttc-�(m3an\7t: wi!h {;on,fr.wnz�ot ,·4wli!ius Stm«htrds ,;imt sh,,ulJ l>c 1eu,J in ,;.:,njmw1i0n w11h 1h,s repoli m c1,1is1deling the n,,;nlts ,1f ,nir 11t1d1L

ur formwg upmwn� ,m tlle foiam.:iu! ,aawmern, thn �ol lce1ivdr ,·,m1pnsi, 1l!e l\mtw:ial s,ai,:meim. n": t•0mhi11it1!! Mal md,vnhnl fun,,!

:;111{! SA:hedufo5;, o:-. in the tnh!e fl ,fmh;nt�. an.? rrr$e1;t�d for t1f ;ind irr 1wt u n.,qmi;::;l pan nf 1ho:: ba,m: Jin�n1:k11 ::wlcn�HL,. '111r- �,:,;11h111rn�

fo,,.f ,t;it;-n1t�ll� i,nd t,d,nlules havr betn su!J;ct!o:! ti> th,; :md,1mg 1m•:<'.1'.hm,., ap,1lii:d t1l 1h,: ,iudll af the 1msic ll\1:mc;�l �,�1errn:nl$ and, in ,wr <',pmirm, .;re fairly �l�k,1, rn :all nmtcnr,l Hl r,dcttu.Jn i,, 1!ie !icstc finnnci;,J H..te111tnts t,,ben ·:ii :1 wlwk 'l 11<'. m\rndunnry tct!lw!l tt,u::11;:il Ncs;11n11 hnv,; not lx:t>n sub,1c.::1c,1 10 the JwJiimi: prcv.:c0durc� :,pphl.'d m dx, �u,ht oftht b3H" finam:i:.I ,1,nc111.:11ts. aml u,nmi, n!!l.Y, "" c·�rrt's, 110 ,,rin;,;,n 1,n !11\"m

MANAGEMENT'S DISCUSSION

AND ANALYSIS

The infannation in this section is not covered by the Independent Auditors' Report, but is presented as required supplementary information for the benefit of the readers of the comprehensive annual financial report.

MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)

As management of the County of Santa Barbara, California (the County), we offer readers of the County's financial statements this narrative overview and analysis of the financial activities of the County for the fiscal year ended June 30, 2003. We encourage readers to consider the infom1ation presented here in conjunction with additional information that we have fumishcd in the Counly's basic financial statements, which immediately follow this section. Al l dollar amounts, unless otherwise indicated, arc expressed in thousands of dollars.

FINANCIAL HIGHLIGHTS

• The assets of the County exceeded its liabilities at the close of the most recent fiscal year by $413,9 10 ( net assets). Of this amount $56,387 (1111restricted net assets) may be used to meet the County's ongoing obligations to citizens and creditors and S 1 13,852 (restricted net assets) may be used for the County's ongoing obligations related lo programs with external restrictions. The remaining $243,671 represents the County's investment in capital assets, less any related outstanding debt used lo acquire those assets (invested in capital assets, net of related debt). (Sec further detail al Table I on page 1 2.)

• The County's total net assets increased by 526,007 during the current fiscal year. The increase in unrcslrictcd net assets of $2,028 represents the degree to which increases in ongoing revenue exceeded increases in ongoing expenses.

• The decrease in restricted net assets of S 1 1 ,452 is attributable lo various factors as discussed in the government-wide financial analysis on pages 12- 13 . l11c $35,43 l increase in net assets invested in capital assets. net of related debt, represents capital purchases less depreciation plus the retirement of related long-tcrrn debt. (Sec further detail at Table I on page 12 and Table 2 on page 13.)

• As of June 30, 2003, the County's governmental funds reported total ending fund balances of $203,650, a decrease of 4% in comparison with the prior year. Approximately 91 %. or $ l 86,095, of this total amount. is al'ailahlefor spending (11nreservedfi111d halance). (Sec further discussion in Financial Analysis of the County's Funds on page 1 6.)

• At the end of the current fiscal year, unreserved fund balance for the General Fund was $40,773 or 1 7% of total General Fund expenditures. (Sec farther discussion in Financial Analysis of the County's Funds on page 16.)

• The County's investment in capital assets increased by $41 ,894 or 1 6%. During the current fiscal year, the County transferred $ 1 ,471 in capital assets to the new City of Goleta and $849 to other agencies. The County also received a land donation valued at $7,686. (Sec further detail at Table 3 on page 18.) The County's total long-term debt increased by 576. (Sec further detail at Table 4 on page 19.)

OVERVIEW OF THE FINANCIAL STATEMENTS Management's Discussion and Analysis is intended lo serve ns an introduction to the County's basic financial statements. The County's basic financial slalcmcnls include three components: I ) govcrmncnt-widc financial statements, 2) fund financial statements, and 3) notes to the basic financial statements.

GovcrnmcntMwide financial statements. The gcwemment-wide financial statements arc designed to provide readers with a broad overview of the County's finances, in a manner similar to a private-sector business.

The statement of net assets presents infonnalion on all of the County's assets and liabilities, with the difference between the two reported as net assets. Over time. increases or decreases in net assets may scP.'C as a useful indicator of whether the financial position of the County is improving or deteriorating.

The statement of activities presents infonnation showing how the County's net assets changed during the mosl recent fiscal year. All changes in net assets arc reported as soon as the underlying event giving rise to the change occurs. regardless of the timing <?{related cash.flows. Thus, revenues and c:xpenscs arc reported in this statement for some items that will result in cash flows in future fiscal periods (e.g. uncollected taxes and earned but unused vacation leave).

The government-wide financial statements distinguish functions of the County that arc principally supported by taxes and intcrgovcmmcntal revenues (governmental acOvities) from other functions that arc intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include policy and executive, law and justice, public safely, health and public assistance, community resources and public facilities, general govcmrnenl and support services, and general County programs. The business-type activities of the County include solid waste, sanitation services. and transit operations.

Component units arc included in the basic financial statements and consist of lcgally separate entities for which the County is financially accountable and that have substantially the same governing board as the County or provide services entirely lo the County. l11cy include the Children and Families Commission, County Service Areas, Santa Barbara County Fire Protection District, Flood Control and Water Conservation Districts, Lighting Districts, Sanitation and Sewer Maintenance Districts, Sandyland Seawall Maintenance District, Redevelopment Agency of the County of Santa Barbara, the Santa Barbara County Finance Corporation, and the Water Agency.

1 0

The government-wide financial statements can be found on pages 21-22 of this report.

Fund financial s tatements. Ajimd is a grouping of related accounts that is used lo maintain control over resources that have been segregated for specific activities or objectives. The County, like other state and local governments, uses fund accounting lo ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the County can be divided into three categories: governmental funds, proprietary flinds. and fiduciary funds.

Gm•er11111e111al fu11ds. Govemmental fund,· arc used lo account for essentially the same functions reported as governmental activities in the government·wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and uu(flows of spendable resources, as well as on ba/a11ces of spendahle resources available at the end of the fiscal year. Such infonnation may be uscfill in evaluating the County's ncar-tcnn financing requirements.

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the infonnation presented for governmental fimds with similar information presented for governmental activities in the government-wide financial statements. By doing so. readers may belier understand the long-tcnn impact of the County's near-term financing decisions. Both the govcmmcnlal funds balance sheet and the governmental funds slalemcnls of revenues, expenditures, and changes in fl.Ind balances provide a reconciliation to the government-wide financial statement in order to facilitate this comparison between gorernmental fimd,; and governmell/al acth'ities.

The County maintains 58 individual governmental funds and for financial reporting purposes, these funds have been combined into 28 funds. The County segregates from the General Fund a number of significant functions in major funds. lnfonnation is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances for the General. Road, Public Health. Social Services, Flood Control District and Capital Projects funds. all of which arc considered to be major funds. Data for the other 22 governmental funds arc combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the fonn of combining statements located in the Comhinmg and lndh·idual Fund Statements and Schedules section of this report.

The County adopts an annual appropriated budget for all of its operating funds. A budgetary comparison slalcmcnl has been provided for the General Fund and major special revenue funds to demonstrate perfonnance against this budget.

The governmental funds financial statements can be found on pages 23-29 of this report.

Propdetary fimds. The County maintains two different types of proprietary funds. E11terprise fi111d, arc used to report the same functions presented as husiness-type activities in the government-wide financial statements. The County uses enterprise funds to account for its solid waste, sanitation services, and transit operations. !111ernal service fim£l,, arc an accounting device used to accumulate and allocate costs inlcmally among the County's various functions. The County uses internal service funds to account for its infonnation technology services, vehicle operations and maintenance, risk management and lnsurancc, and communications functions. Because these services predominantly benefit governmental rather than busincss­typc functions, they have been included within governmental activities in the government-wide financial statements.

Proprietary funds provide the same type of infonnation as the govcrnmcntRwide financial statements, but in more detail. The proprietary fund financial statements provide separate information for the Solid Waste Fund and Laguna Sanitation Fund. which arc considered to be major fonds of the County. Conversely, the four internal service funds arc combined into a single, aggregated presentation in the proprietary fund financial statements. Individual fund data for the internal service funds is provided in the fonn of combi11i11g statemems located in the Combining and Individual Fund Statements and Schedules section of this report.

The proprietary funds financial statements can be found on pages 30-32 of this report.

Fiduciary, f1111ds. Fiduciary funds arc used lo account for resources held for the benefit of parties outside the County. Fiduciary funds arc 1101 reflected in the government-wide financial statements because the resources of those funds arc not available to support the County's own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The external portion of the Treasurer's Investment Pool and agency funds arc reported as fiduciary funds.

The fiduciary funds financial slalcmcnts can be found on pages 33-34 of this report.

Notes to the basic financial statements. The notes lo the basic financial statements provide additional information that is essential lo a full understanding of the data provided in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 35-72 oflhis report.

1 1

GOVERNMENT-WIDE FINANCIAL ANALYSIS

As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the County, assets exceeded liabilities by S41 3,9 10 at the close of the current fiscal year.

The largest portion of the County's net assets, $243,67 1 , reflects its investment in capital assets (e.g. land, buildings, roads, bridges, flood control channels and debris basins, machinery, and equipment), less any related outstanding debt used to acquire those assets. The County uses these capital assets to provide services to citizens; consequently, these assets arc not available for future spending. Although the County's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities.

An additional portion of the County's net assets, SI 1 3,852 represents resources that arc subject to external restrictions on how they may be used. The major restrictions on net assets arc for property taxes dedicated to specific services such as flood control aud fire protection (42%), state restrictions (32%), debt service (9%), federal and state allocations for roads (6%), and cable television public access funds (3%). Restricted net assets decreased by $ 1 1 ,452 from the prior year. This was primarily due to decreases totaling $ 17,559 which consisted primarily of the use of Road funds to complete capital projects ($6,477), the release of property tax impounds in the General Fund ($6, 108), aud a reduction of net assets of the Fire District Fund (S 1 ,322) and the Children and Families Commission Fund ($1 ,254) as expenses exceeded revenues. This was offset by increases totaling $6,107, which was primarily due to revenues exceeding expenses in the Alcohol Dntg and Mental Health Fund ($1 ,553) and the Affordable Housing Fund ($1 ,203), an increase in restrictions for elections programs in the General Fund ($898), and an increase in restrictions for Federally Qualified Health Clinics expenditures in the Public Health Fund ($7 1 7) .

The remaining balance o f total net assets o f S56,387 i s unrestricted and may be used t o meet the County's ongoing obligations to citizens and creditors. Unrestricted net assets increased $2,028 compared to the prior year.

At the end of the current fiscal year, the County reported a positive change of 1 7% in net assets invested in capital assets, net of related debt. As discussed above, the County's restricted net assets decreased by 9%, while unrestricted net assets increased by 4%. In the prior fiscal year, the County reported positive changes in all three categories of net assets.

Current and other assets

Capital assets

Total asscls

Current and other liabilities

Long-tcnn liahilit1cs

Total liabilities

Net assets:

Invested in capital assets, net

of related tlcbt

Restricted

Unrestricted

Total net assets

TABLE 1 - Thl' Counly's Net Asscls (in thousands)

Governmental

ActMtics

2002 2003 $ 348,192 $ 347,551

219,973 256,570 568,165 604, 121

93,822 104,937 124,901 125.250 218,723 230,187

1 76,024 209.452 124,371 1 12,919 49,047 �

$ 349,442 $ 373,934

$500,000

$400,000

$300,000

$200,000

$100,000

$0 99-00

Buslncss·lypc

Activities

2002 2003 $ 28,340 $29,ITT

44,943 50,240 73,283 79,417

1,588 1 ,425 33.234 38,016 34,822 39,441

32,216 34,219 933 933

� 4,824 S 38,461 S 39,976

Net Assets

00-01 01-02

1 2

Total 2002 2003

$376,ill $ 376.728 264,916 306,8!0 641.448 683,538

95.410 106,362 158,135 163,266 253,545 269,628

208.240 243,67 1 125,304 I 13,852 54.359 56,387

$ 387,903 �

CUnreslricled

•Restricted

01nvested in capital assets. net ofrnla!ed deht

02-03

Total

Dollar

Change

$ 196 4 1,894 42,090

10,952 5, 131

1 6,083

35,431 ( 1 1 ,452)

2,028 S 26,007

Percent

Change

0%

16%

-w: 1 1%

3%

6%

17%

(9%) 4%

7%

The County's Iola! net assets increased by $26,007 during the current fiscal year. TI1e increase in net assets invested in capital assets, net of related debt, of$35,431 represents capital purchases net of depreciation plus the retirement of related long-term debt. The decrease in restricted net assets, $ 1 1 ,452, results from using restricted net assets lo acquire capital assets, releasing property lax impounds and the spending of those assets for tl1cir restricted purposes. The increase in unrestricted net assets, $2,028, is due to ongoing revenues exceeding ongoing expenses.

Increase in Net Assets

:::::: �- - ------= --:-- � - - -$0 .. - ·--, -- --··T-

-$20,000

D __

Rc\·cnucs Program revenues;

Charges forSCIVICCS

Operating granls and contnbut1ons Capilal grants and contnbutions

General revenues. Property taxes Motor vehicle m-licu tax Sa!cstaxcs Trans1cnl occupancy tax.

Unrestricted mveslmenl earning.,;.

Other

Tolal revenues

Expcmes Policy & CKeCUllVC Law &ju:shcc

Public safety I lcalth & public assistance Communily rcsourCL'S & public facilities General govcrnmcnl & support services

General County programs Interest on !ong-lcnn deb!

Solid waste Laguna sanilallon

Transit Loss on disposal of c-dpital assets

Total eKpenscs F.J(cess of revenues over expenses

before cxlraordmary items, special items, and tranfcrs

Extraordmary item Spcc:1al 1tcm

Tnmsfcrs Increase (decrease) in net assets

Total Unrestricted Restricted Invested in capital assets, net of related

debt

TABLE 2 - Thc- County's Changes In Net Assels (in thousand�)

Govcr111ne-ntal Business-I� pc

Activities Activities Totnl

2002 2003 2002 2003 2002 2003 --- --- --- --- ------$ 137,597 s 140,783 $ 19,007 s 2 1 ,641 $ 1 56,6fl4 $ 1 62,424

252,572 236,391 1 ,573 1,344 254,145 237,735 272 1 3 1 272 l J 1

105.922 107,279 105,922 107,279 26,078 26,932 26,078 26,932 2 1,674 16,]34 21 .674 16,134 5,877 4,423 5,877 4,423 4,670 3,420 1 ,414 971 6,084 4,391

5,537 4,293 96 -- 5,633 4,293 560,199 539,786 22,090 23,950 582,289 563,742

6,960 7,235 6,960 7,235 36,843 36,850 36,843 36,850

135,606 142.190 135,606 142,190 215,182 221,988 215,182 221 ,988 68,528 65.268 08,528 65,268 29,841 26,927 29,843 26,927 I !,241 15,644 1 1 ,241 15,644 4,541 4,6 10 4,541 4,610

20,265 18,295 20,265 18,295 2,043 3.825 2,043 3,825

36 27 36 27 -- 32 - 277 -- 309

508,744 520,744 22,344 22,424 531,088 543,168

5 1 ,455 19,042 (254) 1 ,532 5 1 ,201 20,574 (22,992) (2,253) (22,992) (2,253)

7,686 7,686 (133) 1 7 133 ( 1 7) -- -

$28,DO $24-492 $(121) $1,515 $28,209 S 26,007 =-== =-=-=-== � = -=====-: =

1 3

Totul Dollar Percent

Change Change

5,820 4% (I0,410) (6%)

( 141 ) (52%)

1,357 1% 854 3%

(S,5•10) (26%) (1 ,454) (25%) (l ,693) (28%)

( 1 .340) (24%) ( 18,547) (3%)

275 4%

0% 6,584 5% 6.806 3%

(3.260) (5%) (2,91 6) ( 1 0%)

4,403 39',.ri 69 2%

(1 ,970) ( 10%) l ,7R2 87%

(9) (25%) 309

12,080 2%

(30,627) {60%) 20,739 (90%)

7,686

� �

Governmental activities. Governmental activities increased the County's net assets by $24,492 for the year ended June 30, 2003, thereby accounting for 94% of the total increase in the net assets of the County. Operating revenues exceeded operating expenses by S 1 9,042. Extraordinary items, special items, and transfers provided an additional total increase in net assets of $5;450.

Total revenues for the County· s governmental activities decreased 4%, or $20,413 from the prior year as discussed below.

• As an arm of the state government, operating grants and contributions serve multiple programs representing 44% of the County's funding for governmental activities and arc tied to mandated services such as public assistance, health, and mental health. These revenue sources decreased by $ 16, 1 8 1 , or 6%, from the prior year primarily due to reduced funding imposed by the State of California and reductions in federal and state monies for road projects.

• Taxes that arc generated locally provide the Board of Supervisors (Board) with most of its discretionary spending power.

•

However, since formation of County govcmmcnt in the I 850's, these resources arc generally consumed by basic public safoty services like sheriff, fire and district attomcy. Total general revenues decreased by $7,277. The major factor in the decline of general revenues was the transfer of tax base to the new City of Goleta. o Property laxes increased I% to $ 107,279. While County-wide property tax revenue grew 7.6%, the County's

property tax revenue increased only I% primarily because of reallocations to the City of Goleta and property tax assessment appeal refunds.

o Motor vehicle in-lieu taxes increased by $854, or 3%, to $26,932 attributable to local sales of automobiles, even though the State reduced allocations by S 1 ,000 in the final year-end distribution.

o Sales taxes decreased by $5,540, or 26%, to S 16, 1 34 due to a reallocation of a portion of the I% local sales tax generated in the City of Goleta and the reallocation of a portion of the Road Measure D Y, cent sales tax to the City of Goleta.

o Transient occupancy taxes decreased by $1 ,454, or 25%, to S4,423 due to the incorporation of the City of Goleta. o Unrestricted investment earnings decreased by $1 ,250, or 27%, to $3,420 as the annual pool investment rate

declined from 4.35% in the prior year to 3.27% in the current year.

A requirement of the incorporation of the City of Goleta (City) in February 2002 was a revenue neutrality agreement between the City and the County. A major component of the agreement requires the City to contract for a five-year period with the County for municipal services the County had previously provided to that geographical area. The purpose of this contrncling provision was to offset the effect to the County for the loss of tax revenues transferred to the City. In an effort to make the City financially feasible, the County provided contract services to the City for five months in FY 01-02 without reimbursement (at no chargc-n/c in table below) and transferred $2,935 tax revenues to the City for the same period. In FY 02-03, the County transferred tax revenues of S I 1 ,671 to the City for the full year. However, the contracted services provided during FY 02-03 was less than budget. TI1c following charts display the major revenue transfers to the City and the contracted service revenues for FY 0 1 -02 and FY 02-03. TI1e net revenue impact to the County for FY 02-03 was less than I% of total County revenues.

County Revenue Transfers to the City of Goleta

Property taxes Property tmnsfor tax I% rctaH sales tax Transient occupancy tax Fmnchisc ft...'CS Road sales tax Measure D Road sales tax Local

Transportatinn Fund County Service Arca #3 Lighting County Sc-rvicc Arca #3 Library Redevelopment Agency property tax Rcdevclop1ncnt Agency housing Total revenue transfers

Fiscal Year

650

l ,200 985 100

1,700 130

4,000 2,900

400 l ,370

18 86

173 675 219

S 2,935 S 1 1 ,67 1

County Contract Senice Revenue from the aty of Goleta

Sheriff Road maintenance Parks & open space mamtcnancc Rcdcvclopm<.'Tlt planning Energy Division Animal control Water agency Surveyor Development pcnn1tting Public works cngtnccnng Building irn,'J)cction Santa Barbara Shores payment Total contrJct service rc,cnuc

1 4

Fiscnl Year 2001-02 2002-03

Budget Actual n/c $ 4,673 $ 4,503 n/c 2, 130 538 n/c n/c n/c n/c n/e n/c nlc n/c n/c

552 455 198 138 134 52

552 342 77

138 134

__ 4_1 1 _ __ 4_1 _l __ 4_1_1 � S 8,743 S 6,695

Total expenses for govcmrncntal activities were $520,744, an increase of 2%, or S 1 2.000, from the prior year. As a service delivery entity, the County's major cost component is salaries and benefits, which accounted for approximately 54% of total County expenses. TI1c average full time equivalent (FTE) employee count for the County (including business-type activities) decreased from 4,347 as of the prior year to 4,295 as of June 30, 2003. Total salaries and benefits expense increased by $ 1 8,000 or 6% from the prior year.

• The total increase in expenses is attributed generally to the following factors: o Policy and executive expenses increased S275, or 4%, due to increased salaries and benefits expenses. o Law and justice expenses increased by $7 due to salaries and benefits expense increases of S l , 100 which were offset

by decreases in contract service costs. A transfer of 21 FTE positions, or $ 1 ,400, to the State funded Courts Collections program was negated by an equal amount for contract services expenses to the Courts for the transferred program.

o Public safety expenses increased $6,584, or 5%, mainly attributable to salaries and benefits expense increases of $7,200. These increases were o!Tsct by a reduction of 15 FTE positions in the Probation Department.

o Health and public assistance expenses increased by $6,806, or 3%, primarily due to salaries and benefits expense increases of $7,700. There was a decline in average FTEs of 40 positions or $2,600 attributable to State program reductions, however other costs increased approximately $ 1 ,700.

o Community resources and public facilities expenses decreased by S3,260, or 5%, generally due to reduced funding for road maintenance projects of $3,500, an I I FTE position reduction in the Planning and Development Department of $700, while salaries and benefits increased S I , I 00.

o General government and support services expenses decreased S2,9 I 6, or I 0%, due to the reduction of the Housing and Community Development Department expenses of S 1 ,500 and a reduction of Redevelopment Agency expenses of $300, offset by a SI , I 00 increase in salaries and benefits. The remainder of the decrease of $2,200 is mainly due to the change in indirect expense allocation to other departments compared to the prior year.

o General County programs expenses increased $4,403, or 39%, due to a $3,400 increase in the litigation liability expense, $2,000 increase in Housing and Community Development expense, a SI ,000 increase in salaries and benefits expense, a $300 increase in Redevelopment Agency expense and a $200 increase in Public Education and Access expense. These increases were offset by a S2,000 decrease in Children and Families Commission expenses and a $600 decrease in amortization expense on debt issuance costs.

• The County recorded additional net revenue of $5,433 for the fiscal year ended June 30. 2003 for extraordinary and special items. The extraordinary item represents a net expense of $2,253, comprised of $782 111 Redevelopment Agency net assets transfciTcd to the City of Goleta on July I, 2002 in accordance with the applicable government code sections and $ 1 .471 in completed infrastructure assets transferred to the City of Goleta during the year. The special item represents a donation of land to the County at the Bcttcravia government center valued at $7,686.

- --- -- - --- - - -- - -Esp•nns and Program R•vunu•1o • Gov•rnm•nlal Actlvl!l•• ::: I I

[-.. ;;;;;;. ... �:;"--· l :.:� . L • -- -I

Po!•c,& .__.&,Jul,l,ro Put>lc3'oty fblllll Conm Rai; & G(Jl(JalGlv'I& Ulnotlli &oc..tM> &Pubhc Puti,cFad �,.! r::t.n,

L_ ___ _,, �·=

Relo'll!m>t:s by Soun:• - Government.II! ktlv!tle:.

Business-type activities. Business-type activities net assets increased by 4%, or $ 1 ,5 t 5 , indicating that these funds generated revenues sufficient to cover the costs of operations.

Exr,.nus and Program Rtvenues - Businus.&cti111lies

$25.000 �,--- - - ------- - - -- �

$20,000 !•;...:.-;; ... ,;.,,;,.;.... l

$15,000 $10,000 $5.000

$0 Solid Waste Laguna Sanitation Transit

1 5

R•venu•• by S•n.irc• • BuslneH Actlvlti••

Charges for

services

90%

FINANCIAL ANALYSIS OF THE COUNTY'S FUNDS As noted earlier, the County uses fond accounting to demonstrate compliance with finance-related legal requirements.

Governmental fnnds. The focus of the County's governmental fimds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is uscfol in assessing the County's financing rt.'(juircments. In particnlar. unreservedjimd balance may serve as a uscfitl measure ofa government's net resources available for spending at the end of the fiscal year.

At June 30, 2003, the County's governmental funds reported total fund balances of $203,650, a 4% decrease, or $8,779 in comparison with the prior year. Approximately 9 1%, $ 1 86,095, of the total fund balances constitutes unreserved fimd balance, which is available to meet the County's current and future needs. The remainder of fund balance is reserved to indicate that it is not available for new spending because it has been reserved for: I) debt service, S8,25 l ; 2) amounts due from other funds that arc long-term in nature and thus do not represent available spendable resources, $3,860; 3) property tax losses, $3,845; 4) property tax impounds receivable, S 1 ,508; and 5) and various other restricted purposes, $9 1 .

The General Fund is the main operating fund of the County. At June 30, 2003, unreserved fund balance of the General Fund was $40,773, an increase of $6,840 from $33,933 as of the prior year-end. The General Fund's total fund balance was $49,674 as of June 30, 2003, an increase of I %, or $703, over Ihc prior year. As a measure of the General Fund·s liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 1 7% of total General Fund expenditures, while Iota! fund balance represents 21 % of total General Fund expenditures. Standard and Poor's in their most recent rating of !he County consider these ratios adequate.

The County's management also dcsignalcs (earmarks) unreserved fund balance to a particular fimction, project or activity. Fund balance may also be designated for purposes beyond the current year. However, designated fund balance is available for appropriation at any time. Of the S40, 773 General Fund unreserved fund balance, 70% is designated. The most significanl designations arc a $ 1 0,000 strategic reserve and a $2,068 litigation reserve. earmarked for settlements of adverse litigation without other coverage. Unreserved, undcsignatcd fund balance at year-end was $12,050, a 60% or $4,504 increase over the prior year due to a $6, 1 08 net decrease of property tax impounds receivable from reserved fund balance.

11,c remaining govcrnmcnlal funds' fund balances decreased 6%, or $9,482, to $1 53,976.

• The Road Fund fund balance decreased $6,475 as a rcsulI using fund equity to finance multiple year projects.

• The Capital Projccls Fund fund balance decreased $5,685 as a result of using fund equity to finance multiple year projccls.

• The Public Hcalih Fund fund balance increased $2, 1 2 1 primarily due to steady intergovernmental revenue growth over the prior year and cost savings from staffing vacancies.

• The Social Services Fund fund balance increased $973 primarily due to incentive revenue in the temporary assistance to needy families program.

• The Flood Control District Fund fund balance increase of $135 resulted from ongoing revenues exceeding ongoing expenditures.

• Other Governmental Funds' fund balance decreased by $55 1 primarily due to the following:

o 11,c Fire Protection District fund balance decreased $ 1 ,321 as salary expenditures increases arc beginning Io outpace revenue growth, requiring the need to draw down on fund balance.

o The Children and Families Commission fund balance decreased $ 1 ,255 because revenues generated from tobacco taxes declined from the previous year and contract commitments were maintained at levels greater than revenues.

o TI1c Santa Barbara Finance Corporation Debt Service Fund fund balance decreased by $768 due to the use of designated fund balance to make capitalized interest payments on 2001 Certificate of Participation projccls.

o The Alcohol, Drug, and Mental Health Services (ADMHS) Fund fund balance increase of$1 ,552 resulted from increases in Medi-Cal revenue reimbursements over the prior year.

o The Affordable Housing Fund fund balance increased $ 1 ,246 because Home Project funding revenues were set aside for future years.

1 6

Proprietary /1111ds. The County's propiietary funds provide the same type o f information found i n Ihc government-wide financial statements, but in more delail.

The total increase in net assets of Ihc enterprise funds was $ 1 ,7 19 for the year. The net assets of the Solid Waste Fund increased by $2,032 while !he Laguna Sanitalion Fund decreased by $3 16. Revenues for the Solid Waste Fund increased by 1 1 %, or $ 1 ,782, primarily due to fee rate increases which was parlially offset by a $157 decrease in operating costs resulting in the increase in net assets.

Total net assets of the internal service funds decreased by $2,886. Net losses of S4,086 occurred in the Risk Management and Insurance Fund, while the lnformalion Technology Services, Vehicle Operations and Maintenance Fund, and the Communications Fund had net asset increases of $299, $678 and $223, respectively. The Risk Management and Insurance Fund has incurred a net loss in seven of the last eight years and has an accumulated deficit of$ l 5,094 as of June 30, 2003 primarily due to continued adverse development in the workers' compensation program. TI1e further increase in the deficit this year was attributed Io net losses in the general and workers' compensation programs or $3 ,246 and $605, respectively. The general liability program experienced adverse development due to major civil lawsuit settlements. The workers' compensation program's net loss of $605 was attributable to increased medical expenses. While the County has a ten-year amortization plan to climinalc the fund deficit via rates charged to departments, the costs in these programs coniinuc to rise.

GENERAL Fu�o BUDGETARY HIGHLIGHTS

The County's final budget differs from the original budget by 3%. Supplemental appropriations of $6,327 were approved during Ihc fiscal year. Approximately 50% of the additional appropriations were in Ihc Sheriffs Department related to increased salary costs due to equity adjustments, higher overtime cost due to staffing vacancies, increased jail medical expenditures and the purchase of equipment with grant funds. The remainder of the appropriation increase was related to the other eighteen departments as follows: the Fire Department received grant funds for the purchase of equipment, the Public Health Department appropriated funds for the community housing assistance programs, departments upgraded various computer software and equipment with releases of designations, and various appropriation adjustments for professional service contracts.

During the year, General Fund revenues exceeded the total budget estimate by $827. Tax revenue exceeded the budget estimate by $4,244 primarily due Io a higher rate of growth for property taxes than estimated in the budget, supplemental property tax billings and collections, and Iransicnl occupancy taxes were higher than budge! eslimatcs. Some of the positive property tax variance is also related to the settlement of property tax assessment appeals that also had associated penalty revenue. This penalty revenue accounts for the majority of the $3,445 positive variance in fines, forfeitures and penalties revenues. Interest earnings were less than the budget estimate by S 1 ,368 due to a decline in Ihe interest rates during the year. Licenses, pcnnits and franchises, intergovernmental, charges for services, and other revenues were less than budget estimates by $606, $2,914, $ 1 ,65 1 and $323, respectively. These revenues were less than the budget estimate by a total of $5,494, but were generally offset by expenditure savings.

The difference between the final budget appropriations and actual expenditures resulted in $8,973 of unspent approprialions. Salary and benefit savings of approximalcly $3,000 resulted from unfilled positions across all functions and $5,900 resulted from unspent appropriaiions from program services in community resources and public facilities, public safely, and general County programs.

Greater limn anticipated property tax revenue and appropriation savings eliminated the need to draw upon fund balance. The cquily position of lhc General Fund grew by $703 as opposed to the budget plan Io draw on fund equity by $8,626.

The General Fund budget to actual statement can be found on page 25 of this report.

Budget to Actual Comparison Effect on Fund Balance

Drigm:il Budget Fmal lludgcl

$350.000 $2,000 -- - -- - --- - - --- -�

5325,000

'300,000 S(2,000)

$275,000

SC4,000J $250,0Cll

$225,000 5(6.000)

$200,000 �a.0001 Final Budget

$(10,000)

1 7

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital assets. The County's investment in capital assets as of June 30, 2003, amounted to $306,810 (net of accumulated depreciation). This investment in a broad range of capital assets includes land, infrastructure, structures and improvements, equipment, and construction in progress.

TABLE 3 - 1lic County's Capital Assets (net or depreciation, in thousands)

Gowrnrnmtal Business-f)pe Total Activities ActMtics Total Dollar Percent

2002 2003 2002 2003 2002 2003 Cbange Cbange Land $JiT6j" $ 38,308 $ 12.529 $ 1 1 ,803 $ 43,692 $5().JII $6.419 15% Structures and iirprovenrnts 94.336 93,458 5.829 6,051 100.165 99.509 (656) (1%) Equipment 3 1.021 36,634 7,243 6,887 38,264 43,521 5.257 14% Infrastructure 1 5.940 51.079 3.131 5.842 19.071 56.921 37,850 198% Coostruction in progress (OP) 47.513 37,091 16.21 1 19,657 63,724 56,748 (6,976) � Total $ 219,973 $ 256.570 $ 44,943 $ 50.240 $2(>4.916 $ 306.810 $ 41.894 16%

TI1c County's capital assets increased 1 6%, or $4 1 ,894, during the fiscal year. Components of the change in capital assets arc as follows (in thousands):

Contributions to Other Net

Additions Agencies Retirements Depreciation o,ange General Fnnd 4,40 1 (859) (200) (3,187) 155 Cupit!] Projects Fund 7.265 (76) 7,1 89 I lculth & Public Assistincc funds 10.899 ( l ,332) 9.567 Road Fund 15,378 ( 1 ,461) (267) ( 1 , 101) 1 2,549 Flood Control District Fund 4,256 ( 14) ( 1 70) 4,072 Internal Service Funds 6,903 (90) (3.671 ) 3,142 Enterprise funds 7,51 8 (770) ( l ,451 ) 5.297 Other Governmental Funds 699 (776) (77) ToW 57,3 19 $ (2,320) ( l ,417) ( 1 1 ,688) $ 41 ,894

The County's major capital asset events in the current fiscal year included the following:

• The General Fund purchased $806 of specialized Fire and Sheriff equipment, computer hardware and software, and office furniture. Capital project completions of S4,200 included the Sheriff's Computer Aided Dispatch system ($2,700) and 3 other major Sheriff equipment projects (totaling $ 1 ,000). Construction in Progress (CIP) at year-end included 45 projects with a total value of$22,090.

• The Health and Public Assistance funds (Public Health Fund, Social Service Fund, and Alcohol, Drug, and Mental Health Services Fund) received a land donation located next to the County's Bcttcravia Government Center valued at $7,686 on which the County paid $314 in closing costs, purchased a Mental Hca!Ih clinic for $732, completed two Public Health lab remodels for S487, and purchased $352 of office and hcald1 lab/medical equipment led by Public Health ($277). Social Services' computer system CIP project had a year end value of$392.

• The Road Fund purchased $781 of equipment and had 32 projects in construction involving pavcmcnl, bridges, traffic signals, bike lanes, and hardscapc at year-end valued at $9,363. Twenty-one infrastructure projects valued at $25,400 were completed during the fiscal year. The main completed project types included pavement replacement ($1 8,300), concrete curb I gutter J sidewalk replacement ($3,900), and a major bridge replacement ($ 1 ,600). Two C!P projects with a value of S 1 ,471 were transferred to the City of Goleta.

• The Flood Control District Fund and Water Agency Fund completed 5 CIP projects valued at $ I 0,200. The largest completions were the Montccito Creek Debris Basin ($4,800) and Green Canyon Improvements in the North County ($3,300). Twenty-one flood control channel, stonn dmin, and debris basin CIP projects with a value of $5,246 were underway at year- end.

1 8

• The Solid Waste Enterprise Fund purchased S 148 of equipment and sold a North County land parcel valued at $726. Six CIP projects were completed for $800 including the Tajiguas sediment basin control structure ($424). The fund also ended the year with $2,7 14 ofCIP in 13 projects.

• The Laguna Sanitation Enterprise Fund completed a wastewater trunklinc expansion project at $2,800 and has 2 wastewater treatment projects in CIP valued at $ 1 6,943.

As a result of the implementation of Government Accounting Siandards Board Statement No. 34 (GASB 34), the accompanying government-wide financial statements include those infrastructure assets that were either completed during the fiscal year or considered construction in progress at year-end. However, the accompanying government -wide financial statements do not reflect tl1ose infrastructure assets completed prior to July I, 2000. From this point forward, new infrastructure will be added to the records while the retroactive historical value of the County's infrastructure assets will be added prior to June 30, 2006 in accordance with GASB 34.

Additional information on the County's capital assets can be found in Note 8 on pages 52-55 of this report.

Long-term debt. At June 30, 2003, the County had total long-term debt outstanding of $80.847. TI1is amount was comprised of $67,860 of certificates of participation that arc secured by the County's lease rental payments with a covenant to budget and appropriate lease payments, S 1 ,355 of long-term settlement obligations, capital lease obligations of $2, 1 6 1 , the state sponsored a construction loan for the Laguna Wastewater Treatment Plant of $9,388, and $83 of loans which arc secured solely by governmental revenue sources.

TABLE 4 - 1lic County's Outstanding Debt (in thousands)

Govcnunental 81L1:1i�typc Total Activities Activiti<.'S Total Dollar Percent

2002 2003 2002 2003 2002 2003 Change Change Certificates of Participation $ 65,935 S6l.635 $6,955 $ 6,225 $ 72,890 $ 67,860 $ (5,030) � Long-termSettlerrenl Obligations 1 ,438 1 ,025 330 1,438 1,355 (83) (6%) Capital Lease Obligations 567 1,753 839 408 1 ,406 2,161 755 54% Laguna Wa-.tewater Treatn-ent

Plant Loan 4,933 9,388 4,933 9.388 4,455 90% Other Loans 104 83 104 ___ 8_3 __ (2_1) (20%) ToW $ 68,044 $ 64,496 $ 12,727 $ 16,351 S 80,771 S 80,847 _.1___.22. � The County's total long-tc,m debt increased by S76, or 0%, during the fiscal year. Decreases were due to $5,030 in certificate of participation payments, a reduction of $83 in long-tcm1 settlement obligations, and a reduction of $21 in other loan payments. These were offset by increases of 5755 in new capital lease obligations and an increase of $4,455 in a state sponsored construction loan for a Laguna Wastewater Treatment Plant expansion. The current debt schedule results in 68% of the balance being paid down in the next ten years.

Long-tenn settlement obligations arc primarily related to an agreement with an oil facility for the County Fire Department to pay back overcharges related to fire station mitigation payments made in previous years by the oil facility. This settlement obligation ofS l ,025 is scheduled to be satisfied in FY 2006-07.

The County maintains a Standard & Poor's "SP-I+" rating for short-term notes and both a Standard & Poor's "AA-" and a Moody�s "Al" for its long-term certificates of participation.

Standard & Poor's, in their June 2003 raling on the County's Tax and Revenue Anticipation Notes states: • "The 'SP-I+· rating on Santa Barbara County, Calif.'s TRANS reflects the County's favorable credit characteristics, . . . • . . . unreserved fund balances for the county arc adequate a t $33.9 million or 1 4 % of expenditures. • . . . the budget is pending board approval and docs not assume any loss in motor vehicle license fee backfill funds, . . . "

Standard & Poor's in their November 2001 credit profile, stated that "the County's underlying credit characteristics include: • A growing, moderately diverse economy, • Above-average wealth and income indicalors, • Good financial position, and • Very low debt level."

Additional information on the County's long-term debt can be found in Note 1 1 on pages 58-61 of this report.

1 9

ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES

The following factors were considered in preparing the County's budget for fiscal year 2003-2004:

• The budget for fiscal year 03-04 relics on a year of slow paced growth. • The rclo.tivc1y slow national and state economic growth rates arc expected to slow the economic growth of the County. • The unemployment rate for the County increased to 4.1 % comparing favorably to the State of California rate of 6.7% • and the U.S. rate of 6.0%.

Four major sources of revenue gcncrntcd from the pcrfonrnmcc of the local economy arc: • Property assessed values grew 6.6% for the FY 03-04 due to appreciation in the real estate markets, home sales and

the 2% Prop 13 inflation adjustment. TI1e fiscal year 03-04 budget assumes a 6.2% increase in property tax revenue. • Retail sales increased to $5.2 billion, a growth rate of I % in FY 02-03. For FY 03-04, the budget includes a growth

rate of !%. • Hotel room sales fell County-wide by 10% in FY 02-03, with occupancy rates at 71 %. For FY 03-04 the budget

inclu<lcs a growth rate of 5% for transient occupancy lax revenue. • Motor vehicle in-lieu tax revenue increased by 3% in FY 02-03. For FY 03-04, the budget includes an increase of

2%. • The budget includes increases in salaries and benefits of 3.5% per negotiated Jong-term salary agreements. I t also

includes an increase in retirement rates and increase in workers• compensation rates. • The State has proposed various budget cuts that would directly affect the County's General Fund discretionary revenues

as well as funding to Social Services, Mental Health and a variety of other programs. The County may have to amend the FY 03-04 budget depending on State actions that have not been completed as of the issue date of this report.

• On July 9, 2003, the State Controller notified counties that effective June 19, 2003 he has stopped distributing the part of the motor vehicle license (MV!L) fee apportionment that the state had previously funded for the Car Tax Reduction at 67.5%. On that date the MVIL was raised lo the full rate. Based on the State Controller's new distribution schedule for the month of June, the County recorded accrued revenues of $ 1 ,400 of the total expected S2,400 MVIL distribution. Therefore, the County absorbed the first $ 1 ,000 of this reduction in FY 02-03. Additional losses arc estimated at approximately $ l ,500 monthly until restoration of the full foe schedule i s implemented. This could take up ta 90 days and additional MV!L revenue reductions of $4,500 could occur during the first quarter of FY 03-04. This could also affect MVIL realignment revenues for ADMHS, Social Services, and Public Health Funds far FY 03-04. The FY 03-04 budget assumed full apportionment of MVlL revenues.

• For FY 03-04 the County has adopted a balanced budget without decreasing overall reserves and assuming the use of $7,355 in General Fund unreserved fund balance. The actual General Fund undcsignatcd fund balance was $ 12,050 as of June 30, 2003, an increase of $4,695 over the amount necessary to balance the FY 03-04 adopted budget. The Board in the final budget resolution directed any excess above the required amount to balance be distributed as follows: first $ 1 ,000 to the General Fund salary and benefit designation, second S 1 ,000 to the strategic designation and the balance of $2,695 to the contingency designation.

• Operating reserve designations and the strategic reserve designations arc part of the financial resources that arc available to address unanticipated revenue shortfa lls or unforeseen expenditures. These designations provide a primary defense against deficit spending and help maintain liquidity when budgeted drawdowns become necessary.

As of June 30, 2003, unreserved fund balance in the General Fund was $40,773. Of this amount, $28,723 is designated but available for appropriation. TI1c County has appropriated $1 2,050 of unreserved, undesignated fund balance in the General Fund for FY 2003-04 expenditures ($7,355) and increases to designations (S4,695) as outlined in the final budget resolution for the adopted FY 2003-04 budget. The proposed and final budgets arc adopted prior to July 1 of the new fiscal year.

The County's perfonnancc-bascd proposed budget and the County's Five Year Capital Improvement Program can be found on the internet at W\\'W.countyofsb.org/cao/dcfault.htm.

REQUESTS FOR INFORMATION

The financial report is designed to provide a general overview of the County's finances for all interested parties. Questions concerning any of the infomiation provided in this report or requests for additional information should be addressed to Santa Barbara County Auditor-Controller, PO Box 39, Santa Barbara, CA 93 102-0039. TI1c County's Comprehensive Annual Financial Report and Financial Highlights publications can be found on the internet at www.countyofsb.org/auditor/publi­cations.asp.

20

BASIC FINANCIAL STATEMENTS

COUNTY OF SANTA BARBARA, CALIFORNIA STATEMENT OF NET ASSETS

AS OF June 30, 2003 (in lhousnnds)

ASSETS Cash and investments (Note 5) Accounts receivable, net

Taxes Licenses, permits, and franchises Fmes, forfeitures, and penalties Use of money and property Jntergovemmenta! Charges for services Other

Impounds receivable (Note 18) Internal balances Inventories Prepaid 1!ems

Other receivables Deferred charges Restricted cash and investments (Notes 5 & 6) Capita! assets (Note 8)

Land and improvements Buildings and improvements Eqmpment Infrastructure Construction in progress less accumulated deprsc1ation

Total capital assets Total assets

LIABILITIES Accounts payable Salaries and benefits payable O!her liabllit1es Interest payable Other payables Deferred revenue (Note 7) Customer deposits payable Notes payable (Note 9) Long-tenn llabi!ities (Note 1 1 ).

Portion due or payable IJl one year. Capital tease obligations (Note 10) Certificates of participation payable (Note 11) Other long-term obl!gallons (Notes 9 & 11) Compensated abse11Ces Liabdily for self-111surance claims (Note 19)

Portion due or payable atter one year: Capital lease obligations {Note 10) Certificates ol participation payable (Note 1 1) Unamortized premium on certificates of participation Other long-term obligations (Notes 9 & 11) Note Payable (Note 9 & 11 ) Compensated absences Liability for self-insurance claims (Note 19) LandfiK ht1galion settlement (Note 18) Estimated htigat1on habillty (Nole 18) Accrued landfill closure costs (Note 12) Rebatabte arbitrage earnings

Tota! habililies

NET ASSETS Invested m capital assets, net of related debt {Notes 8 & 1 1 ) Restnc!ed (Nole 15) Unrestncted Total net assets

Governmental �

$ 206,977

15,653 494 403

2,138 32,892 14,246

578 1 ,508 2,991

244 140

5,254 540

63,493

38,308 145,389

75,123 51 ,843 37,091

� 256,570 604,121

16,515 18,1 1 7

331 2,109

305 17,522

5,038 45,000

392 4,470

291 732

10,209

1,361 57,165

1 ,472 817

22.252 23,657

2,130

302 230,187

209,452 1 1 2,919 51 ,563

� The notes to the basic financial statements are an integral part of this statement.

2 1

Business·type

Activities � 13,011 $ 219,988

15,653 158 652

403 183 2,321 1 27 33,019

1 ,607 15,853 629 1,207

1 ,508 (2,991)

350 594 256 396

20 5,274 95 635

15,732 79,225

11,803 50,1 1 1 1 1 ,192 156,581 15,343 90,466

8,053 59,896 19,657 56,748

� (106,992) 50,240 306,810 79,417 683,538

900 17,415 405 18,522

331 120 2,229

305 1 7,522 5,038

45,000

1 98 590 765 5,235

291 739

1 0,209

210 1 ,571 5.460 62,625

1 ,472 817

9,388 9,388 440 22,692

23,657 330 330

2,130 21.189 21,189

___ 29_ 331 � 269,628

34,219 243,671 933 1 13,852

4,824 56.387 $ 39,976 �

COUNTY OF SANTA BARBARA, CALIFORNIA STATEME'IT OF ACTIVITIES

FOR THE FISCAL YEAR ENDED June 30, 2003 (in thousnnds)

Function!'l/Pr9grams Governmental activities

Policy & e}(ecuU\le Law & JUSt1ce Public safety Health & public

assistance Community resources &

public facilities General government &

support services General County programs Interest on long-term debt

Total governmental activities

Business-type ac1Jv111es: Solid waste Laguna sanitatton Transit

Program Revenues Operating

Indirect Charges for Grants and Expenses Expenses � ConlribuUons

$ 10,576 (3,341) 2,820 36,174 676 12,582

134,703 7,487 27,134

216,326 5,662 55,539

61,889 3,379 21,382

41 ,239 (14.312) 13,392 15,562 82 7,934

4,610 --

35 7,256

34,145

1 55,235

24,436

6,419 8,865

521,079 (367) 140,783 236,391

18,009 286 18,170 1,244 3,744 81 3,463 78

27 - 8 22

Capital Grants and

Contributions

96

35

131

- --Tota! busmess-type act1V1ties 21 ,780 367 21 ,641 1 .344

Total pnmary government � $ - � �

General Revenues. Taxes

Property Sales Transient occupancy

Payments in lieu of !8)CCS. Motor vehicle in lieu Olher payments m lieu

Franchise fees Olher general revenues Reslncted for community resources and pubhc facilities:

Sales tax, allocated to roads Property ta:ic. le\lled for flood control d1stncts Property tax, levied for County servtce areas Property tax, Je..,.ied for water agency Property tax, levied for ltghtmg d1s!ncts Tax increment, a!!ocated to redevelopment agency

Restncted for public safety: Property tax, levied for fire district

Unrestricted investment earnings Loss on sale of capital assets

.l.......lll.

Extraordinary item - transfer of net assets to the City of Goleta (Note 17) Special item - donation of land to County (Note 17) Transfers

Total general revenues, special item, extraordinary item, and transfers Ctiange 1n net assets

Net assets - beginning (Nole 4) Net assets - ending

The notes to the basic financial statements are an integral part of this statement

22

Net (Expense) Revenue and Changes In Net Assets

Governmental Business-Type Activities Activities Total

(4,380) (4,380) (17,012) (17,012) (80,91 1) (80,911)

( 1 1 ,214) ( 1 1 ,214)

(19,354) (19,354)

(7,081 ) (7,081) 1,155 1 ,155

� (4,610) � --- (143,407)

1,119 1 ,1 1 9 (284) (284)

_ __ 3_ 3 838 838

(143,407) 838 (142,569)

80,126 80,126 8,896 8,896 4,423 4,423

26,932 26,932 1,705 1 ,705 2,187 2,187

401 401

7,238 7,238 5,264 5,264

804 804 1 ,374 1,374

283 283 1 ,678 1,678

17,750 1 7,750 3,420 971 4,391

(32) (277) (309) (2,253) (2,253) 7,686 7,686

17 ____t:!ll, � 677 168,576 � � 26,007 349.442 38,461 387,903

$ 373,934 $ 39,976 4 1 3,910

COUNTY OF SANTA BARBARA, CALIFORNIA BALANCE SHEET GO\'ERJ\::\IENTAL FUNDS AS OF June 30. 2003 (in thou�ands)

Flood Other Total Public Social Control Capita! Govarnm•ntal Governmental

� � � � Disbict ProJects � -�'=""="•�-ASSETS Cash and mvestnrenls (Note 5) 22,739 8,808 $ 28,068 6,507 $ 36,002 $ 30,501 $ 39,687 Accounts receivable·

Taxes Ucenses, perm1ts, and franchises Fines, forfeitures. and penalties Use of money and property Intergovernmental Charges for services Other

15,653 494

24 697

9,564 3,939

359 Due from other funds (Note 14) 2,813 Prepard items 136

68 3,109

259

379 203 42 231 220 441

5,684 8,787 178 1 ,432 4,138 211 118 9,717

2 204 13

!rnpounds receivable (Note 18) 1,129 51 328 Other receivables 1,802 309 1,151 Advances to other funds (Nole 14) 1,914 Restncted cash and mvestrmints {Noles 5 & 6) 55,371 - -- -- -- -- 8, 112

Tota/assets $ 1 16.634 $ 12,553 $ 34,168 $ 1 5,658 � � �

LIABILITIES AND FUND BALANCES Llal>lhtJes

Accounls payable Salanes and benefits payable Other l!ab1ht1es Due lo other funds {Note 14) Other payables Notes payable (Note 9) Interest payable Advances payable (Note 14) Deposits payable

3,080 1 ,953 10.797 704

331

39 54 45,000

1 ,436

5,025 13

2,583 1 ,030 184 543 7,598 2,221 1 ,986 157 1.817

2,813 38 97

19 155

Deferred revenue {Nole 7) 1 ,252 2,458 -- 10,872 52 2,268 1,371 Total l!ablllt1es 66,960 5,182 4.804 13,888 429 2,811 13.870

Fund balances Reserved for (Nole 16)

Receivables lmpresl cash Debt service Property tax loss reserve

Unreserved (Note 16)· DeSJgnated Undesignated. repor1ed m·

General fund Speaal revenue funds Ca))lta! proiectsfun<I

Tola! fLim:I balances Total l1ab1�1ies and fund ba!anct's

5.039 1 7 1 5

3,845

28,723 3,306 24,206

12.050 4,064 5,154 1,753

Amounts reported for governmental acbv1t1es 1n the Statement of Ne! Assets are different because (Note 3)

Fund balances - total governmental funds

51

14,706 22,019

21,276

(1) Capita! assels used in governmental actMbes are not current financial resources and, ttierefore, are not reported In ttie balance sheet Long-term l1ab�1ties are not due and payable 1n the current period and ttierefore are not reported in the balance sheet Other tong-term assets are not evadable lo pay for current period expenditures and. therefore, are deferred 1n the funds and

recognlzed as revenue in the statement of acttvibes Issuance costs on certificates of participation are c.ap1tah2ed and amor!J2ed over the life of the related debt issue Receivable from the City of Golela for 1994 Certificates of Par11c1pabon

(2) Intern.al Serwce Funds are used by management to charge the costs of flee I marmgemenl, information technology, risk management, and communicabons services lo 1ndJV1dual funds The assets and llab1btres ol the Internal Service Funds are included in the governmental aclMues m the statemenl of net assets

(3) AdJustmenl for Internal SeMce Funds are necessary to "close" those funds by chargmg add1bonal amounts to part1c1pabng business-type activities to completely cover the Internal Service Funds' costs for the year

Net assets of govemmenlal acbv1t1es

The noles to the basic finane1al statements are an integral part of lh!s statement

23

328 4

8.251

1 8,044

23.469

$ 172,312

15,653 494 403

1,902 32,892 14,244

578 2,813

136 1,508 3,262 1,914

63.483

�

16,971 17,682

331 2.813

226 45,000

1 ,455 155

5.038 18,273

107.944

5,418 41

8.251 3,845

1 1 1 ,006

12,050 55,716

7.323 203,650

�

$ 203.650

237,325 (91,436)

751

540 1.930

19,942

COUNTY OF SANT A BARBARA, CALIFORNIA STATE\1ENT OF REVENUES, EXPENDITURES. AND CHANGES IN FUND BALANCES GOVERNMENT AL FUNDS FOR THE FISCAL YEAR ENDED June 30. 2003 (in thoumnds)

Revonues Taxes Licenses, perm1ls, and franchises Fines, forfeitures, and penalties Use of money and property Intergovernmental Charges for se1V1ces Other

Total revenues

Expenditures Curren!

Pokcy & executive Law & justice Public safety Health & publtc assistance Community resources & facd11.ies General government & support services General County Jlrograms

Debl servicw Pnnc1pal lnteresl

Capital outlay T o!HI expendllures

Excess (deficiency) of revenues over (under) expenditures

Other Financing Sources (Uses) Transfers m (Note 14) Transfers out (Note 14) Proceeds from safe of capital assets Proceeds from long-tenn debt

Total other fmanong sources (uses)

Net change 11"1 fund balances

Fund balances - beginning (Nole 4) Fund balances - ending

Flood Public Social Control Capital

� � � Services District Projects

$ 92,567 7,238 $ 5,198 1 1 ,859 121 278

6,978 4,249 356 952 281 1.189 1.357

74,918 15.784 29,867 90,907 3,914 2,477 58,988 918 22,826 7 2,305 186

1,726 142 6,061 956 41 203 251,285 24.559 59,984 92.151 12.647 4.223

10,334 21 ,093

129,684 2,322

30,433 37.284

6,549

18.264 62,506 99,501

510 33 1,487 3

8.317

40

761 765

1,002 15,369 1,071 417 4,257 1 1 ,900 240,698 33.633 63,577 99,954 12.574 13.468

39,044 (49,036)

108

2,750 (171)

20

7,842 (2,128)

8,453 (333)

56 (3)

5.683 (2,123)

.. - .. 656 .. -(9.884) 2.599 5.714 8.776 62 3,560

703 (6,475) 2.121 973 135 (5,685)

48,971 13,846 27,243 797 35,898 35,027

� ..!...LE1.. � ..l...!.lr2.. � � Amounts reJJorted for governmental acbv1!1es in tt,a Statement of Act1v1bes are different because

Other Gov'1mmental �

$ 21 ,633

5,184 2,351

42,912 31,831

4,350 108.261

14,367 1 ,310

59,584 6,329

8,675

4.461 3,138 1 ,388

99,252

30,949 (41,317)

8 800

(9.560)

(551)

50,647

�

Total Gov'1mm'1nlal �

$ 126,636 12,258 12.162 1 0,735

260,779 1 1 7,061

13,479 553.110

10,334 35,500

130,996 223,913

64,104 38,049 15,224

5,004 4,628

35,404 563,156

94.777 (95,111)

145 1 .456 1,267

(8,779)

212.429

�

Net change 1n fund balances - total governmental funds (8,779) Capital assets

1) The acqmsilmn of capital assets uses current financial resources but has no effect on net assets. 35,404 2) The cos! of capital assets 1s allocated over their estimated useful �ves and reported as depreciabon expense In the stalemenl of acbv1tres {6,566) 3) The proceeds from the sale of captlal assets provide current financial resources but have no �ffecl on nel assets (145) 4) The loss on the disposal of capital assets does not use current financial resources but decreases net assets (607) 5) Contnbullons of capital assets to other ageooes do not use current financial resources but decrease the value of net assets (2,320) 6) Donations of land to the County do not provide current financial resources bu! mcreose the value of net assets 7,693

Measurement focus 7 Revenues that do not provide currentflnanCJal resources are not reported as revenues 111 the funds but are recognized in the statement of acbv1t1es 710 7) The issuance of long-term debl provkle.s currentfinancm! resources to the funds but has no effect on net assets (1,456) B) Pnnopal payments on long-term debt use current finanaal resources but have no effect on net assets 5,004 9) Bond premrums were recorc!ed as m1eresl revenue m the fund statemenls but are amortized 1n the statement of ecbv1t1es 122 10) Costs of issuance were recorded as an expenchlure in the fund statements but are amortized in the statement of acl1vibes (69) 11) Contributions from other governments to pay their portion of long-term debt are recorded as revenue 1n the fund statements but have no effect on nel (350)

assets 12) The decrease rn the Interest payable liab1t1ty does not increase current financial resources but 1s recorded as a decrease u, expense 1n the statement 1 8

ofacttvities 13) The increase in rebalable arbitrage eam1ngs rloes not use of current financial resources bul Is reported as an expense tn the statement of act1V1t1es (28) 14) The increase tn the compensated absences llab�1ty does not use current f1nanc1al resources but 1s recorded as an expense in the statement of acbvil.les (980) 15) The increase in the estrmaltl:d hab1htyfor �llgal1on does not provide current financial resources but increases expenses rn the statement of actlV1ties (477)

lnterml service funds 16) Internal servrce funds are used by management to charge the costs of fleel management, information technology, nsk management, and communicatrons

serv1ces lo mchvidual funds The net expense of internn! service funds Is reported within governmental act!Vltres � Ct,ange m net assets (Statement of acbv1ties, Governmental aclivibes) �

The notes to \he basic financial statements are an integral part of !hrs statement

24

COUNTY OF SANTA BARBARA, CALIFORNIA GENERAL FUND STATl::MENT OF REVENUES, EXPENDITURES, AND CHANGES IN t'UND BALANCES - BUDGET AND ACTUAL FOR THE l<"ISCAL \'EAR ENDED June 30. 2003 (in thousands)

Variance Budaeted Amounts Final Budget -

Actual Positive � � � (Negative)

Revenues Taxes $ 91,577 $ 88,323 92,567 4,244 Licenses, permits and franchises 12,550 12,465 1 1 ,859 (606) Fines, forfeitures, and penalties 2,948 3,533 6,976 3,445 Use of money and property 5,480 5,617 4,249 (1,368) Intergovernmental 75,106 77,832 74,918 (2,914) Charges for services 58,612 60,639 58,986 (1,651) Other _1,lli__ 2.049 1 ,726 �

Total revenues 248,222 250.458 251,285 _.m_ Expendilures Current:

Policy & e::rncutive 10,631 1 0,657 10,334 323 Law &justice 20,521 21 ,093 21 ,093 Public safety 128,322 131 ,513 129,684 1 ,829 Health & public sssrstance 2,015 2,323 2,322 1 Commumty resources & public facihlles 34,412 34,954 30,433 4,521 General government & support services 37,696 38,238 37,284 954 General County programs 7,330 7,476 6,549 927

Debt service Principal 198 510 510 Interest 1 ,533 1 ,538 1 ,487 51

Capital outlay 686 1,369 1 ,002 367 Total expenditures 243,344 249,671 240,698 8,973

Excess of revenues over expenditures � ----1§!_ � ___Q&Q.Q__

other Financing Sources (Uses) Transfers in 39,442 40,275 39,044 (1,231) Transfers out (47,907) (49,695) (49,036) 659 Proceeds from sa!es of capital assets 7 7 108 101

Total other financing uses (8,458) (9,413) (9,884) [471)

Net change H1 fund balances (3,580) (8,626) 703 9,329

Fund balances - beginning 48,971 48,971 48,971 Food balances - ending � $ 40,345 $ 49,674 $ 9,329

The notes to the basic financial statements are an integral part of this statement.

25

COUNTY OF SANTA BARBARA, CALIFORNIA ROAD SPECIAL REVENUE FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL FOR THE FISCAL YEAR 1::NDED June 30, 2003 (in thousands)

Bud9eted Amounts

Revenues Taxes Licenses, permits and franchises Use of money and property Intergovernmental Charges for services Other

Total revenues

Expenditures Current.

Community resources & pub he facdrt.Jes Debt service: Capital outlay

Total e}(penditures

� 7,675

99 185

19,606 6,195

___ 97_ �

34,133

Excess (deficiency) of revenues over (under) e}(pendllures --1.!:i:!.!l Other Financing Sources (Uses)

Transfers in 1 ,484 Transfers out (211 ) Proceeds from sales of capital assets

Total other financing sources (uses) 1 ,273

Net change m fund balances (138)

Fund balances - beginmng 13,846 Fund balances - ending $ 13,708

The notes to the basic flnancaal statements are an integral part of this statement

� s 7,675

99 207

19,606 6,195

97 33,879

19,622

15,719 35,341

2,780 (21 1 )

---� 1 ,107

13,846 �

26

Variance Final Budget -

Actual Positive Amounts (Negative)

7,238 (437) 121 22 356 149

15,784 (3,822) 918 (5,277) 142 45

24,559 [9 320)

18,264 1 ,358

15,369 350 33,633 1 ,708

_____(Q,Qill ---1!&lli

2,750 (30) (171) 40

___ 20_ 20 � 30

(6,475) (7,582)

13,846 $ 7,371 $ (7,582)

COUNTY OF SANTA BARBARA, CALIFORNIA PUBLIC HEALTH SPECIAL REVENUE FUND STATEM ENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL FOR THE FISCAL YEAR ENDED June 30, 2003 (in thousands)

Budaeted Amounts

Revenues Licenses, pcnnits and franchises Use of money nnd property Intergovernmental Charges for services Other

Total revenues

Expenditures Current:

Health & public sssislance Debt service: Capital outlay

Total expenditures

� 331 791

27,137 22,358

5,886 56,503

62,673

771 63,444

Excess (defiClency) of revenues over (under) expenditures �

Olher Financing Sources (Uses) Transfers 1/'l Transfers out

Total other financmg sources

Net change in fund balances

Fund balances - beginning Fund balances - ending

10,213 � �

(1 ,747)

27,243

� The notes to the baslC finanoal statements are an integral part of this statement

� 331 844

29,116 22,530

� �

64,637

1 ,238 65,875

___J§&rQl.

7,892 � �

(3,066)

27.243 $ 24,177

27

Actual �

278 952

29,867 22,826

6,061 59,984

62,506

1,071 63,577

�

7,842 � �

2,121

27,243

�

Variance Final Budget .

Positive (Ne9ative)

(53) 108 751 296

_l.@l. __lli_

2,131

167 2,298

---1.,m__

(50) 1 .960 1,910

5,187

COUNTY OF SANTA BARBARA, CALIFORNIA SOCIAL SERVICES SPECIAL REVENUE FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - BUDG•;T AND ACTUAL FOR THE FISCAL YEAR ENDED June 30, 2003 (in thousands)

Revenues Use of money and property Intergovernmental Charges for services Other

Total revenues

Expenditures Current.

Heallh & public sss1slance Debt service:

Pnndpal Interest

Capital ouUay Total expenditures

Excess (deficrency) of revenues over (under) expenditures

other Financing Sources (Uses) Transfers ITT

Transfers out Proceeds of long term debt

Total other financing sources (uses)

Net change m fund balances

Fund balances - begmnmg Fund balances - ending

Budgeted Amounts

� 336

96,266

3,91 6 100,518

107,534

1 ,267 108,801

�

8,571 (288)

8,283

797 $ 797

� 338

95,667

494 96,499

104,359

33 3

1 , 107 1 05,502

�

8,901 (553) 656

9,004

797

....L.l2!!... The notes to the basic financial statements are an mlegral part of !his statement

28

Variance

Final Budget-Actual Positive

Amounts {Negative)

281 (57) 90,907 (4,760)

7 7 956 462

92,151 (4.348)

99,501 4,858

33 3

417 690 99,954 5,548

� �

8,453 (448) (333) 220 656

8,776 {228)

973 972

797

� �

COUNTY OF SANTA BARBARA, CALIFORNIA FLOOD CONTROL DISTRICT SPECIAL REVENUE FUND STATEMENT OF REVE:-IUES, EXPENDITURES, A:>ID CHANGES IN FUND BALANCES - BUDGET AND ACTUAL FOR THE FISCAL YEAR ENDED June 30, 2003 (in thousands)

Variance Bud9eted Amounts Final Budget -

Actual Positive � � Amounts (Ne921tive)

Revenues Taxes 5,468 5,270 5,198 (72) Use of money and property 1 ,277 1,315 1 ,189 (126) lntergovemmental 4,157 4,009 3,914 (95) Charges for services 2,219 2,219 2,305 86 Other 22 22 41 1 9

Total revenues 13,143 1 2,835 12,647 (188)

Expenditures Current

Community resources & public faci!Jt1es 9,407 10,187 8,317 1 ,870 Debt service: Capital outlay 2,403 4,887 4.257 630

Total expenditures 11 ,810 15,074 12,574 2,500

Excess (deficiency) of revenues over (under) expenditures � � ___ 73_ ---1d1L

Other Financing Sources (Uses) Transfers in 56 56 Transfers out (5) (5) (3) Proceeds from sales of capital assets ___ 9 _ __ 9_

Total other financing sources (uses) (5) 51 ___ 62_ _ _ _ 1 1_

Net change in fund balances 1,328 (2,188) 135 2,323

Fund balances - beginning 35,898 35,898 35,898 Fund balances - ending $ 37,226 $ 33,710 $ 36,033 $ 2,323

The notes to the basic financial statements are an integral part of th1s statement.

29

COUNTY OF SANTA BARBARA, CALIFORNIA STATEMENT OF NE'I' ASSETS PROPRIETARY FUNDS AS OF June 30, 2003 (in thousands)

ASSETS Current assets:

Cash and mvcstments (Note 5) Accounts receivable:

LICenses. permits, and franchises Use of money and property Intergovernmental Charges for seMCes Other

lnventones Prepaid items Other receivables

Total current assets

Noncurrent assets Restncted cash and investments (Notes 5 & 6) Deferred charges Capital assets (Nole 8).

Land and improvements BmJdmgs and improvements Equipment Sewer systems Construction in progress Less accumulated deprec1at10n

Total capital assets Total non current assets

Total Assels

LIABILITIES Curren! Habilities:

Accounts payable Salaries and benefrts payable, currenl portion Compensated absences (Note 1 1 ) Interest payable Capital lease obllgalioos. current portion (Note 10 & 11) Liab1hly for self-insurance claims, current portion (Note 1 1 & 19) Certtficates of participalion payable, current portion (Note 11)

Total current llab1�ties

Noncurrent Hablllties: Compensated absences (Note 1 1 ) Bonds and notes payable, net of current portion (Notes 9 & 1 1 ) Capital lease obl19ations. net of current portion (Noles 10 & 1 1 ) Liablfity for se!f-msurancc claims, net of current portion (Notes 11 & 19) Certificates of participation payable, net of current portion (Nole 1 1 ) Landfill litigation setllement (Note 18) Accrued landfill closure costs (Note 12) Rebatable arbitrage earnings (Note 1 1) Advances payable (Note 14)

Tola! non current liabilitJes Total ltabifities

NET ASSETS Invested in capital assets, net of related debt (Notes 8 & 11) Restricted for debt service (Note 15) Unrestricted

Total Net Assets

Business-Type Activities · Governmental Enterprise Funds Activities·

Nonmajor • Infernal Solid Laguna Transit Service

� � Operalions � -�'�""=d�• --

1 1,881 1,122 13,011

158 158 175 183 127 127

1,083 524 1 ,607 629 629 139 211 350 256 256

_ __ ._. _ __ 20 _ _ __ ._. _ _ _ 20_ � � ---8- �

15,454 95

9,134 8,046

12,658

278 15,732 95

2,669 1 1 ,803 3,146 1 1 ,192 2,685 15,343 8,053 8,053

2,714 16,943 19,657 ___l!_1lli)_ � _ __ -_- �

20,938 29,302 - 50,240 � � - -- --- �

50,935 31,465 8 82,408

766 342

5 115 198

351

210

4,735 330

134 63

89 9,388

725

900 405

120 198

440 9,388

210

5,460 330

�JH �JH 29 29

1 ,759 .. 1 ,759 � � ------ �

30,594 10 606 ---::- 41,200

$ 34,665

236

10

1 ,672 4 1 , 1 54

401 435

23

10,209

579

23,657

1 5,230 18,989 34,219 1 9,245 655 278 933

� 1,592 8 6,056 697 .J...22J!L $ 20,859 $ 8 � $ 1 9,942

Adjustment to reflect the alloca!Jon of the internal service funds' net loss Net assets of business-type activities

The notes to the bas1e financial statements are an integral part of this statement.

30

COUNT\' OF SANTA BARBAIIA, CALIFORNIA STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS FOR THE FISCAL \'EAR ENDED June 30, 2003 (in thousands)

Operating revenul!:s: cnarges for services Sale of scrap and recyclables Franchise fees Other operabng revenues

Total operating revenues

Operating expenses: Salaries and benefits Services and supphes Self-insurance claims Contractual services Depreciation amt amortization County overhead a!locabon C!osure/postciosure costs OU,er charges

Total operating expenses

Operating Income (loss)

Non-operating revenues (expenses): Use of money and property Interest expense Gain (loss) oo sale of capital assets Arbitrage el(pense State rmmbursemenls Other

Total non-operating revenues, net

Income (loss) before transfers

Transfers tn (Note 14) Transfers out (Note 14)

Transfers in (out), net

Change in net assets

Total net assets - beginning {Note 4) Total net assets - ending

Change in net assets - total enterprise funds

Business-Type Aclivities - Governmental Enterprise Funds Activities -

Nonmajor - Internal Solid Laguna Transit Service

� Sanitation Operations � -�F�un�d�• --

12,995 3,404 16,403 2,904 2,904

382 382 1 ,889 59 4 1 ,952

18,170 3,463 8 21,641

5,914 976 6,890

3,377 1,716 5,098

5,496 432 22 5,950 1,130 321 1 ,451

286 81 367 1 ,522 1 ,522

- - - -� � � � � � - -� ----

869 166 1 ,035 (321) (287) (608) (277) (277)

(52) (5) (57) 664 664 594 22 616

1 ,477 (126) 22 1 ,373

1 13 1 1 3

___ill _J1m. _ _ -_- � __ 1_10 _ _J1m. - ---- ---1!21

2,032 (316) 1,719

18,309 21 , 175 5 39,489 $ 20,341 � � �

1,719

36,112

500 36,612

7,037 7,869

20,972

892

3,671 640

29 41 ,110

1 ,237

1 9

5 1 ,261

797 � __ 3_5_1

(2,886)

22,828

�

Adjustment lo reflect the consolidation of mlernal service fund activities related to enterpnse funds

Change in net assets of busmess-type activities

The notes to the basic financial statements are an integral part of this slatement.

3 1

COUNT\' OF SANTA BARBARA, CALIFORNIA STATEMENT OF CASH FLOWS PROPRIETARY FUNDS t'OR THE FISCAL YEAR ENDED June 30, 2003 (in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and users

Payments to employees Payments to suppliers Payments for self-insurance clams County overhead allocation payments to the general fund Other

Net cash provid€d (used) by operating activities

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Payment on landfill hligatlon settlement State reimbursements Other

Net cash provided by noncapital and related financing aci1v1t1es

CASH FLOWS FROM CAPITAL ANO RELATED FINANCING ACTMTIES Purchase of capital assets Proceeds from sale of capital assets Pnncipal paid on capital !ease obligations Interest paid on capital lease obligal1ons Priricipal paid on cert1ftcales of participation Interest paid on certificates of participation Arbitrage payments Proceeds of long-term debt Transfers in Transfers out

Net cash used by capital and rn!alfld f1nancmg acii'llhes

CASH FLOWS FROM INVESTING ACTIVITIES Use of money and property received

Net cash provided by investing aclMtJes

Net 111crease (decrease) m cash and cash equivalents

Cash and cash equivalents - beginning Cash and cash equivalents - ending

Reconciliation of cash and cash equivalents to the Slatement of Net Assets Cash and awestmenls per Statement of Ne! Assets Restricted cash and investmenls per Statement of Net Assets Tota! cash and cash equivalents per Statemenl of Net Assets

Reconciliation of operating Income (loss) to net cash provided (used) by operating activities: Operatmg income (loss) Adjustments to reconcile operating income (loss) to net cash provided (used) by

operatmg activities: Depreciation and amortization Changes Kl assets and llabihties:

Accounts receivable Prepaid items lnventones Accounts payable Salaries and benefits payable Self-insurance claims landfill closure cost liability Deferred revenue

Net cash provided (used) by operating acttvities

The notes to the financial statements are an integral part of this statement.

Business-Type Activities - Governmental Enterprise Funds Activities -

Nonmejor - Internal

Solid Laguna Transit Service � Sanitalion Operations � Funds

18,0 1 1 (5,870) (8,930)

(286)

2,992

(999) (2,238)

(81)

(27)

21,011 (6,869)

(11,195)

(367) - - -- --2,925 (326) (19) 2 ,580

(55) (55) 664 664 594 - 22 616

1 ,203 === 22 1 ,225

(2,045) 491

(432) (48)

(540) (252)

(52)

(5.473) (7,518) 491

(432) (48)

(190) (730) (46) (298) ( 10) (62)

4,217 4,217 1 1 3 1 1 3

__ill _..l1lli ----- � � � - -- -- �

922 167 - -- � 922 167 ----- �

2,282 (1 ,788) 497

25,053 3,188 5 28,246 � $ 1,400 � �

$ 1 1 .881 1,122 $ 13,011 1 5.454 278 -- 15.732

� $ 1 ,400 � $ 28,743

445 (63) (19) 363

1 ,130 321 1,451

(159) (471) (630)

3 (15) (12) (72) (75) (147) 44 (23) 21

1 ,522 1 ,522 12 - - 12

$ 36,689 (6,994) (9,371)

(18,435) (640)

__@ �

58 58

(6,903) 1 12

1 ,349 1,349

(3,813)

38,488

� $ 34,665

1 0 $ 34,675

(4,498)

3,671

77 (4)

(36) (570)

43 2 ,537

� $ (326) $ (19) $ 2,580 �

32

COUNTY OF SANTA BARBARA, CALIFORNIA STATEMENT OF FIDUCIARY NET ASSETS - FIDUCIARY FUNDS AS OF June 30, 2003 (In thousands)

Assets Cash and investments Interest receivable

Total assets

Liabilities Accounts payable Funds held as agent for olhers

Total habiliUes

Net Assets Held m trust for pool participants

Investment Trust Fund

465,740

465,740

The notes to the basic financial statements are an integral part of ttus statement

33

Agency Funds

54,505 292

54,797

28,936 25,861 54,797

COUNTY OF SANTA BARBARA, CALIFORNIA STATEMENT OF CHANGES IN FIDUCIARY Nlff ASSETS - FIDUCIARY FUNDS FOR THE FISCAL YEAR ENDED June 30, 2003 (in thousands)

Additions: Contnbutions to pooled inveslments Interest and investment income

Total addillons

Deductions: Distributions from pooled investments

Total deductions

Net increase

Net assets held R1 trust for pool partiapants - beginning Net assets held in trust for pool participants· ending

The notes to the basic financial statements are an mlcgral part of this statement

Investment Trust Fund

$ 2,293,486 12,881

34

2,306,367

2,173,002 2,173,002

1 33,365

332,375 465,740

NOTES TO THE BASIC

FINANCIAL STATEMENTS

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousand.�)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Reporting Entity

The County of Santa Barbara (the "County"), which was established by an act of the Legislature on Febrnary 1 8, 1850, is a legal subdivision of the State of California charged with governmental powers. The County's powers arc exercised through a five member Board of Supervisors (the "Board") which, as the governing body of tl1c County, is responsible for the legislative and executive control of the County. As required by accounting principles generally accepted in the United States of America ("GAAP"), the accompanying basic financial statements present the activities of the County (the primary government) and its component units. TI1c component units discussed below arc included in the County's reporting entity because of the significance of their operational or financial relationships with the County.

TI1c County's component units include the Redevelopment Agency of the County of Santa Barbara, the Santa Barbara County Finance Corporation, the Water Agency, as well as various service areas and districts which provide specific services County-wide or to distinct geographic areas within the County. While each of these component units is legally separate from the County, the County is financially accountable for these entities. Financial accountability is demonstrated by tl1c County Board of Supervisors acting as the governing board for each of the component units.

Because of their relationship with the County and the nature of their operations, each of the component units arc, in substance, part of the County's opcmtions and, accordingly, the activities of these component units arc combined (blended) with the activities of the County for purposes of reporting in the accompanying basic financial statements. The basis for blending the component units arc that the governing bodies arc substantially the same as the County Board ofSupcrvism�.

Additional detailed information and/or separately issued financial statements of the County's component units can be obtained from the Auditor-Controller's Office of the County located at I 05 East Anapamu Street, Santa Barham, California 93 10 1 .

Blended Component Units

Descriptions of the County's blended component units arc as follows;

Children and Families Commission has been established for the purpose lo promote, support, and improve the early development of children from prenatal stage to five years of age. Revenues consist primarily of funds generated by a tax increase on cigarettes and tobacco products as mandated by Proposition I 0.

County Se1,,ice Areas have been established for the purpose of providing specific services to distinct geographical areas within the County. These services include street lighting, open space maintenance, library, community sewer sanitation and maintenance, sheriff patrol, and road maintenance in various unincorporated areas of the County. Revenues consist primarily of property taxes and benefit assessments.

The Santa Barbara County Fire Protection District covers most of the unincorporated territory of Santa Barbara County, the City of Buellton, and private lands within the National Forest. The district provides a full range of fire services funded principally from property taxes. Other fire districts, cities, the Channel Islands, National Forest land, and military installations provide their own fire protection.

The function of the Flood Control and Water Conserl'alion Districts is to control flood and storm waters and to conserve such waters for beneficial public use. Revenues consist primarily of property taxes and aid from other governmental units.

Lighting Districts provide for the operation and maintenance of streetlights in certain areas of the County and arc financed by property taxes and benefit assessments.

35

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1. SUMMARY OF SIGNIFICA1'T ACCOUNTING POLICIES - C01'TINUED

Sanitation and Sewer Maintenance Districts provide water and sewage treatment to users. The costs of operating these units arc charged to the users in the fonn of water charges and sewer fees.

The Sa11<6'fa11d Seawall Mai11te11ance District provides for the maintenance of a seawall constructed in the Sandyland Cove area, and is financed through benefit assessments levied against those properties adjacent to that beach front area.

!he Wa�er Agel1ly p repares investigations and reports on the County's water requirements, project development. and 1mportat10� of water from the State Water Project. The agency provides technical assistance to County departments, water districts, and the public relative to ground water availability and water well locations and design. The agency also administers the Caclmma Project and Twitchell Project contracts with the U.S. Bureau of Reclamation.

The Redevelopment Agency of' the County of Sama Barhara (Redevelopment Agency) was established on September 12, 1989, pursuant to Scction 33200 of the State of California Hcallh and Safety Code. The first redevelopment plan (the Isla Vista Redevelopment Project Arca) was adopted by ordinance on November 27, 1990. A second redevelopment plan (the Goleta Old Town Redevelopment Project Arcn) was adopted by ordinance on July 7. 1 998. The agency is broadly empowered to engage in the general economic revitalization and redevelopment of property in those areas of the project area that arc detcnnincd to be in declining condition.

The Santa Barbara Co11111y Finance Co17mration was established on July 28, 1983. This corporation is a nonprofit public benefit corporation, and in general its purpose is to: purchase, lease or otherwise acquire real property; constmct, insta11 or acquire public improvements; operate, maintain, repair or improve real or personal property; and borrow money and become indebted for the purpose of acquiring and improving such property. The corporation facilitates financing for the County and other public entities.

Also included in the accompanying basic financial statements as an investment tmst fund arc assets of numerous sclf­govcmcd school and special districts for which the County Treasurer acts as custodian of those assets. The financial reporting for these governmental entities, which arc independent of the County, is limited to the total amount of cash and investments and other assets, and the related fiduciary responsibility of the County for disbursement of these assets. Activities of the school districts and special districts arc administered by separate boards and arc independent of the County Board of Supervisors. The County Auditor-Controller makes disbursements upon the request of the responsible school or self-governed district officers. The County Board of Supervisors has no effective authority to govern, manage. approve budgets, assume financial accountability, establish revenue limits, nor to appropriate surplus fi1nds available in these entities. Eight cities and numerous self-governed special districts provide services to the residents of the County. The operations of these entities have been excluded from the basic financial statements as each entity conducts its own day-to-day operations and answers to its own governing board.

Basic Financial Statements

In accordance with Governmental Accounting Standards Board Statement (GASB) No. 34 (GASB 34), the basic financial statements consist of the following:

• Government-wide financial statements, • Fund financial statements and • Notes to the basic financial statements.

36

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

I . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

The government-wide financial statements consist of the statement of net assets and the statement of activities and report infonnation on all of the nonfiduciary activities of the primary government and its component units. As a general rule. the effect of intcrfund activity has been climmatcd from the government-wide financial statements. All internal balances in the statement of net assets have been eliminated, with the exception of those representing balances between the governmental activities and the business-type activities, which nrc presented as internal bal::tnces and eliminated in the total government column. In the statement of activities. internal setvicc fund transactions have been eliminated: however, those transactions between governmental and business-type activities have not been eliminated. Exceptions to this general rule arc charges between the County's Solid Waste, Laguna Sanitation, and Transit Funds and various other fitnctions of the government. Elimination of these charges would distort the direct costs and program rcvc?ucs reported for the various functions concerned. Governmental activities, which nonnally arc supported by taxes and mtergovernmcntal revenues, arc reported separately from business-type activities, which rely to a significant extent on fees and charges for support.

The government-wide financial statements distinguish fitnctions of the County that arc principally supported by taxes and mtergovemmcntal revenues (gm·ernmental al'/frities) from other functions that arc intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include policy and executive, law and justice, public safety, health and public assistance, community resources and public facilities, general government and support services, and general County prourams. The busincss-type activities of the County include solid waste, sanitation, and transit operations.

.::::,

The statement of activities demonstrates the degree to which the direct and indirect expenses of a given function or segment arc offset by program revenues. Direct expenses arc those that arc clearly identifiable with a specific function or segment. Indirect expenses arc allocated based on the annual County-wide Cost Allocation Plan. Program revenues mcludc I) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions. including special assessments, that arc restricted to mccling the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues arc reported instead as general revenues.

Separate fund financial statements arc provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter arc excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise fimds arc reported as separate columns in the fund financial statements.

Measurement Focus Basis of Accounting and Financial Statement Presentation

The government-wide financial statements arc reported using the economic resources measurement focus and the accrual basis of accounting, as arc the proprietary funds and fiduciary funds financial statements. Revenues arc recorded when camcd and expenses arc recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes arc recognized as revenues in the year for winch they arc levied. Grants and similar items arc recognized as revenue as soon as all eligibility requirements have been met.

Governmental funds financial statements arc reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues arc recognized as soon as they arc both measurable and available. Revenues arc considered to be available when they arc collectible within the current period or soon enough thereafter to pay liabilities of the current period. The County in general considers revenues available if they arc collected within I 80 days after year-end, except for property taxes, which the County considers available if they arc collected within 60 days after year-end. Grants and similar items arc recognized as revenue as soon as all eligibility requirements have been met. Expenditures arc recorded when the related fond liability is incurred, except for unmaturcd interest on general long-tenn debt which is recognized when due, and certain compensated absences and claims and judgments which arc recognized when payment is due.

37

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

For the governmental funds financial statements, the County considers all revenues susceptible to accrual and recognizes revenue if the accmal criteria arc mcl. Specifically, sales taxes, franchise taxes, licenses, interest, special assessments, charges for services and other miscellaneous revenue arc all considered to be susceptible to accrual and have been recognized as revenue in the current fiscal period. Entitlements and shared revenues arc recorded at the time of receipt or earlier if the susceptible to accntal criteria arc met. Expenditure-driven grants arc recognized as revenue when the qualifying expenditures have been incurred and all other eligibility requirements have been met and arc recorded at the time of receipt or earlier, if the susceptible to accrual criteria arc met.

The accounts oftl1e County arc organized on the basis of funds. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements.

TI1c County reports the following major governmental funds:

The General Fund is the County's primary operating fund. It accounts for all the financial resources and the legally authorized activities of the County except those required to be accounted for in other specialized funds.

The Road Fund is used to account for the planning. design, construction, maintcmmcc and administration of County roads. It is also used to account for traffic safety and other transportation planning activities.

The Public Health Fund accounts for a variety of preventative health programs, outpatient services and inmate health programs. TI1c fund is also used to account for Environmental Health, Animal Health and Regulation, and Emergency Medical Services.

The Social Services Fund accounts for a variety of public assistance and social service programs.

The Flood Control District Fund is used to account for the provision of flood protection activities.

The Capital Projects Fund accounts for financial resources used in constructing major facilities.

The County reports the following major proprietary funds:

The Solid Waste Fund accounts for the activities of refuse collection, disposal, landfill operations, and recycling programs.

The Laguna Sanitation District Fund accounts for the activities of sewer collection and sewage treatment in the Orcutt area.

Additionally, the County reports the following fund types:

Internal Service Funds account for vehicle operations, risk management, infonnation technology and communications operations that provide services to other departments or agencies of the County, or to other governments, on a cost reimbursement basis.

The Investment Trust Fund accounts for the external portion of the County Treasurer's investment pool, which commingles resources of legally separate local governments within the County in an investment portfolio for the benefit of all participants.

Agency Funds arc custodial in nature and do not involve measurement of results of operations. Such funds have no equity accounts since all assets arc due to individuals or entities at some future time. These funds account for assets held by the County in an agency capacity for individuals or other govcmmcn! units.

38

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Proprietary funds have elected not to apply Financial Accounting Standards Board (FASB) Statements and Interpretations issued after November 30, 1989. The proprietary funds apply all applicable GASB pronouncements as well as statements nnd interpretations of FASB, the Accounting Principles Board Opinions and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, 1 989, unless those pronouncements conflict with or contradict GASB pronouncements.

Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the Solid Waste and Laguna Sanitation enterprise funds and of the County's internal service funds arc charges to customers for sales and services. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition arc reported as non-operating revenues and expenses.

When both restricted and unrestricted resources arc available for use, it is the County's policy to use restricted resources first, then unrestricted resources as they arc needed.

Fiduciary funds include all Trust and Agency funds, which account for assets held by the County as a trustee or as an agent for individuals or other govcmmcnt units.

Cash and Investments

The County's cash and cash equivalents for statement of cash flow purposes arc considered to be cash on hand, demand deposits, restricted cash, and invcshncnts held by the County Treasurer in a cash management investment pool (the "pool").

The pool is not registered as an investment company with the Securities and Exchange Commission (SEC) nor is it an SEC Ruic 2a7-likc pool. California Government Code statutes and the County Treasury Oversight Committee set forth the various investment policies that the County Treasurer must follow.

State statutes and the County's investment policy authorize the County Treasurer to invest in U.S. Government Treasury and Agency Securities, bankers' acceptances, commercial paper, corporate bonds and notes, repurchase agreements and the State Treasurer's Local Agency Investment Fund (LAIF). In accordance with GASB Statement No. 3 1 , Accounting and Financial Reporting/Or Certain Investments and External fnvestment Pools, investments held by the County Treasurer arc stated at fair value. The fair value of pooled investments is determined annually and is based on current market prices received from the securities custodian. The fair value of participants' position in tl1c pool is the same as the value of the pool shares. The method used to dctcnninc the value of participants' equity withdrawn is based on the book value of the participants' percentage participation at the date of such withdrawal. LAIF is required to invest in accordance with State statutes. The Local Invcshnent Advisory Board (Board) has oversight responsibility for LAIF. The Board consists of five members as designated by State Stahllc.

The Air Pollution Control District (APCD) and the Santa Barbara County Association of Governments, as well as the public school districts, ccmetc1y districts, fire protection districts, pest control districts. recreation and park districts, and resource conservation districts within !he County arc required by legal provisions to participate in the County's investment pool. The total percentage share of the County's investment pool that relates to these involuntary participants is 55% (as of June 30, 2003). TI1e deposits held for these districts arc included in an investment trust fund.

39

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Receivables and Payables

Transactions between funds that arc represcn lalivc of lending/borrowing arrangements outstanding at the end of the fiscal year arc referred to as "advances lo/from other funds" (i.e., the non-current portion ofintcrfund loans). All other outstanding balances between funds arc reported as "due to/from other funds." Any residual balances outst1nding between the governmental activities and business-type activities arc reported in the government-wide financial slatcmenls as "internal balances." Advances between funds arc offset by a corresponding reservation of fund balance to indicate that they arc not available for appropriation and arc not expendable available financial resources.

ll1c County only accrues revenues at fiscal year-end and accmcs only those revenues it deems collectible; as such the County has no allowance for uncollcctiblc accounts. All accounts receivable arc expected to be collected within one year.

At June 30, 2003, the County's governmental activities had approximately $32,892 of intergovernmental accounts receivable. These primarily consisted of approximately $4,219 in State Aid for Public Safety (Proposition 172 proceeds), S l,440 in Motor Vehicle In-Lieu taxes, and S I , 198 in federal revenue for Medi-Cal Administration. The remaining $26,035 consisted primarily of federal and stale grants for Public Assistance, Health and Sanitation, and Public Protcctiun programs.

The County levies, collccls, and apportions property taxes for all taxing jurisdictions within the County including school and special districts. Article XIIIB of the State of California Constitution limits the property tax levy to support general government services of lhc various taxing jurisdictions to $ \ per $ 1 00 of full cash value. Taxes levied to service voter-approved debt prior to June 30, 1978 arc excluded from this limitation.

Secured property laxes arc levied in September of each year based upon the assessed valuation as of the previous January I (lien date). ll1cy arc payable in two equal installments due on November 1 and February l and arc considered dclinqucnl with penalties after December 10 and April 10, respectively. Unsecured property taxes arc due on the January l lien date and become delinquent with penalties after August 3 1 .

During the 1 993-94 fiscal year, the County authorized an ailcrnative property tax distribution method referred to as the "Teeter Plan." This method allows for a I 00% distribution of the current tax levy to entities electing the alternative method, as compared to the previous method where only the current levy less any delinquent taxes was distributed. This results in the General Fund receiving distributions of approximately 50-55% in December, 40-45% in April and the remaining 5% in June of each year. This method also provides that all of the delinquent penalties and redemption penalties of the participating entity flow to the County's General fund. All County entities receiving property taxes were required by statute to participate. All delinquent taxes arc recorded as accounts receivable in the General Fund. At June 30, 2003, property taxes receivable ofS\3,536 were recorded in the General Fund. In addition, the Teeter Plan requires that a property tax loss reserve be maintained in an amount equal to I% of the current year's secured tax levy, which is shown as a reservation of fund balance in the Gcneml Fund (sec note 16).

Inventories and Prepaid Items

Inventories for both governmental and proprietary funds, consisting principally of materials and supplies held for consumption, arc valued at cost, approximating market value, using the first-in, first-out (FIFO) method. The costs of govcmmcntal funds inventories arc recorded as expenditures when consumed, rather than when purchased. Certain payments to vendors reflect costs applicable to future accounting periods and arc recorded as prepaid items in both the government-wide and fund financial statements. The inventories and prepaid items recorded in the governmental funds do not reflect current appropriable resources and thus, an equivalent portion of fund balance is reserved.

40

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Restricted Cash and Investments

Debt covenants require resources to be set aside tu repay tax and revenue anticipation notes and interest thereon as restricted assets. Additionally, cash sci aside to meet the property tax loss reserve funding requirements arc legally restricted to cover losses due lo bankruptcies or inadequate proceeds on the sale of defaulted properties. The "'customer deposits'" account reflects cash from deposits held for services that arc restricted in the County's General Fund and special revenue funds that may be eventually returned lo the customer. Certificates of participation covenants require reserves to be set aside for debt service. These amounts arc included in restricted cash and investments in various governmental funds and in the major enterprise funds.

Capi tal Assets

Capital assets, which include property (e.g. land), plant (e.g. buildings, improvcmcnls), equipment (e.g. vehicles, computers, office equipment) and infrastmcturc assets (e.g., roads, bridges, sidewalks, and similar items), arc reported in the applicable governmental or business-type activities columns in the government-wide financial statements. Capital assets arc recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets arc recorded al the estimated fair market value at the date of donation.

The costs of nonnal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. The capitalization thresholds arc $5 for equipment, with the exception of two internal service fonds: Communications, S.5, and Infonnation Technology, S3. The capitalization threshold for buildings, improvements and infrastmcturc is $ l 00.

Capital assets arc depreciated or amortized using the strnight-linc method over the following estimated useful lives:

Infrastructure: Pavement and traffic signals Bridges Hardscape (curbs, gutter, sidewalks) Constructed flood control assets Sewer and sanitation

Structures and Improvements: Office buildings Building improvements

Equipment: Automobiles and light trucks Conshuction and maintenance vehicles General machinery and office equipment

15 lo 30 years 35 to 75 years 20 years 50 years 20 to 50 years

40 to I 00 years 5 to 75 years

5 to IO ycars 5 to 20 years 3 to 25 years

Expenditures for capital assets and improvements arc capitalized as projects arc constructed in accordance with the County's capitalization policy. Interest and other overhead costs incurred during the construction phase of capital assets of business-type activities arc reflected in the capitalized value of the asset constructed. Deprcciat10n expense is allocated to the Functions/programs in the statement of activities.

4 1

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STA'fEMENTS

June 30, 2003 (in thousands)

I . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Pursuant to GASB 34, an extended period of deferral (fiscal year beginning July I , 2005) is available before the requirement to record and depreciate infrastmcturc assets acquired prior to July I, 2000 is effective. As a result, the govcmmcnlal activities column in the accompanying government-wide financial statements as o_f June 30. 2003 d�cs not rencct those infrastmeture assets completed prior to July 1 , 2000. However, the accompanying government-wide financial statements do include those assets that were either completed since July I , 2001 or considered constmction in progress at year-end. All capitalized infrastructure assets arc currently being depreciated.

Lease Obli�ations

The County leases various assets under both operating and capital lease agreements. In the government-wide and proprietary funds financial statements, capital leases and the related lease obligations arc reported as liabilities in the applicable governmental activities or proprietary funds statement of net assets.

Long-tcnn Debt

In the government-wide financial statements, and proprietary funds financial statements, long-term debt and other long-term obligations arc reported as liabilities in the applicable governmental activities or proprietary funds statement of net assets. Bond premiums and discounts, as well as issuance costs, arc deferred and amortized over the life of the bonds using the effective interest method, Bonds payable arc reported net of the applicable bond premium or discount. Bond issuance costs arc reported as deferred charges and amortized over the tcnn of the related debt.

In the fund financial statements, govcmmcntal funds recognize bond premiums and discounts, as well as issuance costs, in the period issued. Bond proceeds arc reported as other financing sources net of the applicable premium or discount. Issuance costs, even if withheld from the actual net proceeds received, arc reported as debt service expenditures. Interest is reported as an expenditure in the period in which the related payment is made.

Employee Compensated Absences

County policy permits employees to accumulate earned but unused vacation, holiday and sick pay benefits. There is no liability for unpaid accumulated sick leave since the County docs not have a policy to pay any amounts when employees separate from service with the County. However, employees eligible for full rc!ircmcnt bc'.1cfits may apply their unused sick leave toward determining their length of service for purposes of dctcnnmmg thc1r retirement benefits. All vacation pay is accmcd when incurred in the government-wide and proprietary funds financial statements. In accordance with GASB Interpretation No. 6, Recog11itio11 and Measurement of Certain liahilities and Expenditures in Governmelll F1111d Fi11ancial Statemems, a liability for these amounts is reported in the governmental funds financial statements only if they have matured, for example, as a result of employee resignations and retirements prior to ycar­cnd and arc paid by the County subsequent to year -end.

Fund Equity

In the fund financial statements, governmental funds report reservations of fund balance for amounts that arc not appropriable or arc legally restricted for a specific purpose. Designations of fund balance represent tentative management plans that arc subject to change,

42

COUNT\' OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTII\UED

Use of Estimates

The preparation of the basic financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates.

2. BUDGETARY AND LEGAL COMPLIANCE

1110 County is legally required lo adopt an annual budget and adheres to the provisions of the California Government Code (Sections 29000- 30200), commonly known as the County Budget Act. Budgets arc adopted for the General Fund, special revenue funds, debt service funds and capital projects funds. Budgets arc prepared on the modified accrual basis of accounting consistent with GAAP. Annually, the Board conducts a public hearing for the discussion of a proposed budget. At the conclusion of the hearings, and generally no later than September 30, the Board adopts the final budget including revisions by resolution. The Board also adopts subsequent revisions, which may occur during the year. All arumal appropriations lapse at year-end.

l11e legal level ofbudgctmy control (the level at which expenditures may not legally exceed appropriations) is maintained at the fund, department, and object level. Presentation of the basic financial statements at the legal level is not feasible due to excessive length. Because of the large volume of detail, the budget and actual statements contained in the Comprehensive Annual Financial Report have been aggregated by function. l11c County docs prepare a separate Final Budget document demonstrating legal compliance with budgetary control and is made available to the public by the Office of the Auditor-Controller. For fiscal year 2002-03, there were no instances in which expenditures exceeded appropriations.

l11c Board must approve amendments or transfers of appropriations between funds or departments. Supplemental appropriations necessary and normally financed by unanticipated revenues during the year must also be approved by the Board. The Board must approve amendments or transfers of appropriations between object levels within the same department. Any deficiency caused by expenditures and other financing uses being greater than revenues and other financing sources is financed by beginning available ftmd balances as provided for in the County Budget Act

43

3.

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

Amounts reported for governmental activities in the statement of net assets arc different from those reported for governmental funds in the balance sheet. The following provides a reconciliation of those differences:

Total Internal Go\'crnmcntal Long-term Scnicc Net Assets

Funds Assets and Funds (2) Elimina� Totals (Page 23) Liabilities (I) (P:!jlc30) lions (3) (Page 21)

Assets: Ca<.jh and ca"ih equivalents 172,312 34,665 206,977 Rcccivahlcs:

Taxes 15,653 15,653 Licenses, pcnnito;, and franchises 494 494 Fines, forfeitures. and penalties 403 403 Revenue from u...c of rooncy and property 1,902 236 2,138 Intcrgovcmm:ntal revenues 32,892 32,892 C11argcs for services 14,244 14,246 Other 578 578

Ocie from otl1cr fimds 2,813 (2,813) Internal balances 2,991 2,991 Inventories. 244 244 Prepaid items 136 4 140 Unaroortizc<l issuance costs 540 540 lrtl)ounds receivables 1 .508 1 ,508 Other receivables 3,262 1,930 840 (778) 5,254 Mvanccs to other funds J,914 ( J,914) Rcstric.1cd cash and investments 63,483 10 63,493 Capital a-;scL� 237,325 19,245 256,570

Total Assets 3 1 1 ,594 239,795 55,246 (2,514) 604,121

Liabilities: Account<; pay.1blcs 16,971 401 (857) 16,515 Salaries and benefits payable 1 7,682 435 1 8, 1 17 Other Liabilities 33 1 331 Due to other fonds 2,813 (2,813) Other payables 226 79 305 Notes payJblc 45,000 45,000 Interest payable i ,455 654 2,109 Rcbatablc arbitrage earnings 302 302 Mvanccs payable 155 ( 1 55) Deposits payable 5,038 5,038 Dcforrcd revenue 18,273 (75 1) 17,522 Employee compensated absences 22,382 602 22,984 Capital lease oblibJUlions 1,753 1,753 Liability for self-insurance claims 33,866 33,866 Estimated liability for litigation 2,130 2,130 Certificates of participation 61,635 61,635 Unamorti7.Cd prcmim11 on certificates of

participation 1,472 1,472 Other long-tcnn liub1l1tics l , !08 1 ,108

Total Liabilities 107,944 90,685 35,304 (3,746) 230, 187

Fund BaJancclNct Assets: Total Fund BJ!ancc/Nct As.sets 203,650 149,J IO 19,942 1 ,232 373,934

Total Liabilities & Fund BabmcclNct Assets 3 1 1,594 239,795 55,246 (2,514) 604, 121

44

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

3. RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS - CONTINUED

(1) Capital assets u�ed m governmental activities are not current financial resources and, therefore, are not reported in the balance sheet

Long-tem1 habili11es are not due and payable in the current period and, therefore, are not reporled in the balance sheet:

Certtficates ofpart1c1pa1ion Other long-tem1 debt Accrued interest on long-term debt Capital leases payable Esltmated liability ror lttigat1on Employee compensated absences (excluding Internal Service funds) Rebatable arbitrage earnings Unamorl1zed premium on certificates of participation

Total long-term liabilities Other long-term assets are not available to pay for current period expenditures and, therefore,

are dererred in the funds and recognized as revenue in the statement ofactivittes (Note 7) Issuance costs on certificates of participation are capitalized and amortized over lhe hre or the

related debt issue Receivable from the City of Goleta for 1994 Certificates of Participation (Note 1 1 )

(2) Internal Service Funds are used by management to charge the costs of information technology, vehicle operations and maintenance, risk management and insurance, and communicahons services to individual funds. The assets and liabilities of the Internal Service Funds are included in the governmental activities in the statement of net assets.

(61 ,635) ( 1 , 108)

(654) ( 1 ,753) (2,130)

(22,382) (302)

�

(3) Adjustment for 1nternal Service Funds are necessary to "close" those funds by charging additional amounts to participating business-type activities to completely cover the Internal Serv1ce Funds' costs for the year.

45

S 237,325

(91 ,436)

751 540

1 ,930 149,1 10

19,942

1,232

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

4. RECONCILIATION OF BEGINNING FUND BALANCES/NET ASSETS

The County's beginning fund balances/net assets have been reclassified to reflect the change of the Inmate Welfare Fund from an agency fund to a special revenue fund in accordance with GASB 34 as follows:

Fund balances/net assets as of June 30, 2002, as previously reported

Reclassifications of Inmate Welfare Fund from a fiduciary lo special revenue fund: Reclassificalion of6/30/02 fund balance

Fund balances/net assets as of June 30, 2002

Net Assets as of June 30, 2002, as previously reported

Inmate Welfare Pund 6/30/2002 fund balance Inmate Welfare Fund capital assets, net of depreciation

Net Assets as of June 30, 2002

46

Total Governmental

Funds

2 1 0,794

1 ,635

2 1 2,429

Governmental Activities

347,643 1 ,635

164

349,442

Fiduciary Funds

� $ 86,674

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

5. CASH AND INVESTMENTS

Cash and investments include the cash balances of substantially all funds, which arc pooled and invested by the County Treasurer for the purpose of increasing interest earnings through investment activities. Interest earned on pooled investments is apportioned quarterly to certain participating funds based upon each fund's average daily deposit balance with all remaining interest deposited in the General Fund.

At June 30, 2003, the carrying amount of the County's deposits was $3 1 ,935 and the corresponding bank balance was $35,262. The difference of $3,327 was principally due to uncleared outgoing electronic funds transfers. Of the total bank balance, SlOO was insured by Federal depository insurance and $35, 162 was eollateralizcd in accordance with Section 53652 of the Califomia Government C'ode with securities held by the pledging financial institutions in the County's name, which have a mmket value ofat least I 10% of the County's deposits.

In accordance with GAAP, the County's investments at June 30, 2003 arc categorized separately to give an indication of the level of custodial risk assumed by the County. The County's investments arc categorized in the following manner:

Category I -

Category 2 -

Category 3 -

Not Required To Be Categorized -

Includes investments that arc insured or registered or for which the securities arc held by the County or its agent in the County's name.

Includes uninsured and unregistered investments for which the securities arc held by the counterparty's tmst department or agent in the County's name.

Includes uninsured and unregistered investments for which the securities arc held by the counterparty, or by its tmst department or agent but not in the County's name.

Includes investments made directly with another party. real estate, direct invcshncnts in mortgages and other loans, open-end mutual funds, pools managed by other govcmmcnts, annuity contracts and guaranteed investment contracts.

47

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

5. CASH AND INVESTMENTS - CONTINUED

The County's investments by category as of June 30, 2003 arc as follows:

Amounts Invested in Pooled Treasury Fund:

Corporate Bonds Commercial Paper Government Agency Bonds Local Agency Investment Fund

Total Investments Controlled by County Treasurer

Investments Controlled by Fiscal Agents:

U.S. Government securities

Total Investments Controlled by Fiscal Agents

Total Investments

Total Deposits at Carrying Amount Other Cash Funds (imprest, revolving)

Total Cash and Investments

Total Cash and Investments

Category

74,805 -- $ 1 34,460

506,538

7 1 5,803 ---- - -----

- - - -- _ _ _ 3�1=,5�0�1 -----

----- _ __ 3_1�,5_0_1 - - - --

7 1 5,803 S 3 1 ,501 _s_. ___ _

Total Restricted Cash and Investments (Note 6) Total Cash and Investments

Total Cash and Investments Summary: Tola[ Governmental Activities Total Business-Type Activities Total Fiduciary Funds

Total Cash and Invcsnncnts

48

Not Carrying Required Amount

To Be At Fair Categorized Value

-- s 74,805 1 34,460

506,538

40,000 40,000

40,000 755,803

J l ,501

3 1 ,501

$ 40,000 78 7,304

3 1 ,93 5

219 8 19,458

740,233 79.225

8 19,458

$ 270,470

28,743

520,245 8 1 9,458

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

5. CASH AND INVESTMENTS - CONTINUED

The County has not provided nor obtained any legally binding guarantees during the fiscal year ended June 30, 2003 to support the value of shares in the Treasurer's investment pool.

The unrealized gain on investments held in lhe County Treasurer's pool at June 30. 2003 for both internal and external pool participants was $5.225. The unrealized gain has been included as a component of designated fund balance at June JO, 2003. l11e net realized gain on invcslmcnts sold or matured during lhc year was S I , 1 79. The calculation of realized gains and losses is independent of a calculalion of the net change in the fair value of investments. Realized gains and losses on investments that had been held in more than one fiscal year and sold in the cu1Tcnt year were included as a change in the fair value of investments reported in the prior ycar(s) and the current year. The net increase in the fair value of investments was $980. This amount takes into account all changes in fair value (including purchases and sales) that occurred during the year.

A summary of the invcsuncnts held by the County Treasurer's investment pool as of June 30, 2003 is as follows;

Interest Fair Rate Maturity

Investment Value Cost % Ransc Range

Cmporate Bonds s 74,805 72,650 2.63 - 7.50 09/2003 - 05/2006 Commercial Paper 1 34,460 134,325 l .20 - 1 .41 07/2003 - 08/2003 Government Agency Bonds 503,222 500,287 1 .75 - 6.40 06/2004 - 06/2008 Government Agency Bonds - Directed 3,3 16 3, 1 85 5 .01 - 7. 1 3 06/20 I O - 0412014 Local Agency Investment Fund 40,000 40,000 l .77

$ 755,803 S 750,447

·n1c following represents a condensed statement of net assets and changes in net assets for the Treasurer's investment pool as of June 3 0, 2003 :

Statement of Net Assets Net Assets held for pool participants

Equity of internal pool participants Equity of external pool participants (voluntary and involuntary)

Tot.al Equity

Statement of Changes in Net Assets Net Assets held for pool participants at July l , 2002 Net chan,,,c in investments by pool participants

Net Assets held for pool participants at June 30, 2003

49

$ 755,803

$ 290,063 465,740

$ 755,803

$ 622,578

1 33,225 S 755,803

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

6. RESTRICTED CASH AND INVESTMENTS

Cash and investments al June 30, 2003 that arc restricted by legal or contractual requirements arc comprised of the following:

General Fund

Funds set aside for repayment of tax and revenue anticipation notes ("TRANS") including interest

Deposits by various developers Property tax loss reserve

Total General Fund

Nonmajor Governmental Funds

Reserved for debt service Total Nonmajor Governmental Funds

Solid Waste Entcmrisc Fund

Funds set aside for landfill site closure and maintenance costs (sec Note 12) Reserved for debt service

Total Solid Waste Enterprise Fund

Laguna Sanitation Enterprise Fund

Reserved for debt service Total Laguna Sanitation Enterprise Fund

Internal Service Funds

V chide Operations and Maintenance · set aside for underground tank clean-up ToL1l lnternal Service Funds

Total restricted cash and investments

50

$ 46,436 5, 107

__l_JWl ___Thill

1 4,799 ______@

15 454

_ _ 1_0 _ _ 1_0

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

7. DEFERRED REVENUE

Govcmrncnlal funds report deferred revenues in connection with receivables for revenues not considered available to liquidate liabilities of the current period. Governmental and enterprise funds also defer revenue recognition in connection with resources that have been received as of year-end, but no! yet earned.

At June 30, 2003, the various components of deferred revenue and unearned revenue reported were as follows:

Unearned U navailable Total Governmental funds:

General Fund: Property taxes receivable 670 670 Other receivables 582 582

Total General Fund 670 582 1,252

Road Fund: Developer mitigation fees 1 .296 1 ,296 Advances 1 . 162 1 , 1 62

Total Road Fund 2,458 2,458

Social Services Fund: Grant druwdowns prior to meeting all eligibility requirements 10.872 1 0.872

Flood Control District Fund: Developer mitigation fees 52 52

Capital Projects Fund: Developer mitigation fees 2,203 2.203 Other receivables 65 65

2,203 65 2,268 Nonmajor governmental funds:

Advances 1 ,043 I ,D43 Grant drawdov.11s prior lo meeting all eligibility requirements 1 59 159 Other receivables 104 104 Developer mitigation fees 65 65

Total nonmajor govcmmcntal funds 1 ,267 104 1 ,371

Total governmental funds 17.522 75 1 1 8,273

5 1

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

8. CAPITAL ASSETS

Capital assets activity for the year ended June 30, 2003 arc as follows:

Balance July I 2002 Additions Deletions

Governmental activities: Capital assets, not being depreciated: Land s 3 1, 1 63 s 8,005 860 Constrnction in Progress --1Lfil.. -----11,lli_ _jl,lli_

Total capital assets, not being depreciated -----1M1§.. � � Capital assets, being depreciated: Strncturcs and Improvements 1 42,796 2,593 Equipment 65,237 14,058 4, 172 Infrastntcturc ___J_§_filQ_ -----12Jill_ - - --

Total capital assets, being depreciated 224 063 � _____A_J_ll_

Less accumulated depreciation for: Stntcturcs and Improvements (48,460) (3,47 1 ) Equipment (34,2 1 6) (6,092) ( 1 ,8 19) lnfrastmcturc __f2l!} __(§11}

Total accumulated depreciation � ___(J_Q_J]]} __il,fil2}

Total capital assets, being depreciated, net 1 4 1 297 � � Sub-totnl governmental activities ---1.\2,21l_ __Il,lli_ ______1§,ill_

Business-type activities: Capital assets, not being depreciated: Land 1 2,529 726 Constmction in Progress -----1hllL ____j_,Qll_ _______ti2_L

Total capital assets, not being depreciated � ___MR ----2.J.ll.

Capital assets, being depreciated: Structures and (mprovcmcnts 10,9 1 7 658 383 Equipment 14,770 585 12 Infrastmcturc _____i,lli_ ______l,fil ----

Total capital assets, being depreciated 30,923 � _________;fil_

Less accumulated depreciation for: Stmcturcs and Improvements (5,088) (366) (313) Equipment (7,527) (979) (50) Infrastructure _______(b_[@ ______(_l_Qfil - - --

Total accumulated depreciation � ______ilAill _Qfil}

Total capital assets, being depreciated, net � ----1..f&2_ ___ 32_

Sub-total business-type activities ______41,W_ _____l_Q_,§1§_ � Totnl S 264916 � �

52

8.

Balance June 30 2003

$ 38,308 --11.Q2l _____li.122

145,389 75,123

� 272 355

(5 1 ,93 1 ) (38,489)

____l1@ ------12..LlMl

---1fil.J.1l 256 570

1 1 ,803 ----12,ill --1J...1QQ_

1 1 , 192 1 5,343

� �

(5, 141) (8,456)

----1.U.ill _____ill_JQfil

_____lli.1lill

� �

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

CAPITAL ASSETS - CONTINUED

Capital assets activity for each major cntcrp1ise funds for the year ended June 30, 2003 arc as follows:

Balance July I 2002

Solid Waste: Capital assets, not being depreciated: Land 9,860 Constmction in Progress _______l,ill_

Total capital assets, not being depreciated __L!A2§_

Capital assets, being depreciated: Structures and Improvements 7,771 Equipment --1blli..

Total capital assets, being depreciated ------1QJ11.

Less accumulated depreciation for: Structures and Improvements (3,613) Equipment �

Total accumulated depreciation ______(_l_Q,MI}

Total capital assets, being depreciated, net _______J_J/}]_

Total S 20,7.23

Laguna Sanitation: Capital assets, not being depreciated: Land $ 2,669 Construction in Progress ___H,lli_

Total capital assets, not being depreciated _!_l,_ill_

Capital assets, being depreciated: Structures and Improvements 3,146 Equipment 2,397 Infrastmcture _____i,lli_

Total capital assets, being depreciated _____!_Q,112_

Less accumulated depreciation for: Stmcturcs and Improvements ( 1 ,475) Equipment (293) Infrastructure _______(b_[@

Total accumulated depreciation ____Ll_.lilll

Total capital assets, being depreciated, net __fi,2Q§_

Total �

53

Additions

s _LlIB2._ ______Lfill2_

658 _-12)_ __ill_

(289) _____illj_) -----1.LJlQl

______ill_22

��

$

_§.,ill_ _§.,ill_

288 ______l,fil _J.J.fil_

(77) ( 1 38)

__ilQfil ________f1ill

� s S 93?

Deletions

726 _ _ 8_1_1 ________l,fil

383 _ _ _ 1 2_ ----122.

(3 13) __________[.N) _Qfil}

__ _ 32 _

�

$ _J,1fil)_ _____1.1lill_

----

----- -- -

----L..ll§ll

Balance June 30 2003

9,134

-----1l..W.

8,046 ______!I.ill

20 704

(3,589) � ------1l.l.&ill ______2,Q_2Q

S______2ll.2_18

$ 2,669 ---1.§,ill ---1.MJl

3,146 2,685

� ----1l.filH

( 1 ,552) (43 1 )

----1.U.ill _.i1..lW

_2...§2Q

�

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

8. CAPITAL ASSETS - CONTINUED

Internal service funds (ISF) predominantly serve the governmental funds. Accordingly, their capital assets are included witllin governmental activities in the above table. Capital assets activity for Internal Service Funds for the year ended June 30, 2003 are as follows:

Capital assets, not being depreciated: Construction in progress

Capital assets, being depreciated: Structures and Improvements Equipment

Total capital assets, being depreciated

Less accumulated depreciation for: Structures and Improvements Equipment

Total accumulated depreciation

Balance July 1 2002

L____lll_

918 ----12...§fil. �

( 1 3 1 ) ____QMfill

(20 6 12)

Additions

_$ _ __ --

754 � ----1..Qli

(46) � __Q.filll

Deletions

L____UJ_

______fil_ ______fil_

----1Zlill _____fZlfil

Total capital assets, being depreciated, net _______l2.2_TI_ _______1_,lfil_ _ _ _ 9_1

Total

Depreciation expense was charged to functions I programs of the primary government as follows:

Governmental Activities Policy & executive Law & justice Public safety Health & public assistance Community resources & public facilities General government & support services General Cotmty programs

Total depreciation expense-governmental activities

Business-type activities Solid waste Laguna sanitation

Total depreciation expense-business-type activities

Grand Total

Depreciation Expense

( excluding ISF) $ 1 1 3

618 1,852 1 ,568 l,695

590 1 30

6,566

l , 130 321

l,451

8,017

!SF Deprecation Expense

Allocation ( 1) 32 94

1 ,678 837 560 34 1

1 8 3,560

105 6

I l l

3,671

Balance June 30 2003

_$ _ __ --

1 ,672 ----11.ill

42.826

( 177) (23 404) (23 581)

______l2,ill

Total 145 712

3,530 2,405 2,255

93 1 148

10,126

l ,235 327

1,562

1 1,688

( I ) Capital assets held by the County's internal service funds arc charged to the various functions based on their usage of the assets.

54

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

8. CAPITAL ASSETS - CONTINUED Construction in progress at June 30, 2003 consists of the following projects for the primary government:

Governmental activities: Capital Outlay Projects:

Casa Nucva 5,602 Santa Maria Juvenile Hall Santa Ba,barn Bowl Improvements - Phase IA Sheriffs Indoor Rnngc Santa Barbara District Attorney Building Santa Maria Juvenile Court North County Jail Cow1ty Clerk Recorder Building Other Projects (individually less than $400)

Road Projects: Major County-wide Pavement Projects North Jameson Lane Modifications 2001-02 Tea 21 Recycle and Reconstruction Bell Street Bridge Old Coast Bridge Replacement Gaviota Beach Road Bridge Other Projects (individually less than $300)

Flood Control Projects: Blosser Channel Repair Mission Creek Project Carpinteria Watershed/Salt Marsh Ocean Meadows Storm Drain Las Vegas Crcck/Eneina Drain Other Projects (individually less than $300)

Water Agency Projects: Surface Water Controls

Social Services Projects: Cal Win Computer System Sub-total governmental activities

Business .. type activities: Lai,,una Sanitation Projects:

Wastewater Treatment Expansion Wastewater Disposal System

Solid Waste Projects: Ballard Canyon Closure Ballard Canyon Landfill Gas System Foxcn Canyon Transfer Station Tajib,uas 48' Stonn Drain Replacement Dcwatcring System Other Projects (individually less than $200)

Sub-total business-type activities Total construction in progress

55

3,689 3,054 2,261 1 , 136

738 6 1 1 498

�

3,201 l,643

855 667 488 306

�

1,064 798 607 597 454

�

16,604 --112...

963 475 364 3 1 2 2 1 1

__ 3_89_

22,090

9.363

4,659 587

392 37,091

16,943

2,714 1 9,657 56,748

9. NOTES PAYABLE

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

Governmental Activities

Notes payable at June 30, 2003 consists of tax and revenue anticipation notes ("TRANS") payable of $45,000 bearing interest al 3.00% and arc due in full on July 25, 2003. Proceeds from the notes were used lo meet fiscal year 2002-2003 cash flow requirements. The following is a summary of changes in nolcs payable for the year ended June 30, 2003:

Balance Balance July I 2002 Additions Deletions Junc 30 2003

2001-2002 TRANS $ 37,000 -$ -- $ 37,000 $ 2002-2003 TRANS 45 000 45 000 --- -

Total $ 3Z 000 � L..llJ!Q!) 45 000

Business-Type Activities

Laguna Wastewater Treatment Plant Loan

On August 16, 2001 , the Laguna Sanilalion District (District) entered into a contract with the State for lhe conslmclion of a Tola! Dissolved Solids and Recycled Water Treatment Plant. Under the contract, the State made fifteen disbursements to the District during the period February 2002 through June 2003, totaling $9,150. As note proceeds arc received by the District, a corresponding note payable is recorded. Repayment of the note is scheduled lo commence one year after project completion (July 2003) and will continue through July 2023. The interest ralc on lhc note is 2.6 percent per annum. Interest accrues beginning on the date of each disbursement from the Slate. The note payable outstanding at June 30, 2003 is $9,388. The following repayment schedule is based on the nolc proceeds received as of June 30, 2003:

Year Ending June 30. Principal Interest 2005 $ 364 244 2006 373 235 2007 383 225 2008 393 2 1 5 2009 403 205

2010-2014 2,179 86 1 2015-20 19 2,477 562 2020-2024 2.8 16 223

Total $ 9.388 $ 2,770

56

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

JO. LEASE OBLIGATIONS

Operating Leases

The following is a schedule of fun1rc minimum rental payments, principally for the General Fund, required under operating leases entered into by the County that have initial or remaining noncancclablc 1casc terms in excess of one year as of June 30, 2003:

Y car Ending June 30 2004 2005 2006 2007 2008

2009-20 1 1 Total Minimum Payments Required

Amount $ 2.619

2.125 1 ,633 1.443 1, 187

-1.JM2 �

The Iota! rental expenditure/expense for the year ended June 30, 2003 was $3.698 of which $720 was in the General Fund.

Capital Leases

TI1c County has entered into certain CJpital lease arrangements under which the related structures and equipment will become the property of the County when all tcnns of the lease agreements arc met. The following is a schedule of future minimum lease payments, payable from the General Fund, certain special revenue funds, and enterprise funds under capital leases as of June 30, 2003:

Y car Ending June 30 2004 2005 2006 2007 2008 2009-20 13 2014-2018

Total Minimum Lease Payments Less: Amount Representing Interest Total Present Value of

Minimum Lease Payments

Govcmmcnlal Activities

$ 470 339 221 221 1 86 396 357

2,1 90 (437)

1 153

Business-type Activities

220 90 90 50

450 (42)

$� 40�"

TI1c following is a schedule of capital assets under capital leases by major classes at June 30, 2003:

Equipment Stmcturcs and Improvements Less: Accumulated amortization

Total

Governmental Activities

$ 2.027 732

(384) 2 375

Business-type Activities

1 ,070

(585)

Amortization expense related to capital assets under capital leases for the governmental and business-type activities was $ 1 26 and $263 respectively, for lhc year ended June 30, 2003.

57

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 1 . LONG-TERM DEBT

Certificates of Participation

Certificates of participation arc secured by annual lease payments payable by the County for use of the facilities constructed or acquired from the bond proceeds. The Santa Barbara County Finance Corporation, a public benefit corporation, was created to issue tl1e certificates. The County leases various projects from tl1e Santa Barbara County Finance Corporation. The lease payments arc used by the Santa Barbara County Finance Corporation to pay interest and principal of the bonds.

The certificates of participation contain certain bond covenants, which arc deemed by the County to be duties imposed by law. The County must include the applicable lease-purchase payments due each year in its annual budget and make the necessary appropriations. The County is also required to maintain certain levels of liability, property damage, casualty, rental interruption and earthquake insurance in connection with each lease-purchase agreement. The County is in compliance with all significant financial restrictions and requirements as set forth in its various bond covenants.

A summary of certificates of participation outstanding at year-end is as follows: Amount of Outstanding

Interest Date of Original as of Rate % Issue Maturi!}' Issue foac 30 2003

Governmental activities: 1 994 Land and Improvements 3.30-5.70 03·1 5-94 1 997 Capital Improvements 5.39-7. 1 1 06-24-97 1 998 Capital Improvements 3.80-4.60 02-10-98 200 I Capital Improvements 2.00-5.25 12-01-01

Sub-total governmental activities

Business-type activities: 1 997 Laguna Sanitation Refinance 5.39-7. 1 1 06-24-97 1998 Baron Ranch 3.80-4.60 02-10-98

Subtotal business-type activities

Total

03-0 1 - 1 1 $ 12-01-06 02-01- 1 1 12-01-21

12-01 -06 02-01- 1 1

45,680 5,395

1 1 ,720 31 425 94 220

1 ,9 1 5 7 760 9 675

IDJ 825

$ 20,940 1 ,390 8,185

31 120 61 635

925 5 300 6 225

67 860

As of June 30, 2003, the County has an outstanding receivable in the amount of$1 ,930 from the City of Goleta related to the remaining outstanding balance on the 1994 Certificates of Participation used to finance the purchase of land that the County transferred to the city at incorporation on February I, 2002. The County remains legally liable for this debt.

The following is a schedule of total debt service requirements to maturity as of June 30, 2003 for cc,tificatcs of participation:

Y car Ending June 30, 2004

Total

2005 2006 2007 2008

2009-20 13 2014-2018 201 9-2022

Governmental Activities Principal Interest $ 4,470 $2,974

4,965 2,761 4,780 2.547 4,980 2,331 4,905 2.098

1 8,785 7,041 I 0,320 3,421 8,430 9 1 1

$ 6 1 ,635 $ 24,084

58

Business-type Activities Principal Interest $ 765 �

795 226 840 190 935 150 665 1 15

2,225 1 57

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 1 . LONG-TERM DEBT - CONTINUED

Other Long-Term Debt

A schedule of other long-term debt outstanding as of June 30, 2003, recorded within governmental activities and payable from governmental funds, is as follows;

Year Ending June 30,

2004 2005 2006 2007 2008 Total

Cachuma Sanitation Loan

Principal I ntcrcst -$--1-6 -$ --6

1 7 5 1 9 3 20 I I

$ 83 �

Fire Station Settlement Principal

275 275 275 200

I,025

TI1c Fire Station Settlement has no interest payments associated with the long -term debt.

Rcbatablc Arbitrage Earnings

The Tax Reform Act of 1986 instituted certain arbitrage restrictions with respect to the issuance of tax-exempt bonds after August 3 1 , 1986. Arbitrage regulations deal with the investment of all tax-exempt bond proceeds at an interest yield greater than the interest yield paid to bondholders. Generally, all interest paid to bondholders can be retroactively rendered taxable if applicable rebates arc not reported and paid to the Internal Revenue Service at least every five years. During the current year, the County performed calculations of excess investment earnings on various bonds and financings and recorded a rcbatablc arbitrage liability of $33 1 at June 30, 2003, of which $302 is recorded within the governmental activities and $29 is recorded within the business-type activities.

Governmental Activities - Conduit Debt

Special Assessment Debt

The County acts as an agent for the property owners, who may benefit by the projects financed from special assessment bond proceeds, in collecting the assessments, forwarding the collections to bondholders and initiating foreclosure proceedings, if appropriate. Special assessment bonds do not represent a liability of the County, as the County is not obligated in any manner for the debt. Accordingly, such obligations do not appear in the accompanying basic financial statements. The amount of special assessment debt outstanding at June 30, 2003 is $823.

59

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 1 . LONG-TERM DEBT - CONTINUED

Changcg in Long-Tenn Liabilities

Long-tenn liability activity for the year ended June 30, 2003 was as follows:

Balance Balance Due Within July I 2002 Additions Deletions June 30 2003 One Year

Governmental activities: Certificates of participation 65,935 4,300 6 1 ,635 4,470 Other long-tenn obligations:

Cachuma Sanitation Loan 99 1 6 83 16 Fire Station # 1 8 Settlement 1 ,300 275 1 ,025 275 Mental Health Cost/Audit Settlements 138 138 Santa Ynez Airport Loans 5 5

Liability for self-insurance claims 3 1 .329 20,972 1 8,435 33,866 1 0,209 Estimated liability for litigation 1 .653 477 2,130 Employee compensated absences 22,007 1 ,709 732 22,984 732 Capital lease obligations 567 1,456 270 1,753 392 Rcbatab1c arbitrage earnings 274 28 302 Unamortized premium on

certificates of participation I 594 1 22 1 472 Sub-total governmental activities 124 901 24 642 24 293 125 250 16 094

Business-type activities: Certificates of participation 6,955 730 6,225 765 Landfill litigation settlement 385 55 330 Employee compensated absences 421 33 7 447 7 Capital lease obligations 839 I 432 408 198 Laguna wastewater treatment plant loan 4,933 4,455 9,388 Landfill closure costs 19,667 1 ,522 2 1 , 1 89 Rcbatablc arbitrage earnings 34 57 62 29

Sub-total business-type activities 33 234 6 068 I 286 3 8 0 1 6 970

Total 158 135 L-3ll.1lil $______25. 5.7.'l 163 '66 11064

The long-term liability activity for each major enterprise fund for the year ended June 30, 2003 was as follows:

Solid Waste: Certificates of participation 5,840 540 5,300 565 Landfill litigation settlement 385 55 330 Employee compensated absences 345 16 5 356 5 Capital lease obligations 839 l 432 408 198 Landfill closure costs 1 9,667 1,522 2 1 , 1 89 Rebatable arbitrage earnings 29 52 52 29 Total '7. IQ� J 521 � 27612 :168

Laguna Sanitation: Certificates of participation 1 , 1 1 5 -- $ 190 925 200 Laguna wastewater treatment plant loan 4,933 4,455 9,388 Employee compensated absences 76 1 7 2 9 1 Rebatable arbitrage earnings 5 5 1 0 Total !.i 1 24 $ 4 ,pZ 202 IQ 4Q4 .2-0�

60

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

11. LONG-TERM DEBT • CONTINUED

In lhe govcrnmcnlal activities, lhc liability for litigation and the majority of employee compensated absences arc generally liquidated by the General Fund.

Internal service funds predominantly serve the governmental funds. Accordingly, their long-term liabilities arc included as part of the above totals for governmental activities. The long-term liability activity for the Internal Service Funds for the year ended June 30, 2003 is as follows:

Liability for self-insurance claims Employee compensated absences

Total

12. LANDFILL CLOSURE COSTS

Balance July I 2002 $ 3 1 ,329

605 31 23::!

Additions $ 20,972 $

20 ZQ 222

Balance Due Within Deletions June 30 2003 One Year

1 8,435 $ 33,866 $ 10,209 23 6Q2 23

18 458 J;!;l�§ IQm

The County owns and operates four landfill sites including Tajiguas, Foxen Canyon, Ventucopa and New Cuyama Landfills. Two County landfills, New Cuyama and Ventucopa were closed during the 1 995-96 fiscal year. The Foxen Canyon Landfill will be converted to a transfer station in fiscal year 2003-04. State and Federal laws require the County to close the landfills once their capacities arc reached and to monitor and maintain the sites for thirty subsequent years. The County recognizes a portion of the closure and postclosure care costs in each operating period until the landfills arc closed. The amount recognized each year to date is based on the landfill capacities used as of tl1c balance sheet date. As of June 30, 2003, the County had incurred a liability of $21, 1 89, which represents the amount of costs reported to date based on the percentages of landfill capacities used to date. The remaining estimated liability for such costs is $9,894, which will be recognized as the remaining capacities arc used. The estimated total costs of closure and postclosurc care totaling $31 ,083 arc subject to changes such as the effects of inflalion, revisions of laws and other variables.

TI1c estimated percentages of landfill capacity used arc as follows:

Capacity Years Landfill Used Remaining

Tajiguas 59% 20 Foxcn Canyon 99% .7 Ventucopa I OO% closed Ncw Cuyama 100% closed

On August 3, 1999, the Board approved a 15 year expansion of the Tajiguas landfill for purposes of an environmental review, and on April 4, 2003 a revised pern1it was issued that increased the landtill's permitted capacity. The estimated costs for the capacity expansion is $25 to $50 million, which will be funded by the Solid Waste enterprise fund tipping fees.

The County is required by State and Federal laws and regulations to make annual contributions and/or provide an alternative funding mechanism to finance closure and postclosurc care costs. The County funds closure and postclosurc costs with a combination of pledge of revenue agreements and restricted cash. The County has pledged revenues from future tipping fees generated at the Santa Barbara South Coast Transfer Station to fund 67 percent of all postclosurc maintenance costs. Restricted cash and investments arc expected to fund the remaining 33 percent of poslclosurc costs and all closure costs at Fox en Canyon and New Cuyama. The amount of $ 14, 799 is currently reported as a portion of rcslrictcd cash and investments in the Solid Waslc cnlcrprisc fond on the balance sheet (sec Note 6). Rcstricled cash for closure and postclosure costs at June 30, 2003 is comprised of the following:

6 1

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

12. LANDFILL CLOSURE COSTS - CONTINUED

Landfill Tajiguas Foxen Canyon Ventucopa Ncw Cuyama Total

13. RETAINED DEFICIT

Closure Cost

9,497 2,354

I I 851

Postclosure Cost

896 43 1

I 621 $ 2 948

Total Restricted

Cash 9,497 3,250

43 1 I 621

14799

Internal Sctvicc Fund - The County's Risk Management and Insurance Fund has experienced significant increases in workers' compensation claims liabi]ilics due primarily to adverse case development. During the current fiscal year, the County has continued to experience an increase in risk management and insurance fund claims liabilities due to continued adverse case development and civil liability exposures. The retained deficit as of June 30, 2003 is $1 5,094, which is an increase of $4,086 over the retained deficit of $ 1 1 ,008 at June 30, 2002. The County has developed a ten­ycar payback plan in an effort to eliminate the deficit through future premium rate increases charged to the various departments. The County has continued to concentrate its efforts on efficient and focused review and implementation of loss prevention and control measures to minimize costs. as well as to make necessary adjustments to the future premium rate structure in order to eliminate the retained deficit in the future.

14. JNTERFUND TRANSACTIONS

lntcrfund Receivables I Payables

Amounts due to/from other funds at June 30, 2003 arc as follows:

Receivable Fund

General Fund

Total due to/from

Payable Fund

Nommtjor Governmental Funds

Amount

$ 2,8 13

2,8 13

Amounts due to the General Fund arc the result of temporary cash flow loans to cover temporary cash deficits in the Alcohol, Dmg and Mental Health Services (ADM HS) fund and is scheduled to be collected at the beginning of the next fiscal year.

Advances to/from other funds at June 30, 2003 arc as follows:

Receivable Fund

General Fund

Total advances to/from

Payable Fund

Solid Waste Nonmajor Governmental Funds

Amount

1 ,759 1 55

1,914

The $1 ,759 advanced to the Solid Waste enterprise fund represents the balance of $2,994 that provided financing resources for a landfill litigation settlement and will be repaid within the next five years through increases in fees. The General Fund also advanced $155 to the Special Aviation special revenue fund for underground storage tank remediation, which will be repaid within the next five years.

62

COUNTY OF SANT A BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL ST A TEM ENTS

June 30, 2003 (in thousands)

14. INTERFUND TRANSACTIONS - CONTINUED

Transfers to/fi-om other funds at June 30, 2003 arc as follows:

Transfer From Transfer To

General Fund Road Public Health Social Services Capital Projects Nonmajor Governmental Funds Solid Waste Internal Sctvicc Funds

Road Capital Projects

Public Health General Fund Social Sctvices Capital Projects Nonmajor Governmental Funds Internal Service Funds

Social Sctviccs General Fund Public Health Nonmajor Governmental Funds

Flood Capital Projects

Capital Projects General Fund Nonmajor Govenuncntal Funds

Nonmajor Governmental Funds General Fund Road Public Hcaltl1 Social Sctvices Capital Projects Nonmajor Governmental Funds

Solid Waste Capital Projects

Laguna Sanitation Capital Projects

lntcmal Sctvicc Funds General Fund Flood Control District Capital Projects

Total transfers

63

Amount

2,262 7,260 8,036 2,754

27,831 1 13 780

49,036

1 7 1

202 77

906 926

17 2, 1 28

275 50

333

l ,709 4 14

2,123

37,019 488 307 340

1 ,435 1,728

4 1 ,3 1 7

127

106 56

284 446

95,687

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 4. INTERFUND TRANSACTIONS- CONTINUED

Transfers arc used to ( 1) move revenues from the fund required by statute or budget to collect them to the fond required by statute or budget to expend them, (2) move receipts identified for debt service from the funds collecting the receipts to the debt service fond as debt service payments become due, and (3) use unrestricted revenues collected in the General Fund to finance various programs accounted for in other funds in accordance with budgetary authorizations.

During the fiscal year ended June 30, 2003, the Capital Projects Fund returned $ 1 ,709 in unspent resources that were intended for capital outlay to the General Fund.

1 5. RESTRICTED NET ASSETS

Restricted net assets arc net assets whose use is subject lo constraints that arc either ( I ) externally imposed by creditors (such as debt covenants), grantors, contributors, or laws or regulations of other governments or (2) imposed by law through constitutional provisions or cnab1ing legislation. Restricted net assets at June 30, 2003 for governmental activities arc as follows:

Restricted for Public Safety: Fire Protection District Sheriff Probation

Restricted for Health & Public Assistance: Public Health Alcohol, Drug & Mental Health Services Child Support Services Other

Restricted for Community Resources & Public Facilities: Roads Flood Control Districts County Service Areas Water Agency Rcdcvclopmcm Agencies Other

Restricted for General Government & Support Services: Clerk-Recorder-Assessor Affordable Housing

Restricted for General County Programs: Properly Tax Impounds Children & Families First Public & Educational Access Criminal Juslicc & Courlhousc Construction Other

Restricted for Debt Service

Total Restricted Net Assets

4,554 3,208 1.837

15 ,069 5,1 1 0

4 1 2 4

7,371 36,033

1 ,730 1 ,9 1 5 2.041

774

4,54 1 5,827

1 , 1 29 7,730 3,089

436 838

9,27 1

9,599

20,595

49,864

10,368

13,222

9.271 1 12.9 19

For business-type activities, restricted net assets at June 30, 2003 of $933 arc for debt service.

64

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

16. RESERVED AND DESIGNATED FUND BALANCES

Fund balances, which arc not available for appropriation or arc not considered ••expendable available financial resources", arc reserved. Unreserved fund balances that have been cannarkcd by the Board for specified purposes arc considered dcsii,�iatcd. Such reserved and designated fund balances at June 30, 2003 arc as follows:

Reserved for: Debt Service Properly Tax Loss Other Receivables Advances Impounds Receivables Prepaid Items Imprest Cash Total Reserved Fund Balance

Designated for: Capital Outlay Health Care Services Endowments Strategic Reserve Various Contingencies Recorder Automation Sheriff Dispatch System Litigation Fire Protection Projects Unrealized Gains Mental Health Salary and Retirement Offset Probation Alcohol & Drug Programs General Projects Proposition 36 Assessor AB8 I 8 Public Safety Planning & Development Elections Proposition 4 1 Park Projects Capital Contnbution Alcoholism Programs Total Designated Fund

Balances

Total Unrcscrvcd­Undcsignatcd Fund Balances

Total Fund Balances

Flood Other Total

Govern- Govern-Public Social Control Capital mental mental

General Road Health Services District Projects � �

$ 3,845 1 ,860 1 ,914 1 , 1 29

136 17

8.901

-- $

5 1

8,251 8,251 3,845 1 ,946 1 ,914

328 1 ,508 50

1 4 15 - -· 4 41 I 4 1 5 51 == 8,583 17,555

356 4,47 1 12,563 1 7,742 2,244 37,376 1 5,002 1 5,002 4, 130 8,627 12, 757

10,000 I 0,000 5,161 1 50 325 534 6, 170

2,984 864 239 177 4,264 2,349 2,349

� 1 59 � 159 2,068 2,068

2,034 2,034 969 1 72 278 294 47 208 1 ,970

1 ,086 874 1,960 1 ,795 1 ,795 1 ,468 1 ,468

1 ,420 1 ,420 985 298 1,283

1,086 1 ,086 1 .084 1 ,084 1 ,037 1 ,037

941 941 898 898

746 746 597 597

--- ---- --- --- - -- � � 28,723 3,306 24.206 ___ 2 1 4.706 22,0 19 � �

12,050 4,064 � � 2 1 ,276 � � �

$49,674 $ 7,371 $ 29,364 ..!.!.:2ZQ. $36.033 $29,342 � $ 203,650

65

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

1 7. EXTRAORDINARY AND SPECIAL ITEMS

Extraordinary Item

In November 200 1 , voters approved ballot Measure H to incorporate a portion of the Goleta Valley into the City of Goleta (City) effective February I , 2002. The Measure contained a Revenue Neutrality Agreement entered into by the County and the City whose terms include the sharing of the new City's property, retail sales, and transient occupancy taxes with the County. As a result, the County transferred certain land, buildings and improvements to the city at net book value on February 2, 2001 . Under the applicable government code sections, the County was required lo transfer the Redevelopment Agency Goleta Project Arca to the City on July I , 2002. Accordingly, the County transforrcd the following assets and liabilities to the City of Goleta on July I , 2002:

Assets: Cash and investments Receivables

Liabilities: Loans payable to the County

Net assets transferred

764 1 8

Additionally, the County recorded a receivable of $300 due from the city for start-up loans made t o the Redevelopment Agency Goleta Project Arca from the General Fund in prior years.

During the fiscal year ending June 30, 2003, the County also transferred $ 1 ,471 in completed infrastmcturc to the city.

As a result of the above transactions, the County recorded a ner expense of $2,253 for the fiscal year ended June 30, 2003, which has been recorded as an extraordinary item in tl1c accompanying statement of activities.

Special Item

In fiscal year ending June 30, 2003, the County received a land donation with a fair value of$8,000 for a Public Health facility. The County paid $3 14 in closing costs. The County recorded a donation of $7,686 which is shown as a special item in the accompanying statement of activities.

66

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

18. COMMITMENTS AND CONTINGENCIES

The County is subject lo various lawsuits and claims involving public liability and other actions incidental to the ordinary course of County operations. In the aggregate, these claims seek monetary damages in significant amounts. To the extent the outcome of such litigation has been determined to result in probable financial loss to the County, a liability for litigation of$2,130, representing County Counsel's best estimate of the ultimate loss, has been accrued in the government- wide statement of net assets. The timing of the payment of these losses cannot presently be determined.

A number of lawsuits and claims arc pending against the County for which the financial loss to the County has been determined to be reasonably possible by County Counsel. These lawsuits include claims filed for inverse condemnation, tort liability, workers' compensation, civil rights violations, breaches of contract, land use disputes, and storm damages. These lawsuits arc seeking damages in excess of $7,000. The County intends to vigorously defend itself against these lawsuits. The aggregate amount of the uninsured liabilities of the County and the timing of any anticipated payments which may result from such claims will not, in the opinion of County Counsel, significantly affect the financial condition of the County.

Sit,'llificant appeals of assessed values used for property tax calculations have been fi led on a commercial space launch facility and one resort hotel facility in the County. The County is vigorously defending the assessed values. Additionally, the County is impounding current property tax collections. At June 30, 2003. impound receivables related to these facilities were $ 1 ,508. The final results of these actions could also affect cities, school districts, and special districts in addition to the County.

On January 20, 2000, the County entered into a Settlement Agreement and Muma! Release ("'Agreement") in response to an action filed against it for damages concerning the now closed Ballard Canyon landfill. The County's estimate of its liability under this agreement as of June 30, 2003 is $330, which is recorded in the Solid Waste enterprise fund.

The County recognizes as revenue grant monies received as reimbursement for costs incurred in certain Federal and State programs it administers. Although the County's Federal grant programs have been audited through June 30, 2003 in accordance with the requirements of the Federal Single Audit Act of 1997 and the related U.S. Office of Management and Budget Circular A-133, tl1csc programs may be subject to financial and compliance audits by the reimbursing agencies. The amount, if any, of expenditures which may be disallowed by the granting agencies cannot be determined at this time, although the County expects such amounts, if any, to be immaterial.

1l1c County has entered into contracts to purchase goods and services from various vendors during the period July l , 2003 through June 30, 2008. Approximately $76,502 will be payable upon future pcrfonnancc under these contracts.

67

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

19. SELF-INSURANCE

The County is exposed to various risks of Joss related to torts; the fl of, damage to, and dcstrnction of assets; errors and omissions; injuries to employees; natural disasters; medical malpractice; unemployment; and providing health benefits to employees, retirees and their dependents. The County has chosen to establish risk financing internal service funds where assets arc set aside for claim settlements associated with such risks of loss up to certain limits. Excess coverage is provided by the California State Associatrnn of Counties Excess Insurance Authority ("Authority") , a joint powers authority whose purpose is to develop and fund programs of excess insurance for its fifty-three member counties. A Board of Directors consisting of representatives of its member counties governs the Authority. The Authority retains responsibility for claims in excess of the County's self-insurance retention. Self-insurance and Authority limits arc as follows:

Type of Coverage General Liability Medical Malpractice Workers' Compensation

Self-Insurance Limit

500 500 300

Authority Limit

$ 25,000 1 0,000 45,000

Property damage risks arc covered on a per occurrence basis up to $271,770 for real property, with $ 1 06,642 in contents and business interruption/rental values. Coverage is provided by property insurance policies purchased through a pool comprised of a majority of California Counties from commercial insurance companies. Al1 properties arc insured at full replacement values with a $ 1 0 deductible. For the past three years, there have been no settlement amounts that have exceeded the limits of commercial or Authority insurance coverage.

The County also maintains earthquake and Oood insurance coverage to comply, at a minimum, with the proposed Federal Emergency Management Agency (FEMA) regulations in order to maintain eligibility to recover expenses in the event of a catastrophic Joss. All other property coverages currently comply with the proposed FEMA regulations. Earthquake and flood limits arc as follows:

Type of Coverage Real Property Personal Property Business lnterrnption and Rents

Total

Limit 271 ,770

87,397 19 245

378412

The unpaid claims liabilities included in the self-insurance internal service funds arc based on the results of actuarial studies and include amounts for claims mcurrcd but not reported and adjustment expenses. Claims liabilities arc calculated considering the effects of inflation, recent claim settlement trends including frequency and amount of pay­outs, and other economic and social factors. General liability, workers' compensation, and medical malpractice liabil itics arc carried at present value using a discount mtc of 6%. It is the County's practice to obtain full actuarial studies annually for general liability, workers' compensation, and medical malpractice coverages. Premiums arc charged by the Risk Management and [nsurancc Fund using various allocation methods that include actual costs. trends in claims experience, and number of participants. Revenues of the Risk Management and Insurance Fund, together with funds to be provided in the future, arc expected to provide adequate resources to meet liabilities as they come due (Sec Note I 3).

Changes in the liability for self-insurance claims during the past two fiscal years for the Risk Management and Insurance Fund is as follows:

Unpaid Claims, Beginning of Y car Incurred Claims Claim Payments Unpaid Claims, End of Y car

June 30 2003 $ 3 1 ,329

20,972 (18 435) 33 866

68

June 30 2002 $ 25,239

20,625 (14 535)

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

19. SELF-INSURANCE - CONTINUED

Financial infomiation on the Authority as of and for the year ended June 30, 2003 was not available at the date of publication of this repo11. Summary audited financial infonnation as of and for the year ended June 30, 2002 is as follows:

Cash and Investments Other Assets

Total Assets

Loss Reserves Other Liabilities Fund Equity

Total Liabilities and Fund Equity

Total Revenues Total Expenses

Expenses in Excess of Revenues

$ 62,447 ---1Q.1lIB $ 133 155

94,032 1 7,681

----1.Lfil �

I 12,398 (1 1 7.351)

14 95'3)

The County's annual premium paid to the Authority for the year ended June 30, 2003 was $2,1 19.

69

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

20. RETIREMENT PLANS

Santa Barbara County Employees' Retirement System

Plan Description

The Santa Barbara County Public Employees' Retirement System (Retirement System) was organized under the provisions of the 1937 County Employees' Retirement Act, effective on January I , 1 944. The Retirement System operates a cost sharing multiple employer defined benefit plan. Members include all permanent employees working foll time or at least 50% part time for the County, Carpinteria-Summcrland Fire Protection District, Santa Barbara Coastal Vector Control District, Goleta Cemetery District, Santa Maria Cemetery District, Oak Hill Cemetery District, Carpinteria Cemetery District, Summcrland Sanitary District, Air Pollution Control District (APCD), and the Santa Barbara County Association of Governments.

The Retirement System has eight retirement plans, five arc currently available to new employees. All new General member employees (except those of APCD) arc enrolled in the contributory Gcnernl Plan 5b. All new Safety members arc enrolled in the contributory Safety Plan 4b. All new APCD employees arc enrolled in APCD Plan 2. All open plans provide benefits as defined by law upon retirement, death or disability of members based on age, years of service, final average salary (generally 1 2 highest consecutive months) , and the benefit options selected. Cost-of-living adjustments after retirement arc provided in all plans except General Plan 2.

Fiduciary Responsibility

The Retirement System is controlled by its own board, !he Board of Retirement, which acts as a fiduciary agent for the accounting and control of member and employee contributions and investment income. The Retirement System publishes its own Comprehensive Annual Financial Report and receives its own independent audit. The Retirement System is also a legally separate entity from the County and not a component unit.

Additional detailed information and separately issued financial statements of the Retirement System can be obtained from !he Santa Barbara County Employees' Retirement System located at I 05 E. Anapamu Street, San la Barbara, CA 93 1 0 1 .

Funding Policy

Contributions arc made by members and employers at rates recommended by an independent actuary, approved by the Board of Retirement, and adopted by the County Board of Supervisors. For certain budgetary units, a portion of the members contribution is paid by tl1c County. Employee contributions arc based upon each individual member's age of entry into the system. Employee contributions cannot be withdrawn until separation from employment. Member contributions forfeit to the Retirement System after five years if the member docs not request a refund and is not vested.

70

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

20. RETIREMENT PLANS- CONTINUED

Employer Contribution

Employer contribution rates arc as follows:

Open for New Enrollment General Plan 5b County: General Plan 5a Districts: Safety Plan 4a Districts: Safety Plan 4b County: APCD Plan 2 APCD:

Closed to New Enrollment:

9.74% All new County general employees enrolled in plan. 1 0.36% All district general employees enrolled in plan. 19.32% All district safety employees enrolled in plan. 15 .4 1% All new County safety employees enrolled in plan. 1 1 .8 1% All new APCD employees enrolled in plan.

General Plan 5a County: 10.36% County employees hired before October 1 994 continue in plan. General Plan 2 County: APCD Plan I APCD:

3.01% Non-contributory; Employees hired before January 1 999 may continue in plan. 8.41 % Employees hired before July 1 996 may continue in plan.

Annual Pension Cost

The annual required contribution for the current year was dctcm1incd as part of an actuarial valuation performed as of December 3 1 , 2000. The actuarial method used was the entry age nonnal cost method. The significant actuarial assumptions include: ( ! ) annual rate of return on investments of 8 . 1 6%; (2) inflation clement in wage increases of 4.5%; and (3) salary merit and longevity increases of 1 %. Unfunded liabilities arc amortized using the level percentage of projected payroll over five years from December 3 1 , 2000. Changes in actuarial gains and loss assumptions arc spread over an open 5-year period.

Thrcc-Y car Trend Information

The County's actual contributions, annual pension cost, and the percentage of annual pension cost contributed, for the current year and each of the two preceding years, are as follows:

Fiscal Year Ending 6/30/2001 6/30/2002 6/30/2003

Actuarial Valuation Date

1 2/31/2000 1 2/3 1/2000 12/3 1/2000

21 . DEFERRED COMPENSATIONPIANS

Contributions $ 29,346

3 1 ,759 33,799

Santa Barbara County Supplemental Retirement Plan

Plan Description

Annual Pension Cost

$ 29,346 3 1 ,759 33,799

Percentage of Annual Pension Cost Contribution

100% 1 00"/o 100%

The Santa Barbara County Supplemental Retirement Plan is an employer discretionary, defined contribution plan established and governed under Internal Revenue Code Section 401(a). Employer only annual contributions arc calculated based upon a percentage of employee compensation under annual agreements with employee bargaining groups and unions.

This plan is administered through a third-party adminislrntor and is available to all employee groups. The County docs not pcrfonn the investing function, and has no fiduciary accountability for !he plan. Thus, the plan assets and any related liability to plan participants have been excluded from !he County's financial statements.

7 1

COUNTY OF SANTA BARBARA, CALIFORNIA NOTES TO THE BASIC FINANCIAL STATEMENTS

June 30, 2003 (in thousands)

21 . DEFERRED COMPENSATION PLAi'.S - CONTINUED

The County's actual contributions for the current year and each of the two precedmg years, are as follows:

Fiscal Y car Endirn! 6/30/2001 6/30/2002 6/30/2003

Contributions $ 82,996

1 30,820 136,176

COUNTY OF SANTA BARBARA EMPLOYEE CONTRIBUTION DEFERRED COMPENSATION PLAN

The County offers to its employees an optional deferred compensation plan created in accordance with Section 457 of the Internal Revenue Code. This plan is available to substantially all employees and allows participants lo defer a portion of their current income until future years up to a maximum of $ 1 1 ,000 (in whole dollars), so as to shelter such funds and earnings from state and federal taxation until withdrawal. TI1c deferred compcnsalion is not available lo participants until termination, retirement, death, or unforeseeable emergency.

This plan is administered through a third-party administrator. The County docs not perform the investing function, and has no fiduciary accountability for the plan. Thus, the plan assets and any related liability to plan participants have been excluded from the County's financial statements.

COUNTY OF SANTA BARBARA SOCIAL SECURITY COMPLIANCE DEFERRED COMPENSATION PLAN

The Social Security Compliance Deferred Compensation Plan is a supplemental retirement program utilized by the County in lieu of payments to Social Security (FICA), governed under Internal Revenue Code Sections 3 1 2 1 and 457. Enrollment in this plan is mandatory for contract, extra-help, seasonal and temporary employees. Employees enrolled in the regular retirement system arc not eligible for this plan.

Based upon the employee's gross compensation, the employee's deferral , on a before-tax basis, equals 6.0% and the County's contribution equals 1 .5% for a combined total of7.5%.

This plan is administered through a third-party administrator and is available to all employee groups. The County docs not perform the investing function, and has no fiduciary accountability for the plan. Thus. the plan assets and any related liability to plan participants have been excluded from the County's financial statements.

The County's actual contributions for the current year and each oft he two preceding years arc as follows:

Fiscal Y car Ending 6/30/2001 6/30/2002 6/30/2003

22. SUBSEQUENT EVENTS

Contributions $ 93,436

95,424 99,889

In July 2003, the County issued tax and revenue anticipation notes ("TRANS") totaling $45,000 due July 23, 2004 at a coupon rate of 2.00% and net interest cost of .8%. Proceeds from the notes will be used to meet fiscal year 2003-2004 cash flow requirements. Fiscal year 2003-2004 unrestricted revenues col!atcmlizc the notes.

72

This page intentionally left blank

APPENDIX D

Statement of Investment Policy

This page intentionally left blank

SANTA BARBARA COUNTY

TREASURER

INVESTMENT POLICY

STATEMENT

January 2004

This page intentionally left blank

TABLE OF CONTENTS Page No.

I. Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

II. Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

III. Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

V. Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

VI. Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

VII. Ethics and Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

VIII. Safekeeping of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

IX. Delivery vs. Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

X. Internal Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

XI. Authorized Dealers and Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

XII. Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

XIII. Portfolio Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

XIV. Performance and Program Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

XV. Reporting and Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

XVI. Treasury Oversight Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

XVII. Cost and Earnings Apportionment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

XVIII. Voluntary Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

XIX. Participant Withdrawal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

XX. Legislative Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

Appendix I : Authorized Investment Summary Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6

Appendix II: Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7

D-1

INTRODUCTION:

The County of Santa Barbara's Investment Policy has been prepared in accordance with State law. This policy is presented annually to the Treasury Oversight Committee for review and to the Board of Supervisors for approval, pursuant to the requirements of Sections 53646(a) and 27 133 of the California Government Code. The County establishes investment policies that meet its current investment goals. The County may change this policy as its investment objectives change.

I. POLICY STATEMENT

The purpose of this Investment Policy is to provide a basis for the implementation and management of a prudent, conservative investment program. It is the policy of the Santa Barbara County Treasurer (the Treasurer) to invest public funds in a manner which provides the maximum security of principal invested with secondary emphasis on achieving the highest return, while meeting the daily cash flow needs of the Investment Pool participants and conforming to all applicable State statutes and County resolutions governing the investment of public funds.

As an elected official of the County of Santa Barbara, the Treasurer must manage public monies in a way that is consistent with investment oversight and sound investment practices. To have a policy which only concerns itself with maximizing return is reckless. The basic concept of investment management is the risk/reward relationship. A higher promised return on any investment may indicate a higher level of risk. Risk management must be an integral part of any prudent investment policy. Risk management must include adequate internal controls so Investment Pool participants and the public have confidence that public monies are secure. Though all investments contain a degree of risk, the proper exercise of prudence, the maintenance of a high level of ethical standards, and the proper delegation of authority reduces the potential for loss.

II. PURPOSES

This Investment Policy is set forth by the Treasurer for the following purposes:

A. To implement the investment program in accordance with its legislative parameters and the authority to invest which is hereby delegated to the Treasurer by the Board of Supervisors;

B. To establish a clear understanding for the Board of Supervisors, County management, responsible employees, citizens, and third parties of the objectives, policies and guidelines for the investment of County idle and surplus funds;

C. To offer guidance to investment staff arrl any external investment advisors on the investment of the Investment Pool; and

D-2

D. To establish a basis for evaluating results.

III. OBJECTIVES

The objectives of this Investment Policy are, in order of priority:

A Safety of principal. The primary objective of the Treasurer's investment program is to safeguard investment principal by mitigating exposure to risk factors, including, but not limited to, market (interest rate) risk, credit risk, and reinvestment risk. Specific risk parameters are set forth in Sections XII and XIII.

B. Maintenance of sufficient liquidity to meet cashflow needs.

C. Attainment of a "market average rate of return" consistent with the primary objectives of safety and liquidity.

Investments must always be in compliance with all federal, state and local laws governing the investment of moneys under the control of the Treasurer, this Investment Policy, and the Prudent Investor standard of care.

IV. SCOPE

This Statement of Investment Policy applies to county, school and special district fund assets deposited in the County Treasury and under control of the Treasurer. It does not apply to assets that are not deposited in the County Treasury, including, but not limited to:

A Bond Funds (the investment of which is governed by the bond documents);

B. Assets of Investment Pool participants other than assets on deposit in the County Treasury (which are the responsibility of the participant's governing body); and

C. Deferred Compensation Plan assets (which are invested for the benefit of participants in the Plan).

D. The Treasurer may direct specific-purpose assets belonging to the county or other Investment Pool participants in instruments the earnings of which are not shared, but credited to the specific-purpose fund. The investments for these direct investment pools shall be made in accordance with this Policy, except that investments may be for periods greater than five years when a longer term is advantageous for the investment of money held for specific purposes. Investments for periods longer than five years require prior approval of the governing body in accordance with Government Code Section 5360 1 .

D-3

V. STANDARD OF CARE

A. The Prudent Investor Standard is the appropriate standard of care for the Investment Pool. This standard shall be used by investment officials and shall be applied in the context of managing an overall portfolio. Investment staff acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security' s credit risk or market price changes, provided deviations from expectations are reported within 30 days and appropriate action is taken to control adverse developments.

B. The Prudent Investor Standard Defined: When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments of an overall strategy, a trustee is authorized to acquire investments as authorized by law.

VI. DELEGATION OF AUTHORITY

Authority to manage the County's investment program is derived from the California Government Code Sections 53600 et seq. , and Sections 53630 et seq.

Within the Treasurer's office, only the Treasurer, Assistant Treasurer, Treasury Finance Chief, and the Investment Officer are authorized to make investments and to direct the receipt and delivery of investment securities at the custody bank.

VII. ETIDCS AND CONFLICTS OF INTEREST

Individuals performing the investment function and members of the Treasury Oversight Committee shall maintain the highest standards of conduct. They must maintain their independence and not have actual conflicts of interest. In addition, they shall avoid the appearance of having conflicts of interest or having lack of independence.

All investment personnel shall disclose to the Treasurer any financial interests in financial institutions that conduct business with the County of Santa Barbara and shall disclose any material fmancial positions that could be related in a conflicting manner to the investment strategies and performance of the County of Santa Barbara's investment portfolio. In accordance with State law, the Treasurer, Assistant Treasurer, Treasury Finance Chief, and the Investment Manager shall complete and submit State of California Form 700, Statement of Economic Interests Disclosure. Should any conflicts be disclosed, the Treasurer will resolve such matters as soon as practical.

D-4

The Treasurer, Assistant Treasurer, Treasury Finance Chief, Investment Manager, and members of the Treasury Oversight Committee will not accept a gift or gifts aggregating more than the Fair Political Practices Commission (FPPC) guidelines in a calendar year from an advisor, broker, dealer, banker, or other persons with whom the Treasurer conducts business.

The Treasurer, Assistant Treasurer, Treasury Finance Chief, Investment Manager, and members of the Treasury Oversight Committee may not accept any honorarium from advisors, brokers, dealers, bankers, or other persons with whom the Treasurer conducts business or may, in the future, conduct business.

A member of the Treasury Oversight Committee may not be employed by an entity that has contributed to the campaign of a candidate for the office of the Treasurer or a candidate for a legislative body of a local agency that has deposited funds in the County Treasury in the previous three years or while a member of the Committee. A member may not secure employment with bond underwriters, bond counsel, security brokerages or dealers, or with financial services firms during the period that the person is a member of the Committee or for one year after leaving the Committee.

A member of the Treasury Oversight Committee may not directly or indirectly raise money for a candidate for local treasurer or a member of the governing board of any local agency that has deposited funds in the County Treasury while a member of the Committee.

VIII. SAFEKEEPING OF SECURITIES

To protect against potential losses by collapse of individual securities dealers, and to enhance access to securities, interest payments and maturity proceeds, all securities owned by the County shall be deposited for safekeeping with the custodial bank that has contracted to provide the Treasurer with custody and security clearance services or with a tri-party custodian bank under a written tri-party custody agreement. These third party trust department arrangements provide the County with a perfected interest in, ownership of and control over the securities held by the bank custodian on the County's behalf, and are intended to protect the County from the bank's own creditors in the event of a bank default and filing for bankruptcy. Securities are not to be held in investment firm/broker dealer accounts.

IX. DELIVERY VS. PAYMENT

All security transactions are to be conducted using industry-standard "delivery-versus­payment" procedures.

D-5

X. INTERNAL CONTROLS

The Treasurer shall establish and document a system of internal controls that is prudent and comprehensive. Internal controls shall be designed to provide reasonable assurances that the combined Investment Pool assets are protected. The concept of reasonable assurance recognizes that the cost of control should not exceed the benefits likely to be derived.

Internal controls are designed to ensure separation of transaction authority from accounting and record keeping and to prevent loss of public funds due to fraud, employee error, misrepresentation by third parties, unanticipated market changes, or imprudent actions by employees of the Treasurer's office.

No investment personnel may engage in an investment transaction except as provided under this investment policy and the procedures established by the Treasurer.

XI. AUTHORIZED DEALERS AND INSTITUTIONS

The Treasurer shall determine which financial institutions are authorized to provide investment services to the County. Institutions eligible to transact investmett business with the County include:

• Primary government dealers as designated by the Federal Reserve Bank;

• Nationally or state-chartered banks;

• The Federal Reserve Bank; and

• Direct issuers of securities eligible for purchase by the County.

Selection of financial institutions and broker/dealers authorized to engage in transactions with the County shall be at the sole discretion of the County.

All financial institutions which desire to become authorized dealers for investment transactions must complete 1he Santa Barbara County's "Request For Qualification" form ( see Appendix 3 ). Each qualified dealer must certify in writing that they have reviewed the relevant California Government Code Sections and the County's Investment Policy and that all securities offered to the County shall comply fully and in every instance with all provisions of the Code and with this Investment Policy.

The authorized dealers and financial institutions must not have made any political contribution to the Treasurer, Board of Supervisors or candidates for these offices for 48 months before and any time during their engagement with the County.

D-6

The authorized dealers and financial institutions must agree not to provide any honoraria, gift, or gratuity to any Santa Barbara County investment personnel or to any member of the Treasury Oversight Committee.

Public deposits shall be made only in qualified public depositories within the State of California as established by State law. Deposits shall be insured by the Federal Deposit Insurance Corporation, or, to the extent the amount exceeds the insured maximum, shall be collateralized with securities in accordance with State law.

The Treasurer, or designee, will create and review periodically an approved list of firms and financial institutions authorized to do business with the Treasurer. The Treasurer will maintain firms on the authorized list as long as it is in the best interest of the County to do so.

XII. PERMITTED INVESTMENTS

A. Authorized Investments

All investments shall be made in accordance with the California Government Code Sections 53630 et seq. and as described within this Investment Policy. Percentage allowances per this policy shall be determined by the overall portfolio size at the close of the date any security is purchased. Permitted investments under this policy shall include:

1 . Securities issued by the US Treasury, provided that a. There shall be no restriction on the percentage of portfolio investment in

US Treasury securities, and b. The final maturity shall not exceed five years.

2. Securities issued and fully guaranteed as to payment by an agency, or government sponsored enterprise of the US Government, provided that a. There shall be no restriction on the percentage of portfolio investment in

US Government a�ncies and sponsored enterprises, b. The final maturity shall not exceed five years, unless specifically

authorized by the governing body, and c. The issuer shall be rated AAA by at least two of the three major rating

services of Moody's, S&P, and Fitch.

3. Bonds, notes, warrants or certificates of indebtedness issued by the state of California, local agencies within California, or the County of Santa Barbara provided that a. The maximum allowable portfolio investment in this category shall be

10%, b . The final maturity shall not exceed five years, c. Prior approval of the Treasurer is obtained, and

D-7

d. The issuer shall be rated AAA by at least two of the three major rating services of Moody's, S&P, and Fitch.

4. Banker' s acceptances provided that a. The maximum allowable portfolio investment in banker's acceptances

shall be 40%, b. The final maturity shall not exceed 1 80 days, c. Maximum exposure to any one issuer shall be limited to 5% of the total

portfolio, and d. The issuer' s short term obligations shall be rated by at least two of the

three major rating services a minimum of Pl by Moody's, Al by S&P or Fl by Fitch.

5 . Commercial Paper provided that a. The maximum allowable portfolio investment in commercial paper shall

be 40%, b. The final maturity shall not exceed 270 days, c. The obligation is issued by a US corporation with total assets exceeding

$500 million, d. The investment in paper of any one issuer may not exceed 10% of the

outstanding debt of that issuer, e. Maximum exposure to any one issuer (including MTNs, CP, and other

obligations) shall be limited to 5% of the total portfolio, and £ The issuer's short term obligations shall be rated by at least two of the

three major rating services a minimum of P l by Moody' s, Al by S&P or F l by Fitch.

6. State of California Local Agency Investment Fund (LAIF) provided that a. The County may invest up to the maximum amount permitted by LAIF,

and b. LAIF's investments in instruments prohibited by or not specified in the

County' s policy do not exclude it from the County's list of allowable investments, and provided that the fund's reports allow the Treasurer to adequately judge the risk inherent in LAIF's portfolio.

7. Negotiable certificates of deposit (NCDs) provided that a. The maximum allowable portfolio investment in NCDs shall be 30%, b. The final maturity slnll not exceed one year, c. Maximum exposure to any one issuer shall be limited to 5% of the total

portfolio, and d. The issuer's short term obligations shall be rated by at least two of the

three major rating services a minimwn of Pl by Moody's, Al by S&P or Fl by Fitch.

8. Bank deposits (Non-negotiable certificates of deposit) which are fully collateralized with securities in accordance with California law, provided that

D-8

a. The maximum allowable portfolio investment in time non-negotiable certificates of deposit shall be 10%, and

b. The final maturity shall not exceed one year.

9. Repurchase agreements collateralized with securities authorized under Section XIIA of this policy maintained at a level of at least 102% of the market value of the repurchase agreements, provided that a. The total of repurchase agreements may not exceed 40% of the County's

total portfolio. b. The maximum allowable portfolio investment in repurchase agreements

shall be one year, c. The repurchase agreements are the subject of a master repurchase

agreement between the County and the provider of the repurchase agreement. The master repurchase agreement shall be substantially in the form developed by the Public Securities Association, and

d. The counterparty to the repurchase agreements is a primary government securities dealer as designated by the Federal Reserve Bank of New York.

10 . Securities lending and reverse repurchase agreements a. The total of reverse repurchase agreements and securities that are subject

to a securities lending agreement may not exceed 20% of the County's total portfolio,

b. To the extent that the County's authorized securities lending agent does not utilize the full 20% allocation, the County may enter into reverse repurchase agreements in accordance with the government code. The term to maturity of such reverse repurchase agreements may not exceed 92 days, and the maturity of securities purchased with the proceeds of reverse repos must match the maturity of the reverse repurchase agreement, and

c. The counterparty to the agreements is a primary government securities dealer as designated by the Federal Reserve Bank of New York.

1 1 . Medium Term or Corporate Notes (MTNs) provided that a. The maximum allowable portfolio investment in MTNs shall be 30%, b. The final maturity shall not exceed 5 years, c. The maximum allowable portfolio investment in MTNs with maturity in

excess of 3 years shall be 1 0%, d. The obligation shall be issued by a corporation organized and operating

within the U.S. or by a depository institution licensed in the U.S. or any state and operating within the U.S.,

e. Maximum exposure to any one issuer (including MTNs, CP and other obligations) shall be limited to 5% of the total portfolio, and

f. The issuer shall be rated AA by at least two of the three major rating services of Moody's, S&P, and Fitch if maturity is greater than 3 years. The issuer shall be rated AA- by at least two of the thfee major rating services of Moody's, S&P, and Fitch if maturity is 3 years or less.

D-9

12 . Money Market Mutual Funds provided that a. The maximum allowable portfolio investment in Money Market Funds

shall be 1 5%, b. The Fund is registered with the Securities and Exchange Commission, c. The Fund must have as one of its primary objectives that it will strive to

maintain a $ 1 .00 net asset value and share price, d. The Fund shall have retained an investment advisor registered or exempt

from registration with the Securities and Exchange Commission with not less than five years experience investing in the securities and obligations authorized by California Government Code Section 5360 1 (a through j) and with assets under management in excess of $500 million, and

e. The issuer shall be rated AAA by at least two of the three major rating services of Moody's, S&P, and Fitch.

B. Prohibited Investment and Practices

1 . State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to, mutual funds ( other than money market funds as described above), unregulated and/or un-rated investment pools or trusts, collateralized mortgage obligations and futures and options.

2. In accordance with Government Code Section 5360 1 .6, investments in inverse floaters, range notes, or mortgage derived interest-only strips is prohibited.

3 . Investment in any security that could result in a zero interest accrual if held to maturity is prohibited.

4. Purchasing or selling securities on margin is prohibited.

XIII. PORTFOLIO RISK MANAGEMENT

A Mitigating Credit Risk in the Portfolio

Credit risk is the risk that a security or a portfo lio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay its debt. The Treasurer shall mitigate credit risk by adopting the following strategies:

I . The diversification requirements included in Section XII (A) are designed to mitigate credit risk in the portfolio.

2. No more than 5% of the total portfolio may be invested in securities of any single issuer, other than the US Government, its agencies and sponsored enterprises.

D- 10

3 . The County may elect to sell a security prior to its maturity and record a capital gain or loss in order to improve the quality, liquidity or yield of the portfolio in response to market conditions or the County's risk preferences.

4. If the securities owned by the County are downgraded by Moody's, S&P, or Fitch to a level below the quality required by this Investment Policy, it shall be the County's policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. The Treasurer will use discretion in determining whether to sell or hold the security based on its current maturity, the loss in value, the economic outlook for the issuer, and other relevant factors.

5. The Treasurer will continue to monitor and reevaluate the security on a weekly basis in order to reaffirm or change the decision to hold a downgraded security.

6. If a decision is made to retain a downgraded security in the portfolio, the status of the investment will be reported quarterly to the Board of Supervisors.

B. Mitigating Market Risk in the Portfolio

Market risk is the risk that the portfolio will decline in value ( or will not optimize its value) due to changes in the general level of interest rates. The County recognizes that, over time, longer-term portfolios achieve higher returns. On the other hand, longer-term portfolios have a higher volatility of return. The County shall mitigate market risk by providing adequate liquidity for short-term cash needs, and by making some longer-term investments only with funds that are not needed for current cash flow purposes. The County further recognizes that certain types of securities, including variable rate securities, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The County, therefore, adopts the following strategies to control and mitigate its exposure to market risk:

1 . All investments are categorized according to the period of time from sett:ement date to maturity date and shall be limited to short term. However, market circumstances and risk-return calculations for increased yield may require an extended schedule other than short term. In no event shall more than 7 5 percent of the funds available be invested other than short term.

2. The maximum stated final maturity of individual securities in the portfolio shall be five years, except as otherwise stated in this policy. The five-year maturity of callable securities is measured to the final maturity date, not to a call date.

3 . Maturity of investments should be governed by the Treasury's demand for funds through analysis of revenue and expenditure activity over prior periods. The

D- 1 1

portfolio shall be structured in such manner that securities mature concurrent with cash needs.

C. Mitigating Reinvestment Risk in the Portfolio

Reinvestment risk is the risk that cash flows from securities will be reinvested at interest rates that are lower than the rate of the original investment. Securities that are highly subject to reinvestment risk include mortgage-backed and callable securities.

The County, therefore, adopts the following strategies to control and mitigate its exposure to reinvestment risk:

1 . The portfolio shall include securities with a range of durations and maturities.

2. Mortgage-backed securities are prohibited.

3 . Investment in callable securities is limited to 50%.

XIV. PERFORMANCE AND PROGRAM EVALUATION

The Treasurer shall submit quarterly reports to the Treasury Oversight Committee, the Investment Pool participants, the Auditor Controller, and the Board of Supervisors. These reports shall contain sufficient information to pennit an informed outside reader to evaluate the performance of the investment program and shall be h compliance with Government Code.

The investment portfolio shall be designed with the overall objective of obtaining a total rate of return throughout economic cycles that is commensurate with investment risk constraints and cash flow needs.

XV. REPORTING AND DISCLOSURE

A. Monthly Reports

The Investment Officer shall submit a report to the Treasurer on a monthly basis that includes at a minimum, the following:

1 . A detailed listing of assets in the portfolio, including cost and current market value (including accrued interest);

2. A table displaying the distribution of the portfolio by maturity and by duration;

D- 12

3 . A table displaying the elements of the Investment Policy and the level of portfolio compliance with each;

4. A complete list of the corporate positions (MTN s, commercial paper and other non-governmental issues) in the portfolio displaying credit ratings by Moody's, S&P and Fitch, as well as "credit watch" status and outlook; and

5 . A brief description of any significant events or news that affect any of the portfolio holdings.

B. Quarterly Reports

The Treasurer shall submit quarterly investment reports to the Board of Supervisors. These reports shall disclose, at a minimum, the following information about the risk characteristics of the County's portfolio:

1 . An asset listing showing par value, cost and market value of each security, type of investment, issuer, and interest rate;

2 . A one-page summary report showing: a. average maturity of the portfolio; b. maturity distribution of the portfolio; c. a statement of compliance with investment policy, including a schedule of

transactions or holdings which do not comply with this policy or with the California Government Code, with a justification for their presence in the portfolio and a timetable for resolution; and

d. a statement that the County has adequate funds to meet its cash flow requirements for the next six months.

C. Semi-Annual Reports

The Treasurer shall submit a copy of the quarterly investment report, as submitted to the Board of Supervisors, to the California Debt and Investment Advisory Commission (CDIAC) twice a year. The quarterly report for the year ending June 30, shall be submitted no later than the end of August. The quarterly report for the period ending December 3 1 , shall be submitted no later than the end of February.

D. Annual Reports

The investment policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law and financial and economic trends.

D- 1 3

A copy of the investment policy shall be submitted to the California Debt and Investment Advisory Commission (CDIAC) each calendar year and within 60 days of any amendment to the investment policy.

Any internal or external audit reports shall be presented to the Treasury Oversight Committee, together with a plan of implementation of audit recommendations.

XVI. TREASURY OVERSIGHT COMMITTEE

The Board of Supervisors shall establish a Treasury Oversight Committee pursuant to Section 271 3 1 of the California Government Code. The Committee shall consist of between three and eleven member nominated by the Treasurer and confirmed by the Board of Supervisors. The Investment Policy Statement shall be reviewed annually by the Treasury Oversight Committee.

Pursuant to Section 53646 and 53607 of California Government Code, the Treasurer shall annually render to the Board of Supervisors for review and approval the Investment Policy Statement and renew the delegation of investment authority.

Pursuant to California Government Code Section 27137, the county treasury oversight committee is not allowed to direct individual investment decisions, select individual investment advisors, brokers, or dealers, or impinge on the day-to-day operations of the county treasury.

XVII. COST AND EARNINGS APPORTIONMENT

Prior to quarterly interest distribution, actual investment costs incurred by the Treasurer will be deducted from the interest earnings of the Investment Pool. The costs are described in Government Code Sections 27013, 27133 and 27135 and include, but are not limited to, portfolio management, bank and custodial fees, software maintenance fees, and other indirect costs incurred from handling or managing funds.

The Investment Pool earnings distributed to each participant are proportionate to the average daily balance of the amounts on deposit by the participant. The County Auditor-Controller conducts the apportionment process based on the net earnings of the Investment Pool each quarter. In the event there is a negative balance in a participant's fund at any time, it shall reduce the average daily balance for the fund.

XVIII. VOLUNTARY PARTICIPANTS

The Treasurer does not solicit any agency's voluntary entry into the Investment Pool. However, should any agency solicit entry, the agency shall comply with the requirements of section 53684 of the Government Code and provide to the Treasurer

D- 14

a resolution adopted by their governing board stating that they have excess funds available for the purpose of investment. The resolution shall specify the amount of monies to be invested, the person authorized to coordinate the transaction, the anticipated time frame for deposit, and the agency's willingness to be bound to the 3 0 day written notice requirement for withdrawals, as well as the Treasurer's ability to deduct pro-rata administrative charges permitted by Section XVII of this investment policy. Any solicitation for entry into the Investment Pool must have the Treasurer ' s prior written approval.

XIX. PARTICIPANT WITHDRAW AL

Before a local agency withdraws funds from the Investment Pool, it must submit a withdrawal request to the Treasurer. The Treasurer shall review the withdrawal request based on the size of the withdrawal, the remaining balances in the Investment Pool after the withdrawal, current market conditions, effect on cash flows, availability of funds, the circumstances involving the request, and whether the withdrawal would adversely affect other depositors in the Investment Pool.

XX. LEGISLATIVE CHANGES

Any State of California legislative action that further restricts allowable maturities, investment type, or percentage allocations will be incorporated immediately into the Investment Policy.

D- 1 5

Appendix I

AUTHORIZED INVESTMENT SUMMARY TABLE

AUTHORIZED DIVERSIFICATION PURCHASE MATURITY CREDIT QUALITY INVESTMENTS RESTRICTIONS (S&P/MOODY' S/FITCH)

U.S. Treasury Obligations 1 00% None Max 5 years NA Notes, participation's or

obligations issued by an agency 1 00% None Max 5 years AAA of the federal govenunent or U.S. govenunent sponsored

enterprises Bonds, notes, warrants, or

certificates of indebtedness 10% With approval of Max 5 year AAA by at least 2 of the 3 issued by the state or local Treasurer rating agencies

agencies or County of Santa Barbara

Bankers Acceptances among Al I PI I Fl by at least 2 of the 100 largest banks by size of 40% Max 5% of portfolio Max 180 days the 3 rating agencies

deposits. per issuer Max 10% of

Commercial paper of U.S. 40% outstanding paper of Max 270 days A l I P l I FI by at least 2 of corporations with total assets any one issuer & max the 3 rating agencies

exceeding $500,000,000 5% per any one issuer

State of California- Local Agency Investment Fund As limited by LAIF As limited by LAIF NA NA

(LAIF)

Negotiable CDs issued by national or state chartered 30% Max 5% of any one Max 1 year A l / P l / F l by at least 2 of

banks or a licensed branch of issuer the 3 rating agencies the top 1 00 foreign banks

Collateralized Time Deposits As stipulated in Ca. 100/o Govenunent Code Max 1 year NA

53630 et al Repurchase Agreements with Contract must be on Restricted to primary

102% collateral 40% file 1 yr dealers on eligible list Reverse Repurchase Contract must be on Restricted to primary

Agreements 200/o file 92 days dealers on eligible list Medium Term Notes or AA by at least 2 of the 3 Corporate Notes on U.S. 30%/ 1 0%in maturity Max 5% of any one Max 5 years rating agencies if more than

corporation greater than 3 years issuer 3 yrs; AA- up to 3 yrs

Money Market mutual funds Registered with SEC; AAA by at least 2 of the 3 that meet requirements of Ca. 1 5% no NA V adjustments; Immediate rating agencies

Govenunent Code no front end loads liquidity Callable Securities 50% As above As above As above

D- 1 6

Appendix II

GLOSSARY OF TERMS

ACCRUED INTEREST - The amount of interest that is earned, but unpaid since the last payment date.

BANKERS ACCEPTANCES - A draft or bill or exchange accepted by a bank or trust company. The accepting institution, as well as the issuer, guarantees payment of the bill. With the credit strength of a bank behind it, the bankers acceptance usually qualifies as a money market instrument. In its simplest and most traditional form, a bankers acceptance is merely a check drawn on a bank by an importer or exporter of goods.

BASIS POINT - A unit of measurement used in the valuation of fixed- income securities equal to 1/100 of 1 percent of yield, e.g., " 1/4" of 1 percent is equal to 25 basis points.

BID - The indicated price at which a buyer is willing to purchase a security or commodity.

BOOK ENTRY- The system maintained by the Federal Reserve, by which most money market securities are delivered to an investor' s custodian bank. The Federal Reserve maintains a computerized record of the ownership of these securities and records any changes in ownership corresponding to payments made over the Federal Reserve wire (delivery versus payment).

BOOK VALUE - The value at which a security is carried on the inventory lists or other financial records of an investor. The book value may differ significantly from the security's current value in the market.

BROKER/DEALER - Any person engaged in the business of effecting transactions in securities in this state for the account of others or for her/his own account. Broker/dealer also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of her/his own issue.

CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION (CDIAC)­The CDIAC provides information, education, and technical assistance on public debt and investments to local public agencies and other public fmance professionals.

CALLABLE BOND - A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions.

CALL PRICE - The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight premium to the bond's original issue price to compensate the holder for loss of income and ownership.

D- 17

CALL RISK - The risk to a bondholder that a bond may be redeemed prior to maturity.

CASH SALE/PURCHASE - A transaction which calls for delivery and payment of securities on the same day that the transaction is initiated.

COLLERATERALIZATION - Process by which a borrower pledges securities, property, or other deposits for the purpose of securing the repayment of a loan and/or security.

COMBINED INVESTMENT POOL - The county maintains a combined Investment Pool with cash and investments which provide cash flow for the funding needs of the participants. The combined Investment Pool is managed by the Santa Barbara County Treasurer. The combined hvestment Pool is carried at amortized cost and includes accrued interest.

COMMERCIAL PAPER - An unsecured short-term promissory note issued by banks, corporations and other borrowers with temporarily idle cash, with maturities ranging from 2 to 270 days. Such instruments are usually discounted, although some are interest bearing. It is issued only by top-rated concerns and is nearly always backed by bank lines of credit.

CONFIRMATION - Formal memorandum from a broker/dealer to the Treasurer giving the details of a securities transaction, i.e., purchase or sale.

COUPON RATE - The annual rate of interest received by an investor from the issuer of certain types of fixed-income securities. Also known as the "interest rate."

CREDIT QUALITY - The measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer's ability to make timely interest payments and repay the loan principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies.

CREDIT RISK - The risk to an investor that an issuer will default in the payment of interest and/or principal on a security.

CURRENT YIELD (CURRENT RETURN) - A yield calculation determined by dividing the annual interest received on a security by the current market price of that security.

CUSTODIAN/CUSTODY - The financial institution where the investments purchased by the County Treasury are held.

D- 1 8

DELIVERY VERSUS PAYMENT (DVP) - A type of securities transaction in which the purchaser pays for the securities when they are delivered either to the purchaser or his/her custodian.

DERIVATIVE - F inancial instrument created from, or whose value depends upon, one or more underlying assets or indexes of asset values.

DISCOUNT - The amount by which the par value of a security exceeds the price paid for the security.

DIVERSIFICATION - The spreading of risk by investing in assets among a range of security types by sector, maturity, and quality rating.

DURATION - A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed- income security. This calculation is based on three variables: term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates.

EARNINGS APPORTIONMENT - The quarterly interest distribution to the Investment Pool participants where the actual investment costs incurred by the Treasurer are deducted from the interest earnings of the Investment Pool.

FAIR VALUE - The amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

FEDERAL FUNDS - Funds placed in Federal Reserve banks by depository institutions in excess of current reserve requirements. These depository institutions may lend Fed funds to each other overnight or on a longer basis. They may also transfer funds among each other on a same-day basis through the Federal Reserve banking system. Fed funds are considered to be immediately available funds.

FEDERAL FUNDS RATE - Interest rate charged by one institution lending Federal funds to the other.

FITCH IBCA, INC. (FITCH) - One of the three best known rating agencies in the United States, the others being Moody's Investment Service, Inc. (Moody's), and Standard and Poor' s Corporation (S & P). The County Treasury uses all three as its primary rating sources in determining eligibility for securities purchases.

GUARANTEED INVESTMENT CONTRACTS (GICS) An agreement acknowledging receipt of funds for deposit, specifying tenns for withdrawal, and guaranteeing a rate of interest to be paid.

GOVERNMENT SECURITIES - An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest

D- 19

quality of investment securities available in the U.S. securities market. See "Treasury Bills, Notes, and Bonds. "

HIGHLY LIQUID - The most eminent type of security that i s easily converted to cash because there are many interested buyers and sellers to trade large quantities at a reasonable price.

IDLE FUNDS - funds in the combined Investment Pool not required for immediate cash needs.

ILLIQUID - A security that is difficult to buy or sell or has a wide spread between bid price and off er price in the secondary market. There are few buyers and sellers willing to trade large quantities at a reasonable price.

INFORMAL COMPETITIVE BID - A verbal or written bid submitted to the County Treasury by a broker/ dealer for a specific issue at a specific price or yield.

INTEREST RATE - See "Coupon Rate."

INTEREST RA TE RISK - The risk associated with declines or rises in interest rates which cause an investment in a fixed- income security to increase or decrease in value.

INTERNAL CONTROLS - An internal control structure designed to ensure 1hat the assets of the entity are protected from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that I ) the cost of a control ITTould not exceed the benefits likely to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management. Internal controls should address the following points:

1 . Control of collusion - Collusion is a situation where two or more employees are working in conjunction to defraud their employer.

2 . Separation of transaction authority from accounting and record keeping - By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved.

3 . Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping.

4. Avoidance of physical delivery securities - Book-entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities.

5 . Clear delegation of authority to subordinate staff members - Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal

D-20

control structure that is contingent on the various staff positions and their respective responsibilities.

6. Written confirmation of transactions for investments and wire transfers -Due to the potential for error and improprieties arising from telephone and electronic transactions, all transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures.

7. Development of a wire transfer agreement with the lead bank and third­party custodian - The designated official should ensure that an agreement will be entered into and will address the following points: controls, security provisions, and responsibilities of each party making and receiving wire transfers.

INVERTED YIELD CURVE - A chart formation that illustrates long-term securities having lower yields than short-term securities. This configuration usually occurs during periods of high inflation coupled with low levels of confidence in the economy and a restrictive monetary policy.

INVESTl\iENT POLICY - A concise and clear statement of the objectives and parameters formulated by an inve stor or investment manager for a portfolio of investment securities.

INVESTMENT-GRADE OBLIGATIONS - An investment instrument suitable for purchase by institutional investors under the prudent person rule. Investment-grade is restricted to those obligations rated BBB or higher by a rating agency.

LIQUID - An asset that can be converted easily and quickly into cash because of the willingness of interested buyers and sellers to trade large quantities at a reasonable price.

LOCAL AGENCY INVESTMENT FUND (LAIF) - The State of California investment pool in which money of local agencies is pooled as a method for managing and investing local funds.

LOCAL AGENCY OBLIGATION - An indebtedness issued by a local agency, department, board, or authority within the State of California.

LONG-TERM - A security with the maturity greater than one year.

MARK-TO-MARKET - The process whereby the book value or collateral value of a security is adjusted to reflect its current market value.

MARKET RISK - The risk that the value of a security will rise or decline as a result of changes in market conditions.

MARKET VALUE - The price at which a security is trading and presumably could be purchased or sold at a particular point in time.

D-21

MATURITY - The date on which payment of a financial obligation is due. The final stated maturity is the date on which the issuer must retire a bond and pay the face value to the bondholder. See "Weighted Average Maturity."

MEDIUM TERM NOTES - Corporate Notes and Deposit Notes that are obligations of banks, corporations, and insurance companies. They are issued at a specific rate of return

for a specific period of time.

MONEY MARKET MUTUAL FUND - Mutual funds that invest solely in money market instruments (short-term debt instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and federal funds).

MOODY'S INVESTORS SERVICE, INC. (Moody's) - One of the three best known rating agencies in the United States, the others being Standard and Poor's Corporation (S & P) and Fitch IBCA, Inc. (Fitch). The County Treasury uses all three as its primary rating sources in determining eligibility for securities purchases.

MUTUAL FUND - An investment company that pools money and can invest in a variety of securities, including fixed- income securities and money market instruments. Mutual funds are regulated by the Investment Company Act of 1940 and must abide by the following Securities and Exchange Commission (SEC) disclosure guidelines:

1 . Report standardized performance calculations. 2. Disseminate timely and accurate information regarding the fund's holdings,

performance, management and general investment policy.

3 . Have the fund's investment policies and activities supervised by a board of trustees, which are independent of the adviser, administrator or other vendor of the fund.

4. Maintain the daily liquidity of the fund's shares. 5. Value their portfolios on a daily basis. 6. Have all individuals who sells SEC-registered products licensed with a self-.

regulating organization (SRO) such as the National Association of Securities Dealers (NASD ).

7. Have an investment policy governed by a prospectus which is updated and filed by the SEC annually.

NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASO) - A self­

regulatory organization (SRO) of brokers and dealers in the over-the-counter securities business. Its regulatory mandate includes authority over firms that distribute mutual fund shares as well as other securities.

NEGOTIABLE CERTIFICATE OF DEPOSIT - A Money Market instrument representing a receipt from a bank for a deposit at a specified rate of interest for a specified period of time that is traded in the secondary markets.

D-22

NET ASSET VALUE - The market value of one share of an investment company, such as a mutual fund. This figure is calculated by totaling a fund's assets which includes securities, cash, and any accrued earnings, subtracting this from the fund's liabilities and dividing this total by the number of shares outstanding. This is calculated once a day based on the closing price for each security in the fund's portfolio.

NO LOAD FUND - A mutual fund which does not levy a sales charge on the purchase of its shares.

NOMINAL YIELD - The stated rate of interest that a bond pays its current owner, based on par value of the security. It is also known as the "coupon," "coupon rate," or "interest rate. "

NONCALLABLE - A bond that is exempt from any kind of redemption for a stated time period.

NOTE - A written promise to pay a specific amount to a certain entity on demand or on a specified date.

OFFER - An indicated price at which market participants are willing to sell a security or commodity. Also referred to as the "Ask price. "

PAR - Face value or principal value of a bond, typically $ 1 ,000 per bond.

PORTFOLIO - A group of securities held by an investor.

POSITIVE YIELD CURVE - A chart formation that illustrates short-term securities having lower yields than long-term securities.

PREMIUM - The amount by which the price paid for a security exceeds the security's par value.

PRIMARY DEALER - A group of securities dealers that submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker-dealers and banks.

PRIME RA TE - A preferred interest rate charged by commercial banks to their most creditworthy customers. Many interest rates are keyed to this rate.

PRINCIPAL - The face value or par value of a debt instrument. Also may refer to the amount of capital invested in a given security.

PROSPECTUS - A legal document that must be provided to any prospective purchaser of a new securities offering registered with the SEC. This can include information on the issuer, the issuer's business, the proposed use of proceeds, the experience of the issuer's

D-23

management, and certain certified financial statements (also known as an "official statement").

PORTFOLIO - Combined holding of more than one stock, bond, commodity, real estate investment, cash equivalent, or other asset. The purpose of a portfolio is to reduce risk by diversification.

PRUDENT INVESTOR RULE - An investment standard where a person acts with care, skill, prudence, and diligence when investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing funds. The test of whether the standard is met is if a prudent person acting in such a situation would engage in similar conduct to ensure investments safeguard principal and maintain liquidity.

PUT OPTION - The sale of an option to another party giving them the right to sell to the Investment Pool a security at a specified price within a specified time period.

RATING - Evaluation of financial institutions' investment and credit risks by professional rating services. The County Treasury utilizes the ratings designations of Moody's, S&P and Fitch.

REGISTERED STATE WARRANT - A short-te1m obligation of a state governmental body issued in anticipation of revenue.

REGULAR WAY DELIVERY - Securities settlement that calls for delivery and payment on the third business day following the trade date (T+3); payment on a T+ 1 basis is currently under consideration. Mutual funds are settled on a same day basis; government securities are settled on the next business day.

REINVESTMENT RISK - The risk that a fixed-income investor will be unable to reinvest income proceeds from a security holding at the same rate of return currently generated by that holding.

REPURCHASE AGREEMENT (REPO) - An agreement of one party to sell securities at a specified price to a second party and a simultaneous agreement of the first party to repurchase the securities at a specified price or at a specified later date.

REVERSE REPURCHASE AGREEMENT (REVERSE REPO) - An agreement of one party to purchase securities at a specified price from a second party and a simultaneous agreement by the first party to resell the securities at a specified price to the second party on demand or at a specified date.

SAFEKEEPING - A custodian bank's action to store and protect an investor's securities by segregating and identifying the securities.

SECURITIES AND EXCHANGE COMMISSION (SEC) - Agency created by Congress to protect investors in securities transactions by administering securities laws.

D-24

The statutes administered by the SEC are designed to promote full public disclosure and protect the investing public against malpractice in the securities market.

SECURITIES LENDING - A transaction wherein the Investment Pool transfers its securities to broker/dealers and other entities for collateral which may be cash or securities and simultaneously agrees to return the collateral for the same securities in the future.

SERIAL BOND - A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals until the entire issue is retired.

SHORT-TERM - A security with a maturity one year or less.

STANDARD AND POOR'S CORPORATION (S&P) - One of the three best known rating agencies in the United States, the others being Moody's Investment Service, Inc. (Moody's), and Fitch IBCA, Inc. (Fitch). The County Treasury uses all three as its primary rating sources in determining eligibility for securities purchases.

SW AP - Trading one asset for another.

TOTAL RETURN - The sum of all investment income plus changes in the capital value of the portfolio. For mutual funds, return on an investment is composed of share price appreciation plus any realized dividends or capital gains. This is calculated by taking the following components during a certain time period. (Price Appreciation) + (Dividends paid) + (Capital gains) = Total Return.

TREASURY BILLS - Short-term U.S. government non-interest bearing debt securities with maturities of no longer than one year and issued in minimum denominations of $ 10,000. Auctions of three- and six-month bills are weekly, while auctions of one-year bills are monthly. The yields on these bills are monitored closely in the money markets for signs of interest rate trends.

TREASURY NOTES - Intermediate U.S. government debt securities with maturities of one to 10 years and issued in denominations ranging from $1 ,000 to $ 1 million or more.

TREASURY BONDS - Long-term U.S. government debt securities with maturities of ten years or longer and issued in minimum denominations of $ 1 ,000. Currently, the longest outstanding maturity for such securities is 30 years.

VOLATILITY - A degree of fluctuation in the price and valuation of securities

WEIGHTED AVERAGE MATURITY (WAM) - The average maturity of all the securities that comprise a portfolio. According to SEC rule 2a-7, the W AM for SEC registered money market mutual funds may not exceed 90 days and no one security may have a maturity that exceeds 397 days.

D-25

WHEN ISSUED (WI) - A conditional transaction in which an authorized new security has not been issued. All "when issued" transactions are settled when the actual security is issued.

YIELD - The current rate of return on an investment security generally expressed as a percentage of the security's current price.

YIELD-TO-CALL (YTC) - The rate of return an investor earns from a bond assuming the bond is redeemed ( called) prior to its nominal maturity date. Yield Curve - A graphic representation that depicts the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity. A normal yield curve may be alternatively referred to as a positive yield curve.

YIELD-TO-MATURITY - The rate of return yielded by a debt security he Id to maturity when both interest payments and the investor's potential capital gain or loss are included in the calculation of return.

ZERO-COUPON SECURITIES - Security that is issued at a discount and makes no periodic interest payments. The rate of return consists of a gradual accretion of the principal of the security and is payable at par upon maturity.

D-26

APPENDIX E

Form of Continuing Disclosure Certificate

This page intentionally left blank

APPENDIX E

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the "Disclosure Certificate" ) is executed and delivered by the County of Santa Barbara (the "County" ) in connection with the issuance of $55,000, 000 County of Santa Barbara, California 2004-2005 Tax and Revenue Anticipation Notes , Series A (the "Notes") . The Notes are being issued pursuant to a Resolution of the County dated May 25, 2004 (the "Resolution"). The County covenants and agrees as follows:

SECTION 1 . Pumose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the County for the benefit of the Noteholders and in order to assist the Participating Underwriters in complying with SEC Rule 1 5c2-1 2(b)(5) .

SECTION 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

"Dissemination Agent" shall mean the County, or any successor Dissemination Agent designated in writing by the County and which has filed with the County a written acceptance of such designation.

"Holders " shall mean, while the Notes are registered in the name of The Depository Trust Company, any applicable participant in its depository sys tem, or any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Notes (including persons holding Notes through nominees, depositories or other intermediaries ), or (b) is treated as the owner of any Notes for federal income tax purposes .

''Listed Events" shall mean any of the events listed in Section 3 (a) of this Disclosure Certificate.

"Participating Underwriter" shall mean any of the original underwriters of the Notes required to comply with the Rule in connection with the offering of the Notes.

"Rule" shall mean Rule 1 5c2-1 2(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1 934, 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 as a s tate repository for the purpose of the Rule and recognized as such the Securities and Exchange Commission. As of the date of this Disclosure Certificate, there is no State Repository.

Section 3. Reporting of Significant Events.

(a) following events :

(1 )

(2)

(3 )

This Section 3 shall govern the giving notices of the occurrence of any of the

Principal and interest payment delinquencies.

Non-payment related defaults .

Unscheduled draws on debt service reserves reflecting financial difficulties.

E-1

(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 adversely affecting the tax-exempt status of the security.

(7) Modifications to rights of security holders.

(8) Bond calls.

(9) Defeasances.

(10) Release, substitution, or sale of property securing repayment of the securities.

( 1 1) Rating changes.

(b) Whenever the County obtains knowledge of the occmTence of a Listed Event, the County shall as soon as possible determine if such event would be material.

( c) If the County determines that knowledge of the occurrence of a Listed Event would be material, the County shall promptly file a notice of such occurrence with the Municipal Securities Rulemaking Board and each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) or (a)(9) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Notes pursuant to the Resolution.

SECTION 4. Termination of Reporting Obligation. The County's obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Notes.

SECTION 5 . Dissemination Agent. The County may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Agent, with or without appointing a successor Dissemination Agent.

SECTION 6. Amendment. Notwithstanding any other provision of this Disclosure Certificate, the County may amend this Disclosure Certificate, only if:

(A) the amendment is made in connection with a change in circumstances that arise from a change in legal requirements, change in law, or change in the identity, nature, or status of the County, or type of business conducted;

(B) this Disclosure Certificate, as amended, would have complied with the requirements of the Rule at the time of award of the Notes, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(C) the amendment does not materially impair the interests of the Holders, as determined by parties unaffiliated with the County (such as, but without limitation, the County's bond counsel).

SECTION 7. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the County from disseminating any other information, using the means of dissemination set forth in

E-2

this Disclosure Certificate or any other means of communication, or including any other information in any notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the County chooses to include any information in any notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the County shall have no obligation under this Certificate to update such information or include it in any future notice of occurrence of a Listed Event.

SECTION 8. Default . In the event of a failure of the County to comply with any provision of this Disclosure Certificate any Holder may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the County to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an event of default under the Resolution and 1he sole remedy under this Disclosure Certificate in the event of any failure of the County to comply with this Disclosure Certificate shall be an action to compel performance.

SECTION 9. Duties Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the County 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 performance of its powers and duties hereunder, including the costs and expenses (including attorney 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 County under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Notes.

SECTION 10. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the County, the Dissemination Agent, the Participating Underwriters and Holders from time to time of the Notes, and shall create no rights in any other person or entity.

Date: _________ , 2004 COUNTY OF SANTA BARBARA

By:. ____________ _ Treasurer-Tax Collector

E-3

This page intentionally left blank

APPENDIX F

Book-Entry Only System

This page intentionally left blank

APPENDIX F

BOOK-ENTRY ONLY SYSTEM

The information in the following sections entitled "DTC's Book-Enfly System " has been provided by DTC for use in securities offering documents, and the County takes no responsibility for the accuracy or completeness thereof The County cannot and does not give any assurances that DTC, Direct Participants or Indirect Participants will distribute to the Beneficial Owners either (a) payments of interest, principal or premium, if any, with respect to the Notes or (b) certifcates representing ownership interest in or other confirmation of ownership interest in the Notes, or that they will do so on a timely basis or that DTC, Direct Participants or Indirect Participants will act in the manner described in this Official Statement. The current "Rules " applicable to DTC are on file with the Securities and Exchange Commission and the current "Procedures " of DTC to be followed in dealing with Direct Participants are on file with DTC.

DTC's Book-Entry System

The Depository Trust Company ("DTC"), New York, New York, will act as securities depository for the Notes. The Notes will be executed and delivered 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 Note will be issued with respect to each maturity of each series of Notes, and such Notes will be deposited with DTC.

DTC, the world's largest depository, 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 1 7 A of the Securities Exchange Act of 1 934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC' s participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Authority ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Authority, Government Securities Clearing Authority, MBS Clearing Authority, and Emerging Markets Clearing Authority (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor' s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securifos and Exchange Commission. More information about DTC can be found at www.dtcc.com.

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

F- 1

Owners are expected to receive written confirmations 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 ownership interests in the Notes are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Notes, except in the event that use of the book-entry system for the Notes is discontinued.

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

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

Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Notes. Under its usual procedures, DTC mails an Omnibus Proxy to the County 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 Notes are credited on the Record Date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments with respect to the Notes will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC' s practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the County's or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial 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 Participant and not of DTC (nor its nominee), the County or the Trustee, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. ( or such other nominee as may be requested by an authorized representative of DTC is the responsibility of the County or the Trustee, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to Beneficial Owners is the responsibility of Direct and Indirect Participants.

A Beneficial Owner shall give notice to elect to have its Notes purchased or tendered, through its Participant, to the Trustee and shall effect delivery of such Notes by causing the Direct Participant to transfer the Participant's interest in the Notes on DTC's records, to the Trustee. The requirement for physical delivery of Notes in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Notes are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Notes to the Trustee 's DTC account.

DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to the County or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Notes are required to be printed and delivered.

F-2

'

The County may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). Discontinuance of use of the system of book-entry transfers through DTC may require the approval ofDTC Participants under DTC's operational arrangements. In that event, Notes will be printed and delivered.

Discontinuation of Book-Entry Only System; Payment to Beneficial Owners

In the event that the book-entry system described above is no longer used with respect to the Notes, the following provisions will govern the transfer, exchange and replacement of the Notes.

Any Note may be exchanged for Notes of any authorized denomination and the same interest payment mode upon presentation and surrender at the office of the Trustee together with a request for exchange signed by the registered owner or by a person legally empowered to do so in a form satisfactory to the Trustee. A Note may be transferred only on the Note registration books upon presentation and surrender of the Note at such office of the Trustee together with an assignment executed by the registered owner or by a person legally empowered to do so in a form satisfactory to the Trustee. Upon exchange or transfer, the Trustee shall complete, authenticate and deliver a new Note or Notes of the same interest payment mode and of any authorized denomination or denominations requested by the owner equal in the aggregate to the unmatured principal amount of the Note surrendered and bearing interest at the same rate and maturing on the same date. Any exchange or transfer shall be subject to the more particular provisions of the County Resolution, including the requirement for payment by the registered owner of applicable taxes and charges.

Neither the County nor the Trustee will be required to exchange or transfer any Note during the period from the Record Date preceding each Payment Date to such Payment Date.

Risks of Book-Entry System

The County makes no assurance, and the County shall incur no liability, regarding the fulfillment by DTC of its obligations under the book-entry system with respect to the Notes.

In addition, Beneficial Owners of the Notes may experience some delay in their receipt of distributions of principal and interest with respect to the Notes since such distributions will be forwarded by the Trustee to DTC and DTC will credit such distributions to the accounts of the Direct Participants which will thereafter credit them to the accounts of the Beneficial Owners either directly or through Indirect Participants.

Since transactions in the Notes can be effected only through DTC, Direct Participants, Indirect Participants and certain banks, the ability of a Beneficial Owner to pledge Notes to persons or entities that do not participate in the DTC system, or otherwise to take actions in respect of such Notes, may be limited due to lack of a physical certificate. Beneficial Owners will not be recognized by the County as registered owners of the Notes, and Beneficial Owners will only be permitted to exercise the rights of registered owners indirectly through DTC and its Participants.

F-3

This page intentionally left blank