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RISI£ FACTORS The following factors, along with other information in this Official Statement, should be considered by potential investors in evaluating the risks in the purchase of the Bonds. Water System Demand and Growth There can be no assurance that the local demand for the services provided by the Water System will be maintained at levels described in this Official Statement under the heading "THE WATER SYSTEM." Reduction in the level of demand due to conservation efforts of the City and MWD, or other factors, could require an increase in rates or charges in order to produce Net System Revenues sufficient to comply with the City's rate covenant in the Installment Purchase Agreement. Such rate increases could increase the likelihood of nonpayment, and could also further decrease demand. There can be no assurance that any other entity with regulatory authority over the Water System will not adopt further restrictions on operation of the Water System. Water System Expenses There can be no assurance that the City's expenses for the Water System will be consistent with the levels described in this Official Statement. Changes in technology, new regulatory requirements, increases in the cost of energy or other expenses would reduce Net System Revenues, and could require substantial increases in rates or charges in order to comply with the rate covenant. Additionally, the cost of purchasing water from MWD continues to increase. Such rate increases could increase the likelihood of nonpayment, and could also decrease demand. Parity Obligations Although the City has covenanted not to issue additional obligations payable from Net System Revenues senior to the Installment Payments, the Installment Purchase Agreement permits the issuance by the City of certain indebtedness which may have a lien upon the Net System Revenues which is on a parity basis to the lien which secures the Installment Payments, if certain coverage tests are met (see "THE BONDS — Issuance of Parity Obligations" herein). These coverage tests involve, to some extent, projections of Net System Revenues. If such indebtedness is issued or incurred, the debt service coverage for the Installment Payments securing the Bonds will be diluted below what it otherwise would be subject to under the coverage tests. Moreover, there is no assurance that the assumptions which form the basis of such projections, if any, will be actually realized subsequent to the date of such projections. If such assumptions are not realized, the amount of future Net System Revenues may be less than projected, and the actual amount of Net System Revenues may be insufficient to provide for the payment of the Installment Payments and such additional indebtedness. Proposition 218 On November 5, 1996, the voters of the State approved Proposition 218, the "Right to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of the City to levy and collect both existing and future taxes, assessments, fees and charges. Proposition 218 also extends the initiative power to reducing or repealing any local taxes, assessments, fees and charges. This extension of the initiative power is not limited to taxes, assessments, fees and charges imposed on or after November 6, 1996, the effective date of Proposition 218, and could result in retroactive repeal or reduction in any existing taxes, assessments, fees or charges, except those which are pledged to the repayment of debt. If such a repeal or reduction in City fees or charges were to occur, and it was held that any such taxes, assessments, fees or charges were not pledged to any debt repayment, the City's ability to make Installment Payments could be adversely affected. In addition, while the matter is not free from doubt, Proposition 218 imposed restrictions on the levy of charges for "property- related services." hi July 2006 the California Supreme Court confirmed that a public agency's charges for ongoing water delivery are "fees and charges" within the meaning of Proposition 218. As a result, voters within the boundaries of the City could adopt an initiative measure that reduced or repealed 37