MATURITY SCHEDULE (See Inside Cover Page)

Transcription

1 NEW ISSUE FULL BOOK-ENTRY ONLY INSURED RATINGS: Moody s: Aa3 S&P: AA- UNDERLYING RATINGS: Moody s: Baa1 S&P: BBB See MISCELLANEOUS Ratings herein In the opinion of Nixon Peabody LLP, Bond Counsel, under existing law and assuming compliance with the tax covenants described herein, and the accuracy of certain representations and certifications made by the District described herein, interest on and Excess Accreted Value (as defined under TAX MATTERS herein) with respect to the Series 2012 Bonds are excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the Code ). Bond Counsel is also of the opinion that such interest on and Excess Accreted Value with respect to the Series 2012 Bonds are not treated as preference items in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Bond Counsel is further of the opinion that interest on and Excess Accreted Value with respect to the Series 2012 Bonds will be exempt from State of California (the State ) personal income taxes. See TAX MATTERS herein regarding certain other tax considerations. $10,116, Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A $5,815,000 Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B Dated: Date of Delivery Due: As shown on the inside cover The Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A (the Series 2012A Bonds ) in the aggregate amount of $10,116, are being issued to (i) acquire, lease and/or construct school facilities and equipment and other facilities to be used in conjunction with school facilities and for certain incidental expenses; (ii) make a cash deposit to the Series 2012A Reserve Account; and (iii) pay costs of issuance of the Series 2012A Bonds. The Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B (the Series 2012B Refunding Bonds and, together with the Series 2012A Bonds, the Series 2012 Bonds ) in the aggregate amount of $5,815,000 are being issued to (i) refund a portion of the District s Special Tax Bonds, Series 1999 (the Series 1999 Bonds ), (ii) make a deposit to the Series 2012B Reserve Account; and (iii) pay costs of issuance of the Series 2012B Refunding Bonds. The District is located in a residential community in the northern section of Los Angeles County (the County ) and includes portions of the City of Palmdale (the City ) as well as unincorporated areas of the County. The Series 2012 Bonds were authorized at a special election of the eligible voters of the District, at which more than two-thirds of the votes cast were in favor of the proposition to authorize the levy of an annual special tax and the issuance and sale of $300,000,000 principal amount of bonds to acquire and construct certain school facilities. The Series 2012 Bonds are being issued pursuant to the Mello-Roos Community Facilities Act of 1982, as amended (Sections et seq. of the California Government Code) (the Act ), resolutions adopted by the Board of Trustees (the Board ) of the Palmdale School District (the School District ) acting as the legislative body of the District, and an Indenture dated as of December 1, 1999 (the Master Indenture ), as amended and supplemented by the Supplemental Indenture No. 2 dated as of September 1, 2012, both by and between the District and U.S. Bank National Association, as trustee (the Trustee ). The Master Indenture, as so amended and supplemented and as heretofore supplemented and amended, is herein called the Indenture. The Series 2012 Bonds are payable from certain proceeds of a Special Tax (as defined herein) to be levied on property located within the District and from certain other funds pledged under the Indenture. The Special Tax is to be levied according to the rate and method of apportionment approved by the owners of the property within the District. Generally, the Special Tax is to be collected in the same manner and at the same time as ad valorem property taxes are collected by the County. The Series 2012 Bonds are being issued on a parity with the District s Special Tax Bonds, Series 1999, Special Tax Bonds Series 2011A (Taxable Direct Pay Qualified School Construction Bonds), Special Tax Bonds Series 2011B (Taxable Non-Subsidy), and any additional bonds issued under the Indenture. Neither the faith and credit nor the general taxing power of the District, the School District, the State or any political subdivision of any of the foregoing is pledged to the payment of the Series 2012 Bonds. The Series 2012 Bonds are not general obligations of the District or the School District but are limited obligations of the District payable solely from the proceeds of Gross Taxes (as defined herein) and certain funds established pursuant to the Indenture and held by the Trustee, as more fully described herein. The Series 2012 Bonds will be issued in book-entry form only and will be initially issued and registered in the name of Cede & Co. as nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository of the Series 2012 Bonds. Individual purchases of the Series 2012 Bonds will be made in book-entry form only. Purchasers will not receive physical delivery of the Series 2012 Bonds purchased by them. Payments of the principal and accreted value (collectively, Principal ) of and interest on the Series 2012 Bonds will be made by the Trustee to DTC for subsequent disbursement through DTC Participants (defined herein) to the beneficial owners of the Series 2012 Bonds. See THE SERIES 2012 BONDS Book-Entry-Only System herein. The Series 2012 Bonds are comprised of Current Interest Bonds, Capital Appreciation Bonds, and Convertible Capital Appreciation Bonds. Interest on the Current Interest Bonds accrues from the date of delivery and is payable semiannually on February 1 and August 1 of each year, commencing on February 1, The Current Interest Bonds are issuable in denominations of $5,000 or any integral multiple thereof. The Capital Appreciation Bonds are dated the date of delivery of the Bonds and accrue interest from such date, compounded semiannually on February 1 and August 1 of each year, commencing on February 1, The Capital Appreciation Bonds are issuable in denominations of $5,000 Maturity Value or any integral multiple thereof. The Convertible Capital Appreciation Bonds will initially be issued as Capital Appreciation Bonds and will convert to Current Interest Bonds on the respective Conversion Dates set forth on the inside cover page. Prior to the applicable Conversion Date, the Convertible Capital Appreciation Bonds will not pay current interest, but will accrete in value from their initial principal amounts on the date of delivery thereof to the Conversion Date (the initial principal amount plus such accretion, the Conversion Value ). Prior to the applicable Conversion Date, interest on the Convertible Capital Appreciation Bonds will be compounded on each February 1 and August 1, commencing February 1, No payment of interest will be made to the owners of Convertible Capital Appreciation Bonds prior to or on the Conversion Date. From and after the Conversion Date, the Convertible Capital Appreciation Bonds will pay current interest, such interest to accrue based upon the Conversion Value of the Convertible Capital Appreciation Bonds. Following the applicable Conversion Date, interest on the Convertible Capital Appreciation Bonds will be payable semiannually on each February 1 and August 1 thereafter, commencing on the first February 1 or August 1 after the applicable Conversion Date. The Convertible Capital Appreciation Bonds are issuable in denominations of $5,000 Conversion Value or any integral multiple thereof. The Series 2012 Bonds are subject to redemption prior to maturity as more fully described herein. The scheduled payment of principal of (or, in the case of Capital Appreciation Bonds, the accreted value) and interest on the Series 2012 Bonds when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Series 2012 Bonds by ASSURED GUARANTY MUNICIPAL CORP. This cover page contains information for general reference only. Investors must read the entire official statement to obtain information essential in making an informed investment decision. See RISK FACTORS for a discussion of factors that should be considered, in addition to the other matters set forth herein, in evaluating the investment quality of the Series 2012 Bonds. MATURITY SCHEDULE (See Inside Cover Page) The Series 2012 Bonds are offered when, as and if issued, subject to the approval as to their legality by Nixon Peabody LLP, Bond Counsel. Certain matters will be passed upon for the Underwriter by Stradling Yocca Carlson & Rauth, a Professional Corporation, as Underwriter s Counsel. It is anticipated that the Series 2012 Bonds in book entry form will be available for delivery through the facilities of DTC in New York, New York, in book-entry form on or about September 27, Dated: September 18, 2012.

2 MATURITY SCHEDULE $10,116, Palmdale Elementary School District Community Facilities District No. 90-1, Special Tax Bonds, Series 2012A Current Interest Bonds Maturity (August 1) Principal Amount Interest Rate Yield CUSIP (69671T) 2013 $240, % 0.850% DG , DH9 Initial Principal Amount Capital Appreciation Bonds Maturity (August 1) Accretion Rate Maturity Amount Reoffering Yield to Maturity 2025 $ 116, % $ 240, % CS ,031, ,585, CV , ,540, CW , ,495, CX , ,450, CY , ,185, CZ , ,605, DB , ,555, DC , ,500, DD , ,450, DE , ,395, DF3 CUSIP (69671T) Convertible Capital Appreciation Term Bonds Maturity (August 1) Initial Principal Amount Conversion Value and Accreted Value at Maturity Conversion Date (August 1) Accretion Rate Interest Rate After Conversion Reoffering Yield CUSIP (69671T) 2034 $3,020,864 $6,160, % 5.625% 5.625% DA4 Maturity (August 1) $5,815,000 Palmdale Elementary School District Community Facilities District No. 90-1, Special Tax Refunding Bonds, Series 2012B Current Interest Bonds Principal Interest Amount Rate Yield 2014 $170, % 1.390% DJ , DK , DL , DM , DN , DP , DQ , DR , DS , DT , DU , DV , DW6 $1,590, % Term Bond due August 1, 2029, Yield 4.040%, CUSIP 69671T DZ9 CUSIP (69671T) Copyright 2012, American Bankers Association. CUSIP data herein is provided by Standard and Poor s, CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. CUSIP numbers are provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such CUSIP numbers

3 No dealer, broker, salesperson or other person has been authorized by the District or the Underwriter to give any information or to make any representations with respect to the District or the Series 2012 Bonds other than the information contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by the District 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 Series 2012 Bonds by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THE INDENTURE (AS DEFINED HEREIN) BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXCEPTIONS CONTAINED IN SUCH ACTS. THE BONDS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS IN ANY STATE. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL, STATE OR OTHER GOVERNMENTAL ENTITY, NOR ANY AGENCY OR DEPARTMENT THEREOF, HAS PASSED UPON THE MERITS OF THE BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. THE BONDS HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. This Official Statement is not to be construed as a contract with the purchasers of the Series 2012 Bonds. 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. Certain of the information set forth herein has been obtained from sources which the District and the Underwriter believe to be reliable, but such information 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 opinion 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 District or any other parties described herein since the date hereof. This Official Statement is being submitted in connection with the sale of the Bonds 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 District. All summaries of documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions. 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 a part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. All summaries of the Indenture or other documents are made subject to the complete provisions thereof and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District for further information in connection therewith. This Official Statement is submitted in connection with the sale of the Series 2012 Bonds referred to herein and may not be reproduced or used, in whole or in part, for any other purpose. In connection with the offering of the Series 2012 Bonds, the Underwriter may overallot or effect transactions which stabilize or maintain the market price of the Series 2012 Bonds 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 Series 2012 Bonds to certain dealers and dealer banks and banks acting as agent at prices lower than the public offering prices stated on the cover page hereof and such public offering prices may be changed from time to time by the Underwriter. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forwardlooking statements. Assured Guaranty Municipal Corp. ( AGM ) makes no representation regarding the Series 2012 Bonds or the advisability of investing in the Series 2012 Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading Bond Insurance and EXHIBIT I SPECIMEN MUNICIPAL BOND INSURANCE POLICY.

4 PALMDALE SCHOOL DISTRICT Board of Trustees Carol Stanford, President Sandy Corrales-Eneix, Clerk Jeff Ferrin, Member Maria Molina, Member Robert Bo Bynum, Member District Administrators Roger D. Gallizzi, Superintendent Cathy A. Shepard, Chief Business Officer PROFESSIONAL SERVICES Bond and Disclosure Counsel Nixon Peabody LLP Underwriter Piper Jaffray & Co. El Segundo, California Special Tax Consultant Koppel & Gruber Public Finance San Marcos, California Trustee and Escrow Agent U.S. Bank National Association Los Angeles, California Verification Agent Causey Demgen & Moore Inc. Denver, Colorado

5 Page INTRODUCTION... 1 General... 1 The District... 1 Authority for Issuance... 2 Use of Proceeds... 2 Security and Sources of Payment for the Series 2012 Bonds... 2 PLAN OF FINANCE... 3 SOURCES AND USES OF FUNDS... 4 THE SERIES 2012 BONDS... 4 Description of the Series 2012 Bonds... 4 Accreted Values... 5 Book-Entry Only System... 6 Redemption... 8 Effect of Redemption Registration, Transfer and Exchange of Series 2012 Bonds DEBT SERVICE SCHEDULE SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS General Limited Obligations Special Taxes Collection and Deposit of Special Taxes Proceeds of Foreclosure Sales Reserve Fund Additional Bonds BOND INSURANCE Bond Insurance Policy Assured Guaranty Municipal Corp THE SCHOOL DISTRICT THE DISTRICT AND THE SPECIAL TAX Introduction Development Within the District Special Tax Levies, Collections and Delinquencies 21 Estimated Debt Service Coverage Assessed Value Direct and Overlapping Bonded Debt Certificates of Participation RISK FACTORS Limited Obligations of the District Risks of Real Estate Secured Investments Generally Insufficiency of the Special Tax Collection of the Special Tax; Foreclosure Reduction of Special Tax Revenues Payment of the Special Tax is Not a Personal Obligation of the Property Owners Exempt Properties Exempt Properties Property Owned by FDIC and Other Federal Governmental Entities Land Values Legal Requirements Geologic, Topographic and Climatic Conditions Hazardous Substances Prolonged Economic Downturn Risks Related to Mortgage Loans Land Development TABLE OF CONTENTS Public and Private Improvements Future Indebtedness Zoning and Land Use Decisions Bankruptcy Parity Taxes and Special Assessments Disclosures to Future Purchasers Loss of Tax Exemption Non-Cash Payment of Bonds Voter Initiatives Rights of Series 2012 Bond Insurer and Series 1999 Bond Insurer TAX MATTERS Federal Income Taxes State Taxes Original Issue Discount Original Issue Premium Ancillary Tax Matters Changes in Law and Post Issuance Events FINANCIAL STATEMENTS VERIFICATION OF MATHEMATICAL COMPUTATIONS LEGAL MATTERS Legal Opinions No Litigation Continuing Disclosure MISCELLANEOUS Underwriting Rating Financial Interests Miscellaneous Page APPENDIX A: Rate and Method of Apportionment of Special Tax... A-1 APPENDIX B: Summary of the Indenture... B-1 APPENDIX C: The School District... C-1 APPENDIX D: Form of Opinion of Bond Counsel. D-1 APPENDIX E: Form of Continuing Disclosure Certificate... E-1 APPENDIX F: The School District s Audited Financial Statements... F-1 APPENDIX G: Table of Accreted Value... G-1 APPENDIX H: APPENDIX I: General and Economic Information Regarding the District and Surrounding Community... H-1 Specimen Municipal Bond Insurance Policy....I-1

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7 OFFICIAL STATEMENT $10,116, Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A $5,815,000 Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B INTRODUCTION General This Official Statement (which includes the cover page, the Table of Contents and the Appendices attached hereto) is furnished by the Palmdale Elementary School District Community Facilities District No (the District ) to provide information concerning the Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A (the Series 2012A Bonds ) in the initial aggregate amount of $10,116,622.15, and Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B in the initial aggregate amount of $5,815,000 (the Series 2012B Refunding Bonds and, together with the Series 2012A Bonds, the Series 2012 Bonds ) to be offered by the District. This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and Appendices hereto, and the documents summarized or described herein. A full review should be made of the entire Official Statement. The sale and delivery of the Series 2012 Bonds to potential investors is made only by means of the entire Official Statement. Brief descriptions of the Series 2012 Bonds, the security for the Series 2012 Bonds, the District, the School District, the School Facilities, and the property within the District are included in this Official Statement, together with summaries of certain provisions of the Series 2012 Bonds, the Indenture and certain other documents. Such descriptions do not purport to be comprehensive or definitive. All references herein to the Indenture and other documents are qualified in their entirety by reference to such documents, and references herein to the Series 2012 Bonds are qualified in their entirety by reference to the form thereof included in the Indenture. All capitalized terms used in this Official Statement and not defined shall have the meaning set forth in APPENDIX B Summary of the Indenture Definitions attached hereto. Investment in the Series 2012 Bonds entails risks. See RISK FACTORS for a discussion of certain risk factors that should be considered, in addition to the other information set forth in this Official Statement, in considering an investment in the Series 2012 Bonds. The District Pursuant to the Mello-Roos Community Facilities Act of 1982, as amended, constituting Sections 53311, et seq., of the California Government Code (the Act ), on October 16, 1990, the Board of Trustees (the Board ) of the Palmdale School District (the School District ) adopted Resolution No , as amended by Resolution No adopted by the Board on October 29, 1990 (collectively, the 1990 Resolution of Formation ) establishing the District. On November 27, 1990, a landowner election (the Election ) was held within the District, at which the landowners who comprised qualified electors of the District approved by more than two-thirds vote such proposition. The Election authorized the issuance of up to $300,000,000 in principal amount of bonded indebtedness to finance authorized facilities (the Projects ) and approving the levying of, maximum rate and method of apportionment of a special tax to pay the principal and interest on such bonded indebtedness. As a result - 1 -

8 of several separate annexation proceedings together with other actions, as of August 2012, the District is estimated to contain approximately 7,774 taxable assessor parcels comprising approximately 7,950 taxable acres. See THE DISTRICT AND THE SPECIAL TAX. Authority for Issuance The Series 2012 Bonds are being issued pursuant to the Act, a resolution adopted by the Board, acting as the legislative body of the District, on August 7, 2012 (the Series 2012 Bond Resolution ) and an Indenture dated as of December 1, 1999 (the Master Indenture ), by and between the District and U.S. Bank National Association, as Trustee (the Trustee ), as amended and supplemented by the Supplemental Indenture No. 2 dated as of September 1, 2012, by and between the District and the Trustee. The Master Indenture, as so supplemented and as heretofore supplemented and amended from time to time, is herein referred to as the Indenture. Use of Proceeds The proceeds of the Series 2012A Bonds will be used to (i) acquire, lease and/or construct school facilities and equipment and other facilities to be used in conjunction with school facilities and for certain incidental expenses; (ii) make a cash deposit to the Series 2012A Reserve Account; and (iii) pay costs of issuance of the Series 2012A Bonds. The proceeds of the Series 2012B Refunding Bonds will be used to (i) refund a portion of the District s Special Tax Bonds, Series 1999 Bonds (the Series 1999 Bonds ), (ii) make a deposit to the Series 2012B Reserve Account; and (iii) pay costs of issuance of the Series 2012B Refunding Bonds. Security and Sources of Payment for the Series 2012 Bonds The Series 2012 Bonds are being issued on parity with the District s Series 1999 Bonds, its Special Tax Bonds Series 2011A (Taxable Direct Pay Qualified School Construction Bonds) (the Series 2011A QSCB Bonds ), and Special Tax Bonds Series 2011B (Taxable Non-Subsidy) (the Series 2011B Taxable Bonds and, together with the Series 2011A QSCB Bonds, the Series 2011 Bonds ). The Series 1999 Bonds and the Series 2011 Bonds are herein referred to as the Outstanding Bonds. The Outstanding Bonds, the Series 2012 Bonds and any additional bonds issued under the Indenture are herein referred to as the Bonds. After the issuance of the Series 2012 Bonds and the redemption of the Refunded Bonds (as defined herein), there will be $16,997, of Series 1999 Bonds outstanding and $15,670,000 of Series 2011 Bonds outstanding. The District may, from time to time, issue additional bonds secured by the Gross Taxes on a parity with the Series 2012 Bonds and the Outstanding Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS Additional Bonds herein. Under the Indenture, the District has pledged to pay or cause to be paid the principal and Accreted Value (hereinafter defined) of, and interest on the Series 2012 Bonds and the Outstanding Bonds and any amounts required to replenish the Reserve Fund from Gross Taxes. Gross Taxes include (i) the amount of all Special Taxes on Developed Property and Undeveloped Property authorized to be levied in accordance with the Rate and Method of Apportionment of Special Tax (the Special Tax Formula ) on taxable property lying within the District (not including the Prepayment Tax authorized to be paid under the Special Tax Formula) (the Special Taxes ), and (ii) proceeds from the sale of property collected pursuant to the foreclosure provisions of the Act, the Indenture and any Supplemental Indenture for the delinquency of such Special Taxes. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS herein. The Special Tax Formula is described in APPENDIX A Rate and Method of Apportionment of Special Tax hereto. Also see APPENDIX B Summary of the Indenture Definitions. Although the Bonds are secured by all Gross Taxes, the District historically has levied Special Taxes in each Fiscal Year on property designated as Developed Property in amounts sufficient to pay the Principal of and interest on the Bonds for the next succeeding Bond Year. Developed Property means any Assessor s Parcels in the District which are zoned for residential use and for which a building permit for a residential dwelling unit(s) has been issued by June 15th of the prior Fiscal Year; other than Assessor s Parcels for which a Prepayment Tax has been levied and collected pursuant to the Special Tax Formula. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS Special Taxes herein. The Special Tax Formula is described in APPENDIX A Rate and Method of Apportionment of Special Tax hereto. The District expects to be able to pay the Principal - 2 -

9 of and interest on the Outstanding Bonds and the Series 2012 Bonds from amounts received from the levy of the Special Tax on Developed Property. In addition, payments of interest on the Series 2011A QSCB Bonds are to be payable from a cash subsidy payment from the United States Treasury equal to the lesser of (a) the tax credit rate applicable to the Series 2011A QSCB Bonds or (b) 100% of the interest payable on the Series 2011A QSCB Bonds under Section 54F of the Internal Revenue Code of 1986, as amended (the Code ) and applicable regulations promulgated thereunder (the Regulations ) (the Bond Subsidy Payments ). The Bond Subsidy Payments do not secure the Series 2012 Bonds or any Series of Bonds other than the Series 2011A QSCB Bonds. The District does not expect to levy any Special Taxes on Undeveloped Property, nor does it expect to use amounts received from any Prepayment Tax or any foreclosure proceeding under the Act or the Indenture to pay the Principal of and interest on the Outstanding Bonds and the Series 2012 Bonds. To the extent additional funds are required (i) to pay principal of and interest on the bonds at that time outstanding in the CFD, (ii) to make any deposits required to be made with respect to any reserve fund created with respect to such bonds, and (iii) to pay for Administrative Expenses (the Bond Requirements ) due to anticipated delinquencies, the Undeveloped Property Tax shall be levied according to the Special Tax Formula. The portion of taxes levied on property within the District pursuant to the Special Tax Formula which are not used to pay debt service on the Bonds can also be used to pay for certain authorized expenses of the District, including but not limited to (i) administrative expenses, (ii) any deficiency in the Reserve Fund, and (iii) direct acquisition, construction or leasing of school facilities. The District uses a portion of the Special Tax for such purposes. Series 2012A Bonds PLAN OF FINANCE The proceeds of the Series 2012A Bonds will be used to (i) acquire, lease and/or construct school facilities and equipment and other facilities to be used in conjunction with school facilities and for certain incidental expenses; (ii) make a cash deposit to the Series 2012A Reserve Account; and (iii) pay costs of issuance of the Series 2012A Bonds. The proceeds of the Series 2012B Refunding Bonds will be used to (i) refund a portion of the District s Special Tax Bonds, Series 1999 Bonds, (ii) make a deposit to the Series 2012B Reserve Account; and (iii) pay costs of issuance of the Series 2012B Refunding Bonds. Proceeds of the 2012A Bonds will be used by the District to pay for the cost of acquiring, leasing and/or constructing school facilities and equipment and other facilities to be used in conjunction with the school facilities and for certain incidental expenses, and for some or all of the purposes detailed below, all of which were authorized at the Election (the Series 2012 Project ): Construction of a new intermediate school for grades 7-8 on the west side of the District to house approximately 1,200 students; Construction of a new Dos Caminos School; Modernization to science labs at other intermediate schools in the District; Repairs to roofs and fire alarms at schools in the District; and Modernization and remodeling of classrooms and other school facilities. Series 2012B Refunding Bonds Proceeds of the Series 2012B Refunding Bonds will be used to fund an escrow fund (the Escrow Fund ) established pursuant to an Escrow Agreement by and between the District and U.S. Bank National Association, as escrow agent (in such capacity, the Escrow Agent ), for the purpose of paying principal, interest and redemption - 3 -

10 price on $5,185,000 of the Series 1999 Bonds maturing on August 1, 2013, August 1, 2018 and August 1, 2029 (the Refunded Bonds ) (the Escrow Agreement ). The Escrow Agreement will irrevocably direct the Escrow Agent to pay principal and interest on the Refunded Bonds as such amounts become due and payable prior to October 29, 2012 (the Redemption Date ), and on the Redemption Date to pay the principal and accrued interest on the Refunded Bonds maturing on the Redemption Date and to redeem the Refunded Bonds maturing after such date at the redemption price of 100% of the principal amount of such Refunded Bonds, without premium, plus all interest payments due to and including the Redemption Date, including all interest accrued but not yet paid, if any. SOURCES AND USES OF FUNDS The estimated sources and uses of funds in connection with the Series 2012 Bonds are as follows: Sources of Funds Series 2012A Bonds Series 2012B Refunding Bonds Total Principal Amount of Series 2012 $10,116, $5,815, $15,931, Bonds Original Issue Premium/(Discount) 2, (1,623.35) 1, Total Sources of Funds $10,119, $5,813, $15,932, Uses of Funds Construction Fund $ 8,503, $ 8,503, Series 2012A Reserve Account 1,011, ,011, Series 2012B Reserve Account (1) $ 290, , Escrow Fund (2) 5,257, ,257, Costs of Issuance (3) 603, , , Total Uses of Funds $10,119, $5,813, $15,932, (1) (2) (3) The Series 2012B Reserve Account is partially funded by the Series 2012B Reserve Policy. Represents amounts required to refund the Refunded Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS Reserve Fund. Including underwriter s discount, costs of printing, fees of Bond Counsel, the Trustee, the Special Tax Consultant and rating agency fees, miscellaneous other costs of issuance, the cost of a municipal bond insurance policy and the premium for the Series 2012B Reserve Policy. THE SERIES 2012 BONDS Description of the Series 2012 Bonds The Series 2012 Bonds will be issued in book entry form only and will be initially issued and registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York (collectively referred to herein as DTC ). Purchasers of beneficial ownership interests in the Series 2012 Bonds from participants in the DTC system will not receive certificates representing their interest in the Series 2012 Bonds. The Series 2012 Bonds will be issued as Current Interest Bonds, Capital Appreciation Bonds and Convertible Capital Appreciation Bonds. Interest on the Current Interest Bonds accrues from the date of delivery, and is payable semiannually on February 1 and August 1 of each year (each an Interest Payment Date ), commencing on February 1, 2013, at the annual interest rates shown on the inside cover hereof

11 The Current Interest Bonds are issuable in denominations of $5,000 or any integral multiple thereof. Interest will accrue on the Current Interest Bonds on the basis of a 360-day year comprised of twelve 30-day months. The Capital Appreciation Bonds are dated the date of delivery of the Series 2012 Bonds and accrete interest from such date, compounded semiannually on February 1 and August 1 of each year, commencing on February 1, 2013, payable only upon maturity or prior redemption thereof. The Capital Appreciation Bonds are issuable in denominations of $5,000 payable upon maturity (the Maturity Value ) or any integral multiple thereof. Interest will be compounded on the basis of a 360-day year comprised of twelve 30-day months. The Convertible Capital Appreciation Bonds will initially be issued as Capital Appreciation Bonds and will convert to Current Interest Bonds on the respective Conversion Dates set forth on the inside cover hereof. Prior to the applicable Conversion Date, the Convertible Capital Appreciation Bonds will not pay current interest but will accrete in value from their initial principal amount on the date of delivery thereof to the Conversion Date (the initial principal amount and such accretion, the Conversion Value ). Prior to the applicable Conversion Date, interest on the Convertible Capital Appreciation Bonds will be compounded on each February 1 and August 1, commencing February 1, No payment of interest will be made to the registered owners of Convertible Capital Appreciation Bonds prior to or on the Conversion Date. From and after the Conversion Date, the Convertible Capital Appreciation Bonds will pay current interest, such interest to accrue based upon the Conversion Value of the Convertible Capital Appreciation Bonds. Following the applicable Conversion Date, interest on the Convertible Capital Appreciation Bonds will be payable semiannually on each February 1 and August 1 thereafter, commencing on the first February 1 or August 1 occurring after the applicable Conversion Date. The Convertible Capital Appreciation Bonds are issuable in denominations of $5,000 Conversion Value or any integral multiple thereof. Interest will accrue and be compounded on the basis of a 360-day year comprised of twelve 30-day months. Unless otherwise provided herein, the descriptions herein of Capital Appreciation Bonds apply to Convertible Capital Appreciation Bonds prior to the Conversion Date, and descriptions herein of Current Interest Bonds apply to Convertible Capital Appreciation Bonds from and after the Conversion Date. Interest on the Current Interest Bonds and, after the Conversion Date, on the Convertible Capital Appreciation Bonds, including the final interest payment upon maturity, is payable by check mailed to the registered owner thereof as of the close of business on the 15th day of the month preceding the applicable Interest Payment Date (the Record Date ) or, upon request of an owner of $1,000,000 or more of aggregate principal amount, if given at least 20 days prior to any Interest Payment Date, by wire transfer. The principal amount of the Current Interest Bonds and the Accreted Value (as defined below) of the Capital Appreciation Bonds and the Convertible Capital Appreciation Bonds (the principal of the Current Interest Bond and the Accreted Value of the Capital Appreciation Bonds are collectively referred to as Principal ) and premium, if any, on the Series 2012 Bonds are payable only upon surrender of the Series 2012 Bonds at maturity or earlier redemption at the office of the Trustee (as defined below). See the Maturity Schedule on the inside cover and DEBT SERVICE SCHEDULE and THE SERIES 2012 BONDS Redemption. Accreted Values APPENDIX G contains a table of the initial Principal plus interest accreted thereon (the Accreted Value ) as of each February 1 and August 1 for each maturity of Capital Appreciation Bonds and Convertible Capital Appreciation Bonds (on the maturity date of the Capital Appreciation Bonds, the Accreted Value of the Capital Appreciation Bonds will be equal to the Maturity Value of the Capital Appreciation Bonds, and on and after the Conversion Date of the Convertible Capital Appreciation Bonds, the Accreted Value of the Convertible Capital Appreciation Bonds will be equal to the Conversion Value of the Convertible Capital Appreciation Bonds). Interest on the Capital Appreciation Bonds and, until the Conversion Date, on the Convertible Capital Appreciation Bonds is accreted on the basis of a 360-day year comprised of twelve 30-day months. Any Accreted Value determined by the District and Trustee by computing interest in accordance with the provisions of the Series 2012 Bond Resolution, however, shall control over any different Accreted Value determined by reference to APPENDIX G

12 Book-Entry Only System DTC will act as securities depository for the Series 2012 Bonds. The Series 2012 Bonds will be issued 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 Series 2012 Bond certificate will be issued for each maturity of the Series 2012 Bonds, each in the aggregate initial principal amount of such Series 2012 Bond, and will be deposited with DTC. DTC, the world s largest securities 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 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments from over 100 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 Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. 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 a S&P rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of the Series 2012 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2012 Bonds on DTC s records. The ownership interest of each actual purchaser of each Series 2012 Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, 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 Series 2012 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2012 Bonds, except in the event that use of the book-entry system for the Series 2012 Bonds is discontinued. To facilitate subsequent transfers, all Series 2012 Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2012 Bonds 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 Series 2012 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Series 2012 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect 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. Beneficial Owners of the Series 2012 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2012 Bonds, such as redemptions, defaults, and proposed amendments to the Series 2012 Bond documents. For example, Beneficial Owners of the Series 2012 Bonds may wish to ascertain that the nominee holding the Series 2012 Bonds for their benefit has agreed to obtain and transmit - 6 -

13 notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Series 2012 Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2012 Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District 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 the Series 2012 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Series 2012 Bonds 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 District 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, the Trustee, or the District, 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 District or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Series 2012 Bonds at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Series 2012 Bond certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, bond certificates will be printed and delivered. The foregoing description of DTC and the procedures and record keeping with respect to beneficial ownership interests in the Series 2012 Bonds, payment of Principal, interest and premium, if any, on the Series 2012 Bonds to Direct Participants, Indirect Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in such Series 2012 Bonds and other related transactions by and between DTC, the Direct Participants, the Indirect Participants and the Beneficial Owners is based solely on information provided by DTC, which source is believed to be reliable, but the District, the Trustee and the Underwriter do not assume any responsibility therefor. Accordingly, no representations can be made concerning these matters and the Direct Participants, the Indirect Participants and the Beneficial Owners should not rely on the foregoing information with respect to such matters but should instead confirm the same with DTC or the Direct Participants or the Indirect Participants, as the case may be. With respect to Series 2012 Bonds registered in the bond register in the name of DTC s nominee, the District shall have no responsibility or obligation to any member of or participant in DTC (a Participant ) or to any person on behalf of which such a Participant holds a beneficial interest in the Series 2012 Bonds. Without limiting the immediately preceding sentence, the District shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, DTC s nominee or any Participant with respect to any beneficial ownership interest in the Series 2012 Bonds, (ii) the delivery to any Participant, beneficial owner or any other person, other than DTC, of any notice with respect to the Series 2012 Bonds, including any redemption notice, (iii) the selection by DTC and the Participants of the beneficial interests in the Series 2012 Bonds to be redeemed in part, or (iv) the payment to any Participant, beneficial owner or any other person, other than DTC, of any amount with respect to Principal of, premium, if any, and interest on the Series 2012 Bonds

14 The District and the Trustee may treat and consider the person in whose name each Series 2012 Bond is registered in the bond register as the holder and absolute Owner of such Series 2012 Bond for the purpose of payment of Principal of, premium, if any, and interest on such Series 2012 Bond, for the purpose of giving redemption notices and other notices with respect to such Series 2012 Bond, and for all other purposes whatsoever, including, without limitation, registering transfers with respect to the Series 2012 Bonds. Redemption Optional Redemption. Series 2012A Bonds. The Series 2012A Bonds which are Current Interest Bonds (the Series 2012A Current Interest Bonds ) and the Series 2012A Bonds which are Capital Appreciation Bonds are not subject to redemption prior to their maturity dates. The Series 2012A Bonds which are Convertible Capital Appreciation Bonds (the Series 2012A Convertible Capital Appreciation Term Bonds ) maturing on August 1, 2034 are subject to redemption at the option of the District, as a whole or in part in the manner directed by the District and by lot within each maturity, from any source of available funds, on or after August 1, 2030 or on any date thereafter at par, plus accrued interest to the redemption date. Series 2012B Refunding Bonds. The Series 2012B Refunding Bonds maturing on or prior to August 1, 2022 are not subject to redemption prior to their maturity dates. The Series 2012 Refunding Bonds maturing after August 1, 2022 are subject to redemption at the option of the District, as a whole or in part in the manner directed by the District and by lot within each maturity, from any source of available funds, on or after August 1, 2022 or on any date thereafter at par, plus accrued interest to the redemption date. Mandatory Redemption. Series 2012A Bonds. The Series 2012A Convertible Capital Appreciation Term Bonds maturing August 1, 2034 are subject to mandatory sinking fund redemption in part, by lot, commencing on August 1, 2032 from mandatory sinking fund account payments, at a redemption price equal to the Principal amount represented thereby plus accrued interest to the date fixed for redemption, without premium. The Principal amount of such Series 2012A Convertible Capital Appreciation Term Bonds to be redeemed and the dates therefor shall be as follows: Redemption Date Conversion Value 2032 $1,220, ,425, ,515,000 Maturity Series 2012B Refunding Bonds. The Series 2012B Refunding Bonds maturing on August 1, 2029 are subject to mandatory sinking fund redemption in part, by lot, commencing on August 1, 2027 from mandatory sinking fund account payments, at a redemption price equal to the Principal amount represented thereby plus accrued interest to the date fixed for redemption, without premium. The Principal amount of such Series 2012B Refunding Bonds to be redeemed and the dates therefor shall be as follows: Series 2012B Refunding Bonds Due on August 1, 2029 Redemption Date Principal Amount 2027 $500, , ,000 Maturity - 8 -

15 In lieu of depositing cash with the Trustee as a mandatory sinking fund payment, the District has the option to tender to the Trustee for cancellation any amount of Series 2012 Bonds purchased by the District which Series 2012 Bonds may be purchased by the District at public or private sale as and when and at such prices as the District may determine in its discretion. The principal amount of any Series 2012 Bonds so purchased by the District and tendered to the Trustee in any twelve month period ending on July 1 in any calendar year shall be credited towards and shall reduce the next mandatory sinking fund payments required to be made on such Series 2012 Bonds of such series and maturity in the order in which they are required to be made pursuant to the Indenture. Selection of Series 2012 Bonds for Redemption If less than all outstanding Series 2012 Bonds are to be redeemed, the Trustee, upon written instruction from the District, shall select Series 2012 Bonds for redemption in the manner directed by the District. If less than all of the Series 2012 Bonds then Outstanding are to be redeemed as described under Optional Redemption above, and any Series 1999 Bonds, Series 2011A QSCB Bonds and 2011B Taxable Non-Subsidy Bonds remain Outstanding at the time of such redemption, the Trustee will redeem such Bonds in accordance with the provisions of the Master Indenture. Within a series and maturity, the Trustee shall select the Series 2012A and Series 2012B Refunding Bonds for redemption by lot. Redemption by lot shall be in such manner as the Trustee shall determine; provided, however, that the portion of any such Current Interest Bond, and after the Conversion Date, any Convertible Capital Appreciation Bond to be redeemed in part shall be in the Principal amount of $5,000 or any integral multiple thereof and the portion of any Capital Appreciation Bond, and prior to the Conversion Date, on any Convertible Capital Appreciation Bond to be redeemed in part shall be in the maturity amount of $5,000 or any integral multiple thereof. The Accreted Value of such Capital Appreciation Bond or Convertible Capital Appreciation Bond shall be determined by reference to a schedule to be provided to the Trustee. In the event that the Series 2012 Bonds are no longer held by DTC or a successor securities depository, such Series 2012 Bonds shall be selected for redemption by the District in its sole discretion. Notice of Redemption Notice of redemption of the Series 2012 Bonds will be given by the Trustee. The Indenture requires that the notice of redemption state (i) the Series 2012 Bonds or designated portions thereof which are to be redeemed, (ii) the date of redemption, (iii) the place or places where the redemption will be made, including the name and address of any redemption agent, (iv) the redemption price, (v) the CUSIP numbers, if any, assigned to the Series 2012 Bonds to be redeemed, (vi) if less than all the Series 2012 Bonds of a particular maturity are to be redeemed, the Series 2012 Bond numbers of the Series 2012 Bonds to be redeemed, and (vii) the original issue date, interest rate and stated maturity date of each Series 2012 Bond to be redeemed in whole or in part. The redemption notice will further state that on the redemption date there shall become due and payable upon each Series 2012 Bond or portion thereof being redeemed, (i) in the case of Current Interest Bonds, or, from and after the Conversion Date, Convertible Capital Appreciation Bonds, the redemption price, together with the interest accrued to the redemption date or (ii) in the case of Capital Appreciation Bonds, or prior to the Conversion Date, Convertible Capital Appreciation Bonds, the Accreted Value, and that from and after such date interest with respect thereto shall cease to accrue or accrete and be payable. Such notice shall be given to the registered owners of Series 2012 Bonds designated for redemption at least 30 but not more than 45 days prior to the redemption date. So long as DTC is owner of the Series 2012 Bonds, such notice will be sent to DTC. Neither the failure to receive such notice nor any defect therein will affect the sufficiency of the proceedings for the redemption of such Series 2012 Bonds. From and after the redemption date, the Series 2012 Bonds, or portions thereof so designated for redemption, shall be deemed to be no longer Outstanding and such Series 2012 Bonds or portions thereof will cease to bear further interest

16 Effect of Redemption Once notice of redemption has been given as provided in the Indenture and the amount necessary for the redemption has been made available for such redemption on the redemption date, those Series 2012 Bonds, or portions thereof, designated for redemption shall become due and payable at the redemption price thereof, on the designated redemption date as provided in the Indenture. Upon presentation and surrender of those Series 2012 Bonds to be redeemed at the Principal Corporate Trust Office of the Trustee, such Series 2012 Bonds will be redeemed at the redemption price thereof, and from and after the redemption date, such Series 2012 Bonds or portions thereof shall be deemed to be no longer Outstanding and shall cease to bear further interest. From and after the redemption date, no owner of any of the Series 2012 Bonds or portions thereof designated for redemption will be entitled to any of the benefits of the Indenture, or to any other rights, except with respect to payment of the redemption price and interest accrued to the redemption date from the amounts made available to the Trustee. Registration, Transfer and Exchange of Series 2012 Bonds The registration of any Series 2012 Bond may, in accordance with its terms, be transferred upon the Bond Register by the person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such Series 2012 Bond for cancellation at the Principal Corporate Trust Office, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee and duly executed by the Bondowner or his or her duly authorized attorney. Series 2012 Bonds may be exchanged at the Principal Corporate Trust Office for a like aggregate principal amount of Series 2012 Bonds of other Authorized Denominations of the same Series, maturity and interest rate. The Trustee will not charge for any new Series 2012 Bond issued upon any exchange, but will require the Bondowner requesting such exchange to pay any tax or other governmental charge required to be paid with respect to such exchange. Whenever any Series 2012 Bond shall be surrendered for registration of transfer or exchange, the District shall execute or cause to be executed and the Trustee shall authenticate and deliver a new Series 2012 Bond of the same Series and maturity, for a like aggregate principal amount; provided that the Trustee shall not be required to register transfers or make exchanges of (i) Series 2012 Bonds for a period of 15 days next preceding the date of any selection of the Series 2012 Bonds to be redeemed, or (ii) any Series 2012 Bonds chosen for redemption. The Series 2012 Bonds will be issued 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. If at any time the Depository notifies the District that it is unwilling or unable to continue as Depository with respect to the Series 2012 Bonds or if at any time the Depository shall no longer be registered or in good standing under the Securities Exchange Act of 1934 or other applicable statute or regulation and a successor Depository is not appointed by the District within 90 days after the District receives notice or becomes aware of such condition, as the case may be, the District shall issue, or cause to be issued, bonds representing the Series 2012 Bonds as provided below. In addition, the District may determine at any time that the Series 2012 Bonds shall no longer be represented by global bonds. In any such event the District shall execute and deliver or cause to be executed and delivered, bonds representing the Series 2012 Bonds as provided below. Series 2012 Bonds issued in exchange for global bonds pursuant to this subsection (c) shall be registered in such names and delivered in such denominations as DTC or its successor, pursuant to instructions from the Participants or otherwise, shall instruct the District and the Trustee. The Trustee shall deliver such bonds representing the Series 2012 Bonds to the persons in whose names such Series 2012 Bonds are so registered. If the District determines to replace the Depository with another qualified securities depository, the District shall prepare, or cause to be prepared, a new fully-registered global bond for each of the maturities of Series 2012 Bonds, registered in the name of such successor or substitute securities depository or its nominee, or make such other arrangements as are acceptable to the District, the Trustee and such securities depository and not inconsistent with the terms of this Indenture

17 DEBT SERVICE SCHEDULE The following table summarizes the annual debt service requirements of the District for the Series 2012 Bonds and the District s other Outstanding Bonds: Series 2012A Bonds Series 2012B Refunding Bonds Current Interest Bonds Capital Appreciation Bonds Convertible Capital Appreciation Bonds Current Interest Bonds Year Ending Initial Principal Accreted August 1 Principal Interest Amount Interest (1) Principal Interest Accreted Interest (1) Principal Interest Series 2012 Total Annual Debt Service (1)(2) Debt Service on Outstanding Bonds (3) Total Debt Service 2013 $240, $4, $ 175, $ 420, $ 3,109, $ 3,529, , , , , ,860, ,284, , , , ,845, ,273, , , , ,828, ,269, , , , ,791, ,240, , , , ,775, ,236, , , , ,727, ,205, , , , ,687, ,173, , , , ,652, ,145, , , , ,205, ,707, , , , ,976, ,491, , , , ,622, ,142, $ 16, $ 123, , , , ,342, ,113, $ 346, , , , ,221, ,117, , , , , ,189, ,097, ,031, ,553, , , , ,503, ,609, ,113, , ,592, , , , ,468, ,643, ,111, , ,621, , ,841, ,275, ,116, , ,647, , ,796, ,320, ,116, , , , , , ,751, ,365, ,116, ,189, , ,235, ,702, ,415, ,117, ,233, , ,281, ,656, ,460, ,116, , ,963, ,605, ,510, ,115, , ,972, ,555, ,560, ,115, , ,972, ,500, ,615, ,115, , ,966, ,450, ,665, ,115, , ,952, ,395, ,720, ,115, Total $ 285, $ 5, $ 6,810, $ 17,189, $ 3,020, $ 2,844, $ 3,139, $ 5,815, $ 2,305, $ 41,416, $ 77,996, $ 119,412, (1) Amounts paid for compounded interest are paid at maturity of the Services Amounts paid for compounded interest are paid at maturity of the Series 2012 Bond or prior redemption, if any. (2) Includes amounts paid for compounded interest. (3) Reflects refunding of the Refunded Bonds as of October 29, For discussion of other obligations of the District, see DISTRICT DEBT STRUCTURE

18 SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS General The Series 2012 Bonds and the interest thereon are payable from and are equally secured by a pledge of and lien upon the Gross Taxes and, except as provided in the Indenture, the amounts in the Bond Service Fund, the Reserve Fund, the Redemption Fund and the Special Tax Fund (only to the amount of Gross Taxes on deposit therein) created pursuant to the Indenture. Gross Taxes include (i) the Special Taxes (generally defined as the amount of the Annual Special Tax on Developed Property and the Undeveloped Property Tax, but not including the Prepayment Tax) and (ii) proceeds from the sale of property collected pursuant to the foreclosure provisions of the Act and the Indenture or any supplemental indenture for the delinquency of such Special Taxes. Except for the Gross Taxes and the moneys in the aforementioned Funds and moneys held in other funds and accounts under the Indenture and pledged to a particular Series of Bonds, no funds or properties of the District are pledged to the payment of the principal of, premium (if any) or interest on the Bonds. The Series 2012 Bonds are issued on parity with the Outstanding Bonds and any additional Parity Bonds that may be issued by the District pursuant to the Indenture. After the issuance of the Series 2012 Bonds and the redemption of the Refunded Bonds, there will be $16,997, of Series 1999 Bonds outstanding and $15,670,000 of Series 2011 Bonds outstanding. Limited Obligations The Series 2012 Bonds and interest thereon are not payable from the general funds of the District or the School District. Except with respect to the Gross Taxes, neither the credit nor the taxing power of the District or the School District is pledged for the payment of the principal of or interest on the Series 2012 Bonds, and, except as provided herein, no Owner of the Series 2012 Bonds may compel the exercise of any taxing power by the District or the School District or force the forfeiture of any of their respective property. The principal of and interest on the Series 2012 Bonds are limited obligations of the District and are not a legal or equitable pledge, charge, lien or encumbrance, upon any of the District s or the School District s respective property, or upon any of their respective income, receipts or revenues, except the Gross Taxes which are, under the terms of the Indenture or any Supplemental Indenture and the Act, set aside for the payment of the principal of and interest on the Series 2012 Bonds. Special Taxes The District levies the Special Taxes in accordance with the Special Tax Formula set forth in APPENDIX A attached hereto. Pursuant to the Special Tax Formula, parcels in the District are classified each year as Developed Property, Undeveloped Property, or Tax-Exempt Property. As of August 2012, the District contained approximately 7,774 taxable assessor parcels. Of these taxable assessor parcels, approximately 7,353 (approximately percent) were classified as Developed Property, approximately 340 (approximately 3.38 percent) were classified as Undeveloped Property, and approximately 81 (approximately 1.04 percent) were classified as tax-exempt property. Approximately 7,227 (approximately percent of Developed Property) of these taxable parcels were classified as Debt Service Developed Property. For the Fiscal Year, the Annual Special Tax levy on Developed Property, standing alone, is sufficient to pay the Principal of and interest on the Series 2012 Bonds and the Outstanding Bonds. See THE DISTRICT AND THE SPECIAL TAX Special Tax Levies, Collections and Delinquencies herein. Developed Property Annual Special Tax. Under the Special Tax Formula, the District is authorized to levy the annual special tax levied in connection with the Special Tax Formula (the Annual Special Tax ) in each Fiscal Year on all Developed Property (defined generally to be assessor s parcels which are zoned for residential use and for which a building permit for a residential dwelling unit(s) has been issued by June 15 of the prior Fiscal Year). The Annual Special

19 Tax may be levied to the extent necessary to provide for payment of the cost of constructing, leasing and/or acquiring school facilities and of Bond Requirements, subject to the limits described in the following paragraph. See APPENDIX A Rate and Method of Apportionment of Special Tax hereto. Developed Property was subject to the Annual Special Tax in the Fiscal Year of $ per square foot of Assessable Space, which was the maximum permitted under the Special Tax Formula. The Annual Special Tax is subject to a maximum increase in each Fiscal Year of an amount equal to two percent of the maximum Annual Special Tax rate for the prior Fiscal Year. Although the Bonds are secured by all Annual Special Taxes, the District historically has levied Special Taxes in each Fiscal Year on Developed Property in amounts sufficient (after taking into account anticipated delinquencies and together with amounts on deposit in certain funds and accounts) to pay the Principal of, premium (if any) and interest on the Bonds and any amounts required to maintain the Reserve Fund at the Reserve Requirement. The District expects to be able to pay the Principal of, premium (if any) and interest on the Bonds solely from amounts received from the levy of the Special Tax on Developed Property. The District does not expect to levy any Special Taxes on Undeveloped Property, nor does it expect to use amounts received from any Prepayment Tax or any foreclosure proceeding under the Act or the Indenture to pay the Principal of, premium (if any) and interest on the Bonds. The District has covenanted in the Indenture to levy or cause to be levied Special Taxes in amounts anticipated to be sufficient (after taking into account anticipated delinquencies and together with amounts on deposit in certain funds and accounts) to pay 115% of the aggregate amount of Principal of, premium (if any) and interest on the Bonds and any amounts required to maintain the Reserve Fund at the Reserve Requirement. In addition, the District has covenanted in the Indenture to levy Special Taxes on each parcel of Debt Service Developed Property (as defined in APPENDIX B hereto) at least in an amount anticipated to be sufficient (after taking into account anticipated delinquencies and together with amounts on deposit in certain funds and accounts) and anticipated to be available in the next succeeding Bond Year to pay principal of, premium (if any) and interest on the Bonds and any amounts required to maintain the Reserve Fund at the Reserve Requirement. See APPENDIX B Summary of the Indenture Covenants of the District. Undeveloped Property Tax. Although the Special Tax Formula permits the District to levy a Special Tax on the Undeveloped Property (the Undeveloped Property Tax ), the principal amount of the Series 2012 Bonds and the Outstanding Bonds has been limited so that the District does not expect to be required to levy any Undeveloped Property Tax. In the event that on July 1 of any Fiscal Year, the maximum projected revenues that can be generated from the levy of the Special Tax for such Fiscal Year on all Developed Property, together with all other funds of the District legally available to pay Bond Requirements for such Fiscal Year are insufficient to pay Bond Requirements due to anticipated delinquencies in the payment of Special Taxes, then all Undeveloped Property shall be subject to a Special Tax (for that Fiscal Year only) up to an amount not to exceed, per acre of Undeveloped Property (or a proportionate amount thereof for any portion of such acre), the lesser of (i) $750 or (ii) the aggregate amount of the actual delinquencies in the payment of Special Taxes for the prior Fiscal Year divided by the total number of acres of Undeveloped Property in the District. During its twenty-two years of existence, the District has not levied an Undeveloped Property Tax. Prepayment Tax. In lieu of paying an Annual Special Tax on Developed Property, the owner of a parcel of Undeveloped Property may elect to pay a Prepayment Tax prior to the issuance of a building permit for such parcel. Once a parcel has become Developed Property, the owner may not prepay the Annual Special Tax. Upon payment of the Prepayment Tax, the parcel is classified as Tax Exempt Property and is no longer subject to an Annual Special Tax. Because the Principal amount of the Bonds has been limited so that anticipated tax revenues from existing Developed Property will be sufficient to cover debt service, an election of an owner of Undeveloped Property to pay the Prepayment Tax (rather than to have his property reclassified as Developed Property) alone will not diminish the Annual Special Tax revenues being collected. The Prepayment Tax is not pledged under the Indenture to secure the payment of principal of and interest on the Bonds, including the Series 2012 Bonds

20 Collection and Deposit of Special Taxes The Annual Special Taxes levied at the direction of the District are required to be collected each year upon the applicable Assessor s Parcels in the District in the same manner and at the same time as ordinary ad valorem property taxes are collected by the County of Los Angeles (the County ); provided, however, that the District may collect Special Taxes at a different time or in a different manner if necessary to meet its financial obligations. The Prepayment Tax, if any, is to be collected by the Board at the time of issuance of a building permit. In each Bond Year, the District will pay the balance of all Gross Taxes to the Trustee for deposit in the Special Tax Fund on each date on which it receives them from the County until such time as the amounts on deposit in the Special Tax Fund, including interest earnings thereon, equal the aggregate amounts required to be paid as set forth in subsections (i), (ii) and (iii) below in such Bond Year. All Gross Taxes received by the District during any Bond Year in excess of the amount required to be transferred to the Trustee from the Special Tax Fund during such Bond Year as described in subsections (i), (ii) and (iii) below shall be released from the pledge and lien under the Indenture for the security of the Bonds and the District may apply such excess Gross Taxes for any lawful purposes of the District. On or before the fifteenth day preceding each February 1 and August 1, with respect to transfers pursuant to (i) below, or five Business Days preceding each Interest Payment Date, with respect to transfer pursuant to (ii) and (iii) below, the Trustee will withdraw from the Special Tax Fund the amount necessary to make the following deposits or payments in the following order of priority: (i) To the Bond Service Fund, an amount necessary, together with amounts on deposit therein and available for such purpose, to pay the Annual Debt Service coming due and payable on such Interest Payment Date with respect to the Outstanding Bonds; and above. (ii) (iii) To the Reserve Fund, an amount necessary to maintain the Reserve Requirement therein; To any insurer of Bonds, to the extent of any amount due if not paid pursuant to (i) or (ii) The Trustee shall transfer all amounts on deposit in the Special Tax Fund on August 2 of each year to the District to be used for any lawful purpose. Proceeds of Foreclosure Sales A second potential source of funds to pay Principal of, premium (if any), and interest on the Bonds is proceeds received following a judicial foreclosure sale of property within the District resulting from a property owner s failure to pay its portion of the Special Tax when due. Pursuant to the Act, in the event of any delinquency in the payment of any Special Tax, the Board, as the legislative body of the District, may order that the Special Taxes be collected by a superior court action to foreclose the lien within specified time limits. Under the Act, the commencement of judicial foreclosure following the nonpayment of a Special Tax is not mandatory. However, the District has covenanted for the benefit of the Owners of the Bonds that it will commence, or cause to be commenced, judicial foreclosure proceedings by October 31 of each year against (i) all property owned by any single person or any property regardless of ownership with delinquent Special Taxes totaling more than $25,000, and (ii) all property with delinquent Special Taxes if in the immediately preceding Fiscal Year it received Special Taxes in an amount which (together with amounts on deposit in the Special Tax Fund and/or Bond Service Fund) were 95% or less than the Annual Debt Service for the current Bond Year or the amount in the Reserve Fund (plus the stated amount of any Surety Instrument, if any) is less than the Reserve Requirement. In addition, the District may, at its sole election, commence or cause to be commenced judicial foreclosure proceedings by October 31 of each year against any property with delinquent Special Taxes if in the immediately preceding Fiscal Year it received Special Taxes in an amount which (together with amounts deposited into the Special Tax Fund and/or Bond Service Fund) were less than 100%, but greater than 95%, of the Annual Debt Service for the current Bond Year. The District shall diligently pursue to completion each such foreclosure. See APPENDIX B Summary of the Indenture Covenants of the District

21 In the event such superior court foreclosure or foreclosures are necessary, there could be a delay in Principal and interest payments to the owners of the Series 2012 Bonds pending prosecution of the foreclosure proceedings, and receipt by the District of the proceeds of the foreclosure proceedings, if any. See RISK FACTORS Bankruptcy herein. Reserve Fund In order to further secure the payment of Principal of and interest on the Series 2012 Bonds, the District will, upon delivery of the Series 2012 Bonds, deposit moneys and a surety policy in an amount equal to the Reserve Requirement with respect to each Series of the Series 2012 Bonds (each a Series 2012 Reserve Requirement ) into a separate Reserve Account for each Series of the Series 2012 Bonds in the Reserve Fund held by the Trustee. The Series 2012 Reserve Requirement for each Series is, as of any date of calculation, an amount equal to the lowest of (i) 10% of the original aggregate principal amount of such Series, (ii) Maximum Annual Debt Service on such Series, or (iii) 125% of average Annual Debt Service on such Outstanding Series of Series 2012 Bonds. As of the date of issuance of the Series 2012 Bonds, the Reserve Requirement with respect to the Series 2012A Bonds will be $1,011, and the Reserve Requirement with respect to the Series 2012B Refunding Bonds will be $581,500. See APPENDIX B Summary of the Indenture Funds and Accounts attached hereto. The Board of Trustees of the District has covenanted to levy or cause to be levied with respect to Debt Service Developed Property Special Taxes at least in an amount anticipated to be sufficient (after taking into account anticipated delinquencies in the payment of Special Taxes), in light of the other intended uses of the Special Tax proceeds, to maintain the balance in each Series Reserve Account (including the Series 2012A Reserve Account and the Series 2012B Reserve Account (together, the Series 2012 Reserve Accounts )) in the Reserve Fund for each Series of Bonds (including the Series 2012A Bonds and the Series 2012B Refunding Bonds ) at the Reserve Requirement for such Series of Bonds to which the Series Reserve Account relates while any bonds of such Series are Outstanding. The District will deposit moneys equal to the Reserve Requirement with respect to the Series 2012A Bonds from the proceeds of the Series 2012A Bonds. The District will deposit a municipal bond debt service reserve insurance policy issued by the Series 2012 Bond Insurer, guaranteeing principal of and interest on the Series 2012B Refunding Bonds to a maximum amount equal to $290,750, which, when combined with proceeds of the Series 2012B Refunding Bonds deposited into the Series 2012B Reserve Account, is calculated to be the amount of the Reserve Requirement with respect to the Series 2012B Refunding Bonds (the Series 2012B Reserve Policy ). Amounts in each Series 2012 Reserve Account are to be applied solely to the payment of Principal of and interest on the Series of Series 2012 Bonds to which such Series 2012 Reserve Account relates as the same shall become due to the extent other moneys are not available therefor. Amounts in each Series 2012 Reserve Account will also be applied to the payment of the Principal and interest due on the final maturity of such Series of Series 2012 Bonds. The amounts in each Series 2012 Reserve Account will not secure any Outstanding Bonds, nor will they secure any other Parity Bonds to be issued by the District in the future. The Series 2012B Reserve Policy does not secure the payment of principal of and interest on the Series 2012A Bonds or any other series of Parity Bonds to be issued in the future. See Additional Indebtedness herein. The 1999 Bonds are secured by a reserve fund surety policy originally issued by Financial Security Assurance Inc. in an amount equal to the Reserve Requirement for the Outstanding Bonds. Such reserve policy does not secure the payment of Principal of and interest on the Series 2011 Bonds or the Series 2012 Bonds. In addition, the reserve account for any Parity Bonds to be so issued by the District will not secure the payment of Principal of and interest on the Series 2012 Bonds.. Additional Bonds The eligible voters within the District authorized the issuance of up to $300,000,000 principal amount of bonds to finance the cost of the Projects and the expenses associated with the issuance of bonds. The bond authorization for the District remaining after the issuance of the Series 2012 Bonds will be approximately $247,928, In accordance with the Act and the Indenture, additional bonds on a parity with the Bonds ( Parity Bonds ) may be issued by the District (i) to aid in financing the Projects and payment of all costs incidental to or

22 connected with such financing, and/or (ii) to refund any Outstanding Bonds, including payment of all costs incidental to or connected with such refunding. The District has agreed not to issue any Parity Bonds unless certain conditions provided in the Master Indenture have been satisfied, including a certificate or certificates from one or more Independent Financial Consultants which, when taken together, certify that (i) the amount of the maximum Annual Special Taxes that may be levied by the District on Debt Service Developed Property, as of the date of certification, in each Fiscal Year pursuant to the Act and the applicable resolutions and ordinances of the District, assuming that such annual Special Taxes are measured in each such Fiscal Year to the maximum extent provided in the Special Tax Formula, is at least equal in each corresponding Bond Year to the Maximum Annual Debt Service on all Outstanding Bonds theretofore issued and the Parity Bonds proposed to be issued in such Bond Year, plus in such Bond Year 100% of the amount of Series 1999 Policy Costs owed and (ii) the amount of the maximum Annual Special Taxes that may be levied by the District, as of the date of certification, in each Fiscal Year pursuant to the Act and the applicable resolutions and ordinances of the District, assuming that such Annual Special Taxes are increased in each such Fiscal Year to the maximum extent provided in the Special Tax Formula, is at least equal in each corresponding Bond Year to 115% of the aggregate amount of the Maximum Annual Debt Service on all Outstanding Bonds theretofore issued and the Parity Bonds proposed to be issued in such Bond Year, plus in such Bond Year 100% of the amount of Series 1999 Policy Costs owed. For purposes of making the certifications required by this paragraph, the Independent Financial Consultants may rely on reports or certificates of such other persons as may be acceptable to the District, and the initial purchasers of the proposed Parity Bonds. After the issuance of the Series 2012B Refunding Bonds, the Series 1999 Bonds will be Outstanding in the aggregate principal amount of $16,997, and the Series 2011 Bonds will be Outstanding in the aggregate principal amount of $15,670,000. The Series 1999 Bonds and the Series 2011 Bonds are Parity Bonds. For a more complete discussion of the provisions of the Indenture related to the issuance of Parity Bonds, See APPENDIX B Summary of the Indenture. Bond Insurance Policy BOND INSURANCE Concurrently with the issuance of the Series 2012 Bonds, Assured Guaranty Municipal Corp. ( AGM ) will issue its Municipal Bond Insurance Policy for the Bonds (the Policy ). The Policy guarantees the scheduled payment of principal of (or, in the case of Capital Appreciation Bonds, the accreted value) and interest on the Series 2012 Bonds when due as set forth in the form of the Policy included as an exhibit to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Assured Guaranty Municipal Corp. AGM is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Assured Guaranty Municipal Holdings Inc. ( Holdings ). Holdings is an indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. No shareholder of AGL, Holdings or AGM is liable for the obligations of AGM. AGM s financial strength is rated AA- (stable outlook) by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ) and Aa3 (on review for possible downgrade) by Moody s Investors Service, Inc. ( Moody s ). An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. In addition, the rating agencies may at any time change AGM s long-term rating outlooks or place such ratings on a watch list for possible downgrade in the near term. Any downward revision or withdrawal of any of the above ratings, the assignment of a negative outlook to

23 such ratings or the placement of such ratings on a negative watch list may have an adverse effect on the market price of any security guaranteed by AGM. AGM only guarantees scheduled principal and scheduled interest payments payable by the issuer of bonds insured by AGM on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the relevant insurance policy), and does not guarantee the market price or liquidity of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. Current Financial Strength Ratings On March 20, 2012, Moody s issued a press release stating that it had placed AGM s Aa3 insurance financial strength rating on review for possible downgrade. AGM can give no assurance as to any further ratings action that Moody s may take. Reference is made to the press release, a copy of which is available at for the complete text of Moody s comments. On November 30, 2011, S&P published a Research Update in which it downgraded AGM s financial strength rating from AA+ to AA-. At the same time, S&P removed the financial strength rating from CreditWatch negative and changed the outlook to stable. AGM can give no assurance as to any further ratings action that S&P may take. Reference is made to the Research Update, a copy of which is available at for the complete text of S&P s comments. For more information regarding AGM s financial strength ratings and the risks relating thereto, see AGL s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, and its Quarterly Report on Form 10-Q for the quarterly period ended June 30, Capitalization of AGM At June 30, 2012, AGM s consolidated policyholders surplus and contingency reserves were approximately $3,169,404,271 and its total net unearned premium reserve was approximately $2,204,572,593, in each case, in accordance with statutory accounting principles. AGM s statutory financial statements for the fiscal year ended December 31, 2011, for the quarterly period ended March 31, 2012, and for the quarterly period ended June 30, 2012, which have been filed with the New York State Department of Financial Services and posted on AGL s website at are incorporated by reference into this Official Statement and shall be deemed to be a part hereof. Incorporation of Certain Documents by Reference Portions of the following documents filed by AGL with the Securities and Exchange Commission (the SEC ) that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: (i) the Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (filed by AGL with the SEC on February 29, 2012); (ii) the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 (filed by AGL with the SEC on May 10, 2012); and (iii) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 (filed by AGL with the SEC on August 9, 2012). All information relating to AGM included in, or as exhibits to, documents filed by AGL pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, after the filing of the last document referred to above and before the termination of the offering of the Series 2012 Bonds shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of

24 materials incorporated by reference are available over the internet at the SEC s website at at AGL s website at or will be provided upon request to Assured Guaranty Municipal Corp.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). Any information regarding AGM included herein under the caption BOND INSURANCE Assured Guaranty Municipal Corp. or included in a document incorporated by reference herein (collectively, the AGM Information ) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded. Miscellaneous Matters AGM or one of its affiliates may purchase a portion of the Series 2012 Bonds offered under this Official Statement and may hold such Series 2012 Bonds for investment or may sell or otherwise dispose of such Series 2012 Bonds at any time or from time to time. AGM makes no representation regarding the Series 2012 Bonds or the advisability of investing in the Series 2012 Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading BOND INSURANCE. THE SCHOOL DISTRICT The Bonds are not general obligations of the School District but, rather, are limited obligations of the District secured solely by the Special Tax to be paid by the owners of the property in the District and certain funds and accounts held pursuant to the Indenture. Information with respect to the School District is contained in APPENDIX C. This information concerning the School District is presented solely as background information. Introduction THE DISTRICT AND THE SPECIAL TAX The District was formed on October 16, 1990 to provide a means of mitigating the impact of new residential development occurring within the boundaries of the School District on the demand for school facilities. The District constitutes a separate legal entity with limited powers to finance the acquisition, construction and/or leasing of certain identified schools and school facilities, administrative facilities and joint use facilities within the City, such as parks, swimming pools and recreational centers. When first formed, the District consisted of approximately 2,397 acres zoned for residential use

25 As new residential development has occurred within the School District, additional parcels have been annexed into the District. Other parcels have been removed from the District due to subdivision and dedications to other public uses such as rights-of-way, streets, easements, parks and school sites. As a result of the separate annexation proceedings described in Table 1 below together with other actions, as of August 2012, the District is estimated to contain approximately 7,774 taxable assessor parcels comprising approximately 7,950 taxable acres. The District lies completely within the boundaries of the School District and includes portions of the City as well as unincorporated areas of the County. The District s boundaries are not coterminous with the School District or with any other governmental jurisdiction. Pursuant to the Act, the School District established the District pursuant to the 1990 Resolution of Formation for the purpose of financing, acquiring, leasing or constructing certain school facilities, relocatable facilities and administrative facilities. Pursuant to an election conducted pursuant to the Act, the eligible landowner electors within the District authorized the issuance of not to exceed $300,000,000 aggregate principal amount of special tax bonds and the levy of the Special Tax to be used for the purpose of constructing, acquiring and/or leasing such facilities. Details concerning the annexations are outlined in the table below. TABLE 1 PROPERTY ANNEXATIONS TO DATE Annexation (1) Date of Recordation (2) Total Acres Annexed (2) Annexation #1 5/21/ Annexation #2 9/10/ Annexation #2 (Supplemental) 1/15/ Annexation #3 10/16/ Annexation #4 6/8/ Annexation #5 1/15/ Annexation #6 5/26/ Annexation #7 9/10/ Annexation #8 8/17/ Annexation #9 11/16/ Annexation #10 7/10/ Annexation #11 (3) 11/01-12/ Annexation #12 (3) 11/ Annexation #13 (4) 6/10/04 n/a Annexation #14 (4) 3/18/05 n/a Annexation #15 (4) 3/18/05 n/a Annexation #16 (4) 3/18/05 n/a Annexation #18 (3) 11/05-2/06 n/a Annexation #19 5/22/ Annexation #20 6/12/ Annexation #21 6/12/ Annexation #22 (4) 9/5/06 n/a Annexation #23 5/15/ Annexation #24 5/15/ Annexation #25 5/15/ Annexation #26 5/15/ Annexation #27 6/8/ Annexation #28 8/1/ Source: School District/County, as compiled by Koppel & Gruber Public Finance (1) Annexation 17 did not occur. (2) As shown as the Notice of Special Tax Lien ( NSTL ) recorded at the County, unless otherwise noted. (3) The NSTL for Annexations 11, 12 and 18 are unavailable. The dates listed are based on Board approval of the resolutions adopting the amended annexed territory map for such Annexation. (4) The Recorded NSTL for these Annexations did not include an attached owners listing of acreage

26 Development Within the District As of August 2012 approximately 7,529 acres of property have been developed in the District and approximately 180 acres remain undeveloped. In the Fiscal Year, Developed Properties occupied by primarily homeowners and renters accounted for 100% of the levy of the Special Tax. The Special Tax for the Fiscal Year, based on the development status of taxable parcels in the District for the Fiscal Year for property in the Developed tax rate category showing parcels subject to the Special Tax by tax category and tax rate, is summarized in the following table. TABLE 2 SPECIAL TAX BY TAX RATE CATEGORY FISCAL YEAR Tax Rate Category Taxable Acreage Unit Count (1) Assessed Value Actual Tax Levy Percentage of Actual Tax Levy Maximum Special Tax Allowed (2) Percentage of Total Maximum Tax Developed 7, ,495 1,258,377,346 5,752, % 5,752, % Undeveloped (3) ,636, , Tax Exempt ,096, Total Taxable Parcels 7, ,916 1,278,110,765 5,752, % 5,887, % Source: School District, County, as compiled by Koppel & Gruber Public Finance (1) The unit count for Developed Property is the number of units subject to the Special Tax which are located on 7,353 Assessor Parcels. The unit count for Undeveloped Property and Tax Exempt Property is the number of Assessor Parcel Numbers, some of which have not been subdivided to individual lots. (2) Represents the maximum Special Tax that may be levied on a parcel in the Fiscal Year. The maximum Special Tax levied on Developed Property for the Fiscal Year is equal to the actual Special Tax that was levied on Developed Property for such Fiscal Year. Special Tax levies on Developed Property ranged from $ to $36, (up to $1, for single family residential only) for the Fiscal Year. (3) The Special Tax may be levied on Undeveloped Property to the extent necessary to pay the bond requirements, up to the lesser of (i) $750 per acre or (ii) the aggregate amount of the actual delinquencies in Special Taxes from the prior fiscal year. Undeveloped property has not been subject to the Special Tax requirements in past years. The effective tax rate on parcels in the District for Fiscal Year is summarized in the following table. Over 64.06% of parcels in the District have an effective tax rate of 1.75% to 2.50% of their total assessed value. TABLE 3 EFFECTIVE TAX RATE FISCAL YEAR Effective Tax Rate Category Number of Parcels CFD Special Tax Levy Total Taxes Levied Total Assessed Value Percentage of Current CFD Debt Greater than 2.500% 394 $ 263,157 $ 1,089,748 $ 36,354, % to 2.500% 2,022 1,511,091 7,490, ,210, to 2.249% 3,503 2,602,303 13,157, ,786, to 1.999% 1,173 1,010,760 5,337, ,831, to 1.749% , ,923 35,380, Less than 1.500% , ,078 33,653, Total 7,299 $5,597,865 $28,052,212 $1,321,216, % Source: School District, County, National Tax Data, as compiled by Koppel & Gruber Public Finance

27 Special Tax Levies, Collections and Delinquencies Under the provisions of the Act, Special Taxes (from which the payment of annual installments of Principal of and interest on the Bonds are derived) will be billed to properties on the regular property tax bills sent to owners of such properties provided, however, that the District may collect Special Taxes at a different time or in a different manner if necessary to meet its financial obligations. Such Special Taxes are due and payable, and bear the same penalties and interest for non-payment, as do regular property tax installments. See RISK FACTORS Bankruptcy herein. Special Tax payments cannot be made separate from property tax payments. The following Table 4 sets forth the Special Tax levies and delinquencies for the Fiscal Year through the Fiscal Year on the property within the District as of June 30, Table 5 sets forth the Special Tax levies and delinquencies for the Fiscal Year through the Fiscal Year on the property within the District as of May and June of each Fiscal Year. TABLE 4 ANNUAL SPECIAL TAX ON DEVELOPED PROPERTY LEVIES, COLLECTIONS AND DELINQUENCY RATES AS OF JUNE 30, 2011 Fiscal Year Number of Parcels Levied Aggregate Special Tax Levied Total Special Taxes Collected Amount Delinquent Number of Delinquent Parcels Percentage of Special Taxes Delinquent ,880 $3,194, $3,181, $12, % ,453 4,501, ,468, , ,667 4,826, ,761, , ,217 5,429, ,233, , (1) 7,299 5,597, ,433, , Source: School District/County, as compiled by Koppel & Gruber Public Finance. (1) The delinquency amount for Fiscal Year is as of June TABLE 5 ANNUAL SPECIAL TAX ON DEVELOPED PROPERTY LEVIES, COLLECTIONS AND DELINQUENCY RATES AS OF MAY/JUNE (1) OF EACH FISCAL YEAR Fiscal Year Number of Parcels Levied Aggregate Special Tax Levied Total Special Taxes Collected Amount Delinquent Number of Delinquent Parcels Percentage of Special Taxes Delinquent ,880 $3,194, $2,598, $596, , % ,453 4,501, ,104, , ,667 4,826, ,616, , ,217 5,429, ,233, , ,299 5,597, ,433, , Source: School District/County, as compiled by Koppel & Gruber Public Finance. (1) Specific dates vary from May 14 to June 30 of each fiscal year. Estimated Debt Service Coverage The following tables summarize the estimated annual debt service on the Bonds and the coverage produced by the maximum Special Tax authorized to be levied in the District, and the summary coverage information by type of property and by ownership

28 Bond Year Ending Aug. 1 Maximum Special Taxes Developed (1) TABLE 6 COVERAGE BY TYPE OF PROPERTY BASED ON MAXIMUM SPECIAL TAXES FOR DEVELOPED PROPERTY Maximum Special Taxes Bond Debt Service Coverage From Total Maximum Maximum Series 1999 Series 2011 Series 2012 Special Taxes Special Bonds Debt Bonds Debt Bonds Debt Total Debt Developed Undeveloped (2) Taxes Service (4) Service (3) Service Service (1)(3)(4) Property Total Coverage (5) 2012 $5,752, $135, $5,857,998 $1,592, $1,713, $3,305, ,867, , ,973,056 1,351, ,907,764 $ 420, ,679, ,985, , ,090,416 1,227, ,632, , ,284, ,105, , ,210,122 1,254, ,591, , ,273, ,227, , ,332,223 1,277, ,550, , ,269, ,351, , ,456,766 1,303, ,488, , ,240, ,478, , ,583,800 1,325, ,449, , ,236, ,608, , ,713,375 1,350, ,377, , ,205, ,740, , ,845,541 1,375, ,312, , ,173, ,875, , ,980,350 1,406, ,245, , ,145, ,012, , ,117,855 1,438, ,767, , ,707, ,153, , ,258,111 1,465, ,511, , ,491, ,296, , ,401,172 1,493, ,129, , ,142, ,442, , ,547,094 1,525, ,816, , ,113, ,590, , ,695,934 1,547, ,674, , ,117, ,742, , ,847,751 1,579, ,610, , ,097, ,897, , ,002,605 1,609, ,503, ,113, ,055, , ,160,555 1,643, ,468, ,111, ,216, , ,321,665 2,275, ,841, ,116, ,380, , ,485,997 2,320, ,796, ,116, ,548, , ,653,615 2,365, ,751, ,116, ,719, , ,824,586 2,415, ,702, ,117, ,893, , ,998,976 2,460, ,656, ,116, ,071, , ,176,854 2,510, ,605, ,115, ,253, , ,358,290 2,560, ,555, ,115, ,438, , ,543,354 2,615, ,500, ,115, ,627, , ,732,119 2,665, ,450, ,115, ,819, , ,924,660 2,720, ,395, ,115, Source: School District, County, Piper Jaffray & Co., as compiled by Koppel & Gruber Public Finance (1) Based upon the Fiscal Year actual tax roll. (2) Net of $30, for District Administrative Expenses. (3) Includes total amount of interest and principal payments, and does not net out the expected Bond Subsidy Payments. (4) Does not include debt service from the Refunded Bonds being called for redemption on the Redemption Date. (5) Total coverage includes coverage from Developed Property and Undeveloped Property

29 Assessed Value The District is not aware of any estimates or appraisals of the market value of the property in the District performed in the last five years. The secured assessed value of the taxable parcels within the District on which the tax is currently levied, as established by the Los Angeles County Office of the Assessor (the County Assessor ) for the Fiscal Year, is $1,258,377,346, which amount is (a) approximately times the sum of the principal amount of the Series 2012 Bonds (reflecting the issuance of $15,931, aggregate principal amount of Series 2012 Bonds), plus $55,392,006 of total outstanding and overlapping debt of such parcels (which debt includes the amount of the Outstanding Bonds, including the Refunded Bonds) as described in Table 12 and (b) approximately times the sum of the principal amount of the Outstanding Bonds plus the Series 2012 Bonds (reflecting the issuance of $15,931, aggregate principal amount of Series 2012 Bonds). The property in the District is also subject to taxes and assessments to pay debt of other entities, including the School District, as displayed in Table 12. This gross assessed valuation may not be representative of the actual market value of property in the District because Article XIIIA of the California Constitution limits any increase in assessed value to no more than 2% a year unless a property is sold or transferred. See RISK FACTORS Land Values. As a consequence, assessed values are typically less than actual values unless the property has recently changed ownership or has been reassessed. See RISK FACTORS Land Values, Prolonged Economic Downturn and APPENDIX H General and Economic Information Regarding the District and Surrounding Community for discussion of recent declines in assessed value. The following table shows the historical assessed valuation and changes in assessed values for taxable property in the District for the Fiscal Years through the Fiscal Year. TABLE 7 HISTORICAL ASSESSED VALUATION AND GROWTH RATES FOR TAXABLE PARCELS IN THE DISTRICT Fiscal Year Number of Parcels Levied % Change Assessed Value for Levied Parcels % Change , $1,095,973, , % 1,494,607, % , ,368,464, , ,272,006, , ,321,216, , ,258,377, Source: School District/County, as compiled by Koppel & Gruber Public Finance Year. The following tables set forth the assessed lien-to-value ratio for special taxes levied in the Fiscal

30 TABLE 8 ASSESSED VALUE TO DEBT BURDEN CALCULATION CURRENT DISTRICT DEBT FISCAL YEAR Net Taxable Acres Percentage of Special Tax Levy Assessed Improvement Value Current District Debt (1) Current District Debt Current Assessed Value to Lien Ratio Units Taxed Special Tax Levy Assessed Land Value Total Assessed Valuation Less Than 1.0 (2) $ 3, % $ 22 $ 0 $ 22 $ 23, % 1.0 to to , ,309 5, ,652 51, to , ,916, ,362 2,127, , to , , ,610 1,160,032 89, to , ,255 1,351,807 1,903, , to maximum 7, ,236 5,667, ,154, ,823,084 1,252,977,346 37,290, Total 7, ,353 $5,752, % $301,281,140 $957,096,206 $1,258,377,346 $37,852, % Aggregate Value to Lien Burden for the District Debt is 33.24:1 Source: School District/County, as compiled by Koppel & Gruber Public Finance (1) Assumes $22,182, of Outstanding Series 1999 Bonds plus $15,670,000 of Outstanding Series 2011 Bonds (after the August 1, 2012 debt service payments) (2) Includes single family residential units that were previously owned by public agencies. As of August 30, 2012, the County has not appraised the parcels or assigned new assessed values. TABLE 9 VALUE TO DEBT BURDEN CALCULATION CURRENT AND PROPOSED DISTRICT DEBT FISCAL YEAR Net Taxable Acres Percentage of Special Tax Levy Assessed Improvement Value Proposed Plus Current District Debt (1) Percentage of Current District Debt Current Assessed Value to Lien Ratio Units Taxed Special Tax Levy Assessed Land Value Total Assessed Valuation Less Than 1.0 (2) $ 3, % $ 22 $ 0 $ 22 $ 30, % 1.0 to , ,518 5,343 61,861 21, to , ,271 41, , , to , ,779, ,898 2,227, , to , ,434 1,477,041 2,185, , to , ,291,132 44,159,318 58,450,450 3,102, to maximum 7, ,898 5,303, ,950, ,964,806 1,194,914,965 44,800, Total 7, ,353 $5,752, % $301,281,140 $957,096,206 $1,258,377,346 $48,598, % Aggregate Value to Lien Burden for the District Debt is 25.89:1 Source: School District/County, as compiled by Koppel & Gruber Public Finance (1) Assumes $22,182, of Outstanding Series 1999 Bonds less $5,185,000 of Series 1999 Bonds to be redeemed with the Series 2012B Refunding Bonds, plus $15,670,000 of Outstanding Series 2011 Bonds and $15,931, aggregate principal amount of Series 2012 Bonds (comprised of $10,116, Series 2012A Bonds and $5,815,000 of Series 2012B Refunding Bonds (after the August 1, 2012 debt service payments). (2) Includes single family residential units that were previously owned by public agencies. As of August 30, 2012, the County has not appraised the parcels or assigned new assessed values

31 Current Assessed Value to Lien Ratio TABLE 10 VALUE TO DEBT BURDEN CALCULATION CURRENT AND PROPOSED DISTRICT DEBT, INCLUDING GENERAL OBLIGATION DEBT FISCAL YEAR Net Taxable Acres Percentage of Special Tax Levy Assessed Improvement Value Proposed Plus Current District Debt and General Obligation Debt (1) Percentage of Proposed Plus Current District Debt Units Taxed Special Tax Levy Assessed Land Value Total Assessed Valuation Less Than 1.0 (2) $ 3, % $ 22 $ 0 $ 22 $ 40, % 1.0 to , ,205 5, ,548 96, to , ,303, ,078 1,463, , to , ,276,649 1,304,268 2,580, , to , ,950,720 42,582,455 56,533,175 4,013, to , ,542 3,017, ,484, ,629, ,114,817 33,850, to maximum 2, ,371 2,301, ,035, ,414, ,449,968 25,826, Total 7, ,353 $5,752, % $301,281,140 $957,096,206 $1,258,377,346 $64,545, % Aggregate Value to Lien Burden for the District Debt is 19.50:1 Source: School District/County, National Tax Data as compiled by Koppel & Gruber Public Finance (1) Assumes $22,182, of Outstanding Series 1999 Bonds less $5,185,000 of Series 1999 Bonds to be redeemed with the Series 2012B Refunding Bonds, plus $15,670,000 of Outstanding Series 2011 Bonds and $15,931, aggregate principal amount of Series 2012 Bonds (comprised of $10,116, Series 2012A Bonds and $5,815,000 of Series 2012B Refunding Bonds) plus general obligation debt of $15,946,511 (after the August 1, 2012 debt service payments). (2) Includes single family residential units that were previously owned by public agencies. As of August 30, 2012, the County has not appraised the parcels or assigned new assessed values. [Remainder of Page Intentionally Left Blank]

32 The following table sets forth the lien-to-value ratio of the top 20 property taxpayers in the District for the Fiscal Year. TABLE 11 VALUE TO DEBT BURDEN CALCULATION FOR TOP 20 PROPERTY TAXPAYERS FISCAL YEAR Property Owner Percent of Special Tax Levy Proposed Plus Current District Debt (1) Percent of Current District Debt Assessed Value to Lien Ratio Acres Units Taxed Special Tax Assessed Value Sierra View Gardens LP $ 36, % $ 9,208,955 $ 304, % Federal National Mortgage Association , ,143, , Beazer Homes Holdings Corp , ,643, , Sal Holdings LLC , ,273, , Bank Of New York Mellon Trust , ,466, , Desert Senior Associates , ,210, , Kb Home Coastal Inc , ,790, , Terraza Villa Sylmar Associates LLC , ,772, , US Bank National Association Trust , ,464,132 97, Harris Homes , ,509,327 96, Wells Fargo Bank , ,043,548 90, Avtwo Homes LLC , ,316,581 75, Avthree Homes LLC , ,768,600 73, Federal Home Loan Mortgage Corp , ,898,194 67, Deutsche Bank Natl Trust , ,746,746 65, Jdr Vallarta Enterprises LLC , ,686,264 64, BAC Home Loans Servicing LP , ,675,064 63, S And S Property Inc , ,287,279 56, Esparza Jose U , ,306,372 56, Secretary Of Housing And Urban Development , ,419,060 53, Total $306, % $63,630,396 $2,585, % Source: School District, County, as compiled by Koppel & Gruber Public Finance (1) Assumes $22,182, of Outstanding Series 1999 Bonds less $5,185,000 of Series 1999 Bonds to be redeemed with the Series 2012B Refunding Bonds, plus $15,670,000 of Outstanding Series 2011 Bonds and $15,931, aggregate principal amount of Series 2012 Bonds (comprised of $10,116, Series 2012A Bonds and $5,815,000 of Series 2012B Refunding Bonds) for a total District debt amount of $48,598, (2) Each of these property owners has obtained certain building permits on a number of parcels. While construction on some of these parcels may have begun, the County does not yet recognize a structure value for a number of the homes under construction. Direct and Overlapping Bonded Debt Set forth below is a direct and overlapping debt report (the Debt Report ) for debt issued as of June 30, The Debt Report is included for general information purposes only. The District has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith. The Debt Report generally includes long term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the District in whole or in part. Such long term obligations generally are not payable from revenues of the District (except as indicated) nor are they necessarily obligations secured by land within the District. In many cases long term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency

33 TABLE 12 DIRECT AND OVERLAPPING DEBT FOR TAXABLE PARCELS I Secured Roll Assessed Value $1,321,216,867 II. Secured Property Taxes Description on Tax Bill Type Total Parcels Total Levy % Applicable Parcels Levy Combined Ad Valorem Tax Charges AVALL 2,344,861 $12,144,591, % 7,299 $14,758, City of Lancaster Sewer System SEWER 38,313 $4,058, % 1 $78.00 City of Palmdale LMD No LLMD 26,749 $5,232, % 6,700 $1,564, City of Palmdale Parks and Recreation MD LMD 44,347 $2,252, % 7,209 $323, City of Palmdale Sewer Charge SWR/WTR 39,173 $5,260, % 7,195 $773, City of Palmdale Street Light Maintenance District LIGHTING 6,379 $751, % 3,354 $296, County of Los Angeles Building Code Enforcement ABATEMENT 256 $321, % 1 $ County of Los Angeles CFD No. 1 CFD 2,479 $554, % 479 $75, County of Los Angeles Change of Ownership Penalty COSPENALTY 3,469 $1,144, % 41 $7, County of Los Angeles Flood Control 1982BA 2,124,292 $110,462, % 2,127 $15, County of Los Angeles Hazard Abatement ABATEMENT 25,122 $3,692, % 98 $4, County of Los Angeles Health License Fees HEALTHILIC 57,683 $19,815, % 2 $1, County of Los Angeles Library Assessments SPTXLIBRARY 407,490 $11,430, % 89 $2, County of Los Angeles LLD LLMD 187,607 $1,225, % 12 $60.00 County of Los Angeles LMD (Palmdale) LLMD 32,403 $2,492, % 4,545 $318, County of Los Angeles Mosquito And Vector Control VECTOR 104,912 $734, % 7,233 $45, (Antelope Valley) County of Los Angeles Regional Park & Open Space District ,342,821 $80,684, % 7,299 $153, County of Los Angeles Returned Check Charges NSF 4,820 $251, % 12 $ County of Los Angeles Solid Waste Service Charge TRASH 239,357 $1,180, % 89 $ County of Los Angeles Trauma and Emergency Services PARAMED 2,165,066 $253,132, % 7,226 $661, County of Los Angeles Waterworks District No. 40 STANDBY 66,693 $1,213, % 1,214 $18, Standby Charge Los Angeles County Fire Department Special Tax FIRE 876,068 $72,859, % 7,299 $443, Los Angeles County Sanitation District CSD No. 14 SWR/WTR 50,172 $24,754, % 217 $77, Los Angeles County Sanitation District CSD No. 19 SWR/WTR 27,726 $5,637, % 3 $ Los Angeles County Sanitation District CSD No. 20 SWR/WTR 31,854 $18,834, % 6,903 $3,013, Palmdale Elementary School District CFD No CFD 7,299 $5,601, % 7,299 $5,597, TOTAL PROPERTY TAX LIABILITY $28,155, TOTAL PROPERTY TAX LIABILITY AS A PERCENTAGE OF ASSESSED VALUATION 2.13% III. Land Secured Bond Indebtedness Outstanding Direct and Overlapping Bonded Debt Type Issued Outstanding % Applicable Parcels Amount County of Los Angeles CFD No. 1 CFD $8,155,000 $3,140, % 479 $427,925 County of Los Angeles Regional Park & Open Space District 1915 $686,835,000 $170,725, % 7,299 $325,419 Palmdale Elementary School District CFD No CFD $42,157,190 $38,692, % 7,299 $38,692,151 TOTAL LAND SECURED BOND INDEBTEDNESS (1) $39,445,495 TOTAL OUTSTANDING LAND SECURED BOND INDEBTEDNESS (1) $39,445,495 Authorized Direct and Overlapping Bonded Debt Type Authorized Unissued % Applicable Parcels Amount County of Los Angeles CFD No. 1 CFD $11,000,000 $2,845, % 479 $387,722 County of Los Angeles Regional Park & Open Space District 1915 $859,000,000 $172,165, % 7,299 $328,164 Palmdale Elementary School District CFD No CFD $300,000,000 $257,842, % 7,299 $257,842,810 TOTAL UNISSUED LAND SECURED BOND INDEBTEDNESS (1) $258,558,695 TOTAL OUTSTANDING AND UNISSUED LAND SECURED BOND INDEBTEDNESS (1) $298,004,190 IV. General Obligation Bond Indebtedness Outstanding Direct and Overlapping Bonded Debt Type Issued Outstanding % Applicable Parcels Amount Antelope Valley East Kern Water Agency GOB 1974 GOB $71,000,000 $ % 1,423 $0 Antelope Valley Union High School District GOB 2002 GOB $99,793,179 $83,479, % 7,299 $5,128,078 Antelope Valley Community College District GOB 2004 GOB $138,996,533 $128,116, % 7,299 $7,316,209 Palmdale School District GOB 2001 GOB $24,999,827 $18,156, % 7,299 $3,502,224 TOTAL GENERAL OBLIGATION BOND INDEBTEDNESS (1) $15,946,511 TOTAL OUTSTANDING GENERAL OBLIGATION BOND INDEBTEDNESS (1) $15,946,511 Authorized Direct and Overlapping Bonded Debt Type Authorized Unissued % Applicable Parcels Amount Antelope Valley East Kern Water Agency GOB 1974 GOB $71,000,000 $ % 1,423 $0 Antelope Valley Union High School District GOB 2002 GOB $103,600,000 $3,806, % 7,299 $233,849 Antelope Valley Community College District GOB 2004 GOB $139,000,000 $3, % 7,299 $198 Palmdale School District GOB 2001 GOB $25,000,000 $ % 7,299 $33 TOTAL UNISSUED GENERAL OBLIGATION BONDED DEBT (1) $234,080 TOTAL OUTSTANDING AND UNISSUED GENERAL OBLIGATION BOND INDEBTEDNESS (1) $16,180,591 TOTAL OF ALL OUTSTANDING AND OVERLAPPING BONDED DEBT $55,392,006 VALUE TO ALL OUTSTANDING DIRECT AND OVERLAPPING BONDED DEBT 23.85:1 TOTAL OF ALL OUTSTANDING AND UNISSUED DIRECT AND OVERLAPPING BONDED DEBT $314,184,781 VALUE TO ALL OUTSTANDING AND UNISSUED DIRECT AND OVERLAPPING BONDED DEBT 4.21:1 (1) Additional bonded indebtedness or available bond authorization may exist but are not shown because a tax was not levied for the referenced fiscal year. Source: National Tax Data, Inc

34 Certificates of Participation As of August 1, 2012 the School District has three series of Certificates of Participation with an outstanding initial principal balance of $22,700, (excluding accreted value) (collectively, the Certificates of Participation ). The Certificates of Participation are not secured by Gross Taxes or by the Special Tax, however the Special Tax is available to pay debt service on the Certificates of Participation, and is currently being used to pay lease payments related to the Certificates of Participation when due. RISK FACTORS The following is a discussion of certain risk factors which should be considered, in addition to other matters set forth herein, in evaluating the investment quality of the Series 2012 Bonds. This discussion does not purport to be comprehensive or definitive and does purport to be a complete statement of all factors which may be considered as risks in evaluating the credit quality of the Series 2012 Bonds, and this Official Statement should be read in its entirety for the purpose of making an informed investment decision. The order in which this information is presented does not necessarily reflect the relative importance of various risks. The occurrence of one or more of the events discussed herein could adversely affect the ability or willingness of property owners in the District to pay their Special Taxes when due. Such failures to pay Special Taxes could result in a rapid depletion of one or more Series 2012 Reserve Accounts and/or a default in payments of the principal of and interest on, the Series 2012 Bonds. In addition, the occurrence of one or more of the events discussed herein could adversely affect the value of the property in the District and the ability of the District to sell property which has been subject to foreclosure proceedings for amounts sufficient to cover the delinquent installments of Special Taxes levied against such property. Potential investors in the Series 2012 Bonds are advised to consider the following factors, among others, and to review this entire Official Statement to obtain information essential to the making of an informed investment decision. Any one or more of the risk factors discussed below, among others, could lead to a decrease in the market value and/or in the marketability of the Series 2012 Bonds. There can be no assurance that other risk factors not discussed herein will not become material in the future. Limited Obligations of the District The Bonds, including the Series 2012 Bonds, are not general obligations of the School District or general obligations of the District, but are limited obligations of the District only secured by a pledge of and lien upon the Gross Taxes, and the amounts on deposit in the Bond Service Fund, the Reserve Fund, the Redemption Fund and the Special Tax Fund and certain other amounts held under the Indenture; provided, however, that the pledge of and lien upon amounts on deposit in the Special Tax Fund extends only to the amount of Gross Taxes on deposit therein. The Accounts and Subaccounts in the Reserve Fund, Redemption Fund and Bond Service Fund relating to the Series 2012A Bonds and Series 2012B Refunding Bonds secure only the Series of Bonds to which they relate. The Series 1999 Reserve Account secures only the Series 1999 Bonds and does not secure any Series of the Series 2012 Bonds. Likewise, the Series 2011A Reserve Account and 2011B Reserve Account secure only the Series 2011A QSCB Bonds and 2011B Taxable Non-Subsidy Bonds, respectively, and do not secure any Series of the Series 2012 Bonds. Except for the Gross Taxes and such moneys, no funds or properties of the District are pledged to, or otherwise liable for, the payment of the principal of, premium (if any) or interest on the Bonds, including the Series 2012 Bonds. Except as provided in the Indenture, no Owner of the Series 2012 Bonds may compel the exercise of any taxing power by the District or the School District or force the forfeiture of any of their respective property. The principal of and interest on the Series 2012 Bonds are limited obligations of the District and are not a legal or equitable pledge, charge, lien or encumbrance, upon any of their respective property, or upon any of their respective income, receipts or revenues, except the Gross Taxes. See SOURCES AND SECURITY FOR THE SERIES 2012 BONDS, THE DISTRICT AND THE SPECIAL TAX Special Tax Levies, Collections and Delinquencies. Risks of Real Estate Secured Investments Generally The Owners will be subject to the risks generally incident to an investment secured by real estate, including, without limitation, (a) adverse changes in local market conditions, such as changes in the market value of real property in the vicinity of the District, the supply of or demand for competitive properties in such area, and the market value of homes or institutional facilities and/or sites in the event of sale or foreclosure, (b) changes in real

35 estate tax rates, governmental rules (including, without limitation, zoning laws) and fiscal policies, and (c) natural disasters (including, without limitation, earthquake and floods), which may result in uninsured losses. Insufficiency of the Special Tax The principal source of payment of revenues which secure the payment of Principal of and interest on the Series 2012 Bonds is the proceeds of the annual levy and collection of the Special Tax. The annual levy of the Special Tax is subject to the maximum tax rates authorized. See APPENDIX A Rate and Method of Apportionment of Special Tax. The levy cannot be made at a higher rate even if the failure to do so means that the estimated proceeds of the levy and collection of the Special Tax, together with other available funds, will not be sufficient to pay debt service on the Series 2012 Bonds. Other funds which might or might not be available include funds derived from the payment of delinquent special taxes and funds derived from the tax sale of foreclosure and sale of parcels on which the Special Taxes levied are delinquent. The levy of the Special Tax on Developed Property is currently being collected at the maximum rate. The levy of the Special Tax will rarely, if ever, result in a uniform relationship between the value of particular taxed parcels and the amount of the levy of the Special Tax. Thus, there will rarely, if ever, be a uniform relationship between the value of such parcels and the proportionate share of debt service on the Series 2012 Bonds, and certainly not a direct relationship. The Special Tax levied in any particular tax year on a taxed parcel is based upon the revenue needs and application of the Special Tax Formula. Application of the Special Tax Formula will, in turn, be dependent upon certain development factors with respect to each taxed parcel by comparison with similar development factors with respect to the other taxed parcels within the District. Thus, in addition to annual variations of the revenue needs from the Special Tax, the levy of the Special Tax on any particular taxed parcel may vary from the Special Tax that might otherwise be expected due to a reduction in the number of taxed parcels, for such reasons as acquisition of taxed parcels by a government and failure of the government to pay the Special Tax based upon a claim of exemption, thereby resulting in an increased tax burden on the remaining taxed parcels. The levy of the Special Tax on any particular taxed parcel may also vary from that might otherwise be expected due to the failure of the owners of other taxed parcels to pay the Special Tax and delays in the collection of or inability to collect the Special Tax by tax sale or foreclosure and sale of the delinquent parcels, thereby resulting in an increased tax burden on the remaining parcels. Collection of the Special Tax; Foreclosure The Special Tax Formula provides that the Special Tax is to be collected in the same manner as ordinary ad valorem property taxes are collected and, except as provided in the special covenant for foreclosure described below and in the Act, is to be subject to the same penalties and the same lien priority as is provided for ad valorem property taxes. Pursuant to the Act, in the event of any delinquency in the payment of the Special Tax, the District may order the institution of a superior court action to foreclose the lien therefor in the amount of the delinquent Special Taxes plus penalties, interest, and costs (including attorney s fees within specified time limits). In such an action, the real property subject to the unpaid amount may be sold at judicial foreclosure sale. Such judicial foreclosure action is not mandatory. However, the District has covenanted to cause foreclosure proceedings to be commenced and prosecuted against certain properties that are delinquent in the payment of the Special Tax. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS Proceeds of Foreclosure Sales. In the event that sales or foreclosures of property are necessary, there could be a delay in payment of the Series 2012 Bonds pending such sales or the prosecution of foreclosure proceedings and receipt by the District of the proceeds of sale if the Reserve Fund is depleted. The prosecution of a foreclosure action could be delayed due to crowded local court calendars or delays in the legal process. In addition, there can be no assurance that the sale of delinquent parcels in foreclosure proceeds will result in sufficient proceeds to cover delinquencies

36 Reduction of Special Tax Revenues The Special Tax Formula may be amended at any time in accordance with the Act without the consent or approval of the Trustee or any Bondowners; provided, however, that the Special Tax Formula may not be amended to reduce the rate at which the Special Taxes may be levied or to terminate the levy of the Special Tax unless the District determines that the reduction or termination of Special Taxes would not have a material adverse effect on the repayment of the Bonds, including the Series 2012 Bonds. Payment of the Special Tax is Not a Personal Obligation of the Property Owners An owner of a taxable parcel is not personally obligated to pay the Special Tax. Rather, the Special Tax is an obligation only against the taxable parcels. Enforcement of Special Tax payment obligations by the District is limited to judicial foreclosure. See SOURCES AND SECURITY FOR THE SERIES 2012 BONDS Proceeds of Foreclosure Sales. There is no assurance that any current or subsequent owner of a parcel subject to Special Taxes will be able to pay the Special Taxes, or that such owner will choose to pay such installments even though financially able to do so. Exempt Properties Certain properties are exempt from the Special Tax in accordance with the Special Tax Formula. In addition, the Act provides that properties or entities of the state, federal or local government are exempt from the Special Tax; provided, however, that property within the District acquired by a public entity through a negotiated transaction, or by gift or devise, which is not otherwise exempt from the Special Tax, will continue to be subject to the Special Tax. It is possible that property acquired by a public entity following a tax sale or foreclosure based upon failure to pay taxes could become exempt from the Special Tax. In addition, the Act provides that if property subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to that property, for outstanding Bonds only, is to be treated as if it were a special assessment. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Special Taxes. Insofar as the Act requires payment of the Special Tax by a federal entity acquiring property within the District, it may be unconstitutional. If for any reason property within the District becomes exempt from taxation by reason of ownership by a nontaxable entity such as the federal government, another public agency or a religious organization, subject to the limitation of the Annual Special Tax, the Special Tax will be reallocated to the remaining taxable properties within the District. This would result in the owners of such property paying a greater amount of the Special Tax and could have an adverse impact upon the timely payment of the Special Tax. Moreover, if a substantial portion of land within the District becomes exempt from the Special Tax because of public ownership, or otherwise, the maximum Special Tax which could be levied upon the remaining acreage might not be sufficient to pay principal of and interest on the Series 2012 Bonds when due and a default would occur with respect to the payment of such principal and interest. The Act further provides that no other properties or entities are exempt from the Special Tax unless the properties or entities are expressly exempted in a resolution to levy a new special tax or to alter the rate or method of apportionment of an existing special tax. Exempt Properties Property Owned by FDIC and Other Federal Governmental Entities The ability of the District to collect the Special Taxes and interest and penalties specified by State law, and to foreclose the lien of delinquent Special Taxes, may be limited in certain respects with regard to properties in which the Federal Deposit Insurance Corporation (the FDIC ) or other similar federal governmental entities such as Federal National Mortgage Association ( Fannie Mae ), Federal Home Loan Mortgage Corporation ( Freddie Mac ), the Drug Enforcement Agency, the Internal Revenue Service or other federal agencies has or obtains an interest. On June 4, 1991, the FDIC issued a Statement of Policy Regarding the Payment of State and Local Property Taxes (the 1991 Policy Statement ). The 1991 Policy Statement was revised and superseded by a new

37 Policy Statement effective January 9, 1997 (the Policy Statement ). The Policy Statement provides that real property owned by the FDIC is subject to state and local real property taxes only if those taxes are assessed according to the property s value, and that the FDIC is immune from real property taxes assessed on any basis other than property value. According to the Policy Statement, the FDIC will pay its property tax obligations when they become due and payable and will pay claims for delinquent property taxes as promptly as is consistent with sound business practice and the orderly administration of the institution s affairs, unless abandonment of the FDIC s interest in the property is appropriate. The FDIC will pay claims for interest on delinquent property taxes owed at the rate provided under state law, to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay any amounts in the nature of fines or penalties and will not pay nor recognize liens for such amounts. If any property taxes (including interest) on FDIC-owned property are secured by a valid lien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. The Policy Statement further provides that no property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC s consent. In addition, the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC s consent. The Policy Statement states that the FDIC generally will not pay non-ad valorem taxes, including special assessments, on property in which it has a fee interest unless the amount of tax is fixed at the time that the FDIC acquires its fee interest in the property, nor will it recognize the validity of any lien to the extent it purports to secure the payment of any such amounts. Special taxes imposed under the Act and a special tax formula which determines the special tax due each year, are specifically identified in the Policy Statement as being imposed each year and therefore covered by the FDIC s federal immunity. With respect to property in California owned by the FDIC on January 9, 1997, and that was owned by the Resolution Trust Corporation ( RTC ) on December 31, 1995, or that became the property of the FDIC through foreclosure of a security interest held by the RTC on that date, the FDIC will continue the RTC s prior practice of paying special taxes imposed pursuant to the Act if the taxes were imposed prior to the RTC s acquisition of an interest in the property. All other special taxes may be challenged by the FDIC. The FDIC has taken a position similar to that expressed in the Policy Statement in legal proceedings brought against Orange County in United States Bankruptcy Court and in Federal District Court. The Bankruptcy Court issued a ruling in favor of the FDIC on certain of such claims. Orange County appealed that ruling, and the FDIC cross-appealed. On August 28, 2001, the Ninth Circuit Court of Appeals issued a ruling favorable to the FDIC except with respect to the payment of pre-receivership liens based upon delinquent property tax. The District is unable to predict what effect the FDIC s application of the Policy Statement would have in the event of a delinquency on a parcel within the District in which the FDIC has or obtains an interest, although prohibiting the lien of the FDIC to be foreclosed at a judicial foreclosure sale would reduce or eliminate the persons willing to purchase a parcel at a foreclosure sale. Owners of the Series 2012 Bonds should assume that the District will be unable to foreclose on any parcel owned by the FDIC. In the case of Fannie Mae and Freddie Mac, in the event a parcel of taxable property is owned by a federal government entity or federal government sponsored entity, such as Fannie Mae or Freddie Mac, or a private deed of trust secured by a parcel of taxable property is owned by a federal government entity or federal government sponsored entity, such as Fannie Mae or Freddie Mac, the ability to foreclose on the parcel or to collect delinquent Special Taxes may be limited. Federal courts have held that, based on the supremacy clause of the United States Constitution this Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, anything in the Constitution or Laws of any State to the contrary notwithstanding. In the absence of Congressional intent to the contrary, a state or local agency cannot foreclose to collect delinquent taxes or assessments if foreclosure would impair the federal government interest. This means that, unless Congress has otherwise provided, if a federal government entity owns a parcel of taxable property but does not pay taxes and assessments levied on the parcel (including Special Taxes), the applicable state and local governments cannot foreclose on the parcel to collect the delinquent taxes and assessments. Moreover, unless Congress has otherwise provided, if the federal government has a mortgage interest in the parcel and the District wishes to foreclose on the parcel as a result of delinquent Special Taxes, the property cannot be sold at a foreclosure sale unless it can be sold for an amount sufficient to pay delinquent taxes and assessments on a parity with the Special Taxes and preserve the federal government s mortgage interest. For a discussion of risks

38 associated with taxable parcels within the District becoming owned by the federal government, federal government entities or federal government sponsored entities, see Insufficiency of the Special Tax. The District s remedies may also be limited in the case of delinquent Special Taxes with respect to parcels in which other federal agencies (such as the Internal Revenue Service and the Drug Enforcement Administration) have or obtain an interest. No investigation has been made as to whether the FDIC currently owns or has an interest in any property in the District. Freddie Mac, Fannie Mae, and other federal government agencies are listed in the Top 20 Taxpayers in the District. See THE DISTRICT AND THE SPECIAL TAX Assessed Value herein. Land Values The value of taxable parcels within the District is a critical factor in determining the investment quality of the Series 2012 Bonds. If a property owner defaults in the payment of the Special Tax, the District s only remedy is to foreclose on the delinquent property in an attempt to obtain funds with which to pay the delinquent Special Tax. Land values could be adversely affected by economic factors beyond the District s control, such as relocation of employers out of the area, stricter land use regulations, the absence of water, or destruction of property caused by, among other eventualities, earthquake, flood or other natural disaster, or by environmental pollution or contamination. The lien to value ratio provided in this Official Statement is based upon the assessed value of the parcels in the District as of June 30, The assessed value for levied parcels declined by 4.76% in the Fiscal Year, after rising in the Fiscal Year after declines during fiscal years and when compared to prior values. See THE DISTRICT AND THE SPECIAL TAX Assessed Value herein. No assurance can be given that the assessed values of parcels in the District set forth in this Official Statement will be maintained during the time that the Series 2012 Bonds are outstanding. In the last five years, the District has not contracted for an appraisal of all land lying within the District. Therefore, the value of the property as shown on the records of the County Assessor and used by the County Assessor to levy ad valorem real property taxes provides the most accessible source of information about land values within the District. Pursuant to Article XIIIA of the State Constitution, the assessed value of a parcel is determined by reference to the amount shown on the tax bill for the parcel 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 1975 assessment. The assessed value may be adjusted annually to reflect increases, not to exceed two percent per year, or decreases in the consumer price index or comparable local data, or declining property value caused by damage, destruction or other factors. Typically, the County Assessor determines the assessed value of all property as of each January 1. Property taxes for the subsequent fiscal year are then based on these January 1 values. As of August 2012, the aggregate assessed value of all Developed Property parcels was approximately $1,258,377,346. Because determination of the assessed value of a parcel is done in accordance with the State Constitution, assessed values do not necessarily reflect the market value of a parcel. The District can give no assurance that the taxable land within the District can be sold for a price sufficient to pay the Principal of and interest on the Series 2012 Bonds when due in the event of a default in payment of Special Taxes by the landowners within the District. Legal Requirements Other events which may affect the value of a parcel include changes in the law or application of the law. Such changes may include, without limitation, local growth control initiatives, local utility connection moratoriums and local application of statewide tax and governmental spending limitation measures. Geologic, Topographic and Climatic Conditions The value of a taxable parcel in the future can be adversely affected by a variety of additional factors, particularly those which may affect infrastructure and other public improvements and private improvements on taxable parcels and the continued habitability and enjoyment of such private improvements. Such additional factors include, without limitation, geologic conditions such as earthquakes and volcanic eruptions, topographic conditions

39 such as earth movements, landslides and floods and climatic conditions such as droughts and tornadoes. One or more of such conditions could occur and could result in damage to improvements of varying seriousness, that the damage may entail significant repair or replacement costs and that repair or replacement may never occur either because of the cost or because repair or replacement will not facilitate habitability or other use, or because other considerations preclude such repair or replacement. Under any of these circumstances, the value of the taxable parcels may well depreciate or disappear. One or more parcels in the District may be located in a flood plain as mapped by the U.S. Army Corps of Engineers, the Federal Emergency Management Agency or any other federal or state agency. Hazardous Substances The owners and operators of a parcel of taxable parcels may be required by law to remedy conditions of the parcel relating to releases or threatened releases of hazardous substances. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well-known and widely applicable of these laws, but State laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner or operator is obligated to remedy a hazardous substance condition of property whether or not the owner or operator has anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the taxed parcels be affected by a hazardous substance, is to reduce the marketability and value of the parcel by the costs of remedying the condition, because the purchaser, upon becoming owner, will become obligated to remedy the condition just as is the seller. The assessed values set forth herein do not take into account the possible reduction in marketability and value of any of the parcels of taxable parcels by reason of the possible liability of the owner or operator for the remedy of a hazardous substance condition of the parcel. See THE DISTRICT AND THE SPECIAL TAX Assessed Value. Although the District is not aware that the owner or operator of any taxable parcels has such a current liability with respect to any taxable parcel, it is possible that such liabilities do currently exist and that the District is not aware of them. Further, it is possible that liabilities may arise in the future with respect to any of the taxable parcels resulting from the existence, currently, on the parcel of a substance presently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the existence, currently on the parcel of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly affect the value of a parcel that is realizable upon a delinquency. Prolonged Economic Downturn Land values in and around the District have been adversely affected by current economic conditions. To the extent that the economic downturn is prolonged, property values could remain flat for an indefinite period. For economic and demographic information, including employment statistics, on the City and the County, see APPENDIX H General and Economic Information Regarding the District and Surrounding Community. Declines in property values and, to the extent that property owners in the District suffer from unemployment, periods of high unemployment in the District could result in property owner unwillingness or inability to pay mortgage payments, as well as ad valorem property taxes and Special Taxes, when due. Under such circumstances, bankruptcies are likely to increase. Bankruptcy by owners with delinquent Special Taxes would delay the commencement and completion of foreclosure proceedings to collect delinquent Special Taxes. Risks Related to Mortgage Loans Recent events in the United States and world-wide capital markets have adversely affected the availability of mortgage loans to property owners, including potential buyers of the buildings within the District. Any such unavailability could hinder the ability of the current owners to resell their property, and adversely affect the market prices available to current owners

40 Land Development Land values are influenced by the level of development in the area in many respects. First, partially developed land is generally less valuable than developed land and provides less security to the owners of the Series 2012 Bonds should it be necessary for the School District to foreclose on undeveloped property due to the nonpayment of Special Taxes. Moreover, failure to complete development on a timely basis could adversely affect the land values of those parcels which have been completed. In the event of a foreclosure sale necessitated by delinquencies in the payment of the Special Tax, lower land values would result in lower proceeds from the foreclosure sale and thus less security for the payment of principal of and interest on the Series 2012 Bonds. While land ownership in the District is diverse, a portion of the property in the District is in various stages of developments and therefore subject to development risks. Continuing development of land within the District may be adversely affected by changes in general or local economic conditions, fluctuations in the real estate market, increased construction costs, development, financing and marketing capabilities of individual property owners, water shortages and other similar factors. Development in the District may also be affected by development in surrounding areas which may compete with the District. In addition, land development operations are subject to comprehensive federal, state and local regulations, including environmental, land use, zoning and building requirements. There can be no assurance that land development operations within the District will not be adversely affected by these risks. The District has not evaluated development risks. Since these are largely business risks of the type that property owners customarily evaluate individually, and inasmuch as changes in land ownership may well mean changes in the evaluation with respect to any particular parcel, the District is issuing the Series 2012 Bonds without regard to any such evaluation. Thus, the creation of the District and the issuance of the Series 2012 Bonds in no way implies that the District has evaluated these risks or the reasonableness of these risks even though such risks may be serious and may ultimately halt or slow the progress of land development and forestall the realization of taxed parcel values. With respect to the Fiscal Year, the Annual Special Tax levy on Developed Property, standing alone, is sufficient to pay the Principal of and interest on the Series 2012 Bonds. During its twenty-two years of existence, the District has not levied an Undeveloped Property Tax. Public and Private Improvements Future Indebtedness At the present time, a portion of the property in the District is undeveloped. Development of said portion depends upon both public and private improvement of land within. The construction of said improvements is contingent upon an approximate level of funding. The District has the authority to issue Bonds which would be on a parity with the Series 2012 Bonds and the Outstanding Bonds. Upon the issuance of the Series 2012 Bonds, one or more series of Bonds, on a parity with the Series 2012 Bonds and Outstanding Bonds, in an aggregate principal amount up to approximately $247,928, could be issued to finance the Project. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Additional Indebtedness. The cost of public and private improvements within the District will increase the public and private debt for which the land within the District is the security. This increased debt could reduce the ability or desire of the property owners within the District to pay the annual Special Tax levied against their property. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Special Taxes. Zoning and Land Use Decisions The Special Tax is to be levied annually based upon the land use categories in effect for each taxable parcel. Decisions made by the governing bodies having control over zoning and land use decisions for property within the District will affect the prospective use of the property and, therefore, the tax base for the Special Tax. At the present time the City Council of the City has control over zoning and land use decisions for property within the District which is located in the City. The County has control over zoning and land use decisions for property within the District which is located in unincorporated areas of the County. See THE DISTRICT AND THE SPECIAL TAX

41 Bankruptcy The payment of the Special Tax and the ability of the District to foreclose the lien of a delinquent unpaid tax may be limited by bankruptcy, insolvency or other laws generally affecting creditors rights or by the laws of the State relating to judicial foreclosure. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS Proceeds of Foreclosure Sales. The various legal opinions to be delivered concurrently with the delivery of the Series 2012 Bonds (including Bond Counsel s approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors rights and by the application of equitable principles and by the exercise of judicial discretion in appropriate cases. Although bankruptcy proceedings would not cause the lien of the Special Tax to become extinguished, bankruptcy of a property owner could result in a delay in prosecuting superior court foreclosure proceedings. The federal bankruptcy laws provide for an automatic stay of foreclosure and tax sale proceedings, thereby delaying such proceedings, perhaps for an extended period. Any such delays would increase the likelihood of a delay or default in payment of the principal of and interest on the Series 2012 Bonds and the possibility of delinquent tax installments not being paid in full. To the extent that bankruptcy or similar proceedings were to involve a large property owner, the chances would increase that the Reserve Fund could be fully depleted during any resulting delay in receiving payment of delinquent Special Taxes. As a result, sufficient monies would not be available in the Reserve Fund to make up any shortfalls resulting from delinquent payments of the Special Tax and thereby to pay principal of and interest on the Series 2012 Bonds on a timely basis. Parity Taxes and Special Assessments The Special Taxes and any penalties thereon will constitute a lien against the lots and parcels of land on which they will be annually imposed until they are paid. Such lien is on a parity with all special taxes and special assessments levied by other agencies and is co-equal to and independent of the lien for general property taxes regardless of when they are imposed upon the same property. The Special Taxes have priority over all existing and future private liens imposed on the property. The District, however, has no control over the ability of other entities and districts to issue indebtedness secured by special taxes or assessments payable from all or a portion of the property within the District. In the event any additional improvements or fees are financed pursuant to the establishment of an assessment district or another district formed pursuant to the Act, any taxes or assessment levied to finance such improvements will have a lien on a parity with the lien of the Special Tax. For information concerning existing direct and overlapping public indebtedness within the District, see THE DISTRICT AND THE SPECIAL TAX Direct and Overlapping Bonded Debt herein. The existence of general property taxes, other special taxes, and assessments may reduce the value-to-debt ratio of the affected parcels and increases the possibility that foreclosure proceeds will not be adequate to pay delinquent Special Taxes or the principal of and interest on the Series 2012 Bonds when due. The District has covenanted that it will not issue additional bonds on a parity with the Series 2012 Bonds unless certain conditions are met. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2012 BONDS Additional Indebtedness. Disclosures to Future Purchasers The willingness or ability of an owner of a taxable parcel to pay the Special Tax even if the value is sufficient may be affected by whether or not the owner was given due notice of the Special Tax authorization at the time the owner purchased the parcel, was informed of the amount of the Special Tax on the parcel should the Special Tax be levied at the maximum tax rate and the risk of such a levy and, at the time of such a levy, has the ability to pay it as well as pay other expenses and obligations. The District has caused a notice of the Special Tax to be recorded in the Office of the Recorder for the County against each taxable parcel. While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a

42 prospective purchaser or lender will consider such Special Tax obligation in the purchase of a property within the District or lending of money thereon. The Act requires the subdivider (or its agent or representative) of a subdivision to notify a prospective purchaser or long-term lessor of any lot, parcel, or unit subject to a Mello-Roos special tax of the existence and maximum amount of such special tax using a statutorily prescribed form. California Civil Code Section b requires that in the case of transfers other than those covered by the above requirement, the seller must at least make a good faith effort to notify the prospective purchaser of the special tax lien in a format prescribed by statute. Failure by an owner of the property to comply with the above requirements, or failure by a purchaser or lessor to consider or understand the nature and existence of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Tax when due. In the first five years after the District s formation, several homeowners challenged the levy of the Annual Special Tax against their property claiming they did not receive adequate notice of the tax in accordance with law. In response to these challenges, the District has permitted certain developers to prepay the Annual Special Tax following the issuance of a building permit. There have been no formal challenges to the levy since The District has covenanted in the Indenture that it will not permit the payment of a Prepayment Tax with respect to any parcel of property within the District after such parcel has converted to Developed Property. Loss of Tax Exemption Interest on the Series 2012 Bonds might become includable in gross income for purposes of federal income taxation retroactive to the date the Series 2012 Bonds were issued, as a result of future acts or omissions of the District in violation of its covenants in the Indenture. The Indenture does not contain a special redemption feature triggered by the occurrence of an event of taxability. As a result, if interest on the Series 2012 Bonds were to be includable in gross income for purposes of federal income taxation, the Series 2012 Bonds would continue to remain outstanding until maturity unless earlier redeemed pursuant to optional or mandatory redemption. See THE SERIES 2012 BONDS Redemption. Non-Cash Payment of Bonds As a result of State legislation effective on January 1, 1998 (Chapter 946 of the Statutes of 1997; AB 1224 ), the District may reserve to itself the right and authority to allow the owner of a taxable parcel to tender a Bond in full or partial payment of any installment of the Special Taxes or the interest or penalties thereon. Bonds so tendered may only be used to pay installments of Special Taxes that have become due, and not future taxes. A Bond so tendered is to be accepted at par, and credit is to be given for any interest accrued thereon to the date of the tender. If the District were to permit, the same legislation permits the highest bidder at a foreclosure sale (if the bidder elects to treat the sale as a credit transaction pursuant to subdivision (c) of Section of the California Code of Civil Procedure) to pay the balance due by the tender of Series 2012 Bonds (provided that Series 2012 Bonds may not be tendered for costs of foreclosure or other administrative charges). Thus, if Bonds can be purchased in the secondary market at a discount, it may be to the advantage of an owner of a parcel subject to Special Taxes to pay the Special Taxes applicable thereto by tendering a Bond. Such a practice would decrease the cash flow available to the School District to make payments with respect to other Bonds then outstanding; and unless the practice were limited by the School District, the Special Taxes paid in cash could be insufficient to pay the debt service due with respect to such other Bonds. Such a practice could reduce the amount of cash that would otherwise be available to restore the Reserve Fund and to pay debt service with respect to other outstanding Bonds. While the District has not taken any action to implement this authority, there can be no assurance that it will refrain from doing so in the future. Voter Initiatives Under the State Constitution, the power of initiative is reserved to the voters for the purpose of enacting statutes and constitutional amendments. Since 1978, the voters have exercised this power through the adoption of Proposition 13 the People s Initiative to Limit Property Taxation, which among other things, limits the amount of

43 any ad valorem tax on real property in the State to one percent of the full cash value of such property; and similar measures, including Proposition 218 Voters Approval for Local Government Taxes Limitation on Fees, Assessments, and Charges Initiative Constitutional Amendment ( Proposition 218 ), which was approved in the general election held on November 5, Any such initiative may affect the collection of fees, taxes and other types of revenue by local agencies such as the District. Subject to overriding federal constitutional principles, such collection may be materially and adversely affected by voter-approved initiatives, possibly to the extent of creating cash-flow problems in the payment of outstanding obligations such as the Series 2012 Bonds. Proposition 218 added Articles XIIIC and XIIID to the State Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges. Among other things, Proposition 218 states that all taxes imposed by local governments shall be deemed to be either general taxes (imposed for general governmental purposes) or special taxes (imposed for specific purposes); prohibits special purpose government agencies, including school districts, from levying general taxes; and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote. Proposition 218 also provides that no tax may be assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the State Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4. Article XIIIC also provides that the initiative power shall not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. Article XIIID deals with assessments and property-related fees and charges. Article XIIID explicitly provides that nothing in Article XIIIC or XIIID shall be construed to affect laws existing at the time of its passage relating to the imposition of fees or charges as a condition of property development. The Special Taxes and the Series 2012 Bonds were each authorized by not less than a two-thirds vote of the landowners within the District who constituted the qualified electors of the District at the time of such voted authorization. The District believes, therefore, that issuance of the Series 2012 Bonds does not require the conduct of further proceedings under the Act or Proposition 218. The foregoing discussion of Proposition 218 should not be considered an exhaustive or authoritative treatment of the issues. The District does not expect to be in a position to control the consideration or disposition of these issues and cannot predict the timing or outcome of any judicial or legislative activity in this regard. Interim rulings, final decisions, legislative proposals and legislative enactments may all affect the impact of Proposition 218 on the Series 2012 Bonds as well as the market for the Series 2012 Bonds. Legislative and court calendar delays and other factors may prolong any uncertainty regarding the effects of Proposition 218. Rights of Series 2012 Bond Insurer So long as the Series 2012 Bond Insurance Policy and the Series 2012B Reserve Policy remain in full force and effect and the Series 2012 Bond Insurer is not in default thereunder, the Series 2012 Bond Insurer has certain rights with respect to the Indenture and the Series 2012 Bonds. For example, the Series 2012 Bond Insurer is deemed to be the sole holder of the Series 2012 Bonds insured by it for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Series 2012 Bonds insured by it are entitled to take pertaining to the Trustee, defaults and remedies. The Series 2012 Bond Insurer also provides a municipal bond insurance policy for the Series 1999 Bonds (the Series 1999 Bond Insurance Policy ) and the Series 2012B Reserve Policy. Pursuant to the Indenture, so long as the Series 1999 Bond Insurance Policy remains in full force and effect and the Series 1999 Bond Insurer is not in default thereunder, the Series 1999 Bond Insurer has certain rights with respect to the Indenture, the Series 1999 Bonds and the Bonds. For example, the Series 1999 Bond Insurer is deemed to be the sole holder of the Series 1999 Bonds insured by it for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Series 1999 Bonds insured by it are entitled to take

44 pertaining to the Trustee, defaults and remedies. The interests of the Series 2012 Bond Insurer may not be the same as the interests of holders of the Series 2012 Bonds. See APPENDIX B Summary of the Indenture Provisions With Respect to Bond Insurance for the Series 1999 Bonds; Provisions With Respect to Bond Insurance for the Series 2012 Bonds; and Provisions With Respect to the Series 2012B Reserve Policy. Federal Income Taxes TAX MATTERS The Code imposes certain requirements that must be met subsequent to the issuance and delivery of the Series 2012 Bonds for interest thereon to be and remain excluded from gross income for federal income tax purposes. Noncompliance with such requirements could cause the interest on the Series 2012 Bonds to be included in gross income for federal income tax purposes retroactive to the date of issue of the Series 2012 Bonds. Pursuant to the Resolution and the Tax and Nonarbitrage Certificate for the Series 2012 Bonds (the Tax Certificate ), the District has covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on the Series 2012 Bonds from gross income for federal income tax purposes pursuant to Section 103 of the Code. In addition, the District has made certain representations and certifications in the Resolution and the Tax Certificate. Bond Counsel will not independently verify the accuracy of those representations and certifications. In the opinion of Nixon Peabody LLP, Bond Counsel, under existing law and assuming compliance with the aforementioned covenant, and the accuracy of certain representations and certifications made by the District described above, interest on the Current Interest Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code. In addition, Bond Counsel is of the opinion that the excess of Accreted Value of any Capital Appreciation Bond over the initial principal amount thereof, to the extent that such excess represents interest properly allocated to the Owner of such Capital Appreciation Bond (the Excess Accreted Value ), is excluded from gross income for federal income tax purposes. Bond Counsel is also of the opinion that such interest on and Excess Accreted Value with respect to the Series 2012 Bonds are not treated as preference items in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on and Excess Accreted Value with respect to the Series 2012 Bonds are, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations. The increases in Accreted Value with respect to Capital Appreciation Bonds are includable in adjusted current earnings as they accrue semiannually rather than at the time such Accreted Value is actually paid to and received by the Owners of the Capital Appreciation Bonds. Increases in Accreted Value occur each semiannual period in the amount of interest which accrued semiannually during such period on the Accreted Value as of the beginning of such period. An Owner s adjusted basis in a Capital Appreciation Bond, used to determine the amount of gain or loss on disposition of such Capital Appreciation Bond, will be equal to the Accreted Value as of the date of calculation. In rendering these opinions, Bond Counsel has relied upon representations and covenants of the District in the Tax Certificate concerning the property financed and refinanced with Series 2012 Bond proceeds, the investment and use of Series 2012 Bond proceeds and the rebate to the federal government of certain earnings thereon. In addition, Bond Counsel has assumed that all such representations are true and correct and that the District will comply with such covenants. Bond Counsel has expressed no opinion with respect to the exclusion of the interest on and Excess Accreted Value with respect to the Series 2012 Bonds from gross income under Section 103(a) of the Code in the event that any of such District representations are untrue or the District fails to comply with such covenants, unless such failure to comply is based on the advice or the opinion of Bond Counsel. State Taxes Bond Counsel is also of the opinion that interest on and Excess Accreted Value with respect to the Series 2012 Bonds are exempt from State personal income taxes. Bond counsel expresses no opinion as to other state or local tax consequences arising with respect to the Series 2012 Bonds nor as to the taxability of the Series 2012 Bonds or the income therefrom under the laws of any state other than California

45 Original Issue Discount Bond Counsel is further of the opinion that the difference between the principal amount of the Series 2012B Refunding Bonds maturing August 1, 2021 through August 1, 2026, inclusive and on August 1, 2029 (collectively the Discount Bonds ) and the initial offering price to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers) at which price a substantial amount of such Discount Bonds of the same maturity was sold constitutes original issue discount which is excluded from gross income for federal income tax purposes to the same extent as interest on the Series 2012 Bonds. Further, such original issue discount accrues actuarially on a constant interest rate basis over the term of each Discount Bond and the basis of each Discount Bond acquired at such initial offering price by an initial purchaser thereof will be increased by the amount of such accrued original issue discount. The accrual of original issue discount may be taken into account as an increase in the amount of tax-exempt income for purposes of determining various other tax consequences of owning the Discount Bonds, even though there will not be a corresponding cash payment. Owners of the Discount Bonds are advised that they should consult with their own advisors with respect to the state and local tax consequences of owning such Discount Bonds. Original Issue Premium The Series 2012A Current Interest Bonds and Series 2012B Refunding Bonds maturing on August 1, 2014 through August 1, 2020, inclusive (collectively, the Premium Bonds ), are being offered at prices in excess of their principal amounts. An initial purchaser with an initial adjusted basis in a Premium Bond in excess of its principal amount will have amortizable bond premium which is not deductible from gross income for federal income tax purposes. The amount of amortizable bond premium for a taxable year is determined actuarially on a constant interest rate basis over the term of each Premium Bond based on the purchaser s yield to maturity (or, in the case of Premium Bonds callable prior to their maturity, over the period to the call date, based on the purchaser s yield to the call date and giving effect to any call premium). For purposes of determining gain or loss on the sale or other disposition of a Premium Bond, an initial purchaser who acquires such obligation with an amortizable bond premium is required to decrease such purchaser s adjusted basis in such Premium Bond annually by the amount of amortizable bond premium for the taxable year. The amortization of bond premium may be taken into account as a reduction in the amount of tax-exempt income for purposes of determining various other tax consequences of owning such Bonds. Owners of the Premium Bonds are advised that they should consult with their own advisors with respect to the state and local tax consequences of owning such Premium Bonds. Ancillary Tax Matters Ownership of the Series 2012 Bonds may result in other federal tax consequences to certain taxpayers, including, without limitation, certain S corporations, foreign corporations with branches in the United States, property and casualty insurance companies, individuals receiving Social Security or Railroad Retirement benefits, and individuals seeking to claim the earned income credit. Ownership of the Series 2012 Bonds may also result in other federal tax consequences to taxpayers who may be deemed to have incurred or continued indebtedness to purchase or to carry the Series 2012 Bonds. Prospective investors are advised to consult their own tax advisors regarding these rules. Interest paid on tax-exempt obligations such as the Series 2012 Bonds is subject to information reporting to the Internal Revenue Service ( IRS ) in a manner similar to interest paid on taxable obligations. In addition, interest on the Series 2012 Bonds may be subject to backup withholding if such interest is paid to a registered owner that (a) fails to provide certain identifying information (such as the registered owner s taxpayer identification number) in the manner required by the IRS, or (b) has been identified by the IRS as being subject to backup withholding. Bond Counsel is not rendering any opinion as to any federal tax matters other than those described in the opinion attached as APPENDIX D. Prospective investors, particularly those who may be subject to special rules described above, are advised to consult their own tax advisors regarding the federal tax consequences of owning and disposing of the Series 2012 Bonds, as well as any tax consequences arising under the laws of any state or other taxing jurisdiction

46 Changes in Law and Post Issuance Events Legislative or administrative actions and court decisions, at either the federal or state level, could have an adverse impact on the potential benefits of the exclusion from gross income of the interest on and Excess Accreted Value with respect to the Series 2012 Bonds for federal or state income tax purposes, and thus on the value or marketability of the Series 2012 Bonds. This could result from changes to federal or state income tax rates, changes in the structure of federal or state income taxes (including replacement with another type of tax), repeal of the exclusion of the interest on the Series 2012 Bonds from gross income for federal or state income tax purposes, or otherwise. For example, the President recently released legislative proposals that would, among other things, subject interest on tax-exempt bonds (including the Series 2012 Bonds) to a federal income tax for taxpayers with incomes above certain thresholds for tax years beginning after It is not possible to predict whether any legislative or administrative actions or court decisions having an adverse impact on the federal or state income tax treatment of holders of the Series 2012 Bonds may occur. Prospective purchasers of the Series 2012 Bonds should consult their own tax advisor regarding the impact of any changes in law on the Series 2012 Bonds. Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance and delivery of the Series 2012 Bonds may affect the tax status of interest on or Excess Accreted Value with respect to the Series 2012 Bonds. Bond Counsel expresses no opinion as to any federal, state or local tax law consequences with respect to the Series 2012 Bonds, or the interest or Excess Accreted Value with respect thereto, if any action is taken with respect to the Series 2012 Bonds or the proceeds thereof upon the advice or approval of other counsel. FINANCIAL STATEMENTS The financial statements of the School District for the fiscal year ended June 30, 2011 and the Management s Discussion and Analysis and certain supplementary information, and the Independent Auditors Report of Vavrinek, Trine, Day & Co., LLP ( VTD ), dated December 9, 2011 are included as APPENDIX F The School District s Audited Financial Statements. The School District s financial statements as of June 30, 2011 and for the year then ended, included in this Official Statement, have been audited by VTD as stated in their Report appearing in Appendix F. Neither the District nor the School District has received VTD s consent to the inclusion in Appendix F of its report on such financial statements. In addition, VTD has not performed any postaudit review of the financial condition of the District or the School District and has not reviewed this Official Statement. The financial statements of the School District include certain information on the District and as such, are included with this Official Statement. The Series 2012 Bonds are not obligations of the School District but are limited obligations of the District payable solely from the proceeds of Gross Taxes and certain funds established pursuant to the Indenture and held by the Trustee, as more fully described herein. See THE SERIES 2012 BONDS herein. VERIFICATION OF MATHEMATICAL COMPUTATIONS Causey Demgen & Moore Inc. will deliver on or before the date of delivery of the Series 2012 Bonds its verification report indicating that it has verified, in accordance with the standards established by the American Institute of Certified Public Accountants, the mathematical accuracy of certain computations showing the adequacy of the cash, including a portion of the proceeds of the Series 2012B Refunding Bonds, and the maturing principal of and interest on certain government obligations to be acquired on September 27, 2012 to be held in the Escrow Fund to provide for the payment of the redemption price of and interest accrued on the Refunded Bonds up to and including the Redemption Date. Legal Opinions LEGAL MATTERS The validity of the Series 2012 Bonds and certain other legal matters are subject to the approving opinions of Nixon Peabody LLP, Bond Counsel. Bond Counsel expects to deliver an opinion at the time of issuance of the

47 Series 2012 Bonds substantially in the form set forth in APPENDIX D hereto, subject to the matters discussed below. Bond Counsel undertakes no responsibility for the accuracy, completeness, or fairness of this Official Statement. Certain matters will be passed upon for the Underwriter by Stradling Yocca Carlson & Rauth, a Professional Corporation, as Underwriter s Counsel. Compensation of Bond Counsel and Underwriter s Counsel is contingent upon the issuance of the Bonds. No Litigation No litigation is pending or threatened concerning the validity of the Series 2012 Bonds, and a certificate to that effect will be furnished to the Underwriter at the time of the original delivery of the Series 2012 Bonds. The District is not aware of any litigation pending or threatened questioning the political existence of the District or contesting the District s ability to receive Special Taxes or to collect other revenues or contesting the District's ability to issue and retire the Series 2012 Bonds. Continuing Disclosure The District has covenanted for the benefit of the holders and beneficial owners of the Series 2012 Bonds to provide certain financial information and operating data relating to the District to the Municipal Securities Rulemaking Board (the MSRB ) through its Electronic Municipal Market Access System ( EMMA ) by not later than 270 days following the end of the District s fiscal year (which currently ends on June 30), commencing with the report for the Fiscal Year (the Annual Report ), and to provide notices of the occurrence of certain enumerated events. The notices of specified events will be filed by the District with the MSRB through EMMA. The specific nature of the information to be contained in the Annual Report or the notices of material events is included below in APPENDIX E Form of Continuing Disclosure Certificate. These covenants have been made in order to assist the Underwriter in complying with Rule 15c2-12(b)(5) adopted by the SEC under the Exchange Act. The District did not timely file its annual report for the Fiscal Year and did not file certain material event notices relating to the downgrade of the Series 1999 Bond Insurer during the past five years. The District has otherwise complied, in all material respects, with its previous undertakings with regards to Rule 15c2-12(b)(5) to provide annual reports and notices of material events. The District is now current with all required filings and has put procedures in place that it believes will ensure that filings will be made in a timely manner in the future. See APPENDIX E Form of Continuing Disclosure Certificate. Underwriting MISCELLANEOUS The Series 2012 Bonds were purchased through negotiation by Piper Jaffray & Co. (the Underwriter ). The Underwriter agreed to purchase the Series 2012 Bonds at a price of $15,693,838.17, which is equal to the principal amount of Series 2012 Bonds, plus net original issue premium of $1,190.35, less the Underwriter s discount of $238, The initial public offering price set forth on the inside cover page may be changed by the Underwriter. The Contract of Purchase provides that the Underwriter will purchase all of the Bonds if any are purchased. The obligation to make such purchase is subject to certain terms and conditions set forth in the Contract of Purchase. The Underwriter and Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, entered into an agreement (the Agreement ) which enables Pershing LLC to distribute certain new issue municipal securities underwritten by or allocated to the Underwriter, including the Bonds. Under the Agreement, the Underwriter will share with Pershing LLC a portion of the fee or commission paid to the Underwriter. The Underwriter may offer and sell the Series 2012 Bonds to certain dealers and others at a price lower than the public offering price set forth on the inside cover page hereof. The offering prices may be changed from time to time by the Underwriters

48 Rating Moody s and S&P are expected to assign ratings of Aa3 (on review for possible downgrade) and AA- (stable outlook), respectively, to the Series 2012 Bonds based upon the issuance of the Policy by AGM at the time of delivery of the Series 2012 Bonds, and have assigned underlying ratings of Baa1 and BBB (stable), respectively, to the Series 2012 Bonds. Such ratings reflect only the views of Moody s and S&P and any desired explanation of the significance of such rating should be obtained from Moody s and S&P, as applicable. Generally, a rating agency bases its ratings on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of such rating agency, circumstances so warrant. The District is not obligated to oppose any revision or withdrawal of ratings, and any such opposition might be ineffective. Any such change in or withdrawal of such ratings could have an adverse effect on the market price of the Series 2012 Bonds. The above ratings are not recommendation to buy, sell or hold the Series 2012 Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agency. See BOND INSURANCE herein for a discussion of recent rating actions taken with respect to AGM. Financial Interests The fees of Bond Counsel and the Special Tax Consultant are contingent upon issuance of the Series 2012 Bonds. From time to time, Bond Counsel represents the Underwriter on matters unrelated to the Series 2012 Bonds. Miscellaneous All of the preceding summaries of the Indenture, other applicable legislation, agreements and other documents are made subject to the provisions of such documents respectively, and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District for further information in connection therewith. This Official Statement does not constitute a contract with the purchasers of the Series 2012 Bonds. Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. References are made herein to certain documents and reports which are brief summaries thereof which do not purport to be complete or definitive and reference is made to such documents and reports for full and complete statements of the contents thereof. [Remainder of Page Intentionally Left Blank]

49 The execution and delivery of the Official Statement by the District have been duly authorized by the Board acting as the legislative body of the District. PALMDALE ELEMENTARY SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO By: /s/ Roger D. Gallizzi Authorized Officer of the Palmdale School District, as the legislative body of the Palmdale Elementary School District Community Facilities District No

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51 APPENDIX A RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX A Special Tax, determined as shown below, shall be levied each year by the Governing Board of the Palmdale Elementary School District (the District ) within the boundaries of Community Facilities District 90-1 (the CFD ): 1. Definitions. The following definitions shall apply: (a) Administrative Expenses means the costs incurred by the District for the costs associated with the creation of the CFD, issuance of bonds, determination of the amount of taxes, collection of taxes, payment of taxes, or costs otherwise incurred on order to carry out the authorized purposes of the CFD. (b) Annual Special Tax has the meaning given to that term in Section 3. (c) (d) (e) (f) (g) Assessable Space means all of the square footage within the perimeter of a residential structure, not including any carport, walkway, garage, overhang, patio, enclosed patio, detached accessory structure, or similar area as determined by the public agency issuing the building permit. Assessor s Parcel means a parcel of land designated on a map of the Los Angeles County Assessor and which parcel has been assigned a discrete identifying number. Board means the Board of the Palmdale Elementary School District. Bond Requirements means the amount necessary taking into consideration anticipated delinquencies (i) to pay principal of and interest on the bonds at that time outstanding in the CFD, (ii) to make any deposits required to be made with respect to any reserve fund created with respect to such bonds, and (iii) to pay for Administrative Expenses. Developed Property means any Assessor s Parcels in the CFD which are zoned for residential use and for which a building permit for a residential dwelling unit(s) has been issued by June 15th of the prior Fiscal Year; provided, however, that Developed Property shall not include an Assessor s Parcel for which a Prepayment Tax has been levied and collected pursuant to Section 4 hereof. (h) Fiscal Year means the period starting July 1 and ending the following June 30. (i) Ordinance means the Ordinance adopted by the Board, as the legislative body of the CFD, pursuant to California Government Code Section to levy the Special Tax. (j) Prepayment Tax has the meaning given to that term in Section 4. (k) (l) (m) School Facilities shall be those school facilities (including land) and other facilities which the CFD is authorized to acquire, lease and/or construct. Special Tax means the maximum special tax that may be levied on any Developed or Undeveloped Property for any Fiscal Year. Special Taxes include, collectively, Annual Special Taxes and Prepayment Taxes. Tax-Exempt Property means any property within the CFD which is not Developed or Undeveloped Property, and includes property owned or operated by a public agency. A-1

52 (n) Undeveloped Property means any Assessor s Parcel in the CFD which is Zoned for residential use and for which no building permit has been issued by June 15th of the previous Fiscal Year. (o) Undeveloped Property Tax has the meaning given to that term in Section 5. (p) Zoned means any lot or parcel of land used, zoned, allowed or designated for a residential purpose on the applicable General Plan, Specific Plan or Community Plan which the City of Palmdale or the County of Los Angeles utilizes and relies upon for planning purposes and for the approval of development. 2. Classification of Property. At the beginning of each Fiscal Year or at such other time as the Board deems desirable, beginning in 1990 the District shall cause each Assessor s Parcel in the CFD to be classified as one of the following: Developed Property, Undeveloped Property or Tax-Exempt Property. 3. Developed Property: Annual Special Tax. A Special Tax may be levied pursuant to this Section on Developed Property to the extent necessary to pay the Bond Requirements and to provide for the cost of constructing, leasing and/or acquiring the School Facilities. All Developed Property shall be subject to a maximum Special Tax (the Annual Special Tax ) in each Fiscal Year equal to $0.22 per square foot of Assessable Space; provided, however, that the Annual Special Tax rate of $0.22 per square foot of Assessable Space shall be increased in each Fiscal Year after the Fiscal Year ending on June 30, 1991 by an amount equal to 2% of the maximum Annual Special Tax rate for the prior Fiscal Year. 4. Alternative Prepayment Tax. In lieu of paying an Annual Special Tax on Developed Property, the owner of any Assessor s Parcel of Undeveloped Property may elect to prepay the Annual Special Tax (the Prepayment Tax ) (i) with respect to any Assessor s Parcel for which a building permit has been issued prior to the adoption of the Ordinance, within 30 days after the adoption of the Ordinance, and (ii) with respect to any Assessor s Parcel for which a building permit has not been issued prior to the adoption of the Ordinance, at or prior to the time of issuance of a building permit with respect to such Assessor s Parcel. The maximum Prepayment Tax rate which may be levied in each Fiscal Year is per square foot of Assessable Space; provided, however, that the maximum Prepayment Tax rate shall be increased in each Fiscal Year after the Fiscal Year ending on June 30, 1991 by an amount equal to 2% of the maximum Prepayment Tax rate for the prior Fiscal Year. Upon payment and satisfaction of any Prepayment Tax, the Assessor s Parcel with respect to which such Prepayment Tax has been levied and collected shall be characterized as Tax Exempt Property and shall not be subject to an Annual Special Tax. Prepayment Taxes levied and collected pursuant to this Section 4 may be used to pay the Bond Requirements and to provide for the cost of financing, constructing, leasing and/or acquiring the School Facilities. 5. Undeveloped Property Tax. A Special Tax may be levied pursuant to this section on Undeveloped Property (the Undeveloped Property Tax ) to the extent necessary to pay the Bond Requirements subject to the limitations set forth below. In the event that on July 1 of any Fiscal Year, the maximum projected revenues that can be generated from the levy of the Special Tax for such Fiscal Year on all Developed Property together with all other funds of the CFD legally available to pay the Bond Requirements, shall be insufficient to pay the Bond Requirements for such Fiscal Year due to anticipated delinquencies in the payment of Special Taxes, then all Undeveloped Property shall be subject to a Special Tax, for such Fiscal Year only, up to an amount not to exceed, per acre of Undeveloped Property (or a proportionate amount thereof for any portion of such acre), the lesser of (i) $750 or (ii) the aggregate amount of the actual delinquencies in the payment of Special Taxes for the prior Fiscal Year, divided by the total number of acres of Undeveloped Property in the District. 6. Calculation of the Special Tax on Developed Property and Undeveloped Property. A-2

53 At the beginning of each Fiscal Year, beginning in 1991, the Board, as the governing body of the CFD, shall cause the Special Tax to be calculated and levied as follows: First: For each parcel of Developed Property, the Board shall compute the amount of the Assessable Space and multiply that amount by the Annual Special Tax rate in effect for such Fiscal Year pursuant to Section 3 hereof. Second: If additional moneys are needed to pay the Bond Requirements after the maximum Annual Special Tax rate has been levied on all Developed Property pursuant to the first step, the CFD shall apply all legally available moneys of the CFD to the payment of the Bond Requirements. Third: If additional moneys are needed to pay the Bond Requirements after the first two steps have been completed, then the CFD shall levy an Undeveloped Special Tax on each parcel of Undeveloped Property in an amount sufficient to pay the Bonds Requirements up to the maximum amount specified in Section 5. Fourth: In addition, for all Undeveloped Property, the Board shall declare the Prepayment Tax rate in effect for such Fiscal Year at which time an owner can elect to prepay the Annual Special Tax. 7. Limitations. The Board shall not impose any Special Tax on any Tax-Exempt Property. 8. Appeals and Interpretation Procedure. Any taxpayer subject to the Special Tax claiming that the amount or application of the Special Tax has not been properly computed may file a notice with the District appealing the levy of the Special Tax. The Superintendent or designee will promptly review the appeal and, if necessary, meet with the applicant and decide the appeal. If the findings of the Superintendent or designee verify that the tax should be modified or changed, the Special Tax levy shall be corrected and, if applicable, a refund shall be granted. Any dispute over the decision of the Superintendent or designee shall be referred to the Board and the decision of the Board with respect to the Special Tax shall be final. Interpretation may be made by Resolution of the Board for purposes of clarifying any vagueness or uncertainty as it relates to the application of the Special Tax rate, or application of the method of apportionment, or the classification of properties or any definition applicable to the CFD. 9. Claims for Refund. All claims for refund of Special Taxes collected on behalf of the CFD shall be filed with the Superintendent of the District not later than one year after the date the Special Tax has been paid to the County. The claimant shall file the claim within this time period and the claim shall be finally acted upon by the Board as a prerequisite to the claimant bringing suit thereon. The procedure described in this Rate and Method of Apportionment of Special Tax shall be the exclusive claims procedure for claimants seeking a refund of Special Taxes. The decision of the Board in response to a claim for refund of Special Taxes shall be final. 10. Collection of Special Tax. The Annual Special Tax shall be collected each year upon the applicable Assessor s Parcels in the CFD in the same manner as ordinary ad valorem property taxes are collected and the Prepayment Tax shall be collected by the Board at the time of issuance of a building permit; provided, however, that the CFD may collect Special Taxes at a different time or in a different manner if necessary to meet its financial obligations. All Special Taxes shall be subject to the same penalties and lien priorities in the case of delinquency as is provided for ad valorem taxes. The District shall cause the actions required above to be done for each Fiscal Year in a timely manner to assure that the schedule of the Special Taxes to be collected are received by the Auditor of the County of Los Angeles for inclusion with billings for such ad valorem taxes for the applicable Fiscal Year. The Special Tax shall be levied and collected only so long as it is needed to pay the Bond Requirements or to pay to construct lease arid/or acquire the facilities of the CFD. In the event of a delinquency, the CFD will pursue foreclosure in a timely manner. A-3

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55 APPENDIX B SUMMARY OF THE INDENTURE The following is a summary of certain provisions of the Indenture. This summary reflects amendments to the Indenture contained in the Second Supplemental Indenture which are expected to take effect and are conditional upon the successful closing of the Series 2012 Bonds. These summaries do not purport to be comprehensive or definitive and are subject to all of the terms and provisions of the Indenture, to which reference is hereby made. Definitions Abandonment means a finding adopted by resolution of the Board that the District and the School District are ceasing to make every reasonable effort to complete the Series 2012 Project or otherwise failing to proceed with due diligence to complete the Series 2012 Project. Accreted Value means, with respect to any Capital Appreciation Bond or, prior to its Conversion Date, any Convertible Capital Appreciation Bond, as of any date of calculation, the sum of the initial principal amount thereof and the interest accrued thereon to such date of calculation, compounded from the date of initial issuance at the stated yield to maturity thereof on each February 1 and August 1, assuming in any such semiannual period that such Accreted Value increases in equal daily amounts on the basis of a 360-day year of twelve 30-day months. Act means the Mello-Roos Community Facilities Act of 1982, constituting Chapter 2.5, Division 2, Title 5 (commencing with Section 53311) of the California Government Code, as amended. Annual Debt Service means, for any Bond Year, the sum on the first day of such Bond Year of (1) the interest falling due on the Outstanding Bonds in such Bond Year, assuming that the Outstanding Serial Bonds are retired as scheduled and that the Outstanding Term Bonds are redeemed from sinking account payments as scheduled, and (2) the principal amount of Outstanding Bonds falling due by their terms in such Bond Year or required to be paid or redeemed from mandatory sinking fund payments in such Bond Year as provided in the Indenture or in any Supplemental Indenture, together with any premium thereon; provided, however, that Annual Debt Service shall not include (a) interest on Bonds which is to be paid from amounts constituting capitalized interest held in a fund or account solely available to pay such interest and invested in Federal Securities or held in cash, or (b) to the extent so unexpended, that portion of the proceeds of any Parity Bonds required to remain unexpended and to be held in escrow pursuant to the terms of a Supplemental Indenture invested in Federal Securities or an investment authorized in clauses (10) or (11) of the definition of Authorized Investments, provided that (i) projected interest earnings on such proceeds, plus such amounts, if any, deposited by the District in the Bond Service Fund, are sufficient to pay the interest due on such portion of the Parity Bonds so long as it is required to be held in escrow and (ii) the conditions for the release of such proceeds from escrow, insofar as they relate to the coverage requirement for Annual Special Taxes and satisfaction of the Reserve Requirement. are substantially similar to those for the issuance of Parity Bonds. Annual Special Taxes means the annual special taxes authorized to be levied in accordance with Section 3 of the Special Tax Formula on Developed Property lying within the District on behalf of the District pursuant to the election referred to in the recitals of the Indenture and in accordance with the Act. Annual Special Taxes shall not include any Prepayment Taxes (as defined in the Special Tax Formula). Assessable Space means all of the square footage within the perimeter of a residential structure, not including any carport, walkway, garage, overhang, patio, enclosed patio, detached accessory structure, or similar area as determined by the public agency issuing the building permit. Assessor s Parcel means a parcel of land designated on a map of the Los Angeles County Assessor and which parcel has been assigned a discrete identifying number. B-1

56 Authorized Denomination means, with respect to the Series 2012 Bonds, $5,000 and any integral multiple thereof. Authorized Investments means, if and to the extent permitted by law, the following: (1) (a) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ( United States Treasury Obligations ), (b) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (c) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (d) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated. (2) Federal Housing Administration debentures. (3) The listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America: (a) Federal Home Loan Mortgage Corporation (FHLMC) Participation certificates (excluding stripped mortgage securities which are purchased at prices exceeding their principal amounts) and Senior Debt obligations. (b) Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) Consolidated system-wide bonds and notes. (c) (d) (e) (f) (g) Federal Home Loan Banks (FHL Banks) Consolidated debt obligations. Federal National Mortgage Association (FNMA) Senior debt obligations and Mortgage-backed securities (excluding stripped mortgage securities which are purchased at prices exceeding their principal amounts). Student Loan Marketing Association (SLMA) Senior debt obligations (excluding securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date). Financing Corporation (FICO) Debt obligations. Resolution Funding Corporation (REFCORP) Debt obligations. (4) Unsecured certificates of deposit, deposit accounts, time deposits, and bankers acceptances (having maturities of not more than 30 days) of any bank the short-term obligations of which are rated A-l or better by S&P. (5) Deposits, the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation, in banks which have capital and surplus of at least $5 million. (6) Commercial paper (having original maturities of not more than 270 days) rated A-I+ by S&P and Prime-1 by Moody s. B-2

57 (7) State Obligations, which means: (a) (b) (c) Direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated `A3, or better, by Moody s and A, or better, by S&P or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated. Direct general short-term obligations of any state agency or subdivision or agency thereof described in (a) above and rated A-1+ by S&P and MIG-1 or better by Moody s. Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state, state agency or subdivision described in (a) above and rated AA, or better, by S&P and Aa, or better, by Moody s. (8) Pre-refunded municipal obligations rated AAA by S&P and Aaa by Moody s meeting the following requirements: (a) (b) (c) (d) (e) (f) the municipal obligations are (1) not subject to redemption prior to maturity or (2) the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions; the municipal obligations are secured by cash or United States Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations; the principal of and interest on the United States Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations ( Verification ); the cash or United States Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; no substitution of a United States Treasury Obligation shall be permitted except with another United States Treasury Obligation and upon delivery of a new Verification; and the cash or United States Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent. (9) Money market funds rated AAm or AAm-G, or better, by S&P. (10) Repurchase agreements: With (1) any domestic bank, or domestic branch of a foreign bank, the long term debt of which is rated at least A by S&P and Moody s; or (2) any broker-dealer with retail B-3

58 customers or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least A by S&P and Moody s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corporation; or (3) any other entity rated A or better by S&P and Moody s and acceptable to the Series 1999 Bond Insurer, provided that: (a) (b) (c) (d) (e) The market value of the collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody s to maintain an A rating in an A rated structured financing (with a market value approach); The Trustee, or a third party acting solely as agent therefor or for the District, (the Holder of the Collateral ) has possession of the collateral or the collateral has been transferred to the Holder of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor s books); The repurchase agreement shall state, and an opinion of counsel shall be rendered at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession); All other requirements of S&P in respect of repurchase agreements shall be met; The repurchase agreement shall provide that if during its term the provider s rating by either Moody s or S&P is withdrawn or suspended or falls below A- by S&P or A3 by Moody s, as appropriate, the provider must, at the direction of the District or the Trustee (who shall give such direction if so directed by the Series 1999 Bond Insurer), within 10 days of receipt of such direction, repurchase all collateral and terminate the agreement with no penalty or premium to the District or Trustee. Notwithstanding the above, if a repurchase agreement has a term of 270 days or less (with no evergreen provision), collateral levels need not be as specified in (A) above, so long as such collateral levels are 103% or better and the provider is rated at least A by S&P and Moody s. respectively. (11) Investment agreements with a domestic or foreign bank or corporation (other than a life or property casualty insurance company), the long-term debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, the claims paying ability, of the guarantor is rated at least AA by S&P and Aa by Moody s; provided that, by the terms of the investment agreement: (a) (b) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the construction fund, construction draws) on the Bonds; the invested funds are available for withdrawal without penalty or premium at any time upon not more than seven days prior notice; the District and the Trustee hereby agree to give or cause to be given notice B-4

59 in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; (c) (d) (e) the investment agreement shall state that it is the unconditional and general obligation of, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari passu with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors; the District or the Trustee receives the opinion of domestic counsel (which opinion shall be addressed to the District and the Series 1999 Bond Insurer) that such investment agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to, the Series 1999 Bond Insurer; the investment agreement shall provide that if during its term (i) the provider s rating by either S&P or Moody s falls below AA- or Aa3, respectively, the provider shall, at its option, within 10 days of receipt of publication of such downgrade, either (i) 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 District, the Trustee or a third party acting solely as agent therefor (the Holder of the Collateral ) collateral free and clear of any third-party liens or claims the market value of which collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody s to maintain an A rating in an A rated structured financing (with a market value approach); or (ii) repay the principal of and accrued but unpaid interest on the investment, and (ii) the provider s rating by either S&P or Moody s is withdrawn or suspended or falls below A- or A3, respectively, the provider must, at the direction of the District or the Trustee (who shall give such direction if so directed by the Series 1999 Bond Insurer), within 10 days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the District or Trustee; (f) (g) the investment agreement shall state and an opinion of counsel shall be rendered, in the event collateral is required to be pledged by the provider under the terms of the investment agreement, at the time such collateral is delivered, that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession); the investment agreement must provide that if during its term (i) the provider shall default in its payment obligations, the provider s obligations under the investment agreement shall, at the direction of the District or the Trustee (who shall give such direction if B-5

60 so directed by the Series 1999 Bond Insurer), be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or Trustee, as appropriate, and (ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. ( event of insolvency ), the provider s obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the District or Trustee, as appropriate. To the extent that any of the requirements concerning any Authorized Investments embody a legal conclusion, the Trustee shall be entitled to conclusively rely upon a certificate from an Authorized Officer of the District or an opinion of counsel to such party, that such requirement has been met. Authorized Officer of the District means the Superintendent of the School District, the Deputy Superintendent of the School District or any other person appointed by the Board. Balloon Indebtedness means indebtedness twenty-five percent (25%) or more of the principal of which matures on the same date and such amount is not required by the documents governing such indebtedness to be amortized by payment or redemption prior to such date. If any indebtedness consists partially of Variable Rate Indebtedness and partially of indebtedness bearing interest at a fixed rate, the portion constituting Variable Rate Indebtedness and the portion bearing interest at a fixed rate shall be treated as separate issues for purposes of determining whether any such indebtedness constitutes Balloon Indebtedness. Bond Counsel means an attorney at law or a firm of attorneys selected by the District of nationally recognized standing in matters pertaining to the tax-exempt nature of interest on bonds issued by states and their political subdivisions duly admitted to the practice of law before the highest court of any state of the United States of America or the District of Columbia. Bond Insurer means, as to each Series of Bonds, the institution, if any, insuring the payment of principal and interest on such Series of Bonds. Bond Register means the books which the Trustee shall keep or cause to be kept on which the registration and transfer of Bonds shall be recorded. Bond Requirements means the amount necessary taking into consideration anticipated delinquencies (i) to pay principal of and interest on the bonds at that time outstanding in the District, and (ii) to make any deposits required to be made with respect to any reserve fund created with respect to such bonds. Bond Service Fund means the Bond Service Fund established pursuant to the Master Indenture. Bond Subsidy Payments means, with respect to the Series 2011A QSCB Bonds, the amounts which are payable by the Federal government under Section 6431 of the Code, which the District has elected to receive under Section 54AA(g)(1) of the Code. Bond Year means the period of twelve consecutive months beginning on August 2 in any year during which Bonds are or will be Outstanding; provided, however, that (A) the first Bond Year with respect to the Series 1999 Bonds shall begin on the date the Series 1999 Bonds are delivered and shall end on the next succeeding August 1, (B) the first Bond Year with respect to the Series 2011 Bonds shall begin on the date the Series 2011 Bonds are delivered and shall end on the next succeeding August 1, and the final Bond Year with respect to the Series 2011 Bonds shall begin on August 2, 2027 and end on June 1, 2027, (c) the first Bond Year with respect to the Series 2012 Bonds shall begin on the date the Series 2012 Bonds are delivered and shall end on the next succeeding August 1, and (D) the first Bond Year with B-6

61 respect to any additional series of Bonds secured on a parity with the Bonds shall be designated in the Supplemental Indenture relating to such Bonds. Bondowner or Owner means the person or persons in whose name or names any Bond is registered. Bonds mean the Palmdale Elementary School District Community Facilities District No Special Tax Bonds issued pursuant to the Indenture, including the Series 2012 Bonds, the Series 2011 Bonds, the Series 1999 Bonds, and any additional bonds issued under the Indenture. Business Day means any day other than a Saturday, Sunday, or a day on which banks in the State or the State of New York are authorized to be closed. Capital Appreciation Bonds means Bonds designated as such in the Indenture or a Supplemental Indenture and on which interest accrues but which interest is payable only at maturity or upon prior redemption. Capitalized Interest Subaccount means any Capitalized Interest Subaccount created in the Interest Account in the Bond Service Fund, including the Capitalized Interest Subaccounts established for each Series of the Series 2012 Bonds. Certificate of Completion means, with respect to any Series of Bonds, the notice filed with the Trustee by an authorized officer of the District, stating that the portion of the Project relating to such Series of Bonds has been substantially completed. Code means the Internal Revenue Code of 1986, as amended. Construction Period Termination Date means, with respect to any Series of Bonds, the earlier of (a) payment or reimbursement of the Project Costs with respect to the Project relating to such Series of Bonds and delivery to the Trustee of the Certificate of Completion, or (b) Abandonment of the Project relating to such Series of Bonds and delivery to the Trustee of notice of Abandonment. Conversion Date shall mean the date on which any Convertible Capital Appreciation Bond ceases to accrete in value and on which such Convertible Capital Appreciation Bond begins to accrue current interest based upon the Conversion Value thereof. Conversion Value means the Accreted Value of the Convertible Capital Appreciation Bonds at the Conversion Date. Convertible Capital Appreciation Bonds means the Series 2012 Bonds designated as such as provided in the Second Supplemental Indenture or any other Supplemental Indenture. County means the County of Los Angeles, California. Current Interest Bonds means any Bonds which are not designated as Capital Appreciation Bonds or Convertible Capital Appreciation Bonds. Debt Service Developed Property means, as calculated in each Fiscal Year, each parcel of Developed Property for which a certificate of occupancy has been issued by the City of Palmdale or the County, as applicable, and either (A) is owned of record, in the best judgment of the District, by one or more natural persons as determined by reference to the most recent equalized assessment roll prepared by the County Auditor, or (B) has been assigned the land use designation of apartment as determined by reference to the records of the County. No parcel of Developed Property that has qualified as Debt Service Developed Property shall lose its designation as such as a result of a subsequent change in circumstances. B-7

62 Depository means DTC or if (a) the then Depository resigns from its functions as securities depository of the Bonds, or (b) the District discontinues use of the Depository pursuant to the Indenture, any other securities depository which agrees to follow procedures required to be followed by a securities depository in connection with the Bonds and which is selected by the District. Developed Property means any Assessor s Parcels in the District which are zoned for residential use and for which a building permit for a residential dwelling unit(s) has been issued by June 15th of the prior Fiscal Year, provided, however, that Developed Property shall not include an Assessor s Parcel for which a Prepayment Tax has been levied and collected pursuant to Section 4 of the Special Tax Formula. District means the Palmdale Elementary School District Community Facilities District No EMMA means the Electronic Municipal Market Access website of the MSRB, currently located at Federal Securities mean direct obligations issued by the United States Treasury, obligations the timely payment of interest on and principal of which is unconditionally guaranteed by the United States of America (including obligations issued or held in book-entry on the books of the Department of the Treasury of the United States of America), evidences of ownership of proportionate interests in future interest and principal payments on such direct obligations held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and such underlying obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated or Pre-Refunded Municipal Obligations. First Supplemental Indenture means the Supplemental Indenture No. 1, dated as of July 1, 2011 by and between the District and the Trustee relating to the Series 2011 Bonds. Fiscal Year means the period beginning on July 1 in any year and ending on the following June 30 or any other fiscal year established by the District. Gross Taxes mean (i) the amount of all Special Taxes and (ii) proceeds from the sale of property collected pursuant to the foreclosure provisions of the Act and the Indenture or any Supplemental Indenture for the delinquency of such Special Taxes. Indenture means the Master Indenture as amended and supplemented by the Supplemental Indenture. Independent Financial Consultant means a financial consultant or firm of such consultants generally recognized to be well qualified in the financial consulting field, appointed and paid by the District, who, or each of whom: (1) is in fact independent and not under the domination of the District; (2) does not have any substantial interest, direct or indirect, in the District; and (3) is not connected with the District as a member, officer or employee of the District, but who, or each of whom, may be regularly retained to make annual or other reports to the District. Insolvency Proceeding means any proceeding commenced under the United States Bankruptcy Code or other applicable bankruptcy, insolvency, receivership, rehabilitation or similar law. Interest Payment Date means with respect to (i) any Current Interest Bond, February 1 and August 1 in each year and, without duplication, the maturity date thereof, (ii) any Capital Appreciation B-8

63 Bond, the maturity date thereof, and (iii) any Convertible Capital Appreciation Bond, the first February 1 and August 1 after the applicable Conversion Date, and each February 1 and August 1 thereafter. IRS means the Internal Revenue Service. Late Payment Rate means, with respect to the Series 1999 Reserve Policy, the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by The Chase Manhattan Bank (N.A.) at its principal office in the City of New York, as its prime or base lending rate ( Prime Rate ) (any change in such Prime Rate to be effective on the date such change is announced by The Chase Manhattan Bank (N.A.)) plus 3%. and (ii) the then applicable highest rate of interest on the Series 1999 Bonds, and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event The Chase Manhattan Bank (N.A.) ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base leading rate of such national bank as the Series 1999 Bond Insurer shall specify. Master Indenture means the Indenture dated as of December 1, 1999 between the District and the Trustee, under which the Bonds are authorized and secured. date. Maturity Amount means the Accreted Value of any Capital Appreciation Bond on its maturity Maximum Annual Debt Service as computed from time to time with respect to Bonds then Outstanding, means the maximum amount of principal and interest becoming due in the then current or any future Fiscal Year, calculated by the District or by an Independent Financial Consultant as provided in this definition. For purposes of calculating Maximum Annual Debt Service, the following assumptions shall be used to calculate the principal and interest becoming due in any Fiscal Year: (i) in determining the principal amount due in each year, payment shall (unless a different subsection of this definition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any scheduled redemption of Bonds on the basis of accreted value. and for such purpose, the redemption payment shall be deemed a principal payment; (ii) if any of the Outstanding Series of Bonds constitute Balloon Indebtedness or Balloon Indebtedness and Variable Rate Indebtedness or if Bonds then proposed to be issued would constitute Balloon Indebtedness or Balloon Indebtedness and Variable Rate Indebtedness, then, for purposes of determining Maximum Annual Debt Service, such amounts as constitute Balloon Indebtedness shall be treated as if the principal amount of such Bonds were to be amortized in substantially equal annual installments of principal and interest over a term of 25 years; the interest rate used for such computation shall be 12% per annum; (iii) if any Outstanding Bonds constitute Tender Indebtedness or if Bonds then proposed to be issued would constitute Tender Indebtedness, then for purposes of determining the amounts of principal and interest due in any Fiscal Year on such Bonds, the options or obligations of the owners of such Bonds to tender the same for purchase or payment prior to their stated maturity or maturities shall be treated as a principal maturity (but any such amount treated as a maturity shall not be eligible for treatment as Balloon Indebtedness) occurring on the first date on which owners of such Bonds may or are required to tender such Bonds, except that any such option or obligation to tender Bonds shall be ignored and not treated as a principal maturity if (1) such Bonds are rated in one of the two highest long-term rating categories (without reference to gradations such as plus or minus ) by Moody s, if Moody s is then maintaining a rating on Outstanding Bonds, and by S&P, if S&P is then maintaining a rating on Outstanding Bonds, or such Bonds are rated in the highest short-term, note or commercial paper rating categories by Moody s, if Moody s is then maintaining a rating on Outstanding Bonds and by S&P. if S&P is B-9

64 then maintaining a rating on Outstanding Bonds, and (2) any obligation, if any, the District may have. other than its obligations on such Bonds, to reimburse any person for having extended a credit or liquidity facility or a bond insurance policy, or similar arrangement, shall either be subordinated to the obligation of the District on the Bonds or be an obligation incurred under and meeting the tests and conditions for the issuance of Parity Bonds; (iv) if any Bonds issued, or proposed to be issued, constitute Variable Rate Indebtedness, the interest rate on such Bonds shall be assumed to be the maximum interest rate specified in any credit or liquidity facility or other arrangement for the tender of such Bonds, or if no such facility or arrangement exists, the maximum stated interest rate which may be borne by such Bonds; (v) if moneys or Federal Securities have been irrevocably deposited with and are held by the Trustee or another fiduciary bank to be used to pay principal and/or interest on specified Bonds, then the principal and/or interest to be paid from such moneys, Federal Securities or from the earnings thereon shall be disregarded and not included in calculating Maximum Annual Debt Service; and (vi) if the Bonds are Paired Obligations, the interest rate on such Bonds shall be the resulting linked rate or effective fixed interest rate to be paid by the District with respect to such Paired Obligations. Moody s means Moody s Investors Service, or its successors or assigns. MSRB means the Municipal Securities Rulemaking Board or any other entity designated or authorized by the SEC to receive reports pursuant to SEC Rule 15c2-12. Until otherwise designated by the MSRB or the SEC, filings with the MSRB are to be made through EMMA. Nonarbitrage Certificate means, as the context requires, a Tax and Nonarbitrage Certificate of the District delivered on the date of issuance and delivery of a Series of Bonds. Outstanding means all Bonds theretofore issued by the District except: (1) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation: (2) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture or any Supplemental Indenture; (3) From and after the date fixed for redemption, Bonds or portions thereof designated for redemption for which notice of redemption has been duly given and the amount necessary for redemption has been made available for that purpose; and (4) Bonds for the payment of which funds or eligible securities in the necessary amount shall have theretofore been deposited with the Trustee in accordance with the Indenture (whether on or prior to the maturity or redemption date of such Bonds). Paired Obligations means any indebtedness or portion of indebtedness designated as Paired Obligations in the Supplemental Agreement or other document authorizing the issuance or incurrence thereof, which are simultaneously issued or incurred (i) the principal of which is of equal amount maturing and to be redeemed (or canceled after acquisition thereof) on the same dates and in the same amounts, and (ii) the interest rates on which, taken together, result in an irrevocably fixed interest rate obligation of the District for the terms of such indebtedness. B-10

65 Parity Bonds mean all bonds, notes or other similar evidences of indebtedness heretofore or hereafter issued, payable out of the Annual Special Taxes and which, as provided in the Indenture or any Supplemental Indenture, rank on a parity with the Series 1999 Bonds and the Series 2011 Bonds. Preference Claim means any claim in connection with an Insolvency Proceeding seeking the avoidance as a preferential transfer of any payment of principal of, or interest on, the Series 1999 Bonds. Prepayment Tax means the alternative prepayment tax available to an owner of an Assessor s Parcel of Undeveloped Property as set forth in the Master Indenture. Pre-Refunded Municipal Obligations means pre-refunded municipal obligations rated AAA and Aaa by S&P and Moody s, respectively. Principal, principal or principal amount means, as of any date of calculation, with respect to (i) any Current Interest Bond, the principal amount thereof, (ii) any Capital Appreciation Bond, the Accreted Value thereof, and (iii) any Convertible Capital Appreciation Bond, the Accreted Value thereof. Principal Corporate Trust Office means the principal corporate trust office of the Trustee located at 633 W. 5th Street, 12th Floor. Los Angeles, California or such other address as designated by the Trustee. Project means the acquisition, construction and/or leasing of school facilities and equipment and other facilities to be used in conjunction with school facilities as more particularly described in the Resolution of Formation. Project. Project Costs mean all expenses of and incidental to the acquisition and/or construction of the Qualified School Construction Bonds means the Series 2011A QSCB Bonds issued under the First Supplemental Indenture, which are designated as direct-pay qualified school construction bonds under Section 54A of the Code. Date. Record Date means the fifteenth calendar day of the month preceding any Interest Payment Redemption Fund means the Redemption Fund established pursuant to the Master Indenture. Reserve Fund means the Reserve Fund established pursuant to the Master Indenture. Reserve Requirement means, with respect to the Series 2012A Bonds, (i) as of any date of calculation, an amount equal to the lowest of: (i) 10% of the original aggregate principal amount of the Series 2012A Bonds, (ii) Maximum Annual Debt Service on the Series 2012A Bonds, or (iii) 125% of the average Annual Debt Service on the Outstanding Series 2012A Bonds. For purposes of determining if the amount on deposit in the Reserve Account meets the Reserve Requirement for the Series 2012A Bonds, any Surety Instrument deposited with the Trustee shall be deemed to be a deposit in the amount of the policy available to be drawn or the amount available to be drawn of the credit facility provided. With respect to the Series 2012B Bonds, Reserve Requirement means (i) as of any date of calculation, an amount equal to the lowest of: (i) 10% of the original aggregate principal amount of the Series 2012B Bonds, (ii) Maximum Annual Debt Service on the Series 2012B Bonds, or (iii) 125% of the average Annual Debt Service on the Outstanding Series 2012B Bonds. For purposes of determining if the amount on deposit in the Reserve Account meets the Reserve Requirement for the Series 2012B Bonds, any Surety Instrument deposited with the Trustee shall be deemed to be a deposit in the amount of the policy available to be drawn or the amount available to be drawn of the credit facility provided. B-11

66 With respect to the Series 2011A QSCB Bonds, Reserve Requirement means, as of any date of calculation, an amount equal to the lowest of: (i) 10% of the original aggregate principal amount of the Series 2011A QSCB Bonds, (ii) Maximum Annual Debt Service on the Series 2011A QSCB Bonds, or (iii) 125% of the average Annual Debt Service on Outstanding Series 2011A QSCB Bonds. The Reserve Requirement with respect to the Series 2011A QSCB Bonds is subject to the limitation that it shall never exceed an amount which would, in the opinion of Bond Counsel, be determined to be a reasonably required reserve fund within the meaning of the Code and the rulings issued by the United States Department of the Treasury. With respect to the Series 2011B Taxable Non-Subsidy Bonds, Reserve Requirement means, as of any date of calculation, an amount equal to the lowest of: (i) 10% of the original aggregate principal amount of the Series 2011B Taxable Non-Subsidy Bonds, (ii) Maximum Annual Debt Service on the Series 2011B Taxable Non-Subsidy Bonds, or (iii) 125% of the average Annual Debt Service on Outstanding Series 2011B Taxable Non-Subsidy Bonds. With respect to the Series 1999 Bonds, Reserve Requirement means, as of any date of calculation, an amount equal to the lowest of: (i) 10% of the original aggregate principal amount of the Series 1999 Bonds, (ii) Maximum Annual Debt Service on the Series 1999 Bonds, or (iii) 125% of the average Annual Debt Service on the Outstanding Series 1999 Bonds. The Reserve Requirement with respect to the Series 1999 Bonds is subject to the limitation that it shall never exceed an amount which would, in the opinion of Bond Counsel, be determined to be a reasonably required reserve fund within the meaning of the Code and the rulings issued by the United States Department of the Treasury. For purposes of determining if the amount on deposit in the Reserve Account meets the Reserve Requirement for the Series 1999 Bonds, any Surety Instrument deposited with the Trustee shall be deemed to be a deposit in the amount of the policy available to be drawn or the amount available to be drawn of the credit facility provided. With respect to any other Series of Bonds, Reserve Requirement shall have the meaning given to such term in the Supplemental Indenture pursuant to which such Series of Bonds is issued. With respect to all Bonds in the aggregate, Reserve Requirement means the sum of the Reserve Requirements for each Outstanding Series of Bonds. Resolution of Formation means Resolution No adopted by the Board on October 16, 1990, as amended by Resolution No adopted by the Board on October 29, 1990, pursuant to which the School District formed the District. S&P means Standard and Poor s Ratings Services, or its successors or assigns. School District means the Palmdale School District. School Facilities shall be those school facilities (including land) and other facilities which the District is authorized to acquire, lease and/or construct. SEC means the United States Securities and Exchange Commission. Second Supplemental Indenture means the Supplemental Indenture No. 2, dated as of September 1, 2012, between the District and the Trustee. Serial Bonds mean Bonds for which no mandatory sinking account payments are provided in the Indenture or in any Supplemental Indenture. Series means, when used with reference to the Bonds, all of the bonds authenticated and delivered on original issuance and identified pursuant to the Indenture or any Supplemental Indenture B-12

67 authorizing Parity Bonds, and any Bonds thereafter authenticated and delivered in lieu of or in substitution for such Bonds pursuant to the Indenture or any Supplemental Indenture. Series 1999 Bond Insurance Policy means the municipal bond insurance policy issued by the Series 1999 Bond Insurer guaranteeing the scheduled payment of principal of and interest on the Series 1999 Bonds. Series 1999 Bond Insurer means, with respect to the Series 1999 Bonds, Financial Security Assurance Inc., a New York stock insurance company, or any successor thereto. The Series 1999 Bond Insurer shall constitute a provider of a Surety Instrument as contemplated in the Indenture. Series 1999 Bonds mean the Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series Series 1999 Policy Costs means, with respect to the Series 1999 Reserve Policy, repayment of draws and payment of expenses and accrued interest thereon at the Late Payment Rate. Series 1999 Reserve Policy means the municipal bond debt service reserve insurance policy issued by the Series 1999 Bond Insurer guaranteeing principal of and interest on the Series 1999 Bonds to a maximum amount equal to the amount of the Reserve Requirement with respect to the Series 1999 Bonds. Series 1999 Surety Instrument means (i) a letter of credit or a line of credit issued by a bank or other financial institution with long-term debt obligations which are rated in the three highest rating categories (without regard to modifiers) by Moody s and S&P, but in no event less than the rating on the Series 1999 Bonds (if the Series 1999 Bonds are then rated), or (ii) a surety bond or an insurance policy issued by an insurance company whose claims paying ability is rated in the three highest rating categories by Moody s and S&P. Series 2011 Bonds means the Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2011 consisting of the Series 2011A QSCB Bonds and the Series 2011B Taxable Non-Subsidy Bonds. Series 2011A QSCB Bonds means the Bonds issued under the Indenture and designated as Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2011A (Direct Pay Qualified School Construction Bonds). Series 2011B Taxable Non-Subsidy Bonds means the Bonds issued under the Indenture and designated as Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2011B (Taxable Non-Subsidy). Series 2012 Bonds means the Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012 consisting of the Series 2012A Bonds and the Series 2012B Refunding Bonds. Series 2012 Bond Insurance Policy means the insurance policy issued by the Series 2012 Bond Insurer guaranteeing the scheduled payment of principal of and interest on the Series 2012 Bonds when due. Series 2012 Bond Insurer means, with respect to the Series 2012 Bonds, Assured Guaranty Municipal Corp., a New York stock insurance company, or any successor thereto or assignee thereof. The Series 2012 Bond Insurer shall constitute a Bond Insurer as such term is defined and used in the Master Indenture. B-13

68 Series 2012 Closing Date means September 27, 2012 or such earlier or later date as an Authorized Officer of the District may establish, which shall be the date on which the Series 2012 Bonds are delivered by the District to the original purchaser thereof. Series 2012 Project means the buildings, improvements, and land described in Exhibit E attached to the Indenture. Series 2012A Bonds means the Bonds issued under the Indenture and designated as Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A. Series 2012A Costs of Issuance mean the costs of issuing the Series 2012A Bonds, including but not limited to, all printing and document preparation expenses in connection with this Second Supplemental Indenture, the Series 2012A Bonds and the Official Statement pertaining to the Series 2012A Bonds and any and all other agreements, instruments, certificates or other documents issued in connection therewith; legal fees and expenses of counsel with respect to issuing the Series 2012A Bonds, financing the Series 2012 Project and preparing disclosure materials with respect to Series 2012A Bonds; any computer and other expenses incurred in connection with the Series 2012A Bonds; the initial fees and expenses of the Trustee and its counsel, if any (including without limitation, origination fees and first annual fees payable in advance); and other fees and expenses incurred in connection with the issuance of the Series 2012A Bonds or the implementation of the financing for the Series 2012 Project, to the extent such fees and expenses are approved by the District, provided that any Series 2012A Costs of Issuance for the Series 2012A Bonds that are paid from the proceeds of the Series 2012A Bonds shall not exceed one and a half percent (1.5%) of the aggregate principal amount of such Series 2012A Bonds. Series 2012B Costs of Issuance mean the costs of issuing the Series 2012B Bonds, including but not limited to, all printing and document preparation expenses in connection with this Second Supplemental Indenture, the Series 2012B Bonds and the Official Statement pertaining to the Series 2012B Bonds and any and all other agreements, instruments, certificates or other documents issued in connection therewith; legal fees and expenses of counsel with respect to issuing the Series 2012B Bonds, preparing disclosure materials with respect to Series 2012B Bonds; any computer and other expenses incurred in connection with the Series 2012B Bonds; the initial fees and expenses of the Escrow Agent and its counsel, if any(including without limitation, origination fees and first annual fees payable in advance); the fees and expenses of the Verification Agent; the initial fees and expenses of the Trustee and its counsel, if any (including without limitation, origination fees and first annual fees payable in advance); and other fees and expenses incurred in connection with the issuance of the Series 2012B Bonds, to the extent such fees and expenses are approved by the District, provided that any Series 2012B Costs of Issuance for the Series 2012B Bonds that are paid from the proceeds of the Series 2012B Bonds shall not exceed one and a half percent (1.5%) of the aggregate principal amount of such Series 2012B Bonds. Series 2012B Refunding Bonds means the Bonds issued under the Indenture and designated as Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B. Series 2012A Reserve Account means the Series 2012A Reserve Account established pursuant to the Second Supplemental Indenture. Series 2012B Reserve Account means the Series 2012B Reserve Account established pursuant to the Second Supplemental Indenture. Series 2012B Reserve Policy means the municipal bond debt service reserve insurance policy issued by the Series 2012 Bond Insurer, guaranteeing principal of and interest on the Series 2012B Refunding Bonds to a maximum amount equal to $290,750, which, when combined proceeds of the Series 2012B Refunding Bonds deposited into the Series 2012B Reserve Account pursuant to the Indenture, is calculated to be the amount of the Reserve Requirement with respect to the Series 2012B Refunding Bonds. The Series 2012B Reserve Policy shall constitute a Surety Instrument as defined in the Master Indenture. B-14

69 Special Tax Formula means the Rate and Method of Apportionment of Special Tax attached as APPENDIX A to this Official Statement. Special Tax Fund means the Special Tax Fund established pursuant to the Master Indenture. Special Taxes mean the sum of (i) the Annual Special Taxes and (ii) the undeveloped property taxes authorized to be levied in accordance with Section 5 of the Special Tax Formula on property lying within the District on behalf of the District pursuant to the election referred to in the recitals of the Indenture and in accordance with the Act. Special Taxes shall not include any Prepayment Taxes (as defined in the Special Tax Formula). Supplemental Indenture means any indenture supplemental to the Master Indenture executed in accordance with Article IX thereof, including the First Supplemental Indenture and Second Supplemental Indenture. Surety Instrument means with respect to the Series 1999 Bonds, a Series 1999 Surety Instrument, and with respect to any other Series of Bonds, such surety instrument as shall be defined in the Supplemental Indenture relating thereto. Tax Certificate means the Tax and Nonarbitrage Certificate of the District delivered in connection with the Series 2012 Bonds. The Tax Certificate shall constitute a Nonarbitrage Certificate as defined in the Master Indenture. Tax-Exempt Property means any property within the CFD which is not Developed or Undeveloped Property, and includes property owned or operated by a public agency. Tender Indebtedness means any indebtedness or portions of indebtedness a feature of which is an option, on the part of the holders of such indebtedness, or an obligation, under the terms of such indebtedness, to tender all or a portion of such indebtedness to the District, the Trustee or other fiduciary or agent for payment or purchase and requiring that such indebtedness or portions of indebtedness be purchased if properly presented. Term Bonds means Bonds which are payable on or before their specified maturity dates from mandatory sinking account payments established for that purpose and calculated to retire such Bonds on or before their specified maturity date. Transfer Amount means, with respect to (i) any Outstanding Current Interest Bond, the aggregate principal amount thereof, (ii) any Outstanding Capital Appreciation Bond, the Maturity Amount thereof, and (iii) any Outstanding Convertible Capital Appreciation Bond, the Conversion Value thereof. Trustee means U.S. Bank National Association or any successor trustee appointed pursuant to the Indenture. Undeveloped Property means any Assessor s Parcel in the District which is zoned for residential use and for which no building permit has been issued by June 15th of the previous fiscal year. Variable Rate Indebtedness means any portion of indebtedness the interest rate on which is not established at the time of incurrence of such indebtedness and has not at some subsequent date been established at a single numerical rate for the entire term of the indebtedness. Funds and Accounts The Indenture establishes the following funds and accounts: B-15

70 Special Tax Fund. The Trustee shall hold the Special Tax Fund. In each Bond Year, the District is required to deposit all Gross Taxes with the Trustee for deposit in the Special Tax Fund on each date on which it receives them from the County until such time as the amounts on deposit in the Special Tax Fund, including interest earnings thereon, equal the aggregate amounts required to be paid as set forth in subsections (i), (ii) and (iii) below in such Bond Year. On or before the fifteenth day preceding each February 1 and August 1, with respect to the transfers pursuant to (i) below, or five Business Days preceding each Interest Payment Date, with respect to transfers pursuant to (ii) and (iii) below, the Trustee is required to withdraw from the Special Tax Fund the amount necessary to make the following deposits or payments in the following order of priority: (i) To the Bond Service Fund, an amount necessary, together with amounts on deposit therein and available for such purpose, to pay the Annual Debt Service coming due and payable on such Interest Payment Date with respect to the Outstanding Bonds; and (ii) To the Reserve Fund, a amount necessary to maintain the Reserve Requirement therein; (iii) To the Series 1999 Bond Insurer, the Series 2011 Bond Insurer, and the Bond Insurer for any subsequent Series of Bonds, pro rata based on the amounts drawn on their respective policies, to the extent of any amount due if not paid pursuant to (i) or (ii) above. The Trustee shall transfer all amounts on deposit in the Special Tax Fund on August 2 of each year to the District to be used for any lawful purpose. Costs of Issuance Fund. The moneys on deposit in each Costs of Issuance Account relating to the Series 2012 Bonds shall be held by the Trustee and utilized from time to time to pay the Series 2012 Costs of Issuance of the Series of Series 2012 Bonds to which the Series 2012 Costs of Issuance Account relates. There will be deposited in each Series 2012 Costs of Issuance Account in the Series 2012 Costs of Issuance Fund that portion of the proceeds of the Series 2012 Bonds required to be deposited therein pursuant to the Second Supplemental Indenture. The Trustee shall disburse money from each Series 2012 Costs of Issuance Account on such dates and in such amounts as are necessary to pay Series 2012 Costs of Issuance, in each case, promptly after receipt of, and in accordance with, a written request of an Authorized Officer of the District in the form attached to the Second Supplemental Indenture, together with invoices therefor. On the date which is six months following the Series 2012 Closing Date, or upon the earlier written request of an Authorized Officer of the District, all amounts (if any) remaining in the Series 2012A Costs of Issuance Account shall be transferred by the Trustee to the Series 2012A Construction Account of the Construction Fund, all amounts (if any) remaining in the Series 2012B Costs of Issuance Account shall be transferred to the Series 2012B Interest Subaccount and the Series 2012B Costs of Issuance Fund shall be closed. Bond Service Fund. The moneys transferred to the Bond Service Fund shall be held by the Trustee and are to be used for paying all of the interest and all of the principal (including mandatory sinking fund payments) on all Outstanding Bonds when due. The Trustee shall transfer any moneys remaining in the Bond Service Fund to the Special Tax Fund when there are no longer Bonds or Parity Bonds Outstanding. In the Interest Account, an amount which, when added to the amount then contained in the Interest Account and available to pay interest on the Bonds in the applicable Bond Year, equals the aggregate amount of the interest becoming due and payable on the Outstanding Bonds on the next Interest Payment Date. If the Bonds have been accelerated pursuant to the Indenture, interest shall be due and payable on the unpaid Principal Amount of all Outstanding Bonds. All moneys in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds). B-16

71 The Trustee shall establish a separate Interest Subaccount within the Interest Account in the Bond Service Fund for each Series of Bonds, each of which shall be designated the Series Interest Subaccount. Any moneys in a Series Interest Subaccount shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Series of Bonds to which the Series Interest Subaccount relates as it shall become due and payable (including accrued interest on any such Bonds). If the amount available to pay interest on the Bonds on any Interest Payment Date is not sufficient to pay in full all interest due and payable on such Interest Payment Date, then the Trustee shall apply (i) available amounts on deposit in a Capitalized Interest Subaccount to the payment of interest on the Series of Bonds for which such amounts were pledged ratably according to the interest then due on such Series of Bonds, (ii) all other such amounts on deposit in separate subaccounts to the payment of interest on the applicable Series of Bonds, and (iii) all other such amounts to the payment of interest ratably, according to the amounts of interest then due (after application of any capitalized interest) without any discrimination or preference, provided that amounts in a Series Reserve Account may only be used to pay interest on the Series of Bonds to which the Series Reserve Account relates. In the Principal Account, an amount which, when added to the amount then contained in the Principal Account, equals the principal becoming due and payable on the Outstanding Bonds, by reason of maturity, mandatory redemption pursuant to the Indenture or any Supplemental Indenture or acceleration pursuant to the Indenture, on the next Interest Payment Date. All moneys in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of the Bonds as it shall become due and payable at maturity or upon mandatory sinking fund redemption. The Trustee shall establish a separate Principal Subaccount within the Principal Account in the Bond Service Fund for each Series of Bonds, each of which shall be designated the Series Principal Subaccount. Any moneys in a Series Principal Subaccount shall be used and withdrawn by the Trustee solely for the purpose of paying the principal of the Series of Bonds to which the Series Principal Subaccount relates as it shall become due and payable or upon mandatory sinking fund redemption. If the amount available shall not be sufficient to pay in full all the principal of the Bonds due and payable, then to the payment of such principal, ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference, provided that amounts transferred from a Series Reserve Account to a Series Principal Subaccount may only be used to pay interest on the Series of Bonds to which the Series Reserve Account relates. In the event there are no longer Bonds or Parity Bonds Outstanding, any moneys remaining in the Bond Service Fund shall be transferred to the Special Tax Fund at the written request of the District. Reserve Fund. The Trustee shall establish a separate Reserve Account within the Reserve Fund for each Series of Bonds. Moneys in separate Series Reserve Accounts in the Reserve Fund shall be held by the Trustee and are to be used solely for the purpose of paying the principal of and interest on the Series of Bonds to which such account relates if the amounts in the Bond Service Fund are insufficient to pay the principal of and interest on such Series of Bonds when due. If on February 2 or August 2 of each year, the amount on deposit in a Series Reserve Account is in excess of the Reserve Requirement for the Series of Bonds for which the Series Reserve Account relates, the Trustee shall transfer such excess amount to the Bond Service Fund. Moneys on deposit in any Series Reserve Account shall be transferred to the Bond Service Fund upon the final maturity of the related Series of Bonds and applied to the payment of the principal of and interest on the last Outstanding maturity of such Series of Bonds. The District reserves the right initially to deposit into any Series Reserve Account therein other than any Series Reserve Account related to the Series 2011 Bonds, and thereafter to substitute, at any time and from time to time, a Surety Instrument in substitution for or in place of all or any portion of the Reserve Requirement for a Series of Bonds, under the terms of which the Trustee is entitled to draw B-17

72 amounts when required for the purposes of the Indenture. Notwithstanding anything else in the Indenture or in the First Supplemental Indenture, a Surety Instrument may not be deposited into any Series Reserve Account in the Reserve Fund securing the Series 2011 Bonds. Upon deposit by the District with the Trustee of any such Surety Instrument, at the written direction of the District, (i) the Trustee shall transfer to the Construction Fund for the Series to which the Series Reserve Account relates from the balance then in the Series Reserve Account an amount equal to the stated amount of such Surety Instrument, or (ii) the Trustee shall transfer such amount to the District for any other use; provided, however, that the District first delivers to the Trustee an opinion of Bond Counsel; and provided further, that the prior written consent of the Series 1999 Bond Insurer shall have been obtained in connection with the delivery of a Surety Instrument other than the Series 1999 Reserve Policy. If a draw on a Series Reserve Account is required when such Series Reserve Account is comprised partly of moneys and partly of a Surety Instrument, then the Trustee shall draw first from the moneys on deposit and then, if necessary, from the Surety Instrument. Any shortfall in a Series Reserve Account shall be replenished in accordance with the Indenture. In the event that the amount on deposit in more than one Series Reserve Account is less than the Reserve Requirement for the applicable Series of Bonds and amounts available are not sufficient to replenish all such Series Reserve Accounts, then deposits will be made into such Series Reserve Accounts on a pro rata basis based on the amounts of the shortfalls in such Series Reserve Accounts. Construction Fund. The Trustee shall hold the Construction Fund and within the Construction Fund shall establish a separate Construction Account for the Series 2012A Bonds. The Series 2012A Bonds will be issued to finance the Project, and the Project Costs to be financed by the Series 2012A Bonds shall be paid from the Construction Account established with respect to Series 2012A Bonds. There shall be deposited in the Series 2012A Construction Account that portion of the proceeds of the Series 2012A Bonds required to be deposited therein pursuant to the Second Supplemental Indenture. There shall also be deposited into the Series 2012A Construction Account (i) any amounts transferred from the Series 2012A Costs of Issuance Account pursuant to the Second Supplemental Indenture, and (ii) any interest earnings transferred pursuant to the Master Indenture. The Trustee shall pay the Project Costs of the Series 2012 Project from the Series 2012A Construction Account. Excess Earnings Fund. The Trustee shall establish a separate Excess Earnings Account in the Excess Earnings Fund for the Series 2012 Bonds, the Series 2011A QSCB Bonds, and the Series 1999 Bonds. The Trustee shall deposit into each Excess Earnings Account all amounts as instructed by the District in writing in accordance with the provisions of the related Tax Certificate. Notwithstanding anything to the contrary in the Indenture, all earnings on amounts invested in an Excess Earnings Account shall be retained therein, except to the extent provided by the related Tax Certificate. Notwithstanding any other provision hereof, moneys may be transferred at the written request of the District from any fund or account described in the Indenture to an Excess Earnings Account to the extent such transfer is required to comply with the related Tax Certificate. The Trustee shall pay the moneys on deposit in each Excess Earnings Account to the federal government as instructed by the District in writing. In the event moneys are no longer required by a Tax Certificate to be maintained in the related Excess Earnings Account, such moneys shall be transferred to the Special Tax Fund at the written request of the District. The Trustee shall be deemed conclusively to have complied with its obligations with respect to each Excess Earnings Account and rebatable arbitrage if it follows the written instructions of the District given hereunder. Redemption Fund. The Redemption Fund shall be held by the Trustee which shall establish a separate Redemption Account for each Series of Bonds. The moneys on deposit in the redemption accounts are to be used to pay the redemption price due on the Bonds for which such account has been established. Any moneys on deposit in the Redemption Fund when there are no longer Bonds Outstanding shall be transferred to the Special Tax Fund. Investment of Funds and Accounts B-18

73 Moneys in the funds and accounts established by the Indenture shall be invested from time to time by the Trustee at the written direction of an Authorized Officer of the District, in Authorized Investments provided that: (a) Moneys in the Construction Fund shall be invested in obligations which will by their terms mature or be available for withdrawal as close as practicable to the date the District estimates the moneys represented by the particular investment will be needed for withdrawal from the Construction Fund; (b) Moneys in the Bond Service Fund shall be invested only in obligations which will by their terms mature or be available for withdrawal on the applicable dates so as to ensure the payment of principal and interest on the Bonds as the same become due; and (c) Moneys in the Reserve Fund shall be invested only in obligations which mature no longer than five years from the date of investment. (d) Moneys in the Series 2011 Capitalized Interest Subaccounts shall be invested in Federal Securities. The Trustee shall sell at the best price obtainable or present for redemption any obligations so purchased whenever it may be necessary to do so in order to provide moneys to meet any payment or transfer for such funds and accounts or from such funds and accounts. Notwithstanding anything in the Indenture to the contrary, the Trustee shall not be responsible for any loss from any investments authorized pursuant to the Indenture. The Trustee or its affiliates may act as sponsor, principal or agent in the making or disposing of any investment. Any Authorized Investments that are registrable securities shall be registered in the name of the Trustee. Investment earnings on amounts on deposit in any Excess Earnings Account shall be retained therein. Investment earnings on all other funds and accounts established under the Indenture shall be transferred to the Reserve Fund to the extent of any deficiency therein, then (i) prior to the Construction Period Termination Date for any Series of Bonds, be transferred to the Construction Accounts of the Construction Fund on a pro rata basis and (ii) after the Construction Period Termination Date, be transferred to the Interest Account of the Bond Service Fund. In the absence of any written direction of an Authorized Officer of the District. the Trustee shall invest the moneys on deposit in the funds and accounts established under the Indenture in any money market fund rated AAm or AAm-G, or better, by S&P. Covenants of the District So long as any of the Bonds issued are Outstanding and unpaid, the District has made the following covenants with the Bondowners under the provisions of the Act and the Indenture or any Supplemental Indenture; provided, however, that such covenants do not require the District to expend any funds or moneys other than the Gross Taxes. Punctual Payment. The District will duly and punctually pay or cause to be paid the principal of, premium (if any) and interest on every Bond issued under the Indenture or any Supplemental Indenture to the extent Gross Taxes are available therefor, in strict conformity with the terms of the Bonds, the Indenture and any Supplemental Indenture, and will faithfully observe and perform all of the conditions, covenants and requirements of the Indenture and all Supplemental Indentures and of the Bonds issued thereunder. Levy of Special Tax. Subject to the limitations as to the rate thereof (which are set forth in APPENDIX A attached to this Official Statement), the District shall levy or cause to be levied: B-19

74 (a) With respect to Debt Service Developed Property, Special Taxes at least in an amount anticipated to be sufficient (after taking into account anticipated delinquencies in the payment of Special Taxes), together with any moneys on deposit in the Special Tax Fund or the Bond Service Fund (and, with respect to the final Bond Year for a Series of Bonds, in the Reserve Account with respect to such Series of Bonds (other than amounts available under a Surety Instrument)) and anticipated to be available in the next succeeding Bond Year to pay principal of, premium (if any) and interest on the Bonds and any amounts required to maintain the Reserve Fund at the Reserve Requirement or to pay Series 1999 Policy Costs.; and (b) Special Taxes at least in an amount anticipated to be sufficient (after taking into account anticipated delinquencies in the payment of Special Taxes), together with any moneys on deposit in the Special Tax Fund or the Bond Service Fund (and, with respect to the final Bond Year for a Series of Bonds, in the Reserve Account with respect to such Series of Bonds (other than amounts available under a Surety Instrument)) and anticipated to be available in the next succeeding Bond Year to pay 115% of the aggregate amount of principal of, premium (if any) and interest on the Bonds and any amounts required to maintain the Reserve Fund at the Reserve Requirement. The District has confirmed that in complying with the covenants described in paragraphs (a) and (b) above, it shall not take into account any Bond Subsidy Payments that are expected but have not yet been received or have not been deposited into the Series 2011A QSCB Interest Subaccount. Zoning. To the extent permitted by law, in the event that any parcel within the boundaries of the District undergoes a change of zoning so that it is Zoned (as defined in the Special Tax Formula) for residential use, the District shall take all reasonable steps to insure that such property shall be subject to the lien of the Special Taxes. Commencement of Foreclosure Proceedings. The District covenants that it will commence or cause to be commenced judicial foreclosure proceedings by October 31 of each year against (i) all property owned by any single person or any property regardless of ownership with delinquent Special Taxes totaling more than $25,000, and (ii) all property with delinquent Special Taxes if in the immediately preceding Fiscal Year it received Special Taxes in an amount which (together with amounts deposited into the Special Tax Fund and/or Bond Service Fund) were 95% or less than the Annual Debt Service established pursuant to the Indenture, for the current Bond Year or the amount in the Reserve Fund (plus the stated amount of any Surety Instrument, if any) is less than the Reserve Requirement. The District may, at its sole election, commence or cause to be commenced judicial foreclosure proceedings by October 31 of each year against any property with delinquent Special Taxes if in the immediately preceding Fiscal Year it received Special Taxes in an amount which (together with amounts deposited into the Special Tax Fund and/or Bond Service Fund) were less than 100%, but greater than 95%, of the Annual Debt Service established pursuant to the Indenture, for the current Bond Year. The District shall diligently pursue to completion each such foreclosure. General. The District will do and perform or cause to be done and performed all acts and things required to be done or performed by or on behalf of the District under the provisions of the Indenture. The District warrants that upon the date of execution and delivery of any Series of Bonds, the conditions, acts and things required by law and the Indenture to exist, to have happened and to have been performed precedent to and in the execution and delivery of such Series of Bonds will exist, have happened and have been performed and the execution and delivery of such Series of Bonds shall comply in all respects with the applicable laws of the State. Extension of Payment of Bonds. The District will not directly or indirectly extend the maturity dates of any Series of Bonds or the time of payment of interest with respect thereto; provided that the District may issue securities for the purpose of providing funds for the redemption of any Series of Bonds and such issuance will not be deemed to constitute an extension of the maturity of any Series of Bonds. B-20

75 Reduction of Special Tax Revenues. The Special Tax Formula may be amended at any time in accordance with the Act without the consent or approval of the Trustee or any Bondowners; provided, however, that the Special Tax Formula may not be amended to reduce the rate at which the Special Taxes may be levied or to terminate the levy of the Special Tax unless the District receives the prior written consent of the Series 1999 Bond Insurer and determines that the reduction or termination of Special Taxes would not have a material adverse effect on the repayment of the Bonds. In addition, the District will not permit the payment of a Prepayment Tax with respect to any Assessor s Parcel after the Assessor s Parcel has converted to Developed Property (as each of those terms is defined in the Special Tax Formula). Tax Covenants Tax-Exempt Bonds. In order to maintain the exclusion from gross income for federal income tax purposes of interest of any Bonds the interest on which is intended to be excluded from gross income under Section 103 of the Code for Federal tax purposes, until there are no such Bonds which remain Outstanding, the District will comply with all applicable requirements of Section 103 and Sections 141 through 150 of the Code. In furtherance of this covenant, the District agrees to comply with the requirements set forth in the Nonarbitrage Certificate. Notwithstanding any other provision of the Indenture to the contrary, upon the District s failure to observe, or refusal to comply with, the foregoing covenant, no person other than the Trustee and the Owners of such Bonds shall be entitled to exercise any right or remedy provided to the Owners under the Indenture or any Supplemental Indenture on the basis of the District s failure to observe, or refusal to comply with, such covenant. Issuance of Parity Bonds The District may at any time issue Parity Bonds payable from the Gross Taxes, but only subject to the following conditions, which are conditions precedent to the issuance of any such Parity Bonds: (a) The District shall be in compliance with all covenants set forth in the Indenture and any Supplemental Indenture; provided, however, that Parity Bonds may be issued notwithstanding that the District is not in compliance with all such covenants as long as immediately following the issuance of such Parity Bonds the District will be in compliance with all such covenants. (b) The issuance of such Parity Bonds shall have been duly authorized pursuant to the Act and all other applicable laws and the issuance of such Parity Bonds shall have been provided for by a Supplemental Indenture which shall specify the following: (i) The purpose for which such Parity Bonds are to be issued and the fund or funds into which the proceeds thereof are to be deposited, including a provision requiring the proceeds of such Parity Bonds to be applied solely for (A) the purposes of aiding in financing the Project, including payment of all costs incidental to or connected with such financing, and/or (B) the purpose of refunding any Outstanding Bonds, including payment of all costs incidental to or connected with such refunding; (ii) The authorized principal amount of such Parity Bonds; (iii) The date, the maturity date or dates and the interest rate or rates or method of determining the interest rate of such Parity Bonds; (iv) The description of the Parity Bonds, the place of payments thereof and the procedure for execution and authentication; (v) The denomination and method of numbering of such Parity Bonds; B-21

76 (vi) The redemption premiums, if any, and the redemption terms, if any, for such Parity Bonds; provided that, in the event that less than all of such Parity Bonds are to be redeemed at any one time, the Trustee shall redeem that amount of Outstanding Bonds issued prior to the issuance of such Parity Bonds and that amount of such Parity Bonds in the proportion which the principal amount of Outstanding Bonds issued prior to the issuance of such Parity Bonds bears to the then outstanding principal amount of such Parity Bonds, except that such proviso shall not apply to mandatory sinking fund redemptions, or the mandatory extraordinary redemption of Series 2011A QSCB Bonds pursuant to the First Supplemental Indenture; (vii) The amount and due date of each mandatory sinking fund payment, if any, for such Parity Bonds; (viii) The amount, if any, to be deposited from the proceeds of sale of such Parity Bonds in applicable Series Reserve Account in the Reserve Fund to increase the amount therein to an amount equal to the Reserve Requirement for such Series of Bonds.; (ix) The form of such Parity Bonds; and (x) Such other provisions as are necessary or appropriate and not inconsistent with the Indenture. (c) The District and the Trustee shall have received the following documents, all of such documents dated or certified, as the case may be, as of the date of delivery of such Parity Bonds by the Trustee (unless the Trustee shall accept any of such documents bearing a prior date): (i) A certified copy of the Supplemental Indenture authorizing the issuance of such Parity Bonds; (ii) A written request of the District as to the delivery of such Parity Bonds; (iii) An opinion of Bond Counsel to the effect that (A) the District has the right and power under the Act to execute and deliver the Indenture and the Supplemental Indenture relating to such Parity Bonds; and the Indenture and all Supplemental Indentures have been duly executed and delivered by the District, are in full force and effect and are valid and binding upon the District, enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization and other similar laws relating to the enforcement of creditors rights); and (B) such Parity Bonds are valid and binding limited obligations of the District, enforceable in accordance with their terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization and other laws relating to the enforcement of creditors rights) and the terms of the Indenture and all Supplemental Indentures thereto and entitled to the benefits of the Indenture and all Supplemental Indentures, and such Parity Bonds have been duly and validly executed and delivered in accordance with the Act and the Indenture and all such Supplemental Indentures; and a further opinion of Bond Counsel to the effect that assuming compliance by the District with certain tax covenants, the issuance of the Parity Bonds will not adversely affect the exclusion from gross income for federal income tax purposes or the exemption from State personal income taxation of interest on any Outstanding Bonds theretofore issued; (iv) A certificate of the District containing such statements as may be reasonably necessary to show compliance with the requirements of the Indenture; (v) A certificate or certificates from one or more Independent Financial Consultants which, when taken together, certify that (A) the amount of the maximum B-22

77 Annual Special Taxes that may be levied by the District on Debt Service Developed Property, as of the date of certification, in each Fiscal Year pursuant to the Act and the applicable resolutions and ordinances of the District, assuming that such Annual Special Taxes are measured in each such Fiscal Year to the maximum extent provided in the Special Tax Formula, is at least equal in each corresponding Bond Year to the Maximum Annual Debt Service on all Outstanding Bonds theretofore issued and the Parity Bonds proposed to be issued in such Bond Year, plus in each such Bond Year 100% of the amount of Series 1999 Policy Costs owed and (B) the amount of the maximum Annual Special Taxes that may be levied by the District, as of the date of certification, in each Fiscal Year pursuant to the Act and the applicable resolutions and ordinances of the District, assuming that such Annual Special Taxes are measured in each such Fiscal Year to the maximum extent provided in the Special Tax Formula, is at least equal in each corresponding Bond Year to 115% of the aggregate amount of the Maximum Annual Debt Service on all Outstanding Bonds theretofore issued and the Parity Bonds proposed to be issued in such Bond Year, plus in each such Bond Year 100% of the amount of Series 1999 Policy Costs owed. For purposes of making the certifications required the Independent Financial Consultants may rely on reports or certificates of such other persons as may be acceptable to the District and the initial purchasers of the proposed Parity Bonds; and (vi) Such further documents, money and securities as are required by the provisions of the Indenture and the Supplemental Indenture providing for the issuance of such Parity Bonds. Defeasance If all or part of a Series of Outstanding Bonds shall be paid and discharged in any one or more of the following ways: (a) by paying or causing to be paid the principal of and interest with respect to all or part of a Series of Bonds Outstanding, as and when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity, an amount which, together with the amounts then on deposit in the Bond Service Fund and the Reserve Fund and available solely for the payment of such Bonds, is fully sufficient to pay the principal of premium (if any), and interest on all or part of the Outstanding Bonds of any Series or maturity as and when the same shall become due and payable or, in the event of redemption thereof, before their respective maturity dates; or (c) by depositing with an escrow bank meeting the financial criteria set forth in Section 7.01, which may be the Trustee, in trust, direct noncallable Federal Securities or Pre- Refunded Municipal Obligations in such amount as a nationally recognized firm of independent certified public accountants determines will, together with the interest to accrue thereon and moneys then on deposit in the Bond Service Fund and the Reserve Fund allocable to such Series and deposited with such escrow bank together with the interest to accrue thereon, be fully sufficient to pay and discharge the principal of, premium (if any), and interest on all Bonds of such Series Outstanding as and when the same shall become due and payable; then, at the election of the District, and notwithstanding that any Bonds of such Series or part thereof shall not have been surrendered for payment, all obligations of the District under the Indenture with respect to such Bonds Outstanding shall cease and terminate, except for (i) the obligation of the Trustee or such other escrow bank described in (c) above to pay or cause to be paid to the Owners of such Bonds not so surrendered and paid, all sums due thereon, and (ii) the District s obligations under the Indenture. Notice of such election shall be filed with the Trustee. Any funds held by the Trustee, at the time of receipt of such notice from the District, which are not required for the purpose above mentioned, shall be paid over B-23

78 to the Special Tax Fund. The Trustee shall be entitled to receive a report from a nationally recognized accounting firm as to the sufficiencies of moneys and investments to provide for the payment of all Bonds to be defeased pursuant to the provisions set forth above and an opinion of Bond Counsel to the effect that such action is authorized by and in accordance with the Indenture. Supplemental Indentures Subject to the provisions of the Indenture relating to bond insurance for the Series 1999 Bonds, the District and the Trustee may from time to time, without notice to or consent of any of the Bondowners, execute indentures supplemental to the Indenture which are not inconsistent with the terms and provisions thereof and which will thereafter form a part of the Indenture: (i) to cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision in the Indenture, or to make any additional provisions with respect to matters or questions arising under the Indenture or any Supplemental Indenture, provided that such action shall not adversely affect the interests of the Bondowners; (ii) to add to the covenants and agreements of and the limitations and the restrictions upon the District, contained in the Indenture or any Supplemental Indenture, other covenants, agreements, limitations and restrictions to be observed by the District which are not contrary to or inconsistent with the Indenture or any Supplemental Indenture as theretofore in effect; (iii) to modify, alter, amend or supplement the Indenture or any Supplemental Indenture in any other respect which is not materially adverse to interests of the Bondowners; and (iv) to provide for the issuance of any Parity Bonds, and to provide the terms and conditions under which such Parity Bonds may be issued, subject to and in accordance with the Indenture. The Trustee may rely in entering into any such Supplemental Indenture on an opinion of Bond Counsel stating that the above requirements have been met with respect to such Supplemental Indenture. In addition to the Supplemental Indentures described in the foregoing paragraphs, the District may at any time adopt Supplemental Indentures as deemed necessary or desirable by it for the purpose of waiving, modifying, altering, amending, adding to or rescinding any of the terms or provisions of the Indenture or any Supplemental Indenture with the consent of either the Bond Insurers during any period in which such Bond Insurers are not in default under the bond insurance policies provided by such Bond Insurers, acting unanimously, or the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding and the Bond Insurers during any period in which such Bond Insurers are not in default under the bond insurance policies provided by such Bond Insurers, acting together; provided, however, that no Supplemental Indenture may permit, or be construed as permitting (a) an extension of the maturity date of the principal of, or the payment date of interest on, any Bond, (b) a reduction in the principal amount of, or redemption premium on, any Bond or the rate of interest thereon, (c) a preference or priority of any Bond or Bonds over any other Bond or Bonds, or (d) a reduction in the aggregate principal amount of the Bonds the Owners of which are required to consent to such Supplemental Indenture. without the consent of the Owners of all Bonds then Outstanding. Events of Default The following events will be Events of Default under the Indenture: (a) Default in the due and punctual payment of the principal of any Bond when and as the same will become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise; B-24

79 (b) Default in the due and punctual payment of any installment of interest on any Bond when and as such interest installment shall become due and payable; (c) Default by the District in the observance of any of the covenants, agreements or conditions on its part contained in the Indenture or any Supplemental Indenture or in the Bonds if such default will have continued for a period of 30 days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the District by the Trustee, or to the District and the Trustee by the Owners of not less than 25% in aggregate principal amount of the Bonds at the time Outstanding; provided, however, that such default will not constitute an Event of Default under the Indenture if the District will commence to cure such default within the 30-day period and thereafter diligently and in good faith proceed to cure such default within a reasonable period of time; (d) An Insolvency Proceeding shall be commenced by or against the District. Remedies of Default If an Event of Default has occurred, then, and in each and every such case during the continuance of such Event of Default, the Trustee may, and upon the written direction of the Owners of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding will, upon notice in writing to the District, declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same will become and will be immediately due and payable, anything contained in the Indenture, any Supplemental Indenture or in the Bonds to the contrary notwithstanding. As soon as practicable after such acceleration, the Trustee shall notify the Owners of the acceleration by notice mailed first-class to the Owners of record as of the date of acceleration. Any such declaration, however, is subject to the condition that if, at any time after such declaration and before any judgment or decree for the payment of the moneys due will have been obtained or entered, the District will deposit with the Trustee a sum sufficient to pay all the principal of and installments of interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the respective Bonds, and the reasonable fees, charges and expenses of the Trustee, (including without limitation counsel fees) and any and all other defaults known to the Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) will have been made good or cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate will have been made therefor, then, and in every such case, the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding by written notice to the District and the Trustee, or the Trustee if such declaration was made by the Trustee, may, on behalf of the Owners of all of the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment will extend to or will affect any subsequent default, or will impair or exhaust any right or power consequent thereon. In the case of any such annulment, the District, the Trustee and the Owners will be restored to their former positions and rights under the Indenture. Notwithstanding the foregoing, the Trustee may not waive any Event of Default which consists of a breach of a covenant set forth in the Indenture with respect to the exclusion from gross income for federal tax purposes of interest on the Bonds. Notice of such declaration having been given as aforesaid, anything to the contrary contained in the Indenture or in the Bonds notwithstanding, interest will continue to accrue on such Bonds from and after the date set forth in such notice until principal on the Bonds is paid (which will be not more than seven days from the date of such declaration). If an Event of Default shall occur and be continuing, all Gross Taxes and any other funds (other than the amounts in the Excess Earnings Fund) then held or thereafter received by the Trustee under any of the provisions of the Indenture or any Supplemental Indenture will be applied by the Trustee as follows and in the following order of priority: B-25

80 (1) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and payment of reasonable fees, charges and expenses of the Trustee (including reasonable fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Indenture; and (2) To the payment of the principal of and interest then due on the Bonds (upon presentation of the Bonds to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid), subject to the provisions of the Indenture, as follows: First: To the payment to the persons entitled thereto of all interest then due and payable and as of the first date of payment following the occurrence of an Event of Default, and, if the amount available shall not be sufficient to pay in full all such interest, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and Second: To the payment to the persons entitled thereto of the unpaid principal of any Bonds which shall have become due and payable, whether at maturity, by call for redemption, or by acceleration, with interest on the overdue principal at the rate borne by the respective Bonds from the respective dates upon which such Bonds became due and payable, and if the amount available will not be sufficient to pay in full all the principal of the Bonds due and payable, together with such interest on Bonds, then to the payment first of such interest, ratably, according to the amount of interest due on such date, and then to the payment of such principal, ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference. Remedies of Bondowners Anything in the Indenture to the contrary notwithstanding, the Owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method of conducting all remedial proceedings taken by the Trustee hereunder, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Bondowners not parties to such direction. No Owner of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture or any applicable law with respect to such Bond unless (1) such Owner previously shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers thereinbefore granted or to institute such suit, action or proceeding in its own name; (3) such Owner or said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy hereunder or under law; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Owners of Bonds, or to enforce any right under the Indenture or applicable law with respect to the Bonds, except in the manner provided in the Indenture, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner provided in the Indenture and for the benefit and protection of all Owners of the Outstanding Bonds, subject to the provisions of the Indenture. B-26

81 Nothing in the Indenture, or in the Bonds, shall affect or impair the obligation of the District, which is absolute and unconditional, to pay the principal of and interest on the Bonds to the respective Owners of the Bonds at their respective dates of maturity or upon call for redemption, as provided in the Indenture, but only out of the tax revenues and other assets pledged in the Indenture therefor, or affect or impair the right of such Owners, which is also absolute and unconditional, to enforce such payment by virtue of the contract embodied in the Bonds. In case any proceedings taken by the Trustee or any one or more Bondowners on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee or the Bondowner, then in every such case the District, the Trustee and the Bondowner, subject to any determination in such proceedings, shall be restored to their former positions and rights hereunder, severally and respectively, and all rights, remedies, powers and duties of the District, the Trustee and the Bondowner shall continue as though no such proceedings had been taken. No remedy in the Indenture conferred upon or reserved to the Trustee or to the Owners of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given hereunder or now or hereafter existing at law or in equity or otherwise. No delay or omission of the Trustee or of any Owner of the Bonds to exercise any right or power arising upon the occurrence of any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; nor shall any waiver of any default or breach of duty or contract by any Owner affect any subsequent default or breach of duty or contract, or impair any rights or remedies on any such subsequent default or breach; and every power and remedy given by the Indenture to the Trustee or to the Owners of the Bonds may be exercised from time to time and as often as may be deemed expedient. Trustee The District is authorized to appoint a Trustee. Any Trustee appointed will (i) be a trust company, a bank or a member of a bank holding company having the powers of a trust company having a corporate trust office in the State, (ii) have (or if such bank is a member of a bank holding company system, its bank holding company has) a combined capital and surplus of at least $50,000,000 and (iii) be subject to supervision or examination by federal or state authority. If such bank, trust company or bank holding company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purpose of the Indenture the combined capital and surplus of such bank, trust company or bank holding company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this paragraph, the Trustee shall resign immediately in the manner and with the effect specified in the Indenture. The Trustee is authorized to and will mail interest payments to the Bondowners, select Bonds for redemption, give notice of redemption and meetings of Bondowners, maintain the Bond Register and maintain and administer the funds and accounts established pursuant to the Indenture. The Trustee is authorized to pay the principal of and premium, if any, on the Bonds when the same are duly presented to it for payment at maturity or on call and redemption, to provide for the registration or transfer and exchange of Bonds presented to it for such purposes, to provide for the cancellation of Bonds, all as provided in the Indenture, and to provide for the authentication of Bonds, and shall perform all other duties assigned to or imposed on it as provided in the Indenture and any Supplemental Indenture. The Trustee shall keep accurate records of all funds administered and all Bonds paid and discharged by it. Provisions With Respect to Bond Insurance for the Series 1999 Bonds B-27

82 Notwithstanding anything to the contrary set forth in other sections of the Indenture, the following provisions of the Indenture govern so long as the Series 1999 Bond Insurance Policy remains in full force and effect and the Series 1999 Bond Insurer is not in default thereunder. Acceleration of Maturities of Bonds. No acceleration of the maturities of the Series 1999 Bonds may be made without obtaining the prior written consent of the Series 1999 Bond Insurer. In the event the maturity of the Series 1999 Bonds is accelerated, the Series 1999 Bond Insurer may elect, in its sole discretion, to pay accelerated principal and interest accrued on such principal to the date of acceleration (to the extent unpaid by the District) and the Trustee shall be required to accept such amounts. Upon payment of such accelerated principal and interest accrued to the acceleration date as provided above, the Series 1999 Bond Insurer s obligations under the Series 1999 Bond Insurance Policy shall be fully discharged. Series 1999 Bond Insurer as Holder of Bonds. The Series 1999 Bond Insurer shall be deemed to be the sole holder of the Series 1999 Bonds insured by it for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Series 1999 Bonds insured by it are entitled to take pertaining to the Trustee, defaults and remedies, pursuant to the Indenture. Supplemental Indentures. (a) In the event holders of Series 1999 Bonds insured by the Series 1999 Bond Insurer shall consent to any modification to the Indenture, the Series 1999 Bond Insurer s consent shall also be required to effectuate such insured Bondowners consent. In such circumstance, Series 1999 Bond Insurer consent shall not be taken into consideration in determining whether the required percentage of Bondowners consent has been obtained. (b) No provision of the Indenture expressly recognizing or granting rights in or to the Series 1999 Bond Insurer shall be modified without the consent of the Series 1999 Bond Insurer. (c) No amendment or supplement to the Indenture which (1) does not require the consent of Bondowners on the basis that it is not to the detriment of, or does not adversely affect (materially or otherwise), Bondowners or (2) requires the consent of a majority of Bondowners, may become effective except upon obtaining the prior written consent of the Series 1999 Bond Insurer, which consent shall not be unreasonably withheld. (d) Copies of any modification or amendment to the Indenture requiring the approval of the Series 1999 Bond Insurer shall be sent to S&P and Moody s at least 15 days prior to the effective date thereof. Rights of Series 1999 Bond Insurer. The rights granted to the Series 1999 Bond Insurer under the Indenture to request, consent to or direct any action are rights granted to the Series 1999 Bond Insurer in consideration of its issuance of the Series 1999 Bond Insurance Policy. Any exercise by the Series 1999 Bond Insurer of such rights is merely an exercise of the Series 1999 Bond Insurer s contractual rights and shall not be construed or deemed to be taken for the benefit or on behalf of the Bondowners nor does such action evidence any position of the Series 1999 Bond Insurer, positive or negative, as to whether Bondowner consent is required in addition to consent of the Series 1999 Bond Insurer. Suspension of Rights of Series 1999 Bond Insurer. Rights of the Series 1999 Bond Insurer to direct or consent to District, Trustee or Bondowner actions under the Indenture shall be suspended during any period in which the Series 1999 Bond Insurer is in default in its payment obligations under the Series 1999 Bond Insurance Policy (except to the extent of amounts previously paid by the Series 1999 Bond Insurer and due and owing to the Series 1999 Bond Insurer) and shall be of no force or effect in the event the Series 1999 Bond Insurance Policy is no longer in effect or the Series 1999 Bond Insurer asserts that the Series 1999 Bond Insurance Policy is not in effect or the Series 1999 Bond Insurer shall have provided written notice that is waives such rights. B-28

83 Third Party Beneficiary. The Series 1999 Bond Insurer shall be included as a third party beneficiary to the Indenture. Insolvency Proceedings; Preference Claims. The Trustee shall promptly notify the Series 1999 Bond Insurer of either of the following as to which it has actual knowledge: (i) the commencement of an Insolvency Proceeding by or against the District and (ii) the making of any Preference Claim in connection with any Insolvency Proceeding. Each Bondowner, by its purchase of Series 1999 Bonds, and the Trustee hereby agree that the Series 1999 Bond Insurer may at any time during the continuation of an Insolvency Proceeding direct all matters relating to such Insolvency Proceeding, including, without limitation, (i) all matters relating to any Preference Claim, (ii) the direction of any appeal of any order relating to any Preference Claim and (iii) the posting of any surety supersedeas or performance bond pending any such appeal. In addition, and without limitation of the foregoing. the Series 1999 Bond Insurer shall be subrogated to the rights of the Trustee and each Bondowner in any Insolvency Proceeding to the extent it is subrogated pursuant to the Indenture, including without limitation, any rights of any party to an adversary proceeding action with respect to any court order issued in connection with any such Insolvency Proceeding. Payment of Costs. To the extent permitted by law, the District hereby agrees to pay or reimburse the Series 1999 Bond Insurer any and all charges, fees, costs and expenses which the Series 1999 Bond Insurer may reasonably pay or incur in connection with (i) the administration, enforcement, defense or preservation of any rights or security in respect of the Indenture, (ii) the pursuit of any remedies under the Indenture or otherwise afforded by law or equity, (iii) any amendment, waiver or other action with respect to, or related to, the Indenture whether or not executed or completed, (iv) the violation by the District of any law. rule or regulation, or any judgment, order or decree applicable to it or (v) any litigation or other dispute in connection with the Indenture or the transactions contemplated hereby, other than amounts resulting from the failure of the Series 1999 Bond Insurer to honor its obligations under the Series 1999 Bond Insurance Policy. The Series 1999 Bond Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment. waiver or consent proposed in respect of the Indenture. Maximum Annual Debt Service. Balloon Indebtedness shall be deemed to mature at the earlier of the actual maturity date and 25 years. Authorized Investments. Any moneys in any of the funds and accounts under the Indenture invested pursuant to the Indenture shall only be invested in Authorized Investments. Reserve Fund. Investments in the Reserve Fund, other than repurchase agreements or investment agreements, shall have an aggregate weighted term to maturity not exceeding five years. Series 1999 Reserve Policy. If the District shall fail to pay any Series 1999 Policy Costs in accordance with the requirements of clause (a) above, the Series 1999 Bond Insurer shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Indenture other than (i) acceleration of the maturity of the Series 1999 Bonds or (ii) remedies which would adversely affect owners of the Series 1999 Bonds. The Indenture shall not be discharged until all Series 1999 Policy Costs owing to the Series 1999 Bond Insurer shall have been paid in full. The District s obligation to pay such amounts shall expressly survive payment in full of the Series 1999 Bonds. In order to secure the District s payment obligations with respect to the Series 1999 Policy Costs, there shall be granted in favor of the Series 1999 Bond Insurer a security interest (subordinate only to that of the owners of the Bonds) in all revenues and collateral pledged as security for the Bonds, other than any amounts in funds and accounts established under the Indenture that do not secure the Series 1999 Bonds. B-29

84 Provisions With Respect to Bond Insurance for the Series 2012 Bonds Notwithstanding anything to the contrary set forth in other sections of the Indenture, the following provisions of the Indenture govern so long as the Series 2012 Bond Insurance Policy remains in full force and effect and the Series 2012 Bond Insurer is not in default thereunder; provided, however, that the paragraphs under the heading Claims Upon the Series 2012 Bond Insurance Policy and Payments by and to the Series 2012 Bond Insurer shall continue to apply in all events to the extent of any amounts paid by the Series 2012 Bond Insurer under the Series 2012 Bond Insurance Policy. Series 2012 Surety Instruments. The prior written consent of the Series 2012 Bond Insurer shall be a condition precedent to the deposit of any credit instrument, other than the Series 2012B Reserve Policy or any policy provided by the Series 2012 Bond Insurer, provided in lieu of a cash deposit into the Series 2012 Reserve Accounts. Notwithstanding anything to the contrary set forth in the Indenture, amounts on deposit in the Series 2012A Reserve Account shall be applied solely to the payment of debt service due on the Series 2012A Bonds and amounts on deposit in the Series 2012B Reserve Account shall be applied solely to the payment of debt service due on the Series 2012B Refunding Bonds. Series 2012 Bond Insurer as Sole Holder of Series 2012 Bonds. The Series 2012 Bond Insurer shall be deemed to be the sole holder of the Series 2012 Bonds for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Series 2012 Bonds insured by it are entitled to take pursuant to the Indenture pertaining to (i) defaults and remedies and (ii) the duties and obligations of the Trustee. Remedies granted to the Owners of the Series 2012 Bonds shall expressly include mandamus. Limitation on Acceleration of Series 2012 Bonds. The maturity of Series 2012 Bonds insured by the Series 2012 Bond Insurer shall not be accelerated without the consent of the Series 2012 Bond Insurer and in the event the maturity of the Series 2012 Bonds is accelerated, the Series 2012 Bond Insurer may elect, in its sole discretion, to pay accelerated principal and interest accrued, on such principal to the date of acceleration (to the extent unpaid by the District) and the Trustee shall be required to accept such amounts. Upon payment of such accelerated principal and interest accrued to the acceleration date as provided above, the Series 2012 Bond Insurer s obligations under the Series 2012 Bond Insurance Policy with respect to such Series 2012 Bonds shall be fully discharged. Grace Periods. No grace period for a covenant default shall exceed 30 days or be extended for more than 60 days, without the prior written consent of the Series 2012 Bond Insurer. No grace period shall be permitted for payment defaults. Third Party Beneficiary. The Series 2012 Bond Insurer shall be included as a third party beneficiary to the Indenture. Purchase of Series 2012 Bonds. The exercise of any provision of the Indenture which permits the purchase of Series 2012 Bonds in lieu of redemption shall require the prior written approval of the Series 2012 Bond Insurer if any Series 2012 Bond so purchased is not cancelled upon purchase. Amendments. Any amendment, supplement, modification to, or waiver of, the Indenture or any other transaction document, including any underlying security agreement (each a Related Document ), that requires the consent of Owners of the Series 2012 Bonds or adversely affects the rights and interests of the Insurer shall be subject to the prior written consent of the Insurer. Events of Default. Unless the Series 2012 Bond Insurer otherwise directs, upon the occurrence and continuance of an Event of Default or an event which with notice or lapse of time would constitute an Event of Default, amounts on deposit in the Series 2012 Construction Account shall not be disbursed, but shall instead be applied to the payment of debt service or redemption price of the Series 2012 Bonds. B-30

85 Consideration. The rights granted to the Series 2012 Bond Insurer under the Indenture or any other Related Document to request, consent to or direct any action are rights granted to the Insurer in consideration of its issuance of the Series 2012 Bond Insurance Policy. Any exercise by the Series 2012 Bond Insurer of such rights is merely an exercise of the Series 2012 Bond Insurer s contractual rights and shall not be construed or deemed to be taken for the benefit, or on behalf, of the Owners of the Series 2012 Bonds and such action does not evidence any position of the Series 2012 Bond Insurer, affirmative or negative, as to whether the consent of the Owners of the Series 2012 Bonds or any other person is required in addition to the consent of the Series 2012 Bond Insurer. Provisions Relating to Defeasance. Only (1) cash, (2) non-callable direct obligations of the United States of America ( Treasuries ), (3) evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated, (4) subject to the prior written consent of the Insurer, prerefunded municipal obligations rated AAA and Aaa by S&P and Moody s, respectively, or (5) subject to the prior written consent of the Insurer, securities eligible for AAA defeasance under then existing criteria of S&P or any combination thereof, shall be used to effect defeasance of the Series 2012 Bonds unless the Series 2012 Bond Insurer otherwise approves. To accomplish defeasance of the Series 2012 Bonds, the District shall cause to be delivered (i) a report of an independent firm of nationally recognized certified public accountants or such other accountant as shall be acceptable to the Series 2012 Bond Insurer ( Accountant ) verifying the sufficiency of the escrow established to pay the Series 2012 Bonds in full on the maturity or redemption date ( Verification ), (ii) an Escrow Deposit Agreement (which shall be acceptable in form and substance to the Series 2012 Bond Insurer), (iii) an opinion of nationally recognized bond counsel to the effect that the Series 2012 Bond Bonds are no longer Outstanding under the Indenture and (iv) a certificate of discharge of the Trustee with respect to the Series 2012 Bonds; each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the District, Trustee and Series 2012 Bond Insurer. The Series 2012 Bond Insurer shall be provided with final drafts of the above-referenced documentation not less than five business days prior to the funding of the escrow. Series 2012 Bonds shall be deemed Outstanding under the Indenture unless and until they are in fact paid and retired or the above criteria are met. Discharge of Indenture. Amounts paid by the Series 2012 Bond Insurer under the Series 2012 Bond Insurance Policy shall not be deemed paid for purposes of the Indenture and the Series 2012 Bonds relating to such payments shall remain Outstanding and continue to be due and owing until paid by the District in accordance with the Indenture. The Indenture shall not be discharged unless all amounts due or to become due to the Series 2012 Bond Insurer have been paid in full or duly provided for. Priority of Pledge. Each of the District and Trustee covenant and agree to take such action (including, as applicable, filing of UCC financing statements and continuations thereof) as is necessary from time to time to preserve the priority of the pledge of the Gross Taxes under applicable law. Claims Upon the Series 2012 Bond Insurance Policy and Payments by and to the Series 2012 Bond Insurer. If, on the third Business Day prior to the related scheduled interest payment date or principal payment date ( Payment Date ) there is not on deposit with the Trustee, after making all transfers and deposits required under the Indenture, moneys sufficient to pay the principal of and interest on the Series 2012 Bonds due on such Payment Date, the Trustee shall give notice to the Series 2012 Bond Insurer and to its designated agent (if any) (the Insurer's Fiscal Agent ) by telephone or telecopy of the amount of such deficiency by 12:00 noon, New York City time, on such Business Day. If, on the second Business Day prior to the related Payment Date, there continues to be a deficiency in the amount available to pay the principal of and interest on the Series 2012 Bonds due on such Payment Date, the Trustee shall make a claim under the Series 2012 Bond Insurance Policy and give notice to the Series 2012 Bond Insurer and the B-31

86 Series 2012 Bond Insurer s Fiscal Agent (if any) by telephone of the amount of such deficiency, and the allocation of such deficiency between the amount required to pay interest on the Series 2012 Bonds and the amount required to pay principal of the Series 2012 Bonds, confirmed in writing to the Series 2012 Bond Insurer and the Series 2012 Bond Insurer s Fiscal Agent by 12:00 noon, New York City time, on such second Business Day by filling in the form of Notice of Claim and Certificate delivered with the Series 2012 Bond Insurance Policy. The Trustee shall designate any portion of payment of principal on Series 2012 Bonds paid by the Series 2012 Bond Insurer, whether by virtue of mandatory sinking fund redemption, maturity or other advancement of maturity, on its books as a reduction in the principal amount of Series 2012 Bonds registered to the then current Owner of the Series 2012 Bonds, whether DTC or its nominee or otherwise, and shall issue a replacement Series 2012 Bond to the Series 2012 Bond Insurer, registered in the name of Assured Guaranty Municipal Corp., in a principal amount equal to the amount of principal so paid (without regard to authorized denominations); provided that the Trustee s failure to so designate any payment or issue any replacement Series 2012 Bond shall have no effect on the amount of principal or interest payable by the District on any Series 2012 Bond or the subrogation rights of the Series 2012 Bond Insurer. The Trustee shall keep a complete and accurate record of all funds deposited by the Series 2012 Bond Insurer into the Policy Payments Account (defined below) and the allocation of such funds to payment of interest on and principal of any Series 2012 Bond. The Series 2012 Bond Insurer shall have the right to inspect such records at reasonable times upon reasonable notice to the Trustee. Upon payment of a claim under the Series 2012 Bond Insurance Policy, the Trustee shall establish a separate special purpose trust account for the benefit of Owners of the Series 2012 Bonds referred to as the Policy Payments Account and over which the Trustee shall have exclusive control and sole right of withdrawal. The Trustee shall receive any amount paid under the Series 2012 Bond Insurance Policy in trust on behalf of Owners of the Series 2012 Bonds and shall deposit any such amount in the Policy Payments Account and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Trustee to Owners of the Series 2012 Bonds in the same manner as principal and interest payments are to be made with respect to the Series 2012 Bonds under the sections of the Indenture regarding payment of Series 2012 Bonds. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Notwithstanding anything in the Indenture to the contrary, the District agrees to pay to the Series 2012 Bond Insurer (i) a sum equal to the total of all amounts paid by the Series 2012 Bond Insurer under the Series 2012 Bond Insurance Policy (the Insurer Advances ); and (ii) interest on such Insurer Advances from the date paid by the Series 2012 Bond Insurer until payment thereof in full, payable to the Series 2012 Bond Insurer at the Late Payment Rate per annum (collectively, the Insurer Reimbursement Amounts ). Late Payment Rate means the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in The City of New York, as its prime or base lending rate (any change in such rate of interest to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Series 2012 Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. The District covenants and agrees that the Insurer Reimbursement Amounts are secured by a lien on and pledge of the Gross Taxes and payable from such Gross Taxes on a parity with debt service due on the Series 2012 Bonds. Funds held in the Policy Payments Account shall not be invested by the Trustee and may not be applied to satisfy any costs, expenses or liabilities of the Trustee. Any funds remaining in the Policy Payments Account following a Series 2012 Bond payment date shall promptly be remitted to the Insurer. Survival of Obligations. The Series 2012 Bond Insurer shall, to the extent it makes any payment of principal of or interest on the Series 2012 Bonds, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Series 2012 Bond Insurance Policy. Each obligation of the B-32

87 District to the Series 2012 Bond Insurer under the Related Documents shall survive discharge or termination of such Related Documents. Reimbursement of Costs. The District shall pay or reimburse the Series 2012 Bond Insurer any and all charges, fees, costs and expenses that the Series 2012 Bond Insurer may reasonably pay or incur in connection with (i) the administration, enforcement, defense or preservation of any rights or security in any Related Document; (ii) the pursuit of any remedies under the Indenture or any other Related Document or otherwise afforded by law or equity, (iii) any amendment, waiver or other action with respect to, or related to, the Indenture or any other Related Document whether or not executed or completed, or (iv) any litigation or other dispute in connection with the Indenture or any other Related Document or the transactions contemplated thereby, other than costs resulting from the failure of the Insurer to honor its obligations under the Series 2012 Bond Insurance Policy. The Series 2012 Bond Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Indenture or any other Related Document. Application of Funds Upon Default. After payment of reasonable expenses of the Trustee, the application of funds realized upon default shall be applied to the payment of expenses of the District or rebate only after the payment of past due and current debt service on the Series 2012 Bonds and amounts required to restore the Series 2012 Reserve Accounts to the applicable Series 2012 Reserve Requirement. Nonpayment. The Series 2012 Bond Insurer shall be entitled to pay principal or interest on the Series 2012 Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the District (as such terms are defined in the Insurance Policy) and any amounts due on the Series 2012 Bonds as a result of acceleration of the maturity thereof in accordance with the Indenture, whether or not the Series 2012 Bond Insurer has received a Notice of Nonpayment (as such terms are defined in the Insurance Policy) or a claim upon the Series 2012 Bond Insurance Policy. Issuance of Additional Bonds. Notwithstanding satisfaction of the other conditions to the issuance of Additional Bonds set forth in the Indenture, no such issuance may occur (1) if an Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default) exists unless such default shall be cured upon such issuance and (2) unless the Series 2012 Reserve Accounts are fully funded at the applicable Series 2012 Reserve Requirement upon the issuance of such Additional Bonds, in either case unless otherwise permitted by the Series 2012 Bond Insurer. Trustee Consideration of Series 2012 Insurance Policy. In determining whether any amendment, consent, waiver or other action to be taken, or any failure to take action, under the Indenture would adversely affect the security for the Series 2012 Bonds or the rights of the Owners of the Series 2012 Bonds, the Trustee shall consider the effect of any such amendment, consent, waiver, action or inaction as if there were no Series 2012 Bond Insurance Policy. Limitation on Contracts. No contract shall be entered into or any action taken by which the rights of the Insurer or security for or sources of payment of the Series 2012 Bonds may be impaired or prejudiced in any material respect except upon obtaining the prior written consent of the Series 2012 Bond Insurer. The District shall not enter into any interest rate exchange agreement or other rate maintenance agreement secured by and payable from the Gross Taxes without the prior written consent of the Series 2012 Bond Insurer. Provisions With Respect to the Series 2012B Reserve Policy Notwithstanding anything to the contrary set forth in other sections of the Indenture, the below provisions shall govern so long as the Series 2012B Reserve Policy remains in full force and effect and the Series 2012 Bond Insurer is not in default thereunder. Repayment of Draws. The District shall repay any draws under the Series 2012B Reserve Policy and pay all related reasonable expenses incurred by the Series 2012 Bond Insurer. Interest shall accrue and B-33

88 be payable on such draws and expenses from the date of payment by the Series 2012 Bond Insurer at the Late Payment Rate. Late Payment Rate means the lesser of (a) the greater of (i) the per annum rate of interest, publicly announced from time to time by JPMorgan Chase Bank at its principal office in the City of New York, as its prime or base lending rate ( Prime Rate ) (any change in such Prime Rate to be effective on the date such change is announced by JPMorgan Chase Bank) plus 3%, and (ii) the then applicable highest rate of interest on the Series 2012B Refunding Bonds and (b) the maximum rate permissible under applicable usury or similar laws limiting interest rates. The Late Payment Rate shall be computed on the basis of the actual number of days elapsed over a year of 360 days. In the event JPMorgan Chase Bank ceases to announce its Prime Rate publicly, Prime Rate shall be the publicly announced prime or base lending rate of such national bank as the Series 2012 Bond Insurer shall specify. Repayment of draws and payment of expenses and accrued interest thereon at the Late Payment Rate (collectively, Series 2012B Policy Costs ) shall commence in the first month following each draw, and each such monthly payment shall be in an amount at least equal to 1/12 of the aggregate of Series 2012B Policy Costs related to such draw. Amounts in respect of Series 2012B Policy Costs paid to the Series 2012 Bond Insurer shall be credited first to interest due, then to the expenses due and then to principal due. As and to the extent that payments are made to the Series 2012 Bond Insurer on account of principal due, the coverage under the Series 2012B Reserve Policy will be increased by a like amount, subject to the terms of the Series 2012B Reserve Policy. All cash and investments in the Series 2012B Reserve Account shall be transferred to the Series 2012B Interest Subaccount and the Series 2012B Principal Subaccount, as applicable, for payment of debt service on Series 2012B Refunding Bonds before any drawing may be made on the Series 2012B Reserve Policy or any other credit facility credited to the Series 2012B Reserve Account in lieu of cash (a Series 2012B Credit Facility ). Payment of any Series 2012B Policy Costs shall be made prior to replenishment of any such cash amounts. Draws on all Series 2012B Credit Facilities (including the Series 2012B Reserve Policy) on which there is available coverage shall be made on a pro-rata basis (calculated by reference to the coverage then available thereunder) after applying all available cash and investments in the Series 2012B Reserve Account. Payment of Series 2012B Policy Costs and reimbursement of amounts with respect to other Series 2012B Credit Facilities shall be made on a pro-rata basis prior to replenishment of any cash drawn from the Series 2012B Reserve Account. For the avoidance of doubt, available coverage means the coverage then available for disbursement pursuant to the terms of the applicable alternative credit instrument without regard to the legal or financial ability or willingness of the provider of such instrument to honor a claim or draw thereon or the failure of such provider to honor any such claim or draw. (b) Acceleration. If the District shall fail to pay any Series 2012B Policy Costs in accordance with the requirements of the above subsection (a), the Series 2012 Bond Insurer shall be entitled to exercise any and all legal and equitable remedies available to it, including those provided under the Indenture other than (i) acceleration of the maturity of the Series 2012B Refunding Bonds or (ii) remedies which would adversely affect owners of the Series 2012B Refunding Bonds. (c) Survival of Series 2012B Policy Costs. The Indenture shall not be discharged until all Series 2012B Policy Costs owing to the Series 2012 Bond Insurer shall have been paid in full. The District s obligation to pay such amounts shall expressly survive payment in full of the Series 2012B Refunding Bonds. (d) Additional Bonds Test and Rate Covenant. The additional bonds test and the rate covenant in the Indenture shall expressly provide for at least one times coverage of the Series 2012 Policy Costs then due and owing. (e) Duties of the Trustee. The Indenture shall require the Trustee to ascertain the necessity for a claim upon the Series 2012B Reserve Policy in accordance with the provisions of subsection (a) above B-34

89 and to provide notice to the Series 2012 Bond Insurer in accordance with the terms of the Series 2012B Reserve Policy at least five business days prior to each date upon which interest or principal is due on the Series 2012B Refunding Bonds. Where deposits are required to be made by the District with the Trustee to the Series 2012B Interest Subaccount and the Series 2012B Principal Subaccount for the Series 2012B Refunding Bonds more often than semi-annually, the Trustee shall be instructed to give notice to the Series 2012 Bond Insurer of any failure of the District to make timely payment in full of such deposits within two business days of the date due. B-35

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91 APPENDIX C THE SCHOOL DISTRICT Introduction Established in 1888, the District encompasses approximately 70 square miles in the northern section of the County. The School District is located in the high desert of the Antelope Valley, an area about seventy miles north of the City of Los Angeles. Virtually all of the City, as well as portions of the surrounding unincorporated areas of the County, are served by the District. Currently, approximately 20,200 students are provided a K-8 educational program within 24 District facilities. The current student-teacher ratio in the District is 31:1 in kindergarten through grade 3, 31:1 in grades 4-6, and 33:1 in grades 7-8. Board of Trustees The District is governed by a five member Board of Trustees (the Board ), whose members are elected to four-year terms. The terms are staggered at two-year intervals to provide continuity of governance. Table 1 PALMDALE SCHOOL DISTRICT Board of Trustees Name Position Term Expires Carol Stanford President 11/2013 Sandy Corrales-Eneix Clerk 11/2013 Robert Bo Bynum Member 11/2015 Jeffrey Ferrin Member 11/2013 Maria Molina Member 11/2015 Source: Palmdale School District. Superintendent and Administrative Personnel The Superintendent of the District is appointed by and reports to the Board. All other District administrators are appointed by and report to the Superintendent. The Superintendent is responsible for management of the District s day to day operations and supervises the work of other District administrators. Roger D. Gallizzi, Superintendent Mr. Gallizzi is a graduate of Dominican School of Philosophy and Theology at the Graduate Theological Union in Berkeley, California, with a Bachelor of Philosophy degree. He earned his Masters in Education Leadership at the University of LaVerne. He completed his doctoral studies at the University of LaVerne and is seeking to finish his dissertation. A noted consultant and staff developer, Mr. Gallizzi has worked for the Los Angeles County Office of Education and numerous school districts in Southern California. He has taught on the faculties of the University of California at Los Angeles Extension; California State University, Northridge; and, currently, at California State University, Bakersfield and Chapman University, where he is adjunct faculty. Mr. Gallizzi is the recipient of the Graduate Instructor of the Year Award from Chapman University (2003); the Administrator of the Year Award from the Los Angeles County Bilingual Directors Association (2003); and the Honorary Service Award Founders Day by the Parent Teachers Association. Mr. Gallizzi is a Senior Associate of the California School Leadership Academy. He is a member of the California and National Association of Bilingual Educators, as well as the Association of California School C-1

92 Administrators. He holds professional clear and administrative multiple subject teaching credentials and the crosscultural language and academic development certification. Mr. Gallizzi began his career in education as a substitute teacher in both the Lancaster School District and the District. After teaching in the Lancaster School District for a short duration, he made his home at Yucca Elementary School in the District where he taught grades 4, 5 and 6. He later became a Curriculum Resource Teacher, an Administrative Intern and finally moved to the position of Coordinator of Biliteracy Programs where he oversaw the implementation of a multi-million dollar federal grant to improve the instructional programs of the District s rapidly-growing population of English learners. As the Director of Biliteracy Programs, Mr. Gallizzi implemented another federal grant which began the Los Amigos dual-immersion program. He also served as the Principal of the Pueblo Learning Center, and then moved to the Human Resources Department where he served as Director of Certificated Personnel. Mr. Gallizzi was promoted to the position of Assistant Superintendent of Human Resources in July Since July 2006, he has also served as Interim Superintendent of the District. Mrs. Cathy A. Shepard, Chief Business Officer Mrs. Cathy A. Shepard is the Chief Business Officer of the District. As the Chief Business Officer, Mrs. Shepard oversees the operational functions of the District, such as finance, purchasing and warehouse, facilities maintenance, information technology, child nutrition, and student transportation. Mrs. Shepard began her career in public education in 1993 and has been with the District since Mrs. Shepard has worked in both the high school and elementary school environment in two large school districts (student enrollment in excess of 20,000). While employed in the high school district Mrs. Shepard was actively involved in the finance and accounting processes of constructing six new schools, including campaigns to secure general obligation bonds, and has participated in refunding bond debt with the elementary school district. One of Mrs. Shepard s strength is in communicating complicated financial issues in easy to understand terms to the various stakeholders associated with the District. Mrs. Shepard received both her Bachelor of Science Business Administration and her Master of Science Administration from the California State University Bakersfield. She received her California School Business Officials Certification in Average Daily Attendance and Base Revenue Limit Between the Fiscal Year and the Fiscal Year, the District s average daily attendance ( ADA ) decreased by approximately 8% percent, and is projected to decrease further in the current and following fiscal year before leveling out in the Fiscal Year, with growth expected to begin in the Fiscal Year, based upon information the District has received from the Los Angeles County Office of Education and new charters schools located in the District. The ADA and Base Revenue Limit for the Fiscal Year through the Fiscal Year, as well as projections for the Fiscal Year through the Fiscal Year are set forth below: Table 2 PALMDALE SCHOOL DISTRICT Average Daily Attendance Fiscal Year Average Daily Attendance Base Revenue Limit ,467 $109,928, , ,140, , ,272, , ,374, ,570 19,450 96,207,783 99,474,191 Projected Projected , ,702, ,094 99,400,783 Source: Palmdale School District. Financial Reports C-2

93 Employee Relations In the fall of 1974, the State Legislature enacted a public school employee collective bargaining law known as the Rodda Act, which became effective in stages in The law provides that employees are to be divided into appropriate bargaining units which are to be represented by an exclusive bargaining agent. The Certificated employees, which include, teachers, speech therapists, school psychologists, nurses, and similar classifications, have assigned California s Teachers Association as their exclusive bargaining agent and were covered by a contract that expires on June 30, All union business conducted between the District and the Certificated employees are with Palmdale Elementary Teachers Association ( PETA ), the local representative of California s Teachers Association. Negotiations relative to salary and benefits are negotiated annually. The Classified employees, include clerical staff, instructional assistants, custodians, accounting personnel and similar classifications, have assigned California School Employees Association ( CSEA ) as their exclusive bargaining agent and are covered by a contract that expires on November 1, Negotiations relative to salary and benefits are negotiated annually. As of June 30, 2011, accrued vacation benefits amounted to approximately $2,677,096. Table 3 PALMDALE SCHOOL DISTRICT Certificated Employees and Classified Employees Fiscal Year Certificated Employees Classified Employees , , , ,088 1, , Projected Projected , , Source: Palmdale School District. C-3

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95 APPENDIX D FORM OF OPINION OF BOND COUNSEL September 27, 2012 Palmdale Elementary School District Community Facilities District No RE: Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A and Special Tax Refunding Bonds, Series 2012B Ladies and Gentlemen: We have acted as bond counsel in connection with the issuance and sale by the Palmdale Elementary School District Community Facilities District No (the District ), of $10,116, aggregate principal amount of bonds designated Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A (the Series 2012A Bonds ), and $5,815,000 aggregate principal amount of bonds designated Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B (the Series 2012B Bonds and together with the Series 2012A Bonds, the Bonds ). The Bonds are issued under the Mello-Roos Community Facilities Act of 1982, constituting Title 5, Division 2, Part 1, Chapter 2.5 (commencing with Section 53311) of the California Government Code, and pursuant to resolutions adopted by the Board of Trustees of the Palmdale School District, acting as the legislative body of the District, on August 7, 2012 (the Resolution ) and an Indenture, dated as of December 1, 1999 (the Master Indenture ), by and between the District and U.S. Bank National Association, as Trustee (the Trustee ), as amended and supplemented, including as amended and supplemented by a Supplemental Indenture No. 2, dated as of September 1, 2012, by and between the District and the Trustee. The Master Indenture, as so amended and supplemented, is herein referred to as the Indenture. All capitalized terms used herein and not otherwise defined shall have the respective meanings given to such terms in the Indenture. The Bonds will be issued as Current Interest Bonds, Capital Appreciation Bonds, and Convertible Capital Appreciation Bonds. Any Bonds which are Current Interest Bonds will bear current interest on the principal amount thereof from the date of delivery. The interest on any Bonds which are Capital Appreciation Bonds will accrue on the initial principal amount thereof and will be payable only at maturity or upon prior redemption. Prior to August 1, 2025 (the Conversion Date ), any Bonds that comprise Convertible Capital Appreciation Bonds will not pay current interest, but will accrete in value from their initial principal amounts on the date of delivery thereof to the Conversion Date. From and after the Conversion Date, those Bonds that are Convertible Capital Appreciation Bonds will pay current interest, such interest to accrue based upon the Conversion Value of such Convertible Capital Appreciation Bonds. Unless otherwise provided herein, the descriptions herein of Capital Appreciation Bonds will apply to Convertible Capital Appreciation Bonds prior to the Conversion Date, and the descriptions herein of Current Interest Bonds will apply to Convertible Capital Appreciation Bonds from and after the Conversion Date. The Bonds are limited obligations of the District payable solely from the proceeds of Gross Taxes (as defined in the Indenture) and certain funds established pursuant to the Indenture and held by the Trustee. As bond counsel, we have examined copies, certified to us as being true and complete, of the proceedings of the District for the authorization and issuance of the Bonds. In this connection, we have also examined such certificates of public officials and officers of the District as we have considered necessary for the purposes of this opinion. We have, with your approval, assumed that all items submitted to us as originals are authentic and that all items submitted as copies conform to the originals. D-1

96 On the basis of such examination, our reliance upon the assumptions contained herein and our consideration of such questions of law as we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that: 1. The Bonds have been duly authorized and issued and constitute legally valid and binding limited obligations of the District, enforceable in accordance with their terms and the terms of the Indenture. 2. The Indenture has also been duly and validly authorized, executed and delivered by the District and, assuming it constitutes the valid and binding obligation of the other party thereto, constitutes the valid and binding obligation of the District, enforceable in accordance with its terms. The Bonds, assuming due authentication by the Trustee, are entitled to the benefits of the Indenture. 3. The Internal Revenue Code of 1986 (the Code ) sets forth certain requirements which must be met subsequent to the issuance and delivery of the Bonds for interest on those Bonds which are Current Interest Bonds and Convertible Capital Appreciation Bonds and the excess of the Accreted Value with respect to any Bonds which are Capital Appreciation Bonds or Convertible Capital Appreciation Bonds over the Initial Amount thereof, to the extent such excess represents interest properly allocated to the Owner of such Convertible Capital Appreciation Bonds or Capital Appreciation Bonds (the Excess Accreted Value ), to be and remain excluded from gross income for federal income tax purposes. Noncompliance with such requirements could cause the interest on and Excess Accreted Value with respect to the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issue of the Bonds. Pursuant to the Indenture and the Tax and Nonarbitrage Certificate executed by the District in connection with the issuance of the Bonds (the Tax Certificate ), the District has covenanted to comply with the applicable requirements of the Code in order to maintain the exclusion of the interest on and Excess Accreted Value with respect to the Bonds from gross income for federal income tax purposes pursuant to Section 103 of the Code. In addition, the District has made certain representations and certifications in the Indenture and Tax Certificate. We have not independently verified the accuracy of those certifications and representations. Under existing law, assuming compliance with the tax covenants described herein and the accuracy of the aforementioned representations and certifications, interest on and Excess Accreted Value with respect to the Bonds are excluded from gross income for federal income tax purposes under Section 103 of the Code. We are also of the opinion that such interest on and Excess Accreted Value with respect to the Bonds are not treated as preference items in calculating the alternative minimum tax imposed under the Code with respect to individuals and corporations. Interest on and Excess Accreted Value with respect to the Bonds are, however, included in the adjusted current earnings of certain corporations for purposes of computing the alternative minimum tax imposed on such corporations. The increases in Accreted Value with respect to those Bonds which are Capital Appreciation Bonds and Convertible Capital Appreciation Bonds are includable in adjusted current earnings as they accrue semiannually rather than at the time such Accreted Value is actually paid to and received by the owners of the Bonds. Increases in Accreted Value occur each semiannual period in the amount of interest which accrues semiannually during such period on the Accreted Value as of the beginning of such period. An owner s adjusted basis in a Bond which is a Capital Appreciation Bond or Convertible Capital Appreciation Bond, used to determine the amount of gain or loss on disposition of such Capital Appreciation Bond or Convertible Capital Appreciation Bond, will be equal to the Accreted Value as of the date of calculation. 4. Interest on and Excess Accreted Value with respect to the Bonds are exempt from personal income taxes of the State of California under present state law. 5. Bond Counsel is further of the opinion that the difference between the principal amount of the Series 2012B Refunding Bonds maturing August 1, 2021 through August 1, 2026, inclusive and on August 1, 2029 (collectively, the Discount Bonds ) and the initial offering price to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters or wholesalers) at which price a substantial amount of such Discount Bonds of the same maturity was D-2

97 sold constitutes original issue discount which is excluded from gross income for federal income tax purposes to the same extent as interest on and Excess Accreted Value with respect to the Bonds. Further, such original issue discount accrues actuarially on a constant interest rate basis over the term of each Discount Bond and the basis of each Discount Bond acquired at such initial offering price by an initial purchaser thereof will be increased by the amount of such accrued original issue discount. The accrual of original issue discount may be taken into account as an increase in the amount of taxexempt income for purposes of determining various other tax consequences of owning the Discount Bonds, even though there will not be a corresponding cash payment. The opinions set forth in paragraphs 1 and 2 above (i) assume that the Trustee has duly authenticated the Bonds and (ii) are subject to (a) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors rights generally (including, without limitation, fraudulent conveyance laws), (b) the effect of general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and (c) the limitations on legal remedies against government entities in the State of California. In rendering the opinions set forth in paragraphs 3 and 5 above, we are relying upon representations and covenants of the District in the Indenture and in the Tax Certificate concerning the investment and use of Bond proceeds, the rebate to the federal government of certain earnings thereon, and the use of the property and facilities refinanced with the proceeds of the Bonds. In addition, we have assumed that all such representations are true and correct and that the District will comply with such covenants. We express no opinion with respect to the exclusion of the interest on and Excess Accreted Value with respect to the Bonds from gross income under Section 103(a) of the Code in the event that any of such representations are untrue or the District fails to comply with such covenants, unless such failure to comply is based on our advice or opinion. We express no opinion as to any provision in the Indenture or the Bonds with respect to the priority of any pledge or security interest or indemnification. We express no opinion with respect to the Rate and Method of Apportionment of Special Tax or the validity of the Special Tax levied upon any individual parcel. Except as stated in paragraphs 3, 4 and 5 we express no opinion as to any other federal, state or local tax consequences of the ownership or disposition of the Bonds. Furthermore, we express no opinion as to any federal, state or local tax law consequences with respect to the Bonds, or the interest thereon, or Excess Accreted Value with respect thereto, if any action is taken with respect to the Bonds or the proceeds thereof upon the advice or approval of other counsel. No opinion is expressed herein on the accuracy, completeness or sufficiency of the Official Statement or other offering material relating to the Bonds. This opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters. We call attention to the fact that the opinions expressed herein and the exclusion of interest on those Bonds which are Current Interest Bonds and Convertible Capital Appreciation Bonds and Excess Accreted Value with respect to those Bonds which are Capital Appreciation Bonds and Convertible Capital Appreciation Bonds from gross income for federal income tax purposes may be affected by actions taken or omitted or events occurring or failing to occur after the date hereof. We have not undertaken to determine, or inform any person, whether any such actions are taken, omitted, occur or fail to occur. This letter and the opinions and matters expressed herein are solely for your use in connection with the sale and delivery of the Bonds to the Underwriter and may not be delivered to or relied upon by any other person. This letter is not intended to, and may not, be relied upon by owners of the Bonds. We do not undertake to advise you of any subsequent events or developments which might affect the statements contained herein. Our engagement with respect to this matter has terminated as of the date hereof, and we disclaim any obligation to update this letter. Respectfully submitted, D-3

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99 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Certificate (this Disclosure Certificate ) is entered into as of September 1, 2012, by the Palmdale Elementary School District Community Facilities District No (the District ) for the benefit of the Owners and Beneficial Owners of the Series 2012 Bonds (as hereinafter defined) in connection with the issuance of $10,116, aggregate principal amount of Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A (the Series 2012A Bonds ), and $5,815,000 aggregate principal amount of Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B (the Series 2012B Bonds and, together with the Series 2012A Bonds, the Series 2012 Bonds ). WITNESSETH: WHEREAS, the District and U.S. Bank National Association, as trustee (the Trustee ) have entered into an Indenture, dated as of December 1, 1999 (the Master Indenture ), as amended by a Supplemental Indenture No. 1, dated as of July 1, 2011, as further supplemented and amended by a Supplemental Indenture No. 2, dated as of September 1, 2012, by and between the District and the Trustee, authorizing and providing for the issuance of the Series 2012 Bonds (the Master Indenture, as so amended and supplemented, is herein referred to as the Indenture ); and WHEREAS, the Underwriter with respect to the Series 2012 Bonds is required to comply with the provisions of Rule 15c2-12 adopted by the United States Securities and Exchange Commission (the SEC ) under the Securities Exchange Act of 1934, as amended (the 1934 Act ). NOW THEREFORE, the District covenants and agrees for the benefit of the Owners and Beneficial Owners of the Series 2012 Bonds as follows: SECTION 1. Definitions. In addition to the definitions set forth in the Indenture, 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: Annual Report shall mean any Annual Report provided by the District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. Beneficial Owner shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Series 2012 Bonds (including persons holding bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Series 2012 Bonds for federal income tax purposes. Bond Register shall have the meaning provided in the Indenture. Disclosure Representative shall mean the Superintendent of the Palmdale School District or his or her designee, or such other officer, employee, or agent as the District shall designate in writing to the Dissemination Agent from time to time. Dissemination Agent shall mean the Superintendent of the Palmdale School District, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation. Listed Events shall mean any of the events listed in Section 5(a) of this Disclosure Certificate. MSRB means the Municipal Securities Rulemaking Board or any other entity designated or authorized by the SEC to receive reports pursuant to the Rule (defined below). Until otherwise designated by the MSRB or the E-1

100 SEC, filings with the MSRB are to be made through the Electronic Municipal Market Access ( EMMA ) website of the MSRB, currently located at Official Statement shall mean the Official Statement, dated September 18, 2012 relating to the Series 2012 Bonds. Owner, whenever used herein with respect to a Series 2012 Bond, shall mean the Person in whose name the ownership of such Series 2012 Bond is registered on the Bond Register. Person shall mean an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. Rule shall mean Rule 15c2-12 adopted by the SEC under the 1934 Act, as the same may be amended from time to time. SECTION 2. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the Owners and the Beneficial Owners, and in order to assist the Underwriters in complying with Rule 15c2-12. SECTION 3. Provision of Annual Reports. (a) The District shall, or shall cause the Dissemination Agent to, not later than 270 days after the end of each fiscal year of the District, commencing with the fiscal year of the District ending June 30, 2012, provide to the MSRB copies of an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the District may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the District s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(f). The Annual Report shall be in electronic format and accompanied by identifying information as prescribed by the MSRB. (b) Not later than 15 business days prior to the date specified in subsection (a) for providing the Annual Report to the MSRB, the District shall provide the Annual Report to the Dissemination Agent. If by 15 business days prior to such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the District to determine if the District is in compliance with subsection (a). (c) If the Dissemination Agent is unable to verify that an Annual Report has been provided to the MSRB by the date required in subsection (a), the Dissemination Agent shall send a notice to the MSRB, in substantially the form attached as Exhibit A. (d) The Dissemination Agent shall: (i) (ii) SECTION 4. determine each year prior to the date for providing the Annual Report the contact information and format and identifying information requirements for the MSRB; and to the extent such Annual Report has been provided to it, file a report with the District certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided to the MSRB. Content of Annual Reports. (a) The District s Annual Report shall contain the CUSIP numbers of the Series 2012 Bonds and contain or incorporate by reference the following: E-2

101 (i) Audited Financial Statements of the District prepared in accordance with generally accepted accounting principles for the fiscal year ended (the Financial Statements ); provided, however, that in the event that such Audited Financial Statements shall not be available, unaudited Financial Statements may be substituted therefor; provided, further, that Audited Financial Statements shall be provided by the District as soon as such Financial Statements become available; (ii) To the extent not included in the Financial Statements of the District: (A) (B) (C) (D) (E) (F) (G) updated information for Table 1 (Property Annexations to Date) of the Official Statement for the previous fiscal year; updated information for Table 2 (Special Tax by Tax Rate Category) of the Official Statement for the previous fiscal year; updated information for Table 4 (Annual Special Tax on Developed Property Levies, Collections and Delinquency Rates as of June 30) of the Official Statement for the previous fiscal year; updated information for Table 5 (Annual Special Tax on Developed Property Levies, Collections and Delinquency Rates as of May/June of each Fiscal Year) of the Official Statement for the previous fiscal year; updated information for Table 6 (Coverage by Type of Property Based Maximum Special Taxes for Developed Property) of the Official Statement for the previous fiscal year; updated information for Table 7 (Historical Assessed Valuation and Growth Rates for Taxable Parcels in the District) of the Official Statement for the previous fiscal year; updated information for Table 9 (Value to Debt Burden Calculation Current and Proposed District Debt) of the Official Statement for the previous fiscal year; (H) Updated information for Table 11 (Value to Debt Burden Calculation for Top 20 Property Taxpayers) of the Official Statement for the previous fiscal year. (b) Any or all of the items listed in subsection (a) may be incorporated by specific reference to other documents, including official statements of debt issues of the District or related public entities. The District shall clearly identify each such other document so incorporated by reference. SECTION 5. Reporting of Significant Events. (c) Pursuant to the provisions of this Section 5, the District shall give, or cause to be given, in a timely manner not in excess of ten business days after the occurrence of the event, notice of the occurrence of any of the following events with respect to the Series 2012 Bonds. The occurrence of any of the following events with respect to the Series 2012 Bonds shall be a Listed Event: (i) (ii) (iii) (iv) principal and interest payment delinquencies; non-payment related defaults, if material; unscheduled draws on debt service reserves reflecting financial difficulties; unscheduled draws on credit enhancements reflecting financial difficulties; E-3

102 (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) substitution of credit or liquidity providers, or their failure to perform; adverse tax opinions or the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Series 2012 Bonds, or other material events affecting the tax status of the Series 2012 Bonds; modifications to rights of Series 2012 Bond holders, if material; bond calls, if material, and tender offers; defeasances; release, substitution or sale of property securing repayment of the securities, if material; rating changes; bankruptcy, insolvency, receivership or similar event of the District (Note: For purposes of this subsection, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the District in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the District); the consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and appointment of a successor or additional trustee or the change of name of a trustee, if material. (d) The Dissemination Agent shall, within one (1) business day of obtaining actual knowledge at his or her address listed in Section 12 hereof of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform such person of the event, and, for any Listed Event that requires the District to determine if such event is material, request that the District promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection (f). (e) Whenever the District obtains knowledge of the occurrence of a Listed Event that requires it to determine if such event would constitute material information, whether because of a notice from the Dissemination Agent pursuant to subsection (b) or otherwise, the District shall as soon as possible determine if such event would be material under applicable federal securities laws. (f) If the District obtains knowledge of the occurrence of a Listed Event that does not require it to determine if such event is material or has determined that knowledge of the occurrence of a Listed Event that requires such a determination would be material under applicable federal securities laws, the District shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f). E-4

103 (g) If in response to a request for a determination of materiality under subsection (b), the District determines that the Listed Event would not be material under applicable federal securities laws, the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f). (h) If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the MSRB. Such notice shall include the CUSIP numbers of the Series 2012 Bonds. (i) The Dissemination Agent may conclusively rely on an opinion of counsel that the District s instructions to the Dissemination Agent under this Section 5 comply with the requirements of the Rule. SECTION 6. Termination of Reporting Obligation. The District s and the Dissemination Agent s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series 2012 Bonds. If such termination occurs prior to the final maturity of the Series 2012 Bonds, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5(f). SECTION 7. Dissemination Agent. The District 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 Dissemination Agent. Upon such discharge, however, a new Dissemination Agent must be appointed within 60 days. The Dissemination Agent may resign by providing 60 days written notice to the District. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the District pursuant to this Disclosure Certificate. If at any time there is not any other designated Dissemination Agent, the Superintendent of the School District shall be the Dissemination Agent. The initial Dissemination Agent shall be the Superintendent of the Palmdale School District. SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that any of the following conditions is satisfied: (xv) (xvi) (xvii) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Series 2012 Bonds, or the type of business conducted by the District; The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Series 2012 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; or The amendment or waiver either (i) is approved by the Owners of the Series 2012 Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Owners of the Series 2012 Bonds, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Owners or Beneficial Owners of the Series 2012 Bonds. In the event of any amendment or waiver of a provision of this Disclosure Certificate, the District shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the District. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(f), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative E-5

104 form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. SECTION 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the District chooses to include any information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Certificate, the District shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. SECTION 10. Default. In the event of a failure of the District or the Dissemination Agent to comply with any provision of this Disclosure Certificate, any Owner or Beneficial Owner may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District or the Dissemination Agent, as the case may be, 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 Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the District or the Dissemination Agent to comply with this Disclosure Certificate shall be an action to compel performance, and no person or entity shall be entitled to recover monetary damages under this Disclosure Certificate. SECTION 11. 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 District agrees, to the extent permitted by law, to indemnify and save the Dissemination Agent, or his or her employees and agents, harmless against any loss, expense and liabilities which he or she may incur arising out of or in the exercise or performance of his or her powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding losses, expenses and liabilities due to the Dissemination Agent s negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Series 2012 Bonds. SECTION 12. Notices. Any notices or communications to or among any of the parties to this Disclosure Certificate may be given as follows: To the District: To the Dissemination Agent: Palmdale School District Attn: Superintendent N. 10th Street East Palmdale, CA Palmdale School District Attn: Superintendent/Dissemination Agent N. 10th Street East Palmdale, CA Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent. SECTION 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Underwriter, the Owners and Beneficial Owners from time to time of the Series 2012 Bonds, and shall create no rights in any other person or entity. E-6

105 SECTION 14. Governing Law. THIS DISCLOSURE CERTIFICATE SHALL BE GOVERNED BY THE LAWS OF CALIFORNIA DETERMINED WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAW. SECTION 15. Severability. In case any provision in this Disclosure Certificate shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions thereof will not in any way be affected or impaired thereby. [Remainder of Page Intentionally Left Blank] E-7

106 IN WITNESS WHEREOF, the District has caused this Disclosure Certificate to be executed by its proper officer thereunto duly authorized, as of the day and year first above written. PALMDALE ELEMENTARY SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO By: Title: Roger D. Gallizi, Superintendent of the Palmdale School District, Authorized Signatory on behalf of the District E-8

107 EXHIBIT A NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT Name of Obligor: Palmdale Elementary School District Community Facilities District No Name of Series 2012 Bond Issue: Palmdale Elementary School District Community Facilities District No Special Tax Bonds, Series 2012A and Palmdale Elementary School District Community Facilities District No Special Tax Refunding Bonds, Series 2012B (together, the Series 2012 Bonds ). Date of Execution and Delivery: September 27, 2012 NOTICE IS HEREBY GIVEN that PALMDALE ELEMENTARY SCHOOL DISTRICT COMMUNITY FACILITIES DISTRICT NO (the District ) has not provided an Annual Report with respect to the abovenamed Series 2012 Bonds as required by Section 3 of the Continuing Disclosure Certificate, dated September 1, 2012, entered into by the District for the benefit of the Owners of the Series 2012 Bonds. [The District anticipates that the Annual Report will be filed by.] Dated: PALMDALE SCHOOL DISTRICT, as Dissemination Agent By: SUPERINTENDENT cc: Palmdale Elementary School District Community Facilities District No E-9

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109 APPENDIX F THE SCHOOL DISTRICT S AUDITED FINANCIAL STATEMENTS

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111 PALMDALE SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2011 FINANCIAL SECTION Independent Auditors' Report 2 Management's Discussion and Analysis 4 Basic Financial Statements Government-Wide Financial Statements Statement of Net Assets 14 Statement of Activities 15 Fund Financial Statements Governmental Funds - Balance Sheet 16 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets 17 Governmental Funds - Statement of Revenues, Expenditures, and Changes in Fund Balances 18 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities 19 Fiduciary Funds - Statement of Net Assets 21 Notes to Financial Statements 22 REQUIRED SUPPLEMENTARY INFORMATION General Fund - Budgetary Comparison Schedule 51 Budgetary Comparison Statement Schedule for the Child Development Fund 52 Schedule of Other Postemployment Benefits (OPEB) Funding Progress 53 SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 55 Local Education Agency Organization Structure 58 Schedule of Average Daily Attendance 59 Schedule of Instructional Time 60 Reconciliation of Annual Financial and Budget Report With Audited Financial Statements 61 Schedule of Financial Trends and Analysis 62 Combining Statements - Non-Major Governmental Funds Schedule of Charter Schools 63 Combining Balance Sheet 64 Combining Statement of Revenue, Expenditures, and Changes in Fund Balances 65 Note to Supplementary Information 66 INDEPENDENT AUDITORS' REPORTS Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 69 Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A Report on State Compliance 73

112 PALMDALE SCHOOL DISTRICT TABLE OF CONTENTS JUNE 30, 2011 SCHEDULE OF FINDINGS AND QUESTIONED COSTS Summary of Auditors' Results 76 Financial Statement Findings 77 Federal Awards Findings and Questioned Costs 81 State Awards Findings and Questioned Costs 82 Summary Schedule of Prior Audit Findings 83 Management Letter 94

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118 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2011 Governmental Funds - All of the District's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. The differences of results in the governmental fund financial statements to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement. THE DISTRICT AS TRUSTEE Reporting the District's Fiduciary Responsibilities The District is the trustee, or fiduciary, for funds held on behalf of others, like our funds for associated student body activities and CFDs. The District's fiduciary activities are reported in the Statement of Fiduciary Net Assets. We exclude these activities from the District's other financial statements because the District cannot use these assets to finance its operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes. THE DISTRICT AS A WHOLE Net Assets The District's net assets were $192.8 million for the fiscal year ended June 30, Of this amount, $4.2 million was unrestricted. Restricted net assets are reported separately to show legal constraints from debt covenants and enabling legislation that limit the School Board's ability to use those net assets for day-to-day operations. Our analysis below focuses on the net assets (Table 1) and change in net assets (Table 2) of the District's governmental activities. 6

119 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2011 Table 1 (Amounts in millions) Governmental Activities 2010, as 2011 restated Assets Current and other assets $ 99.8 $ Capital assets Total Assets Liabilities Current liabilities Long-term obligations Total Liabilities Net Assets Invested in capital assets, net of related obligations Restricted Unrestricted Total Net Assets $ $ The $4.2 million in unrestricted net assets of governmental activities represents the accumulated results of all past years' operations. 7

120 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2011 Changes in Net Assets The results of this year's operations for the District as a whole are reported in the Statement of Activities on page 15. Table 2 takes the information from the Statement, rounds off the numbers, and rearranges them slightly so you can see our total revenues for the year. (Amounts in millions) Revenues Program revenues: Table 2 Governmental Activities 2010, as 2011 restated Charges for services $ 2.7 $ 2.8 Operating grants and contributions General revenues: Federal and State aid not restricted Property taxes Other general revenues Total Revenues Expenses Instruction-related Student support services Administration Plant services Other Total Expenses Governmental Activities Change in Net Assets $ (13.7) $ (17.1) As reported in the Statement of Activities on page 15, the cost of all of our governmental activities this year was $241.7 million. However, the amount that our taxpayers ultimately financed for these activities through local taxes was only $13.6 million because the cost was paid by those who benefited from the programs ($2.7 million) or by other governments and organizations who subsidized certain programs with grants and contributions ($104.4 million). We paid for the remaining "public benefit" portion of our governmental activities with $106.2 million in Federal and State funds and with other revenues, like interest and general entitlements of $7.0 million. 8

121 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2011 In Table 3, we have presented the cost and net cost of each of the District's largest functions: instruction-related, school administration, pupil transportation, food services, other student support services, administration, plant services, and other. As discussed above, net cost shows the financial burden that was placed on the District's taxpayers by each of these functions. Providing this information allows our citizens to consider the cost of each function in comparison to the benefits they believe are provided by that function. Table , as restated (Amounts in millions) Net Cost/ Total Cost (Revenues) Total Cost Net Cost/ of Services of Services of Services of Services Instruction-related $ $ 80.1 $ $ 73.8 School administration Pupil transportation Food services 10.1 (0.4) Other student support services Administration Plant services Other Total $ $ $ $ THE DISTRICT'S FUNDS As the District completed this year, our governmental funds reported a combined fund balance of $70.6 million, which is a decrease of $5.7 million from prior year. Table 4 (Dollar amounts in millions) Balances and Activity July 1, 2010, as restated Revenues Expenditures June 30, 2011 General $ 46.6 $ $ $ 43.5 Child Development (0.6) Cafeteria Building Capital Facilities County School Facilities Special Reserve Fund for Capital Outlay Projects Bond Interest and Redemption Debt Service Total $ 76.3 $ $ $

122 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2011 The primary reasons for this decrease are: Our General Fund is our principal operating fund. The fund balance in the General Fund decreased from $46.6 million to $43.5 million due to decreased designated ending balance carryovers and restricted ending balance carryovers. The County School Facilities Fund decreased from $4.3 million to $1.8 million due to a transfer out to the Building Fund for the purpose of paying debt service. General Fund Budgetary Highlights Over the course of the year, the District revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final revision to the budget was adopted on June 18, (A schedule showing the District's original and final budget amounts compared with amounts actually paid and received is provided in our annual report on page 51.) Revenue and expenditure revisions were made to the budgets due to changes in State funding, changes in ADA, amended grant awards, and expenditure increases and savings that were confirmed after the budget was adopted. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At June 30, 2011, the District had a carrying value of $202.5 million in a broad range of capital assets (net of depreciation), including land, buildings, furniture and equipment, and vehicles. This amount represents a net decrease (including additions, deductions and depreciation) of $1.0 million, or 0.5 percent, from last year. Table 5 (Amounts in millions) Governmental Activities Land and construction in progress $ 34.2 $ 33.4 Buildings and improvements Equipment Total $ $ Several capital projects are planned for the year; the two primary projects are the construction of Dos Caminos School and the David G. Millen Intermediate School. Dos Caminos School is designed as a prefabricated structure to house approximately 250 students with a projected open date of September David G. Millen Intermediate School is currently in the design/architectural phase. It is designed to house approximately 1,200 students and is projected to open in September We present more detailed information about our capital assets in Note 4 to the financial statements. 10

123 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2011 Long-Term Obligations At the end of this year, the District had $81.4 million in long-term obligations outstanding versus $74.4 million last year, an increase of 9.4 percent from last year. Those long-term obligations consisted of: Table 6 (Amounts in millions) Governmental Activities 2010, as 2011 restated General obligation bonds $ 22.6 $ 23.1 Certificates of participation Compensated absences Capital leases Other postemployment benefits Early retirement plan Total $ 81.4 $ 74.4 Long-term obligations include general obligation bonds, certificates of participation, compensated absences, capital leases, other postemployment benefits and an early retirement plan. We present more detailed information regarding our long-term obligations in Note 8 of the financial statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES In considering the District Budget for the year, the District Board and management used the following criteria and assumptions: A. ADA Assumptions 1. Regular ADA is estimated to decline again in Fiscal : a : 19,450 Actual P-2 (-153 from prior year) b : 19,569 Actual P-2 (-480 from prior year) c : 20,044 Actual P-2 (-717 from prior year) d : 20,550 Actual P-2 (-609 from prior year) e : 21,225 Actual P-2 (-363 from prior year) 2. In a declining enrollment year, the ADA that is used to calculate the Revenue Limit is the higher of either (1) current year ADA or (2) prior year ADA. As a result, the ADA for the Revenue Limit calculation is estimated at 19,

124 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2011 B. Revenue Assumptions 1. Revenue Limit adjustments include: 2.24 percent Cost of Living Adjustment (COLA), plus zero equalization aid minus percent deficit factor. 2. Other State Revenue adjustments include: a. Continued bifurcated COLA on Special Education Revenues. 1) State categorical programs: a) Tier I are funded at 100 percent of , b) Tier II are reduced ongoing by 20 percent of , c) Tier III are reduced ongoing by 20 percent and become unrestricted dollars. 2) This results in less than COLA growth on total funding thereby worsening the encroachment. b. Lottery was budgeted using an estimated Annual ADA of 19,040 a) Unrestricted Lottery - $ per ADA. b) Restricted Lottery - $17.00 per ADA. c. Categorical programs have been adopted at or below minus the reductions. d. Revenues have been adopted at or below the funding levels to allow for estimated declining enrollment and other program changes. 3. Local Categorical Revenues have been adopted at or below the funding levels to allow for estimated declining enrollment and other program changes. C. Expenditure Assumptions 1. Step and column increases have been provided for all applicable contract positions, with no projected increase for salary and benefits. 2. Based on the State Adopted Budget and the incorporation of the estimated effects of declining enrollment, subsequent reductions were made to General Fund expenditures including, but not limited to, contract salary and benefits and formula driven allocations. 3. All Federal, State, and Local categorical grant programs are budgeted with revenues equaling expenditures. Entitlement programs are budgeted for expenditures equaling the sum of current year revenues and restricted fund balances. D. Fund Balance 1. The estimated ending fund balance includes a Reserve for Economic Uncertainties of $4.9 million. This amount is based on the District's Unaudited Actual Report. 12

125 PALMDALE SCHOOL DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, The total General Fund ending fund balance projected for is estimated at $29.1 million less the Restricted ending fund balance of $9.4 million. E. Multi-Year Projection In order to obtain a positive certification on State required Interim Financial Reports, the District must prepare and governing board approve, a multi-year projection that includes a solvent financial picture for the current fiscal year ( ) and two subsequent fiscal years ( and ). CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors with a general overview of the District's finances and to show the District's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Chief Business Officer, Cathy A. Shepard, at Palmdale School District, th Street East, Palmdale, California or at cashepard@palmdalesd.org. 13

126 PALMDALE SCHOOL DISTRICT STATEMENT OF NET ASSETS JUNE 30, 2011 Governmental Activities ASSETS Deposits and investments $ 51,219,984 Receivables 46,130,359 Prepaid expenses 506,507 Stores inventories 422,294 Deferred costs on issuance 1,491,793 Capital assets Land and construction in progress 34,174,892 Other capital assets 240,938,820 Less: Accumulated depreciation (72,605,521) Total Capital Assets 202,508,191 TOTAL ASSETS 302,279,128 LIABILITIES Accounts payable 26,838,242 Accrued interest 485,354 Deferred revenue 811,313 Long-term obligations Current portion of long-term obligations 2,376,154 Noncurrent portion of long-term obligations 79,024,007 Total Long-Term Obligations 81,400,161 TOTAL LIABILITIES 109,535,070 NET ASSETS Invested in capital assets, net of related debt 171,052,515 Restricted for: Debt service 1,802,071 Capital projects 3,474,495 Educational programs 9,447,973 Other activities 2,784,581 Unrestricted 4,182,423 TOTAL NET ASSETS $ 192,744,058 The accompanying notes are an integral part of these financial statements. 14

127 PALMDALE SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2011 Net (Expenses) Revenues and Changes in Program Revenues Net Assets Charges for Operating Services and Grants and Governmental Functions/Programs Expenses Sales Contributions Activities Governmental Activities: Instruction $ 114,550,967 $ 351,403 $ 37,344,070 $ (76,855,494) Instruction-related activities: Supervision of instruction 11,038,555 23,528 9,909,113 (1,105,914) Instructional library, media, and technology 2,386,063 1, ,302 (2,109,908) School site administration 11,174,411 6,165 1,935,944 (9,232,302) Pupil services: Home-to-school transportation 4,563, ,730,747 (2,832,725) Food services 10,097,549 1,550,718 8,977, ,512 All other pupil services 10,083,237 93,203 5,810,375 (4,179,659) Administration: Data processing 2,076,811-17,178 (2,059,633) All other administration 9,051,834 69,788 1,687,191 (7,294,855) Plant services 16,553,047 75,632 2,108,815 (14,368,600) Facility acquisition and construction (415) Ancillary services 96,453-99,775 3,322 Community services 620, ,476 41,744 Interest on long-term obligations 2,806, (2,806,951) Other outgo 43,209, ,989 33,902,216 (8,750,809) Depreciation (unallocated) 1 3,441, (3,441,006) Total Governmental Activities $ 241,750,519 $ 2,728,281 $ 104,459,545 (134,562,693) General revenues and subventions: Property taxes, levied for general purposes 5,984,682 Property taxes, levied for debt service 1,661,197 Taxes levied for other specific purposes 29,871 Federal and State aid not restricted to specific purposes 106,174,548 Interest and investment earnings 758,828 Miscellaneous 6,219,055 Subtotal, General Revenues 120,828,181 Change in Net Assets (13,734,512) Net Assets - Beginning 188,307,498 Prior Period Restatement 18,171,072 Net Assets - Beginning, as restated 206,478,570 Net Assets - Ending $ 192,744,058 1 This amount excludes any depreciation that is included in the direct expenses of the various programs. The accompanying notes are an integral part of these financial statements. 15

128 PALMDALE SCHOOL DISTRICT GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2011 Child Non-Major Total General Development Building Governmental Governmental Fund Fund Fund Funds Funds ASSETS Deposits and investments $ 22,822,838 $ 1,744,033 $ 17,826,193 $ 8,826,920 $ 51,219,984 Receivables 43,624,509 1,668,191 53, ,690 46,130,359 Due from other funds 2,717, ,717,092 Prepaid expenditures , ,507 Stores inventories 99, , ,294 Total Assets $ 69,263,460 $ 3,412,224 $ 17,880,162 $ 10,440,390 $ 100,996,236 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable 24,930,453 1,248, ,924 26,838,242 Due to other funds - 2,717, ,717,092 Deferred revenue 783,620 27, ,313 Total Liabilities 25,714,073 3,993, ,924 30,366,647 Fund Balances: Nonspendable 199, ,780 1,028,801 Restricted 9,447,973-17,880,162 7,716,721 35,044,856 Assigned 8,374, ,234,965 9,609,344 Unassigned 25,528,014 (581,426) ,946,588 Total Fund Balances 43,549,387 (581,426) 17,880,162 9,781,466 70,629,589 Total Liabilities and Fund Balances $ 69,263,460 $ 3,412,224 $ 17,880,162 $ 10,440,390 $ 100,996,236 The accompanying notes are an integral part of these financial statements. 16

129 PALMDALE SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2011 Total Fund Balance - Governmental Funds $ 70,629,589 Amounts Reported for Governmental Activities in the Statement of Net Assets are Different Because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds. The cost of capital assets is: $ 275,113,712 Accumulated depreciation is: (72,605,521) 202,508,191 Expenditures relating to issuance of debt were recognized on the modified accrual basis. Under the accrual basis, these expenditures are capitalized and will be amortized as an adjustment to interest expense. 1,491,793 In governmental funds, unmatured interest on long-term obligations is recognized in the period when it is due. On the government-wide financial statements, unmatured interest on long-term obligations is recognized when it is incurred. (485,354) Long-term obligations, including bonds payable, are not due and payable in the current period and, therefore, are not reported as liabilities in the funds. Long-term obligations at year-end consist of: Bonds payable (including accreted interest) 21,661,817 Unamortized premium on issuance 882,349 Certificates of participation 26,558,457 Unamortized discount on issuance (181,754) Compensated absences (vacations) 2,677,096 Capital leases payable 1,906,762 Other postemployment benefits (OPEB) 27,646,411 Early retirement incentive 249,023 (81,400,161) Total Net Assets - Governmental Activities $ 192,744,058 The accompanying notes are an integral part of these financial statements. 17

130 PALMDALE SCHOOL DISTRICT GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2011 Child Non-Major Total General Development Building Governmental Governmental Fund Fund Fund Funds Funds REVENUES Revenue limit sources $ 99,417,992 $ - $ - $ - $ 99,417,992 Federal sources 35,541,427 11,089,794-8,246,523 54,877,744 Other State sources 61,434,099 2,230, ,900 64,342,389 Other local sources 4,019,032 23, ,007 5,111,568 9,377,882 Total Revenues 200,412,550 13,343, ,007 14,035, ,016,007 EXPENDITURES Current Instruction 102,195,980 7,056, ,252,175 Instruction-related activities: Supervision of instruction 7,613,367 2,961, ,574,606 Instructional library, media and technology 2,240, ,240,271 School site administration 9,312,047 1,257, ,570,012 Pupil services: Home-to-school transportation 5,522, ,522,293 Food services 5, ,537-9,050,738 9,765,426 All other pupil services 8,505,943 1,123, ,629,110 Administration: Data processing 1,976, ,976,066 All other administration 8,250, ,020 8,668,713 Plant services 14,962, , ,130 16,367,874 Facility acquisition and construction 230, , ,266 1,091,800 Ancillary services 96, ,453 Community services 614, ,389 Other outgo 41,180,752-2,028,262-43,209,014 Debt service Principal 219,974 28,000-1,825,000 2,072,974 Interest and other 274, ,763,682 2,037,873 Total Expenditures 203,200,601 14,344,350 2,028,262 14,115, ,689,049 (Deficiency) of Revenues Over Expenditures (2,788,051) (1,000,891) (1,804,255) (79,845) (5,673,042) Other Financing Sources (Uses) Transfers in - 228,683 2,028,262 2,532 2,259,477 Transfers out (228,683) - - (2,030,794) (2,259,477) Net Financing Sources (Uses) (228,683) 228,683 2,028,262 (2,028,262) - NET CHANGE IN FUND BALANCES (3,016,734) (772,208) 224,007 (2,108,107) (5,673,042) Fund Balances - Beginning 46,397, ,782 17,656,155 19,489,135 83,733,825 Prior Period Restatement 168, (7,599,562) (7,431,194) Fund Balances - Ending $ 43,549,387 $ (581,426) $ 17,880,162 $ 9,781,466 $ 70,629,589 The accompanying notes are an integral part of these financial statements. 18

131 PALMDALE SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2011 Total Net Change in Fund Balances - Governmental Funds $ (5,673,042) Amounts Reported for Governmental Activities in the Statement of Activities are Different Because: Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures; however, for governmental activities, those costs are shown in the Statement of Net Assets and allocated over their estimated useful lives as annual depreciation expenses in the Statement of Activities. This is the amount by which depreciation exceeds capital outlays in the period. Depreciation expense $ (3,441,006) Capital outlays 2,490,110 (950,896) In the Statement of Activities, certain operating expenses - compensated absences (vacations) and special termination benefits (early retirement) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these items are measured by the amount of financial resources used (essentially, the amounts actually paid). This year, there were special termination benefits paid in the amount of $117,303. Vacation earned was more than the amounts paid by $882,884. (705,581) Other Postemployment Benefits (OPEB) other than pensions: In governmental funds, OPEB costs are recognized when employer contributions are made. In the Statement of Activities, OPEB costs are recognized on the accrual basis. This year, the difference between OPEB costs and actual employer contributions was: (7,708,889) Payment of principal on long-term obligations is an expenditure in the governmental funds, but it reduces long-term obligations in the Statement of Net Assets and does not affect the Statement of Activities: General obligation bonds 785,000 Certificates of participation 1,040,000 Capital lease obligations 247,974 Under the modified accrual basis of accounting used in governmental funds, expenditures are not recognized for transactions that are not normally paid with available financial resources. In the Statement of Activities, however, which is presented on the accrual basis, expenses and liabilities are reported regardless of when financial resources are available. This adjustment combines the net changes of the following balances: Amortization of debt premium 48,821 Amortization of debt discount (110,729) Amortization of costs of issuance (115,643) (177,551) The accompanying notes are an integral part of these financial statements. 19

132 PALMDALE SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES, continued FOR THE YEAR ENDED JUNE 30, 2011 Interest on long-term obligations is recorded as an expenditure in the governmental funds when it is due; however, in the Statement of Activities, interest expense is recognized as the interest accrues, regardless of when it is due. The additional interest reported in the Statement of Activities is a result of two factors. First, accrued interest on general obligation bonds and certificates of participation decreased by $16,450. Second, $607,977 of additional accumulated interest accreted on the District's general obligation bonds and certificates of participation. $ (591,527) Change in Net Assets of Governmental Activities $ (13,734,512) The accompanying notes are an integral part of these financial statements. 20

133 PALMDALE SCHOOL DISTRICT FIDUCIARY FUNDS STATEMENT OF NET ASSETS JUNE 30, 2011 Agency Funds ASSETS Deposits and investments $ 10,456,028 Receivables 17,741 Total Assets $ 10,473,769 LIABILITIES Accounts payable $ 3,549 Due to student groups 102,480 Due to bondholders 10,367,740 Total Liabilities $ 10,473,769 The accompanying notes are an integral part of these financial statements. 21

134 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Reporting Entity The Palmdale School District (the District) was organized in 1888 under the laws of the State of California. The District operates under a locally-elected five-member Board form of government and provides educational services to grades K-8 as mandated by the State. The District operates 19 elementary schools, five middle schools, and three learning centers. A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, boards, and agencies that are not legally separate from the District. For Palmdale School District, this includes general operations, food service, and student related activities of the District. Component Units Component units are legally separate organizations for which the District is financially accountable. Component units may also include organizations that are fiscally dependent on the District, in that the District approves their budget, the issuance of their debt or the levying of their taxes. In addition, component units are other legally separate organizations for which the District is not financially accountable but the nature and significance of the organization's relationship with the District is such that exclusion would cause the District's financial statements to be misleading or incomplete. For financial reporting purposes, the component units described below have a financial and operational relationship which meets the reporting entity definition criteria of the Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, and thus are included in the financial statements of the District. The component units, although legally separate entities, are reported in the financial statements using the blended presentation method as if they were part of the District's operations because the governing board of the component units is essentially the same as the governing board of the District. The Palmdale Unified School District Facilities Foundation's (the Foundation) financial activity is presented in the financial statements as the Debt Service Fund. Certificates of Participation issued by the Foundation are included as long-term obligations in the government-wide financial statements. The Community Facilities District of the Palmdale School District (the CFDs) financial activity is presented in the financial statements as an Agency Fund. Long-term obligations of the CFDs do not represent obligations of the District and thus are not included in the government-wide financial statements. Individually-prepared financial statements are not available for the Foundation or the CFDs. Basis of Presentation - Fund Accounting The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The District's funds are grouped into two broad fund categories: governmental and fiduciary. 22

135 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the District's major and non-major governmental funds: Major Governmental Funds General Fund The General Fund is the chief operating fund for all districts. It is used to account for and report all financial resources not accounted for and reported in another fund. One fund currently defined as a special revenue fund in the California State Accounting Manuel (CSAM) does not meet the GASB Statement No. 54 special revenue fund definition. Specifically, Fund 20, Special Reserve Fund for Postemployment Benefits, is not substantially composed of restricted or committed revenue sources. While this fund is authorized by statute and will remain open for internal reporting purposes, this fund functions effectively as an extensions of the General Fund, and accordingly has been combined with the General Fund for presentation in these audited financial statements. As a result, the General Fund reflects an increase in assets, fund balance and revenues of $170,588, $170,588, and $2,220, respectively. Child Development Fund The Child Development Fund is used to account separately for Federal, State, and local revenues to operate child development programs and is to be used only for expenditures for the operation of child development programs. Building Fund The Building Fund exists primarily to account separately for proceeds from the sale of bonds (Education Code Section 15146) and may not be used for any purposes other than those for which the bonds were issued. Non-Major Governmental Funds Special Revenue Funds The Special Revenue Funds are established to account for the proceeds of specific revenue sources that are restricted or committed to expenditures for the specific purpose (other than debt service or capital projects) of the individual funds. Cafeteria Fund The Cafeteria Fund is used to account separately for Federal, State, and local resources to operate the food service program (Education Code Sections ) and is used only for those expenditures authorized by the governing board as necessary for the operation of the District's food service program (Education Code Sections and 38100). Capital Project Funds The Capital Project funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditures for capital outlays, including the acquisition or construction of capital facilities and other capital assets (other than those financed by proprietary funds and trust funds). 23

136 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Capital Facilities Fund The Capital Facilities Fund is used primarily to account separately for monies received from fees levied on developers or other agencies as a condition of approving a development (Education Code Sections ). Expenditures are restricted to the purposes specified in Government Code Sections or to the items specified in agreements with the developer (Government Code Section 66006). County School Facilities Fund The County School Facilities Fund is established pursuant to Education Code Section to receive apportionments from the 1998 State School Facilities Fund (Proposition la), the 2002 State School Facilities Fund (Proposition 47), or the 2004 State School Facilities Fund (Proposition 55) authorized by the State Allocation Board for new school facility construction, modernization projects, and facility hardship grants, as provided in the Leroy F. Greene School Facilities Act of 1998 (Education Code Section et seq.). Special Reserve Fund for Capital Outlay Projects The Special Reserve Fund for Capital Outlay Projects exists primarily to provide for the accumulation of General Fund monies for capital outlay purposes (Education Code Section 42840). Debt Service Funds The Debt Service Funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditures for principal and interest on long-term obligations. Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is used for the repayment of bonds issued for a district (Education Code Sections ). Debt Service Fund The Debt Service Fund is used to account for the accumulation of resources for the payment of principal and interest on certificates of participation. Fiduciary Funds Fiduciary fund reporting focuses on net assets and changes in net assets. The District maintains Fiduciary Funds that are classified as Agency Funds. Agency Funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. Such funds have no equity accounts since all assets are due to individuals or entities at some future time. The District's Agency Fund accounts for associated student body (ASB) activities and receipt of special taxes for payment of non-obligatory debt related to the CFDs. Basis of Accounting - Measurement Focus Government-Wide Financial Statements The government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This approach differs from the manner in which governmental fund financial statements are prepared. 24

137 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 The government-wide financial statement of activities presents a comparison between direct expenses (both direct and indirect) and program revenues for each governmental program. Direct expenses are those that are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the Statement of Activities. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each program or business segment is self-financing or draws from the general revenues of the District. Eliminations have been made to minimize the double counting of internal activities. Net assets should be reported as restricted when constraints placed on net asset use are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net assets restricted for other activities result from special revenue funds and the restrictions on their net asset use. Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Non-major funds are aggregated and presented in a single column. Governmental Funds All governmental funds are accounted for using a flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balances reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide financial statements are prepared. Governmental fund financial statements therefore include reconciliation with brief explanations to better identify the relationship between the government-wide financial statements and the statements for the governmental funds on a modified accrual basis of accounting and the current financial resources measurement focus. Under this basis, revenues are recognized in the accounting period in which they become measurable and available. Expenditures are recognized in the accounting period in which the fund liability is incurred, if measurable. Fiduciary Funds Fiduciary Funds are accounted for using the flow of economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are excluded from the government-wide financial statements because they do not represent resources of the District. 25

138 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Revenues - Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. Generally, available is defined as collectible within 90 days. However, to achieve comparability of reporting among California districts and so as not to distort normal revenue patterns, with specific respect to reimbursement grants and corrections to State-aid apportionments, the California Department of Education has defined available for districts as collectible within one year. The following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources. Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose requirements. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. Deferred Revenue Deferred revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for deferred revenue is removed from the combined balance sheet and revenue is recognized. Certain grants received before the eligibility requirements are met are recorded as deferred revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as deferred revenue. Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable, and typically paid within 90 days. Principal and interest on longterm obligations, which has not matured, are recognized when paid in the governmental funds as expenditures. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds but are recognized on the entity-wide statements. Investments Investments held at June 30, 2011, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost. Fair values of investments in county and State investment pools are determined by the program sponsor. 26

139 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Prepaid Expenditures Prepaid expenditures (expenses) represent amounts paid in advance of receiving goods or services. The District has the option of reporting an expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The District has chosen to report the expenditures when incurred. Stores Inventories Inventories consist of expendable food and supplies held for consumption. Inventories are stated at cost on the weighted average basis. The costs of inventory items are recorded as expenditures in the governmental type funds when used. Capital Assets and Depreciation The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. General capital assets are long-lived assets of the District. The District maintains a capitalization threshold of $5,000. The District does not possess any infrastructure. Improvements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not capitalized, but are expensed as incurred. When purchased, such assets are recorded as expenditures in the governmental funds and capitalized in the government-wide financial statement of net assets. The valuation basis for general capital assets are historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated. Depreciation of capital assets is computed and recorded by the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings and improvements, 20 to 50 years; vehicles, 8 to 15 years; equipment, 2 to 15 years. Interfund Balances On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables." These amounts are eliminated in the governmental activities column of the statement of net assets. Compensated Absences Compensated absences are accrued as a liability as the benefits are earned. The entire compensated absence liability is reported on the government-wide statement of net assets. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occurrence of relevant events such as employee resignations and retirements that occur prior to year end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who have accumulated leave are paid. 27

140 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. However, credit for unused sick leave is applicable to all classified school members who retire after January 1, At retirement, each member will receive.004 year of service credit for each day of unused sick leave. Credit for unused sick leave is applicable to all certificated employees and is determined by dividing the number of unused sick days by the number of base service days required to complete the last school year, if employed full-time. Accrued Liabilities and Long-Term Obligations All payables, accrued liabilities, and long-term obligations are reported in the government-wide financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources are reported as obligations of the funds. However, claims and judgments, compensated absences, special termination benefits, and contractually required pension contributions that will be paid from governmental funds are reported as a liability in the fund financial statements only to the extent that they are due for payment during the current year. Bonds, capital leases, and long-term loans are recognized as a liabilities in the governmental fund financial statements when due. Deferred Issuance Costs, Premiums, and Discounts In the government-wide financial statements, long-term obligations are reported as liabilities in the applicable governmental activities statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight line method. Fund Balances - Governmental Funds As of June 30, 2011, fund balances of the governmental funds are classified as follows: Nonspendable - amounts that cannot be spent either because they are in nonspendable form or because they are legally or contractually required to be maintained intact. Restricted - amounts that can be spent only for specific purposes because of constitutional provisions or enabling legislation or because of constraints that are externally imposed by creditors, grantors, contributors, or the laws or regulations of other governments. Assigned - amounts that do not meet the criteria to be classified as restricted or committed but that are intended to be used for specific purposes. Under the District's adopted policy, only the governing board or chief business officer/assistant superintendent of business services may assign amounts for specific purposes. Unassigned - all other spendable amounts. 28

141 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Spending Order Policy When an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, the District considers restricted funds to have been spent first. When an expenditure is incurred for which committed, assigned, or unassigned fund balances are available, the District considers amounts to have been spent first out of committed funds, then assigned funds, and finally unassigned funds, as needed, unless the governing board has provided otherwise in its commitment or assignment actions. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction, or improvement of those assets. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. The District applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. The government-wide financial statements report $17,509,120 of net assets restricted by enabling legislation. Interfund Activity Exchange transactions between funds are reported as revenues in the seller funds and as expenditures in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds. Repayments from funds responsible for particular expenditures to the funds that initially paid for them are not presented on the financial statements. Interfund transfers are eliminated in the governmental columns of the statement of activities. Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Budgetary Data The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July 1 of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the year to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account. 29

142 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For budget purposes, on behalf payments have not been included as revenue and expenditures as required under generally accepted accounting principles. Property Tax Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November 1 and February 1 and become delinquent on December 10 and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Lo Angeles bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received. Changes in Accounting Principles In March 2009, the GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. The objective of this Statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. This Statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The initial distinction that is made in reporting fund balance information is identifying amounts that are considered nonspendable, such as fund balance associated with inventories. This Statement also provides for additional classification as restricted, committed, assigned, and unassigned based on the relative strength of the constraints that control how specific amounts can be spent. The restricted fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation. The committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision-making authority. Amounts in the assigned fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. Unassigned fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned. Governments are required to disclose information about the processes through which constraints are imposed on amounts in the committed and assigned classifications. Governments also are required to classify and report amounts in the appropriate fund balance classifications by applying their accounting policies that determine whether restricted, committed, assigned, and unassigned amounts are considered to have been spent. Disclosure of the policies in the notes to the financial statements is required. 30

143 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 This Statement also provides guidance for classifying stabilization amounts on the face of the balance sheet and requires disclosure of certain information about stabilization arrangements in the notes to the financial statements. The definitions of the general fund, special revenue fund type, capital projects fund type, debt service fund type, and permanent fund type are clarified by the provisions in this Statement. Interpretations of certain terms within the definition of the special revenue fund type have been provided and, for some governments, those interpretations may affect the activities they choose to report in those funds. The capital projects fund type definition also was clarified for better alignment with the needs of preparers and users. Definitions of other governmental fund types also have been modified for clarity and consistency. The District has implemented the provisions of this Statement for the year ended June 30, New Accounting Pronouncements In November 2010, the GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus-an amendment of GASB Statements No. 14 and No. 34. The objective of this Statement is to improve financial reporting for a governmental financial reporting entity. The requirements of GASB Statement No. 14, The Financial Reporting Entity, and the related financial reporting requirements of GASB Statement No. 34, Basic Financial Statementsand Management's Discussion and Analysis-for State and Local Governments, were amended to better meet user needs and to address reporting entity issues that have arisen since the issuance of those Statements. This Statement modifies certain requirements for inclusion of component units in the financial reporting entity. For organizations that previously were required to be included as component units by meeting the fiscal dependency criterion, a financial benefit or burden relationship also would need to be present between the primary government and that organization for it to be included in the reporting entity as a component unit. Further, for organizations that do not meet the financial accountability criteria for inclusion as component units but that, nevertheless, should be included because the primary government's management determines that it would be misleading to exclude them, this Statement clarifies the manner in which that determination should be made and the types of relationships that generally should be considered in making the determination. This Statement also amends the criteria for reporting component units as if they were part of the primary government (that is, blending) in certain circumstances. For component units that currently are blended based on the "substantively the same governing body" criterion, it additionally requires that (1) the primary government and the component unit have a financial benefit or burden relationship or (2) management (below the level of the elected officials) of the primary government have operational responsibility (as defined in paragraph 8a) for the activities of the component unit. New criteria also are added to require blending of component units whose total debt outstanding is expected to be repaid entirely or almost entirely with resources of the primary government. The blending provisions are amended to clarify that funds of a blended component unit have the same financial reporting requirements as a fund of the primary government. Lastly, additional reporting guidance is provided for blending a component unit if the primary government is a business-type activity that uses a single column presentation for financial reporting. This Statement also clarifies the reporting of equity interests in legally separate organizations. It requires a primary government to report its equity interest in a component unit as an asset. The provisions of this Statement are effective for financial statements for periods beginning after June 15, Early implementation is encouraged. 31

144 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 NOTE 2 - DEPOSITS AND INVESTMENTS Summary of Deposits and Investments Deposits and investments as of June 30, 2011, are classified in the accompanying financial statements as follows: Governmental activities $ 51,219,984 Fiduciary funds 10,456,028 Total Deposits and Investments $ 61,676,012 Deposits and investments as of June 30, 2011, consisted of the following: Cash on hand and in banks $ 155,932 Cash in revolving 100,000 Investments 61,420,080 Total Deposits and Investments $ 61,676,012 Policies and Practices The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. Investment in County Treasury The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001). The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis. 32

145 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 General Authorizations Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below: Maximum Maximum Maximum Authorized Remaining Percentage Investment Investment Type Maturity of Portfolio in One Issuer Local Agency Bonds, Notes, Warrants 5 years None None Registered State Bonds, Notes, Warrants 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Securities 5 years None None Banker's Acceptance 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements 1 year None None Reverse Repurchase Agreements 92 days 20% of base None Medium-Term Corporate Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 10% Mortgage Pass-Through Securities 5 years 20% None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None Joint Powers Authority Pools N/A None None Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The District manages its exposure to interest rate risk by primarily investing in the County Pool and money market funds. The District monitors the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. Information about the weighted average maturity of the District's portfolio is presented in the following schedule: Carrying Fair Average Days Investment Type Amount Value to Maturity Los Angeles County Treasury Pool $ 55,622,120 $ 55,645, Federated Treasury Obligations Fund 5,797,960 5,797, Total $ 61,420,080 $ 61,443,623 33

146 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of an investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The District's investments in the County Pool were rated by Moody's Investor Service as Aaa. Custodial Credit Risk - Deposits This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by State or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under State law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110 percent of the total amount deposited by the public agency. California law also allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150 percent of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105 percent of the secured deposits. As of June 30, 2011, the District's bank balances were within the federally insured limits. NOTE 3 RECEIVABLES Receivables at June 30, 2011, consisted of intergovernmental grants, entitlements, interest, and other local sources. All receivables are considered collectible in full. Child Non-Major Total General Development Building Governmental Governmental Fiduciary Fund Fund Fund Funds Activities Funds Federal Government Categorical aid $ 12,109,263 $ 1,588,912 $ - $ 666,523 $ 14,364,698 $ - State Government Apportionment 19,506, ,506,677 - Categorical aid 515,144 78,038-59, ,356 - Lottery 1,358, ,358,223 - Special Education 9,334, ,334,789 - Local Government Interest 86,538 1,241 53,969 17, ,900 17,741 Other Local Sources 713, , ,716 - Total $ 43,624,509 $ 1,668,191 $ 53,969 $ 783,690 $ 46,130,359 $ 17,741 All receivables are expected to be collected within one year. 34

147 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 NOTE 4 - CAPITAL ASSETS Capital asset activity for the fiscal year ended June 30, 2011, was as follows: Balance Balance July 1, 2010 Additions Deductions June 30, 2011 Governmental Activities Capital Assets Not Being Depreciated Land $ 26,826,447 $ 447,015 $ - $ 27,273,462 Construction in progress 6,535, ,519-6,901,430 Total Capital Assets Not Being Depreciated 33,362, ,534-34,174,892 Capital Assets Being Depreciated Buildings and improvements 216,881, , ,160,777 Furniture and equipment 22,379,733 1,398,310-23,778,043 Total Capital Assets Being Depreciated 239,261,244 1,677, ,938,820 Total Capital Assets 272,623,602 2,490, ,113,712 Less Accumulated Depreciation Buildings and improvements 53,500,664 2,467,714-55,968,378 Furniture and equipment 15,663, ,292-16,637,143 Total Accumulated Depreciation 69,164,515 3,441,006-72,605,521 Governmental Activities Capital Assets, Net $ 203,459,087 $ (950,896) $ - $ 202,508,191 Depreciation expense was charged to governmental functions as unallocated. NOTE 5 INTERFUND TRANSACTIONS Interfund Receivables/Payables (Due To/Due From) A balance of $2,717,092 due to the General Fund from the Child Development Fund resulted from a temporary loan. 35

148 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Operating Transfers Interfund transfers for the year ended June 30, 2011, consisted of the following: Transfer From Non-Major General Governmental Transfer To Fund Funds Total Child Development Fund $ 228,683 $ - $ 228,683 Building Fund - 2,028,262 2,028,262 Non-Major Governmental Funds - 2,532 2,532 Total $ 228,683 $ 2,030,794 $ 2,259,477 The General Fund transferred to the Child Development Fund for reimbursement of costs incurred for postemployment benefits. The County School Facilities Non-Major Governmental Fund transferred to the Building Fund for unspent state apportionment revenue. $ 228,683 2,028,262 The County School Facilities Non-Major Governmental Fund transferred to the Special Reserve Fund for Capital Outlay Projects Non-Major Governmental Fund for reimbursement of project costs. 2,532 Total $ 2,259,477 NOTE 6 ACCOUNTS PAYABLE Accounts payable at June 30, 2011, consisted of the following: Child Non-Major Total General Development Governmental Governmental Fiduciary Fund Fund Funds Activities Funds Salaries and benefits $ 4,980,903 $ 1,074,544 $ 516,710 $ 6,572,157 $ - Materials and supplies 286,173 31, , ,666 - Services and other operating 2,356,835 49,266 36,955 2,443,056 - Construction 11, ,817 - State apportionment 1,166, ,166,768 - Due to SELPA 15,356, ,356,214 - Other vendor payables 771,743 93,646 5, ,564 3,549 Total $ 24,930,453 $ 1,248,865 $ 658,924 $ 26,838,242 $ 3,549 36

149 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 NOTE 7 DEFERRED REVENUE Deferred revenue at June 30, 2011, consisted of the following: Child Total General Development Governmental Fund Fund Activities Federal financial assistance $ 757,264 $ - $ 757,264 State categorical aid 12,761 27,693 40,454 Other local 13,595-13,595 Total $ 783,620 $ 27,693 $ 811,313 NOTE 8 LONG-TERM OBLIGATIONS Summary The changes in the District's long-term obligations during the year consisted of the following: Balance July 1, 2010, Balance Due in as restated Additions Deductions June 30, 2011 One Year General Obligation Bonds $ 22,203,482 $ 243,335 $ 785,000 $ 21,661,817 $ 850,000 Unamortized premium 931,170-48, ,349 - Certificates of Participation 27,233, ,642 1,040,000 26,558,457 1,165,000 Unamortized discount (292,483) - (110,729) (181,754) - Compensated absences 1,854, ,884-2,677,096 - Capital leases 2,154, ,974 1,906, ,092 Other postemployment benefits 19,937,522 11,811,830 4,102,941 27,646,411 - Early retirement incentive 366, , , ,062 $ 74,388,780 $ 13,242,691 $ 6,231,310 $ 81,400,161 $ 2,376,154 Payments on the general obligation bonds are made by the Bond Interest and Redemption Fund. The compensated absences and other postemployment benefits are paid by the fund for which the employee worked. Capital lease payments are made out of the fund utilizing the equipment and modulars. The General Fund makes payments for the early retirement incentive. Payments on the certificates of participation are made by the Debt Service Fund. 37

150 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Bonded Debt The outstanding general obligation bonded debt is as follows: Issue Maturity Interest Original Outstanding Outstanding Date Date Rate Issue July 1, 2010 Accreted Redeemed June 30, /28/2002 2/1/ % - 5.6% $ 21,128,371 $ 18,446,279 $ 199,808 $ 700,000 $ 17,946,087 12/11/2003 4/1/ % - 5.5% 3,871,456 3,757,203 43,527 85,000 3,715,730 $ 22,203,482 $ 243,335 $ 785,000 $ 21,661,817 General Obligation Bonds, Election of 2011, Series 2002 In February 2002, the District issued $21,128,371 of the General Obligation Bonds, Election of 2001, Series The Series 2002 Bonds were issued at both current interest and capital appreciation bonds, with the value of the capital appreciation accreting to $7,920,000 and an aggregate principal debt service balance of $28,055,000. The bonds mature on February 1, 2027, with the interest rates of 2.0 to 5.6 percent. Proceeds from the sale of the bonds will be used to construct new school facilities and repair and expand existing school facilities. At June 30, 2011, the Series 2002 Bonds principal balance outstanding was $17,946,087 and unamortized premium was $641,382. General Obligation Bonds, Election of 2001, Series 2003 In December 2003, the District issued $3,871,456 of the General Obligation Bonds, Election of 2001, Series The Series 2003 Bonds were issued at both current interest and capital appreciation bonds, with the value of the capital appreciation bonds accreting to $2,445,000 and an aggregate principal debt service balance of $6,050,000. The bonds mature on April 1, 2028, with interest rates of 2.0 to 5.52 percent. Proceeds from the sale will be used to construct new school facilities and repair and expand existing school facilities. At June 30, 2011, the Series 2003 Bonds principal balance outstanding was $3,715,730 and unamortized premium was $240,967. Debt Service Requirements to Maturity The General Obligation Bonds mature through 2028 as follows: Principal Current Including Accreted Accreted Interest to Fiscal Year Interest Interest Maturity Total 2012 $ 850,000 $ - $ 857,170 $ 1,707, , ,953 1,738, , ,700 1,771, ,060, ,588 1,803, ,145, ,258 1,840, ,165,000-2,576,073 9,741, ,392,479 2,727, ,533 10,804, ,149,338 4,950,662 29,806 7,129,806 Total $ 21,661,817 $ 7,678,183 $ 7,197,081 $ 36,537,081 38

151 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Certificates of Participation (COP) The outstanding COP debt is as follows: Issue Maturity Interest Original Outstanding Outstanding Date Date Rate Issue July 1, 2010 Accreted Redeemed June 30, /1/ /1/ % - 5.5% $ 15,230,053 $ 4,873,815 $ 364,642 $ - $ 5,238,457 7/24/2003 9/1/ % - 4.2% 11,205,000 7,500, ,000 7,055,000 6/19/ /1/ % % 15,960,000 14,860, ,000 14,265,000 $ 27,233,815 $ 364,642 $ 1,040,000 $ 26,558,457 Certificates of Participation, 1997 Refunding and School Building Project In December 1997, the District issued $15,230,053 of the Certificates of Participation, 1997 Refunding and School Building Project. The certificates were issued at both current interest and capital appreciation certificates, with the value of the capital appreciation certificates accreting to $4,420,000, and an aggregate principal debt service balance of $21,525,000. The certificates mature on October 1, 2023, with interest rates of 3.8 to 5.45 percent. Proceeds from the sale of the certificates were used to pay off a portion of the 1993B Lease Revenue Bonds, with remaining proceeds used to acquire and construct school facilities. In June 2008, the current interest certificates were refunded with the issuance of the Certificates of Participation, 2008 Refunding Project. At June 30, 2011, the principal balance outstanding on the Certificates of Participation, 1997 Refunding and School Building Project was $5,238,457. Certificates of Participation, Refunding Series 2003 In July 2003, the District issued $11,205,000 of the Certificates of Participation, Refunding Series The certificates mature on September 1, 2020, with interest rates of 1.5 to 4.2 percent. Proceeds from the sale of the certificates were used pay off the 1990 and 1993 Certificates of Participation. At June 30, 2011, the principal balance outstanding on the Certificates of Participation, Refunding Series 2003 was $7,055,000 and unamortized discount was $(56,429). Certificates of Participation, 2008 Refunding Project In June 2008, the District issued $15,960,000 of the Certificates of Participation, 2008 Refunding Project. The certificates mature on October 1, 2024, with interest rates of 3.0 to 4.75 percent. Proceeds from the sale of the certificates were used pay off a portion of the Certificates of Participation, 1997 Refunding and School Building Project. At June 30, 2011, the principal balance outstanding on the Certificates of Participation, 2008 Refunding Project was $14,265,000 and unamortized discount was $(125,325). 39

152 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 The Certificates of Participation mature through 2025 as follows: Principal Current Including Accreted Accreted Interest Fiscal Year Interest Interest to Maturity Total 2012 $ 1,165,000 $ - $ 841,723 $ 2,006, ,295, ,654 2,096, ,170, ,173 1,929, ,555, ,178 2,266, ,715, ,158 2,367, ,624,562 1,520,438 2,325,344 13,470, ,033,895 2,081, ,050 12,974,050 Total $ 26,558,457 $ 3,601,543 $ 6,950,280 $ 37,110,280 Accumulated Unpaid Employee Vacation The accumulated unpaid employee vacation for the District at June 30, 2011, amounted to $2,677,096. Capital Leases The District has entered into agreements to lease various facilities and equipment. Such agreements are, in substance, purchases (capital leases) and are reported as capital lease obligations. The District's liability on lease agreements with options to purchase is summarized below: Equipment Modulars Total Balance, Beginning of Year $ 84,000 $ 2,521,823 $ 2,605,823 Payments (28,000) (315,228) (343,228) Balance, End of Year $ 56,000 $ 2,206,595 $ 2,262,595 The capital leases have minimum lease payments as follows: Year Ending Lease June 30, Payment 2012 $ 343, , , , , ,455 Total 2,262,595 Less: Amount Representing Interest (355,833) Present Value of Minimum Lease Payments $ 1,906,762 40

153 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Other Postemployment Benefits (OPEB) Obligation The District's annual required contribution for the year ended June 30, 2011, was $12,111,923, and contributions made by the District during the year were $4,102,941. Interest on the net OPEB obligation and adjustments to the annual required contribution were $996,876 and $(1,296,969), respectively, which resulted in an increase to the net OPEB obligation of $7,708,889. As of June 30, 2011, the net OPEB obligation was $27,646,411. See Note 11 for additional information regarding the OPEB obligation and the postemployment benefits plan. Early Retirement Incentive The District adopted an Early Retirement Incentive Plan, whereby the service credit to eligible employees is increased by two years. The District has elected to pay the California State Teachers' Retirement System the amount due to early retirees under the deferred payment plan. The outstanding liability at June 30, 2011, amounted to $249,023. NOTE 9 - FUND BALANCES Fund balances are composed of the following elements: Child Non-Major General Development Building Governmental Fund Fund Fund Funds Total Nonspendable Revolving cash $ 100,000 $ - $ - $ - $ 100,000 Stores inventories 99, , ,294 Prepaid expenditures , ,507 Total Nonspendable 199, ,780 1,028,801 Restricted Legally restricted programs 9,447, ,954,801 11,402,774 Capital projects ,880,162 3,474,495 21,354,657 Debt services ,287,425 2,287,425 Total Restricted 9,447,973-17,880,162 7,716,721 35,044,856 Assigned Board designated 1% 1,952, ,952,833 Mid-year budget cut 6,421, ,421,546 Capital projects ,234,965 1,234,965 Total Assigned 8,374, ,234,965 9,609,344 Unassigned Reserve for economic uncertainties 5,865, ,865,358 Remaining unassigned 19,662,656 (581,426) ,081,230 Total Unassigned 25,528,014 (581,426) ,946,588 Total $ 43,549,387 $ (581,426) $ 17,880,162 $ 9,781,466 $ 70,629,589 41

154 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 NOTE 10 - NON-OBLIGATORY DEBT Non-obligatory debt relates to debt issuances by the Community Facilities Districts as authorized by the Mello- Roos Community Facilities Act of 1982 as amended, and the Mark-Roos Local Bond Pooling Act of 1985, and are payable from special taxes levied on property within the Community Facilities Districts according to a methodology approved by the voters within the District. Neither the faith and credit nor taxing power of the District is pledged to the payment of the bonds. Reserves have been established from the bond proceeds to meet delinquencies should they occur. If delinquencies occur beyond the amounts held in those reserves, the District has no duty to pay the delinquency out of any available funds of the District. The District acts solely as an agent for those paying taxes levied and the bondholders, and may initiate foreclosure proceedings. Special assessment debt of $25,670,411 as of June 30, 2011, does not represent debt of the District and, as such, does not appear in the accompanying basic financial statements. NOTE 11 - POSTEMPLOYMENT HEALTH CARE PLAN AND OTHER POSTEMPLOYMENT BENEFITS (OPEB) OBLIGATION Plan Description The District offers medical, dental, vision, and life insurance benefits to its employees, retirees and their dependents. Certificated employees may retire with District-paid benefits after the later of age 55 and the completion of 10 years of service with the District. The service requirement was increased to 15 years for certificated employees hired on or after July 1, 2006, and 20 years for certificated employees hired on or after July 1, District-paid benefits for certificated retirees end at age 70. Classified employees may retire with District-paid benefits after the later of age 50 and the completion of 10 years of service with the District. Districtpaid benefits for classified retirees end at age 65, or age 70 for retirees who had at least 20 years of District service at the time of retirement. Management employees may retire with District-paid benefits after the later of age 55 and 10 years of service with the District. District-paid benefits for management retirees end at age 75, or age 70 for retirees who were hired after June 30, Membership of the Plan consists of 189 retirees currently receiving benefits, 50 terminated Plan members entitled to but not yet receiving benefits, and 1,641 active Plan members. Contribution Information The contribution requirements of Plan members and the District are established and may be amended by the District and the California Teachers Association (CTA), the local California Service Employees Association (CSEA), and unrepresented groups. The required contribution is based on projected pay-as-you-go financing requirements. For fiscal year , the District contributed $4,102,941 to the Plan, all of which was used for current premiums (approximately 100 percent of total premiums). 42

155 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Annual OPEB Cost and Net OPEB Obligation The District's annual other postemployment benefits (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial accrued liabilities (UAAL) (or funding excess) over a period not to exceed thirty years. The following table shows the components of the District's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District's net OPEB obligation to the Plan: Annual required contribution $ 12,111,923 Interest on net OPEB obligation 996,876 Adjustment to annual required contribution (1,296,969) Annual OPEB cost (expense) 11,811,830 Contributions made (4,102,941) Increase in net OPEB obligation 7,708,889 Net OPEB obligation, beginning of year 19,937,522 Net OPEB obligation, end of year $ 27,646,411 Trend Information Trend information for annual OPEB cost, the percentage of annual OPEB cost contributed to the Plan, and the net OPEB obligation is as follows: Year Ended Annual OPEB Actual Percentage Net OPEB June 30, Cost Contribution Contributed Obligation 2009 $ 10,483,464 $ 3,422,722 33% $ 14,194, ,516,373 3,773,368 40% 19,937, ,811,830 4,102,941 35% 27,646,411 Funded Status and Funding Progress A schedule of funding progress as of the most recent actuarial valuation is as follows: Actuarial Accrued Liability Unfunded UAAL as a Actuarial (AAL) - AAL Percentage of Valuation Actuarial Value Projected (UAAL) Funded Ratio Covered Covered Payroll Date of Assets (a) Unit Credit (b) (b - a) (a / b) Payroll (c) ([b - a] / c) June 30, 2010 $ - $ 99,080,873 $ 99,080,873 0% $ 96,207, % 43

156 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, investment returns, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the Plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the June 30, 2010, actuarial valuation, the Projected Unit Credit cost method was used. The actuarial assumptions included a five percent investment rate of return based on the actuary's best estimate of expected long-term plan experience. Healthcare cost trend rates were based the actuaries analysis of recent District experience and knowledge of the general health care environment. The UAAL is being amortized at a level dollar amount over 30 years on an open basis. NOTE 12 - RISK MANAGEMENT The District's risk management activities are recorded in the General Fund. The employee workers' compensation program is administered by the General Fund through the purchase of commercial insurance. The District participates in various public entity risk pools (JPAs) for the workers' compensation administration, property/liability insurance, and health and welfare programs. Refer to Note 14 for additional information regarding the JPAs. For insured programs, there have been no significant reductions in insurance coverage. Settlement amounts have not exceeded insurance coverage for the current year or the three prior years. NOTE 13 - EMPLOYEE RETIREMENT SYSTEMS Qualified employees are covered under multiple-employer retirement plans maintained by agencies of the State of California. Certificated employees are members of the California State Teachers' Retirement System (CalSTRS) and classified employees are members of the California Public Employees' Retirement System (CalPERS). 44

157 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 CalSTRS Plan Description The District contributes to the CalSTRS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalSTRS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers' Retirement Law. CalSTRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalSTRS annual financial report may be obtained from CalSTRS, 7919 Folsom Blvd., Sacramento, California Funding Policy Active plan members are required to contribute 8.0 percent of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by CalSTRS Teachers' Retirement Board. The required employer contribution rate for fiscal year was 8.25 percent of annual payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to CalSTRS for the fiscal years ending June 30, 2011, 2010, and 2009, were $6,051,889, $6,185,295, and $6,302,070, respectively, and equal 100 percent of the required contributions for each year. Other Information Under CalSTRS law, certain early retirement incentives require the employer to pay the present value of the additional benefit which may be paid on either a current or deferred basis. The District has obligations to CalSTRS totaling $249,023 for early retirement incentives granted to terminated employees. CalPERS Plan Description The District contributes to the School Employer Pool under the CalPERS, a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and survivor benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Laws. CalPERS issue a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalPERS' annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, California

158 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Funding Policy Active plan members are required to contribute 7.0 percent of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the CalPERS Board of Administration. The required employer contribution rate for fiscal year was percent of covered payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to CalPERS for the fiscal years ending June 30, 2011, 2010, and 2009, were $2,446,732, $2,340,010, and $2,191,808, respectively, and equal 100 percent of the required contributions for each year. On Behalf Payments The State of California makes contributions to CalSTRS on behalf of the District. These payments consist of State General Fund contributions to CalSTRS in the amount of $3,130,110 (4.267 percent of annual payroll). Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures; however, guidance received from the California Department of Education advises local educational agencies not to record these amounts in the Annual Financial and Budget Report Unaudited Actuals. These amounts have not been included in the budget amounts reported in the General Fund - Budgetary Comparison Schedule. These amounts have been recorded in these financial statements. On behalf payments have been excluded from the calculation of available reserves. NOTE 14 - COMMITMENTS AND CONTINGENCIES Grants The District received financial assistance from Federal and State agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the General Fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30, Litigation The District is involved in various litigation arising from the normal course of business. In the opinion of management and legal counsel, the disposition of all litigation pending is not expected to have a material adverse effect on the overall financial position of the District at June 30,

159 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 NOTE 15 - PARTICIPATION IN PUBLIC ENTITY RISK POOLS AND JOINT POWER AUTHORITIES The District participates in the following public entity risk pools. The Self-Insured Schools of California (SISC II) provides property and liability insurance coverage. The Self-Insurance Risk Management Authority (SIRMA I) provides workers' compensation administration. The District participates in the Self-Insured Schools of California (SISC III) for health benefits coverage. Annual premiums are paid to each JPA. For insured programs, there have been no significant reductions in insurance coverage. Settlement amounts have not exceeded insurance coverage for the current year or the three prior years. During the year ended June 30, 2011, the District made payments of $86,820, $2,893,506, and $767,851 to SIRMA I, SISC III, and SISC II, respectively. NOTE 16 - TAX AND REVENUE ANTICIPATION NOTES In , the District issued $7,175,000 in Tax and Revenue Anticipation Notes (TRANS). The notes matured on June 30, 2011 and had an interest yield of 0.87 percent. The TRANS were issued to supplement cash flows. Repayment requirements were that certain amounts were deposited in a special fund. The monies were required to remain on deposit until the maturity date of the note, at which time they were applied to pay the principal and interest on the notes. NOTE 17 - FISCAL ISSUES RELATING TO BUDGET REDUCTIONS The State of California continues to suffer the effects of a recessionary economy. California school districts are reliant on the State of California to appropriate the funding necessary to continue the level of educational services expected by the State constituency. With the implementation of education trailer bill Senate Bill 16 of the Fourth Extraordinary Session (SBX4 16) (Chapter 23, Statutes of 2009), and Assembly Bill 1610 (AB 1610) (Chapter 724, Statutes of 2010), approximately 28 percent of current year appropriations have now been deferred to a subsequent period, creating significant cash flow management issues for districts in addition to requiring substantial budget reductions, ultimately impacting the ability of California school districts to meet their goals for educational services. 47

160 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 NOTE 18 - SUBSEQUENT EVENTS On July 1, 2011, the District issued $20,000,000 in Tax and Revenue Anticipation Notes (TRANS). The notes mature on June 29, 2012, and yield 0.71 percent interest. The TRANS were issued to supplement cash flows. Repayment requirements are that certain amounts are to be deposited in a special fund. The monies are required to remain on deposit until the maturity date of the note, at which time they will be applied to pay principal and interest on the notes. On September 1, 2011, the District issued $14,775,000 of 2011 General Obligation Refunding Bonds. The bonds mature on August 1, 2023, with interest rates ranging from 2.00 to 4.00 percent. The net proceeds from the issuance were used to advance refund a portion of the District's outstanding Election of 2001 General Obligation Bonds, Series 2002 and to pay the costs of issuance associated with the refunding bonds. NOTE 19 - RESTATEMENT OF PRIOR YEAR FUND BALANCES AND NET ASSETS The District's prior year fund balances for the General Fund and for the Non-Major Governmental Funds have been restated as of June 30, 2011, to conform to GASB Statement No. 54's definition of governmental funds. Accordingly, the beginning fund balance for Fund 20, Special Reserve Fund for Postemployment Benefits, as presented in the Non-Major Governmental Fund opinion unit, are reported as a restatement to the beginning fund balance of the General Fund. The restatement does not change the total fund balance amounts reported in the District's audited financial statements. As discussed in the Notes to the basic financial statements, the accompanying financial statements reflect certain changes required as a result of the implementation of GASB Statement No. 54 for the year ended June 30, These changes required a restatement to the beginning fund balance of the General Fund and the Non-Major Governmental Funds, as discussed in Note 1. General Fund Net Assets - Beginning $ 46,397,753 Change in accounting principles to conform to GASB Statement No ,368 Net Assets - Beginning, As Restated $ 46,566,121 Non-Major Special Reserve Fund for Postemployment Benefits Net Assets - Beginning $ 168,368 Change in accounting principles to conform to GASB Statement No. 54 (168,368) Net Assets - Beginning, As Restated $ - 48

161 PALMDALE SCHOOL DISTRICT NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Certain items that occurred in the prior year net assets and fund balances have been restated as of June 30, 2011, to more accurately reflect the substance of the underlying transactions. The following table summarizes the reason for the restatement. Government-Wide Financial Statements Net Assets - Beginning $ 188,307,498 Misclassification of CFD debt service activity as governmental, reclassified to agency fund (7,431,194) Overstatement of long-term obligations from CFD activity 26,547,839 Overstatement of accrued interest payable from CFD activity 129,022 Overstatement of deferred charges from CFD activity (1,364,879) Overstatement of premium on issuance from CFD activity 290,284 Net Assets - Beginning, As Restated $ 206,478,570 Non-Major Debt Service Fund for Blended Component Units Net Assets - Beginning $ 7,431,194 Misclassification of CFD debt service activity as governmental, reclassified to agency fund (7,431,194) Net Assets - Beginning, As Restated $ - 49

162 REQUIRED SUPPLEMENTARY INFORMATION 50

163 PALMDALE SCHOOL DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2011 Variances - Positive (Negative) Budgeted Amounts Actual Final Original Final (GAAP Basis) to Actual REVENUES Revenue limit sources $ 95,219,219 $ 100,464,451 $ 99,417,992 $ (1,046,459) Federal sources 29,926,591 45,919,463 35,541,427 (10,378,036) Other State sources 54,892,983 56,625,068 61,434,099 4,809,031 Other local sources 1,756,000 2,793,255 4,019,032 1,225,777 Total Revenues 1 181,794, ,802, ,412,550 (5,389,687) EXPENDITURES Current Certificated salaries 70,515,238 71,699,744 72,800,625 (1,100,881) Classified salaries 22,287,463 21,629,610 20,077,916 1,551,694 Employee benefits 36,658,436 37,357,819 44,380,732 (7,022,913) Books and supplies 7,476,575 23,360,983 6,685,215 16,675,768 Services and operating expenditures 14,891,019 18,923,042 16,619,692 2,303,350 Other outgo 46,654,482 47,082,948 40,815,776 6,267,172 Capital outlay 419,000 2,323,781 1,505, ,364 Debt service - principal 219, , ,974 - Debt service - interest 95,254 95,254 95,254 - Total Expenditures 1 199,217, ,693, ,200,601 19,492,554 Excess (Deficiency) of Revenues Over Expenditures (17,422,648) (16,890,918) (2,788,051) 14,102,867 Other Financing Sources (Uses) Transfers out - - (228,683) (228,683) Net Financing Sources (Uses) - - (228,683) (228,683) NET CHANGE IN FUND BALANCE (17,422,648) (16,890,918) (3,016,734) 13,874,184 Fund Balance - Beginning, As Restated 46,397,753 46,397,753 46,566, ,368 Fund Balance - Ending $ 28,975,105 $ 29,506,835 $ 43,549,387 $ 14,042,552 1 On behalf payments of $3,130,110 are included in the actual revenues and expenditures, but have not been included in the budgeted amounts. In addition, due to the consolidation of Fund 20, Special Reserve Fund for Postemployment Benefits for reporting purposes into the General Fund, additional revenues and expenditures pertaining to this fund are included in the Actual (GAAP Basis) revenues and expenditures, however, are not included in the original and final General Fund budgets. 51

164 PALMDALE SCHOOL DISTRICT CHILD DEVELOPMENT FUND BUDGETARY COMPARISON STATEMENT FOR THE YEAR ENDED JUNE 30, 2011 Variances - Positive (Negative) Budgeted Amounts Actual Final Original Final (GAAP Basis) to Actual REVENUES Federal sources $ 11,580,133 $ 11,235,380 $ 11,089,794 $ (145,586) Other State sources 2,193,046 2,142,054 2,230,390 88,336 Other local sources ,275 23,275 Total Revenues 13,773,179 13,377,434 13,343,459 (33,975) EXPENDITURES Current Certificated salaries 3,889,724 4,186,934 4,105,729 81,205 Classified salaries 3,149,545 3,166,791 3,308,337 (141,546) Employee benefits 3,130,865 3,485,848 4,432,665 (946,817) Books and supplies 1,725,670 1,502,357 1,471,811 30,546 Services and operating expenditures 1,177, , ,790 3,676 Other outgo 28,500 28,000 28,000 - Capital outlay 671, , ,018 6,020 Total Expenditures 13,773,179 13,377,434 14,344,350 (966,916) Excess (Deficiency) of Revenues Over Expenditures - - (1,000,891) (1,000,891) Other Financing Sources (Uses) Transfers in , ,683 Net Financing Sources (Uses) , ,683 NET CHANGE IN FUND BALANCE - - (772,208) (772,208) Fund Balance - Beginning 190, , ,782 - Fund Balance - Ending $ 190,782 $ 190,782 $ (581,426) $ (772,208) 52

165 PALMDALE SCHOOL DISTRICT SCHEDULE OF OTHER POSTEMPLOYMENT BENEFITS (OPEB) FUNDING PROGRESS FOR THE YEAR ENDED JUNE 30, 2011 Actuarial Accrued Liability Unfunded UAAL as a Actuarial (AAL) - AAL Funded Percentage of Valuation Actuarial Value Unprojected (UAAL) Ratio Covered Covered Payroll Date of Assets (a) Unit Credit (b) (b - a) (a / b) Payroll (c) ([b - a] / c) June 30, 2008 $ - $ 79,401,256 $ 79,401,256 0% $ 106,936,136 74% June 30, ,080,873 99,080,873 0% 96,207, % 53

166 SUPPLEMENTARY INFORMATION 54

167 PALMDALE SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, 2011 Pass-Through Entity Federal Grantor/Pass-Through CFDA Identifying Program Grantor/Program Number Number Expenditures U.S. DEPARTMENT OF EDUCATION Foreign Language Assistance Program [1] $ 76,327 Passed through California Department of Education (CDE): No Child Left Behind Act (NCLB) Title I Grants to Local Educational Agencies Cluster: Title I, Part A - Low Income and Neglected ,922,857 ARRA Title I, Part A - Low Income and Neglected ,772 Subtotal Title I Grants to Local Educational Agencies Cluster 4,440,629 Title I, School Improvement Grants Cluster Title I, School Improvement Grant ,621 ARRA Title I, School Improvement Grant ,258,756 Subtotal Title I, School Improvement Grants Cluster 3,465,377 Title I, Part B, Reading First Cluster Title I, Part B, Reading First Program ,033 Title I, Part B, Reading First, Special Education Teacher Professional Development Pilot Program ,106 Subtotal Title I, Part B, Reading First Cluster 1,117,139 Title II, Part D, Educational Technology State Grants Cluster Title II, Part D, Enhancing Education Through Technology, Formula Grants ,569 ARRA Title II, Part D, Enhancing Education Through Technology, Formula Grants ,744 ARRA Title II, Part D, Enhancing Education Through Technology, Competitive Grants ,174 Subtotal Title II, Part D Educational Technology State Grants Cluster 269,487 Title III, Immigrant Education Cluster Title III, Immigrant Education Program ,544 Title III, Limited English Proficient (LEP) Student Program ,062,511 Subtotal Title III, Immigrant Education Cluster 1,154,055 [1] Direct-funded, no PCA number See accompanying note to supplementary information. 55

168 PALMDALE SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS, CONTINUED FOR THE YEAR ENDED JUNE 30, 2011 Pass-Through Entity Federal Grantor/Pass-Through CFDA Identifying Program Grantor/Program Number Number Expenditures U.S. DEPARTMENT OF EDUCATION (Continued) Title I, Part C, Migrant Ed (Regular and Summer Program) $ 121,900 Title II, Part B, CA Mathematics and Science Partnerships ,570 Title II, Part A - Improving Teacher Quality ,851 ARRA - State Fiscal Stabilization Funds , ,039,377 Education Jobs Fund ,739,664 Title IV, Drug-Free Schools ,238 Passed through The Regents of the University of California: California State Gear Up Program A ,181 Individuals with Disabilities Education Act (IDEA) Cluster: Local Assistance Entitlement ,224,121 Preschool Local Entitlement A ,279,479 Preschool Grants, Part B, Sec ,846 Preschool Staff Development, Part B, Sec A ,819 ARRA IDEA Local Assistance ,537,437 ARRA IDEA Federal Preschool ,095 ARRA IDEA Part B, Sec 611, Preschool Local Entitlement ,832 Subtotal Individuals with Disabilities Education Act Cluster 17,701,629 Early Intervention Grants ,818 Total U.S. Department of Education 37,369,242 U.S. DEPARTMENT OF AGRICULTURE Passed through California Department of Education (CDE): Child Nutrition Cluster: Especially Needy Breakfast Program ,242,602 National School Lunch Program ,278,386 Commodities ,535 Subtotal Child Nutrition Cluster 8,246,523 Child Care Food Program ,056 Cash in Lieu of Commodities ,755 Total U.S. Department of Agriculture 8,917,334 See accompanying note to supplementary information. 56

169 PALMDALE SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS, CONTINUED FOR THE YEAR ENDED JUNE 30, 2011 Pass-Through Entity Federal Grantor/Pass-Through CFDA Identifying Program Grantor/Program Number Number Expenditures U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Passed through Los Angeles County Office of Education: Head Start Program Cluster [2] Head Start - Basic $ 9,030,805 Head Start Basic Training and Technical Assistance ,324 Early Head Start - Basic ,895 Early Head Start Training & Technical Assistance ,960 ARRA Head Start - Quality Improvement ,803 ARRA Early Head Start - Quality Improvement ARRA Early Head Start Expansion ,390 ARRA Early Head Start Up ,251 ARRA Training & Technical Assistance ,644 Subtotal Head Start Cluster 10,418,983 Passed through California Department of Health Services: Medical Assistance Program Cluster Medi-Cal Billing Option ,660 Medical Administrative Activities ,664 Subtotal Medical Assistance Program Cluster 653,324 Total U.S. Department of Health and Human Services 11,072,307 Total Expenditures of Federal Awards $ 57,358,883 [2] Does not include District in-kind contributions of $4,083,177 to meet Federal match requirements. Contributions by program are as follows: Head Start - Basic $ 3,789,702 Head Start - Training and Technical Assistance ,581 Early Head Start - Basic ,725 Early Head Start Training & Technical Assistance ,490 ARRA Early Head Start Expansion ,018 ARRA Training & Technical Assistance ,661 Total in-kind contributions $ 4,083,177 See accompanying note to supplementary information. 57

170 PALMDALE SCHOOL DISTRICT LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE JUNE 30, 2011 ORGANIZATION The Palmdale School District was established in The District operates 19 elementary schools, five middle schools, and three learning centers. There were no boundary changes during the year. GOVERNING BOARD MEMBER OFFICE TERM EXPIRES Robert "Bo" Bynum President 2011 Carol Stanford Clerk 2013 Sandy Corrales-Eneix Member 2013 Jeff Ferrin Member 2013 Marcanthony Sanchez Member 2011 ADMINISTRATION Roger Gallizi Cathy A. Shepard Pauline Winbush Judy Hall John Porter Stacy Bryant Superintendent Chief Business Officer Assistant Superintendent, Human Resources Assistant Superintendent, Educational Services Assistant Superintendent, Special Educations/Student Services Chief Leadership Officer See accompanying note to supplementary information. 58

171 PALMDALE SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE FOR THE YEAR ENDED JUNE 30, 2011 Final Report Second Period Annual Report Report ELEMENTARY Kindergarten 1,965 1,966 First through third 6,003 5,998 Fourth through sixth 6,412 6,402 Seventh and eighth 4,189 4,151 Home and hospital Special education Community day school Total Elementary 19,451 19,424 See accompanying note to supplementary information. 59

172 PALMDALE SCHOOL DISTRICT SCHEDULE OF INSTRUCTIONAL TIME FOR THE YEAR ENDED JUNE 30, 2011 Reduced Reduced Number of Days Actual Actual Minutes Minutes Actual Traditional Multitrack Grade Level Minutes Minutes Requirement Requirement Minutes Calendar Calendar Status Kindergarten 31,500 30,625 36,000 35,000 36, Complied Grades ,000 47,639 50,400 49,000 Grade 1 54, Complied Grade 2 54, Complied Grade 3 54, Complied Grades ,000 47,639 54,000 52,500 Grade 4 54, Complied Grade 5 54, Complied Grade 6 54, Complied Grades ,000 47,639 54,000 52,500 Grade 7 54, Complied Grade 8 54, Complied See accompanying note to supplementary information. 60

173 PALMDALE SCHOOL DISTRICT RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2011 Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report and the audited financial statements. Child Capital County School General Development Cafeteria Facilities Facilities FUND BALANCE Fund Fund Fund Fund Fund Balance, June 30, 2011, Unaudited Actuals $ 46,337,602 $ 166,589 $ 2,936,955 $ 1,674,777 $ 1,787,705 Increase in: Accounts receivable 2,055, Accounts payable (4,819,341) (748,015) (152,374) (4,940) - Decrease in: Revolving cash (14,344) Other assets (9,958) Accounts payable ,953 Balance, June 30, 2011, Audited Financial Statement $ 43,549,387 $ (581,426) $ 2,784,581 $ 1,669,837 $ 1,804,658 See accompanying note to supplementary information. 61

174 PALMDALE SCHOOL DISTRICT SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2011 (Budget) GENERAL FUND 4 Revenues $ 146,819,296 $ 200,410,330 $ 198,215,860 $ 211,628,065 Other sources and transfers in - - 8,072,988 1,265,922 Total Revenues and Other Sources 146,819, ,410, ,288, ,893,987 Expenditures 163,918, ,200, ,737, ,588,784 Other uses and transfers out - 228,683-2,206,437 Total Expenditures and Other Uses 163,918, ,429, ,737, ,795,221 INCREASE (DECREASE) IN FUND BALANCE $ (17,099,114) $ (3,018,954) $ (448,808) $ 1,098,766 ENDING FUND BALANCE $ 26,279,685 $ 43,378,799 $ 46,397,753 $ 46,846,561 AVAILABLE RESERVES 2 $ 13,198,379 $ 25,528,014 $ 26,254,164 $ 28,433,346 AVAILABLE RESERVES AS A PERCENTAGE OF TOTAL OUTGO 3 8.1% 12.7% 12.7% 13.4% LONG-TERM OBLIGATIONS N/A $ 81,400,161 $ 74,388,780 $ 70,008,260 K-12 AVERAGE DAILY ATTENDANCE AT P-2 19,276 19,451 19,570 20,045 The General Fund balance has decreased by $3,467,762 over the past two years. The fiscal year budget projects a further decrease of $17,099,114 (39 percent). For a District this size, the State recommends available reserves of at least three percent of total General Fund expenditures, transfers out, and other uses (total outgo). The District has incurred operating deficits in two of the past three years and anticipates incurring an operating deficit during the fiscal year. Total long-term obligations have increased by $11,391,901 over the past two years. Average daily attendance has decreased by 594 over the past two years. Additional decline of 175 ADA is anticipated during fiscal year Budget 2011 is included for analytical purposes only and has not been subjected to audit. 2 Available reserves consist of all unassigned fund balances including all amounts reserved for economic uncertainty contained within the General Fund. 3 On behalf payment of $3,130,110 have been excluded from the calculation of available reserves for the year ended June 30, General Fund amounts do not include activity related to the consolidation of the Special Reserve Fund for Postemployment Benefits, as required by GASB Statement No. 54. See accompanying note to supplementary information. 62

175 PALMDALE SCHOOL DISTRICT SCHEDULE OF CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2011 Name of Charter School Guidance Charter SchoolNo Antelope Valley Learning Academy Included in Audit Report No See accompanying note to supplementary information. 63

176 PALMDALE SCHOOL DISTRICT NON-MAJOR GOVERNMENTAL FUNDS COMBINING BALANCE SHEET JUNE 30, 2011 Capital County School Cafeteria Facilities Facilities Fund Fund Fund ASSETS Deposits and investments $ 1,798,883 $ 1,705,282 $ 1,804,262 Receivables 768,995 5,283 5,515 Prepaid expenditures 506, Stores inventories 323, Total Assets $ 3,397,658 $ 1,710,565 $ 1,809,777 LIABILITIES AND FUND BALANCES Liabilities: Accounts payable $ 613,077 $ 40,728 $ 5,119 Total Liabilities 613,077 40,728 5,119 Fund Balances: Nonspendable 829, Restricted 1,954,801 1,669,837 1,804,658 Assigned Total Fund Balances 2,784,581 1,669,837 1,804,658 Total Liabilities and Fund Balances $ 3,397,658 $ 1,710,565 $ 1,809,777 See accompanying note to supplementary information. 64

177 Special Reserve Fund for Bond Interest Total Non-Major Capital Outlay and Redemption Debt Service Governmental Projects Fund Fund Funds $ 1,231,243 $ 1,471,809 $ 815,441 $ 8,826,920 3, , , ,273 $ 1,234,965 $ 1,471,809 $ 815,616 $ 10,440,390 $ - $ - $ - $ 658, , ,780-1,471, ,616 7,716,721 1,234, ,234,965 1,234,965 1,471, ,616 9,781,466 $ 1,234,965 $ 1,471,809 $ 815,616 $ 10,440,390 64

178 PALMDALE SCHOOL DISTRICT NON-MAJOR GOVERNMENTAL FUNDS COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30, 2011 Special Reserve Fund for Capital County School Cafeteria Postemployment Facilities Facilities Fund Benefits Fund Fund REVENUES Federal sources $ 8,246,523 $ - $ - $ - Other State sources 659, Other local sources 1,704, ,770 49,244 Total Revenues 10,610, ,770 49,244 EXPENDITURES Current Pupil services: Food services 9,050, Administration: All other administration 364,976-53,044 - Plant services 328, ,370 (16,953) Facility acquisition and construction , ,747 Debt service Principal Interest and other Total Expenditures 9,744, , ,794 Excess (Deficiency) of Revenues Over Expenditures 866,109 - (120,163) (474,550) Other Financing Sources (Uses) Transfers in Transfers out (2,030,794) Net Financing Sources (Uses) (2,030,794) NET CHANGE IN FUND BALANCES 866,109 - (120,163) (2,505,344) Fund Balances - Beginning 1,918, ,368 1,790,000 4,310,002 Prior Period Restatement - (168,368) - - Fund Balances - Ending $ 2,784,581 $ - $ 1,669,837 $ 1,804,658 See accompanying note to supplementary information. 65

179 Special Reserve Debt Service Fund for Bond Interest Fund for Debt Total Non-Major Capital Outlay and Redemption Blended Service Governmental Projects Fund Component Units Fund Funds $ - $ - $ - $ - $ 8,246,523-18, ,900 16,036 1,687,693-1,515,205 5,111,568 16,036 1,706,200-1,515,205 14,035, ,050, , , , ,000-1,040,000 1,825, , ,873 1,763,682-1,671,809-1,916,873 14,115,836 16,036 34,391 - (401,668) (79,845) 2, , (2,030,794) 2, (2,028,262) 18,568 34,391 - (401,668) (2,108,107) 1,216,397 1,437,418 7,431,194 1,217,284 19,489, (7,431,194) - (7,599,562) $ 1,234,965 $ 1,471,809 $ - $ 815,616 $ 9,781,466 65

180 PALMDALE SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2011 NOTE 1 - PURPOSE OF SCHEDULES Schedule of Expenditures of Federal Awards The accompanying Schedule of Expenditures of Federal Awards includes the Federal grant activity of the District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the United States Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the financial statements. The following schedule provides reconciliation between revenues reported on the Statement of Revenues, Expenditures, and Changes in Fund Balances, and the related expenditures reported on the Schedule of Expenditures of Federal Awards. The reconciling amounts consist primarily of ARRA State Fiscal Stabilization Funds that in the previous period were recorded as revenues but were not expended. These unspent balances have been expended in the current period. In addition, Medi-Cal Billing Option funds have been recorded in the current period as revenues that have not been expended by June 30, The unspent balances are reported as legally restricted ending balances within the General Fund. CFDA Number Amount Total Federal Revenues From the Statement of Revenues, Expenditures, and Changes in Fund Balances: $ 54,877,744 ARRA State Fiscal Stabilization Funds ,101,711 Medi-Cal Billing Option (620,572) Total Schedule of Expenditures of Federal Awards $ 57,358,883 Subrecipients Of the Federal expenditures presented in the schedule, the District provided awards to Subrecipients as follows: Federal Grantor/Pass-Through CFDA Amount Provided to Grantor/Program Number Subrecipients Local Assistance Entitlement $ 10,432,259 Preschool Local Entitlement A 477,974 Preschool Grants, Part B, Sec ,144 Preschool Staff Development, Part B, Sec A 3,066 Early Intervention Grants $ 155,818 11,324,261 Local Education Agency Organization Structure This schedule provides information about the District's boundaries and schools operated, members of the governing board, and members of the administration. 66

181 PALMDALE SCHOOL DISTRICT NOTE TO SUPPLEMENTARY INFORMATION JUNE 30, 2011 Schedule of Average Daily Attendance (ADA) Average daily attendance (ADA) is a measurement of the number of pupils attending classes of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of State funds are made to school districts. This schedule provides information regarding the attendance of students at various grade levels and in different programs. Schedule of Instructional Time The District has received incentive funding for increasing instructional time as provided by the Incentives for Longer Instructional Day. This schedule presents information on the amount of instructional time offered by the District and whether the District complied with the provisions of Education Code Sections through Districts must maintain their instructional minutes at either the actual minutes or the requirement, whichever is greater, as required by Education Code Section Reconciliation of Annual Financial and Budget Report With Audited Financial Statements This schedule provides the information necessary to reconcile the fund balance of all funds reported on the Annual Financial and Budget Report Unaudited Actuals to the audited financial statements. Schedule of Financial Trends and Analysis This schedule discloses the District's financial trends by displaying past years' data along with current year budget information. These financial trend disclosures are used to evaluate the District's ability to continue as a going concern for a reasonable period of time. Schedule of Charter Schools This schedule lists all Charter Schools chartered by the District, and displays information for each Charter School on whether or not the Charter School is included in the District audit. Non-Major Governmental Funds - Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances The Non-Major Governmental Funds Combining Balance Sheet and Combining Statement of Revenues, Expenditures and Changes in Fund Balances is included to provide information regarding the individual funds that have been included in the Non-Major Governmental Funds column on the Governmental Funds Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances. 67

182 INDEPENDENT AUDITORS' REPORTS 68

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189 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 75

190 PALMDALE SCHOOL DISTRICT SUMMARY OF AUDITORS' RESULTS FOR THE YEAR ENDED JUNE 30, 2011 FINANCIAL STATEMENTS Type of auditors' report issued: Internal control over financial reporting: Material weakness(es) identified? Significant deficiency(ies) identified? Noncompliance material to financial statements noted? FEDERAL AWARDS Internal control over major programs: Material weakness(es) identified? Significant deficiency(ies) identified? Type of auditors' report issued on compliance for major programs: Any audit findings disclosed that are required to be reported in accordance with Section.510(a) of OMB Circular A-133? Identification of major programs: Unqualified Yes Yes No No None reported Unqualified No CFDA Number(s) Name of Federal Program or Cluster (ARRA) State Fiscal Stabilization Fund (ARRA) , Title I, School Improvement Grants Cluster (includes (ARRA) ARRA) Education Jobs Fund , A, , A, (ARRA), (ARRA) Special Education (IDEA) Cluster ( includes ARRA) , Child Nutrition Cluster , (ARRA), (ARRA) , (ARRA) Head Start Program Cluster (includes ARRA) Title II, Part D, Educational Technology State Grants Cluster (includes ARRA) Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee? STATE AWARDS Type of auditors' report issued on compliance for State programs: $ 1,720,766 No Unqualified 76

191 PALMDALE SCHOOL DISTRICT FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 The following findings represent significant deficiencies, material weaknesses, and/or instances of noncompliance related to the financial statements that are required to be reported in accordance with Government Auditing Standards. The findings have been coded as follows: Five Digit Code AB 3627 Finding Type Internal Control Financial Statement Adjustment Fringe Benefits Criteria or Specific Requirements The District is required to recognize expenditures related to fringe benefits according to when the associated salaries are earned. However, there may be differences between the timing of these expenditures being incurred and the actual payment of these expenditures. Therefore, the District's payroll system charges these expenditures each time payroll is processed. The result is to increase designated liability holding accounts. As the District is actually required to pay the costs of these fringe benefits, the liability holding accounts are reduced. The District must monitor the activity within these accounts to ensure that charges generated by the payroll system are accurate. Otherwise, significant variances may develop between recorded expenditures for fringe benefits and the true cost of the benefits. Condition Expenditure and related liability holding accounts for employee fringe benefits are not being properly reconciled. Effect The improper monitoring of these accounts has resulted in an audit adjustment for the current fiscal year. The net effect of the audit adjustment has caused the following changes to fund balances: Cause General Fund has decreased by $4,843,643. Child Development Fund has decreased by $748,015. Cafeteria Fund has decreased by $152,374. Capital Facilities Fund has decreased by $4,940. County School Facilities Fund has increased by $16,953. The condition identified above is caused by improper monitoring of amounts being charged for fringe benefits by the District's payroll system. 77

192 PALMDALE SCHOOL DISTRICT FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Recommendation The District should ensure that all amounts being used by the payroll system to charge employee fringe benefits are accurate. As part of the closing process, the District should adjust these accounts to agree with the true cost of providing employee benefits for the year District Response The District has completed an audit of the fringe benefits through June 30, 2011, and has adjusted the accounts accordingly. The District is currently reviewing all amounts in the payroll system to verify that the correct amounts are charged for employee benefits. In addition, procedures for maintaining correct amounts are being implemented Warrant Pass-Through Fund Criteria or Specific Requirements The District operates a warrant pass-through fund which is used to account for voluntary deductions and the associated disbursement of amounts withheld from employee payroll. Ideally, all amounts deposited into to the warrant pass-through fund should be eventually disbursed. However, procedures should be in place to ensure that the activity in the warrant pass-through fund is properly reconciled. Condition During our review of activity in the warrant pass-through fund, we identified beginning balances which were carried over from the prior fiscal year that had not appropriately been cleared as of the final audit date. Effect The condition identified above has resulted in an audit adjustment for the current fiscal year. The adjustment has increased the receivable balance in the General Fund by $56,419. Cause The misstatement stated above is the result of a lack of proper reconciliation procedures over the activity within the warrant pass-through fund. 78

193 PALMDALE SCHOOL DISTRICT FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, Recommendation The District should establish and enforce formalized procedures related to reconciliation of the warrant pass-through fund. In addition, there should be a third-party review of all reconciliations. The reconciliations should identify balances that are not disbursed within a reasonable amount of time. The causes of carryover balances should be investigated and appropriate action should be taken to resolve the identified issues. District Response A third-party review has been performed and adjustments were made to reconcile the Warrant Pass- Through Fund as of June 30, The District is implementing formal procedures for periodic reconciliation of the fund and appropriate actions for resolving issues identified during the reconciliation process. Capital Assets Criteria or Specific Requirements Education Code Section requires the District to establish and maintain an inventory of all capital assets. In order to maintain an accurate inventory listing, the District must perform periodic physical inventory counts and adjust the inventory for any discrepancies. Condition The District does not perform physical inventory counts of capital assets to ensure the accuracy of the inventory listing. Effect Consequently, amounts recorded for capital assets in the district's financial statements could be misstated. By not performing physical inventory counts of capital assets, the District increases the risk of loss from damage, theft, or otherwise. Cause The condition identified above appears to be caused by the lack of formal procedures related to this process. 79

194 PALMDALE SCHOOL DISTRICT FINANCIAL STATEMENT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Recommendation The District should establish and enforce formalized procedures related to physical inventories of capital assets. Such procedures should include timelines for when the inventory counts will be performed along with a process for reconciling physical inventory count information with the perpetual capital asset listing. Physical inventory counts of capital assets should occur at least on an annual basis. District Response The District currently has a formal procedure for annual inventory of fixed assets for categorical compliance. This procedure will be reviewed and expanded to include all capital assets. 80

195 PALMDALE SCHOOL DISTRICT FEDERAL AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2011 None reported. 81

196 PALMDALE SCHOOL DISTRICT STATE AWARDS FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2011 None reported. 82

197 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Except as specified in previous sections of this report, summarized below is the current status of all audit findings reported in the prior year's schedule of financial statement findings. Financial Statement Findings Associated Student Body (ASB) Finding At Barrel Springs Elementary, we tested three cash receipts related to the ASB's only fundraising activity, "World's Finest Chocolate Sales" and could not reconcile the deposits to the tally control sheets for any of the three. The fundraising activity was expected to raise $31,600. We noted that there was $28,396 in deposit receipts collected throughout the year, which is $3,204 short of expected cash receipts. Boxes of chocolate worth $2,050 were checked out to students, for which cash receipts have not yet been collected, leaving $1,154 in unaccounted for receipts. Recommendation We recommended the District investigates the fundraising activity in the interest of gaining an understanding of the unaccounted inventory, and we recommend the District implements stronger internal controls over future fundraising activities. District Response The District will review the fundraising activity as well as implementing stronger cash control procedures for all fundraising activities. Current Status Implemented. Vacation Accrual Policy Finding We noted that all classified employees excluding management have no limit on the amount of vacation they are allowed to accrue. This allows for a large liability to accrue to the District. Each year the hours accrue at current pay rates, increasing the amounts due to the District individuals and payable by the District. 83

198 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, Recommendation We recommended that the District establish a policy that limits the amount of vacation an employee can accrue and/or carryover to future years. District Response The District will take action to enforce current policy and review to determine if current policy needs to be amended to avoid increasing this liability. Current Status Implemented. Capital Assets Finding The last asset valuation the District had was in 2002, at which time the District hired a firm to do a complete count and valuation. The firm hired included all assets which had barcodes, even if not the items were capital assets. These items are still included in the capital assets listing and have not been reviewed since. The District is not confident that all assets exist as indicated on the capital asset spreadsheet log. The District does not perform annual observation counts on the capital assets to ensure the assets exist and remain in operational condition. Many of the capital assets are vulnerable to theft or damage, thus absent an annual physical count the capital asset records may be overstated. Recommendation We recommended that the District perform a District Wide capital asset inventory valuation and reconcile it to the capital asset spreadsheets maintained, making any adjustments necessary to fairly state capital assets at year-end. Also, the District does have a capital asset module in its software that could be used to track this information automatically if tied into the purchasing system. This could be another possibility for tracking capital assets in the future. District Response The District needs to perform a District-Wide capital asset inventory valuation and reconcile it to the current capital asset spreadsheet, making necessary adjustments to more accurately State capital assets at year-end. Current Status Not implemented. See current year finding

199 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Payroll Finding We noted in our testing of the sick/vacation time record keeping that there are numerous deficiencies. Specifically, four of 20 employees selected for testing had discrepancies in hours accrued/taken between their sick/vacation card and the payroll system. Also, some employees were found to be paid at full-time wages when they had a negative balance for vacation or sick leave. When this occurs, the employee is supposed to be compensated at a part-time rate. These errors transpired due to the lack of review over the recording of sick leave/vacation hours. The payroll registers and sick leave/vacation records are not being reviewed at a supervisor or management level. Recommendation We recommended that management perform monthly reviews of the payroll records to ensure that employees are being paid the correct rates and any docking activity is posted timely and accurately. We also recommend that the District implement an automated system for tracking all employees' sick leave and vacation time to minimize the potential for clerical errors to occur. The District indicated that the KRONOS time attendance system will begin its implementation during the fiscal year in order to better automate the sick leave and vacation time recordkeeping process. District Response The District is piloting the KRONOS system with departments and plans to be on-line with all classified and leadership positions for Fiscal Year The District will also develop a procedure for management review of payroll records. Management is currently doing reviews of select groups of employees monthly. Current Status Implemented. Expenditures Finding Budget control is an important function that helps the District ensure that they are within their spending limits. During expenditures testing, we noted six of 45 expenditures tested had purchase orders dated after the invoice date. 85

200 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, Recommendation We recommended that the District establishes purchases orders prior to payment to all vendors by ensuring purchase requisitions are approved, budgeted funds are sufficient and the final purchase order is signed and distributed to all affected parties. Blanket purchase orders may be implemented at the beginning of the year for frequently used vendors. District Response The District will review its procedures for requisitions and the timely monitoring of blanket purchase orders. Current Status Implemented. Payroll Clearing Account Finding We found that the payroll clearing account had not been formally reconciled. The payroll clearing account is being reconciled by multiple district employees every quarter, but the District is not reviewing the reconciliations that are being performed. Recommendation We recommended that the payroll clearing account be reconciled on a monthly basis and ensure that important tasks, such as account reconciliations, be delegated to a responsible employee as part of their regular duties. District Response The District is unaware of the requirements under the Procurement and Suspension and Debarment requirement. As a result, the District lacks sufficient internal controls to ensure compliance in this area. The District will continue to develop a procedure for the timely reconciliation of the payroll clearing fund and assign the Assistant Director of Fiscal Services as the responsible employee. Current Status Not implemented. See current year finding

201 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Federal Awards Findings Personnel Time Accounting for Federal Programs Federal Program National School Lunch Program Cluster, CFDA # , , , and Special Education (IDEA) Cluster, CFDA # , A, , A, , Criteria OMB Circular A-87, Cost Principles for Local, State and Indian Tribe Governments, requires an accounting for personnel time on multi-funded positions by the time spent on each program and to semi-annually certify positions charged 100 percent to Federal programs. The California Department of Education has issued an advisory dated August 28, 1997, that further expands on the requirements as related to school district agencies. Condition The District did not provide time certification documents under OMB Circular A-87, Cost Principles for Local, State and Indian Tribe Governments, which requires an accounting of personnel time for individuals charged 100 percent to the IDEA programs and National School Lunch programs. Also, the District was charging salaries to National School Lunch programs based on an unsupported percentage rather than determining actual hours worked on the program and then charging for actual time worked. Questioned Costs National School Lunch program was charged $134,665 and $4,734,016 was charged to IDEA in salaries and benefits costs in without semi-annual time certifications or other time documentation. However, the charges appear otherwise appropriate based on our review of personnel records on program assignments. Context Twenty-two of 23 employees tested. Cause Management is not monitoring the time certifications used to account for salaries charged to Federal programs. Effect Non-compliance with Federal documentation regulation. 87

202 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, Recommendation We recommended the District follow OMB Circular A-87 and CSAM Procedure 905 to prepare semi-annual certification for those charged to a "single cost objective." The certifications may be signed by the employee or their immediate supervisor. The District should also determine if any after-the-fact adjustments are needed to correct expenditures for time not worked on each program. District Response The District will implement the requirements of OMB Circular A-87 and obtain semi-annual time certifications for individuals charged 100 percent to the program. Current Status Implemented. Other Postemployment Benefits (OPEB) Charges Federal Program National School Lunch Program Cluster, CFDA # , , , and Head Start, CFDA # Criteria According to CSAM Procedure 785, OPEB costs for already retired employees may only be charged across total salaries or total FTE's across all activities and not directly charged to the program for which they used to work. Condition The District is direct charging OPEB costs to Federal programs for already retired employees instead of allocating costs in accordance with CSAM Procedure 785. Questioned Cost Identified Head Start was $25,168 and National School Lunch was $42,415. Context Unknown. 88

203 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Effect Federal expenditures are not in compliance with CSAM procedure 785 and Federal cost accounting principles. Cause The District did not review or follow the proper accounting procedures in CSAM 785. Recommendation We recommended transferring the costs of those expenditures across all salaries or FTE's across all activities and to make whole the programs over charged in District Response The District will transfer costs of these expenditures across all salaries or FTE's across all activities. Current Status Implemented. Allocation of Plant Maintenance and Operation Costs to SFSF Federal Program State Fiscal Stabilization Funds, CFDA # Criteria OMB Circular A-133 Compliance Supplement SFSF Section 6.c.(1) states that no entity may use SFSF funds for maintenance of systems, equipment or facilities. Section 6.e.(1) states that LEAs may not use SFSF funds for payment of maintenance costs. Condition The District allocated Plant Maintenance and Operation (PM&O) costs to the State Fiscal Stabilization program. The District hired a consulting firm that determined a rate to allocate PM&O costs across all resources including Federal resources. However, the portion allocated to PM&O costs is an inappropriate use of SFSF funds. Questioned Costs The amount of PM&O allocated to SFSF was $109,

204 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Context Plant maintenance and operation costs charges to Federal programs. Effect Improper use of Federal funds per OMB Circular A-133 guidance. Cause The District was not aware of the prohibition. Recommendation We recommended transferring the PM&O costs from SFSF resource to another allowable resource in District Response The District will make the recommended transfer. Current Status Implemented. State Award Findings and Questioned Costs Instructional Materials Criteria or Specific Requirement California Education Code 60119(b) stipulates that the governing board of the District should provide advance notice of the public hearing regarding the sufficiency of instructional materials and that "the notice shall contain the time, place and purpose of the hearing." Condition We noted that the District's notice of public hearing for the sufficiency of textbooks did not specify the location of the hearing. Questioned Cost Identified Questioned costs amounted to $82,

205 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Effect Non-compliance of State requirements. Cause The District was not aware of the requirement. Recommendation We recommended that the governing board conduct a public hearing for a sufficiency of instructional materials that is properly advertised with an advance notice containing all of the requirements stipulated in Education Code 60119(b). District Response The District has amended the public hearing notices to specify the location of the hearing. Current Status Implemented. School Accountability Report Card Criteria or Specific Requirement School facilities conditions assessments as indicated in a school's annual School Accountability Report Card (SARC) should match the information indicated in facility conditions evaluation instruments developed by the Office of Public School Construction and approved by the State Allocation Board, or local evaluation instruments that meet the same criteria, as per Education Code Sections 33126(b)(8) and Condition We noted four of six sites tested had discrepancies found to what was reported on the SARC compared to the facilities inspection tool form used to evaluate the sites facilities. The sites that had inconsistencies are Barrel Springs Elementary, Chaparral Elementary, Oak Tree Learning Center, and Quail Valley Elementary. Questioned Cost Not applicable. 91

206 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Effect Non-compliance of State requirements. Cause The District reported the incorrect facilities information. Recommendation The District should update the SARCs to ensure that accurate information is being reported and made available. As required per Education Code Section 33126, SARC information reported about the conditions of school facilities must be consistent with the facilities inspection tool forms used to make the evaluation. District Response The District will review and update the SARC and facilities inspection tool form to reconcile the inconsistencies. Current Status Implemented. After School Education and Safety (ASES) Program Attendance Criteria Education Code requires districts applying for ASES funding to follow all fiscal reporting and accounting requirements of the California Department of Education. The auditor is to verify the District has maintained proper controls over the ASES Program to ensure that amounts recorded for reporting to the state are accurate. Condition In the testing of the number of students served in the ASES program that was submitted to the State, we found three of twenty pupils' attendance being inaccurately reported compared to the students sign-in and sign-out log. The attendance testing results in a net of one day overstatement. Questioned Costs None. The District met their participation threshold of a minimum of 85 percent after taking into account this correction of this error. 92

207 PALMDALE SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30, 2011 Effect Incorrect attendance being reported on the report submitted to the State. Cause Insufficient controls over attendance reporting. Recommendation We recommend that the District perform monthly reconciliations of manual sign-in sheets and system detail reports to ensure that the correct numbers of students are being recorded for attendance reporting purposes. District Response The District will work with the program providers to perform monthly reconciliations of the attendance records. Current Status Implemented. 93

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