SECOND SUPPLEMENT TO OFFICIAL STATEMENT relating to

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1 SECOND SUPPLEMENT TO OFFICIAL STATEMENT relating to $21,585, REFUNDING CERTIFICATES OF PARTICIPATION Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the SAN YSIDRO SCHOOL DISTRICT (San Diego County, California) This Second Supplement to the Official Statement (this Second Supplement ) provides information in connection with the sale of the above-captioned certificates of participation (the Certificates ). All persons in possession of the Official Statement are requested to permanently insert this Second Supplement inside the front cover of, or otherwise attach this Second Supplement to, the Official Statement. All terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Official Statement. The following information updates certain information regarding the administration of the District provided in the Official Statement. Board Vacancy. On August 21, 2015, Jose F. Barajas resigned from the Board. His seat on the Board is currently vacant. On August 27, 2015, the Board approved filling the unexpired vacancy through an appointment and is currently accepting applications. The Board intends to make an appointment based on a review of applications and an interview on September 24, Chief Operations Officer. On August 20, 2015, Dena Whittington, Assistant Superintendent of Business Services, was placed on administrative leave from her position at the District and, subsequently, on August 26, 2015, Ms. Whittington resigned. As of the date of this Second Supplement, there are no outstanding matters regarding Ms. Whittington. On August 13, 2015, the Board approved a contract commencing September 1, 2015, with Arturo Sanchez Macias to serve as the Chief Operations Officer of the District, which position is intended to replace the Assistant Superintendent of Business Services position formerly filled by Ms. Whittington. Mr. Sanchez Macias began serving as the Chief Operations Officer of the District on September 1, Dated: September 11, 2015 SAN YSIDRO SCHOOL DISTRICT By: /s/ Julio Fonseca Julio Fonseca, Ed.D. Superintendent

2 SUPPLEMENT TO OFFICIAL STATEMENT relating to $21,585, REFUNDING CERTIFICATES OF PARTICIPATION Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the SAN YSIDRO SCHOOL DISTRICT (San Diego County, California) This Supplement to the Official Statement (this Supplement ) provides information in connection with the sale of the above-captioned certificates of participation (the Certificates ). All persons in possession of the Official Statement are requested to permanently insert this Supplement inside the front cover of, or otherwise attach this Supplement to, the Official Statement. All terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Official Statement. The first Record Date for the Certificates shall be August 18, 2015 such that interest with respect to the Certificates shall be payable from August 18, Dated: August 13, 2015 SAN YSIDRO SCHOOL By: /s/ Julio Fonseca Julio Fonseca, Ed.D. Superintendent

3 NEW ISSUE-FULL BOOK-ENTRY RATINGS: S&P (Insured): AA/stable Moody s (Underlying): A3 (See RATINGS herein) In the opinion of Dannis Woliver Kelley, Long Beach, California, Special Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, the interest (and original issue discount) with respect to the Certificates is excluded from gross income for federal income tax purposes. In the further opinion of Special Counsel, such interest (and original issue discount) is exempt from State of California personal income tax. Special Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest with respect to, the Certificates. See TAX MATTERS herein. $21,585, REFUNDING CERTIFICATES OF PARTICIPATION Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the SAN YSIDRO SCHOOL DISTRICT (San Diego County, California) Dated: Date of Delivery Due: September 1, as shown on the inside cover hereof The San Ysidro School District s (the District ) 2015 Refunding Certificates of Participation (the Certificates ) are being executed and delivered pursuant to a Trust Agreement, dated as of August 1, 2015 (the Trust Agreement ), by and among The Bank of New York Mellon Trust Company, N.A., as trustee, the San Ysidro Schools Public Financing Corporation (the Corporation ) and the District to (i) prepay on a current basis certain outstanding certificates of participation of the District, (ii) acquire a municipal bond insurance policy and a debt service reserve insurance policy for the Certificates, and (iii) pay the costs related to the execution and delivery of the Certificates, all as further described in the sections PLAN OF REFUNDING and ESTIMATED SOURCES AND USES OF PROCEEDS herein. Pursuant to a Site Lease, dated as of August 1, 2015, the District will lease Sunset Elementary School and La Mirada Elementary School (collectively, the Property ), to the Corporation, and will lease the Property back from the Corporation pursuant to a Lease Agreement, dated as of August 1, 2015 (the Lease ), by and between the Corporation and the District. The Certificates evidence fractional interests in Lease Payments to be made by the District, as lessee under the Lease. The District will covenant to budget and appropriate Lease Payments in each year in consideration of the use and occupancy of the Property from any source of legally available funds, and to take such action as may be necessary to include all Lease Payments in its annual budgets and to make the necessary annual appropriations therefor. See SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES Lease Payments herein. The District s obligation to make Lease Payments is subject to abatement in the event of the taking of, damage to or loss of use and possession of the Property. See RISK FACTORS Abatement herein. Interest represented by the Certificates is payable semiannually on March 1 and September 1 of each year, commencing September 1, The Certificates will be delivered as fully registered securities, without coupons, and when delivered will be registered in the name of The Depository Trust Company ( DTC ), New York, New York, or its nominee. DTC will act as securities depository for the Certificates. Ownership interests in the Certificates may be purchased in book-entry form only, in authorized denominations, as described in this Official Statement. See Appendix G BOOK-ENTRY ONLY SYSTEM. The Certificates are subject to prepayment prior to their stated maturity as described herein. See THE CERTIFICATES Prepayment herein. The scheduled payment of principal and interest evidenced by the Certificates when due will be guaranteed under a municipal bond insurance policy to be issued concurrently with the execution and delivery of the Certificates by Build America Mutual Assurance Company (the Insurer ). See BOND INSURANCE herein and APPENDIX H - Specimen Municipal Bond Insurance Policy hereto. THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS IS SUBJECT TO ANNUAL APPROPRIATION AND DOES NOT CONSTITUTE AN OBLIGATION OF THE DISTRICT FOR WHICH THE DISTRICT IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION FOR WHICH THE DISTRICT HAS LEVIED OR PLEDGED ANY FORM OF TAXATION, EXCEPT FOR THE PLEDGE OF SPECIAL TAXES RECEIVED BY THE DISTRICT FROM CERTAIN COMMUNITY FACILITIES DISTRICTS RELATED TO THE DISTRICT. SEE SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES PLEDGE OF SPECIAL TAXES HEREIN. NEITHER THE CERTIFICATES NOR THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS CONSTITUTES A DEBT OF THE DISTRICT, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. IF SUFFICIENT FUNDS ARE NOT APPROPRIATED TO MAKE LEASE PAYMENTS, THEN THE LEASE WILL TERMINATE AND THE DISTRICT WILL NOT BE OBLIGED TO MAKE LEASE PAYMENTS BEYOND THE LAST FISCAL YEAR FOR WHICH FUNDS HAVE BEEN APPROPRIATED. THE OBLIGATION OF THE DISTRICT TO MAKE LEASE PAYMENTS IS SUBJECT TO THE DISTRICT S BENEFICIAL USE AND POSSESSION OF THE PROPERTY. This cover page of the Official Statement contains information for quick reference only. It is not a complete summary of the Certificates or the Lease. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. See RISK FACTORS herein. The Certificates will be offered when, as and if executed and delivered and received by the Underwriter, subject to the approval as to legality by Dannis Woliver Kelley, Long Beach, California, Special Counsel. Certain matters will be passed on for the District by Dannis Woliver Kelley, Long Beach, California, Disclosure Counsel. Certain matters will be passed upon for the Underwriter by its counsel, Katten Muchin Rosenman LLP, Los Angeles, California. It is anticipated that the Certificates in definitive form will be available for delivery through the facilities of DTC in New York, New York on or about August 18, Dated: July 30, 2015

4 MATURITY SCHEDULE $21,585, REFUNDING CERTIFICATES OF PARTICIPATION Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the SAN YSIDRO SCHOOL DISTRICT (San Diego County, California) (BASE CUSIP 1 NO.: ) Maturity (September 1) Principal Amount Interest Rate Yield Price CUSIP 1 No $1,205, % 0.500% % FF , FG , FH , FJ , FK ,055, FL ,115, FM ,165, FN ,230, FP ,170, FQ ,060, FR ,030, c FS ,110, FT ,175, c FU ,270, c FV ,160, c FW ,160, c FX ,110, c FY ,050, c FZ , GA3 C Priced to first optional redemption date of September 1, 2025 at par. 1 Copyright 2015, American Bankers Association. CUSIP data herein is provided by Standard and Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Service. The CUSIP number is provided for convenience of reference only. Neither the District nor the Underwriter takes any responsibility for the accuracy of such CUSIP number.

5 No dealer, broker, salesperson or other person has been authorized by the District or RBC Capital Markets, LLC (the Underwriter ) to give any information or to make any representations other than those contained herein. If given or made, such other information or representations 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 Certificates by a person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. This Official Statement is not to be construed as a contract with the Underwriter of the Certificates or any purchasers thereof. 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 representations of fact. 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. The information and expression 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 Certificates 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. While the District maintains an internet website for various purposes, none of the information on that website is intended to assist investors in making any investment decision or to provide any continuing information with respect to the Certificates or any other Certificates or obligations of the District. Certain statements included or incorporated by reference in this Official Statement constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as a plan, expect, estimate, project, budget or similar words. Such forward-looking statements include, but are not limited to certain statements contained in the information under the captions THE DISTRICT and DISTRICT FINANCIAL INFORMATION herein. The achievement of certain results or other expectations contained in such forward-looking statements involves 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 forward-looking statements. While the District has agreed to provide certain on-going financial and operating data for a limited period of time, it does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which statements are based change. See CONTINUING DISCLOSURE herein and APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE hereto. Build America Mutual Assurance Company (the Insurer ) makes no representation regarding the Certificates or the advisability of investing in the Certificates. In addition, the Insurer 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 the Insurer, supplied by the Insurer and presented under the heading BOND INSURANCE and Appendix H SPECIMEN MUNICIPAL BOND INSURANCE POLICY attached hereto. WITH RESPECT TO THIS OFFERING, THE UNDERWRITER MAY ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES 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 CERTIFICATES DESCRIBED HEREIN TO CERTAIN DEALERS, INSTITUTIONAL INVESTORS AND DEALER BANKS OR BANKS ACTING AS AGENT AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED IN THIS OFFICIAL STATEMENT AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER. THE CERTIFICATES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION CONTAINED IN SUCH ACT AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.

6 SAN YSIDRO SCHOOL DISTRICT (SAN DIEGO COUNTY, CALIFORNIA) Board of Education Antonio Martinez, President Marcos A. Diaz, Vice President Rodolfo Linares, Clerk Jose F. Barajas, Member Luciana Corrales, Member District Administrators Julio Fonseca, Ed.D., Superintendent Dena Whittington, Assistant Superintendent of Business Services Gloria Madera, Assistant Superintendent of Educational Services PROFESSIONAL SERVICES Special Counsel and Disclosure Counsel Dannis Woliver Kelley Long Beach, California Financial Advisor Isom Advisors, a Division of Urban Futures, Inc. Walnut Creek, California Underwriter RBC Capital Markets, LLC Los Angeles, California Trustee The Bank of New York Mellon Trust Company, N.A. Los Angeles, California Verification Agent Causey Demgen Moore P.C. Denver, Colorado

7 TABLE OF CONTENTS INTRODUCTION...1 The District...1 Purpose of the Certificates...1 Security and Source of Payment of the Certificates..2 Certificate Insurance...2 Description of the Certificates...2 Certificate Insurance...3 Continuing Disclosure...3 Professionals Involved in the Offering...3 Certificate Owners Risks...4 Other Information...4 PLAN OF REFUNDING...4 THE PROPERTY...5 THE CERTIFICATES...5 General...5 Prepayment...6 Prepayment Procedures...6 Book-Entry Only System...7 CERTIFICATE PAYMENT SCHEDULE...8 SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES...8 General...8 Lease Payments...9 Pledge of Special Taxes Reserve Fund Additional Payments Insurance Remedies on Default Additional Certificates BOND INSURANCE Bond Insurance Policy Build America Mutual Assurance Company Bond Insurance Risk Factors ESTIMATED SOURCES AND USES OF PROCEEDS RISK FACTORS General Considerations - Security for the Certificates Constitutional and Statutory Limitations on Appropriations Abatement No Cash Reserve Absence of Earthquake Insurance and Flood Insurance Other Limitations on Liability No Acceleration Upon Default Limited Recourse on Default; Insurer Right to Control Remedies Substitution of Property Additional Certificates Economic Conditions in California Loss of Tax Exemption THE CORPORATION THE DISTRICT Board of Education Superintendent Employee Relations Retirement System Other Postemployment Benefits Insurance DISTRICT FINANCIAL INFORMATION District Investments Financial Statements of the District District Budgets General Fund Long-Term Debt Short-Term Debt Capital Facilities Funds STATE FUNDING OF EDUCATION Local Control Funding Formula PROPERTY WITHIN THE DISTRICT Assessed Valuations Tax Rates The Teeter Plan Direct and Overlapping Debt Tax Levies and Delinquencies COUNTY OF SAN DIEGO TREASURER S INVESTMENT POOL General The Treasury Pool s Portfolio STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES Article XIIIA Article XIIIB Articles XIIIC and XIIID Unitary Property Proposition Proposition Propositions 98 and Proposition 1A and Proposition Proposition Proposition Jarvis v. Connell Future Initiatives STATE OF CALIFORNIA FISCAL ISSUES General Overview State Budgets Future Actions State Dissolution of Redevelopment Agencies Litigation Challenging Method of School Financing CONTINUING DISCLOSURE TAX MATTERS CERTAIN LEGAL MATTERS ABSENCE OF MATERIAL LITIGATION RATINGS VERIFICATION UNDERWRITING MISCELLANEOUS Audited Financial Statements Financial Interests ADDITIONAL INFORMATION i

8 TABLE OF CONTENTS - continued APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS... A-1 APPENDIX B ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE DISTRICT... B-1 APPENDIX C PROPOSED FORM OF OPINION OF SPECIAL COUNSEL... C-1 APPENDIX D DISTRICT S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, D-1 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE... E-1 APPENDIX F BOOK-ENTRY ONLY SYSTEM... F-1 APPENDIX G COUNTY INVESTMENT POLICY... G-1 APPENDIX H SPECIMEN MUNICPAL BOND INSURANCE POLICY... H-1 ii

9 $21,585, REFUNDING CERTIFICATES OF PARTICIPATION Evidencing the Fractional Interests of the Owners Thereof in Lease Payments to be Made by the SAN YSIDRO SCHOOL DISTRICT (San Diego County, California) INTRODUCTION This Official Statement, which includes the cover page, inside cover and Appendices hereto, provides certain information concerning the sale and delivery of the 2015 Refunding Certificates of Participation (the Certificates ), in the aggregate principal amount of $21,585,000, evidencing the fractional interests of the registered owners thereof (the Owners ) in Lease Payments (as hereinafter defined) to be made by the San Ysidro School District (the District ) pursuant to a Lease Agreement, dated as of August 1, 2015 (the Lease ), by and between the San Ysidro Public Schools Financing Corporation, as lessor (the Corporation ), and the District, as lessee, for the use and possession of Sunset Elementary School and La Mirada Elementary School (collectively, the Property ). This introduction is not a summary of the 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, inside cover page and appendices hereto. Capitalized terms not defined herein shall have the meanings set forth in Appendix A hereto. The District The District is located in the southernmost region of San Diego County (the County ), directly north of the United States-Mexico border approximately 15 miles south of downtown San Diego, consisting primarily of the community of San Ysidro and unincorporated portions of the County. The District provides education services in two kindergarten through third grade schools, two kindergarten through sixth grade schools, two kindergarten through eighth grade schools, one fourth through sixth grade school and one seventh and eighth grade middle school. In addition, the District includes a preschool and child development center. The estimated average daily attendance ( ADA ) for the District for fiscal year is 4,575 students. The audited financial statements for the District for the fiscal year ended June 30, 2014 are attached as APPENDIX D hereto. For further information concerning the District, see the caption SAN YSIDRO SCHOOL DISTRICT herein. Purpose of the Certificates The proceeds received from the sale of the Certificates will be used to (i) prepay on a current basis certain outstanding certificates of participation and (ii) pay the costs related to the execution and delivery of the Certificates, all as further described in the sections PLAN OF REFUNDING and ESTIMATED SOURCES AND USES OF PROCEEDS herein. 1

10 Security and Source of Payment of the Certificates The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of August 1, 2015 (the Trust Agreement ), by and among the District, the Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ). The District is required under the Lease to pay Lease Payments for the use and possession of the Property, which is further described under the caption THE PROPERTY herein. The District is also required to pay any taxes and assessments and the cost of maintenance and repair of the Property. Pursuant to an Assignment Agreement, dated as of August 1, 2015 (the Assignment Agreement ), by and between the Corporation and the Trustee, the Corporation will assign to the Trustee, for the benefit of the Owners of the Certificates, substantially all of its rights under the Lease and a Site Lease, dated as of August 1, 2015 (the Site Lease ), by and between the District and the Corporation, including its rights to receive and collect Lease Payments, Reserve Replenishment Rent and Prepayments from the District under the Lease and rights as may be necessary to enforce payment of Lease Payments, Reserve Replenishment Rent and Prepayments and to exercise all rights and remedies under the Lease following a default. All rights assigned by the Corporation pursuant to the Assignment Agreement shall be administered by the Trustee in accordance with the provisions of the Trust Agreement for the equal and proportionate benefit of all Owners. The Certificates evidence fractional and undivided interests in the right to receive Lease Payments and Prepayments thereof to be made by the District to the Corporation under the Lease. The Lease Payments are designed to pay, when due, the principal and interest with respect to the Certificates. The District will covenant in the Lease that it will take such action as may be necessary to include the Lease Payments and other payments due under the Lease in its annual budgets and to make the necessary annual appropriations therefor. The District s obligation to make Lease Payments is subject to abatement in the event of the loss of use and possession of all or a portion of the Property due to its damage, destruction, title defect or taking by eminent domain. See RISK FACTORS Abatement herein. The obligation of the District to make Lease Payments is subject to annual appropriation of the District and does not constitute an obligation of the District for which the District is obligated to levy or pledge any form of taxation or for which the District has levied or pledged any form of taxation, except for the pledge of special taxes paid to the District by certain community facilities districts related to the District. See Security and Sources of Payment for the Certificates Pledge of Special Taxes herein. Neither the Certificates nor the obligation of the District to make Lease Payments constitutes a debt of the District, the State or any of its political subdivisions within the meaning of any constitutional or statutory debt limitation or restriction. See RISK FACTORS herein. Certificate Insurance The scheduled payment of principal and interest evidenced by the Certificates when due will be guaranteed under an insurance policy (the Policy ) to be issued concurrently with the execution and delivery of the Certificates by Build America Mutual Assurance Company (the Insurer ). See BOND INSURANCE and Appendix H SPECIMEN MUNICIPAL BOND INSURANCE POLICY. The Reserve Requirement for the Certificates will initially be satisfied by a debt service reserve insurance policy to be provided by the Insurer. See SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES Reserve Fund and Appendix A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Reserve Fund. Description of the Certificates For a more complete description of the Certificates and the basic documentation pursuant to which they are being sold and delivered, see THE CERTIFICATES and Appendix A SUMMARY OF 2

11 PRINCIPAL LEGAL DOCUMENTS hereto. The summaries and descriptions in the Official Statement of the Trust Agreement, the Lease, the Site Lease, the Assignment Agreement and other agreements relating to the Certificates are qualified in their entirety by the form thereof and the information with respect thereto included in such documents. Prepayment. The Certificates are subject to optional and extraordinary prepayment prior to maturity. See THE CERTIFICATES Prepayment herein. Registration, Transfers and Exchanges. The Certificates will be executed and delivered as fully registered Certificates, registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York ( DTC ), and will be available to actual purchasers of the Certificates (the Beneficial Owners ) in the denominations set forth above, under the book-entry system maintained by DTC, only through brokers and dealers who are or act through DTC Participants as described herein. Beneficial Owners will not be entitled to receive physical delivery of the Certificates. See THE CERTIFICATES Book-Entry Only System herein. In the event that the book-entry only system described below is no longer used with respect to the Certificates, the Certificates will be registered and transferred in accordance with the provisions of the Trust Agreement. The Certificates are being delivered in the minimum denominations of $5,000 and any integral multiple thereof. Payments. Principal and interest due with respect to the Certificates are payable by the Trustee to DTC. Disbursement of such payments to DTC Participants is the responsibility of DTC and disbursement of such payments to the Beneficial Owners is the responsibility of DTC Participants. In the event that the bookentry only system is no longer used with respect to the Certificates, the Beneficial Owners will become the registered owners of the Certificates and will be paid principal and interest by the Trustee, all as described in the Trust Agreement. See THE CERTIFICATES General herein. Certificate Insurance The District has applied for a policy of municipal bond insurance which, if purchased, will guarantee the payment of principal and interest with respect to the Certificates under an insurance policy to be issued concurrently with the delivery of the Certificates. Continuing Disclosure The District will agree in the Continuing Disclosure Certificate for the benefit of Certificate Owners and Beneficial Owners to make available certain financial information and operating data relating to the District and to provide notices of the occurrence of certain enumerated events in compliance with Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission. The specific nature of the information to be made available and of the event notices to be provided is summarized below under the caption CONTINUING DISCLOSURE and Appendix E FORM OF CONTINUING DISCLOSURE CERTIFICATE hereto. For information concerning the District s compliance with its continuing disclosure undertakings over the past five years, see CONTINUING DISCLOSURE herein. Professionals Involved in the Offering The Bank of New York Mellon Trust Company, N.A., will act as Trustee with respect to the Certificates. The Certificates will be delivered subject to the approval as to their legality by Dannis Woliver Kelley, Long Beach, California, Special Counsel. Dannis Woliver Kelley will also act as the District s Disclosure Counsel with respect to the Certificates. Isom Advisors, a Division of Urban Futures, Inc. will act as Financial Advisor to the District. The District s financial statements for the fiscal year ended June 30, 2014 are included as Appendix D hereto. The financial report for the fiscal year ended June 30, 2014 has been audited by Wilkinson Hadley King & Co. LLP Certified Public Accountants and Advisors. 3

12 Certificate Owners Risks Certain events could affect the ability of the District to make the Lease Payments when due. See RISK FACTORS for a discussion of certain factors that should be considered, in addition to other matters set forth herein, in evaluating an investment in the Certificates. Other Information This Official Statement speaks only as of its date, and the information contained herein is subject to change. The sale and delivery of the Certificates to potential investors is made only by means of the Official Statement. Copies of the Lease, the Site Lease, the Trust Agreement, the Assignment Agreement and the Continuing Disclosure Certificate are available, upon request, and upon payment to the District of a charge for copying, mailing and handling, from the District at 4350 Otay Mesa Road, San Ysidro, California 92173, telephone (619) This Official Statement contains brief descriptions of, among other things, the District, the Corporation, the Certificates, the Trust Agreement, the Lease, the Assignment Agreement, the Site Lease and certain other matters relating to the security for the Certificates. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to documents and agreements are qualified in their entirety by reference to such documents, and agreements and references herein to the Certificates are qualified in their entirety by reference to the form thereof included in the Trust Agreement. Copies of such documents will be available for inspection at the principal office of the Trustee after delivery of the Certificates. Capitalized terms used but not otherwise defined herein shall have the meanings assigned thereto in the Trust Agreement. PLAN OF REFUNDING The District expects to apply the net proceeds from the sale of the Certificates to (i) prepay, on a current basis, certain outstanding certificates of participation as described below, (ii) acquire the Policy and a debt service reserve insurance policy for the Certificates (iii) pay the costs related to the execution and delivery of the Certificates. The District previously caused to be executed and delivered $3,050,000 aggregate principal amount of its 1998 Certificates of Participation (School Facilities Project) (the 1998 Certificates ) pursuant to a Trust Agreement, dated as of October 1, 1998, by and among the District, the Corporation and the Trustee, as trustee thereunder. A portion of the proceeds of the Certificates will be deposited into the Prepayment Fund established pursuant to the 1998 Trust Agreement and applied to prepay, on or about August 25, 2015 (the Prepayment Date ), all of the outstanding 1998 Certificates at a prepayment price equal to the par amount of the 1998 Certificates to be prepaid, plus interest with respect to the 1998 Certificates to the Prepayment Date. The District previously caused to be executed and delivered $7,075,000 aggregate principal amount of its 2001 Certificates of Participation (School Facilities Project) (the 2001 Certificates ) pursuant to a Trust Agreement, dated as of June 1, 2001, by and among the District, the Corporation and the Trustee, as trustee thereunder. A portion of the proceeds of the Certificates will be deposited into the Prepayment Fund established pursuant to the 2001 Trust Agreement and applied to prepay, on the Prepayment Date, all of the outstanding 2001 Certificates at a prepayment price equal to the par amount of the 2001 Certificates to be prepaid, plus interest with respect to the 2001 Certificates to the Prepayment Date. The District previously caused to be executed and delivered $17,000,000 aggregate principal amount of its 2005 Certificates of Participation (School Facilities Project) (the 2005 Certificates ) pursuant to a Trust Agreement, dated as of January 1, 2005, by and among the District, the Corporation and the Trustee, as trustee 4

13 thereunder. A portion of the proceeds of the Certificates will be deposited into the Prepayment Fund established pursuant to the 2005 Trust Agreement and applied to prepay, on the Prepayment Date, all of the outstanding 2005 Certificates at a prepayment price equal to the par amount of the 2005 Certificates to be prepaid, plus interest with respect to the 2005 Certificates to the Prepayment Date. The sufficiency of amounts deposited into the Prepayment Funds to effect the foregoing prepayments and to pay the costs of issuance will be verified by Causey Demgen Moore P.C., certified public accountants. See the caption VERIFICATION herein. THE PROPERTY Pursuant to the Site Lease, the District is leasing the Property to the Corporation and leasing the Property back from the Corporation pursuant to the Lease. The Property consists of Sunset Elementary School and La Mirada Elementary School. Sunset Elementary School is located on a 5.45-acre site and is comprised of approximately 72,000 square feet of permanent school facilities, including 28 classrooms, a multi-purpose/gymnasium building, library, and administration facilities. The original Sunset Elementary School facilities were constructed in 1949 and were demolished and completely rebuilt in 2003 and The cost of the reconstruction of Sunset Elementary School was $14.6 million. La Mirada Elementary School is located on an 11.4-acre site and is comprised of approximately 38,000 square feet of permanent school facilities, including 22 classrooms, a multi-purpose/gymnasium building, library, and administration facilities. La Mirada Elementary School was constructed in General THE CERTIFICATES The Certificates will be executed in the aggregate principal amount of $21,585,000. The Certificates will be dated their date of delivery, and will be delivered as registered Certificates without coupons in denominations of $5,000 each, and any integral multiple thereof. Interest with respect to the Certificates will be payable on each March 1 and September 1, commencing September 1, 2015 (each a Certificate Payment Date ), at the rates per annum set forth on the cover page of this Official Statement. The Certificates will mature on September 1 in the designated years and in the principal amounts as set forth on the inside cover of this Official Statement. If a Certificate is executed: (i) as of a Certificate Payment Date, interest will be payable from such Certificate Payment Date; and (ii) after the close of business on the fifteenth day of the month preceding each Certificate Payment Date (whether or not a business day) (each, a Record Date ) and before the following Certificate Payment Date, interest will be payable from such following Certificate Payment Date. Interest with respect to the Certificates will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Certificates evidence and represent fractional and undivided interests of the Owners thereof in the Lease Payments and Prepayments thereof to be made by the District pursuant to the Lease. To the extent Lease Payments are abated or not made under the Lease and insurance proceeds or amounts in the Reserve Fund are not available to make such Lease Payments, all Certificate Owners will receive a proportionate reduction in their payments. See RISK FACTORS Abatement. So long as the Certificates are held in book-entry form, principal and interest will be paid to DTC for disbursement to Beneficial Owners of interests in the Certificates in accordance with DTC s procedures. See Book-Entry Only System below. In the event that the Certificates are no longer held in book-entry form, the following provisions will apply. Principal with respect to the Certificates will be payable upon surrender 5

14 by the Certificate Owners thereof at the principal office of the Trustee. Interest with respect to the Certificates will be payable by check mailed by first class mail to the Certificate Owners of record at the address shown on the Certificate registration books maintained by the Trustee for such purpose. Certificate Owners in an aggregate principal amount of $1,000,000 or more may, by providing written instruction to the Trustee, receive interest with respect to the Certificates by wire transfer. Prepayment Optional Prepayment. The Certificates maturing on or before September 1, 2025 are not subject to redemption prior to their stated maturity dates. The Certificates maturing on or after September 1, 2026, are subject to optional prepayment prior to their stated maturities on any date on or after September 1, 2025, in whole or in part, at the option of the District, from any lawfully available source in the event the District exercises its option under the Lease to prepay the Principal Component of the Lease Payments (in integral multiples of $5,000), at a prepayment price equal to the Principal Component of the Lease Payments to be prepaid, plus accrued interest to the date fixed for prepayment, without premium. The District may provide a conditional notice to optionally prepay Certificates. In the event the District gives a conditional notice to the Trustee of its intention to exercise such option, but does not deposit with the Trustee on or prior to the prepayment date an amount equal to the prepayment price, the prepayment of the Certificates shall not occur and the District shall not be required to prepay the Certificates and the District will continue to pay the Lease Payments as if no such notice had been given. Within a reasonable time thereafter, the Trustee shall give notice to the Owners that the conditions to prepayment were not met and the prepayment was cancelled. Selection of Certificates for Prepayment. Whenever provision is made for the optional prepayment of Certificates and less than all Outstanding Certificates are called for prepayment, the Trustee shall select Certificates for optional prepayment from among maturities selected by the District and by lot within any maturity. In connection with an extraordinary prepayment of the Certificates, the Trustee shall select Certificates for prepayment pro rata among maturities and by lot within a maturity. The Trustee will promptly notify the District and the Corporation in writing of the Certificates so selected for prepayment by mailing to the District and the Corporation copies of the notice of prepayment provided. Extraordinary Prepayment. The Certificates are subject to prepayment prior to their respective maturity dates on any date, in whole or in part, from Net Proceeds which the Trustee shall transfer to the Prepayment Fund as provided in the Lease at least 45 days prior to the date set for prepayment, at a prepayment price equal to the Principal Component of the Lease Payments to be prepaid, together with accrued interest to the date fixed for prepayment, without premium. Prepayment Procedures Notice of prepayment shall be mailed by first-class mail, postage prepaid, not less than 30 nor more than 60 days before the prepayment date, to the respective Certificates Owners designated for prepayment at their addresses appearing on the Certificate registration books; provided that neither failure to receive such notice nor any defect in any notice so mailed shall affect the sufficiency of the proceedings for prepayment. In addition, notice shall be sent to the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access System. Neither failure to send such notice nor any defect in any notice so sent shall affect the sufficiency of the proceedings for the prepayment of the Certificates. Such notice shall specify: (a) the prepayment date, (b) the prepayment price, (c) if less than all of the Outstanding Certificates are to be prepaid, the Certificate numbers (and in the case of partial prepayment, the respective principal amounts), (d) the CUSIP numbers of the Certificates to be prepaid, (e) the place or places where the prepayment will be made, (f) the original date of execution and delivery of the Certificates, (g) the rate of interest payable with respect to each Certificate being prepaid, (h) any other descriptive information regarding the Certificates needed to identify accurately the Certificates being prepaid, and (i) if the notice is conditional, a statement to that effect. 6

15 Such notice shall further state that on the specified date there shall become due and payable upon each Certificate to be prepaid, the portion of the principal amount of such Certificate to be prepaid, together with interest accrued to said date and that from and after such date, provided that moneys therefor have been deposited with the Trustee, interest with respect thereto shall cease to accrue and be payable. So long as DTC is the registered Owner of the Certificates, all such notices will be provided only to DTC as the registered Owner, and will not be mailed by the Trustee to the Beneficial Owners of the Certificates. See Book-Entry Only System herein. Effect of Prepayment. Notice having been given to the Owners of the Certificates in accordance with the Trust Agreement, and the moneys for the prepayment (including the interest to the applicable date of prepayment), having been set aside in the Prepayment Fund, the Certificates shall become due and payable on the date of prepayment, and upon presentation and surrender thereof at the Principal Office, said Certificates shall be paid at the prepayment price with respect thereto, plus interest accrued and unpaid to said date of prepayment. If, on the date of prepayment, moneys for the prepayment of all the Certificates to be prepaid, together with interest to the date of prepayment, shall be held by the Trustee so as to be available therefor on such date of prepayment, and, if notice of prepayment thereof shall have been given as provided in the Trust Agreement, then, from and after the date of prepayment, interest with respect to the Certificates to be prepaid shall cease to accrue and become payable. All moneys held by or on behalf of the Trustee for the prepayment of Certificates shall be held in trust for the account of the Owners of the Certificates so to be prepaid, without liability for interest thereon. Book-Entry Only System The Certificates will be executed and delivered as one fully registered certificate without coupons for each maturity and, when executed and delivered, will be registered in the name of Cede & Co., as nominee DTC. DTC will act as securities depository of the Certificates. Individual purchases may be made in bookentry form only, in the principal amount of $5,000 and integral multiples thereof for each maturity. Beneficial Owners will not receive certificates representing their interest in the Certificates purchased. Principal and interest will be paid to DTC, which will in turn remit such principal and interest to its participants for subsequent dispersal to the Beneficial Owners of the Certificates in accordance with DTC s procedures. See Appendix G BOOK-ENTRY ONLY SYSTEM hereto. [Remainder of page intentionally left blank] 7

16 CERTIFICATE PAYMENT SCHEDULE Lease Payments are required to be made by the District under the Lease on or before February 15 and August 15 of each year for the use and possession of the Property for the period commencing as of the Closing Date and terminating as provided in the Lease. The aggregate annual amounts of Lease Payments, comprising interest and principal payable to the Owners, are set forth below. The following table summarizes the annual Certificate payments to be made from the Lease Payments of the District assuming no optional or extraordinary prepayments. Bond Year (September 1) ANNUAL CERTIFICATE PAYMENT SCHEDULE Principal Component Interest Component Total Annual Certificate Payments 2015 $1,205,000 $ 30, $ 1,235, , , ,665, , , ,699, , , ,697, , , ,725, ,055, , ,761, ,115, , ,803, ,165, , ,830, ,230, , ,872, ,170, , ,751, ,060, , ,582, ,030, , ,499, ,110, , ,528, ,175, , ,557, ,270, , ,593, ,160, , ,419, ,160, , ,361, ,110, , ,253, ,050,000 88, ,138, ,000 35, , Total $21,585,000 $9,324, $30,909, SECURITY AND SOURCES OF PAYMENT OF THE CERTIFICATES Neither the Certificates nor the obligation of the District to make Lease Payments constitutes an obligation of the District for which the District is obligated to levy or pledge, or for which the District has levied or pledged, any form of taxation, except for the pledge of special taxes to be paid to the District by certain community facilities districts related to the District. See - Pledge of Special Taxes below. Neither the Certificates nor the obligation of the District to make Lease Payments constitutes a debt of the District, the State or any of its political subdivisions within the meaning of any constitutional limitation or violates any statutory debt limitation. General Each Certificate represents a fractional interest in the Lease Payments and Prepayments to be made by the District to the Trustee pursuant to the Lease. The District is obligated to pay Lease Payments from any source of legally available funds, and will covenant in the Lease, subject to the abatement provisions therein, to include all Lease Payments coming due in its annual budgets and to make the necessary annual appropriations therefor. The Corporation, pursuant to the Assignment Agreement, will assign all of its rights 8

17 under the Lease (excepting certain rights as specified therein), including the right to receive Lease Payments, Reserve Replenishment Rent and Prepayments, to the Trustee for the benefit of the Certificate Owners. By the fifteenth day of each March and September (if such day is not a Business Day, the next succeeding Business Day), the District must pay to the Trustee a Lease Payment (to the extent required under the Lease) which is equal to the amount necessary to pay the principal, if any, and interest due with respect to the Certificates on the next succeeding Certificate Payment Date. Under the Lease, the District will agree to pay certain taxes, assessments, utility charges, and insurance premiums due with respect to the Property and the Certificates and fees and expenses of the Trustee. The District is responsible for repair and maintenance of the Property during the term of the Lease. The District may at its own expense in good faith contest such taxes, assessments and utility and other charges if certain requirements set forth in the Lease are satisfied, including obtaining an opinion of counsel that the Property will not be subjected to loss or forfeiture. In accordance with the Lease, the District will certify to the Trustee on or before September 1 of each year that the District has included all Lease Payments, Reserve Replenishment Rent and Additional Payments (known as of the date of budget adoption) due under the Lease in the Fiscal Year covered by its annual budget and the amount so included. If the District fails to certify that it has included all such Lease Payments, Reserve Replenishment Rent and Additional Payments in its annual budget, the Trustee will promptly provide the District written notice specifying that the District has failed to observe and perform its covenant and agreement in the Lease and requesting that such failure be remedied within 30 days, or such failure shall constitute an Event of Default under the Lease. The District s obligation to make Lease Payments will be abated in the event of, and to the extent of, substantial interference with use and possession of the Property arising from damage, destruction, title defect, or taking by eminent domain or condemnation of the Property. Abatement does not constitute a default under the Lease and the Trustee will not be entitled in such event to pursue remedies against the District. See RISK FACTORS Abatement herein. Should the District default under the Lease, the Trustee, as assignee of the Corporation, may terminate the Lease and re-lease the Property or may continue the Lease in effect and hold the District liable for all Lease Payments thereunder on an annual basis. So long as it is not in default under its Policy, the Insurer shall have the right to control the exercise all remedies following an Event of Default by the District. Under no circumstances will the Trustee or the Insurer have the right to accelerate Lease Payments. See RISK FACTORS No Acceleration Upon Default and Limited Recourse on Default; Insurer Right to Control Remedies herein. Lease Payments Subject to the provisions of the Lease regarding abatement in the event of loss of use and possession of any portion of the Property (see RISK FACTORS Abatement herein) and prepayment of Lease Payments (see the provisions relating to prepayment under the caption THE CERTIFICATES above), the District agrees to pay to the Corporation, its successors and assigns, as annual rental for the use and possession of the Property, the Lease Payments to be due and payable on March 1 and September 1 of each year. Under the Lease, the District is required to deposit the Lease Payments with the Trustee on February 15 and August 15 of each year, or, if such day is not a Business Day, the next succeeding Business Day (each, a Lease Payment Deposit Date ). Any amounts held in the Lease Payment Fund on any Lease Payment Deposit Date (other than amounts resulting from the prepayment of the Lease Payments in part but not in whole pursuant to the Lease and amounts required for payment of past due principal or interest with respect to any Certificates not presented for payment) shall be credited to the payment of Lease Payments due and payable on such Lease Payment Deposit Date. 9

18 The Trust Agreement requires that Lease Payments be deposited in the Lease Payment Fund maintained by the Trustee. Pursuant to the Trust Agreement, on each Certificate Payment Date, the Trustee will apply such amounts in the Lease Payment Fund as are necessary to make interest and principal payments, respectively, with respect to the Certificates as the same shall become due and payable. Pledge of Special Taxes The District previously established Community Facilities District No. 1 of the San Ysidro School District ( CFD No. 1 ), Community Facilities District No. 2 of the San Ysidro School District ( CFD No. 2 ) and Community Facilities District No. 3 of the San Ysidro School District ( CFD No. 3 and, together with CFD No. 1 and CFD No. 2, the CFDs ) pursuant to the Mello-Roos Community Facilities Act of Pursuant to separate elections held in CFD No. 1, CFD No, 2 and CFD No. 3, respectively, CFD No. 1, CFD No. 2 and CFD No. 3 are each authorized to levy and collect special taxes for the purpose of financing certain authorized school facilities as approved at the election within such CFD. The District has previously entered into certain pledge agreements (the Pledge Agreements ) with CFD No. 1, CFD No. 2, and CFD No. 3, respectively. See APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS PLEDGE AGREEMENTS. In connection with the execution and delivery of the Certificates, the District will enter into certain supplements and amendments to the Pledge Agreements as described below. The Pledge Agreement for CFD No. 1 is a fourth supplement and amendment of an existing Pledge Agreement with respect to the District s $7,330, Certificates of Participation (School Facilities Project) (the 2007 Certificates ) and $10,409, Certificates of Participation (School Facilities Project) (the 2012 Certificates ). The special tax levied and collected on taxable property within CFD No. 1 (net of certain administrative costs of CFD No. 1, as discussed below) is pledged to the payment of Lease Payments on a parity with the 2007 Certificates and the 2012 Certificates. The Pledge Agreement for CFD No. 2 is a third supplement and amendment of an existing Pledge Agreement with respect to the District s 2007 Certificates and 2012 Certificates. The special tax levied and collected on taxable property within CFD No. 2 (net of certain administrative costs of CFD No. 2, as discussed below) is pledged to the payment of Lease Payments on a parity with the 2007 Certificates and the 2012 Certificates. The Pledge Agreement for CFD No. 3 is a fourth supplement and amendment of an existing Pledge Agreement with respect to the District s 2007 Certificates and 2012 Certificates. See Certificates of Participation herein. The special tax levied and collected on taxable property within CFD No. 3 (net of certain administrative costs of CFD No. 3, as discussed below) is pledged to the payment of Lease Payments on a parity with the 2007 Certificates and the 2012 Certificates. All special taxes levied, collected and received by CFD No. 1, CFD No. 2 and CFD No. 3, after deduction of annual administrative expenses of the respective community facilities districts, are irrevocably pledged by the District, pursuant to the Pledge Agreements, as amended and supplemented, to the payment of the Lease Payments for the Certificates (and for the 2007 Certificates and the 2012 Certificates, as described above). The special taxes pledged under the terms of the Pledge Agreements, as amended and supplemented, will be transferred to the Trustee, once received by the District, for application to the Lease Payments. The Pledge Agreements, as amended and supplemented, further specify that the special tax revenues of CFD No. 1, CFD No. 2 and CFD No. 3 will not be used for any other purpose during the term of the Pledge Agreements, as amended and supplemented, although the District and CFD No. 1, CFD No. 2 and CFD No. 3 may, under specified conditions, also provide for a parity pledge of the special taxes of CFD No. 1, CFD No. 2 and CFD No. 3 to parity obligations of the District. The Pledge Agreements, as amended and supplemented, shall be effective upon the execution and delivery of the Certificates. 10

19 The District expects the special taxes to be sufficient to pay the Lease Payments to pay the Certificates in full, however, no assurance can be made regarding events subsequent to the execution and delivery of the Certificates that might cause a disruption in the collection of special taxes. Reserve Fund A Reserve Fund will be established by the Trust Agreement for the Certificates and any Additional Certificates in an amount equal to the least of (i) maximum aggregate annual Lease Payments payable under the Lease in any Certificate Year with respect to the Certificates and any Additional Certificates, (ii) 125% of the average annual aggregate Lease Payments then payable under the Lease (calculated based on Certificate Years) with respect to the Certificates and any Additional Certificates, or (iii) 10% of the original face amount of the Certificates and any Additional Certificates (less original issue discount of in excess of two percent (2%) of the stated Principal Components at maturity) (collectively, the Reserve Requirement ). The full amount available in the Reserve Fund may be used by the Trustee in the event that amounts in the Lease Payment Fund are not sufficient to pay the principal or interest due with respect to the Certificates due to abatement or failure by the District to make Lease Payments. Subject to the requirements and restrictions contained in the Trust Agreement, the District may substitute a line of credit, letter of credit, an insurance policy, surety bond or any other comparable credit facility (each, a Reserve Facility ) or combination thereof in lieu of all or a portion of the initial security funding the Reserve Fund, which in the aggregate makes funds available in the Reserve Fund in an amount equal to the Reserve Requirement; provided, however, other than the Reserve Policy (defined below), the long-term unsecured debt or claimpaying ability, as the case may be, of the provider of any such Reserve Facility, must be rated in one of the two highest rating categories by S&P and/or Moody s (without regard to qualifiers) at the time of purchase of the Reserve Facility. The District will initially satisfy the Reserve Requirement with a Debt Service Reserve Insurance Policy (the Reserve Policy ) issued by the Insurer. Under the Trust Agreement, the Trustee is obligated to draw on the Reserve Policy in the event the amounts held under the Trust Agreement are insufficient to pay the interest and principal represented by the Certificates when due. The amounts available to be drawn under the Reserve Policy will be automatically reduced by the amount of any payment on the Reserve Policy and will be reinstated only to the extent that Reserve Replenishment Rent is paid to the Insurer to reimburse it for previous draws together with interest thereon and expenses. See Appendix A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Reserve Fund hereto. Additional Payments The District shall pay such amounts ( Additional Payments ) as shall be required for the payment of all administrative costs of the Corporation relating to the Property or the Certificates, including, without limitation, all expenses, assessments, compensation and indemnification of the Trustee payable by the District under the Trust Agreement, taxes of any sort whatsoever payable by the Corporation as a result of its leasehold interest in the Property or undertaking of the transactions contemplated in the Lease or in the Trust Agreement, fees of auditors, accountants, attorneys or engineers, any and all amounts due to the Insurer under the Trust Agreement (other than amounts paid by the Insurer to Certificate Owners under the Policy and the Reserve Policy), and all other necessary administrative costs of the Corporation or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Certificates or of the Trust Agreement, including premiums on insurance required to be maintained by the Lease or to indemnify the Corporation and its officers and directors. Insurance Pursuant to the Lease, the District will obtain an ALTA leasehold title insurance policy (with certain exceptions) on the Property in an amount equal to the aggregate Principal Component of unpaid Lease 11

20 Payments. The Lease also requires that the District maintain rental interruption insurance to insure against loss of Lease Payments from the Property in an amount not less than the maximum remaining scheduled Lease Payments in any future two-year period. The District is obligated to obtain a standard comprehensive general public liability and property damage insurance policy or policies and workers compensation insurance or to self-insure against such risks as permitted by the Lease. See Appendix A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE LEASE Insurance and THE DISTRICT Insurance hereto. The proceeds of any rental interruption or use and occupancy insurance will be deposited to (i) the Reserve Fund to make up any deficiency therein, and (ii) in the Lease Payment Fund to be credited towards the payment of the Lease Payments in the order in which such Lease Payments become due and payable. The Lease requires the District to apply the Net Proceeds of any insurance or condemnation award either to replace or repair the Property or to prepay Certificates if certain certifications with respect to the adequacy of the Net Proceeds to make repairs, and the timing thereof, cannot be made. The amount of Lease Payments will be abated and Lease Payments due under the Lease may be reduced during any period in which a title defect, condemnation, material damage or destruction to all or part of the Property substantially interferes with the District s use and possession thereof. See RISK FACTORS Abatement herein. Remedies on Default If the District defaults in performance of its obligations under the Lease, the Trustee, as assignee of the Corporation, may, among other things, elect either (i) to terminate the Lease and re-enter and relet the Leased Premises, or (ii) without terminating the Lease enforce the Lease and hold the District liable for all Lease Payments on an annual basis whether or not it has re-entered and relet the Leased Premises. So long as the Insurer is not in default under the Policy, it will have the right to control all remedies under the Lease and the Trust Agreement. See RISK FACTORS Limited Recourse on Default; Insurer Right to Control Remedies and Appendix A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Events of Default and Remedies. Additional Certificates Pursuant to the Trust Agreement, the District may cause Additional Certificates to be executed and delivered without the consent of the Owners of the Certificates if certain conditions precedent are satisfied. See RISK FACTORS Additional Certificates herein and Appendix A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE TRUST AGREEMENT Additional Certificates hereto. BOND INSURANCE The information under this caption has been prepared by the Insurer for inclusion in this Official Statement. Neither the District nor the Underwriter has reviewed this information, nor do the District or the Underwriter make any representation with respect to the accuracy or completeness thereof. The following information is not complete and reference is made to Appendix H for a specimen of the Policy. Bond Insurance Policy Concurrently with the execution and delivery of the Certificates, Build America Mutual Assurance Company ( BAM or the Insurer ) will issue its Municipal Bond Insurance Policy for the Certificates (the Policy ). The Policy guarantees the scheduled payment of principal of and interest with respect to the Certificates when due as set forth in the form of the Policy included as APPENDIX H 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. 12

21 Build America Mutual Assurance Company BAM is a New York domiciled mutual insurance corporation. BAM provides credit enhancement products solely to issuers in the U.S. public finance markets. BAM will only insure obligations of states, political subdivisions, integral parts of states or political subdivisions or entities otherwise eligible for the exclusion of income under section 115 of the U.S. Internal Revenue Code of 1986, as amended. No member of BAM is liable for the obligations of BAM. The address of the principal executive offices of BAM is: 200 Liberty Street, 27 th Floor, New York, New York 10281, its telephone number is: , and its website is located at: BAM is licensed and subject to regulation as a financial guaranty insurance corporation under the laws of the State of New York and in particular Articles 41 and 69 of the New York Insurance Law. BAM s financial strength is rated AA/Stable by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ). An explanation of the significance of the rating and current reports may be obtained from S&P at The rating of BAM should be evaluated independently. The rating reflects the S&P s current assessment of the creditworthiness of BAM and its ability to pay claims on its policies of insurance. The above rating is not a recommendation to buy, sell or hold the Certificates, and such rating is subject to revision or withdrawal at any time by S&P, including withdrawal initiated at the request of BAM in its sole discretion. Any downward revision or withdrawal of the above rating may have an adverse effect on the market price of the Certificates. BAM only guarantees scheduled principal and scheduled interest payments payable by the issuer of the Certificates 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 Policy), and BAM does not guarantee the market price or liquidity of the Certificates, nor does it guarantee that the rating on the Certificates will not be revised or withdrawn. Capitalization of BAM BAM s total admitted assets, total liabilities, and total capital and surplus, as of March 31, 2015 and as prepared in accordance with statutory accounting practices prescribed or permitted by the New York State Department of Financial Services were $466.5 million, $22.2 million and $444.3 million, respectively. BAM is party to a first loss reinsurance treaty that provides first loss protection up to a maximum of 15% of the par amount outstanding for each policy issued by BAM, subject to certain limitations and restrictions. BAM s most recent Statutory Annual Statement, which has been filed with the New York State Insurance Department and posted on BAM s website at is incorporated herein by reference and may be obtained, without charge, upon request to BAM at its address provided above (Attention: Finance Department). Future financial statements will similarly be made available when published. BAM makes no representation regarding the Certificates or the advisability of investing in the Certificates. In addition, BAM 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 BAM, supplied by BAM and presented under the heading BOND INSURANCE. 13

22 Additional Information Available from BAM Credit Insights Videos. For certain BAM-insured issues, BAM produces and posts a brief Credit Insights video that provides a discussion of the obligor and some of the key factors BAM s analysts and credit committee considered when approving the credit for insurance. The Credit Insights videos are easily accessible on BAM's website at buildamerica.com/creditinsights/. Obligor Disclosure Briefs. Prior to the pricing of bonds that BAM has been selected to insure, BAM may prepare a pre-sale Obligor Disclosure Brief for those bonds. These pre-sale Obligor Disclosure Briefs provide information about the sector designation (e.g. general obligation, sales tax); a preliminary summary of financial information and key ratios; and demographic and economic data relevant to the obligor, if available. Subsequent to closing, for any offering that includes bonds insured by BAM, any pre-sale Obligor Disclosure Briefs will be updated and superseded by a final Obligor Disclosure Brief to include information about the gross par insured by CUSIP, maturity and coupon. BAM pre-sale and final Obligor Disclosure Briefs are easily accessible on BAM's website at buildamerica.com/obligor/. BAM will produce an Obligor Disclosure Brief for all bonds insured by BAM, whether or not a pre-sale Obligor Disclosure Brief has been prepared for such bonds. Disclaimers. The Obligor Disclosure Briefs and the Credit Insights videos and the information contained therein are not recommendations to purchase, hold or sell securities or to make any investment decisions. Credit-related and other analyses and statements in the Obligor Disclosure Briefs and the Credit Insights videos are statements of opinion as of the date expressed, and BAM assumes no responsibility to update the content of such material. The Obligor Disclosure Briefs and Credit Insight videos are prepared by BAM; they have not been reviewed or approved by the issuer of or the underwriter for the Certificates, and the issuer and underwriter assume no responsibility for their content. BAM receives compensation (an insurance premium) for the insurance that it is providing with respect to the Certificates. Neither BAM nor any affiliate of BAM has purchased, or committed to purchase, any of the Certificates, whether at the initial offering or otherwise. Bond Insurance Risk Factors In the event of default of the payment of principal or interest with respect to the Certificates when all or some becomes due, any owner of the Certificates shall have a claim under the Policy for such payments. However, in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments are to be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. The Policy does not insure against redemption premium, if any. The payment of principal and interest in connection with mandatory or optional prepayment of the Certificates by the District which is recovered by the District from the bond owner as a voidable preference under applicable bankruptcy law is covered by the insurance policy, however, such payments will be made by the Insurer at such time and in such amounts as would have been due absence such prepayment by the Issuer unless the Insurer chooses to pay such amounts at an earlier date. Under most circumstances, default of payment of principal and interest does not obligate acceleration of the obligations of the Insurer without appropriate consent. The Insurer may direct and must consent to any remedies and the Insurer s consent may be required in connection with amendments to any applicable bond documents. In the event the Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Certificates are payable solely from the moneys received pursuant to the applicable bond documents. In the event the Insurer becomes obligated to make payments with respect to the Certificates, no assurance is given that such event will not adversely affect the market price of the Certificates or the marketability (liquidity) for the Certificates. 14

23 The long-term ratings on the Certificates are dependent in part on the financial strength of the Insurer and its claim paying ability. The Insurer s financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance is given that the long-term ratings of the Insurer and of the ratings on the Certificates insured by the Insurer will not be subject to downgrade and such event could adversely affect the market price of the Certificates or the marketability (liquidity) for the Certificates. See RATINGS herein. The obligations of the Insurer are general obligations of the Insurer and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law or other similar laws related to insolvency. Neither the District nor the Underwriter have made independent investigation into the claims paying ability of the Insurer and no assurance or representation regarding the financial strength or projected financial strength of the Insurer is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the District to pay principal and interest with respect to the Certificates and the claims paying ability of the Insurer, particularly over the life of the investment. ESTIMATED SOURCES AND USES OF PROCEEDS The estimated sources and uses of proceeds to be received from the sale of the Certificates are as follows: Sources Uses Certificate Par Amount $21,585, Plus Net Original Issue Premium 1,558, Total $23,143, Prepayment of Prior Certificates $22,573, Costs of Delivery (1) 570, Total $23,143, (1) Includes Underwriter s discount, legal fees, financial advisor fees, printing, municipal bond insurance premium, municipal bond debt service reserve insurance policy premium, and rating agency fees and expenses, and other miscellaneous delivery costs. RISK FACTORS The following factors, together with all other information provided in this Official Statement, should be considered by potential investors in evaluating the purchase of the Certificates. The discussion below does not purport to be, nor should it be construed to be, complete nor a summary of all factors which may affect the financial condition of the District, the District s ability to make Lease Payments in the future, the effectiveness of any remedies that the Trustee may have or the circumstances under which Lease Payments may be abated. No representation is made as to the future financial condition of the District. Payment of the Lease Payments is an obligation of the District payable from legally available funds and the ability of the District to make Lease Payments may be adversely affected by its financial condition as of any particular time. See STATE OF CALIFORNIA FISCAL ISSUES herein. General Considerations - Security for the Certificates The obligation of the District to make the Lease Payments does not constitute a debt of the District or of the State or of any political subdivision thereof within the meaning of any constitutional or statutory debt 15

24 limit or restriction, and does not constitute an obligation for which the District or the State is obligated to levy or pledge any form of taxation or for which the District or the State has levied or pledged any form of taxation, except for the pledge of special taxes received from the CFDs. See SECURITY AND SOURCES OF PAYMENT FOR THE CERTIFICATES Pledge of Special Taxes herein. Although the Lease does not create a pledge, lien or encumbrance upon the funds of the District, the District is obligated under the Lease to pay the Lease Payments, Reserve Replenishment Rent and Additional Payments from any source of legally available funds and the District will covenant in the Lease that it will take such action as may be necessary to include all Lease Payments, Reserve Replenishment Rent and Additional Payments due under the Lease in its annual budgets and to make necessary annual appropriations for all such rental payments. The District is currently liable and may become liable on other obligations payable from general revenues, some of which may have a priority over the Lease Payments. To the extent that additional obligations are incurred by the District, the funds available to make Lease Payments may be decreased. In the event the District s revenue sources are less than its total obligations, the District could choose to fund other activities before making Lease Payments and other payments due under the Lease. Constitutional and Statutory Limitations on Appropriations There are limitations on the ability of the District to increase revenues. The ability of the District to increase the ad valorem property tax is limited pursuant to Article XIIIA of the State Constitution, which was enacted in In 1986, California voters approved an initiative statute that attempts to limit the imposition of new or higher taxes by local agencies, including the District. On November 5, 1996, voters approved Proposition 218 the Right to Vote on Taxes Act, which further affects the ability of local agencies to levy and collect existing and future taxes, assessments, fees and charges. On November 3, 2010, California voters approved Proposition 26, which generally expands the definition of taxes that are subject to voter approval requirements imposed by Proposition 218. Additionally, Article XIIIB of the State Constitution places certain limits on the appropriations the District is permitted to make. See STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES herein. Abatement The obligation of the District under the Lease to pay Lease Payments is in consideration for the use and possession of the Property. The obligation of the District to make Lease Payments (other than to the extent that funds to make Lease Payments are available in the Lease Payment Fund and the Reserve Fund) may be abated in whole or in part if the District does not have full use and possession of the Property. The amount of Lease Payments due under the Lease will be adjusted or abated during any period in which by reason of damage, destruction, title defect or taking by eminent domain or condemnation, there is substantial interference with the use and possession of any portion of the Property. The amount of such abatement shall be determined by the District such that the resulting Lease Payments and Additional Payments represent fair consideration for the District s right to use and possession of the portion of the Property not damaged, destroyed or interfered with as a result of title defect or taking. The Reserve Fund will be funded on the date of execution and delivery of the Certificates with the Reserve Policy, in an amount equal to the Reserve Requirement, and amounts available in the Reserve Fund shall be used by the Trustee to make payments in the event Lease Payments received by the Trustee are insufficient to pay principal and interest with respect to the Certificates as such amounts become due. If damage or destruction, title defect or taking of the Property results in abatement or adjustment of Lease Payments and the resulting Lease Payments, together with moneys in the Reserve Fund, are insufficient to make all payments of principal and interest with respect to the Certificates during the period that the Property is being replaced, repaired or reconstructed, then such payments of principal and interest may not be made, and the only source of funds available to the Trustee or Owners will be any proceeds of rental interruption insurance. Such insurance is required to provide coverage of Lease Payments for up to two years 16

25 following damage or destruction of the Property with respect to an insured loss. Rental interruption insurance does not cover a loss of use due to uninsured events such as earthquake and flood. Notwithstanding the provisions of the Lease and the Trust Agreement specifying the extent of abatement in the event of the District s failure to have use and possession of the Property, such provisions may be superseded by operation of law and, in such event, the resulting Lease Payments of the District may not be sufficient to pay all of the remaining principal and interest with respect to the Certificates Outstanding. No Cash Reserve Initially, the Reserve Requirement is being satisfied by the Reserve Policy. In the event that the Insurer were to experience financial difficulties, there would be no cash available for transfer from the Reserve Fund. The obligations of the Insurer under the Reserve Policy are unsecured contractual obligations and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law or state law related to insolvency of insurance companies. See BOND INSURANCE Bond Insurance Risk Factors. Absence of Earthquake Insurance and Flood Insurance Much of California is seismically active, with numerous faults that could be earthquake sources. The District has no earthquake insurance on the Property and is not obligated under the Lease to procure and maintain, or cause to be procured and maintained, earthquake insurance on the Property. Seismic activity could cause significant damage to the Property and the value of the Property could be adversely affected and an abatement of Lease Payments could occur due to a seismic event. The District is not able to predict whether or to what extent these results might occur. The Property is not in a 100-year flood plain. The District has no flood insurance on the Property. Other Limitations on Liability Although the District will covenant to budget and appropriate annually to provide for Lease Payments, the District has not pledged its full faith and credit to such payment. In the event that the District s revenue sources are less than its total obligations in any year, the District could choose to pay other District expenditures before paying any or all of the annual Lease Payments. Except as expressly provided in the Trust Agreement, the Corporation shall not have any obligation or liability to the Owners with respect to the payment when due of the Lease Payments by the District, or with respect to the performance by the District of other agreements and covenants required to be performed by it contained in the Lease or the Trust Agreement, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Trust Agreement. No Acceleration Upon Default In the event of a default by the District under the Lease, the remedy of acceleration of the remaining Lease Payments is not available. The District will only be liable for Lease Payments on an annual basis, and, in the event of default, the Trustee would be required to seek a separate judgment each year for that year s defaulted Lease Payments. Any such suit for money damages would be subject to limitations on legal remedies against school districts in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. 17

26 Limited Recourse on Default; Insurer Right to Control Remedies The Lease and the Trust Agreement provide that the Trustee may take possession of the Property and re-lease it if there is a default by the District and that, in the event such re-leasing occurs, the District would be liable for any resulting deficiency in the Lease Payments. The Lease provides that the Trustee may have such rights of access to the Property as may be necessary to exercise any remedies. If the Property is determined to be of an essential nature to the District by a court, it is not certain whether such court would permit the exercise of the remedies of repossession and re-leasing of the Property. The Trustee is not empowered to sell the Property for the benefit of the Owners. Alternatively, the Lease provides that, following an event of default, the Trustee may terminate the Lease with respect to the Property and proceed against the District to recover damages pursuant to the Lease. Any suit for money damages would be subject to limitations on legal remedies against school districts in California, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. The enforceability of the rights and remedies of the Owners of the Certificates, and the obligations incurred by the District, may become subject to the following: the Federal Bankruptcy Code and applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting the enforcement of creditors rights generally, now or hereafter in effect; usual equity principles which may limit the specific enforcement under state law of certain remedies; the exercise by the United States of America of the powers delegated to it by the Constitution; and the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of servicing a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of powers by the federal or state government, if initiated, would subject the Owners to judicial discretion and interpretation of their rights in bankruptcy or otherwise, and consequently entail risks of delay, limitation, or modification of their rights with respect to the Certificates. In a bankruptcy case, a plan of adjustment for the District could be confirmed that would allow for enforcement of the Lease, but the priority, interest rate, payment terms, collateral, maturity dates, payment sources, covenants and other terms or provisions of the Lease and the Certificates may be altered by the bankruptcy court. Such a plan could be confirmed even over the objections of the Trustee and the Owners, and without their consent. In addition, if the Lease is determined to constitute a true lease by the bankruptcy court (rather than a financing lease providing for the extension of credit), the District could choose not to perform under the Lease and the claim of the Owners could be substantially limited. An allowable claim could be substantially less than the amount of the Certificates outstanding, resulting in the Owners not receiving the full amount of the principal and interest due with respect to the Certificates. So long as the Policy remains in effect and the Insurer is not in default of its obligations thereunder, the Insurer shall have the right to control all remedies for default under the Lease and the Trust Agreement and shall not be required to obtain the consent of the Owners with respect to the exercise of remedies. Substitution of Property The Lease provides that, upon the satisfaction of certain conditions specified therein, the District may substitute other public facilities or real property for all or any portion of the Property and may release a portion of the Property from the Lease. Although the Lease requires, among other things, that the Property, as constituted after such substitution or release, have an annual fair rental value at least equal to the maximum Lease Payments payable by the District in any fiscal year, it does not require that such Property have an annual fair rental value equal to the annual fair rental value of the Property at the time of substitution or release. Thus, a portion of the Property could be replaced with less valuable real property, or could be released altogether. Such a replacement or release could have an adverse impact on the security for the Certificates, particularly if an event requiring abatement of Lease Payments were to occur subsequent to such substitution or release. See 18

27 Appendix A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE LEASE AGREEMENT Substitution or Release of the Property hereto. Additional Certificates The Trust Agreement permits Additional Certificates secured on a parity with the Certificates to be executed and delivered upon compliance with the provisions in the Trust Agreement. In connection with the execution and delivery of any Additional Certificates, the Lease Payments due under the Lease would be increased. The Certificates and the Additional Certificates will be secured on a parity under the Trust Agreement by Lease Payments and other amounts held in the funds established thereunder. See Appendix A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS THE CERTIFICATES OF PARTICIPATION Additional Certificates hereto. Economic Conditions in California As described further under STATE OF CALIFORNIA FISCAL ISSUES, the State recently experienced several years of significant financial pressure and, until fiscal year , the State funding of K-12 education for local school districts had been reduced substantially. Although State funding has increased in the last several fiscal years, the District cannot predict what actions will be taken in the future by the State Legislature and the Governor to address State budget issues, changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State s ability to fund schools. State budget shortfalls in future fiscal years could have an adverse financial impact on the State General Fund budget and on the District. Loss of Tax Exemption As discussed under the heading TAX MATTERS, certain acts or omissions of the District in violation of its covenants in the Trust Agreement and the Lease could result in the interest represented by the Certificates being includable in gross income for purposes of federal income taxation retroactive to the date of delivery of the Certificates. Should such an event of taxability occur, the Certificates would not be subject to mandatory prepayment and would remain Outstanding until maturity or until prepaid at the option of the District. THE CORPORATION The San Ysidro Public Financing Corporation, a nonprofit public benefit corporation, duly organized and existing under the laws of the State of California was incorporated on June 30, 1998 pursuant to the Nonprofit Public Benefit Corporation Law of the State (Title 1, Division 2, Part 2 of the California Corporation Code). The Corporation was established in order to assist the District in financing and refinancing capital projects and equipment needs. Introduction THE DISTRICT The District is located in the southernmost region of San Diego County, directly north of the United States-Mexico border approximately 15 miles south of downtown San Diego, consisting primarily of the community of San Ysidro and unincorporated area of the County. The District provides education services in two kindergarten through third grade schools, two kindergarten through sixth grade schools, two kindergarten through eighth grade schools, one fourth through sixth grade school and one seventh and eighth grade middle school. In addition, the District includes a preschool and child development center. The estimated ADA for 19

28 the District for fiscal year is 4,575 students, and the District has a secured assessed valuation of $3,956,220,264. The audited financial statements for the District for the fiscal year ended June 30, 2014 are attached hereto as APPENDIX D. Board of Education The District is governed by a Governing Board (the Board ). The Board consists of five members who are elected at-large to overlapping four-year terms at elections held in staggered years. If a vacancy arises during any term, the vacancy is filled by either an appointment by the majority vote of the remaining Board members or by a special election. The years in which the current terms for each member of the Board expire are set forth in the following table: SAN YSIDRO SCHOOL DISTRICT Board of Education Name Office Term Expires December Superintendent Antonio Martinez President 2016 Marcos A. Diaz Vice-President 2018 Rodolfo Linares Clerk 2018 Jose F. Barajas Member 2016 Luciana Corrales Member 2018 Source: The District. The Superintendent of the District, appointed by the Board of Education, is responsible for management of the day-to-day operations and supervises the work of other District administrators. A short biography of the District s Superintendent is set forth below. Dr. Julio Fonseca Superintendent. Dr. Fonseca has served as Superintendent of the District since July 1, Prior to the District, Dr. Fonseca served as the Assistant Superintendent, Administrative Services at Bassett Unified School District, as the Assistant Superintendent of Human Resources at Temple City School District and as a principal in West Covina Unified School District. Dr. Fonseca earned a Bachelor s Degree in Sociology from California State Polytechnic University, Pomona, a Master s Degree in Social Work with an emphasis in family and education and a Doctorate in Education from the University of Southern California. 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 District employs approximately 290 full-time equivalent certificated academic professionals as well as approximately 105 full-time equivalent classified employees. The certificated employees of the District have assigned the San Ysidro Education Association ( SYEA ) as their exclusive bargaining agent. The contract among the District and SYEA expires on June 30,

29 The classified employees have assigned California School Employees Association and its San Ysidro Chapter Number 154 ( CSEA ) as their exclusive bargaining agent. The contract among the District and CSEA expires on June 30, Retirement System This section contains certain information relating to the Public Employees Retirement System ( PERS ) and the State Teachers Retirement System ( STRS ). Other than the information provided by the District regarding its annual contributions thereto, the information is primarily derived from information produced by PERS and STRS, their independent accountants and their actuaries. The District has not independently verified the information provided by PERS and STRS and makes no representations nor expresses any opinion as to the accuracy or completeness of the information provided by PERS and STRS, and the information should not to be construed as a representation by the District or the Underwriter. The comprehensive annual financial reports of PERS and STRS are available on their websites at and respectively. The PERS and STRS websites also contain the most recent actuarial valuation reports, as well as other information concerning benefits and other matters. Such information is not incorporated by reference herein. The District cannot guarantee the accuracy of such information. Actuarial assessments are forward-looking information that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans. STRS. All full-time certificated employees, as well as certain classified employees, are members of the State Teachers Retirement System ( STRS ). STRS provides retirement, disability and survivor benefits to plan members and beneficiaries under a defined benefit program (the STRS Defined Benefit Program ). The STRS Defined Benefit Program is funded through a combination of investment earnings and statutorily set contributions from three sources: employees, employers, and the State. Benefit provisions and contribution amounts are established by State statutes, as legislatively amended from time to time, with in the State Teachers Retirement Law. The State also contributes to STRS. Prior to fiscal year , unlike typical defined benefit programs, neither the employee, employer or State contribution rate to the STRS Defined Benefit Program varied annually to make up funding shortfalls or assess credits for actuarial surpluses. In recent years, the combined employer, employee and State contributions to the STRS Defined Benefit Program have not been sufficient to pay actuarially required amounts. As a result, and due to significant investment losses, the unfunded actuarial liability of the STRS Defined Benefit Program has increased significantly in recent fiscal years. In September 2013, STRS projected that the STRS Defined Benefit Program would be depleted in 31 years assuming existing contribution rates continued, and other significant actuarial assumptions were realized. In an effort to reduce the unfunded actuarial liability of the STRS Defined Benefit Program, the State recently passed legislation described below to increase contribution rates. Prior to July 1, 2014, K-14 school districts were required by statute to contribute 8.25% of eligible salary expenditures, while participants contributed 8% of their respective salaries. On June 24, 2014, the Governor signed A.B ( A.B ) into law as a part of the State Budget. A.B seeks to fully fund the unfunded actuarial obligation with respect to service credited to members of the STRS Defined Benefit Program before July 1, 2014 (the 2014 Liability ), within 32 years, by increasing member, K-14 school district and State contributions to STRS. Commencing on July 1, 2014, the employee contribution rates will increase over a three year phase in period in accordance with the schedule set forth in the table below: 21

30 Effective Date Source: A.B MEMBER CONTRIBUTION RATES STRS (Defined Benefit Program) STRS Members Hired Prior to January 1, 2013 STRS Members Hired After January 1, 2013 July 1, % 8.150% July 1, July 1, Pursuant to A.B. 1469, K-14 school districts contribution rate will increase over a seven year phase in period in accordance with the schedule set forth in the table below: (1) K-14 SCHOOL DISTRICT CONTRIBUTION RATES STRS (Defined Benefit Program) Effective Date K-14 school districts (1) July 1, % July 1, July 1, July 1, July 1, July 1, July 1, Percentage of eligible salary expenditures to be contributed. Source: A.B Based upon the recommendation from its actuary, for fiscal year and each fiscal year thereafter, the STRS Teachers Retirement Board (the STRS Board ) is required to increase or decrease the K-14 school districts contribution rate to reflect the contribution required to eliminate the remaining 2014 Liability by June 30, 2046; provided that the rate cannot change in any fiscal year by more than 1% of creditable compensation upon which members contributions to the STRS Defined Benefit Program are based; and provided further that such contribution rate cannot exceed a maximum of 20.25%. In addition to the increased contribution rates discussed above, A.B also requires the STRS Board to report to the State legislature every five years (commencing with a report due on or before July 1, 2019) on the fiscal health of the STRS Defined Benefit Program and the unfunded actuarial obligation with respect to service credited to members of that program before July 1, The reports are also required to identify adjustments required in contribution rates for K-14 school districts and the State in order to eliminate the 2014 Liability. The District contributed $1,655,116 to STRS for fiscal year , $1,591,600 to STRS for fiscal year and $1,533,284 for fiscal year Such contributions were equal to 100% of the required contributions for the respective years. The District estimates a contribution to STRS of approximately $1,700,000 for fiscal year and has budgeted a contribution of $1,791,708 for fiscal year With the implementation of AB 1469, the District anticipates that its contributions to STRS will increase in future fiscal years as compared to prior fiscal years. The District, nonetheless, is unable to predict all factors or any changes in law that could affect its required contributions to STRS in future fiscal years. The State made contributions to STRS on behalf of the District in the amount of $967,178 ( % of District salaries subject to STRS). The State s contribution reflects a base contribution rate of 2.017%, and a supplemental contribution rate that will vary from year to year based on statutory criteria. Pursuant to A.B. 1469, the State contribution rate will increase over the next three years to a total of 6.328% in 22

31 fiscal year Based upon the recommendation from its actuary, for fiscal year and each fiscal year thereafter, the STRS Board is required, with certain limitations, to increase or decrease the State s contribution rates to reflect the contribution required to eliminate the unfunded actuarial accrued liability attributed to benefits in effect before July 1, In addition, the State is currently required to make an annual general fund contribution up to 2.5% of the fiscal year covered STRS member payroll to the Supplemental Benefit Protection Account (the SBPA ), which was established by statute to provide supplemental payments to beneficiaries whose purchasing power has fallen below 85% of the purchasing power of their initial allowance. PERS. Classified employees working four or more hours per day are members of the Public Employees Retirement System ( PERS ). PERS provides retirement and disability benefits, annual cost-ofliving adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by the State statutes, as legislatively amended from time to time within the Public Employees Retirement LAws. PERS operates a number of retirement plans including the Public Employees Retirement Fund ( PERF ). PERS is a multiple-employer defined benefit retirement plan. In addition to the State, employer participants at June 30, 2013 included 1,580 public agencies and schools (representing more than 2,500 entities). PERS acts as the common investment and administrative agent for the member agencies. The State and school districts (for classified employees, which generally consist of school employees other than teachers) are required by law to participate in PERF. Employees participating in PERF generally become fully vested in their retirement benefits earned to date after five years of credited service. One of the plans operated by PERS is for school districts throughout the State (the Schools Pool ). Contributions by employers to the PERS Schools Pool are based upon an actuarial rate determined annually and contributions by plan members vary based upon their date of hire. The District is currently required to contribute to PERS at an actuarially determined rate, which is % of eligible salary expenditures for fiscal year Participants enrolled in PERS prior to January 1, 2013 contribute 7% of their respective salaries, while participants enrolled after January 1, 2013 contribute at an actuarially determined rate, which was % of their respective salaries for fiscal year See California Public Employees Pension Reform Act of 2013 herein. Effective July 1, 2014, the Board of Administration of PERS adopted new contribution rates for school districts. The new contribution rates resulted in large part from new demographic assumptions adopted by the Board of Administration in February 2014 which took into account longer life spans of public employees from previous assumptions. Such demographic assumptions are expected to increase costs for the State and public agency employers (including school districts), which costs will be amortized over 20 years and phased in over three years beginning in fiscal year for the State and amortized over 20 years and phased in over five years beginning in fiscal year for the employers. PERS estimates that the new demographic assumptions could cost public agency employers up to 5% of payroll for miscellaneous employees at the end of the five year phase in period. To the extent, however, that future experiences differ from PERS current assumptions, the required employer contributions may vary. The District contributed $736,312 to PERS for fiscal year , $773,103 for fiscal year and $758,860 for fiscal year , which amounts equaled 100% of required contributions to PERS. The District estimates a contribution to PERS of approximately $850,000 for fiscal year and has budgeted a contribution of $217,268 for fiscal year State Pension Trusts. Each of STRS and PERS issues a separate comprehensive financial report that includes financial statements and required supplemental information. Copies of such financial reports may be obtained from each of STRS and PERS as follows: (i) STRS, P.O. Box 15275, Sacramento, California ; (ii) PERS, P.O. Box , Sacramento, California Moreover, each of STRS and PERS maintains a website, as follows: (i) STRS: (ii) PERS: However, the information presented in such financial reports or on such websites is not incorporated into this Official Statement by any reference. 23

32 Both STRS and PERS have substantial statewide unfunded liabilities. The amount of these unfunded liabilities will vary depending on actuarial assumptions, returns on investments, salary scales and participant contributions. The table below summarizes information regarding the actuarially-determined accrued liability for both STRS and PERS. Actuarial assessments are forward-looking information that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans. Fiscal Year (1) Amounts may not add due to rounding. (2) (3) (4) (5) (6) FUNDED STATUS STRS (Defined Benefit Program) and PERS (Dollar Amounts in Millions) (1) Fiscal Years through Accrued Liability Value of Trust Assets (MVA) (2) STRS Unfunded Liability (MVA) (2)(3) Value of Trust Assets (AVA) (4) Unfunded Liability (AVA) (4) $208,405 $147,140 $68,365 $143,930 $64, , ,118 80, ,232 70, , ,176 74, ,614 73, , ,749 61, ,495 72,718 Value of Trust Assets (MVA) (2) PERS Value of Trust Assets (AVA) (4) Unfunded Unfunded Fiscal Year Accrued Liability Liability (MVA) (2) Liability (AVA) (4) $58,358 $45,901 $12,457 $51,547 $6, ,439 44,854 14,585 53,791 5, ,487 49,482 12,005 56,250 5, (5) 65,600 56,838 8, (6) -- (6) Reflects market value of assets. Excludes assets allocated to the SBPA reserve. Reflects actuarial value of assets. On April 14, 2015, the PERS Finance & Administration Committee approved the K-14 school district contribution rate for fiscal year and released certain actuarial information to be incorporated into the June 30, 2014 actuarial valuation to be released in summer Figures not provided. Source: PERS Schools Pool Actuarial Valuation; STRS Defined Benefit Program Actuarial Valuation. Unlike PERS, STRS contribution rates for participant employers, employees hired prior to the Implementation Date (defined herein) and the State are set by statute and do not currently vary from year-toyear based on actuarial valuations. As a result of the Reform Act (defined below), the contribution rate for STRS participants hired after the Implementation Date will vary from year-to-year based on actuarial valuations. See California Public Employees Pension Reform Act of 2013 below. In recent years, the combined employer, employee and State contributions to STRS have been significantly less than actuarially required amounts. As a result, and due in part to investment losses, the unfunded liability of STRS has increased significantly. AB 1469 is intended to address this unfunded liability. According to the STRS Defined Benefit Program Actuarial Valuation, as of June 30, 2014, the future revenue from contributions and 24

33 appropriations for the STRS Defined Benefit Program is projected to be sufficient to finance its obligations. This finding reflects the scheduled contribution increases specified in AB 1469 and is based on the valuation assumptions and the valuation policy adopted by the STRS Board. In recent years, the PERS Board of Administration (the PERS Board ) has taken several steps, as described below, intended to reduce the amount of the unfunded accrued actuarial liability of its plans, including the Schools Pool. On March 14, 2012, the PERS Board of Administration (the PERS Board ) voted to lower the PERS rate of expected price inflation and its investment rate of return (net of administrative expenses) (the PERS Discount Rate ) from 7.75% to 7.5%. As one consequence of such decrease, the annual contribution amounts paid by PERS member public agencies, including the District, have been increased by 1 to 2% for miscellaneous plans and by 2 to 3% for safety plans beginning in fiscal year On February 18, 2014, the PERS Board voted to keep the PERS Discount Rate unchanged at 7.5%. On April 17, 2013, the PERS Board approved new actuarial policies aimed at returning PERS to fullyfunded status within 30 years. The policies include a rate smoothing method with a 30-year amortization period for gains and losses, a five-year increase of public agency contribution rates, including the contribution rate at the onset of such amortization period, and a five year reduction of public agency contribution rates at the end of such amortization period. The PERS Board has delayed the implementation of the new actuarial policies until fiscal year for the State, K-14 school districts and all other public agencies. Also, on February 20, 2014, the PERS Board approved new demographic assumptions reflecting (i) expected longer life spans of public agency employees and related increases in costs for the PERS system and (ii) trends of higher rates of retirement for certain public agency employee classes, including police officers and firefighters. The new actuarial assumptions will first be reflected in the Schools Pool in the June 30, 2015 actuarial valuation. The increase in liability due to the new assumptions will be amortized over 20 years with increases phased in over five years, beginning with the contribution requirement for fiscal year The new demographic assumptions affect the State, K-14 school districts and all other public agencies. The District can make no representations regarding the future program liabilities of STRS, or whether the District will be required to make additional contributions to STRS in the future above those amounts required under A.B The District can also provide no assurances that the District s required contributions to PERS will not increase in the future. California Public Employees Pension Reform Act of On September 12, 2012, the Governor signed into law the California Public Employee s Pension Reform Act of 2013 (the Reform Act ), which makes changes to both STRS and PERS, most substantially affecting new employees hired after January 1, 2013 (the Implementation Date ). For STRS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor (the age factor is the percent of final compensation to which an employee is entitled to for each year of service) from age 60 to 62 and increasing the eligibility of the maximum age factor of 2.4% from age 63 to 65. Similarly, for non-safety PERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67. Among the other changes to PERS and STRS, the Reform Act also: (i) requires all new participants enrolled in PERS and STRS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary, (ii) requires STRS and PERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date (previously 12 months for STRS members who retire with 25 years of service), and (iii) caps pensionable compensation for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers) and benefit 25

34 base for members participating in Social Security or 120% for members not participating in social security (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers), while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off. GASB Statement Nos. 67 and 68. On June 25, 2012, the Governmental Accounting Standards Board ( GASB ) approved two new standards ( Statements ) with respect to pension accounting and financial reporting standards for state and local governments and pension plans. The new Statements, No. 67 and No. 68, will replace GASB Statement No. 27 and most of Statements No. 25 and No. 50. The changes will impact the accounting treatment of pension plans in which state and local governments participate. Major changes include: (1) the inclusion of unfunded pension liabilities on the government s balance sheet (currently, such unfunded liabilities are typically included as notes to the government s financial statements); (2) more components of full pension costs being shown as expenses regardless of actual contribution levels; (3) lower actuarial discount rates being required to be used for underfunded plans in certain cases for purposes of the financial statements; (4) closed amortization periods for unfunded liabilities being required to be used for certain purposes of the financial statements; and (5) the difference between expected and actual investment returns being recognized over a closed five-year smoothing period. In addition, according to GASB, Statement No. 68 means that, for pensions within the scope of the Statement, a cost-sharing employer that does not have a special funding situation is required to recognize a net pension liability, deferred outflows of resources, deferred inflows of resources related to pensions and pension expense based on its proportionate share of the net pension liability for benefits provided through the pension plan. Because the accounting standards do not require changes in funding policies, the full extent of the effect of the new standards on the District is not known at this time. The reporting requirements for pension plans took effect for the fiscal year beginning July 1, 2013 and the reporting requirements for government employers, including the District, took effect for the fiscal year beginning July 1, Other Postemployment Benefits In June 2004, the Governmental Accounting Standards Board ( GASB ) pronounced Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions. The pronouncement required public agency employers providing healthcare benefits to retirees to recognize and account for the costs for providing these benefits on an accrual basis and provide footnote disclosure on the progress toward funding the benefits. The implementation date for this pronouncement was staggered in three phases based upon the entity s annual revenues, similar to the implementation for GASB Statement No. 34 and 35. GASB Statement No. 45 ( GASB 45 ) was effective for The District for the fiscal year ending June 30, Employees who are eligible to receive retiree employment benefits other than pensions ( Health & Welfare Benefits ) while in retirement must meet specific criteria, i.e., age and years with the District. The District provides Health & Welfare Benefits to qualified eligible certificated employees who retire on or after attaining age 55 with at least 15 years of full-time service to the District until such retirees reach age 65. On July 1, 2014, 50 retirees met these qualifications with 403 employees earning service credit towards eligibility. Expenditures for post-employment healthcare benefits are recognized each pay period at a rate that approximates the amount of premiums paid. During the fiscal years ended June 30, 2012, June 30, 2013 and June 30, 2014, expenditures of approximately $380,000, $390,000 and $330,000, respectively, were recognized for post-employment healthcare benefits, respectively. The District has completed an actuarial study of its Health and Welfare Benefits dated July 1, Based on that study, the District s Annual Required Contribution is $859,716 and its unfunded actuarial accrued liability is $6,885,

35 FUNDED STATUS OTHER POST-EMPLOYMENT BENEFITS Fiscal Year Ended (June 30) Annual OPEB Cost Percentage of Annual Cost Contributed Net OPEB Obligation 2012 $653,411 59% $1,184, , ,504, , ,910,189 Source: The District. Insurance The District is a member of San Diego County Schools Risk Management JPA ( SDCSRM ), a joint powers authority that provides various types of insurance to its members as requested. SDCSRM provides property, liability, health and workers compensation to the District. The relationship between the District and SDCSRM is such that SDCSRM is not a component unit of the District for financial reporting purposes. The District believes its coverage s are adequate for a school district of its size and for the nature of its operations. In addition, based upon prior claims experience, the District believes that the recorded liabilities for insured claims are adequate. The District maintains insurance or self-insurance in such amounts and with such retentions and other terms providing coverage s for property damage, fire and theft, general public liability and worker s compensation as are adequate, customary and comparable with such insurance maintained by similarly situated school districts. In addition, based upon prior claims experience, the District believes that the recorded liabilities for self-insured claims are adequate. District Investments DISTRICT FINANCIAL INFORMATION The San Diego County Treasurer-Tax Collector (the Treasurer ) manages, in accordance with California Government Code Section et seq., funds deposited with the Treasurer by school and community college districts located in the County, various special districts, and some cities within the State of California. State law generally requires that all moneys of the County, school and community college districts and certain special districts located in the County be held in the County s Treasury Pool. Financial Statements of the District The District s general fund finances the legally authorized activities of the District for which restricted funds are not provided. General fund revenues are derived from such sources as State fund apportionments, taxes, use of money and property, and aid from other governmental agencies. The District has not requested its auditor to provide any review or update of such financial statements in connection with their inclusion in this Official Statement. Certain information from the District s financial statements follows. The audited financial statements for the District for the fiscal year are attached as APPENDIX D hereto. The District has not requested, and its auditors have not provided, any review or update to such audited financial statements. The District s audited financial statements for prior and subsequent fiscal years can be obtained by contacting the District at 4350 Otay Mesa Road, San Ysidro, California 92173, telephone (619) The District may impose a charge for copying, mailing and handling. The District s financial statements are prepared on a modified accrual basis of accounting in accordance with generally accepted accounting principles as set forth by the Governmental Accounting Standards Board. See DISTRICT FINANCIAL INFORMATION General Fund for more information regarding the District s financial statements for recent fiscal years. 27

36 Funds used by the District are categorized as follows: Governmental Funds General Fund Special Revenue Funds Debt Service Funds Capital Project Funds Fiduciary Funds Trust and Agency Funds Proprietary Funds Internal Service Funds The general fund of the District, as shown herein, is a combined fund comprised of moneys which are unrestricted and available to finance the legally authorized activities of the District not financed by restricted funds and moneys which are restricted to specific types of programs or purposes. General fund revenues shown thereon are derived from such sources as taxes, aid from other government agencies, charges for current services and other revenue. The financial statements included herein were prepared by the District using information from the Annual Financial Reports which are prepared by the Assistant Superintendent, Business Services for the District and audited by independent certified public accountants each year. The District s audited financial statements for the year ending June 30, 2014 are attached as APPENDIX D hereto. District Budgets The fiscal year of the District begins on the first day of July of each year and ends on the 30th day of June of the following year. The District adopts on or before July 1 of each year a fiscal line-item budget setting forth expenditures in priority sequence so that appropriations during the fiscal year can be adjusted if revenues do not meet projections. The District is required by provisions of the California Education Code to maintain a balanced budget each year, where the sum of expenditures plus the ending fund balance cannot exceed the revenues plus the carry-over fund balance from the previous year. California Assembly Bill 1200 ( A.B ), effective January 1, 1992, tightened the budget development process and interim financial reporting for school districts, enhancing the authority of the county schools superintendents offices and establishing guidelines for emergency State aid apportionments. Many provisions affect the District s operations directly, while others create a foundation from which outside authorities (primarily state and county school officials) may impose actions on the District. Under the provisions of A.B. 1200, each school district is required to file interim certifications with the county office of education as to its ability to meet its financial obligations for the remainder of the then-current fiscal year and, based on current forecasts, for the subsequent fiscal year. The county office of education reviews the certification and issues either a positive, negative or qualified certification. A positive certification is assigned to any school district that will meet its financial obligations for the current fiscal year and subsequent two fiscal years. A negative certification is assigned to any school district that will be unable to meet its financial obligations for the remainder of the fiscal year or subsequent fiscal year. A qualified certification is assigned to any school district that may not meet its financial obligations for the current fiscal year or two subsequent fiscal years. Each certification is based on then-current projections. A summary of the District s interim certifications for the last five fiscal years is shown below. 28

37 Fiscal Year First Interim Second Interim Positive Positive Positive Qualified Qualified Negative Negative Negative Negative Qualified The District filed its Second Interim Report for fiscal year with the San Diego County Office of Education with a negative certification within the meaning of section of the Education Code because the District did not have enough cash on hand to meet its financial obligations for the remainder of the fiscal year as well as satisfy reserve requirements. On March 20, 2013, the San Diego County Office of Education appointed a fiscal advisor to the District as a result of the negative certification. Also as a result of the negative certification, existing cash flow borrowing options for the District, including the County Tax and Revenue Anticipation Note pool, were not available further exacerbating the District s cash flow deficits and overall financial projections. The District filed its First and Second Interim Reports for fiscal year as well as its First Interim Report for fiscal year with negative certifications within the meaning of section due in large part to expenditures budgeted for fiscal year and that exceeded revenues budgeted for such fiscal years. The District filed its Second Interim Report for fiscal year with a positive certification after review of its budgeted revenues and expenditures for fiscal years and resulted in recognition of sufficient revenues to meet financial obligations in those years. Citing certain fiscal indicators, the County changed the District s certification to qualified. The District has employed additional resources to ensure that future budgeting takes into account all potential sources of revenue and the permitted expenditures thereof. 29

38 General Fund The following table describes the District s audited financial results for fiscal years , and SAN YSIDRO SCHOOL DISTRICT GENERAL FUND Statement of Revenues, Expenditures and Change in Fund Balances for Fiscal Years , and Audit Audit Audit REVENUES Revenue Limit/LCFF Sources State apportionment or State aid $11,497,482 $10,935,439 $11,897,153 Education Protection Account funds ,250,793 Local sources 13,977,224 14,650,191 15,240,740 Federal Revenues 3,034,566 3,204,904 2,763,321 Other State Revenues 6,658,612 6,616,888 3,253,736 Other Local Revenues 4,038,018 3,416,956 3,475,984 TOTAL REVENUES $39,205,902 $38,824,378 $41,881, EXPENDITURES Instruction 27,786,889 25,949,644 25,974,419 Instruction related services 3,615,350 3,400,957 3,029,146 Pupil services 2,540,666 2,275,234 2,380,854 General administration 2,784,025 3,281,762 4,120,355 Plant services 3,988,875 4,186,169 4,113,591 Other outgo -- 10,108 35,640 Debt Service Principal 467, , ,899 Interest Debt Issue Costs 79,621 10,722 11,893 TOTAL EXPENDITURES $41,263,325 $39,582,495 $40,133,797 Excess (Deficiency) of Revenues Over Expenditures (2,057,423) (758,117) 1,747,930 OTHER FINANCING SOURCES (USES): Operating Transfers In 2,340, Operating Transfers Out (2,340,674) TOTAL OTHER FINANCING SOURCES (USES) Net Change in Fund Balances (2,057,423) (758,117) 1,747,930 Fund Balances at Beginning of Year 7,428,249 5,370,826 4,612,709 Fund Balances at End of Year $5,370,826 $4,612,709 $6,360,639 Source: The District. 30

39 The table on the following page sets forth the budgets as compared to the audited actual results of the District for fiscal years , and as well as the adopted budget and estimated actual results for fiscal year and the adopted budget for fiscal year

40 Adopted Budget Audited Actuals SAN YSIDRO SCHOOL DISTRICT GENERAL FUND BUDGETING Fiscal Years through Adopted Budget REVENUES Revenue Limit/LCFF Sources State Apportionment or State Aid $10,500,934 $11,497,482 $10,194,277 $10,935,439 $11,324,137 $11,897,153 $18,522,249 $17,255,212 $21,563,215 Education Protection Account Funds ,250,793 4,491,347 5,496,463 5,377,347 Local Sources 13,320,289 13,977,224 13,173,659 14,650,191 13,504,570 15,240,740 13,581,691 14,132,987 14,339,696 Federal 2,842,631 3,034,566 2,439,076 3,204,904 2,932,847 2,763,321 2,875,659 3, ,033,452 Other State 6,578,695 6,658,612 5,862,037 6,616,888 6,621,958 2,316,361 1,042,801 1,409,261 1,910,539 Other Local 4,154,266 4,037,070 3,951,647 3,416,956 3,529,783 3,475,984 3,438,807 3,391,102 3,116,864 Total Revenues $37,396,815 $39,204,954 $35,620,696 $38,824,378 $37,913,295 $40,944, $43,952, $45,462, $49,341,113 EXPENDITURES Audited Actuals Certificated Salaries 18,927,842 19,638,557 19,536,793 18,860,165 20,797,683 18,490,096 19,825,338 17,372,630 20,812,785 Classified Salaries 6,480,674 6,912,376 6,040,149 6,527,543 6,776,113 6,305,497 6,826,293 4,508,125 6,945,394 Employee Benefits 7,525,716 7,295,972 7,385,759 7,036,283 7,262,855 6,833,953 7,793,984 5,961,532 7,745,892 Books and Supplies 2,791,608 1,868,034 2,014,438 1,274,213 2,594, ,955 6,594,287 2,411,840 3,251,785 Services, Other Operating Expenses 4,254,249 5,124,452 4,965,211 5,541,321 5,884,857 6,256,608 6,527,301 3,689,258 6,620,691 Other Outgo , , , , ,085 Direct Support/Indirect Costs (183,763) (192,300) 300,478 (144,785) (188,587) (197,202) (207,054) (222,133) (184,125) Capital outlay 10, ,335 24,788 9, , , ,397 Debt service Principal 467, , , , , Total Expenditures $40,274,225 $41,263,325 $40,267,616 $39,582,495 $43,595,500 $39,196,422 $47,828,038 $45,528,210 $45,357,901 EXCESS (DEFICIENCY) OR REVENUES OVER (UNDER) EXPENDITURES (2,877,410) (2,058,371) (4,646,920) (758,117) (5,682,205) 1,747,930 (3,875,484) (65,437) 3,803,212 OTHER FINANCING SOURCES (USES) -- 2,340, Total Other Financing Sources and Uses -- 2,340, Excess (Deficiency) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Sources (2,877,410) 282,303 (4,646,920) (758,117) (5,682,205) 1,747,930 (3,875,484) (65,437) 3,803,212 Adopted Budget Audited Actuals Adopted Budget Estimated Actuals Adopted Budget Fund Balance, July 1 5,088,523 5,088,523 5,370,826 5,370,826 4,612,709 4,612,709 5,308,599 5,308,599 6,295,202 Audit Adjustments, Beginning Balance ,052,040 1,052, Adjusted Beginning Balance ,360,639 6,360, Fund Balance, June 30 $2,211,113 $5,370,826 $723,906 $4,612,709 $(1,069,496) $6,360,639 $2,485,145 $6,295,202 $10,098,414 Source: The District. 32

41 The estimated actual financial results show projected deficit spending of $65,437, with a projected ending reserve of $6,295,202 or 13.8% of budgeted expenditures. Under SB 858, enacted as part of the Education Omnibus Trailer Bill for , effective upon passage of Proposition 2 at the November 2, 2014 election, limitations upon the permitted amount of school districts reserves were created. The District cannot estimate at this time whether SB 858 will have an adverse impact on its financial operations. See STATE OF CALIFORNIA FISCAL ISSUES State Budget for more information relating to SB 858. Long-Term Debt As of June 30, 2014, the District had $193,403,048 of long-term debt outstanding without regard to the Certificates. The table below does not reflect the issuance of the District s 2015 General Obligation Refunding Bonds which refunded certain outstanding general obligation bonds of the District on June 3, 2015 and the execution and delivery of the Certificates. SAN YSIDRO SCHOOL DISTRICT Long-Term Debt Balance June 30, 2013 Additions Deductions Balance June 30, 2014 Due Within One Year General obligation bonds 1 $146,296,483 $5,386,754 $2,997,293 $148,685,944 $3,363,460 Certificates of Participation 40,583,395 62, ,350 39,986, ,349 Other general long term debt 3,218, ,529 2,496, ,529 Net OPEB obligations 1,504, , ,323 1,910, Compensated absences 223,484 99, , ,394 Total $191,826, $6,285,975 $4,709,495 $193,403,048 $5,137,732 1 Does not reflect the issuance of the District s 2015 General Obligation Refunding Bonds on June 3, 2015 which refunded certain outstanding general obligation bonds of the District and the execution and delivery of the Certificates. Source: The District. General Obligation Bonds. The District received authorization from the voters within the District to issue $250,000,000 aggregate principal amount of general obligation bonds pursuant to an authorization on March 4, 1997 (the 1997 Authorization ). On August 1, 1997, the District issued its $10,590,000 General Obligation Bonds, 1997 Election, Series A, on June 5, 2001, the District issued its $9,885,000 General Obligation Bonds, 1997 Election, Series B, on September 29, 2004, the District issued its $15,875,000 General Obligation Bonds, 1997 Election, Series C, on February 1, 2005, the District issued its $24,619, General Obligation Bonds, 1997 Election, Series D, on December 5, 2007, the District issued its $33,952, General Obligation Bonds, 1997 Election, Series E (the Series E Bonds ), on June 28, 2011, the District issued its $17,599, General Obligation Bonds, 1997 Election, Series F (the Series F Bonds ) and on May 31, 2012, the District issued its $28,990, General Obligation Bonds, 1997 Election, Series G. On June 27, 2012, the District refunded the Series A Bonds, Series B Bonds, the Series C Bonds and a portion of the Series D Bonds through the issuance of its $29,860,000 General Obligation Refunding Bonds, Series On June 3, 2015, the District issued its $45,643, General Obligation Refunding Bonds which refunded a portion of the Series E Bonds and the Series F Bonds. $108,487,390 aggregate principal amount of general obligation bonds remain to be issued under the 1997 Authorization. Certificates of Participation. The District has executed and delivered five series of certificates of participation which as of June 30, 2014 were outstanding in the aggregate principal amount of $44,864,715. In addition to the 1998 Certificates, the 2001 Certificates and the 2005 Certificates, on December 18, 2007, the District executed and delivered $7,330,000 aggregate principal amount of its 2007 Certificates of Participation (School Facilities Project) and on January 12, 2012, the District executed and delivered $10,409, aggregate principal amount of its 2012 Refunding Certificates of Participation. 33

42 The District intends to apply the net proceeds of the Certificates to the current prepayment of the 1998 Certificates, the 2001 Certificates and the 2005 Certificates. Qualified Zone Activity Bond. On October 14, 2005, the District issued a qualified zone academy bond in the principal amount of $5,000,000 (the QZAB ) to finance capital improvements, equipment and educational development programs. The District is required to deposit $253,630 annually into an escrow account through the maturity date of the QZAB on October 27, Interest earned on the deposits to the escrow account are applied to pay the balance of the amounts due on the QZAB above the amount of the District s annual deposit. Supplemental Early Retirement Plan. In fiscal year , the District offered a one-time supplemental early retirement plan ( SERP ) to its employees. 33 employees elected to participate in the SERP. Under the 5 year SERP, the total expected premium payment is $2,339,495. Additional information regarding the long-term debt and its scheduled repayment is set forth in Note M to the District s Audited Financial Statements attached as Appendix D hereto. Short-Term Debt As of June 30, 2014, the District did not have any short-term debt outstanding. The District does not expect to issue any tax and revenue anticipation notes in fiscal year Capital Facilities Funds The District maintains a Capital Facilities Fund, separate and apart from the General Fund, to account for developer fees collected by the District. The District s developer fees may be utilized for any capital purpose related to growth. Separate and apart from the General Fund, the District also maintains a Building Fund to account for general obligation bond proceeds restricted to capital projects and a County School Facilities Fund to account for certain State apportionments. Collection of developer fees followed a formal declaration by the Governing Board which addressed the overcrowding of District schools as a result of new development. These fees are collected pursuant to certain provisions of the Education Code of the State. The square-foot amounts are periodically adjusted for inflation and the current developer fee is $2.05 per square foot of habitable space on domestic housing developments. The current developer fee on commercial/industrial developments is $3.29 per square foot. As of June 30, 2014, a balance of $669,064 existed in the District s Capital Facilities Fund. The following table sets forth developer fee collections by the District for the last five fiscal years and an estimate for fiscal year Fiscal Year Developer Fees Collected 1 Estimated. Source: The District $ , , , , ,

43 Local Control Funding Formula STATE FUNDING OF EDUCATION On June 27, 2013, the State adopted a new method for funding school districts commonly known as the Local Control Funding Formula. The Local Control Funding Formula will be implemented in stages, beginning in fiscal year and will be fully implemented in fiscal year Prior to adoption of the Local Control Funding Formula, the State used a revenue limit system described below. State Assembly Bill 97 (Stats. 2013, Chapter 47) ( AB 97 ), enacted as a part of the State Budget (defined below) enacted the Local Control Funding Formula beginning in fiscal year , which replaced the revenue limit funding system and many categorical programs. See Revenue Limit Funding System below. The Local Control Funding Formula distributes resources to schools through a guaranteed base revenue limit funding grant (the Base Grant ) per unit of ADA. The average Base Grant is $7,643 per unit of ADA, which is $2,375 more than the average revenue limit. Additional supplemental funding is made available based on the proportion of English language learners, low-income students and foster youth. The Local Control Funding Formula replaces the existing revenue limit funding system and many categorical programs. The District expects revenues to increase as a result of the implementation of the Local Control Funding Formula. The primary component of AB 97, as amended by SB 91, is the implementation of the Local Control Funding Formula ( LCFF ), which replaces the revenue limit funding system for determining State apportionments, as well as the majority of categorical program funding. State allocations will be provided on the basis of target base funding grants per unit of ADA (a Base Grant ) assigned to each of four grade spans. Full implementation of the LCFF is expected to occur over a period of several fiscal years. Beginning in fiscal year , an annual transition adjustment was required to be calculated for each school district, equal to such district s proportionate share of appropriations included in the State budget to close the gap between the prior-year funding level and the target allocation following full implementation of the LCFF. In each year, school districts will have the same proportion of their respective funding gaps closed, with dollar amounts varying depending on the size of a district s funding gap. The Base Grants per unit of ADA for each grade span are as follows: (i) $6,845 for grades K-3; (ii) $6,947 for grades 4-6; (iii) $7,154 for grades 7-8; and (iv) $8,289 for grades Beginning in fiscal year , and in each subsequent year, the Base Grants are to be adjusted for cost-of-living increases by applying the implicit price deflator for government goods and services. Following full implementation of the LCFF, the provision of COLAs will be subject to appropriation for such adjustment in the annual State budget. The differences among Base Grants are linked to differentials in statewide average revenue limit rates by district type, and are intended to recognize the generally higher costs of education at higher grade levels. The Base Grants for grades K-3 and 9-12 are subject to adjustments of 10.4% and 2.6%, respectively, to cover the costs of class size reduction in early grades and the provision of career technical education in high schools. Following full implementation of the LCFF, and unless otherwise collectively bargained for, school districts serving students in grades K-3 must maintain an average class enrollment of 24 or fewer students in grades K-3 at each school site in order to continue receiving the adjustment to the K-3 Base Grant. Such school districts must also make progress towards this class size reduction goal in proportion to the growth in their funding over the implementation period. Additional add-ons are also provided to school districts that received categorical block grant funding pursuant to the Targeted Instructional Improvement and Home-to-School Transportation programs during fiscal year School districts that serve students of limited English proficiency ( EL students), students from low income families that are eligible for free or reduced priced meals ( LI students) and foster youth are 35

44 eligible to receive additional funding grants. Enrollment counts are unduplicated, such that students may not be counted as both EL and LI (foster youth automatically meet the eligibility requirements for free or reduced priced meals and are not discussed separately herein). A supplemental grant add-on (each, a Supplemental Grant ) is authorized for school districts that serve EL/LI students, equal to 20% of the applicable Base Grant multiplied by such districts percentage of unduplicated EL/LI student enrollment. School districts whose EL/LI populations exceed 55% of their total enrollment are eligible for a concentration grant add-on (each, a Concentration Grant ) equal to 50% of the applicable Base Grant multiplied by the percentage of such district s unduplicated EL/LI student enrollment in excess of the 55% threshold. The following table sets forth the ADA by grade span, enrollment and the percentage of EL/LI enrollment for fiscal year with projections for fiscal years and ADA, ENROLLMENT AND ENGLISH LANGUAGE/LOW INCOME ENROLLMENT Fiscal Year and Projections for and San Ysidro School District ADA Fiscal Year K Total Enrollment Enrollment % of EL/LI Enrollment ,079 1,579 1,057 4, % ,970 1, , ,895 1,601 1,006 4, Projected. Source: The District. For certain school districts that would have received greater funding levels under the prior revenue limit system, the LCFF provides for a permanent economic recovery target ( ERT ) add-on, equal to the difference between the revenue limit allocations such districts would have received under the prior system in fiscal year , and the target LCFF allocations owed to such districts in the same year. To derive the projected funding levels, the LCFF assumes the discontinuance of deficit revenue limit funding, implementation of a 1.94% COLA in fiscal years through , and restoration of categorical funding to pre-recession levels. The ERT add-on will be paid incrementally over the implementing period of the LCFF. The District does not qualify for the ERT add-on. The sum of a school district s adjusted Base, Supplemental and Concentration Grants will be multiplied by such district s P-2 ADA for the current or prior year, whichever is greater (with certain adjustments applicable to small school districts). This funding amount, together with any applicable ERT or categorical block grant add-ons, will yield a district s total LCFF allocation. Generally, the amount of annual State apportionments received by a school district will amount to the difference between such total LCFF allocation and such district s share of applicable local property taxes. Most school districts receive a significant portion of their funding from such State apportionments. As a result, decreases in State revenues may significantly affect appropriations made by the Legislature to school districts. Certain schools districts, known as basic aid districts, have allocable local property tax collections that equal or exceed such districts total LCFF allocation, and result in the receipt of no State apportionment aid. Basic aid school districts receive only special categorical funding, which is deemed to satisfy the basic aid requirement of $120 per student per year guaranteed by Article IX, Section 6 of the State Constitution. The implication for basic aid districts is that the legislatively determined allocations to school districts, and other politically determined factors, are less significant in determining their primary funding sources. Rather, property tax growth and the local economy are the primary determinants. The District does not qualify as basic aid, and does not expect to in future fiscal years. 36

45 Accountability. The State Board of Education has promulgated regulations regarding the expenditure of supplemental and concentration funding, including a requirement that school districts increase or improve services for EL/LI students in proportion to the increase in funds apportioned to such district on the basis of the number and concentration of such EL/LI students, as well as the conditions under which school districts can use supplemental or concentration funding on a school-wide or districtwide basis. School districts are also required to adopt local control and accountability plans ( LCAPs ) disclosing annual goals for all students, as well as certain numerically significant student subgroups, to be achieved in eight areas of State priority identified by the LCFF. LCAPs may also specify additional local priorities. LCAPs must specify the actions to be taken to achieve each goal, including actions to correct identified deficiencies with regard to areas of State priority. LCAPs are required to be adopted every three years, beginning in fiscal year , and updated annually thereafter. The State Board of Education has developed and adopted a template LCAP for use by school districts. Support and Intervention. AB 97, as amended by SB 91, establishes a new system of support and intervention to assist school districts meet the performance expectations outlined in their respective LCAPs. School districts must adopt their LCAPs (or annual updates thereto) in tandem with their annual operating budgets, and not later than five days thereafter submit such LCAPs or updates to their respective county superintendents of schools. On or before August 15 of each year, a county superintendent may seek clarification regarding the contents of a district s LCAP (or annual update thereto), and the district is required to respond to such a request within 15 days. Within 15 days of receiving such a response, the county superintendent can submit non-binding recommendations for amending the LCAP or annual update, and such recommendations must be considered by the respective school district at a public hearing within 15 days. A district s LCAP or annual update must be approved by the county superintendent by October 8 of each year if the superintendent determines that (i) the LCAP or annual update adheres to the State template, and (ii) the district s budgeted expenditures are sufficient to implement the actions and strategies outlined in the LCAP. A school district is required to receive additional support if its respective LCAP or annual update thereto is not approved, if the district requests technical assistance from its respective county superintendent, or if the district does not improve student achievement across more than one State priority for one or more student subgroups. Such support can include a review of a district s strengths and weaknesses in the eight State priority areas, or the assignment of an academic expert to help the district identify and implement programs designed to improve outcomes. Assistance may be provided by the California Collaborative for Educational Excellence, a state agency created by the LCFF and charged with assisting school districts achieve the goals set forth in their LCAPs. On or before October 1, 2015, the State Board of Education is required to develop rubrics to assess school district performance and the need for support and intervention. The State Superintendent of Public Instruction (the State Superintendent ) is further authorized, with the approval of the State Board of Education, to intervene in the management of persistently underperforming school districts. The State Superintendent may intervene directly or assign an academic trustee to act on his or her behalf. In so doing, the State Superintendent is authorized (i) to modify a district s LCAP, (ii) impose budget revisions designed to improve student outcomes, and (iii) stay or rescind actions of the local governing board that would prevent such district from improving student outcomes; provided, however, that the State Superintendent is not authorized to rescind an action required by a local collective bargaining agreement. Revenue Limit Funding System. Prior to the implementation of the LCFF, annual State apportionments of basic and equalization aid to school districts for general purposes were computed up to a revenue limit (described below) per unit of ADA. Generally, such apportionments amounted to the difference between the District s revenue limit and the District s local property tax allocation. Revenue 37

46 limit calculations were adjusted annually in accordance with a number of factors designed primarily to provide cost of living increases and to equalize revenues among all of the same type of California school districts (i.e., unified, high school or elementary). State law also provided for State support of specific school related programs, including summer school, adult education, deferred maintenance of facilities, pupil transportation, portable classrooms and other capital outlays and various categorical aids. The State revenue limit was calculated three times a year for each school district. The first calculation was performed for the February 20th First Principal Apportionment, the second calculation for the June 25th Second Principal Apportionment, and the final calculation for the end of the year Annual Principal Apportionment. Calculations were reviewed by the County Office of Education and submitted to the State Department of Education to review the calculations for accuracy, calculate the amount of State aid owed to such school district and notify the State Controller of the amount, who then distributed the State aid. The calculation of the amount of State aid a school district was entitled to receive each year was a five-step process. First, the prior year State revenue limit per ADA was established, with recalculations as are necessary for adjustments for equalization or other factors. Second, the adjusted prior year State revenue limit per ADA was inflated according to formulas based on the implicit price deflator for government goods and services and the statewide average State revenue limit per ADA for the school districts. Third, the current year s State revenue limit per ADA for each school district was multiplied by such school district s ADA for either the current or prior year, whichever is greater. Fourth, revenue limit add-ons were calculated for each school district if such school district qualified for the add-ons. Add-ons included the necessary small school district adjustments, meals for needy pupils and small school district transportation, and were added to the State revenue limit for each qualifying school district. Finally, local property tax revenues were deducted from the State revenue limit to arrive at the amount of State aid based on the State revenue limit each school district was entitled to for the current year. PROPERTY WITHIN THE DISTRICT The information provided in the tables below has been provided by California Municipal Statistics, Inc., an independent consulting firm. Neither the District nor the Underwriter has independently verified this information and does not guarantee its accuracy. The information in this section describes property taxation, assessed valuation, and other measures of the tax base of the District. Though the Certificates are not payable directly from property taxes, a large portion of the District s funding under the LCFF is derived from property taxes, and the District has pledged special taxes received from the CFDs to the payment of the Lease Payments. Assessed Valuations The assessed valuation of property in the District is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the full value of the property, as defined in Article XIIIA of the California Constitution. See CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS herein. A State-reimbursed exemption currently provides a credit of $7,000 of the full value of an owneroccupied dwelling for which application has been made to the County Assessor. The revenue estimated to be lost to local taxing agencies due to the exemption is reimbursed from State sources. Reimbursement is based upon total taxes due upon such exempt value and is not reduced by any amount for estimated or actual delinquencies. 38

47 In addition, certain classes of property such as churches, colleges, not-for-profit hospitals and charitable institutions are exempt from property taxation and do not appear on the tax rolls. No reimbursement is made by the State for such exemptions. The following table presents the historical assessed valuation in the District for the last eleven fiscal years including the annual percent change. The District s total assessed valuation is $4,573,043,851 in fiscal year SAN YSIDRO SCHOOL DISTRICT Summary of Assessed Valuations Fiscal Years through Fiscal Year Local Secured Utility Unsecured Total % Change $2,360,927,573 $197,571,236 $158,727,253 $2,717,226, ,918,498,267 89,373, ,634,415 3,178,506,456 17% ,404,173,293 95,434, ,738,318 3,797,346, ,756,004, ,500, ,570,891 4,160,075, ,344,155, ,600, ,346,242 4,798,102, ,121,710, ,100, ,800,006 4,768,611,149 (0.6) ,009,249, ,600, ,591,242 4,775,441, ,903,852, ,500, ,988,913 4,693,341,521 (1.7) ,702,323, ,100, ,210,968 4,424,634,513 (5.7) ,715,061, ,000, ,987,107 4,419,048,617 (0.1) ,897,158, ,560, ,324,817 4,573,043, Source: California Municipal Statistics, Inc. The table below presents the assessed valuation within the District by jurisdiction. SAN YSIDRO SCHOOL DISTRICT Assessed Valuation by Jurisdiction (1) Assessed Valuation % of Assessed Valuation % of Jurisdiction Jurisdiction: in School District School District of Jurisdiction in School District City of San Diego $4,008,425, % $197,090,226, % Unincorporated San Diego County 564,617, ,063,426, Total District $4,573,043, % San Diego County $4,573,043, % $419,094,352, % (1) Before deduction of redevelopment incremental valuation. Source: California Municipal Statistics, Inc. 39

48 The table below presents the assessed valuation within the District by land use. SAN YSIDRO SCHOOL DISTRICT Assessed Valuation and Parcels by Land Use % of No. of % of Assessed Valuation (1) Total Parcels Total Non-Residential: Agricultural/Rural $ 116,029, % % Commercial 580,987, Vacant Commercial 41,492, Industrial 1,230,975, Vacant Industrial 342,820, Recreational 18,000, Government/Social/Institutional 96,708, Subtotal Non-Residential $2,427,014, % 1, % Residential: Single Family Residence $1,035,535, % 3, % Condominium/Townhouse 135,231, Mobile Home 8,076, Mobile Home Park 9,819, Residential Units 36,266, Residential Units/Apartments 189,554, Miscellaneous Residential Improvements 1,564, Vacant Residential 54,096, Subtotal Residential $1,470,144, % 4, % Total $3,897,158, % 6, % (1) Local Secured Assessed Valuation, excluding tax-exempt property. Source: California Municipal Statistics, Inc. [Remainder of page intentionally left blank] 40

49 The table below sets forth the largest local secured taxpayers within the District in fiscal year SAN YSIDRO SCHOOL DISTRICT Largest Total Secured Taxpayers % of Property Owner Primary Land Use Assessed Valuation Total (1) 1. Chelsea San Diego Finance LLC Shopping Center $211,214, % 2. Otay Greenfield Developers LLC Apartments 153,654, Corrections Corp. of America Correctional Facility 90,804, Casoleil LP Apartments 67,305, TKG San Ysidro Development LLC Shopping Center 50,000, PPF Sudberry Ocean View Hills LP Industrial 38,468, LIT Industrial LP Industrial 35,970, PPF Industrial 2020 Piper Ranch Road LP Industrial 34,482, Kearny PCCP Otay 311 LLC Undeveloped 33,934, Sanyo North America Corp. Industrial 32,000, Pardee Homes Residential Development 30,606, BIT Holding Seventh Inc. Industrial 29,684, Project Bay Exchange LLC TKG SA Commercial 25,000, Airway Diego LLC Industrial 23,692, Brown Field Business Park LP Industrial 23,594, ADESA California LLC Auto Sales 23,426, Shamrock Las Americas West LLC Shopping Center 20,726, Costco Wholesale Corp. Commercial 18,681, Ice II Real Estate LP Industrial 18,485, FLIK Inc. Movie Theater 18,000, $979,731, % (1) total secured assessed valuation: $3,897,158,534. Source: California Municipal Statistics, Inc. [Remainder of page intentionally left blank] 41

50 Tax Rates The following tables set forth typical tax rates levied in two Tax Rate Areas within the District for fiscal years through : SAN YSIDRO SCHOOL DISTRICT Typical Tax Rate per $100 Assessed Valuation TRA 8-215: Within the City of San Diego/ Assessed Valuation: $1,067,007,307 General $ $ $ $ $ $ San Ysidro School District Sweetwater Union High School District Southwestern Community College District City of San Diego Metropolitan Water District Total $ $ $ $ $ TRA 84-35: Within the Unincorporated San Diego County/ Assessed Valuation: $301,453,128 General $ $ $ $ $ $ San Ysidro School District Sweetwater Union High School District Southwestern Community College District Metropolitan Water District Total $ $ $ $ $ $ Source: California Municipal Statistics, Inc. The Teeter Plan The Board of Supervisors of the County has approved the implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the Teeter Plan ), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code. Under the Teeter Plan for the County, the County apportions secured property taxes on an accrual basis when due (irrespective of actual collections) to its local political subdivisions, including the District, for which the County acts as the tax-levying or tax-collecting agency. The Teeter Plan for the County is applicable to all tax levies for which the County acts as the taxlevying or tax-collecting agency, or for which the County Treasury is the legal depository of tax collections. The special taxes to be received by the District from the CFDs are not encompassed within the Teeter Plan. By policy, the County does not include special taxes, assessments, or reassessments in its Teeter Plan. The special taxes received by the District and pledged to the Lease Payments are not included in the County s Teeter Plan. Direct and Overlapping Debt Numerous overlapping local agencies provide public services within the District. These local agencies have outstanding debt issued in the form of general obligation, lease revenue and special tax and assessment bonds. An estimate of direct and overlapping debt of the District is shown in the table below based on information available as of August 1, Tax and revenue anticipation notes, revenue, mortgage revenue and tax allocation bonds, and non-bonded capital lease obligations are excluded from the debt statement. The information provided in the table below has been provided by California 42

51 Municipal Statistics, Inc. The District has not independently verified the information in the table below and does not guarantee its accuracy. The table that follows does not include the Certificates Assessed Valuation: $4,573,043,851 SAN YSIDRO SCHOOL DISTRICT Estimated Direct and Overlapping Bonded Debt as of August 1, 2015 DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 8/1/15 Metropolitan Water District 0.197% $ 217,527 Southwestern Community College District ,189,257 Sweetwater Union High School District ,019,624 San Ysidro School District ,872,132 (1) San Ysidro School District Certificates of Participation ,015,125 (2) California Statewide Communities Development Authority 1915 Act Bonds ,102,014 City of San Diego 1915 Act Bonds ,135,000 Sweetwater Union High School District Community Facilities District No. 5, 8, 9 and ,300,740 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $266,851,419 OVERLAPPING GENERAL FUND DEBT: San Diego County General Fund Obligations 1.091% $ 3,836,720 San Diego County Pension Obligation Bonds ,447,332 San Diego County Superintendent of Schools Obligations ,732 Otay Municipal Water District Certificates of Participation ,120,880 Southwestern Community College District General Fund Obligations ,798 Sweetwater Union High School District Certificates of Participation ,119,674 City of San Diego General Fund Obligations ,895,763 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $33,689,899 Less: Otay Municipal Water District Certificates of Participation 4,120,880 TOTAL NET OVERLAPPING GENERAL FUND DEBT $29,569,019 OVERLAPPING TAX INCREMENT DEBT (Successor Agency): $13,080,580 GROSS COMBINED TOTAL DEBT $313,621,898 (3) NET COMBINED TOTAL DEBT $309,501,018 (1) Excludes accreted interest on capital appreciation bonds. (2) Special taxes levied in Community Facilities Districts No. 1, 2 and 3 are covenanted to support lease payments. The District has covenanted to make lease payments from its general fund to the extent that special tax revenues are not used or insufficient to make debt service payments. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Ratios to Assessed Valuation: Direct Debt ($172,887,257) % Total Direct and Overlapping Tax and Assessment Debt % Gross Combined Total Debt % Net Combined Total Debt % Ratio to Redevelopment Incremental Valuation ($508,309,589): Total Overlapping Tax Increment Debt % Source: California Municipal Statistics, Inc. 43

52 Tax Levies and Delinquencies The table below summarizes the annual secured tax levy within the District as of June 30 for fiscal years through The County has adopted the Teeter Plan. As a result, the District s receipt of property taxes is not subject to delinquencies so long as the Teeter Plan remains in effect. (1) SAN YSIDRO SCHOOL DISTRICT Secured Tax Charges Fiscal Year Secured Tax Charges Levied (1) $14,474, ,501, ,196, ,591, ,486, Represents 1% General Fund apportionment. (2) San Diego County utilizes the Teeter Plan for assessment levy and distribution. This method guarantees distribution of 100% of the assessments levied to the taxing entity, with the County retaining all penalties and interest. Source: California Municipal Statistics, Inc. COUNTY OF SAN DIEGO TREASURER S INVESTMENT POOL Pursuant to State law, substantially all of the District s funds are invested in the County of San Diego Treasurer s Treasury Pool. This section provides a general description of the investment policy, current portfolio holdings and valuation procedures. The information has been taken from information provided by the County Treasurer on its website at Neither the District nor the Underwriter guarantees the accuracy or completeness of this information. Further information may be obtained from the office of the Treasurer-Tax Collector of the County of San Diego, County Administration Center, 1600 Pacific Highway, Room 112, San Diego, California General In accordance with Government Code section et seq., the County Treasurer manages funds deposited with it by the District. The County is required to invest such funds in accordance with California Government Code section et seq. In addition, counties are required to establish their own investment policies which may impose limitations beyond those required by the Government Code. All investments in the County Treasurer s investment portfolio conform to the statutory requirements of Government Code section et seq., authorities delegated by the County Board of Supervisors and the Treasurer s investment policy. For information on the investment policy, see EXHIBIT H County Investment Policy. Pursuant to a resolution adopted July 8, 1958, the Board of Supervisors delegated to the County Treasurer the authority to invest and reinvest funds of the County. Applicable law limits this delegation of authority to a one-year period and must be renewed annually by action of the Board of Supervisors. In addition to funds of the County (and the various departments in the County, such as Public Works and Public Administration), funds of certain local agencies within the County, including school districts in the County, are required under state law to be deposited into County treasury ( Involuntary Depositors ). In addition, certain agencies, including community college districts, invest certain of their funds in the County treasury on a voluntary basis ( Voluntary Depositors and, together with the Involuntary Depositors, the Depositors ). Deposits made by the County and the various local agencies are 44

53 commingled in a pooled investment fund (the Treasury Pool or the Pool ). No particular deposits are segregated for separate investment. Under State law, Depositors in the Pool are permitted to withdraw funds which they have deposited on 30 days notice. The County does not expect that the Pool will encounter liquidity shortfalls based on its current portfolio and investment guidelines or realize any losses that may be required to be allocated among all Depositors in the Pool. The County has established an Oversight Committee pursuant to State law. The members of the Oversight Committee include the County Treasurer, the County Auditor, the County Superintendent of Schools or designee, a representative from special districts, a representative from school districts and community college districts in the County, and members of the public. The role of the Oversight Committee is to review and approve the Investment Policy that is prepared by the County Treasurer. The Treasury Pool s Portfolio As of June 30, 2015, the securities in the Treasury Pool had a market value of $7,521, 104,948 and a book value of $7,517,249,341, for a net unrealized gain of $3,855,607. The effective duration for the Treasury Pool was 0.81 years as of June 30, Duration is a measure of the price volatility of the portfolio and reflects an estimate of the projected increase or decrease in the value of the portfolio based upon a decrease or increase in interest rates. A duration of 0.81 means that, for every one percent increase in interest rates, the market value of the portfolio would decrease by 0.81%. As of June 30, 2015, approximately 6.83% of the total funds in the Pool were deposited by Voluntary Depositors, such as cities and fire districts, 2.60% by non-county funds, 11.91% by community colleges, 39.59% by the County and 39.07% by K-12 school districts. Standard & Poor s Ratings Group maintains ratings on the Pool s ability to meet its financial commitments of AAAf (extremely strong protection against losses and credit defaults) and S1 (low sensitivity to changing market conditions). The ratings reflect only the view of the rating agency and any explanation of the significance of such ratings may be obtained from such rating agency as follows: Standard & Poor s Rating Services, a Division of McGraw-Hill Companies, Inc., 55 Water Street, New York, New York Certain Information Relating to Pool The following table reflects information with respect to the Pool as of the close of business June 30, As described above, a wide range of investments is authorized by state law. Therefore, there can be no assurances that the investments in the Pool will not vary significantly from the investments described below. In addition, the value of the various investments in the Pool will fluctuate on a daily basis as a result of a multitude of factors, including generally prevailing interest rates and other economic conditions. Therefore, there can be no assurance that the values of the various investments in the Pool will not vary significantly from the values described below. In addition, the values specified in the following tables were based upon estimates of market values provided to the County by a third party. Accordingly, there can be no assurance that if these securities had been sold on June 30, 2015, the Pool necessarily would have received the values specified. 45

54 Percent of Portfolio COUNTY OF SAN DIEGO POOLED MONEY FUND as of June 30, 2015 Weighted Average Days to Maturity Yield to Maturity Current Par/Share Book Value Market Price Market Value Accrued Interest Net Unrealized Gain/(Loss) Certificates of Deposit 0.92% % 69,363,000 $ 69,363, $ 69,363,000 $ 2,408 $ 0 Commercial Paper ,870,000,000 1,868,504, ,868,576,563 0 (925,113) Fannie Mae ,668, ,739, ,846,494 1,972,885 1,107,248 Federal Farm Credit Bank Notes ,000, ,757, ,822, ,429 64,580 Federal Home Loan Bank Notes ,018,050,000 1,019,467, ,020,412,980 1,233, ,216 Federal Home Loan Mortgage Corp , ,000, ,982, ,708,600 1,190, ,132 Money Market Funds ,255, ,255, ,360,105 16, ,105 Negotiable Certificates of Deposit ,094,700,000 2,094,703, ,094,700,000 1,308,286 (3,057) Repurchase Agreements ,999,406 8,999, ,999,406 (2) 0 Supranationals ,000, ,912, ,995, ,264 82,551 US Treasury Notes , ,000, ,564, ,320,300 1,453,974 1,755,945 Totals for June % % 7,512,035,406 $7,517,249, $7,521,104,948 $7,740,009 $3,855,607 Totals for May ,921,579,053 7,927,421, ,933,537,946 10,276,009 6,116,238 Change from prior month (409,543,647) (410,172,368) (412,432,998) (2,536,000) (2,260,631) Portfolio Effective Duration 0.81 years Source: County of San Diego. 46

55 STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES Articles XIIIA, XIIIB, XIIIC and XIIID of the Constitution, Propositions 22, 39, 46, 49, 98, 111, and 1A, and certain other provisions of law discussed below, are discussed in this section to describe the potential effect of these Constitutional and statutory measures on the ability of the District to levy taxes and spend tax proceeds for operating and other purposes, and it should not be inferred from the inclusion of such materials that these laws impose any limitation on the ability of the District to levy ad valorem taxes for payment of the Certificates. The tax levied by the County for payment of the Certificates was approved by the District s voters in compliance with Article XIIIA, Article XIIIC, and all applicable laws. Article XIIIA On June 6, 1978, California voters approved an amendment (commonly known as both Proposition 13 and the Jarvis-Gann Initiative) to the California Constitution. This amendment, which added Article XIIIA to the California Constitution, among other things affects the valuation of real property for the purpose of taxation in that it defines the full cash property value to mean the county assessor s valuation of real property as shown on the 1975/76 tax bill under full cash value, or thereafter, the appraised value of real property newly constructed, or when a change in ownership has occurred after the 1975 assessment. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or a reduction in the consumer price index or comparable local data at a rate not to exceed 2% per year, or reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The amendment further limits the amount of any ad valorem tax on real property to 1% of the full cash value except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978 by two-thirds of the votes cast by the voters voting on the proposition. Legislation enacted by the California Legislature to implement Article XIIIA provides that all taxable property is shown at full assessed value as described above. In conformity with this procedure, all taxable property value included in this Official Statement (except as noted) is shown at 100% of assessed value and all general tax rates reflect the $1 per $100 of taxable value. Tax rates for voter approved bonded indebtedness and pension liability are also applied to 100% of assessed value. Future assessed valuation growth allowed under Article XIIIA (new construction, change of ownership, 2% annual value growth) will be allocated on the basis of situs among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and school districts will share the growth of base revenue from the tax rate area. Each year s growth allocation becomes part of each agency s allocation the following year. The District is unable to predict the nature or magnitude of future revenue sources that may be provided by the State to replace lost property tax revenues. Article XIIIA effectively prohibits the levying of any other ad valorem property tax above the 1% limit except for taxes to support indebtedness approved by the voters as described above. Article XIIIB On November 6, 1979, California voters approved Proposition 4, the so-called Gann Initiative, which added Article XIIIB to the California Constitution. In June 1990, Article XIIIB was amended by the voters through their approval of Proposition 111. Article XIIIB of the California Constitution limits the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the state to the level of appropriations for the prior fiscal year, as adjusted annually for changes in the cost of living, population and services rendered by the governmental entity. The base year for establishing such appropriation limit is the fiscal year. Increases in appropriations by a governmental entity are also permitted (a) if financial responsibility for providing services is transferred to the governmental entity, or (b) for emergencies so long as the appropriations limits for the three years following the emergency are 47

56 reduced to prevent any aggregate increase above the Constitutional limit. Decreases are required where responsibility for providing services is transferred from the government entity. Appropriations subject to Article XIIIB include generally any authorization to expend during the fiscal year the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. Appropriations subject to limitation pursuant to Article XIIIB do not include debt service on indebtedness existing or legally authorized as of January 1, 1979 on bonded indebtedness thereafter approved according to law by a vote of the electors of the issuing entity voting in an election for such purpose, appropriations required to comply with mandates of courts or the Federal government, appropriations for qualified outlay projects, and appropriations by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. Proceeds of taxes include, but are not limited to, all tax revenues and the proceeds to any entity of government from (a) regulatory licenses, user charges, and user fees to the extent such proceeds exceed the cost of providing the service or regulation, (b) the investment of tax revenues and (c) certain State subventions received by local governments. Article XIIIB includes a requirement that if an entity s revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two fiscal years. As amended in June 1990, the appropriations limit for local governments in each year is based on the limit for the prior year, adjusted annually for changes in the costs of living and changes in population, and adjusted, where applicable, for transfer of financial responsibility of providing services to or from another unit of government. The change in the cost of living is, at the local government s option, either (i) the percentage change in California per capita personal income, or (ii) the percentage change in the local assessment roll for the jurisdiction due to the addition of nonresidential new construction. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college ( K-14 ) districts. As amended by Proposition 111, the appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate proceeds of taxes received by the District over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years. Any proceeds of taxes received by the District in excess of the appropriations limit are absorbed into the State s allowable limit. The District does not currently have and does not anticipate having proceeds of taxes in excess of its appropriations limit. Article XIIIB permits any government entity to change the appropriations limit by vote of the electorate in conformity with statutory and Constitutional voting requirements, but any such voter-approved change can only be effective for a maximum of four years. Pursuant to statute, if a school district receives any proceeds of taxes in excess of its appropriations limit, it may, by resolution of the governing board, increase its appropriations limit to equal the amount received, provided that the State has sufficient excess appropriations limit in that fiscal year. Articles XIIIC and XIIID On November 5, 1996, California voters approved Proposition 218 Voters Approval for Local Government Taxes Limitation on Fees, Assessments, and Charges Initiative Constitutional Amendment. Proposition 218 added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and propertyrelated 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 maybe assessed on property other than ad valorem property taxes imposed in accordance 48

57 with Articles XIII and XIIIA of the California 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. A portion of the District s revenues are received annually from property taxes. The State Constitution and the laws of the State impose a mandatory, statutory duty on the County Treasurer and Tax Collector to levy a property tax sufficient to pay debt service on the District s general obligation bonds coming due in each year. There is no court case which directly addresses whether the initiative power may be used to reduce or repeal the ad valorem taxes pledged to repay general obligation bonds. See DISTRICT FINANCIAL MATTERS State Funding of Education. In the case of Bighorn- Desert View Water Agency v. Virjil (Kelley) (the Bighorn Decision ), the California Supreme Court held that water service charges may be reduced or repealed through a local voter initiative subject to Article XIIIC. The Supreme Court did state that it was not holding that the initiative power is free of all limitations. Such initiative power could be subject to the limitations imposed on the impairment of contracts under the contract clause of the United States Constitution. Legislation adopted in 1997 provides that Article XIIIC shall not be construed to mean that any owner or beneficial owner of a municipal security assumes the risk of or consents to any initiative measure that would constitute an impairment of contractual rights under the contracts clause of the U.S. Constitution. On November 2, 2010, voters in the State approved Proposition 26. Proposition 26 amends Article XIIIC of the State Constitution to expand the definition of tax to include any levy, charge, or exaction of any kind imposed by a local government except the following: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property; (5) a fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law; (6) a charge imposed as a condition of property development; and (7) assessments and property-related fees imposed in accordance with the provisions of Article XIIID. Proposition 26 provides that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor s burdens on, or benefits received from, the governmental activity. 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 existing laws relating to the imposition of fees or charges as a condition of property development; however it is not clear whether the initiative power is therefore unavailable to repeal or reduce developer and mitigation fees imposed by the District. No developer fees imposed by the District are pledged or expected to be used to make payments with respect to the Certificates. The provisions of Article XIIIC and XIIID may have an indirect effect on the District, such as by limiting or reducing the revenues otherwise available to other local governments whose boundaries encompass property located within the District thereby causing such local governments to reduce service levels and possibly adversely affecting the value of property within the District. 49

58 The interpretation and application of Proposition 218 will ultimately be determined by the courts with respect to a number of matters discussed above, and it is not possible at this time to predict with certainty the outcome of such determination. Unitary Property Some amount of property tax revenue of the District is derived from utility property which is considered part of a utility system with components located in many taxing jurisdictions ( unitary property ). Under the State Constitution, such property is assessed by the State Board of Equalization ( SBE ) as part of a going concern rather than as individual pieces of real or personal property. State-assessed unitary and certain other property is allocated to the counties by SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the District) according to statutory formulae generally based on the distribution of taxes in the prior year. Proposition 46 On June 3, 1986, California voters approved Proposition 46, which provided an additional exemption to the 1% tax limitation imposed by Article XIIIA. Under this amendment to Article XIIIA, local governments and school districts may increase the property tax rate above 1% for the period necessary to retire new general obligation bonds, if two-thirds of those voting in a local election approve the issuance of such bonds and the money raised through the sale of the bonds is used exclusively to purchase or improve real property. Proposition 39 On November 7, 2000, California voters approved Proposition 39, called the Smaller Classes, Safer Schools and Financial Accountability Act (the Smaller Classes Act ) which amends Section 1 of Article XIIIA, Section 18 of Article XVI of the California Constitution and Section of the California Education Code and allows an alternative means of seeking voter approval for bonded indebtedness by 55 percent of the vote, rather than the two-thirds majority required under Section 18 of Article XVI of the Constitution. The 55 percent voter requirement applies only if the bond measure submitted to the voters includes, among other items: (1) a restriction that the proceeds of the bonds may be used for the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of school facilities, or the acquisition or lease of real property for school facilities, (2) a list of projects to be funded and a certification that the school district board has evaluated safety, class size reduction, and information technology needs in developing that list and (3) that annual, independent performance and financial audits will be conducted regarding the expenditure and use of the bond proceeds. Section 1(b)(3) of Article XIIIA has been added to exempt from the one percent ad valorem tax limitation under Section 1(a) of Article XIIIA of the Constitution levies to pay bonds approved by the 55 percent of the voters, subject to the restrictions explained above. The Legislature enacted AB 1908, Chapter 44, which became effective upon passage of Proposition 39 and amends various sections of the Education Code. Under amendments to Section and of the Education Code, the following limits on ad valorem taxes apply in any single election: (1) for a school district, indebtedness shall not exceed $30 per $100,000 of taxable property, (2) for a unified school district, indebtedness shall not exceed $60 per $100,000 of taxable property, and (3) for a community college district, indebtedness shall not exceed $25 per $100,000 of taxable property. Finally, AB 1908 requires that a citizens oversight committee must be appointed to review the use of the bond funds and inform the public about their proper usage. 50

59 Propositions 98 and 111 On November 8, 1988, California voters approved Proposition 98, a combined initiative, constitutional amendment and statute called the Classroom Instructional Improvement and Accountability Act ( Proposition 98 ). Proposition 98 changed State funding of public education below the university level and the operation of the State s appropriations limit, primarily by guaranteeing K-14 schools a minimum share of State General Fund revenues. Under Proposition 98 (as modified by Proposition 111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater of (a) 40.9% of State General Fund revenues (the first test ), or (b) the amount appropriated to K-14 schools in the prior year, adjusted for changes in the cost-ofliving (measured as in Article XIIIB by reference to per capita personal income) and enrollment (the second test ), or (c) a third test which would replace the second test in any year when the percentage growth in per capita State General Fund revenues from the prior year plus 1/2 of 1% is less than the percentage growth in California per capita personal income. Under the third test, schools would receive the amount appropriated in the prior year adjusted for changes in enrollment and per capita State General Fund revenues, plus an additional small adjustment factor. If the third test is used in any year, the difference between the third test and the second test would become a credit to schools which would be paid in future years when State General Fund revenue growth exceeds personal income growth. Proposition 98 permits the Legislature by two-thirds vote of both houses, with the Governor s concurrence, to suspend the K-14 schools minimum funding formula for a one-year period, and any corresponding reduction in funding for that year will not be paid in subsequent years. However, in determining the funding level for the succeeding year, the formula base for the prior year will be reinstated as if such suspension had not taken place. In certain fiscal years, the State Legislature and the Governor have utilized this provision to avoid having the full Proposition 98 funding paid to support K-14 schools. Proposition 98 also changes how tax revenues in excess of the State Appropriations Limit are distributed. Excess tax revenues are determined based on a two-year cycle, so that the State could avoid having to return to taxpayers excess tax revenues in one year if its appropriations in the next fiscal year were under its limit. After any two-year period, if there are excess State tax revenues, 50% of the excess would be transferred to K-14 schools with the balance returned to taxpayers. Further, any excess State tax revenues transferred to K-14 schools are not built into the school districts base expenditures for calculating their entitlement for State aid in the next year, and the State s appropriations limit will not be increased by this amount. Since Proposition 98 is unclear in some details, there can be no assurance that the Legislature or a court might not interpret Proposition 98 to require a different percentage of State General Fund revenues to be allocated to K-14 districts, or to apply the relevant percentage to the State s budgets in a different way than is proposed in the Governor s Budget. In any event, some fiscal observers expect Proposition 98 to place increasing pressure on the State s budget over future years, potentially reducing resources available for other State programs, especially to the extent the Article XIIIB spending limit would restrain the State ability to fund such other programs by raising taxes. The application of Proposition 98 and other statutory regulations has become increasingly difficult to predict accurately in recent years. One major reason is that Proposition 98 minimums under the first test and the second test described above are dependent on State General Fund revenues. In several recent fiscal years, the State made actual allocations to K-14 districts based on an assumption of State General Fund revenues at a level above that which was ultimately realized. In such years, the State has considered the amounts appropriated above the minimum as a loan to K-14 districts, and has deducted the value of these loans from future years estimated Proposition 98 minimums. 51

60 Proposition 1A and Proposition 22 On November 2, 2004, California voters approved Proposition 1A, which amends the State Constitution to significantly reduce the State s authority over major local government revenue sources. Under Proposition 1A, the State cannot (i) reduce local sales tax rates or alter the method of allocating the revenue generated by such taxes, (ii) shift property taxes from local governments to schools or community colleges, (iii) change how property tax revenues are shared among local governments without two-third approval of both houses of the State Legislature or (iv) decrease Vehicle License Fee revenues without providing local governments with equal replacement funding. Beginning in , the State may shift to schools and community colleges a limited amount of local government property tax revenue if certain conditions are met, including: (i) a proclamation by the Governor that the shift is needed due to a severe financial hardship of the State, and (ii) approval of the shift by the State Legislature with a two-thirds vote of both houses. Under such a shift, the State must repay local governments for their property tax losses, with interest, within three years. Proposition 1A does allow the State to approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also amends the State Constitution to require the State to suspend certain State laws creating mandates in any year that the State does not fully reimburse local governments for their costs to comply with the mandates. This provision does not apply to mandates relating to schools or community colleges or to those mandates relating to employee rights. Many of the provisions of Proposition 1A have been superseded by Proposition 22 enacted in November Proposition 22, The Local Taxpayer, Public Safety, and Transportation Protection Act, approved by the voters of the State on November 2, 2010, prohibits the State from enacting new laws that require redevelopment agencies to shift funds to schools or other agencies and eliminates the State s authority to shift property taxes temporarily during a severe financial hardship of the State. In addition, Proposition 22 restricts the State s authority to use State fuel tax revenues to pay debt service on state transportation bonds, to borrow or change the distribution of state fuel tax revenues, and to use vehicle license fee revenues to reimburse local governments for state mandated costs. Proposition 22 impacts resources in the State s general fund and transportation funds, the State s main funding source for schools and community colleges, as well as universities, prisons and health and social services programs. According to an analysis of Proposition 22 submitted by the Legislative Analyst s Office (the LAO ) on July 15, 2010, the longer-term effect of Proposition 22, according to the LAO analysis, will be an increase in the State s general fund costs by approximately $1 billion annually for several decades. On December 30, 2011, the California Supreme Court issued its decision in the case of California Redevelopment Association v. Matosantos, which resulted in all redevelopment agencies in California being dissolved on February 1, 2012, and the property tax revenue which previously flowed to the redevelopment agencies is now instead going to other local governments, including school districts. It is likely that the dissolution of redevelopment agencies has mooted the effects of Proposition 22. Proposition 30 On November 6, 2012, voters approved the Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment (also known as Proposition 30 ), which temporarily increases the State Sales and Use Tax and personal income tax rates on higher incomes. Proposition 30 temporarily imposes an additional tax on all retailers, at the rate of 0.25% of gross receipts from the sale of all tangible personal property sold in the State from January 1, 2013 to December 31, Proposition 30 also imposes an additional excise tax on the storage, use, or other consumption in the State of tangible personal property purchased from a retailer on and after January 1, 2013 and before January 1, 2017, for storage, use, or other consumption in the State. This excise tax will be levied at a rate of 0.25% of the sales price of the property so purchased. For personal income taxes imposed beginning in the taxable year commencing January 1, 2012 and ending January 1, 2019, Proposition 30 increases the marginal personal 52

61 income tax rate by: (i) 1% for taxable income over $250,000 but less than $300,000 for single filers (over $340,000 but less than $408,000 for joint filers), (ii) 2% for taxable income over $300,000 but less than $500,000 for single filers (over $408,000 but less than $680,000 for joint filers), and (iii) 3% for taxable income over $500,000 for single filers (over $608,000 for joint filers). The revenues generated from the temporary tax increases will be included in the calculation of the Proposition 98 minimum funding guarantee for school districts and community college districts. See Propositions 98 and 111. From an accounting perspective, the revenues generated from the temporary tax increases will be deposited into the State account created pursuant to Proposition 30 called the Education Protection Account (the EPA ). Pursuant to Proposition 30, funds in the EPA will be allocated quarterly, with 89% of such funds provided to schools districts and 11% provided to community college districts. The funds will be distributed to school districts and community college districts in the same manner as existing unrestricted per-student funding, except that no school district will receive less than $200 per unit of ADA and no community college district will receive less than $100 per full time equivalent student. The governing board of each school district and community college district is granted sole authority to determine how the moneys received from the EPA are spent, provided that, the appropriate governing board is required to make these spending determinations in open session at a public meeting and such local governing boards are prohibited from using any funds from the EPA for salaries or benefits of administrators or any other administrative costs. Proposition 2 On November 4, 2014, voters approved the Rainy Day Budget Stabilization Fund Act (also known as Proposition 2 ). Proposition 2 is a legislatively-referred constitutional amendment which makes certain changes to State budgeting practices, including substantially revising the conditions under which transfers are made to and from the State s Budget Stabilization Account (the BSA ) established by the California Balanced Budget Act of 2004 (also known as Proposition 58). Under Proposition 2, and beginning in fiscal year and each fiscal year thereafter, the State will generally be required to annually transfer to the BSA an amount equal to 1.5% of estimated State general fund revenues (the Annual BSA Transfer ). Supplemental transfers to the BSA (a Supplemental BSA Transfer ) are also required in any fiscal year in which the estimated State general fund revenues that are allocable to capital gains taxes exceed 8% of total estimated general fund tax revenues. Such excess capital gains taxes net of any portion thereof owed to K-14 school districts pursuant to Proposition 98 will be transferred to the BSA. Proposition 2 also increases the maximum size of the BSA to an amount equal to 10% of estimated State general fund revenues for any given fiscal year. In any fiscal year in which a required transfer to the BSA would result in an amount in excess of the 10% threshold, Proposition 2 requires such excess to be expended on State infrastructure, including deferred maintenance. For the first 15 year period ending with fiscal year , Proposition 2 provides that half of any required transfer to the BSA, either annual or supplemental, must be appropriated to reduce certain State liabilities, including making certain payments owed to K-14 school districts, repaying State interfund borrowing, reimbursing local governments for State mandated services, and reducing or prefunding accrued liabilities associated with State-level pension and retirement benefits. Following the initial 15-year period, the Governor and the Legislature are given discretion to apply up to half of any required transfer to the BSA to the reduction of such State liabilities. Any amount not applied towards such reduction must be transferred to the BSA or applied to infrastructure, as described above. Proposition 2 changes the conditions under which the Governor and the Legislature may draw upon or reduce transfers to the BSA. The Governor does not retain unilateral discretion to suspend transfers the BSA, nor does the Legislature retain discretion to transfer funds from the BSA for any reason, as previously provided by law. Rather, the Governor must declare a budget emergency, defined as a an emergency within the meaning of Article XIIIB of the Constitution or a determination that estimated resources are inadequate to 53

62 fund State general fund expenditures, for the current or ensuing fiscal year, at a level equal to the highest level of State spending within the three immediately preceding fiscal years. Any such declaration must be followed by a legislative bill providing for a reduction or transfer. Draws on the BSA are limited to the amount necessary to address the budget emergency, and no draw in any fiscal year may exceed 50% of funds on deposit in the BSA unless a budget emergency was declared in the preceding fiscal year. Proposition 2 also requires the creation of the Public School System Stabilization Account (the PSSSA ) into which transfers will be made in any fiscal year in which a Supplemental BSA Transfer is required (as described above). Such transfer will be equal to the portion of capital gains taxes above the 8% threshold that would be otherwise paid to K-14 school districts as part of the minimum funding guarantee. A transfer to the PSSSA will only be made if certain additional conditions are met, as follows: (i) the minimum funding guarantee was not suspended in the immediately preceding fiscal year, (ii) the operative Proposition 98 formula for the fiscal year in which a PSSSA transfer might be made is Test 1, (iii) no maintenance factor obligation is being created in the budgetary legislation for the fiscal year in which a PSSSA transfer might be made, (iv) all prior maintenance factor obligations have been fully repaid, and (v) the minimum funding guarantee for the fiscal year in which a PSSSA transfer might be made is higher than the immediately preceding fiscal year, as adjusted for ADA growth and cost of living. Proposition 2 caps the size of the PSSSA at 10% of the estimated minimum guarantee in any fiscal year, and any excess funds must be paid to K-14 school districts. Reductions to any required transfer to the PSSSA, or draws on the PSSSA, are subject to the same budget emergency requirements described above. However, Proposition 2 also mandates draws on the PSSSA in any fiscal year in which the estimated minimum funding guarantee is less than the prior year s funding level, as adjusted for ADA growth and cost of living. Jarvis v. Connell On May 29, 2002, the California Court of Appeal for the Second District decided the case of Howard Jarvis Taxpayers Association, et al. v. Kathleen Connell (as Controller of the State of California). The Court of Appeal held that either a final budget bill, an emergency appropriation, a self-executing authorization pursuant to state statutes (such as continuing appropriations) or the California Constitution or a federal mandate is necessary for the State Controller to disburse funds. The foregoing requirement could apply to amounts budgeted by the District as being received from the State. To the extent the holding in such case would apply to State payments reflected in the District s budget, the requirement that there be either a final budget bill or an emergency appropriation may result in the delay of such payments to the District if such required legislative action is delayed, unless the payments are self-executing authorizations or are subject to a federal mandate. On May 1, 2003, the California Supreme Court upheld the holding of the Court of Appeal, stating that the Controller is not authorized under State law to disburse funds prior to the enactment of a budget or other proper appropriation, but under federal law, the Controller is required, notwithstanding a budget impasse and the limitations imposed by State law, to timely pay those State employees who are subject to the minimum wage and overtime compensation provisions of the federal Fair Labor Standards Act. Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC, Article XIIID, and Propositions 22, 26, 30, 39, 46, 98, 111 and 1A were each adopted as measures that qualified for the ballot pursuant to California s initiative process. From time to time other initiative measures could be adopted, further affecting school districts revenues or such districts ability to expend revenues. There can be no assurance that the California electorate will not at some future time adopt other initiatives or that the Legislature will not enact legislation that will amend the laws or the Constitution of the State of California resulting in a reduction of amounts legally available to the District. 54

63 STATE OF CALIFORNIA FISCAL ISSUES The following information concerning the State s budgets has been obtained from publicly available information which neither the District nor the Underwriter believe to be reliable; however, neither the District nor the Underwriter guarantee the accuracy or completeness of this information and has not independently verified such information. General Overview Recent Financial Stress on State Budget. In 2008, the State began experiencing the most significant economic downturn and financial pressure since the Great Depression of the 1930s. Despite the recent significant budgetary improvements, there remain a number of major risks and pressures that threaten the State s financial condition, including the need to repay approximately $5.0 billion of obligations which were deferred to balance budgets during the economic downturn and large unfunded liabilities now totaling approximately $222 billion for PERS, STRS and the State s retiree healthcare benefits plan. In addition, the State s revenues (particularly the personal income tax) can be volatile and correlate to overall economic conditions. There can be no assurances that the State will not face fiscal stress and cash pressures again, or that other changes in the State or national economies will not materially adversely affect the financial condition of the State. See State Budget below. Cash Management by State and Impact on Schools. To conserve cash in light of declining revenues, the State enacted several statutes deferring the payment of amounts owed to public schools, until a later date in the then current, or in a then subsequent, fiscal year. This technique was used in all of the State s budget bills from fiscal year through fiscal year Some of these statutory deferrals were made permanent, and others were implemented only for one fiscal year. These deferrals reduced amounts paid to K-12 districts and resulted in deferred payments that at one point totaled more than $10 billion. These deferrals also created cash flow shortages for certain K-12 districts which required an increased level of cash flow borrowings. The Budget repays approximately $4.7 billion in such deferrals and the Governor proposes to repay the remaining $1.0 billion of deferrals in fiscal year See State Budget and State Budget. State Budgets The District s principal funding formulas and revenue sources are derived from the budget of the State of California. The following information concerning the State of California s budgets has been obtained from publicly available information which the District believes to be reliable; however, the State has not entered into any contractual commitment with the District, the County, the Underwriter, Special and Disclosure Counsel nor the owners of the Certificates to provide State budget information to the District or the owners of the Certificates. Although they believe the State sources of information listed above are reliable, none of the District, Special and Disclosure Counsel nor the Underwriter assume any responsibility for the accuracy of the State budget information set forth or referred to herein or incorporated by reference herein. Additional information regarding State budgets is available at various State-maintained websites including which website is not incorporated herein by reference State Budget. The Governor signed the State Budget for fiscal year ( the State Budget ) into law on June 20, The State Budget reduced State debt by more than $10 billion by paying down deferrals to K-12 schools by $5 billion, paying off the Economic Recovery Bonds, repaying various special fund loans and funding $100 million in mandate claims that had been owed to local governments. The State Budget also set forth a plan of shared responsibility among the State, school districts and teachers to shore up STRS, the teacher s pension system. By increasing teacher contributions over the next decades from 19.3 percent to 37.5 percent under the State Budget, STRS unfunded liability was projected to be eliminated by The legislature placed a Constitutional amendment (the 55

64 Rainy Day Fund ) on the November ballot that required both saving for a rainy day and the pay down of liabilities. The Constitutional amendment was approved by the voters at the November 2014 election. Deposits to a rainy day fund are now required whenever capital gains revenues rise to more than eight percent of general fund tax revenues and 1.5 percent of general fund revenues will be aside annually. Deposits to the Rainy Day Fund are limited to 10 percent of general fund revenues. In addition, a Proposition 98 reserve has been created to smooth school spending and avoid future cuts. See -Rainy Day Fund and -SB 858 below. The State Budget included total K-12 education funding of $76.6 billion ($45.3 general fund and $31.3 billion other funds). The State Budget included Proposition 98 funding of $60.9 billion for , an increase of $5.6 billion over the 2013 Budget Act level. When combined with increases of $4.4 billion in and , the State Budget provided a $10 billion increased investment in K-14 education. Proposition 98 funding for K-12 education grew by more than $12 billion from the fiscal year to the fiscal year, representing an increase of more than $1,900 per student. Significant features of the State Budget impacting K-12 education included: Local Control Funding Formula - An increase of $4.75 billion Proposition 98 funding to continue the transition to LCFF closing the remaining funding implementation gap by more the 29 percent. K-12 Deferrals - The Budget repaid nearly $4.7 billion Proposition 98 funding for K-12 expenses. Independent Study - The Budget streamlined the existing independent study program, reduced administrative burdens and freed up time for teachers to spend on student instruction and support, while making it easier for schools to offer and expand instructional opportunities available to students through non-classroom based instruction. K-12 Mandates - An increase of $400.5 million in one-time Proposition 98 funding to reimburse K-12 local educational agencies for the costs of State-mandated programs. K-12 High-Speed Internet Access - An increase of $26.7 million in one-time Proposition 98 funding for the K-12 High Speed Network to provide technical assistance and grants to local educational agencies to address Common Core implementation with funds targeted to those local educational agencies most in need of help securing internet connectivity and infrastructure to implement Common Core. Career Technical Education Pathways Program - An increase of $250 million in one-time Proposition 98 funding to support a second cohort of competitive grants for participating K- 14 local educational agencies. Child Care and State Preschool Slots - $57 million general fund and $30 million Proposition 98 funding for 500 slots for the Alternative Payment program, 1,000 slots for General Child Care, 7,500 part-day State Preschool slots, and 7,500 part-day wrap around care slots. Rainy Day Fund. The State Budget proposed certain constitutional amendments to the Rainy Day Fund on the November 2014 ballot, which proposition was approved by the voters. Such constitutional amendments (i) required deposits into the Rainy Day Fund whenever capital gains revenues rise to more than eight percent of general fund tax revenues (and the State Budget noted that capital gains revenues were expected to account for approximately 9.8% of general fund revenues in fiscal year ); (ii) set the maximum size of the Rainy Day Fund at 10% of general fund revenues; (iii) for the next 15 years, required half of each year s deposit to be used for supplemental payments to pay down the budgetary debts or other long-term liabilities and, thereafter, required at least half of each year s deposit to be saved and the remainder 56

65 used for supplemental debt payments or savings; (iv) allowed the withdrawal of funds only for a disaster or if spending remains at or below the highest level of spending from the past three years; (v) required the State to provide a multiyear budget forecast; and (vi) created a Proposition 98 reserve (the Public School System Stabilization Account) to set aside funds in good years to minimize future cuts and smooth school spending. The State may deposit amounts into such account only after it has paid all amounts owing to school districts relating to the Proposition 98 maintenance factor for fiscal years prior to fiscal year The State, in addition, may not transfer funds to the Public School System Stabilization Account unless the State is in a Test 1 year under Proposition 98 or in any year in which a maintenance factor is created. SB 858. As part of the State Budget, the Governor signed Senate Bill 858 ( SB 858 ) which includes provisions which could limit the amount of reserves that may be maintained by a school district in certain circumstances. Such provisions became effective when the State voters approved the constitutional amendments relating to the Rainy Day Fund described above. Under SB 858, in any fiscal year immediately following a fiscal year in which the State has made a transfer into the Public School System Stabilization Account, any adopted or revised budget by a school district would need to contain a combined unassigned and assigned ending fund balance that (a) for school districts with an ADA of less than 400,000, is not more than two times the amount of the reserve for economic uncertainties mandated by the Education Code, or (b) for school districts with an A.D.A. that is more than 400,000, is not more than three times the amount of the reserve for economic uncertainties mandated by the Education Code. In certain cases, the county superintendent of schools may grant a school district a waiver from this limitation on reserves for up to two consecutive years within a three-year period if there are certain extraordinary fiscal circumstances. The District, which has an A.D.A. of less than 400,000, is required to maintain a reserve for economic uncertainty in an amount equal to 3% of its general fund expenditures and other financing uses. The District s estimated actual financial results for fiscal year projected total expenditures and other financing uses of approximately $45.5 million, 3% of which is approximately $1.35 million. The estimated maximum amount permitted under SB 858 in fiscal year , if SB 848 were in effect for such fiscal year, would be approximately $2.7 million. The District s estimated actual financial results for fiscal year projects a combined assigned and unassigned ending fund balance of approximately $6.3 million, which is approximately $3.6 million more than the maximum that would be permitted under SB 858 if SB 858 were in effect. SB 858 would not adversely affect the payment of principal of and interest with respect to the Certificates as and when due. See DISTRICT FINANCIAL INFORMATION- Budgeting Procedures above for information relating to the District s adopted budget State Budget. On June 24, 2015, Governor Brown signed the fiscal year budget for the State (the State Budget ). The State Budget includes general fund revenues and transfers of $11.3 billion in and $115 billion in Total general fund expenditures under the State Budget are $114.4 billion in and $115.3 billion in As of the close of , the Rainy Day Fund will have a balance of approximately $3.5 billion. The State Budget includes certain provisions to address poverty in the State including an Earned Income Tax Credit for the poorest residents as well as Medi-Cal coverage for all financially eligible children without regard to immigration status. In addition, $1.8 billion in one time resources are included for various State-wide drought-related activities. $1 billion in deferrals of apportionments to schools and community colleges will be repaid, the final $15 billion payment on the Economic Recovery Bonds will be made and local governments will be paid $533 million in mandate reimbursements. Total K-12 funding under the Budget is $83.2 billion ($49.7 general fund and $33.5 billion other funds). Total K-12 per-pupil funding is increased by more than $3,000 per student over funding levels to reach $9,942 in Proposition 98 funding is increased by $7.6 billion over levels in with $68.4 billion in An additional $5.994 billion is committed to the LCFF to eliminate an estimated 51.5% of the remaining funding gap to full implementation of the LCFF. 57

66 Significant features of the State Budget pertaining to K-12 education are as follows: Local Control Funding Formula - An increase of $6 billion Proposition 98 funding to continue the State s landmark transition to the Local Control Funding Formula. This formula commits most new funding to districts serving English language learners, students from low-income families, and youth in foster care. This increase will close the remaining funding implementation gap by more than 51 percent. Career Technical Education - Career Technical Education (CTE) Incentive Grant Program provides $400 million, $300 million, and $200 million Proposition 98 funding in , , and , respectively, for local education agencies to establish new or expand high - quality CTE programs including a required local match. Priority will go to school districts that : (1) are establishing new programs; (2) serve a large number of English-learner, low-income, or foster youth students; (3) serve pupil groups with higher-than-average dropout rates; or (4) are located in areas of high unemployment. Educator Support - $500 million one-time Proposition 98 funding for educator support. $490 million for activities that promote educator quality and effectiveness, including beginning teacher and administrator support and mentoring, support for teachers who have been identified as needing improvement, and professional development that is aligned to the state cademic content standards. Additionally, $10 million is provided for the K-12 High Speed Network to provide professional development and technical assistance to local educational agencies related to network management. Special Education - $60.1 million Proposition 98 funding ($50.1 million ongoing and $10 million one-time) to implement selected program changes recommended by the California Statewide Special Education Task Force, making targeted investments that improve service delivery and outcomes for all disabled students, with a particular emphasis on early education. K-12 High Speed Internet Access - $50 million in one-time Proposition 98 funding to support additional investments in internet connectivity and infrastructure. to further upgrade internet infrastructure to reflect the increasing role that technology plays in classroom operations to support teaching and learning. K-12 Mandates - An increase of $3.2 billion in one-time Proposition 98 funding to reimburse K- 12 local educational agencies for the costs of state-mandated programs. These funds will make a significant down payment on outstanding mandate debt, while providing school districts, county offices of education, and charter schools with discretionary resources to support critical investments such as Common Core implementation. K-12 Deferrals - $897 million Proposition 98 General Fund to eliminate deferrals consistent with the revenue trigger included in the State Budget. Full-Day State Preschool An increase of $34.3 million ($30.9 million Proposition 98, $3.5 million General Fund) to provide access to full-day State Preschool for an additional 7,030 children from low-income working families. In addition, $145 million will shift from General Child Care to State Preschool to allow full-day State Preschool providers that are local educational agencies to access a single funding stream (Proposition 98) in their full-day State Preschool contracts. 58

67 Future Actions The District cannot predict what actions will be taken in the future by the State legislature and the Governor to address changing State revenues and expenditures. The District also cannot predict the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions or results could produce a significant shortfall of revenue and cash, and could consequently impair the State s ability to fund schools. State budget shortfalls in future fiscal years may also have an adverse financial impact on the financial condition of the District. State Dissolution of Redevelopment Agencies On December 30, 2011, the California Supreme Court issued its decision in the case of California Redevelopment Association v. Matosantos ( Matosantos ), finding ABx1 26, a trailer bill to the State budget, to be constitutional. As a result, all Redevelopment Agencies in California ceased to exist as a matter of law on February 1, The Court in Matosantos also found that ABx1 27, a companion bill to ABx1 26, violated the California Constitution, as amended by Proposition 22. See STATE CONSTITUTIONAL LIMITATIONS ON DISTRICT SOURCES AND EXPENDITURES Proposition 1A and Proposition 22. ABx1 27 would have permitted redevelopment agencies to continue operations provided their establishing cities or counties agreed to make specified payments to school districts and county offices of education, totaling $1.7 billion statewide. ABx1 26 was modified by Assembly Bill No (Chapter 26, Statutes of ) ( AB 1484 ), which, together with ABx1 26, is referred to herein as the Dissolution Act. The Dissolution Act provides that all rights, powers, duties and obligations of a redevelopment agency under the California Community Redevelopment Law that have not been repealed, restricted or revised pursuant to ABx1 26 will be vested in a successor agency, generally the county or city that authorized the creation of the redevelopment agency (each, a Successor Agency ). All property tax revenues that would have been allocated to a redevelopment agency, less the corresponding county auditor-controller s cost to administer the allocation of property tax revenues, are now allocated to a corresponding Redevelopment Property Tax Trust Fund ( Trust Fund ), to be used for the payment of pass-through payments to local taxing entities, and thereafter to bonds of the former redevelopment agency and any enforceable obligations of the Successor Agency, as well as to pay certain administrative costs. The Dissolution Act defines enforceable obligations to include bonds, loans, legally required payments, judgments or settlements, legal binding and enforceable obligations, and certain other obligations. Among the various types of enforceable obligations, the first priority for payment is tax allocation bonds issued by the former redevelopment agency; second is revenue bonds, which may have been issued by the host city, but only where the tax increment revenues were pledged for repayment and only where other pledged revenues are insufficient to make scheduled debt service payments; third is administrative costs of the Successor Agency, not to exceed $250,000 in any year, to the extent such costs have been approved in an administrative budget; then, fourth tax revenues in the Trust Fund in excess of such amounts, if any, will be allocated as residual distributions to local taxing entities in the same proportions as other tax revenues. Moreover, all unencumbered cash and other assets of former redevelopment agencies will also be allocated to local taxing entities in the same proportions as tax revenues. Notwithstanding the foregoing portion of this paragraph, the order of payment is subject to modification in the event a Successor Agency timely reports to the Controller and the Department of Finance that application of the foregoing will leave the Successor Agency with amounts insufficient to make scheduled payments on enforceable obligations. If the county auditor-controller verifies that the Successor Agency will have insufficient amounts to make scheduled payments on enforceable obligations, it shall report its findings to the Controller. If the Controller agrees there are insufficient funds to pay scheduled payments on enforceable obligations, the amount of such deficiency shall be deducted from the amount remaining to be distributed to taxing agencies, as described as the fourth distribution above, then from amounts available to the Successor Agency to defray administrative costs. In 59

68 addition, if a taxing agency entered into an agreement pursuant to Health and Safety Code Section for payments from a redevelopment agency under which the payments were to be subordinated to certain obligations of the redevelopment agency, such subordination provisions shall continue to be given effect. As noted above, the Dissolution Act expressly provides for continuation of pass-through payments to local taxing entities. Per statute, 100% of contractual and statutory two percent pass-throughs, and 56.7% of statutory pass-throughs authorized under the Community Redevelopment Law ACT of 1993 (AB 1290, Chapter 942, Statutes of 1993) ( AB 1290 ), are restricted to educational facilities without offset against revenue limit apportionments by the State. Only 43.3% of AB 1290 pass-throughs are offset against State aid so long as the District uses the moneys received for land acquisition, facility construction, reconstruction, or remodeling, or deferred maintenance as provided under Education Code Section 42238(h). ABX1 26 states that in the future, pass-throughs shall be made in the amount which would have been received had the redevelopment agency existed at that time, and that the County Auditor-Controller shall determine the amount of property taxes that would have been allocated to each redevelopment agency had the redevelopment agency not been dissolved pursuant to the operation of [ABX1 26] using current assessed values and pursuant to statutory [pass-through] formulas and contractual agreements with other taxing agencies. Successor Agencies continue to operate until all enforceable obligations have been satisfied and all remaining assets of the Successor Agency have been disposed of. AB 1484 provides that once the debt of the Successor Agency is paid off and remaining assets have been disposed of, the Successor Agency shall terminate its existence and all pass-through payment obligations shall cease. The District can make no representations as to the extent to which State apportionments may be offset by the future receipt of residual distributions or from unencumbered cash and assets of former redevelopment agencies any other surplus property tax revenues pursuant to the Dissolution Act. Litigation Challenging Method of School Financing In Robles-Wong, et al. v. State of California (Alameda County Superior Court, Case No. RG ), plaintiffs challenge the State s education finance system as unconstitutional. Plaintiffs, consisting of 62 minor school children, various school districts, the California Association of School Administrators and the California School Boards Association, allege the State has not adequately fulfilled its constitutional obligation to support its public schools, and seek an order enjoining the State from continuing to operate and rely on the current financing system and to develop a new education system that meets constitutional standards as declared by the court. In a related matter, Campaign for Quality Education et al. ( CQE ) v. State of California (Alameda County Superior Court, Case No. RG ), plaintiffs also challenge the constitutionality of the State s education finance system. The court issued a ruling that there was no constitutional right to a particular level of school funding. The court allowed plaintiffs to amend their complaint with respect to alleged violation of plaintiffs right to equal protection. Both of these cases were dismissed by the trial court and the plaintiffs have appealed the rulings. The District cannot predict the outcome of this litigation or its possible impact on the District s financial condition. CONTINUING DISCLOSURE Pursuant to the Continuing Disclosure Certificate (the Continuing Disclosure Certificate ), the form of which is attached hereto as Appendix E, the District will agree, upon the occurrence of any of the following events (the Listed Events ), to report such event in a timely manner not more than ten (10) business days after the occurrence of such event to the Municipal Securities Rulemaking Board (the MSRB ) through its Electronic Municipal Market Access ( EMMA ) system. Listed Events include: (1) principal and interest 60

69 payment delinquencies; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) adverse tax opinions or issuance by the Internal Revenue Service of proposed or final determinations of taxability or of a Notice of Proposed Issue (IRS Form TEB); (6) tender offers; (7) defeasances; (8) ratings changes; and (9) bankruptcy, insolvency, receivership or similar proceedings. Notice of certain other events will be provided as described in the Continuing Disclosure Certificate, if material. See Appendix E FORM OF CONTINUING DISCLOSURE CERTIFICATE hereto. In addition, the District will agree in the Continuing Disclosure Certificate to provide certain annual financial and operating data to the MSRB not later than 290 days following the end of the District s fiscal year (currently June 30), commencing with the report for the fiscal year ending June 30, These covenants will be made in order to assist the Underwriter in complying with Rule 15c2-12 promulgated by the Securities and Exchange Commission. The Owners and Beneficial Owners of the Certificates are third party beneficiaries of the Continuing Disclosure Certificate. In the event the District fails to comply with any provision in the Continuing Disclosure Certificate, any Owner or Beneficial Owner may take all action necessary to cause the District to comply with the Continuing Disclosure Certificate. A default under the Continuing Disclosure Certificate shall not be an event of default under the Trust Agreement. In addition, no person or entity shall be entitled to recover any monetary damages under the Continuing Disclosure Certificate. Within the past five years, the District failed to file the annual report for fiscal year in a timely manner, as required by its existing continuing disclosure obligations. Within the past five years, the District also failed to file in a timely manner notices of certain enumerated events, as required by its existing continuing disclosure obligations. TAX MATTERS In the opinion of Dannis Woliver Kelley, Long Beach, California, Special Counsel, under existing statutes, regulations, rulings and judicial decisions, interest with respect to the Certificates is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Special Counsel, interest with respect to the Certificates is exempt from State of California personal income tax. Special Counsel notes that, with respect to corporations, interest with respect to the Certificates may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations. The difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of the same series and maturity is to be sold to the public) and the stated payment price at maturity with respect to the Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to an owner of a Certificate (the Certificate Owner ) before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Certificate Owner will increase the Certificate Owner s basis in the applicable Certificate. In the opinion of Special Counsel, original issue discount that accrues to a Certificate Owner is excluded from gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. Special Counsel s opinion as to the exclusion from gross income of interest (and original issue discount) with respect to the Certificates is based upon certain representations of fact and certifications made by the District and others and is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the Code ), that must be satisfied subsequent to the execution 61

70 and delivery of the Certificates to assure that the interest (and original issue discount) with respect to the Certificates will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) with respect to the Certificates to be included in gross income for federal income tax purposes retroactive to the date of execution and delivery of the Certificates. The District has covenanted to comply with all such requirements. The amount by which a Certificate Owner s original basis for determining loss on sale or exchange in the applicable Certificate (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Certificate premium, which must be amortized under Section 171 of the Code; such amortizable Certificate premium reduces the Certificate Owner s basis in the applicable Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Certificate premium may result in a Certificate Owner realizing a taxable gain when a Certificate is sold by the Owner for an amount equal to or less (under certain circumstances) than the original cost of the Certificate to the Owner. Purchasers of the Certificates should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable Certificate premium. The Internal Revenue Service (the IRS ) has initiated an expanded program for the auditing of taxexempt bond issues, including both random and targeted audits. It is possible that the Certificates will be selected for audit by the IRS. It is also possible that the market value of the Certificates might be affected as a result of such an audit of the Certificates (or by an audit of similar certificates). No assurance can be given that in the course of an audit, as a result of an audit, or otherwise, Congress or the IRS might not change the Code (or interpretation thereof) subsequent to the execution delivery of the Certificates to the extent that it adversely affects the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Certificates or their market value. SUBSEQUENT TO THE EXECUTION AND DELIVERY OF THE CERTIFICATES, THERE MIGHT BE FEDERAL, STATE OR LOCAL STATUTORY CHANGES (OR JUDICIAL OR REGULATORY INTERPRETATIONS OF FEDERAL, STATE OR LOCAL LAW) THAT AFFECT THE FEDERAL, STATE OR LOCAL TAX TREATMENT OF THE INTEREST ON THE CERTIFICATES OR THE MARKET VALUE OF THE CERTIFICATES. LEGISLATIVE CHANGES HAVE BEEN PROPOSED IN CONGRESS, WHICH, IF ENACTED, WOULD RESULT IN ADDITIONAL FEDERAL INCOME TAX BEING IMPOSED ON CERTAIN OWNERS OF TAX-EXEMPT STATE OR LOCAL OBLIGATIONS, SUCH AS THE CERTIFICATES. THE INTRODUCTION OR ENACTMENT OF ANY OF SUCH CHANGES COULD ADVERSELY AFFECT THE MARKET VALUE OR LIQUIDITY OF THE CERTIFICATES. NO ASSURANCE CAN BE GIVEN THAT, SUBSEQUENT TO THE EXECUTION AND DELIVERY OF THE CERTIFICATES, SUCH CHANGES (OR OTHER CHANGES) WILL NOT BE INTRODUCED OR ENACTED OR INTERPRETATIONS WILL NOT OCCUR. BEFORE PURCHASING ANY OF THE CERTIFICATES, ALL POTENTIAL PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING POSSIBLE STATUTORY CHANGES OR JUDICIAL OR REGULATORY CHANGES OR INTERPRETATIONS, AND THEIR COLLATERAL TAX CONSEQUENCES RELATING TO THE CERTIFICATES. Special Counsel s opinions may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. Special Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Trust Agreement and the Tax Certificate relating to the Certificates permit certain actions to be taken or to be omitted if a favorable opinion of Special Counsel is provided with respect thereto. Special Counsel expresses no opinion as to the effect on the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Certificates if any such action is taken or omitted based upon the advice of counsel other than Dannis Woliver Kelley. 62

71 Although Special Counsel will render an opinion that interest (and original issue discount) with respect to the Certificates is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the ownership of the Certificates and the accrual or receipt of interest (and original issue discount) with respect to the Certificates may otherwise affect the tax liability of certain persons. Special Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Certificates, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Certificates. Should interest (and original issue discount) with respect to the Certificates become includable in gross income for federal income tax purposes, the Certificates are not subject to early prepayment and will remain outstanding until maturity or until prepaid in accordance with the Trust Agreement. A copy of the proposed form of opinion of Special Counsel is attached hereto as Appendix C. CERTAIN LEGAL MATTERS Dannis Woliver Kelley, Long Beach, California, Special Counsel, will render an opinion with respect to the Certificates substantially in the form attached hereto as Appendix C. Copies of such approving opinion will be available at the time of delivery of the Certificates. Certain matters will also be passed on for the District by Dannis Woliver Kelley, as Disclosure Counsel. Dannis Woliver Kelley expresses no opinion to the Owners of the Certificates as to the accuracy, completeness or fairness of this Official Statement. ABSENCE OF MATERIAL LITIGATION At the time of delivery of and payment for the Certificates, the District and the Corporation will each certify that there is no action, suit, litigation, inquiry or investigation before or by any court, governmental agency, public board or body served, or to the best knowledge of the District or the Corporation threatened, against the District or the Corporation in any material respect affecting the existence of the District or the Corporation or the titles of their officers to their respective offices or seeking to prohibit, restrain or enjoin the sale, execution or delivery of the Certificates or the payment of Lease Payments or challenging, directly or indirectly, the validity or enforceability of the proceedings to have the District lease the Property to the Corporation and lease it back from the Corporation, or the validity or enforceability of the Trust Agreement, the Lease, the Assignment Agreement or the Site Lease. Disposition of Solar Contract Litigation. The District previously entered into a contract for the construction of solar power facilities at District campuses (the Solar Contract ). Prior to performance of the Solar Contract by either the District or the contractor, the contractor filed a lawsuit against the District citing breach of contract by the District. The contractor prevailed in that lawsuit and was awarded approximately $12 million in damages. The District filed an appeal of the judgment. The District and the solar contractor subsequently agreed to perform the Solar Contract with certain mutually agreed upon amendments (as amended, the Amended Solar Contract ) and to set-aside the breach of contract action and the appeal. The District intends to fund the Amended Solar Contract from proceeds of general obligation bonds of the District. The District does not anticipate that any amounts from its general fund will be applied towards payment of the Amended Solar Contract. The District does have claims pending against it. The aggregate amount of the uninsured liabilities of the District which may result from all claims will not, in the opinion of the District, materially affect the District s finances or impair its ability to make Lease Payments under the Lease. RATINGS Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ) is expected to assign its long term underlying rating of AA/stable to the Certificates with the expectation that 63

72 the Insurer will issue the Policy at Closing. Moody s has assigned its long term underlying rating of A3 to the Certificates without regards to the Policy. Such ratings reflect only the views of S&P and Moody s and an explanation of the significance of such ratings may be obtained as follows: S&P at Municipal Finance Department, 55 Water Street, New York, New York 10041, tel. (212) and Moody s Investors Service at 7 World Trade Center at 250 Greenwich Street, New York, New York 10007, tel. (212) There is no assurance that such ratings will continue for any given period of time, or that they will not be revised downward or withdrawn entirely by the rating agency if in the judgment of the rating agency circumstances so warrant. An explanation of the significance of such ratings may be obtained from such rating agency. Any such downward revision or withdrawal of the ratings may have an adverse effect on the market price of the Certificates. The District will covenant in a Continuing Disclosure Certificate to file on EMMA, notices of any ratings changes on the Certificates. See the caption CONTINUING DISCLOSURE above and Appendix E FORM OF CONTINUING DISCLOSURE CERTIFICATE. Notwithstanding such covenant, information relating to ratings changes on the Certificates may be publicly available from S&P prior to such information being provided to the District and prior to the date the District is obligated to file a notice of rating change on EMMA. Purchasers of the Certificates are directed to S&P and its website and official media outlets for the most current ratings changes with respect to the Certificates after the initial delivery of the Certificates. VERIFICATION The sufficiency of amounts on deposit in each of the respective Prepayment Funds to pay the prepayment price of the 1998 Certificates, the 2001 Certificates and the 2005 Certificates on the Prepayment Date will be verified by Causey Demgen Moore, P.C., certified public accountants (the Verification Agent ). The Verification Agent will deliver a report to that effect on the date of delivery of the Certificates. UNDERWRITING The Certificates are being purchased by RBC Capital Markets, LLC (the Underwriter ). The Underwriter has agreed to purchase the Certificates pursuant to a Certificate Purchase Agreement with the District (the Certificate Purchase Agreement ) at the initial purchase price of $22,962, (being equal to the aggregate principal amount of the Certificates, less an Underwriter s discount of $181,314.00, plus a net original issue premium of $1,558,824.40). The Certificate Purchase Agreement provides that the Underwriter will purchase all of the Certificates if any are purchased and that the obligation to make such purchase is subject to certain terms and conditions set forth in the Certificate Purchase Agreement. The Underwriter may offer and sell the Certificates to certain dealers and others at prices lower than the offering prices stated on the cover page hereof. The offering prices may be changed from time to time by the Underwriter. The Underwriter and its respective affiliates are full-service financial institutions engaged in various activities that may include securities trading, commercial and investment banking, municipal advisory, brokerage, and asset management. In the ordinary course of business, the Underwriter and its respective affiliates may actively trade debt and, if applicable, equity securities (or related derivative securities) and provide financial instruments (which may include bank loans, credit support or interest rate swaps). The Underwriter and its respective affiliates may engage in transactions for their own accounts involving the securities and instruments made the subject of this securities offering or other offering of the District. The Underwriter and its respective affiliates may make a market in credit default swaps with respect to municipal securities in the future. The Underwriter and its respective affiliates may also communicate independent investment recommendations, market color or trading ideas and publish independent research views in respect of this securities offering or other offerings of the District. 64

73 MISCELLANEOUS Audited Financial Statements The District s audited financial statements for Fiscal Year , included in this Official Statement have been audited by Wilkinson Hadley King & Co. LLP, Certified Public Accountants (the Auditor ), as stated in the report in Appendix D. Attention is called to the scope limitation described in the auditor s report accompanying the financial statements. The Auditor has not been requested to consent to the inclusion of its report herein and has not undertaken to update the audited financial statements for Fiscal Year or its report, and no opinion is expressed by the Auditor with respect to any event subsequent to its report dated December 15, See Appendix D DISTRICT S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2014 herein. Financial Interests The fees being paid to Special Counsel and the District s Financial Advisor are contingent upon the execution and delivery of the Certificates. ADDITIONAL INFORMATION The references herein to the Lease, the Site Lease, the Trust Agreement and the Assignment Agreement are brief outlines of certain provisions thereof. Such outlines do not purport to be complete and for full and complete statements of such provisions reference is made to said documents. Copies of the documents mentioned under this heading are available for inspection at the District and following delivery of the Certificates will be on file at the Principal Office of the Trustee in Los Angeles, California. References are made herein to certain documents and reports which are brief summaries thereof which do not purport to be complete or definitive. Reference is made to such documents and reports for full and complete statements of the content thereof. Any statement in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Certificates. The execution and delivery of this Official Statement has been duly authorized by the District. SAN YSIDRO SCHOOL DISTRICT By: /s/ Julio Fonseca, Ed.D. Superintendent 65

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75 APPENDIX A SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a brief summary of certain provisions of the legal documents related to the Certificates which are not described in the Official Statement to which this Appendix is attached. This summary is not intended to be definitive and is qualified in its entirety by reference to the Lease, the Trust Agreement, the Assignment Agreement, the Site Lease and the Pledge Agreements for the complete terms thereof. Copies of the Lease, the Trust Agreement, the Assignment Agreement, the Site Lease and the Pledge Agreements are available upon request from the District. DEFINITIONS The following are summaries of definitions of certain terms used in this Summary of Principal Legal Documents. All capitalized terms not defined herein or elsewhere in the Official Statement have the meanings set forth in the Lease or the Trust Agreement. Additional Certificates means certificates of participation authorized by a supplemental Trust Agreement that are executed and delivered by the Trustee under and pursuant to the Trust Agreement. Additional Payments means such amounts as will be required for the payment of all administrative costs of the Corporation relating to the Property or the Certificates, including without limitation all expenses, compensation and indemnification of the Trustee payable by the District under the Trust Agreement, taxes of any sort whatsoever payable by the Corporation as a result of its ownership of the Property or undertaking of the transactions contemplated in the Lease or the Trust Agreement, fees of auditors, accountants, attorneys or engineers, any and all amounts due to the Insurer and the Reserve Insurer under the Trust Agreement (other than amounts paid by the Insurer and the Reserve Insurer to Certificate Owners under the Policy and the Reserve Policy), and all other necessary administrative costs of the Corporation or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Certificates or of the Trust Agreement, including premiums on insurance maintained pursuant to the Lease Agreement or to indemnify the Corporation and its employees, officers and directors and the Trustee. Assignment Agreement means the Assignment Agreement related to the Certificates, dated on even date with the Lease and the Trust Agreement, by and between the Trustee and the Corporation, and any duly authorized and executed amendments thereto. Business Day means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the State of New York or the State of California are authorized or required by law or executive order to remain closed. Certificate or Certificates means the $21,585,000 aggregate principal amount of San Ysidro School District 2015 Refunding Certificates of Participation executed and delivered by the Trustee pursuant to the Trust Agreement, and any certificate or certificates executed and delivered pursuant to the Trust Agreement. Certificate Payment Date means March 1 and September 1 of each year commencing September 1, 2015 with respect to the interest payments evidenced by the Certificates and September 1 of each year, commencing September 1, 2015, with respect to the principal payments evidenced by the Certificates. Closing Date means the date on which the Certificates, duly executed by the Trustee, are delivered to the Underwriter thereof. Code means the Internal Revenue Code of 1986, and the regulations issued thereunder, as the same may be amended from time to time, and any successor provisions of law. Reference to a particular section of the Code will be deemed to be a reference to any successor to any such section. A-1

76 Continuing Disclosure Certificate means that certain Continuing Disclosure Certificate, dated the Closing Date, executed by the District. Corporation means the San Ysidro Schools Public Financing Corporation, a nonprofit public benefit corporation organized under the laws of the State, its successors and assigns. Corporation Representative means the President, Vice President, Secretary / Treasurer, Executive Director or Chief Financial Officer of the Corporation, or any other person authorized to act on behalf of the Corporation under or with respect to the Lease. Defeasance Securities means the securities described in paragraph (a) of the definition of Permitted Investments. Delivery Cost Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Delivery Costs means and further includes all items of expense directly or indirectly payable by or reimbursable to the District or the Corporation relating to the refunding of the Prior Certificates from the proceeds of the Certificates, including, but not limited to, the premium for any insurance policies purchased to satisfy the Reserve Requirement or to guarantee payment of the Certificates, filing and recording costs, settlement costs, printing costs, word processing costs, reproduction and binding costs, initial fees and charges of the Trustee, including its first annual administration fee and the fees of its counsel, legal fees and charges, financing and other professional consultant fees, costs of rating agencies and costs of providing information to such rating agencies, any computer and other expenses incurred in connection with the Certificates, fees for execution, transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing. District means the San Ysidro School District, a school district organized and existing under the laws and Constitution of the State, and its successors and assigns. District Representative means the Superintendent and the Assistant Superintendent, Business Services of the District or any other person authorized by the Superintendent of the District to act on behalf of the District with respect to the Lease or the Trust Agreement. Event of Default means an event of default under the Lease as described under the caption THE LEASE AGREEMENT Events of Default and Remedies herein. Fiscal Year means the fiscal year of the District commencing July 1 and ending June 30 of the next year. Insurance Business Day means any day other than (i) a Saturday or Sunday, or (ii) a day on which the Insurer s Fiscal Agent or banking institutions in the State of New York are authorized or required by law or executive order to remain closed. Insurance Policy or Policy means the financial guaranty insurance policy, and any endorsement thereto, issued by the Insurer insuring the scheduled payment of the interest components and principal components represented by the Certificates when due. Insurer means Build America Mutual Assurance Company, or any successor thereto or assignee thereof. Lease means the Lease Agreement related to the Certificates, dated as of August 1, 2015, by and between the District and the Corporation, and any duly authorized and executed amendments thereto. Lease. Lease Payment means any payment required to be paid by the District to the Corporation pursuant to the A-2

77 Lease Payment Deposit Date means the fifteenth day next preceding the respective Certificate Payment Date (or if such day is not a Business Day, the next succeeding Business Day). Lease Payment Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Lease Year means the extending from September 1 of each calendar year to August 31 of the subsequent calendar year provided that the first Lease Year shall commence on the Closing Date and end on August 31, Moody s means Moody s Investors Service or any successors or assigns thereto. Net Proceeds means any proceeds of any insurance, performance bonds or taking by eminent domain or condemnation paid with respect to the Property remaining after payment therefrom of any expenses (including attorneys fees) incurred in the collection thereof. Net Proceeds Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Outstanding, when used as of any particular time with respect to the Certificates, means (subject to the provisions of the Trust Agreement) all Certificates theretofore executed and delivered by the Trustee under the Trust Agreement except: (1) Certificates theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Certificates for the payment or prepayment of which funds or Government Obligations, together with interest earned thereon, in the necessary amount will have theretofore been deposited with the Trustee (whether upon or prior to the maturity or prepayment date of such Certificates), provided that, if such Certificates are to be prepaid prior to maturity, notice of such prepayment will have been given as provided in the Trust Agreement or provision satisfactory to the Trustee will have been made for the giving of such notice; and (3) Certificates in lieu of or in exchange for which other Certificates will have been executed and delivered by the Trustee pursuant to the Trust Agreement. Owner or Certificate Owner or Owner of a Certificate, or any similar term, when used with respect to a Certificate means the person in whose name such Certificate is registered on the registration books maintained by the Trustee. Permitted Encumbrances means, as of any particular time: (i) liens for general ad valorem taxes and assessments, if any, not then delinquent, or which the District may, pursuant to provisions of the Lease, permit to remain unpaid; (ii) the Assignment Agreement; (iii) the Lease; (iv) the Site Lease; (v) any contested right or claim of any mechanic, laborer, materialman, supplier or vendor filed or perfected in the manner prescribed by law to the extent permitted under the Lease; (vi) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions which exist of record as of the Closing Date and which the District certifies will not materially impair the use of the Property by the District; and (vii) easements, rights of way, mineral rights, drilling rights and other rights, reservations, covenants, conditions or restrictions established following the date of recordation of the Lease and to which the District certifies in writing do not affect the intended use of the Property or impair the security granted to the Trustee for the benefit of the owners of the Certificates by the Trust Agreement and the Assignment Agreement and to which the Corporation and the Insurer consent in writing. A-3

78 Permitted Investments means any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (a) For all purposes, including defeasance investments, any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (i) Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ( United States Treasury Obligations ), (ii) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (iii) 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 (iv) 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. (b) For all purposes other than defeasance investments, any of the following which at the time of investment are legal investments under the laws of the State for the moneys proposed to be invested therein: (i) Federal Housing Administration debentures. (ii) The listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America: -Federal Home Loan Mortgage Corporation (FHLMC) Participation certificates (but not including stripped mortgage securities which are purchased at prices exceeding their principal amounts) Senior Debt obligations -Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) Consolidated system-wide bonds and notes -Federal Home Loan Banks (FHL Banks) Consolidated debt obligations -Federal National Mortgage Association (FNMA) Senior debt obligations Mortgage-backed securities (but not including stripped mortgage securities which are purchased at prices exceeding their principal amounts) (iii) Unsecured certificates of deposit (including those placed by a third party pursuant to an agreement between the Trustee and the Corporation), time deposits, trust accounts, trust funds, interest bearing deposits, overnight bank deposits, interest bearing money market accounts and bankers acceptances (having maturities of not more than 365 days) of any bank the short-term obligations of which are rated A-1+ or better by S&P and Prime-1 by Moody s, which may include the Trustee and its affiliates. (iv) Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation (FDIC), in banks which have capital and surplus of at least $15 million. (v) Commercial paper (having original maturities of not more than 270 days) rated at the time of purchase A-1+ by S&P and Prime-1 by Moody s. A-4

79 (vi) Money market mutual funds rated AAm or AAm-G by S&P, or better, and if rated by Moody s rated Aa2 or better, including mutual funds for which the Trustee, its parent company, if any, or any affiliates or subsidiaries of the Trustee provide investment advising or other management services or serves as investment administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or an affiliate of the Trustee receives and retains a fee for services provided to the fund, whether as a custodian, transfer agent, investment advisor or otherwise, (ii) the Trustee collects fees for services rendered, which fees are separate from the fees received from such funds, and (iii) services performed for such funds may at times duplicate those provided to such funds by the Trustee or an affiliate of the Trustee. (vii) 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 by Moody s and A- by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated. (viii) Direct general short-term obligations of any state agency or subdivision or agency thereof described in (vii) above and rated A-1+ by S&P and MIG-1 by Moody s. (ix) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state, state agency or subdivision described in (vii) above and rated AA- or better by S&P and Aa3 or better by Moody s. (x) Pre-refunded municipal obligations rated in the highest rating category then assigned to the United States of America by S&P and Moody s meeting the following requirements: 1. such municipal obligations are (1) not subject to redemption prior to maturity or (2) the trustee for such municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of such municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions; 2. such 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; 3. 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 such municipal obligations ( Verification ); 4. the cash or United States Treasury Obligations serving as security for such municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; 5. 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 6. 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. (xi) Repurchase agreements entered into 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 A3 by Moody s including the Trustee and any of its affiliates; or (2) any broker-dealer with retail customers or a related affiliate thereof which brokerdealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least A- by S&P and A3 by Moody s, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corporation; or (3) any other entity rated at least A- by S&P and A3 by Moody s and acceptable to the Insurer (each an Eligible Provider ), provided that: A-5

80 1. (i) permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers), and (ii) collateral levels must be at least 102% of the total principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA s and 104% of the total principal when the collateral type is FNMA and FHLMC ( Eligible Collateral ); 2. the trustee or a third party acting solely as agent therefore or for the District (the Custodian ) has possession of the collateral or the collateral has been transferred to the Custodian in accordance with applicable state and federal laws (other than by means of entries on the transferor s books) and such collateral shall be marked to market; 3. the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Trustee, the District and the Insurer setting forth the type of collateral, the collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral; 4. the repurchase agreement (or guaranty, if applicable) may not be assigned or amended without the prior written consent of the Insurer; 5. the repurchase agreement shall state and an opinion of counsel shall be rendered at the time such collateral is delivered that the Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; 6. 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 notify the District, the Trustee and the Insurer within five (5) days of receipt of such notice. Within ten (10) days of receipt of such notice, the provider shall either: (i) provide a written guarantee acceptable to the Insurer, (ii) post Eligible Collateral, or (iii) assign the agreement to an Eligible Provider. If the provider does not perform a remedy within ten (10) business days, the provider shall, at the direction of the Trustee (who shall give such direction if so directed by the Insurer) repurchase all collateral and terminate the repurchase agreement, with no penalty or premium to the District or the Trustee. (xii) Investment agreements: with a domestic or foreign bank or corporation 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, claims paying ability, of the guarantor is rated at least AA- by S&P and Aa3 by Moody s, and acceptable to the Insurer, each of which shall be an Eligible Provider, provided that: 1. interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service; 2. the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven (7) days prior notice; the District and the Trustee agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; 3. the provider shall send monthly reports to the Trustee, the District and the Insurer setting forth the balance the District or Trustee has invested with the provider and the amounts and dates of interest accrued and paid by the provider; 4. the investment agreement shall state that is an unconditional and general obligation of the provider, 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 passé with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors; A-6

81 5. the investment agreement (or guaranty, if applicable) may not be assigned or amended without the prior written consent of the Insurer; 6. the District, the Trustee and the Insurer shall receive an opinion of domestic counsel to the provider that such investment agreement is legal, valid, binding and enforceable against the provider in accordance with its terms; 7. the District, the Trustee and the Insurer shall receive an opinion of foreign counsel to the provider (if applicable) that (1) the investment agreement has been duly authorized, executed and delivered by the provider and constitutes the legal, valid and binding obligation of the provider, enforceable against the provider in accordance with its terms, (b) the choice of law of the state set forth in the investment agreement is valid under that country s laws and a court in such country would uphold such choice of law, and (c) any judgment rendered by a court in the United States would be recognized and enforceable in such country; 8. 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, the provider shall, at its option, within ten (10) days of receipt of publication of such downgrade, either (i) provide a written guarantee acceptable to the Insurer, (ii) post Eligible Collateral with the District, the Trustee or a third party acting solely as agent therefore (the Custodian ) free and clear of any third party liens or claims, or (iii) assign the agreement to an Eligible Provider, or (iv) repay the principal of and accrued but unpaid interest on the investment; (ii) the provider s rating by either S&P or Moody s is withdrawn or suspended or falls below A- or A3, the provider must, at the direction of the District or the Trustee (who shall give such direction if so directed by the Insurer), within ten (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. 9. in the event the provider is required to collateralize, permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers) and collateral levels must be 102% of the total principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA s and 104% of the total principal when the collateral type is FNMA and FHLMC ( Eligible Collateral ). In addition, the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Trustee, the District and the Insurer setting forth the type of collateral, the collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral; 10. 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 Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; 11. 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 so directed by the 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; and (xiii) Deposits in the Local Agency Investment Fund of the California State Treasurer, to the extent the Trustee is authorized to register such investments in its name. A-7

82 Prepayment means any payment made by the District pursuant to the Lease as a prepayment of Lease Payments. Prepayment Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. Principal Office means the principal corporate trust office of the Trustee in Los Angeles, California, or such other address as the Trustee may inform the District, or the principal office of any successor trustee pursuant to the Trust Agreement. Property means the Property, as defined in the Lease. Reserve Facility means any line of credit, letter of credit, insurance policy, surety bond or other credit deposited with the Trustee pursuant to the Trust Agreement. Reserve Fund means the fund by that name established and held by the Trustee pursuant to the Trust Agreement. thereof. Reserve Insurer means Build America Mutual Assurance Company, or any successor thereto or assignee Reserve Policy means the financial guaranty insurance policy issued by the Reserve Insurer under which claims may be made in order to provide moneys in the Reserve Fund available for the purposes thereof. Reserve Replenishment Rent means Reserve Replenishment Rent payable pursuant to the Lease as further described under the caption THE LEASE AGREEMENT Reserve Replenishment Rent below. Reserve Requirement means, as of any calculation date, the lesser of (1) the maximum aggregate annual Lease Payments (in any Fiscal Year) then payable under the Lease, (2) 125% of the average annual aggregate Lease Payments (in any Fiscal Year) then payable under the Lease, or (3) 10% of the face amount of the Certificates and/or the Additional Certificates, as applicable (less original issue discount if in excess of two percent (2%) of the stated prepayment amount at maturity). S&P means Standard & Poor s Ratings Services, a division of McGraw-Hill Companies, or any successors or assigns thereto. Site Lease means the Site Lease related to the Certificates, dated the date of the Trust Agreement, by and between the Corporation and the District, and any duly authorized and executed amendments thereto. Special Counsel means Dannis Woliver Kelley or any other attorney or firm of attorneys of nationally recognized standing in matters pertaining to the tax-exempt status of interest on obligations issued by states and their political subdivisions and acceptable to the District. State means the State of California. Tax Certificate means the Tax Certificate dated as of the Closing Date, concerning matters pertaining to the use and investment of proceeds of the Certificates executed and delivered to the District on the date of execution and delivery of the Certificates, including any and all exhibits attached thereto. Term means the time during which the Lease is in effect, as provided in the Lease, as further described under the caption THE LEASE AGREEMENT Term of the Lease herein. Trust Agreement means the Trust Agreement, related to the Certificates, dated on even date with the Assignment Agreement and the Lease, by and among the Trustee, the Corporation and the District, and any duly authorized and executed amendment thereto. A-8

83 Trustee means U.S. Bank National Association, a national banking corporation duly organized under the laws of the United States of America, and any successor trustee. Underwriter means RBC Capital Markets, LLC, as underwriter of the Certificates on the Closing Date. Lease; Interests in the Property THE LEASE AGREEMENT Pursuant to the terms of the Lease, the Corporation agrees to lease the Property to the District and the District agrees to lease the Property from the Corporation. During the Term of the Lease, the Corporation will hold a leasehold interest in the Property under the Site Lease. Upon the expiration of the Term of the Lease, the leasehold interest of the Corporation in the Property under the Site Lease and all right, title and interest of the Corporation in and to the Property will transfer to and vest in the District. Term of the Lease The Term of the Lease will commence as of the date of its execution and ends on September 1, 2034, unless extended pursuant to the Lease, or terminated prior thereto upon the earliest of any of the following events: (a) a default by the District and the Corporation s election to terminate the Lease; (b) the payment by the District of all Lease Payments, Reserve Replenishment Rent and any Additional Payments required by the Lease or (c) the deposit of funds or Defeasance Securities with the Trustee in amounts sufficient to pay all Lease Payments as the will become due. Lease Payments The District agrees to pay to the Corporation, its successors and assigns, as annual rental for the use and possession of the Property, Lease Payments in such semiannual amounts as are sufficient in both time and amount to pay when due the annual principal and interest represented by the Certificates. Lease Payments will be due and payable on the fifteenth day of the month (or if such date is not a Business Day, the next succeeding Business Day) immediately preceding the respective Certificate Payment Date. Certain amounts held in the Lease Payment Fund on any Lease Payment Date are credited towards the Lease Payment then due and payable. The District must make all Lease Payments, Additional Payments and Reserve Replenishment Rent payments when due notwithstanding any dispute between the Corporation and the District, including a dispute as to the failure of any portion of the Property to perform the task for which it is leased, and cannot withhold any Lease Payment pending the final resolution of such dispute. Any Lease Payment in default continues as an obligation of the District until fully paid, with interest, to the extent permitted by law, from the date such amount was originally payable at the rate equal to the original interest rate payable with respect to each Certificate then outstanding. The Corporation and the District have agreed and determined that the total rental under the Lease represents the fair rental value of the Property. The District covenants to take such action as may be necessary to include and maintain all Lease Payments, Additional Payments and Reserve Replenishment Rent in its annual budgets (to the extent the amounts of such Additional Payments and Reserve Replenishment Rent are known to the District at the time its annual budget is proposed) and to provide the Trustee annually with a certificate to this effect. Pursuant to the Assignment Agreement, the Corporation has assigned its right to receive and to collect Lease Payments, Reserve Replenishment Rent, and Prepayments to the Trustee in trust for the benefit of the Owners of the Certificates. (See THE ASSIGNMENT AGREEMENT herein.) Reserve Replenishment Rent The District has agreed to pay to the Trustee from its first legally available moneys, after payment of the Lease Payments, Reserve Replenishment Rent to replace amounts withdrawn from the Reserve Fund in order to pay interest or principal represented by the Certificates; provided, however, that such obligation to pay will only occur if (i) the Lease Payments are not in abatement, and (ii) the amount of the Lease Payments and Additional Payments due in each year is less than the fair market rental value of the Property as determined in an appraisal filed with the Trustee. A-9

84 The District s obligation to fund Reserve Replenishment Rent is subject to the District s right to pay such Reserve Replenishment Rent over a period of not more than twelve (12) months, in substantially equal monthly payments, in the event of a deficiency from a withdrawal of amounts from the Reserve Fund to pay principal and interest with respect to the Certificates; provided, however, if such payments would cause the sum of the Lease Payments and the Reserve Replenishment Rent to exceed the fair rental value in a Fiscal Year, then the amount of the Reserve Replenishment Rent shall be reduced so that such fair rental value amount is not exceeded and the remainder of the Reserve Replenishment Rent shall be paid in equal monthly installments in the subsequent Fiscal Year until fully paid. Abatement of Lease Payments in Event of Loss of Use Lease Payments will be paid in consideration of the right of possession and the continued quiet use and enjoyment of the Property during each period for which such Lease Payments are to be paid. The obligation of the District to pay Lease Payments, Reserve Requirement Rent and Additional Payments will be abated, in whole or in part, during any period in which, by reason of damage, destruction, interference due to title defect or taking by eminent domain or condemnation with respect to any portion of the Property, there is substantial interference with the District s right to the use and possession of such portion of the Property by the District. The amount of such abatement will be determined by the District such that the resulting Lease Payments, Reserve Replenishment Rent and Additional Payments represent fair consideration for the use and possession of the portion of the Property not damaged, destroyed, interfered with or taken. Such abatement will commence with such damage, destruction, interference or taking and end with the substantial completion of the replacement or work or repair; provided, however, that during abatement, available moneys on deposit in the Reserve Fund and the Lease Payment Fund, as well as other special sources of money, including the proceeds of rental interruption or use and occupancy insurance, will be applied to pay the Lease Payments. Maintenance, Utilities, Taxes and Assessments The District is responsible for all repair and maintenance of the Property throughout the Term of the Lease. The District must pay for or otherwise arrange for the payment of the cost of the repair and replacement of any portion of the Property resulting from ordinary wear and tear or want of care on the part of the District or any sublessee thereof. The District will also pay all taxes and assessments, including but not limited to utility charges, charged to the Corporation or the District or levied, assessed or charged against any portion of the Property or the respective interests or estates therein. The District is obligated to pay special assessments or governmental charges only to the extent they are required to be paid during the Term of the Lease. No Liens Except for Permitted Encumbrances, the District will not permit any mechanic s or other lien to be established or remain against the Property for labor or materials furnished in connection with any additions, modifications or improvements made by the District; provided that if any such lien is established and the District must first notify or cause to be notified the Corporation of the District s intention to do so, the District may in good faith contest any lien filed or established against the Property, and in such event may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and must provide the Corporation with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Trustee as assignee of the Corporation. Disclaimers The Corporation makes no warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the District of the Property or any portion thereof. Insurance The District must maintain or cause to be maintained the following insurance: A-10

85 Public Liability and Property Damage. The District must maintain or caused to be maintained, throughout the Term of the Lease, a standard comprehensive general public liability and property damage insurance policy or policies in protection of the District and the Corporation, their directors, officers, agents and employees. Said policy or policies must provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the use or operation of any District property or portion thereof. Said policy or policies will provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event, and in a minimum amount of the amount of $150,000 (subject to a deductible clause of not to exceed $75,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy covering all such risks in an amount equal to the liability limits set forth in the Lease. Such liability insurance, including the deductible, may be maintained as part of or in conjunction with any other insurance coverage carried by the District, and, subject to the provisions of the Lease, may be maintained in the form of self-insurance by the District. Workers Compensation. The District must maintain workers compensation insurance issued by a responsible carrier authorized under the laws of the State of California to insure its employees against liability for compensation under the Workers Compensation Insurance and Safety Act now in force in the State, or any act subsequently enacted as an amendment or supplement thereto (with provision for self-insurance of no more than $1,000,000). Casualty and Theft. The District must maintain, throughout the Term of the Lease, insurance against loss or damage to any item or portion of the Property caused by fire and lightning, with extended coverage and theft, vandalism and malicious mischief insurance. Such extended coverage insurance must, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards normally covered by such insurance. Such insurance will be maintained in an amount (except that such insurance may be subject to deductible clauses of not to exceed $50,000 for any one loss) not less than the greater of (i) the replacement cost of the Property and (ii) the aggregate principal amount of the Certificates at the time Outstanding. Such insurance may be maintained as part of or in conjunction with any other insurance carried or required to be carried by the District, and, subject to the provisions of the Lease, may be maintained in the form of self-insurance by the District. Rental Interruption or Use and Occupancy. The District must maintain rental income or use and occupancy insurance in an amount not less than the maximum remaining scheduled Lease Payments in any future 24-month period, to insure against loss of rental income from the Property caused by perils covered by the insurance described in the Lease. Such rental interruption or use and occupancy insurance shall name the Trustee as loss payee. Such insurance may be maintained as part of or in conjunction with any other rental income insurance carried by the District. Title Insurance. The District must obtain and, throughout the Term of the Lease, maintain or cause to be maintained title insurance on the Property, in the form of an ALTA title policy (with Western Regional exceptions), in an amount equal to the aggregate principal amount of the Certificates Outstanding, issued by a company of recognized standing, duly authorized to issue the same, payable to the Trustee for the benefit of the Owners and the Insurer subject only to Permitted Encumbrances. Said policy shall insure (a) the Corporation s ground leasehold estate in the Property under the Site Lease, and (b) the District s leasehold estate under the Lease in the Property, subject only to Permitted Encumbrances. The Net Proceeds of such insurance shall be applied as provided in the Lease. The Trustee shall be provided with a title insurance policy in an amount equal to principal amount of the Certificates. Substitution or Release of the Property The District has the right to substitute alternate real property for any portion of the Property described in the Lease or to release a portion of the Property from the lien of the Lease by providing the Trustee with a supplement to the Lease substantially in the form attached to the Lease and satisfying the conditions set forth below. All costs and expenses incurred in connection with such substitution or release will be borne by the District. Notwithstanding any such substitution, there will be no reduction in or abatement of the Lease Payments due from the District as a result of such substitution. No substitution will be permitted unless (1) any substituted property is A-11

86 free from any liens, other than Permitted Encumbrances, as certified by the District in a certificate delivered to the Trustee; (2) the District provides prior written notice thereof to each rating agency then rating the Certificates; (3) (c) an independent MAI or equivalent certified real estate appraiser selected by the District finds (and delivers a certificate to the District and the Trustee setting forth its findings) that the real property remaining after such substitution or release (i) has a fair rental value in each Fiscal Year during the remaining Term greater than or equal to the Lease Payments due in such Fiscal Year such that the Lease Payments payable by the District pursuant to the Lease will not be reduced and (ii) has an equivalent or greater useful life as the Property to be released and that the useful life of the substituted real Property exceeds the remaining Term; (4) with respect to substitution, the District obtains or causes to be obtained an ALTA title insurance policy (with Western Regional exceptions) with endorsement so as to be payable to the Trustee for the benefit of the Owners (such policy will comply with the Lease, will be in a form satisfactory to the Insurer and the Corporation, will be in the amount equal to the principal component of Lease Payments attributable to the substituted real property, and will insure the leasehold interest or the site leasehold interest of the Corporation or the District, as applicable, to the substituted real property); (5) the District provides the Corporation, the Insurer and the Trustee with an opinion of Special Counsel that such substitution or release does not cause, in and of itself, the Interest Component evidenced by the Certificates to be included in gross income for federal income tax purposes; (6) the District will give, or cause to be given, any notice of the occurrence of such substitution or release required to be given pursuant to the Continuing Disclosure Certificate; (7) upon any substitution or release, the District, the Corporation and the Trustee will execute and the District will record with the office of the County Recorder, County of San Diego, California, any document necessary to reconvey to the District the portion of the Property being substituted and to include the substituted real property and/or improvements thereon as all or a portion of the Property; and (8) the District will certify to the Trustee and the Insurer that any substituted real property is of approximately the same degree of essentiality to the District as the portion of the Property being released. Assignment and Subleasing Except as provided in the Lease, the Trust Agreement and the Assignment Agreement, the Corporation will not assign the Lease to any other person, firm or corporation so as to impair or violate the representations, covenants and warranties contained therein and any assignment in contravention thereof shall be void. The District may sublease all or any portion of the Property (with the prior written consent of the Insurer), so long as such sublease does not, in the opinion of Special Counsel, adversely affect (i) the exemption from State personal income tax or the exclusion from gross income for federal income tax of the Interest Component evidenced by the Certificates or (ii) affect the validity of the Lease, subject to all of the following conditions: (1) the Lease and the obligation of the District to make Lease Payments under the Lease will remain obligations of the District; (2) the District will, within 30 days after the delivery thereof, furnish or cause to be furnished to the Corporation, the Insurer, the Trustee and Moody s, a true and complete copy of such sublease; and (3) any sublease of the Property by the District shall expressly provide that such sublease is subject to all rights of the Corporation under the Lease Agreement, including, the right to re-enter and re-let the Property or terminate the Lease Agreement in the event of a default by the District. Events of Default and Remedies Events of Default Defined. The following constitute events of default under the Lease (each, an Event of Default ) and the terms events of default and default will mean, whenever they are used in the Lease, any one or more of the following events: (i) Failure by the District to pay any Lease Payment required to be paid under the Lease by the corresponding Lease Payment Date, and failure by the District to timely pay any Reserve Replenishment Rent, if and when required. (ii) Failure by the District to observe and perform any warranty, covenant, condition or agreement contained in the Lease or in the Trust Agreement or in the Site Lease, other than the default described in (i) above, for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the District by the Corporation, the Insurer, the Trustee or the Owners of not less than 20% in aggregate principal amount of the Certificates then Outstanding, provided, however, that if the failure stated in the notice cannot be corrected within the applicable period, the Corporation or such Owners, as the case may be, will not unreasonably withhold their consent to an extension of such time A-12

87 if corrective action is instituted by the District within the applicable period and diligently pursued until the default is corrected, except that such grace period shall not exceed 60 days without the prior written consent of the Insurer (iii) Filing by the District of a case in bankruptcy, or the subjection of any right or interest of the District under the Lease to any execution, garnishment or attachment, or adjudication of the District as a bankrupt, or assignment by the District for the benefit of creditors, or the entry by the District into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the District in any proceedings instituted under the provisions of the federal bankruptcy code, as amended, or under any similar act which may be enacted in the future. Remedies. Whenever any Event of Default described above will have happened and be continuing, the Corporation may exercise any and all remedies available pursuant to law or granted pursuant to the Lease as described below. The Corporation has no right under any circumstances, however, to accelerate the Lease Payments or otherwise declare any Lease Payments not then in default to be immediately due and payable. After the occurrence of an Event of Default under the Lease the District will surrender possession of the Property to the Corporation if requested to do so by the Corporation, the Trustee or the Certificate Owners, in accordance with the provisions of the Lease. So long as the Insurer is not in default under the Insurance Policy, the Insurer, acting alone, shall have the right to direct and control all remedies upon an event of default including, without limitation, the election to terminate or not to terminate the Lease. No Termination: Repossession and Re-Lease on Behalf of District. In the event the Corporation does not elect to terminate the Lease, the Corporation may, with the consent of the District, repossess the Property, and re-lease it for the account of the District, in which event the District s obligation will continue to accrue from year to year in accordance with such Lease and the District will continue to receive the value of the use of the Property to the Lease from year to year in the form of credits against its obligation to pay Lease Payments. The obligations of the District will remain the same as prior to such default; to pay Lease Payments, Reserve Replenishment Rent and Additional Payments whether the Corporation re-enters or not. The District agrees to and will remain liable for the payment of all Lease Payments, Reserve Replenishment Rent and Additional Payments and the performance of all conditions contained in such Lease, and to reimburse the Corporation for any deficiency arising out of the re-leasing of the Property, or, in the event that the Corporation is unable to re-lease the Property, then for the full amount of all Lease Payments, Reserve Replenishment Rent and Additional Payments to the end of the Lease Term, but said Lease Payments, Reserve Replenishment Rent and Additional Payments and/or deficiency will be payable only at the same time and in the same manner as provided above for the payment of Lease Payments, Reserve Replenishment Rent and Additional Payments under the Lease, notwithstanding such repossession by the Corporation, or any suit brought by the Corporation for repossession of the Property, or the exercise of any other remedy by the Corporation. The District irrevocably appoints the Corporation its agent and attorney-in-fact for purposes of repossessing or re-leasing the Property in the event of default. In addition, the District exempts and agrees to save harmless the Corporation from any cost, loss or damage arising from or occasioned by any such repossession and re-leasing of the Property. The District waives all claims for damages caused by the Corporation in repossessing the Property as provided in the Lease and all claims for damage that may result from the destruction of or injury to the Property, and all claims for damages to or loss of any property belonging to the District that may be in or upon the Property. Termination: Repossession and Re-Lease. In the event of the termination of the Lease by the Corporation at its option and in the manner provided by the Lease on account of default by the District (and notwithstanding any repossession of the Property by the Corporation in any manner whatsoever or the re-leasing of the Property), the District nevertheless agrees to pay to the Corporation all costs, losses or damages howsoever arising or occurring payable at the same time and in the same manner as is provided in the Lease in the case of payment of Lease Payments, Reserve Replenishment Rent and Additional Payments. Any proceeds of the re-lease or other disposition of the Property by the Corporation will be deposited into the Lease Payment Fund and be applied in accordance with the provisions of the Trust Agreement. Any surplus received by the Trustee, as assignee of the Corporation, from such re-leasing over total Lease Payments, Reserve Replenishment Rent and Additional Payments that would have been due under the Lease and the fees, expenses and costs of the Trustee as assignee of the Corporation on re-leasing the Property will be remitted to the District. Neither notice to pay rent or to deliver up A-13

88 possession of the Property given pursuant to law nor any proceeding taken by the Corporation to recover possession of the Property will of itself operate to terminate the Lease, and no termination of the Lease on account of default by the District will be or become effective by operation of law, or otherwise, unless and until the Corporation will have given written notice to the District of the election on the part of the Corporation to terminate the Lease. The District covenants and agrees that no surrender of the Property for the remainder of the Term of the Lease or any termination of the Lease will be valid in any manner or for any purpose whatsoever unless stated or accepted by the Corporation by such written notice. No such termination will be effected either by operation of law or act of the parties to the Lease, except only in the manner in the Lease expressly provided. The re-leasing of the Property shall be subject to the opinion of Special Counsel that such re-leasing will not cause the Interest Component evidenced by the Certificates to be subject to State personal income tax or adversely affect the exclusion of such Interest Component from gross income for federal income tax purposes. In the event the Corporation does not elect to terminate the Lease in the manner provided therein or to exercise its right to re-enter and re-lease, the Corporation may collect each installment of Lease Payments as the same become due and enforce any other terms or provisions of the Lease to be kept or performed by the District, regardless of whether or not the District has abandoned the Property. The District s rights and remedies are assigned to the Trustee and are exercisable by the Trustee and the Owners of the Certificates as provided in the Trust Agreement. (See THE ASSIGNMENT AGREEMENT herein.) Additional Certificates THE TRUST AGREEMENT Subsequent to the execution and delivery by the Trustee of the Certificates, the Trustee will, with the written consent of the Insurer, if any, upon written request or requests of the District Representative and of the Corporation Representative, execute and deliver from time to time one or more series of Additional Certificates in such aggregate principal amount as may be set forth in such written request or requests, provided that there shall have been compliance with all of the following conditions, which are conditions precedent to the preparation, execution and delivery of such Additional Certificates: (a) The parties to the Trust Agreement shall have executed a supplemental agreement setting forth the terms and provisions of such Additional Certificates, including the establishment of such funds and accounts, separate and apart from the funds and accounts established under the Trust Agreement for the Certificates executed and delivered on the Closing Date, as shall be necessary or appropriate, which supplemental agreement shall require that prior to the delivery of such Additional Certificates there shall be on deposit in the Reserve Fund established under the Trust Agreement or in a reserve fund established under such supplemental agreement an amount equal to the Reserve Requirement upon the execution and delivery of the Additional Certificates; (b) The principal and interest payable with respect to such Additional Certificates and any premium payable upon prepayment of such Additional Certificates will be payable only on Certificate Payment Dates applicable to the Certificates; (c) The Lease will have been amended by the parties thereto if necessary to (i) increase or adjust the Lease Payments due and payable on each Lease Payment Deposit Date to an amount sufficient to pay the principal, premium (if any) and interest payable with respect to all Outstanding Certificates, including all Additional Certificates as and when the same mature or become due and payable (except to the extent such principal, premium and interest may be payable out of moneys then in the Reserve Fund or otherwise on deposit with the Trustee in accordance with the Trust Agreement), (ii) if appropriate, amend the definition of Property to include as part of the Property all or any portion of additions, betterments, extensions, improvements or replacements, or such other real or personal property (whether or not located upon the Property as such Property is constituted as of the date of the Trust Agreement), to be financed, acquired or constructed by the preparation, execution and delivery of such Additional Certificates, and (iii) make such other revisions to the Lease as are necessitated by the execution and A-14

89 delivery of such Additional Certificates (provided, however, that such other revisions shall not prejudice the rights of the Owners of Outstanding Certificates as granted them under the terms of the Trust Agreement); (d) The District and the Corporation will have determined that the Lease Payments to be paid by the District (including those evidenced by the Additional Certificates) do not exceed the fair rental value of the Property pursuant to the Lease. (e) There will have been delivered to the Trustee a counterpart of the amendments required by the Trust Agreement; (f) The Trustee will have received a certificate of the Corporation Representative that there exists on the part of the Corporation no Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default); (g) The Trustee will have received a certificate of the District Representative that (i) there exists on the part of the District no Event of Default (or any event which, once all notice or grace periods have passed, would constitute an Event of Default) and (ii) the Lease Payments as increased or adjusted do not exceed in any year the fair rental value of the Property (as such term is defined in the amended Lease); (h) The Trustee will have received an opinion of Special Counsel substantially to the effect that (i) said supplemental agreement and said amendments to the Lease comply in all respects with the requirements of the Trust Agreement, (ii) said supplemental agreement and said amendments to the Lease have been duly authorized, executed and delivered by each of the respective parties thereto (provided that said opinion of Special Counsel, in rendering the opinions set forth in the Trust Agreement, shall be entitled to rely upon one or more other opinions of counsel, including counsel to any of the respective parties to said supplemental agreement or said amendments to the Lease), and (iii) assuming that no Event of Default has occurred and is continuing, the Trust Agreement, as amended by said supplemental agreement, and the Lease, as amended by the respective amendments thereto, constitute the legal, valid and binding obligations of the respective parties thereto, enforceable against said parties in accordance with their respective terms (except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, moratorium, debt adjustment or other laws affecting creditors rights generally, and except to the extent that enforcement thereof may be limited by general principles of equity, regardless of whether enforcement is sought in a legal or equitable proceeding); (i) The District will have provided each rating agency then rating the Certificates written notice of the proposed execution and delivery of such Additional Certificates at the addresses indicated in the Trust Agreement and will receive a rating confirmation that the current rating or ratings of the Outstanding Certificates will not be reduced, withdrawn or suspended as a result of the execution and delivery of such Additional Certificates from each rating agency then rating the Certificates. (j) There will have been delivered to the Trustee an endorsement to or reissuance of the title insurance policy delivered under the Lease providing that the insured amount is at least equal to the aggregate principal amount of all of the Certificates and Additional Certificates outstanding upon the execution and delivery of such Additional Certificates; (k) Upon the execution and delivery of such Additional Certificates, there will have been delivered to the Trustee cash or a Reserve Facility sufficient to increase the amount on deposit in the Reserve Fund, or a reserve fund established under the supplemental agreement, to the Reserve Requirement (calculated with respect to all Outstanding Certificates and Additional Certificates); (l) Such other conditions will have been satisfied, and such other instruments will have been duly executed and delivered to the Trustee (with a copy to each rating agency then rating the Certificates), as the District or the Corporation shall have reasonably requested. A-15

90 Upon delivery to the Trustee of the foregoing instruments, the Trustee will cause to be executed and delivered Additional Certificates representing the aggregate principal amount specified in such supplemental agreement, and such Additional Certificates shall be equally and ratably secured with all Certificates, including any Additional Certificates, theretofore prepared, executed and delivered, all without preference, priority or distinction (other than with respect to maturity, payment, prepayment or sinking fund payment (if any)) of any one Certificate, including Additional Certificates, over any other; provided, however, that no provision of the Trust Agreement shall require the District to consent to or otherwise permit the preparation, execution and delivery of Additional Certificates, it being understood and agreed that any such consent or other action of the District to permit the preparation, execution and delivery of Additional Certificates, or lack thereof, shall be in the sole discretion of the District. The Trustee Indemnification. The District will, to the extent permitted by law, indemnify and save the Trustee and its officers, directors, agents and employees harmless from and against all claims, losses, costs, expenses, liability and damages, including legal fees and expenses, arising out of (i) the use, maintenance, condition or management of, or from any work or thing done on, the Property by the District, (ii) any breach or default on the part of the District in the performance of any of its obligations under the Trust Agreement and any other agreement made and entered into for purposes of the Property, (iii) any act of negligence of the District or of any of its agents, contractors, servants, employees or licensees with respect to the Property, (iv) any act of negligence of any assignee of, or purchaser from, the District or of any of its or their agents, contractors, servants, employees or licensees with respect to the Property, (v) the exercise and performance by the Trustee of its powers and duties under the Trust Agreement or any related document, (vi) the sale of the Certificates and the carrying out of any of the transactions contemplated by the Certificates or the Trust Agreement or (vii) any untrue statement or alleged untrue statement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made in light of the circumstances in which they were made, not misleading in any official statement or other disclosure document utilized in connection with the sale of the Certificates. The indemnification set forth in the Trust Agreement will extend to the Trustee s officers, agents, employees, successors and assigns. No indemnification will be made under the Trust Agreement or other agreements for willful misconduct or negligence by the Trustee, its officers, agents, employees, successors or assigns. The District s obligations under the Trust Agreement will remain valid and binding notwithstanding maturity and payment of the Certificates, or the resignation or removal of the Trustee. Removal. The Insurer and, so long as there is no Event of Default, the District (with the prior consent of the Insurer), may remove the Trustee initially appointed, and any successor thereto, and may appoint a successor or successors thereto. Resignation. The Trustee may, upon prior written notice to the District, the Insurer, if any, and the Corporation, and so long as the Insurance Policy is in full force and effect, to the Insurer resign; provided that such resignation will not take effect until the successor Trustee is appointed. Upon receiving such notice of resignation, the District will promptly appoint a successor Trustee, subject to the written approval of the Insurer. In the event the District does not name a successor Trustee within 30 days of receipt of notice of the Trustee s resignation, then the Trustee may petition a court of suitable jurisdiction to seek the immediate appointment of a successor Trustee. Successor. Any successor Trustee will be a bank, association, corporation or trust company meeting the qualifications as set forth in the Trust Agreement. Any resignation or removal of the Trustee and appointment of a successor Trustee will become effective upon acceptance of appointment by the successor Trustee and upon receipt of written approval of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy). Upon such acceptance, the successor Trustee will mail notice thereof to the Owners at their respective addresses set forth on the Certificate registration books. Funds; Pledge The Trust Agreement creates (1) a Delivery Cost Fund, (2) a Prepayment Fund, (3) a Lease Payment Fund, (4) a Reserve Fund, (5) a Net Proceeds Fund, and (6) a Rebate Fund, to be held in trust by the Trustee. A-16

91 The Delivery Cost Fund. The moneys in the Delivery Cost Fund will be used and withdrawn by the Trustee from time to time to pay the Delivery Costs upon submission of a Delivery Cost Requisition of the District stating (a) the person to whom payment is to be made, (b) the amount to be paid, (c) the purpose for which the obligation was incurred, (d) that such payment is a proper charge against the Delivery Cost Fund, and (e) that such amounts have not been the subject of a prior Delivery Cost Requisition. On the earlier of (i) October 27, 2015, or (ii) the date of receipt by the Trustee of a Delivery Cost Requisition therefor, all amounts (if any) remaining in the Delivery Cost Fund will be withdrawn therefrom by the Trustee and transferred to the Lease Payment Fund. Thereafter, the Delivery Cost Fund will be closed. The Prepayment Fund. Moneys to be used for prepayment of the Certificates will be deposited into the Prepayment Fund and used solely for the purpose of prepaying the Certificates in advance of their maturity on the date designated for prepayment and upon presentation and surrender of such Certificates to the Trustee. Any funds remaining in the Prepayment Fund after prepayment and payment of all Certificates Outstanding with respect to such Prepayment Fund, including payment of any applicable fees and expenses to the Trustee and any other Additional Payments payable under the Lease, or provision made thereof satisfactory to the Trustee, will be withdrawn by the Trustee and remitted to the District. The Lease Payment Fund. Lease Payments and any proceeds from the re-letting or any other distribution of the Property pursuant to the Lease will be deposited in or credited to the Lease Payment Fund. Amounts in the Lease Payment Fund must be used solely for the purpose of paying the principal and interest evidenced by the Certificates as the same become due and payable in accordance with the Trust Agreement, subject to the requirement that certain investment earnings may be transferred to the Rebate Fund as provided in the Trust Agreement, as follows: on each Certificate Payment Date, the Trustee first will set aside an amount sufficient to pay the interest evidenced by the Certificates becoming due and payable on such date, and mail such amount to the Owners; and second will set aside an amount sufficient to pay the principal evidenced by the Certificates becoming due and payable on such Certificate Payment Date. Any funds remaining in the Lease Payment Fund after payment of all Certificates Outstanding, including accrued interest and payment of any applicable fees, expenses or other amounts to the Trustee pursuant to the Trust Agreement and any other Additional Payments due under the Lease, or provision made therefor satisfactory to the Trustee, and provision for any amounts required to be transferred to the Rebate Fund pursuant to the Trust Agreement, will be withdrawn by the Trustee and remitted to the District. The Net Proceeds Fund. Any Net Proceeds received by the District in the event of any accident, destruction, theft or taking by eminent domain or condemnation with respect to the Property must be transferred to the Trustee and deposited by the Trustee in the Net Proceeds Fund. The Trustee will disburse Net Proceeds for replacement or repair of the Property as provided in the Lease, or transfer such proceeds to the Prepayment Fund upon notification of the District Representative as provided in the Lease for prepayment of all or part of the Certificates. Any balance of the Net Proceeds remaining in the Net Proceeds Fund after replacement or repair has been completed shall, with the prior written consent of the Insurer, be disbursed to the District. Any amounts remaining in the Net Proceeds Fund after payment or provision for payment of all Certificates, including provision for all amounts required to be transferred to the Rebate Fund pursuant to the Trust Agreement, shall be paid to the District as provided in the Trust Agreement. Proceeds of any policy of title insurance received by the Trustee with respect to the Property shall be applied and disbursed by the Trustee upon the Written Request of the District as follows: (i) If the District determines that the title defect giving rise to such proceeds has not substantially interfered with its use and occupancy of the Property and will not result in an abatement of Lease Payments and Additional Payments payable by the District under the Lease (such determination to be certified by the District in writing), such proceeds shall be remitted to the District and used for any lawful purpose thereof; or A-17

92 (ii) If the District determines that the title defect giving rise to such proceeds has substantially interfered with its use and occupancy of the Property and will result in an abatement of Lease Payments and Additional Payments payable by the District under the Lease, then the Trustee will, with the prior consent of the Insurer, immediately deposit such proceeds in the Prepayment Fund and such proceeds shall be applied to the prepayment of Certificates. Security Interest in Moneys and Funds. The Corporation and the District, as their interests may appear, grant to the Trustee for the benefit of the Owners a lien on and a security interest in all moneys in the funds held by the Trustee under the Trust Agreement (excepting only the Rebate Fund and any money sto be deposited into the Rebate Fund), including without limitation, the Lease Payment Fund, the Reserve Fund (including the Reserve Policy), the Prepayment Fund and the Net Proceeds Fund, and all such moneys will be held by the Trustee in trust and applied to the respective purposes specified in the Trust Agreement and in the Lease. Pledge of Lease Payments and Proceeds. The Lease Payments and any proceeds from the re-letting or any other disposition of the Property pursuant to the Lease (the Lease Proceeds ) are irrevocably pledged to and will be used for the punctual payment of the interest and principal represented by the Certificates and, except as permitted under the Trust Agreement with respect to Additional Certificates, the Lease Payments and Lease Proceeds will not be used for any other purpose while any of the Certificates remain Outstanding. This pledge will constitute a first lien on the Lease Payments and Lease Proceeds in accordance with the terms of the Trust Agreement. Reserve Fund All moneys at any time on deposit in the Reserve Fund (including any Reserve Facility provided to satisfy the Reserve Requirement in whole or in part) will be held by the Trustee in trust for the benefit of the Owners of the Certificates, as a reserve for the payment when due of all the Lease Payments to be paid pursuant to the Lease and of all payments on the Certificates and applied solely as provided in the Trust Agreement. On the Closing Date, there will be deposited in the Reserve Fund the Reserve Policy. Reserve Replenishment Rent. Any Reserve Replenishment Rent payable pursuant to the Lease will be deposited in the Reserve Fund. Transfers of Excess. The Trustee will, on or before March 15 and September 15 of each year, provide written notice to the District of any moneys which are estimated to be on hand in the Reserve Fund in excess of the Reserve Requirement on the next succeeding January 1 or July 1, as the case may be, and one Business Day immediately preceding any Lease Payment Date, the Trustee will transfer such excess moneys to the Lease Payment Fund to be applied to the Lease Payment then due from the District. In the event of the partial Prepayment of Lease Payments the District may instruct the Trustee to reduce the cash amounts on deposit in the Reserve Fund to the Reserve Requirement as of such date and may direct the Trustee to transfer excess cash amounts from the Reserve Fund for any lawful purpose. The transfers described above are in each case subject to the requirement that if the Certificate proceeds have become subject to the arbitrage rebate provisions of Section 148(f) of the Code as described in the Trust Agreement, then certain investment earnings are to be transferred to the Rebate Fund at the direction of the District as provided in the Trust Agreement. Application of Reserve Fund in Event of Deficiency in Lease Payment Fund. At least five (5) Business Days immediately preceding any Certificate Payment Date, the Trustee shall ascertain the necessity for a claim under the Reserve Policy or other Reserve Facility in accordance with the terms of the Trust Agreement, and shall provide notice to the Reserve Insurer and the provider of any other Reserve Facility at least five (5) Business Days prior to each date upon which interest or principal is due on the Certificates. Whether or not Lease Payments are then in abatement, if five (5) Business Days immediately preceding any Certificate Payment Date, the moneys available in the Lease Payment Fund do not equal the amount of the principal and interest with respect to the Certificates then coming due and payable, the Trustee first shall apply the moneys A-18

93 available in the Reserve Fund to make delinquent Lease Payments on behalf of the District by transferring the amount necessary for such purpose to the Lease Payment Fund. All cash and investments in the Reserve Fund shall be transferred to the Lease Payment Fund before any drawing shall be made on the Reserve Policy or any other Reserve Facility. The Trustee shall take whatever action is necessary to liquidate or draw upon investments of funds held in the Reserve Fund or draw upon the Reserve Policy or other Reserve Facility to make such funds available for application as provided under the Trust Agreement on the Certificate Payment Date. Draws on all Reserve Facilities 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 Reserve Fund. Available coverage means the coverage then available for disbursement pursuant to the terms of the applicable Reserve Facilities 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 provide to honor any such claim or draw. Moneys in Funds; Investment Held in Trust. The moneys and investments held by the Trustee under the Trust Agreement are irrevocably held in trust for the benefit of the Owners and, in the case of the Rebate Fund, for payment as required to the United States Treasury, and for the purposes specified in the Trust Agreement, and such moneys, and any income or interest earned thereon, will be expended only as provided in the Trust Agreement, and will not be subject to levy or attachment or lien by or for the benefit of any creditor of the Corporation, the Trustee or the District, or any of them. Investment. Moneys held by the Trustee under the Trust Agreement will be invested and reinvested on maturity by the Trustee pursuant to the Trust Agreement. The Trustee will report any such investments to the District on a monthly basis in its regular statements. Such investments and reinvestments will be made giving full consideration for the time at which funds are required to be available based upon information supplied by the District. Investments purchased with funds on deposit in the Lease Payment Fund and Prepayment Fund will mature not later than the Certificate Payment Date or prepayment date, as appropriate, immediately succeeding the investment. Notwithstanding anything to the contrary contained in the Trust Agreement, investments purchased with funds on deposit in the Reserve Fund should have an average aggregate weighted term to maturity of not greater than five years unless invested as permitted in the Trust Agreement pursuant to which funds may be withdrawn, without penalty, to make payments. Any income, profit or loss on the investment of moneys held by the Trustee under the Trust Agreement will be credited to the respective fund for which it is held, except as otherwise provided in the Trust Agreement. Rebate Fund Absent an opinion of Special Counsel that the exclusion from gross income for federal income tax purposes of the Interest Component evidenced by the Certificates will not be adversely affected, the District will cause to be deposited in the Rebate Fund such amounts as are required to be deposited therein pursuant to the Trust Agreement and the Tax Certificate. All amounts at any time on deposit in the Rebate Fund will be held by the Trustee in trust, to the extent required to satisfy the requirement to make rebate payments to the United States (the Rebate Requirement ) pursuant to Section 148 of the Code and the Treasury Regulations promulgated thereunder (the Treasury Regulations ). Such amounts will be free and clear of any lien under the Trust Agreement and will be governed by the provisions relating to the Rebate Fund in the Trust Agreement and by the Tax Certificate executed by the District. The Trustee will be deemed conclusively to have complied with the Rebate Requirement and the Tax Certificate if it follows the directions of the District, and will have no independent responsibility to, or liability resulting from its failure to, enforce compliance by the District with the Rebate Requirement. Deposits. (i) Within 45 days of the end of the fifth Certificate Year and each fifth Certificate Year thereafter, (1) the District will calculate or cause to be calculated with respect to the Certificates the amount that would be considered the rebate amount within the meaning of Section of the Treasury Regulations, and (2) the A-19

94 District will transfer to the Trustee for deposit in the Rebate Fund, if and to the extent required, amounts sufficient to cause the balance in the Rebate Fund to be equal to the rebate amount so calculated. (ii) The District will not be required to deposit any amount to the Rebate Fund in accordance with the provision described in clause (i) above if the amount on deposit in the Rebate Fund prior to the deposit required to be made as described in the Trust Agreement relating to deposits equals or exceeds the rebate amount calculated in accordance with the provision described in clause (i) above. Such excess may be withdrawn from the Rebate Fund to the extent permitted under the Trust Agreement. (iii) The District will not be required to calculate the rebate amount, and will not be required to deposit any amount to the Rebate Fund in accordance with the Trust Agreement, with respect to all or a portion of the proceeds of the Certificates (including amounts treated as proceeds of the Certificates) (1) to the extent such proceeds satisfy the expenditure requirements of Section 148(f)(4)(B) or Section 148(f)(4)(C) of the Code or Section (d) of the Treasury Regulations, whichever is applicable, and otherwise qualify for the exception to the Rebate Requirement pursuant to whichever of said sections is applicable, (2) to the extent such proceeds are subject to an election by the District under Section 148(f)(4)(C)(vii) of the Code to pay a 1½% penalty in lieu of arbitrage rebate in the event any of the percentage expenditure requirements of Section 148(f)(4)(C) are not satisfied, or (3) to the extent such proceeds qualify for the exception to arbitrage rebate under Section 148(f)(4)(A)(ii) of the Code for amounts in a bona fide debt service fund. Withdrawal Following Payment of Certificates. Any funds remaining in the Rebate Fund after prepayment of all the Certificates and any amounts described in the Trust Agreement, or provision made therefor satisfactory to the Trustee, including accrued interest and payment of any applicable fees and expenses to the Trustee, will be withdrawn by the Trustee and remitted to the District. Withdrawal for Payment of Rebate. Upon the District s written direction, but subject to the exceptions contained in the Trust Agreement to the requirement to calculate the rebate amount and make deposits to the Rebate Fund, the Trustee will pay to the United States, from amounts on deposit in the Rebate Fund, (i) not later than 60 days after the end of (1) the fifth Certificate Year, and (2) each fifth Certificate Year thereafter, an amount that, together with all previous rebate payments, is equal to at least 90% of the rebate amount calculated as of the end of such Certificate Year in accordance with Section of the Treasury Regulations; and (ii) not later than 60 days after the payment of all Certificates, an amount equal to 100% of the rebate amount calculated as of the date of such payment (and any income attributable to the rebate amount determined to be due and payable) in accordance with Section of the Treasury Regulations. Rebate Payments. Each payment required to be made pursuant to the Trust Agreement will be made to the Internal Revenue Service Center on or before the date on which such payment is due, and will be accompanied by Internal Revenue Service Form 8038-T, which will be completed by the arbitrage rebate consultant for execution by the District and provided to the Trustee. Deficiencies in the Rebate Fund. In the event that, prior to the time any payment is required to be made from the Rebate Fund, the amount in the Rebate Fund is not sufficient to make such payment when such payment is due, the District will calculate the amount of such deficiency and direct the Trustee to deposit an amount received from the District equal to such deficiency into the Rebate Fund prior to the time such payment is due. Withdrawals of Excess Amounts. In the event that immediately following the calculation required by the Trust Agreement described above, but prior to any deposit as described above, the amount on deposit in the Rebate Fund exceeds the rebate amount calculated in accordance with said subsection, upon written instructions from the District, the Trustee will withdraw the excess from the Rebate Fund and credit such excess to the Lease Payment Fund. A-20

95 Record Keeping. The District will retain records of all determinations made with respect to the matters described above until six years after the complete retirement of the Certificates. Survival of Defeasance. Notwithstanding anything in the Trust Agreement to the contrary, the Rebate Requirement will survive the payment in full or defeasance of the Certificates. Amendments Permitted With Consent. The Trust Agreement and the rights and obligations of the Owners, and the Lease and the rights and obligations of the parties thereto, may be modified or amended at any time, with notice to any rating agency then rating the Certificates, by a supplemental agreement or amendment thereto which will become effective when the written consents of the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy) and Owners of a majority in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided below, will be filed with the Trustee. No such modification or amendment will (1) extend or have the effect of extending the fixed maturity of any Certificate or reducing the interest rate with respect thereto or extending the time of payment of interest, or reducing the amount of principal thereof or reducing any premium payable upon the prepayment thereof, or diminish the security afforded by the Insurance Policy without the prior written consent of the Owner of such Certificate and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy), or (2) reduce the percentage of Owners whose consent is required for the execution of any amendment of the Trust Agreement or supplement thereto without the prior written consent of the Owners of all Certificates then Outstanding and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy), or (3) modify any of the rights or obligations of the Trustee without its written assent thereto, or (4) amend the section of the Trust Agreement pertaining to amendments without the prior written consent of the Owners of all Certificates then outstanding and the Insurer (so long as the Insurer is not in default in its payment obligations under the Insurance Policy). The Trustee will have the right to require such opinions of counsel as it deems necessary concerning (i) the lack of material adverse effect of the amendment on Owners, (ii) the amendment will not affect the tax status of interest with respect to the Certificates, and (iii) that such amendment is authorized or permitted under the terms of the Trust Agreement (and, if applicable, the Lease) and complies with the provisions of the Trust Agreement. Any such supplemental agreement or amendment will become effective as provided in the Trust Agreement. Without Consent. The Trust Agreement and the rights and obligations of the Owners, and the Lease and the rights and obligations of the parties thereto, may be modified or amended at any time by a supplemental agreement or amendments thereto, with the prior written consent of the Insurer, with notice to any rating agency then rating the Certificates, but without the consent of any such Owners, but only to the extent permitted by law and only: (1) to add to the covenants and agreements of the District and the Corporation under the Trust Agreement; (2) to cure, correct or supplement any ambiguous or defective provision contained in the Trust Agreement or in the Lease; (3) in regard to matters arising under the Trust Agreement or the Lease, as the parties thereto may deem necessary or desirable and which will not adversely affect the interest of the Owners or the Insurer (unless the Insurer has consented, in writing, to such amendment); (4) to make such additions, deletions or modifications as may be necessary or appropriate to assure the exclusion from gross income for federal income tax purposes of the Interest Component evidenced by the Certificates; (5) to add to the rights of the Trustee; (6) to maintain the rating or ratings assigned to the Certificates; or (7) to provide for the execution and delivery of Additional Certificates in accordance with the provisions of the Trust Agreement. No such modification or amendment, however, will modify any of the rights or obligations of the Trustee or the Insurer without their written assent thereto. Any such supplemental agreement will become effective upon execution and delivery by the parties thereto. Limitation of Liability Limited Liability of the District. Except for the payment of Lease Payments, Additional Payments, Reserve Replenishment Rent and Prepayments when due in accordance with the Lease and the performance of the other covenants and agreements of the District contained in the Trust Agreement and in the Lease, the District will have no obligation or liability to any of the other parties or to the Owners with respect to the Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee. A-21

96 No Liability of the District or Corporation for Trustee Performance. Except as expressly provided in the Trust Agreement, neither the District nor the Corporation will have any obligation or liability to any other parties or to the Owners with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement. Limited Liability of Trustee. The Trustee will have no obligation or responsibility for providing information to the Owners concerning the investment character of the Certificates. The Trustee makes no representations as to the validity or sufficiency of the Certificates, will incur no responsibility in respect thereof, other than in connection with the duties or obligations in the Trust Agreement or in the Certificates assigned to or imposed upon it. The Trustee will not be responsible for the sufficiency or enforceability of the Lease, Site Lease or Assignment Agreement. The Trustee will not be liable for the sufficiency or collection of any Lease Payments or other moneys required to be paid to it under the Lease (except as provided in the Trust Agreement), its right to receive moneys pursuant to said Lease, or the value of or title to the Property. The Trustee will have no obligation or liability to any of the other parties or the Owners with respect to the Trust Agreement or failure or refusal of any other party to perform any covenant or agreement made by any of them under the Trust Agreement or the Lease, but will be responsible solely for the performance of the duties and obligations expressly imposed upon it under the Trust Agreement. The recitals of facts, covenants and agreements in the Trust Agreement and in the Certificates will be taken as statements, covenants and agreements of the District or the Corporation (as the case may be), and the Trustee assumes no responsibility for the correctness of the same. Events of Default and Remedies Remedies. If an Event of Default happens, then, and in each and every such case during the continuance of such Event of Default, the Trustee may exercise any and all remedies available pursuant to law or granted pursuant to the Lease; provided, however, that notwithstanding anything in the Trust Agreement or in the Lease to the contrary, THERE WILL BE NO RIGHT UNDER ANY CIRCUMSTANCES TO ACCELERATE THE MATURITIES OF THE CERTIFICATES OR OTHERWISE TO DECLARE ANY LEASE PAYMENTS NOT THEN IN DEFAULT TO BE IMMEDIATELY DUE AND PAYABLE; provided further that so long as the Insurer will not be in default in its payment obligations under the Insurance Policy, the Insurer will control all remedies upon an Event of Default. Application of Funds. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of the Trust Agreement or of the Lease, will be deposited into the Lease Payment Fund and be applied by the Trustee after payment of all amounts due and payable under the Trust Agreement and of the Lease in the following order upon presentation of the several Certificates, and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid First, Costs and Expenses: to the payment of the costs, fees and expenses of the Trustee and then of the Owners in declaring such Event of Default and in performing its duties under the Trust Agreement, including reasonable compensation to its or their agents, attorneys and counsel; Second, Interest: to the payment to the persons entitled thereto of all installments of interest then due in the order of the maturity of such installment, and, if the amount available will not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; Third, Principal: to the payment to the persons entitled thereto of the unpaid principal with respect to any Certificates which will have become due, whether at maturity or by call for prepayment, in the order of their due dates, with interest on the overdue principal and interest at a rate equal to the rate paid with respect to the Certificates and, if the amount available will not be sufficient to pay in full all the amounts A-22

97 Defeasance due with respect to the Certificates on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal due on such date to the persons entitled thereto, without any discrimination or preference; and Fourth, Insurer: to the extent not included in clauses First, Second or Third above, to the payment of all amounts then due to the Insurer, as certified in writing to the Trustee. If and when any Outstanding Certificates will be paid and discharged in any one or more of the following ways (1) Payment or Prepayment: by well and truly paying or causing to be paid the principal of and interest and prepayment premiums (if any) with respect to such Certificates Outstanding, as and when the same become due and payable; (2) Cash: if prior to maturity and having given at least thirty (30) days prior written notice of prepayment by depositing with the Trustee, in trust, concurrent with the giving of such notice, an amount of cash which (together with cash then on deposit in the Lease Payment Fund and the Reserve Fund together with the interest to accrue thereon, in the event of payment or provision for payment of all Outstanding Certificates) is sufficient to pay such Certificates Outstanding, including all principal and interest and premium, if any; or (3) Defeasance Securities: by irrevocably depositing with the Trustee, in trust, Defeasance Securities together with cash, if required, in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon (and, in the event of payment or provision for payment of all Outstanding Certificates, moneys then on deposit in the Lease Payment Fund and the Reserve Fund together with the interest to accrue thereon), be fully sufficient to pay and discharge such Certificates (including all principal and interest represented thereby and prepayment premiums if any) at or before their maturity date; and all other amounts due under the Trust Agreement have been paid in full, then, notwithstanding that any Certificates will not have been surrendered for payment, all obligations of the Corporation, the Trustee and the District with respect to such Certificates will cease and terminate, except only the obligation of the Trustee to pay or cause to be paid, from Lease Payments paid by or on behalf of the District from funds deposited pursuant to paragraphs (2) and (3) above, to the Owners of the Certificates not so surrendered and paid all sums due with respect thereto, and in the event of deposits pursuant to paragraphs (2) and (3) above, the Certificates will continue to represent direct and proportionate interests of the Owners thereof in the Lease Payments under the Lease. Notwithstanding anything in the Trust Agreement to the contrary, in the event that the principal and/or interest with respect to the Certificates will be paid by the Insurer pursuant to the Insurance Policy, the Certificates will remain Outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid by the District, and the assignment and pledge of the Lease Payments and all covenants, agreements and other obligations of the District to the Owners will continue to exist and will run to the benefit of the Insurer, and the Insurer will be subrogated to the rights of such Owners. Prior to any defeasance becoming effective under the Trust Agreement, the District will cause to be delivered at least five business days prior to any defeasance becoming effective (i) an executed copy of a report, addressed to the Trustee and the District, in form and substance acceptable to the District of a nationally recognized firm of certified public accountants, verifying that the Defeasance Securities and cash, if any, satisfy the requirements described above, (ii) a copy of the escrow deposit agreement entered into in connection with such defeasance, which escrow agreement will be in form and substance acceptable to the Insurer, and (iii) a copy of an Opinion of Special Counsel, dated the date of such defeasance and addressed to the Trustee, the District, and the Insurer in form and substance acceptable to the Trustee, the District and the Insurer, to the effect that such Certificates are no longer Outstanding under the Trust Agreement. A-23

98 Notwithstanding the foregoing, if the defeasance is effected by means of a cash deposit only, the escrow deposit agreement referenced above shall not be necessary to effect such defeasance, though the other requirements above shall still apply. Any funds held by the Trustee, at the time of payment or provision for payment of all Outstanding Certificates pursuant to one of the procedures described in the Trust Agreement, which are not required for the payment to be made to Owners, will be paid over to the District, after the payment of any amounts due to the Trustee pursuant to the Trust Agreement, any amounts due and owing to the Insurer, and any other Additional Payments due under the Lease. THE ASSIGNMENT AGREEMENT The Assignment Agreement provides for the transfer, assignment and setting over by the Corporation to the Trustee, for the benefit of the Owners of Certificates, all of the Corporation s rights under the Lease (excepting only the Corporation s rights to recover attorneys fees and expenses in the event the Corporation is a non-defaulting party to a Lease after a default), including, without limitation, (1) the right to receive and collect all of the Lease Payments, Additional Payments, Prepayments and Reserve Replenishment Rent from the District under the Lease; (2) the right to receive and collect any proceeds of any insurance maintained pursuant to the Lease, or any condemnation award rendered with respect to the Property or any lease of the Property in the event of a default by the District under the Lease; (3) the right to take all actions and give all consents under the Lease; (4) the right to exercise such rights and remedies conferred on the Corporation under the Lease as may be necessary or convenient (a) to enforce payment of the Lease Payments, Additional Payments, Prepayments, Reserve Replenishment Rent, and any other amounts required to be deposited in the Lease Payment Fund, the Prepayment Fund, the Reserve Fund, the Net Proceeds Fund or any other fund established under the Trust Agreement, or (b) otherwise to protect the interests of the Corporation in the event of a default by the District under the Lease; and (5) the right of the Corporation be paid its fees and expenses for re-leasing the Property upon events of default under the Lease. The Trustee accepts such assignment for the benefit of the Owners of the Certificates, subject to the provisions of the Trust Agreement. THE SITE LEASE Pursuant to the Site Lease, the District, as lessor, leases to the Corporation, as lessee, right, title and interest in the Property. The term of the Site Lease will commence as of the date of the Lease to the Site Lease and will remain in effect until the expiration of the term of such Lease. The Property will be simultaneously leased back to the District under the Lease, and title will remain in the District. THE PLEDGE AGREEMENTS CFD NO. 1 Fourth Supplement and Amendment to Agreement for Pledge of Special Taxes CFD No. 1 and the District previously entered into that certain Agreement for Pledge of Special Taxes Community Facilities District No. 1, as supplemented by a First Supplement and Amendment to the CFD No. 1 Pledge Agreement, a Second Supplement and Amendment to the CFD No. 1 Pledge Agreement and a Third Supplement and Amendment to CFD No. 1 Pledge Agreement (collectively referred to as CFD No. 1 Pledge Agreement ). Pursuant to the provisions of the CFD No. 1 Pledge Agreement, CFD No. 1 agreed to transfer special taxes (net of administrative expenses) collected within CFD No. 1 to the District and the District pledged special taxes received from CFD No. 1 to the payment of lease payments with respect to the San Ysidro School District 1998 Certificates of Participation (School Facilities Project) ( 1998 Certificates ), the San Ysidro School District 2001 Certificates of Participation (School Facilities Project) ( 2001 Certificates ), the San Ysidro School District 2007 Certificates of Participation (School Facilities Project) ( 2007 Certificates ) and the San Ysidro School District 2012 Certificates of Participation (School Facilities Project) (the 2012 Certificates ). CFD No. 1 agreed that the special tax revenues would not be used for any other purpose during the term of the CFD No. 1 Pledge Agreements although it was specified that the San Ysidro School District and CFD No. 1 could, under specified conditions, also provide for a pledge of the CFD No. 1 special taxes to parity obligations of the District. The Lease Payments to be paid by the District pursuant to the Lease constitute such a parity obligation. A-24

99 The District and CFD No. 1 have entered into a Fourth Supplement and Amendment to the CFD No. 1 Pledge Agreement ( CFD No. 1 Fourth Supplement ) to provide that special taxes levied and collected within CFD No. 1, after deduction of identified administrative expenses, are irrevocably pledged by the District to the payment of Lease Payments on the Certificates in addition to the 2007 Certificates and the 2012 Certificates as parity obligation. The CFD No. 1 Fourth Supplement will also extend the term of the CFD No. 1 Pledge Agreements until such time as the 2007 Certificates, the 2012 Certificates and the Certificates have been fully paid, prepaid or defeased. Upon the payment, prepayment, or defeasance of all of the outstanding 2007 Certificates, the 2012 Certificates and the Certificates, the CFD No. 1 Pledge Agreements, as supplemented and amended by the CFD No. 1 Fourth Supplement, shall immediately terminate without further action. CFD No. 2 Third Supplement and Amendment to Agreement for Pledge of Special Taxes CFD No. 2 and the District previously entered into that certain Agreement for Pledge of Special Taxes Community Facilities District No. 2, as supplemented by a First Supplement and Amendment to the CFD No. 2 Pledge Agreement and a Second Supplement and Amendment to the CFD No. 2 Pledge Agreement, ( CFD No. 2 Pledge Agreements ). Pursuant to the provisions of the CFD No. 2 Pledge Agreement, CFD No. 2 agreed to transfer special taxes (net of administrative expenses) collected within CFD No. 2 to the District and the District pledged special taxes received from CFD No. 2 to the payment of lease payments on the the San Ysidro School District 2005 Certificates of Participation (School Facilities Project) ( 2005 Certificates ), the 2007 Certificates and the 2012 Certificates. CFD No. 2 agreed that the special tax revenues would not be used for any other purpose during the term of the CFD No. 2 Pledge Agreement although it was specified that the San Ysidro School District and CFD No. 2 could, under specified conditions, also provide for a pledge of the CFD No. 2 special taxes to parity obligations of the District. The Lease Payments to be paid by the District pursuant to the Lease constitute such a parity obligation. The District and CFD No. 2 have entered into a Third Supplement and Amendment to the CFD No. 2 Pledge Agreement ( CFD No. 2 Third Supplement ) to provide that special taxes levied and collected within CFD No. 2 after deduction of identified administrative expenses, are irrevocably pledged by the District to the payment of Lease Payments in addition to the 2007 Certificates and the 2012 Certificates as parity obligations. The CFD No. 2 Third Supplement will also extend the term of the CFD No. 2 Pledge Agreement until such time as the 2007 Certificates, the 2012 Certificates and the Certificates have been fully paid, prepaid or defeased. Upon the payment, prepayment, or defeasance of all of the outstanding the 2007 Certificates, 2012 Certificates and the Certificates, the CFD No. 2 Pledge Agreements, as supplemented and amended by the CFD No. 2 Third Supplement, shall immediately terminate without further action. CFD N. 3 Fourth Supplement and Amendment to Agreement for Pledge of Special Taxes CFD No. 3 and the District previously entered that certain Agreement for Pledge of Special Taxes Community Facilities District No. 3 as supplemented by a First Supplement and Amendment to the CFD No. 3 Pledge Agreement, a Second Supplement and Amendment to the CFD No. 3 Pledge Agreement and a Third Supplement and Amendment to the CFD NO. 4 Pledge Agreement (collectively referred to as CFD No. 3 Pledge Agreements ). Pursuant to the provisions of the CFD No. 2 Pledge Agreement, CFD No. 2 agreed to transfer special taxes (net of administrative expenses) collected within CFD No. 2 to the District and the District pledged special taxes received from CFD No. 2 to the payment of lease payments on the 2001 Certificates, the 2005 Certificates, the 2007 Certificates and the 2012 Certificates. CFD No. 3 agreed that the special tax revenues would not be used for any other purpose during the term of the CFD No. 3 Pledge Agreements although it was specified that the San Ysidro School District and CFD No. 3 could, under specified conditions, also provide for a pledge of the CFD No. 3 special taxes to parity obligations of the District. The Lease Payments to be paid by the District pursuant to the Lease constitute such a parity obligation. The District and CFD No. 3 have entered into a Fourth Supplement and Amendment to the CFD No. 3 Pledge Agreement ( CFD No. 3 Fourth Supplement ) to provide that special taxes levied and collected within CFD No. 3, after deduction of identified administrative expenses, are irrevocably pledged by the District to the payment of Lease Payments in addition to the 2007 Certificates and the 2012 Certificates as parity obligations. A-25

100 The CFD No. 3 Fourth Supplement will also extend the term of the CFD No. 3 Pledge Agreements until such time as the 2007 Certificates, the 2012 Certificates and the Certificates have been fully paid, prepaid or defeased. Upon the payment, prepayment, or defeasance of all of the outstanding 2007 Certificates Certificates and the Certificates, the CFD No. 3 Pledge Agreements, as supplemented and amended by the CFD No. 3 Fourth Supplement, shall immediately terminate without further action. A-26

101 APPENDIX B ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE DISTRICT The Certificates are not obligations of the County of San Diego (the County ) and do not represent a lien or charge against any funds or property of the County. The following information is provided only to give prospective investors an overview of the general economic condition of the San Ysidro School District (the District ) and the County. The following information has been obtained from sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the District or the Underwriter. Introduction The community of San Ysidro lies immediately north of the United States-Mexico border and, together with Tijuana, Mexico, is one of the busiest border crossing cities in the world. San Ysidro was annexed into the City in The San Ysidro Port of Entry has undergone recent expansion that is expected to shorten lines at the San Ysidro Port of Entry and increase the efficiency of border crossing. This increased efficiency is expected to greatly benefit the economies both north and south of the border, including San Ysidro, the community in which the District lies. Further expansion is expected to be completed by January The District is located in the City and the County. The City is the County seat. The City comprises approximately 44 square miles at an elevation between sea level and 300 feet. Incorporated in 1888, the City operates as a general law city. It has a council-manager form of government, with the Mayor and other council members elected at large for four-year terms. The County is located in the southwestern corner of the state of California and is bordered by the Pacific Ocean to the west, Orange and Riverside Counties to the north and Imperial County to the east. The County includes 70 miles of the Pacific Ocean coastline, the Anza-Borrego Desert, which forms the eastern third of the County, the Laguna Mountains and the San Diego Bay, one of the world s largest natural deepwater harbors. The County is the second-most populous county in California, and the fifth-most populous county in the United States, encompassing approximately 4,526 square miles. Population The following table shows historical population statistics for the cities in the County as well as the County. B-1

102 POPULATION Cities of the County and the County of San Diego Calendar Years 2010 through Carlsbad 105, , , , ,169 Chula Vista 243, , , , ,139 Coronado 24,697 23,329 23,104 23,201 23,419 Del Mar 4,161 4,182 4,174 4,205 4,234 El Cajon 99,478 99, , , ,256 Encinitas 59,518 59,827 60,057 60,568 61,204 Escondido 143, , , , ,102 Imperial Beach 26,324 26,437 26,483 26,533 26,675 La Mesa 57,065 57,969 58,018 58,328 58,769 Lemon Grove 25,320 25,445 25,481 25,590 25,928 National City 58,582 58,688 58,709 58,915 59,381 Oceanside 167, , , , ,183 Poway 47,811 48,088 48,151 48,628 48,979 San Diego 1,301,617 1,309,784 1,315,177 1,328,073 1,345,895 San Marcos 83,781 84,586 85,160 87,165 90,179 Santee 53,413 54,102 54,384 55,110 55,806 Solana Beach 12,867 12,928 12,938 13,006 13,099 Vista 93,834 94,269 94,587 95,398 96,122 Balance of County 486, , , , ,823 County Total 3,095,313 3,115,810 3,128,749 3,154,574 3,194,362 Based on 2010 Census benchmark and Population Estimates for Cities, Counties, and State. Source: California State Department of Finance. B-2

103 Employment The table below provides the California Employment Development Department s estimates of total annual civilian nonagricultural wage and salary employment by number of employees in each major industry in the County from calendar years 2010 through WAGE AND SALARY EMPLOYMENT County of San Diego Calendar Years 2010 through 2014 (1) Industry Category Natural Resources & Mining Construction 55,400 55,200 57,000 60,900 63,500 Manufacturing Nondurable Goods 21,900 22,200 23,100 24,100 24,900 Durable Goods 71,200 71,100 71,400 71,100 71,400 Total Manufacturing 93,100 93,400 94,500 95,200 96,300 Transportation, Warehousing & Utilities 26,500 26,100 27,300 27,200 26,800 Trade Wholesale 40,200 41,500 43,500 43,900 43,900 Retail 130, , , , ,200 Total Trade 170, , , , ,100 Financial Activities (2) 67,200 67,600 70,200 71,400 70,500 Services (3) 593, , , , ,600 Government Federal 47,000 46,700 46,800 46,500 45,800 State and Local 183, , , , ,100 Total Government 230, , , , ,900 TOTAL NONAGRICULTURAL (4) 1,237,100 1,247,000 1,280,500 1,317,800 1,348,000 (1) (2) (3) (4) All figures are based on a 2014 benchmark. Includes finance, insurance, and real estate. Includes professional and business, information, educational and health, leisure and hospitality, and other services. Figures may not add to total due to independent rounding. Source: State of California Employment Development Department, Labor Market Information Division. B-3

104 The following table summarizes the labor force, employment and unemployment figures for the County, the State and the United States from 2010 through LABOR FORCE, EMPLOYMENT, AND UNEMPLOYMENT (1) County of San Diego, State of California and United States 2010 through 2014 Year and Area Labor Force Employment Unemployment Unemployment Rate (2) 2010 San Diego County 1,574,100 1,408, , % California 18,336,300 16,068,400 2,267, United States 153,889, ,064,000 14,825, San Diego County 1,582,200 1,423, , % California 18,417,900 16,249,600 2,168, United States 153,617, ,869,000 13,747, San Diego County 1,594,900 1,452, , % California 18,519,000 16,589,700 1,929, United States 154,975, ,469,000 12,506, San Diego County 1,590,000 1,470, , % California 18,596,800 16,933,300 1,663, United States 155,389, ,929,000 11,460, San Diego County 1,544,600 1,445,400 99, % California 18,726,400 17,474,600 1,251, United States 155,922, ,305,000 9,617, (1) Data reflects employment status of individuals by place of residence. (2) Unemployment rate is based on unrounded data. Source: California State Employment Development Department and U.S. Department of Labor. B-4

105 Personal Income The following tables show the personal income and per capita personal income for the County, State of California and United States from 2008 through PERSONAL INCOME County of San Diego, State of California, and United States Year County of San Diego California United States 2008 $141,796,326 $1,596,229,973 $12,429,234, ,336,773 1,537,094,676 12,080,223, ,243,429 1,578,553,439 12,417,659, ,466,837 1,685,635,498 13,189,935, ,914,306 1,805,193,769 13,873,161, ,008,428 1,856,614,186 14,151,427, (1) Not Available 1,944,369,223 14,708,582,165 Note: Dollars in Thousands. (1) Preliminary figures, County figures not yet available. Source: U.S. Department of Commerce, Bureau of Economic Analysis. PER CAPITA PERSONAL INCOME (1) County of San Diego, State of California, and United States (1) Year County of San Diego California United States 2008 $46,920 $43,608 $40, ,864 41,587 39, ,501 42,282 40, ,260 44,749 42, ,664 47,505 44, ,384 48,434 44, (2) Not Available 50,109 46,129 Per capita personal income is the total personal income divided by the total mid-year population estimates of the U.S. Bureau of the Census. All dollar estimates are in current dollars (not adjusted for inflation). (2) Preliminary figures, County figures not yet available. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Major Employers B-5

106 MAJOR EMPLOYERS County of San Diego 2014 Employer State of California University of California, San Diego County of San Diego Sharp HealthCare Scripps Health Qualcomm Inc. City of San Diego UC San Diego Health System Kaiser Permanente General Atomics (and affiliated companies) Product/Service Government Higher Education Government Healthcare Healthcare Wireless Communications Government Healthcare Healthcare Aerospace and Defense Source: County of San Diego Comprehensive Annual Financial Report for the year ending June 30, Commercial Activity A summary of taxable sales within the the County of San Diego for years 2007 through 2013 is shown in the following table. TAXABLE SALES County of San Diego (Dollars in Thousands) Retail and Food Taxable Transactions Total Outlets Taxable Transactions Year Retail and Food Permits Total Permits ,011 $34,038,545 85,341 $47,485, ,695 31,715,672 87,050 45,329, ,808 27,958,518 80,595 39,728, ,462 29,475,489 83,194 41,623, ,723 31,985,292 83,971 45,090, ,143 34,153,236 84,267 47,947, ,466 35,948,594 85,143 50,297,331 Note: In 2009, retail permits expanded to include permits for food services. Source: Taxable Sales in California (Sales & Use Tax) - California State Board of Equalization. B-6

107 Building Activity In addition to annual building permit valuations, the numbers of permits for new dwelling units issued each year from 2010 through 2014 are shown in the following tables for the County. BUILDING PERMIT VALUATIONS San Diego County Valuation ($000 s) Residential $975,269 $1,311,815 $1,609,782 $2,060,250 $1,818,853 Non-Residential 258,867 1,072,380 1,235,122 1,401,245 1,920,627 Total $1,234,136 $2,384,195 $2,844,904 $3,461,495 $3,739,480 Units Single Family 2,255 2,242 2,100 2,539 2,276 Multiple Family 1,092 3,038 4,319 5,803 4,327 Total 3,347 5,280 6,419 8,342 6,603 Note: Totals may not add to sum because of rounding. Source: Construction Industry Research Board. Transportation Transportation within and without the County is available by car, train, bus and air. Several interstate highways provide access to the County. Interstate Highways 5 runs parallel to the Pacific Coast from the Mexico border and runs north through the County and the State. Interstate Highway 15 provides access inland from the County east through Riverside, San Bernardino, Las Vegas and Salt Lake City while Interstate Highway 8 runs eastward through the southern United States. In addition, several State routes provide access from the County to adjacent counties and the State. San Diego's International Airport (Lindbergh Field) is located approximately one mile west of the downtown San Diego area at the edge of San Diego Bay. The facilities are owned and maintained by the San Diego Airport Authority and are leased to commercial airlines and other tenants. The airport is California's third most active commercial airport, served by 20 major airlines. In addition to San Diego International Airport, there are several general aviation airports located in the County, including McClellan-Palomar Airport in Imperial Beach. Amtrak provides rail service through the County and local bus and light rail service is available in the City and provides connecting services between most cities in the County. Education The County has many higher education opportunities for residents as well as students who travel from outside of the County to attend its universities. The County is home to three public state universities: University of California, San Diego; San Diego State University; and California State University, San Marcos; as well as four private universities: University of San Diego, Point Lima Nazarene University, Alliant International University, and National University. In addition, the County has 23 public elementary school districts, six high school districts, and 13 unified school districts providing kindergarten through twelfth grade educational services throughout the County. There are also five community college districts in the County. B-7

108 Public instruction in the County is provided by 23 elementary school districts, six high school districts, and 13 unified (combined elementary and high school) districts. The following table represents the total enrollment of students in the County s public schools for the last seven fiscal years. PUBLIC SCHOOL ENROLLMENT County of San Diego For Fiscal Years through Grades: K-8 (1) 333, , , , , , , (2) 162, , , , , , ,553 TOTAL 495, , , , , , ,096 (1) (2) Includes ungraded elementary. Includes ungraded secondary. Source: California Department of Education Educational Demographics Unit. B-8

109 APPENDIX C PROPOSED FORM OF OPINION OF SPECIAL COUNSEL August 18, 2015 Board of Trustees San Ysidro School District San Ysidro, California Re: $21,585, Refunding Certificates of Participation Evidencing the Fractional Interests of the Owners thereof in Lease Payments to be Made by the San Ysidro School District (San Diego, California) Dear Honorable Members of the Board of Trustees: We have reviewed the Constitution and the laws of the State of California and certain proceedings taken by the San Ysidro School District (the District ) in connection with the authorization, execution and delivery by the District of that certain Lease Agreement, dated as of August 1, 2015 (the Lease ), by and between the San Ysidro Schools Public Financing Corporation (the Corporation ) and the District. We have also reviewed that certain Trust Agreement, dated as of August 1, 2015 (the Trust Agreement ), by and among The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ), the Corporation and the District. All capitalized terms used herein shall have the meaning given them in the Trust Agreement unless otherwise defined. Pursuant to the Trust Agreement, the Trustee will execute and deliver the $21,585, Refunding Certificates of Participation (the Certificates ) evidencing undivided proportionate interests of the owners of the Certificates in lease payments (the Lease Payments ) to be made by the District pursuant to the Lease. Pursuant to that certain Assignment Agreement, dated as of August 1, 2015 (the Assignment Agreement ), the Corporation has assigned to the Trustee the Corporation s right to receive Lease Payments and certain other amounts paid by the District under the Lease. The Certificates are dated their date of delivery. The Certificates mature on the dates and in the amounts set forth in the Trust Agreement. Interest due with respect to the Certificates is payable on the dates and at the rates per annum set forth in the Trust Agreement. The Certificates are registered Certificates in the form set forth in the Trust Agreement and are subject to optional and extraordinary prepayment prior to maturity in the manner and upon the terms set forth in the Trust Agreement. In rendering the opinions set forth below, we have examined certified copies of the proceedings of the District and the Corporation, and other information submitted to us relative to the execution and delivery of the Certificates. We have examined originals, or copies identified to our satisfaction as being true copies, of the Trust Agreement, the Lease, the Site Lease, dated August 1, 2015 (the Site Lease ), by and between the Corporation and the District, the Tax Certificate relating to the Certificates, the resolutions of the District and the Corporation adopted with respect to the Certificates, and such other documents, agreements, opinions and matters as we have considered necessary or appropriate under the circumstances to render the opinions set forth herein. We have assumed the genuineness of all documents and signatures presented to us, the authenticity of documents submitted as originals and the conformity to originals of documents submitted as copies. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions referred to in C-1

110 the preceding paragraph of this opinion. Furthermore, we have assumed compliance with all covenants and agreements contained in the Trust Agreement, the Lease and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause the interest due with respect to the Certificates to be included in gross income for federal income tax purposes. Based upon our examination of the foregoing, and in reliance thereon and on all matters of fact as we deem relevant under the circumstances, and upon consideration of applicable laws, we are of the opinion that: (1) The District is duly organized and legally existing under the laws of the State of California. (2) The obligation of the District to pay Lease Payments in accordance with the terms of the Lease is a legal, valid and binding obligation payable from the funds of the District lawfully available therefor, except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws relating to or affecting generally the enforcement of creditors rights, by equitable principles, by the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against school districts in the State of California. The obligation of the District to make Lease Payments under the Lease does not constitute a debt of the District, the State of California or any political subdivision thereof within the meaning of any statutory or constitutional debt limitation or restriction and does not constitute a pledge of the faith and credit or taxing power of the District, the State of California or any political subdivision thereof. (3) The Lease, the Site Lease and the Trust Agreement have been duly authorized, executed and delivered by the District and constitute valid and legally binding agreements of the District enforceable against the District in accordance with their terms, except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws relating to or affecting generally the enforcement of creditors rights, by equitable principles, by the exercise of judicial discretion in appropriate cases and by the limitations on legal remedies against school districts in the State of California, except that we express no opinion as to any provisions in the Lease or the Trust Agreement with respect to indemnification, penalty, contribution, choice of law, choice of forum or waiver provisions contained therein. (4) Under existing statutes, regulations, rulings and judicial decisions, interest (and original issue discount) with respect to the Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations; however, it should be noted that, with respect to corporations, any such interest (and original issue discount) may be included as an adjustment in the calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of corporations. (5) Interest (and original issue discount) with respect to the Certificates is exempt from personal income taxes imposed in the State of California. (6) The difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of a maturity is to be sold to the public) and the stated payment price at maturity with respect to such Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Certificate owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Certificate owner will increase the Certificate owner s basis in the applicable Certificate. Original issue discount that accrues for the Certificate owner is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals or corporations (as described in paragraph (3) above) and is exempt from State of California personal income tax. C-2

111 (6) The amount by which a Certificate owner s original basis for determining loss on sale or exchange in the applicable Certificate (generally, the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable Certificate premium, which must be amortized under Section 171 of the Internal Revenue Code of 1986, as amended (the Code ); such amortizable Certificate premium reduces the Certificate owner s basis in the applicable Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Certificate premium may result in a Certificate owner realizing a taxable gain when a Certificate is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Certificate to the owner. The opinions expressed in paragraphs (4) and (6) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) with respect to the Certificates are subject to the condition that the District complies with all requirements of the Code that must be satisfied subsequent to the execution and delivery of the Certificates to assure that such interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause interest (and original issue discount) with respect to the Certificates to be included in gross income for federal income tax purposes retroactive to the date of delivery of the Certificates. The District has covenanted to comply with all such requirements. Except as set forth in paragraphs (4), (5), (6) and (7) above, we express no opinion as to any tax consequences related to the Certificates. Certain agreements, requirements and procedures contained or referred to in the Trust Agreement, the Tax Certificate executed by the District and other documents related to the Certificates may be changed and certain actions may be taken or omitted, under the circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with the approving opinion of counsel nationally recognized in the area of tax-exempt obligations. We express no opinion as to the effect on the exclusion from gross income for federal income tax purposes of the portion of each Certificate constituting interest if any such change occurs or action is taken or omitted upon advice or approval of counsel other than Dannis Woliver Kelley. We have not made or undertaken to make an investigation of the state of title to any of the real property described in the Lease, the Site Lease and the Assignment Agreement or of the accuracy or sufficiency of the description of such property contained therein, and we express no opinion with respect to such matters. Our opinion is limited to matters governed by the laws of the State of California and federal law. We assume no responsibility with respect to the applicability or the effect of the laws of any other jurisdiction. The opinions expressed herein are based upon our analysis and interpretation of existing statutes, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. The opinions expressed herein may be affected by actions taken (or not taken) or events occurring (or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken (or not taken) or do occur (or do not occur). Our engagement as Special Counsel terminates upon the execution and delivery of the Certificates. We express no opinion herein as to the accuracy, completeness or sufficiency of the Preliminary Official Statement relating to the Certificates or other offering material relating to the Certificates and expressly disclaim any duty to advise the owners of the Certificates with respect to matters contained in the Preliminary Official Statement. Respectfully submitted, C-3

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113 APPENDIX D DISTRICT S AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2014 D-1

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115 SAN YSIDRO SCHOOL DISTRICT COUNTY OF SAN DIEGO SAN DIEGO, CALIFORNIA AUDIT REPORT JUNE 30,2014 Wilkinson Hadley King & Co. LLP CPA's and Advisors 218 W. Douglas Ave. EI Cajon, California

116 Introductory Section

117 San Ysidro School District Audit Report For The Year Ended June 30, 2014 TABLE OF CONTENTS ~ ExhibitlTable FINANCIAL SECTION Independent Auditor's Report..., 1 Management's Discussion and Analysis (Required Supplementary Information)... 4 Basic Financial Statements Government-wide Financial Statements: Statement of Net Position Exhibit A-1 Statement of Activities Exhibit A-2 Fund Financial Statements: Balance Sheet - Governmental Funds..., 17 Exhibit A-3 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position Exhibit A-4 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds..., 19 Exhibit A-5 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Exhibit A-6 Statement of Fiduciary Net Position - Fiduciary Funds Exhibit A-7 Notes to the Financial Statements Required Supplementary Information Budgetary Comparison Schedules: General Fund Exhibit B-1 Schedule of Funding Progress for Other Post Employment Benefits Plan Notes to Required Supplementary Information Combining Statements as Supplementary Information: Combining Balance Sheet - All Nonmajor Governmental Funds Exhibit C-1 Combining Statement of Revenues, Expenditures and Changes in Fund Balances - All Nonmajor Governmental Funds..., 51 Exhibit C-2 Special Revenue Funds: Combining Balance Sheet - Nonmajor Special Revenue Funds Exhibit C-3 Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Special Revenue Funds Exhibit C-4 Debt Service Funds: Combining Balance Sheet - Nonmajor Debt Service Funds..., 54 Exhibit C-5 Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Debt Service Funds Exhibit C-6

118 San Ysidro School District Audit Report For The Year Ended June 30, 2014 TABLE OF CONTENTS ~ ExhibitlTable Capital Projects Funds: Combining Balance Sheet - Nonmajor Capital Projects Funds Exhibit C-7 Combining Statement of Revenues, Expenditures and Changes in Fund Balances - Nonmajor Capital Projects Funds Exhibit C-8 OTHER SUPPLEMENTARY INFORMATION SECTION Local Education Agency Organization Structure Schedule of Average Daily Attendance Table 0-1 Schedule of Instructional Time Table 0-2 Schedule of Financial Trends and Analysis Table 0-3 Reconciliation of Annual Financial and Budget Report With Audited Financial Statements Table 0-4 Schedule of Charter Schools Table 0-5 Schedule of Expenditures of Federal Awards Table 0-6 Notes to the Schedule of Expenditures of Federal Awards 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 Report on Compliance for Each Major Program and on Internal Control over Compliance Required by OMB Circular A Independent Auditor's Report on State Compliance Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 77

119 Financial Section

120 Independent Auditor's Report To the Board of Trustees San Ysidro School District San Diego, California JI;l""... rt on the Financial Statements financial statements of the n,.",,,,,,,nm,,,,nt,,,1 fund information of San Ysidro School District ("the ended June 30, 2014, and the related notes to the financial statements, which District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements each and as of and for the year collectively comprise the Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinion In our opinion, the financial statements referred to above present fairly, in a/l material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of San Ysidro School District as of June 30, 2014, and the respective changes in financial position, for the year then ended in accordance with accounting principles generally accepted in the United States of America.

121 Emphasis of Matter Change in Accounting Principles As described in Note A to the financial statements, in 2014, San Ysidro School District adopted new accounting guidance, Government Accounting Standards Soard Statement No. 65, Items Previously Reported as Assets and Liabilities. Our opinion is not modified with respect to this matter. Going Concern The accompanying financial statements have been prepared assuming that San Ysidro School District will continue as a going concern. As described in Note T to the financial statements, the District has filed negative certifications with the San Diego County Office of Education indicating that they will not be able to meet their financial obligations. Management's plans with regards to these matters are also described in Note T to the financial statements. The financial statements do not include any adjustments that might result from the outcomes of this uncertainty. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis, budgetary comparison information and schedule of funding progress for OPES benefits identified as Required Supplementary Information in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the Required Supplementary Information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the San Ysidro School District's basic financial statements. The combining financial statements are presented for purposes of additional analysis and are not required parts of the basic financial statements. The schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U. S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is also not a required part of the basic financial statements. The accompanying other supplementary information is presented for purposes of additional analysis as required by the State's audit guide, Standards and Procedures for Audits of California K-12 Local Education Agencies , published by the Education Audit Appeals Panel, and is also not a required part of the basic financial statements. The combining financial statements and other supplementary information and the schedule of expenditures of federal awards are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining financial statements and other supplementary information and the schedule of expenditures of federal awards are fairly stated in all material respects in relation to the basic financial statements as a whole. 2

122 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 15, 2014 on our consideration of San Ysidro School District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering San Ysidro School District's internal control over financial reporting and compliance. W~~#~/;~~ 0. LLfJ EI Cajon, California December 15,

123 San Ysidro School District Management's Discussion and Analysis Fiscal Year (U naudited) Profile of the District The San Ysidro School District (District) was formed in 1887 and serves the children of the City of San Ysidro and portions of the unincorporated area of San Diego County. The District operates one preschool, four elementary schools, one 4-8 school, one K-8 school and one middle school housing 5103 students. Management's Discussion and Analysis This section of San Ysidro School District's annual financial report presents Management's Discussion and Analysis (MD&A) of the District's financial performance during the year ending June 30, The MD&A is required as an element of the reporting model established by the Governmental Accounting Standards Board (GASB) in Statement Number 34. The District implemented GASB 34 in Please read the MD&A in conjunction with the District's financial statements, which follow this section. Comparisons to the Previous Fiscal Year In , the district's Net Assets are $19.6 million compared to $24.1 million in In , overall revenues were $54.4 million and expenses were $52.0 million. The district's revenue exceeded expenses by $2.4 million. In the district's overall revenues were $50.8 million and expenses were $59.3 million. Expenses exceeded revenue by $8.5 million. The District enrollment in October 2013 was This is a decrease of 132 students from October 2012 when the enrollment was at Overview of the Financial Statements This discussion and analysis are intended to serve as an introduction to the District's basic financial statements. The District's basic financial statements are comprised of three components: 1) governmentwide financial statements; 2) fund financial statements; and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. 4

124 San Ysidro School District, Management Discussion & Analysis cont'd Government-wide financial statements The government-wide financial statements are designed to provide readers with a broad overview of the District's finances, in a manner similar to a private-sector business. The statement of net assets presents information on all of the assets and liabilities of the District, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the District is improving or deteriorating. The statement of activities presents information showing how the net assets of the District changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). The government-wide financial statements can be found on pages of this report. Fund financial statements A fund is a group of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The District, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the District can be divided into two categories: governmental funds, and fiduciary funds. Governmental funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on nearterm inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the government's near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government's near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The District maintains twelve individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the general fund, building fund, and the blended component unit fund, each of which are considered to be major funds. Data from the other nine governmental funds are combined into a single, aggregated presentation. Individual data for each of these non-major funds is provided in the form of combining statements elsewhere in this report. The District adopts an annual appropriated budget for its general fund. A budgetary comparison statement has been provided for the general fund to demonstrate compliance with this budget on page 48 of this report. Fiduciary funds Fiduciary funds are used to account for resources held for the benefit of parties outside the governmental entity. The District maintains an agency fund for associated student body funds. The basic agency fund financial statements can be found on pages 21 of this report. 5

125 San Ysidro School District, Management Discussion & Analysis cont'd Notes to the financial statements The notes provide additional information that is essential for a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages of this report. 6

126 San Ysidro School District, Management Discussion & Analysis cont'd Government-wide Financial Analysis As noted earlier, net assets may serve over time as a useful indicator of a government's stability and financial position. The district's assets exceeded liabilities by $19.6 million at the close of SAN YSIDRO SCHOOL DISTRICT NET ASSETS (In Millions a/dollars) Governmental Activities Governmental Activities Current and Other Assets Capital Assets Total Assets $58.3 $163.4 $221.7 $56.2 $158.9 $215.1 Deferred Outflows of Resources $3.4 Long-Tenn Debt Outstanding Other Liabilities Total Liabilities $191.5 $6.1 $197.6 $193.4 $5.5 $198.9 Net Assets: Invested in Capital Assets, Net of Related Debt Restricted Unrestricted Total Net Assets $16.2 $50.5 $(42.6) $24.1 $5.1 $49.3 $(34.8) $19.6 At the end of the , the District is able to report a positive balance in net assets. 7

127 San Ysidro School District, Management Discussion & Analysis cont'd Governmental activities. The key elements of the District's net assets for the year ended June 30,2014 are as follows: SAN YSIDRO SCHOOL DISTRICT GOVERNMENT-WIDE STATEMENT OF ACTIVITIES % of Total % of Total Revenues Program Revenues Charges for services Operating grants and contributions Capital grants and contributions General Revenues Property taxes $ 1,433,173 12,216,539 22,052, % 24.11% 0.00% 43.52% Federal and state aid not restricted to specific purposes 14,716, % Interest and investment earnings 21, % Interagency revenues 0.00% Miscellalleous 226, % Special and extraordinary items 0.00% Total Revenues $ 50,665, % Expenditures by Function Governmental Activities Instruction $ 30,777, % Pupil services 4,345, % General administration 3,655, % Plant services 5,237, % Ancillary services 0.00% Community services 0.00% Enterprise activities 0.00% Interest on long-term debt 8,918, % Other outgo 4,865, % Business-type Activities Enterprise activities 0.00% Total Expenditures $ 57,799, % Increase (Decrease) in Net Assets $ (7,133,804) Net Position - Beginning $ 31,225,846 Net Position - Ending $ 24,092,042 $ 1,715, % 10,146, % 0.00% 23,501, % 18,801, % 21, % 0.00% 219, % 0.00% $ 54,405, % $30,605, % 4,698, % 4,668, % 4,312, % 0.00% 0.00% 0.00% 8,655, % 4,735, % 0.00% $ 57,675, % $ (3,269,938) $ 22,892,984 (Restated) $ 19,623,046 The district's total revenue this year increased from $50.7 million in FY to $54.4 million in FY State aid COLA (Cost of Living Adjustment) in is 1.57% percent which is 1.67 percent less than last year. State aid is based primarily on average daily attendance (ADA) and other appropriations. If a student is in attendance for 180 days, the state awards the District one ADA. Expenses related to educating and caring for students (see Figure A-2) is percent of the district's total expenditures. 8

128 San Ysidro School District, Management Discussion & Analysis cont'd Figure A-I Revenues by Source c.:.vernment-wide Activities. Into-est and. Miscellalleous Federal and >tate aid UlVesImalt ealuljl!is not re,tricted to "'P«ific pwposes Figure A Expenditures by Function Government-wide Activities Interest 00 loo~-tclm debt Othel'~o PllIlt savices General admillistration Pupil services 9

129 San Ysidro School District, Management Discussion & Analysis cont'd Financial Analysis of the District's Funds As noted earlier, the District uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements. Governmental funds. The focus of the District's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the District's financing requirements. As the District completed the year, its governmental funds reported a combined fund balance of $52.2 million, $2.4 million more than last year's fund balance. The Governmental Accounting Standard Board (GASB) has issued Statement 54 (GASB 54) that went into effect in fiscal year This statement considerably altered the categories and terminology used to describe the components of the ending fund balance. These changes are intended to enhance how fund balance information is reported by establishing new classifications that are easier to understand. GASB 54 also clarifies the definition of some governmental funds. Fund balance reporting is unique to governmental fund accounting GASB 54 implements a five-tier fund balance classification based on spending constraints on the use of these resources. The components of the district ending fund balance as of June 30, 2014 were: SAN YSIDRO SCHOOL DISTRICT GOVERNMENTAL FUNDS COMPONENTS OF ENDING FUND BALANCE IN ACCORDANCE WITH GASB STATEMENT 54 JUNE 30, 2014 a) Nonspendable Revolving Cash Stores Prepaid Expenditures All Others b) Restricted ,753 97,295 3,000 49,219,814 c) Committed Stabilization Arrangements Other Commitments d) Assigned Other Assignments d) Unassigned Reserve for Economic Uncertainties UnassignedlUnappropriated ,175,893 1,728,509 10

130 San Ysidro School District, Management Discussion & Analysis cont'd General Fund Budgetary Highlights During the year, the Board revised the District's budget. Budget amendments were to reflect changes in programs and related funding. The difference between the original budget and the final amended budget was a decrease of $0.56 million or 1.28% in total general fund expenditures budget. During the year, final budgeted revenues exceeded original budgetary estimates by $3.4 million or 9% to account for implementation of the LCFF and increases in federal and state aid and local donations. Variances primarily result from expenditure-driven federal and state grants that are included in the budgets at their full amounts. Such grants are recognized as revenue when the qualifying expenditures have been incurred and all other grant requirements have been met; unspent grant amounts are carried forward and included in the succeeding year's budget. Therefore, actual grant revenues and expenditures are normally less than the amounts budgeted. For comparative purposes, the following table is presented to show General Fund actuals by Standardized Account Code Structure (SACS) functions and changes from fiscal year to SAN YSIDRO SCHOOL DISTRICT GENERAL FUND - MAJOR FUND Change Expenditures by Function Amount % Amount 0/0 General Education Grades K -12 $25,949,643 $25,037, % ($912,598) -3.52% Instruction Related Services 1,100, , % ($190,435) % School Administration 2,300,218 2,118, % ($181,376) -7.89% Pupil Services 1,750,863 1,871, % $120, % Transportation 524, , % ($15,116) -2.88% General Administration 2,667,376 3,518, % $851, % Central Data Processing 614, , % ($12,500) -2.03% Maintenance & Operations 4,186,169 4,113, % ($72,578) -1.73% Other Outgo 488, , % $26, % Total $39,582,495 $39,196, % $(386,071) Final October CBEDS Enrollment 5,235 5,103 (132) Expenditures per Student $7, $7, $1l % The expenditures per student went up 1.59% from $7, to $7,

131 San Ysidro School District, Management Discussion & Analysis cont'd Capital Asset and Debt Administration Capital Assets. The building and blended component unit funds are used to account for the costs incurred in improving sites, constructing and remodeling facilities, and procuring equipment necessary for providing educational programs for all students within the District. Capital assets as of June 30, 2013 and June 30, 2014 are outlined below: SAN YSIDRO SCHOOL DISTRICT CAPITAL ASSETS NET OF DEPRECIA non Governmental Activities June 30, 2013 June 30, 2014 Total Change Land Improvement of Sites Buildings Equipment Work in Progress $ 45,896,267 $45,896,267 18,013,956 $18,073, ,546,266 $119,628,776 4,355,378 $4,381,446 3,722,359 $3,993,174 $0 $59,215 '5 (917,490) $26,068 $270,815 Total Capital Assets $ 192,534,226 $191,972,834 $ (561,392} Additional information on the District's capital assets can be found in Note E to the basic financial statements. 12

132 San Ysidro School District, Management Discussion & Analysis cont'd Debt Administration. At year-end the District had $193.4 million in general obligation bonds, certificates of participation, Qualified Zone Academy Bonds and employment benefits - an increase of 0.82% from last year - as shown in the table below. SAN YSIDRO SCHOOL DISTRICT LONG-TERM DEBT Governmental Activities June 30, 2013 June 30,2014 Total Change General obligation bonds Certificates of Participation Qualified zone academic bonds Compensated absences SERP Net OPEB obligations $ 146,016,483 $ 148,685,944 40,583,395 39,986,582 2,282,670 2,029, , , , ,899 1,504,738 1,910,189 $2,389,461 ($596,813) ($253,630) $99,910 ($467,899) $405,451 Total Long-Term Debt $ 191,546,568 $ 193,403,048 $ 1,576,480 Additional information on the District's long-term debt can be found in Note J to the basic financial statements. 13

133 San Ysidro School District, Management Discussion & Analysis cont'd Changing Enrollment within the District Enrollment can fluctuate due to factors such as population growth, competition from private, parochial, and public charter schools, inter-district transfers in or out, economic conditions and housing values. Losses in enrollment will cause a school district to lose operating revenues without necessarily permitting the district to make adjustments in fixed operating costs. SAN YSIDRO SCHOOL DISTRICT CIL.\NGES IN CBEDS FOR THREE YEARS Grade K TOTAL Elementary K-6 Middle 7-8 Oct !L Oct (29) (11) (22) (6) ~ 580 5,261 (26) 5, !L , ,096 1,206 ~ 1,139 ~ Oct (126) (45) (77) (132) 5,103 ~ (153) 3, ,160 TOTAL 5,261 {26} 5,235 ~ 5,103 Requests for Information This financial report is designed to provide a general overview of the San Ysidro School District's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Assistant Superintendent of Business Services, San Ysidro School District, 4350 Otay Mesa Road, San Ysidro, CA

134 Basic Financial Statements

135 SAN YSIDRO SCHOOL DISTRICT STATEMENT OF NET POSITION JUNE 30,2014 EXHIBIT A-1 ASSETS Cash Receivables Stores Prepaid Expenses Capital Assets: Land Improvements Buildings Equipment VVorkin Progress Less Accumulated Depreciation Total Assets DEFERRED OUTFLOWS OF RESOURCES LIABILITIES Accounts Payable and Other Current Liabilities Current Loans Unearned Revenue Long-Term Liabilities: Due Within One Year Due in More Than One Year Accreted Interest Total Liabilities Governmental Activities $ 52,525,303 3,624,171 97,295 3,000 45,896,267 18,073, ,628,776 4,381,446 3,993,174 (33,160,906) 215,061,697 3,445,384 3,161,154 2,319, ,137, ,192,570 21,072, ,884,035 DEFERRED INFLOWS OF RESOURCES NET POSITION Net Investment in Capital Assets Restricted for: Capital Projects Debt Service Educational Programs Other Purposes (Expendable) Other Purposes (Nonexpendable) Unrestricted Total Net Position 5,107,541 39,851,726 4,650,129 3,369,913 1,342, ,048 (34,806,357) $ 19,623,046 The accompanying notes are an integral part of this statement. 15

136 SAN YSIDRO SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014 EXHIBIT A-2 Functions Governmental Activities: Instruction Instruction-Related Services: Instructional Supervision and Administration Instructional Library, Media and Technology School Site Administration Pupil Services: Home-to-School Transportation Food Services All Other Pupil Services General Administration: Centralized Data Processing All Other General Administration Plant Services Interest on Long-Term Debt Debt Issue Costs Depreciation (Unallocated)* Program Revenues Operating Charges for Grants and Expenses Services Contributions $ 27,269,807 $ 1,504,235 $ 6,594, ,532 8, , , ,838 2,212,263 4,979 50, ,904 2,178,875 99,186 2,172,942 2,004,327 12, , ,198 4,001 1,160 4,062,887 16, ,834 4,312,947 64, ,601 8,655, ,488 4,633,363 $ Capital Grants and Contributions Net (Expense) Revenue and Changes in Net Assets Governmental Activities $ (19,171,419) (398,696) (215,336) (2,156,559) (514,904) 93,253 (1,673,619) (600,037) (3,704,302) (4,080,721) (8,655, i 37) (102,488) (4,633,363) Total Expenses $ 57,675,902 $ 1,715,627 $ 10,146,947 $ (45,813,328) General Revenues: Taxes and Subventions: Taxes Levied for General Purposes Taxes Levied for Debt Service Taxes Levied for Other Specific Purposes Federal and State Aid Not Restricted to Specific Programs Interest and Investment Earnings Miscellaneous Total General Revenues 15,240,740 5,370,216 2,890,146 18,801,602 21, ,266 $ 42,543,390 Change in Net Position (3,269,938) Net Position Beginning As Restated (See Note S) Net Position Ending 22,892,984 $ 19,623,046 *This amount excludes depreciation that is included in the direct expenses of various programs. The accompanying notes are an integral part of this statement. 16

137 SAN YSIDRO SCHOOL DISTRICT BALANCE SHEET-GOVERNMENTAL FUNDS JUNE 30, 2014 EXHIBIT A-3 ASSETS: Cash in County Treasury Cash on Hand and in Banks Cash in Revolving Fund Cash with a Fiscal AgentlTrustee Accounts Receivable Due from Other Funds Stores Inventories Prepaid Expenditures Total Assets $ General Fund 6,861,753 $ 17,630 7,753 3,162, ,995 75,571 3,000 10,340,812 Other Total Building Governmental Governmental Fund Funds Funds 36,997,179 $ 8,576,406 $ 52,435,338 1,055 18,685 7,753 63,528 63,528 36, ,625 3,624,170 1, ,030 21,724 97,295 3,000 37,033,614 56,463,799 LIABILITIES AND FUND BALANCE: Liabilities: Accounts Payable Due to Other Funds Current Loans Unearned Revenue Total Liabilities $ 1,659,305 $ 1,035 2,319, ,980,173 14,407 $ 23,960 $ 1,697, , ,030 2,319, ,955 4,231,535 Fund Balance: Nonspendable Fund Balances Restricted Fund Balances Unassigned Fund Balances Total Fund Balance 86,324 3,369,913 2,904,402 6,360,639 21, ,048 37,019,207 8,830,694 49,219,814 2,904,402 37,019,207 8,852,418 52,232,264 Total Liabilities and Fund Balances $ 10,340,812 $ 37,033,614 $ 9,089,373 $ 56,463,799 The accompanying notes are an integral part of this statement. 17

138 SAN YSIDRO SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION JUNE 30, 2014 EXHIBIT A-4 Total fund balances - governmental funds balance sheet $ 52,232,264 Amounts reported for assets and liabilities for governmental activities in the statement of net position are different from amounts reported in governmental funds because: Capital assets: In governmental funds, only current assets are reported. In the statement of net position, all assets are reported, including capital assets and accumulated depreciation. Capital assets relating to governmental activities, at historical cost Accumulated depreciation Net 191,972,834 (33,160,906) 158,811,928 Unamortized costs: In governmental funds, debt issue costs are recognized as expenditures in the period they are incurred. In the government-wide statements, debt issue costs for prepaid debt insurance are amortized over the life of the debt. Unamortized debt insurance costs included in deferred outflows of resources on the statement of net position are: Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is not recognized until the period in which it matures and is paid. In the government-wide statement of activities, it is recognized in the period that it is incurred. The additional liability for unmatured interest owing at the end of the period was: 1,449,417 (1,463,483) Long-term liabilities: In governmental funds, only current liabilities are reported. In the statement of net position, all liabilities, including long-term liabilities relating to governmental activities consist of: General obligation bonds payable Certificates of participation payable Other general long term debt Net OPEB obligation payable Compensated absences payable Total 148,685,944 39,986,582 2,496,939 1,910, ,394 (193,403,048) Deferred gain or loss on debt refunding: In the government wide financial statements deferred gain or loss on debt refunding is recognized as a deferred outflow of resources (for a loss) or deferred inflow of resources (for a gain) and subsequently amortized over the life of the debt. Deferred gain or loss on debt refunding recognized as a deferred outflow of resources or deferred inflow of resources on the statement of net position was: Net position of governmental activities - statement of net position 1,995,968 $ 19,623,046 The accompanying notes are an integral part of this statement. 18

139 SAN YSIDRO SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2014 EXHIBIT A-5 General Fund Revenues: LCFF Sources: State Apportionment or State Aid $ 11,897,153 Education Protection Account Funds 5,250,793 Local Sources 15,240,740 Federal Revenue 2,763,321 Other State Revenue 3,253,736 Other Local Revenue 3,475,984 Total Revenues 41,881,727 Expenditures: Instruction 25,974,419 Instruction - Related Services 3,029,146 Pupil Services 2,380,854 General Administration 4,120,355 Plant Services 4,113,591 Other Outgo 35,640 Debt Service: Principal 467,899 Interest Debt Issue Costs 11,893 Total Expenditures 40,133,797 Excess (Deficiency) of Revenues Over (Under) Expenditures 1,747,930 Other Financing Sources (Uses): Transfers In Transfers Out Total Other Financing Sources (Uses) Net Change in Fund Balance 1,747,930 Fund Balance, July 1 4,612,709 Fund Balance, June 30 $ 6,360,639 Other Total Building Governmental Governmental Fund Funds Funds $ $ $ 11,897,153 5,250,793 15,240,740 2,175,824 4,939,145 1,081,374 4,335, ,855 8,830,185 12,743, ,855 12,087,383 54,405,965 1,024,381 26,998, ,192 3,214,338 2,301,658 4,682, ,352 4,328, ,405 63,217 4,622,213 35,640 3,688,630 4,156,529 3,946,858 3,946,858 11, ,405 11,418,288 51,997,490 (8,550) 669,095 2,408,475 2,476,977 2,476,977 (2,476,977) (2,476,977) (8,550) 669,095 2,408,475 37,027,757 8,183,323 49,823,789 $ 37,019,207 $ 8,852,418 $ 52,232,264 The accompanying notes are an integral part of this statement. 19

140 SAN YSIDRO SCHOOL DISTRICT RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014 Net change in fund balances - total governmental funds EXHIBIT A 6 $ 2,408,475 Amounts reported for governmental activities in the statement of activities are different from amounts reported in governmental funds because: Capital outlay: In governmental funds, the costs of capital assets are reported as expenditures in the period when the assets are acquired. In the statement of activities, costs of capital assets are allocated over their estimated useful lives as depreciation expense. The difference between capital outlay expenditures and depreciation expense for the period is: Debt service: In governmental funds, repayments of long-term debt are reported as expenditures. In the government-wide statements, repayments of long-term debt are reported as reductions of liabilities. Expenditures for repayment of the principal portion of long-term debt were: Debt issue costs for prepaid debt insurance: In governmental funds, debt issue costs are recognized as expenditures in the period they are incurred. In the government-wide statements, debt insurance costs are amortized over the life of the debt. The difference between debt insurance costs recognized in the current period and insurance costs amortized forthe period is: Gain or loss from disposal of capital assets: In governmental funds, the entire proceeds from disposal of capital assets are reported as revenue. In the statement of activities, only the resulting gain or loss is reported. The difference between the proceeds from disposal of capital assets and the resulting gain or loss is: Unmatured interest on long-term debt: In governmental funds, interest on long-term debt is recognized in the period that it becomes due. In the government-wide statement of activities, it is recognized in the period that it is incurred. Unmatured interest owing at the end of the period, less matured interest paid during the period but owing from a prior period, was: Compensated absences: In governmental funds, compensated absences are measured by the amounts paid during the period. In the statement of activities, compensated absences are measured by the amounts earned. The difference between compensated absences paid and compensated absences earned was: Postemployment benefits other than pensions (OPEB): 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: Amortization of debt issue premium or discount or deferred gain or loss from debt refunding: In governmental funds, if debt is issued at a premium or at a discount, the premium or discount is recognized as an Other Financing Source or an Other Financing Use in the period it is incurred. In the government-wide statements, the premium or discount plus any deferred gain or loss from debt refunding, is amortized as interest over the life of the debt. Amortization of premium and discount or deferred gain or loss from debt refunding, for the period is: Change in net position of governmental activities - statement of activities (4,268,264) 4,156,529 (54,955) (298,082) (4,810,824) (99,910) (405,451 ) 102,544 $ (3,269,938) The accompanying notes are an integral part of this statement. 20

141 SAN YSIDRO SCHOOL DISTRICT STATEMENT OF FIDUCIARY NET POSITION FIDUCIARY FUNDS JUNE 30, 2014 ASSETS: Cash on Hand and in Banks Total Assets LIABILITIES: Due to Student Groups Total Liabilities NET POSITION: Total Net Position Agency Fund Student Body Fund $ 46,134 46,134 $ 46,134 46,134 EXHIBIT A 7 The accompanying notes are an integral part of this statement. 21

142 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 A. Summary of Significant Accounting Policies San Ysidro School District (District) accounts for its financial transactions in accordance with the policies and procedures of the Department of Education's "California School Accounting Manual". The accounting policies of the District conform to accounting principles generally accepted in the United States of America (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants (AICPA). 1. Reporting Entity The District's combined financial statements include the accounts of all its operations. The District evaluated whether any other entity should be included in these financial statements. The criteria for including organizations as component units within the District's reporting entity, as set forth in GASB Statement No. 14, "The Financial Reporting Entity," include whether: - the organization is legally separate (can sue and be sued in its name) - the District holds the corporate powers of the organization - the District appoints a voting majority of the organization's board - the District is able to impose its will on the organization - the organization has the potential to impose a financial benefitlburden on the District - there is fiscal dependency by the organization on the District The District also evaluated each legally separate, tax-exempt organization whose resources are used principally to provide support to the District to determine if its omission from the reporting entity would result in financial statements which are misleading or incomplete. GASB Statement No. 14 requires inclusion of such an organization as a component unit when: 1) The economic resources received or held by the organization are entirely or almost entirely for the direct benefit of the District, its component units or its constituents; and 2) The District or its component units is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the organization; and 3) Such economic resources are significant to the District. Based on these criteria, the district has two component units which have been included as blended component units. San Ysidro School District Financing Corporation: The corporation is a nonprofit, public benefit corporation incorporated under the laws of the State of California and recorded by the Secretary of State in The corporation was formed for the sole purpose of providing financial assistance to the District by acquiring, constructing, financing, selling and leasing public facilities, land, personal property and equipment for the use and benefit of the District. The District leases certain school facilities from the corporation under various lease purchase agreements. Community Facilities Districts (CFDs): The district has established three CFDs. The CFDs are authorized to levy special taxes on parcels of taxable property within the CFDs to pay the principal and interest on the certificates of participation. 2. Basis of Presentation, Basis of Accounting a. Basis of Presentation Government-wide Statements: The statement of net position and the statement of activities include the financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double-counting of internal activities. Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange transactions. 22

143 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 The statement of activities presents a comparison between direct expenses and program revenues for each function of the District's governmental activities. Direct expenses are those that are specifically associated with a program or function and, therefore, are clearly identifiable to a particular function. The District does not allocate indirect expenses in the statement of activities. Program revenues include (a) fees, fines, and charges paid by the recipients of goods or services offered by the programs and (b) 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, including all taxes, are presented as general revenues. Fund Financial Statements: The fund financial statements provide information about the District's funds, with separate statements presented for each fund category. The emphasis of fund financial statements is on major governmental funds, each displayed in a separate column. All remaining governmental funds are aggregated and reported as nonmajor funds. The District reports the following major governmental funds: General Fund. This is the District's primary operating fund. It accounts for all financial resources of the District except those required to be accounted for in another fund. Building Fund. This 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. Other authorized revenues to the Building Fund (Fund 21) are proceeds from the sale or lease with option-to-purchase of real property (Education Code Section 17462) and revenue from rentals and leases of real property specifically authorized for deposit into the fund by the governing board (Education Code Section 41003). In addition, the District reports the following fund types: Special Revenue Funds. Special revenue funds are established to account for the proceeds from specific revenue sources (other than trusts, major capital projects, or debt service) that are restricted or committed to the financing of particular activities and that compose a substantial portion of the inflows of the fund. Additional resources that are restricted, committed, or assigned to the purpose of the fund may also be reported in the fund. Capital Projects Funds. Capital projects funds are established to account for financial resources to be used for the acquisition or construction of major capital facilities and other capital assets (other than those financed by proprietary funds and trust funds). Debt Service Funds. Debt service funds are established to account for the accumulation of resources for and the payment of principal and interest on general long-term debt. Fiduciary funds are reported in the fiduciary fund financial statements. However, because their assets are held in a trustee or agent capacity and are therefore not available to support District programs, these funds are not included in the government-wide statements. Student Body Fund. In the financial reports of the LEA, the Student Body Fund (Fund 95) is an agency fund and, therefore, consists only of accounts such as cash and balancing liability accounts, such as Due to Student Groups. The student body itself maintains its own general fund, which accounts for the transactions of that entity in raising and expending money to promote the general welfare, morale, and educational experiences of the student body (Education Code sections ). 23

144 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 b. Measurement Focus, Basis of Accounting Government-wide and Fiduciary Fund Financial Statements: These financial statements are reported using the economic resources measurement focus. They are reported using the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange transactions, in which the District gives (or receives) value without directly receiving (or giving) equal value in exchange, include property taxes, grants, entitlements, and donations. On an accrual basis, revenue from property taxes is recognized in the fiscal year for which the taxes are levied. Revenue from grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Governmental Fund Financial Statements: Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. The District does not consider revenues collected after its year-end to be available in the current period. Revenues from local sources consist primarily of property taxes. Property tax revenues and revenues received from the State are recognized under the susceptible-to-accrual concept. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Expenditures are recorded when the related fund liability is incurred, except for principal and interest on general long-term debt, claims and judgments, and compensated absences, which are recognized as expenditures to the extent they have matured. General capital asset acquisitions are reported as expenditures in governmental funds. Proceeds of general long-term debt and acquisitions under capital leases are reported as other financing sources. 3. Encumbrances When the District incurs an expenditure or expense for which both restricted and unrestricted resources may be used, it is the District's policy to use restricted resources first, then unrestricted resources. Encumbrance accounting is used in all budgeted funds to reserve portions of applicable appropriations for which commitments have been made. Encumbrances are recorded for purchase orders, contracts, and other commitments when they are written. Encumbrances are liquidated when the commitments are paid. All encumbrances are liquidated as of June Budgets and Budgetary Accounting Annual budgets are adopted on a basis consistent with generally accepted accounting principles for all governmental funds. By state law, the District's governing board must adopt a final budget no later than July 1. A public hearing must be conducted to receive comments prior to adoption. The District's governing board satisfied these requirements. These budgets are revised by the District's governing board and district superintendent during the year to give consideration to unanticipated income and expenditures. Formal budgetary integration was used as a management control device during the year for all budgeted funds. The District employs budget control by minor object and by individual appropriation accounts. 24

145 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Revenues and Expenses a. Revenues - Exchange and Non-Exchange 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 year or 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 60 days. However, to achieve comparability of reporting among California districts and so as to not 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 are transactions in which the District receives value without directly giving equal value in return, including 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 restrictions. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized. b. 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 long-term 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 in the government-wide financial statements. 6. Assets, Liabilities. and Equity a. Deposits and Investments Cash balances held in banks and in revolving funds are insured to $250,000 by the Federal Depository Insurance Corporation. All cash held by the financial institutions is fully insured or collateralized. In accordance with Education Code Section 41001, the District maintains substantially all its cash in the San Diego County Treasury. The county pools these funds with those of other districts in the county and invests the cash. These pooled funds are carried at cost, which approximates market value. Interest earned is deposited quarterly into participating funds, except for the Tax Override Funds, in which interest earned is credited to the general fund. Any investment losses are proportionately shared by all funds in the pool. The county is authorized to deposit cash and invest excess funds by California Government Code Section et seq. The funds maintained by the county are either secured by federal depository insurance or are collateralized. Information regarding the amount of dollars invested in derivatives with San Diego County Treasury was not available. 25

146 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 b. Stores Inventories and Prepaid Expenditures Inventories are recorded using the purchases method in that the cost is recorded as an expenditure at the time individual inventory items are purchased. Inventories are valued at average cost and consist of expendable supplies held for consumption. Reported inventories are equally offset by a fund balance reserve, which indicates that these amounts are not "available for appropriation and expenditure" even though they are a component of net current assets. 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 expenditure during the benefiting period. c. Capital Assets Purchased or constructed capital assets are reported at cost or estimated historical cost. Donated fixed assets are recorded at their estimated fair value at the date of the donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. A capitalization threshold of $5,000 is used. Capital assets are being depreciated using the straight-line method over the following estimated useful lives: Asset Class Buildings and Improvements Furniture and Equipment Vehicles Estimated Useful Lives d. Compensated Absences Accumulated unpaid employee vacation benefits are recognized as liabilities of the District. The current portion of the liabilities is recognized in the general fund at year end. Accumulated sick leave benefits are not recognized as liabilities of the District. The District's policy is to record sick leave as an operating expense in the period taken since such benefits do not vest nor is payment probable; however, unused sick leave is added to the creditable service period for calculation of retirement benefits when the employee retires. e. Unearned Revenue Unearned 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 occurrence 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 unearned revenue is removed from the combined balance sheet and revenue is recognized. f. Interfund Activity Interfund activity results from loans, services provided, reimbursements or transfers between funds. Loans are reported as interfund receivables and payables as appropriate and are subject to elimination upon consolidation. Services provided, deemed to be at market or near market rates, are treated as revenues and expenditures or expenses. Reimbursements occur when one fund incurs a cost, charges the appropriate benefiting fund and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers In and Transfers Out are netted and presented as a single ''Transfers'' line on the government-wide statement of activities. Similarly, interfund receivables and payables are netted and presented as a single "Internal Balances" line of the government-wide statement of net position. 26

147 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 g. Property Taxes Secured property taxes attach as an enforceable lien on property as of March 1. Taxes are payable in two installments on November 15 and March 15. Unsecured property taxes are payable in one installment on or before August 31. The County of San Diego bills and collects the taxes for the District. h. Fund Balances - Governmental Funds Fund balances of the governmental funds are classified as follows: Nonspendable Fund Balance - represents amounts that cannot be spent because they are either not in spendable form (such as inventory or prepaid insurance) or legally required to remain intact (such as notes receivable or principal of a permanent fund). Restricted Fund Balance - represents amounts that are constrained by external parties, constitutional provisions or enabling legislation. Committed Fund Balance represents amounts that can only be used for a specific purpose because of a formal action by the District's governing board. Committed amounts cannot be used for any other purpose unless the governing board removes those constraints by taking the same type of formal action. Committed fund balance amounts may be used for other purposes with appropriate due process by the governing board. Commitments are typically done through adoption and amendment of the budget. Committed fund balance amounts differ from restricted balances in that the constraints on their use do not come from outside parties, constitutional provisions, or enabling legislation. Assigned Fund Balance - represents amounts which the District intends to use for a specific purpose, but that do not meet the criteria to be classified as restricted or committed. Intent may be stipulated by the governing board or by an official or body to which the governing board delegates the authority. Specific amounts that are not restricted or committed in a special revenue, capital projects, debt service or permanent fund are assigned for purposes in accordance with the nature of their fund type or the fund's primary purpose. Assignments within the general fund conveys that the intended use of those amounts is for a specific purpose that is narrower than the general purposes of the District itself. Unassigned Fund Balance - represents amounts which are unconstrained in that they may be spent for any purpose. Only the general fund reports a positive unassigned fund balance. Other governmental funds might report a negative balance in this classification because of overspending for specific purposes for which amounts had been restricted, committed or assigned. When an expenditure is incurred for a purpose 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. i. Minimum Fund Balance The District has adopted a policy to maintain a minimum economic uncertainty reserve of at least 3% of total general fund expenditures and other financing uses. The reserve may be increased from time to time in order to address specific anticipated revenue or cash flow shortfalls. It is the District's intent to continuously sustain a 3% economic uncertainty reserve. The primary purpose of this reserve is to avoid the need for service level reductions in the event of economic downturn. The District is committed to maintaining a prudent level of financial resources to protect against the need to reduce service levels because of temporary revenue shortfalls or unpredicted expenditures. Because amounts in the nonspendable, restricted, committed, and assigned categories are subject to varying constraints in use, the Reserve for Economic Uncertainties consists of balances that are otherwise unassigned. 27

148 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Deferred Inflows and Deferred Outflows of Resources Deferred outflows of resources is a consumption of net assets or net position that is applicable to a future reporting period. Deferred inflows of resources is an acquisition of net assets or net position that is applicable to a future reporting period. Deferred outflows of resources and deferred inflows of resources are recorded in accordance with GASB Statement numbers 63 and 65. For the year ended June 30, 2014 the district did not have any deferred inflows of resources. 8. Use of Estimates The preparation of financial statements in conformity with GAAP requires the use of management's estimates. Actual results could differ from those estimates. 9. Changes in Accounting Policies In March 2012, the GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities. This statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. Concepts Statement No.4, Elements of Financial Statements, introduced and defined the elements included in financial statements, including deferred outflows of resources and deferred inflows of resources. In addition, Concepts Statement No. 4 provides that reporting a deferred outflow of resources or a deferred inflow of resources should be limited to those instances identified by the Board in authoritative pronouncements that are established after applicable due process. Prior to the issuance of this Statement, only two such pronouncements have been issued. Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, requires the reporting of a deferred outflow of resources or a deferred inflow of resources for the changes in fair value of hedging derivative instruments, and Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, requires a deferred inflow of resources to be reported by a transferor government in a qualifying service concession arrangement. This statement amends the financial statement element classification of certain items previously reported as assets and liabilities to be consistent with the definitions in Concepts Statement No.4. This statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term deferred in financial statement presentations. The District has implemented the provisions of this Statement for the year ended June 30, B. Compliance and Accountability 1. Finance-Related Legal and Contractual Provisions In accordance with GASB Statement No. 38, "Certain Financial Statement Note Disclosures," violations of financerelated legal and contractual provisions, if any, are reported below, along with actions taken to address such violations: Violation None reported Action Taken Not applicable 28

149 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Deficit Fund Balance or Fund net position of Individual Funds Following are funds having deficit fund balances or fund net position at year end, if any, along with remarks which address such deficits: Fund Name None reported C. Excess of Expenditures Over Appropriations Deficit Amount Not applicable Remarks Not applicable As of June 30, 2014, expenditures exceeded appropriations in individual funds as follows: Appropriations Category General Fund: Other Outgo $ Excess Expenditures 35,640 General fund: The District incurred unanticipated expenditures for other outgo associated with transfers of services. D. Cash and Investments 1. Cash in County Treasury: In accordance with Education Code Section 41001, the District maintains substantially all of its cash in the San Diego County Treasury as part of the common investment pool ($52,435,337 as of June 30, 2014). The fair value of the District's portion of this pool as of that date, as provided by the pool sponsor, was $52,502,848. Assumptions made in determining the fair value of the pooled investment portfolios are available from the County Treasurer. 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 investments in the pool is reported in the accounting financial statements as 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 the 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. 2. Cash on Hand. in Banks. and in Revolving Fund Cash balances on hand and in banks ($64,819 as of June 30, 2014) and in the revolving fund ($7,753) are insured up to $250,000 by the Federal Depository Insurance Corporation. All cash held by the financial institution is fully insured or collateralized. 3. Investments: The District's investments at June 30, 2014 are shown below. Investment or Investment Type U.S. Treasury Obligations San Diego County Treasury Pooled Investments Total Investments Average Days to Maturity <30 Days 366 Days Amount Reported $ 63,528 $ 52,435,337 $ 52,498,865 $ Fair Value 63,528 52,502,848 52,566,376 29

150 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 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 Remaining Percentage Investment in Authorized Investment Maturity of Portfolio 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 N/A None None Joint Powers Authority Pools N/A None None 5. Aoal sis Qf Specific Deposit and lovestment Bisks GASB Statement No. 40 requires a determination as to whether the District was exposed to the following specific investment risks at year end and if so, the reporting of certain related disclosures: a. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The county is restricted by Government Code Section pursuant to Section to invest only in time deposits, U.S. government securities, state registered warrants, notes or bonds, State Treasurer's investment pool, bankers' acceptances, commercial paper, negotiable certificates of deposit, and repurchase or reverse repurchase agreements. The ratings of securities by nationally recognized rating agencies are designed to give an indication of credit risk. The San Diego County Investment Pool is rated AAA by Standard and Poors. b. Custodial Credit Risk Deposits are exposed to custodial credit risk if they are not covered by depository insurance and the deposits are uncollateralized, collateralized with securities held by the pledging financial institution, or collateralized with securities held by the pledging financial institution's trust department or agent but not in the District's name. 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% 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% of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having value of 105% of the secured deposits. 30

151 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 Investment securities are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the government, and are held by either the counterparty or the counterparty's trust department or agent but not in the District's name. At year end, the District was not exposed to custodial credit risk. c. Concentration of Credit Risk This risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. At year end, the District was not exposed to concentration of credit risk. d. Interest Rate Risk This is the risk that changes in 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 investing in the county pool. e. Foreign Currency Risk This is the risk that exchange rates will adversely affect the fair value of an investment. At year end, the District was not exposed to foreign currency risk. 5. Investment Accounting Policy The District is required by GASB Statement No. 31 to disclose its policy for determining which investments, if any, are reported at amortized cost. The District's general policy is to report money market investments and short-term participating interest-earning investment contracts at amortized cost and to report nonparticipating interest-earning investment contracts using a cost-based measure. However, if the fair value of an investment is significantly affected by the impairment of the credit standing of the issuer or by other factors, it is reported at fair value. All other investments are reported at fair value unless a legal contract exists which guarantees a higher value. The term "short-term" refers to investments which have a remaining term of one year or less at time of purchase. The term "nonparticipating" means that the investment's value does not vary with market interest rate changes. Nonnegotiable certificates of deposit are examples of nonparticipating interest-earning investment contracts. The District's investments in external investment pools are reported at an amount determined by the fair value per share of the pool's underlying portfolio, unless the pool is 2a7-like, in which case they are reported at share value. A 2a7-like pool is one which is not registered with the Securities and Exchange Commission ("SEC") as an investment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of

152 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 E. Accounts Receivable As of June 30, 2014, Accounts Receivable consisted of: Major Governmental Funds General Building Fund Fund Federal Government Federal Programs $ 514,751 $ $ Nonmajor Governmental Funds 301,429 $ Total Governmental Funds 816,180 State Government LCFF State Aid 1,654,512 Lottery 384,542 Categorical Programs 67,713 Special Education 466,357 Other State Programs 17,755 Local Sources Interest 7,958 36,435 Other Local Sources 48,522 Total $ 3,162,110 $ 36,435 $ 103,900 17,153 3, ,625 $ 1,654, , , ,357 34,908 47,536 48,522 3,624,170 There are no significant receivables which are not scheduled for collection within one year of year end. F. Capital Assets Capital asset activity for the year ended June 30, 2014, was as follows: Beginning Balances Increases Decreases Governmental activities: Capital assets not being depreciated: Land $ 45,896,267 $ $ $ Work in progress 3,722, ,816 Total capital assets not being depreciated 49,618, ,816 Capital assets being depreciated: Buildings 120,546, ,490 Improvements 18,013,956 59,215 Equipment 4,355,378 35,068 9,000 Total capital assets being depreciated 142,915,600 94, ,490 Less accumulated depreciation for: Buildings (19,844,377) (3,356,140) (619,858) Improvements (6,041,545) (1,078,428) Equipment (3,270,029) (198,795) (8,550) Total accumulated depreciation (29,155,951 ) (4,633,363) (628,408) Total capital assets being depreciated, net 113,759,649 (4,539,080) 298,082 Governmental activities capital assets, net $ 163,378,274 $ (4,268,264) $ 298,082 $ Ending Balances 45,896,267 3,993,174 49,889, ,628,776 18,073,171 4,381, ,083,393 (22,580,659) (7,119,973) (3,460,274) (33,160,906) 108,922, ,811,928 Depreciation was charged to functions as follows: Unallocated Depreciation $ 4,633,363 $ 4,633,363 32

153 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 G. Deferred Outflows of Resources In 2012 the District issued refunding bonds to repay a portion of the 1997 Election Series A and 1997 Election Series B Bonds. The refunding resulted in a loss on refunding of $2,245,472 which is recorded as a deferred outflow of resources and amortized over 18 years (the life of the bonds). The District prepaid debt insurance when issuing the 1997 Election Series F Bonds, the 1997 Election Series G Bonds, the 2012 Refunding Bonds, the 2007 Certificates of Participation, and the 2012 Certificates of Participation. In accordance with GASB Statement No. 65 the prepaid debt insurance is recorded as a deferred outflow of resources and amortized over the life of the debt. A summary of the deferred outflows of resources as of June 30, 2014, are as follows: Amortization Beginning Description Term Balance Current Year Additions Current Year Amortization Ending Balance 2012 Refunding Loss 18 Years $ 2,120,716 $ Prepaid Insurance Series F 40 Years 702,240 Prepaid Insurance Series G 30 Years 429,896 Prepaid Insurance Ref. 18 Years 119,085 Prepaid Insurance COPs 30 Years 83,650 Prepaid Insurance COPs 30 Years 163,850 $ 124,748 $ 18,480 14,824 7,005 3,346 5,650 1,995, , , ,080 80, ,200 Total Deferred Outflows of Resources $ 3,619,437 $ 3,445,384 H. Accounts Payable As of June 30, 2014, Accounts Payable consisted of: Major Governmental Funds General Building Fund Fund Nonmajor Governmental Funds Total Governmental Funds Vendor payables $ Payroll and related liabilities 1,376,579 $ 282,726 14,407 $ 6,727 $ 17,233 1,397, ,959 Total $ 1,659,305 $ 14,407 $ 23,960 $====1,,==69=7=,,,,,6=7=2 I. Interfund Balances and Activities 1. Due To and Due From Other Funds Balances due to and due from other funds at June 30, 2014, consisted of the following: Due To Fund Due From Fund Amount General Fund General Fund Child Development Fund Child Development Fund Cafeteria Fund General Fund Total $ 91, ,844 1,035 $===21=4'E,0=3==0 Indirect Costs and OPEB Indirect Costs and OPEB Reimburse expenses All amounts due are scheduled to be repaid within one year. 33

154 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Transfers To and From Other Funds Transfers to and from other funds at June 30, 2014, consisted of the following: Transfers From Transfers To Amount Reason Blended Component Unit (49) Blended Component Unit (52) Total $ 2,599,285 Debt Service Payments $===:!2,=59==9,=,=,2=8=5 J. Unearned Revenue As of June 30, 2014, Unearned Revenue consisted of: State Government Categorical Programs Total General Fund 500 $====::,5=0=0 K. Short-Term Debt Activity The District accounts for short-term debts for maintenance purposes through the General Fund. The proceeds from loans are shown in the financial statements as Other Resources. During the fiscal year, the District issued $1,810,332 of a short term Principal Apportionment Temporary Transfer of Funds (TTF) agreement with the San Diego County. The temporary transfer was repaid in July During the fiscal year, the District issued $2,319,333 of short term Principal Apportionment Temporary Transfer of Funds (TTF) agreement with the San Diego County. The temporary transfer was repaid in July Temporary Transfer of Funds $ Beginning Balance 1,810,332 $ Issued 2,319,333 $ Redeemed 1,810,332 $ Ending Balance 2,319,333 L. Components of Ending Fund Balance As of June 30, 2014, ending fund balances in governmental funds consisted of: Major Governmental Funds Nonmajor General Building Governmental Fund Fund Funds Nonspendable Fund Balances Revolving Cash $ 7,753 $ $ $ Stores Inventory 75,571 21,724 Prepaid Expenses 3,000 Restricted Fund Balances Educational Programs 3,369,913 46,330 Capital Projects 37,019,207 2,832,519 Debt Service 4,650,129 Child Nutrition Program 1,301,716 Unassigned Fund Balances For Economic Uncertainty 1,175,893 Other Unassigned 1,728,509 Total Governmental Funds 7,753 97,295 3,000 3,416,243 39,851,726 4,650,129 1,301,716 1,175,893 1,728,509 Total Fund Balance $ 6,360,639 $ 37,019,207 $ 8,852,418 $ 52,232,264 34

155 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 M. Long-Term Obligations 1. Long-Term Obligation Activity Long-term obligations include debt and other long-term liabilities. Changes in long-term obligations for the year ended June 30, 2014, are as follows: Amounts Beginning Ending Due Within Balance Increases Decreases Balance One Year Govemmental activities: General obligation bonds $ 146,296,483 $ 5,386,754 $ 2,997,293 $ 148,685,944 3,363,460 Certificates of participation 40,583,395 62, ,350 39,986, ,349 Other general long term debt 3,218, ,529 2,496, ,529 Net OPEB obligation Compensated absences 1,504, , ,774 99, ,323 1,910, , , ,826,568 $ 6,285,975 $ 4,709,495 $ 193,403,048 $ 5,137,732 Total governmental activities $========== ========== ========= ======== ========== Other long-term liabilities The funds typically used to liquidate other long-term liabilities in the past are as follows: Liability Compensated absences 2. Debt Service Requirements Activity Type Governmental ~F,::;-un_d,---c-=----,-_ General Fund Debt service requirements on long-term debt, net of certificates of participation, premium, discount, and OPEB obligation as of June 30, 2014, are as follows: net Year Ending June 30, 2015 $ Principal 4,199,923 3,813,630 4,258,630 4,001,476 4,294,044 25,006,826 23,320,344 16,203,032 18,019,212 11,764,098 8,329,707 2,992,022 Governmental Activities Accreted Interest Interest $ 2,006,507 $ 1,853,882 1,672, ,154 1,520, ,586 1,398,557 7,229,064 4,860,641 21,794,656 1,056,871 38,221,968 23,700 50,165,788 77,815, ,335,293 53,197,978 Totals $====~==,==== 126,202,944 $ ===~=="=== 360,357,389 $ 14,393,722 $ Total 6,206,430 5,667,512 5,931,212 6,259,612 6,552,187 37,096,531 46,171,871 54,448,700 68,185,000 89,580, ,665,000 56,190, ,954,055 35

156 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, General Obligation Bonds General obligation bonds as of June 30, 2014, consisted of: Amount of Date of Interest Maturity Original Issue Rate Date Issue 1997 Election Series A 08/01/ % 08/01/2021 $ 10,590, Election Series C 09/01/ % 08/01/ ,875, Election Series 0 02/01/ % 08/01/ ,619, Election Series E 11/15/ % 08/01/ ,952, Election Series F 06/28/ % 08/01/ ,599, Election Series G 05/31/ % 08/01/ ,990, Refunding Bonds 06/27/ % 08/ ,860,000 Total GO Bonds $ 161,487,609 Beginning Ending Balance Increases Decreases Balance 1997 Election Series A $ 485,000 $ $ 485,000 $ A Bond Premium 12,624 12, Election Series C 380, , C Bond Premium 6,209 6, Election Series 0 18,514, ,000 17,534, Bond Premium 333,624 19, , Accreted Interest 8,137,466 1,269,157 9,406, Election Series E 32,917, ,000 32,422, E Bond Premium 542,803 27, , E Accreted Interest 4,288, ,537 5,259, Election Series F 15,599,623 15,599, F Bond Premium 1,032,711 27,177 1,005, F Accreted Interest 2,028,427 1,408,263 3,436, Election Series G 28,990,884 28,990, G Bond Premium 892,307 30, , G Accreted Interest 1,105,597 1,737,797 2,843, Refunding Bonds 29,265, ,000 28,835, Bond Premium 1,763, ,749 1,659,969 Total GO Bonds $ 146,296,483 $ 5,386,754 $ 2,997,293 $ 148,685,944 36

157 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 The annual requirements to amortize the bonds outstanding at June 30, 2014, are as follows: Accreted Year Eoding June 30, Principal Interest Interest Total 2015 $ 3,155,000 $ $ 2,006,507 $ 5,161, ,560,000 1,853,882 5,413, ,005,000 1,672,582 5,677, ,747, ,154 1,520,982 6,005, ,040, ,586 1,398,557 6,298, ,245,936 7,229,064 4,860,641 36,335, ,320,344 21,794,656 1,056,871 46,171, ,203,032 38,221,968 23,700 54,448, ,019,212 50,165,788 68,185, ,764,098 77,815,902 89,580, ,329, ,335, ,665, ,992,022 53,197,978 56,190,000 Totals $ 123,382,611 $ 360,357,389 $ 14,393,722 $ 498,133,722 Amounts for accreted interest in the table represent amounts accrued as of year end. Amounts for accreted interest in the repayment schedule represent total payments of accreted interest over the life of the bonds. 4. Certificates of Participation (COPs) Certificates of Participation (COPs) as of June 30, 2014, consisted of: Amount of Date of Interest Maturity Original Issue Rate Date Issue 1998 COPs 09/23/ % 09/01/2023 $ 3,050, COPs 05115/ % 09/01/2030 7,075, COPs 01/06/ % 09/01/ ,000, COPs 11/29/ % 09/01/2037 7,330, COPs 01/31/ % 09/ ,409,715 Total COPs $ 44,864,715 Beginning Ending Balance Increases Decreases Balance 1998 COPs $ 1,825,000 $ $ 130,000 $ 1,695, COPs 5,925, ,000 5,720, COPs Discount (15,186) (844) (14,342) 2005 COPs 15,590, ,000 15,320, COPs Discount (77,834) (3,538) (74,296) 2007 COPs 7,060,000 60,000 7,000, COPs Premium COPs 10,249,715 10,249, COPs Discount (37,529) (1,294) (36,235) 2012 COPs Accreted Interest 63,579 62, ,116 Total COPs $ 40,583,395 $ 62,537 $ 39,986,582 37

158 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 The annual requirements to amortize the COPs outstanding at June 30, 2014, are as follows: Accreted Year Ending June 30, Principal Interest Interest Total 2015 $ 745,000 $ $ 1,783,138 $ 2,528, ,000 1,750,547 2,585, ,000 1,713,831 2,638, ,025,000 1,672,531 2,697, ,130,000 1,626,609 2,756, ,195,000 7,276,753 14,471, ,890,000 5,751,545 14,641, ,380,000 3,908,629 14,288, ,930,000 1,526,503 9,456, ,715 1,335, ,675 2,448,675 Totals $ 39,984,715 $ 1,335,285 $ 27,193,761 $ 68,513,761 Amounts for accreted interest in the table represent amounts accrued as of year end. Amounts for accreted interest in the repayment schedule represent total payments of accreted interest over the life of the bonds. On September 23, 1998, the District issued $3,050,000 Certificates of Participation pursuant to a lease agreement with the San Ysidro School District Financing Corporation for the purpose of a school facilities project. The certificates consist of: a) Serial 1998 Certificates of $2,110,000 with interest rates ranging from 3.9% to 6.75% and fully maturing on September 1, 2018; and, b) Term 1998 Certificates of $940,000 with a stated interest rate of 4.6% and fully maturing on September 1, On May 15, 2001 the District issued $7,075,000 Certificates of Participation pursuant to a lease agreement with the San Ysidro School District Financing Corporation for the purpose of a school facilities project. The certificates consist of: a) Serial 2001 Certificates of $2,115,000 with interest rates ranging From 4.5% to 6.5% and fully maturing on September 1, 2016; b) Term 2001 Certificates of $1,310,000 with a stated interest rate of 5.125% and fully maturing on September 1,2020; c) Term 2001 Certificates of $2,255,000 with a stated interest rate of 5.21% and fully maturing on September 1,2025; and, d) Term 2001 Certificates of $1,395,000 with a stated interest rate of 5.2% and fully maturing on September 1,2030. On January 6, 2005 the District issued $17,000,000 Certificates of Participation pursuant to a lease agreement with the San Ysidro School District Financing Corporation for the purpose of a school facilities project. The certificates consist of: a) Serial 2005 Certificates of $14,925,000 with interest rates ranging from 2.5% to 4.625% and fully maturing on September 1, 2032, and b) Term 2005 Certificates of $2,075,000 with a stated interest rate of 5.0% and fully maturing on September 1, On November 29, 2007 the District issued $7,330,000 Certificates of Participation pursuant to a lease agreement with the San Ysidro School District Financing Corporation for the purpose of a school facilities project. The certificates consist of a) Serial 2007 Certificates of $2,940,000 with interest rates ranging from 3.5% to 3.875% and fully maturing on September 1, 2028, and b) Term 2007 Certificates of $1,715,000 and $2,675,000 with stated interest rates of 4.625% and 4.750% and fully maturing on September 1, 2032 and September 1, On January 31, 2012 the District issued $10,409,715 in Certificates of Participation pursuant to a lease agreement with the San Ysidro School District Financing Corporation for the purpose of a school facilities project. The certificates consist of a) current interest certificates of $9,480,000 with interest rates ranging from 2.0% to 5.0% and fully maturing on September 1, 2038; and b) convertible capital appreciation certificates of $929,715 which are accreting at a rate of 6.2% until September 1, 2026 at which time they convert to current interest bonds with a stated interest rate of 6.2% and fully maturing on September 1,

159 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Other General Long Term Debt Other general long term debt as of June 30, 2014, consisted of: Date of Issue Interest Rate Maturity Date Amount of Original Issue QZAB Bonds SERP Retirement Total Other GLTD 10/14/ /09/2011 N/A N/A 10/27/2021 $ 5,000,000 07/01/2015 2,339,495 $ 7,339,495 Beginning Balance Increases Decreases Ending Balance QZAB Bonds SERP Retirement Total Other GL TO $ $ 2,282,670 $ 935,798 3,218,468 $ $ 253,630 $ 2,029, , ,899 $ 721,529 $ 2,496,939 The annual requirements to amortize other general long term debt is as follows: Year Ending June Totals $ $ Accreted Principal Interest Interest Total 721,529 $ $ 721, , , , , , , , , , ,890 2,496,939 $===== ~=====$====2',==4=96~,9=3=9 On October 14, 2005, the District issued $5,000,000 in Qualified Zone Academy Bonds (QZABs) to provide funds to finance certain capital improvements, equipment and other educational development programs of the District. The District is required to make a scheduled deposit of $253,630 each year through the maturity date of October 27, Accumulated interest earned on the account provides the additional funding required to pay the bonds in full upon maturity. The escrow account accrues interest at a fixed rate of 5.51 %. As of June 30, 2014 the escrow account carried an accrued balance of $1,760,974. The District does not have a legal right to claim cash in the escrow account and is not obligated to make payments in excess of the scheduled deposit amounts. In , the District offered its classified and certificated employees to participate in a one-time Supplemental Early Retirement Plan (SERP). A SERP is a program designated to create incentives that effectively and efficiently increase and accelerate the retirement rate, in excess of the natural attrition rate in order to generate fiscal savings as a result of the salary differential of a retiring employee and new hire, while factoring in the District cost of the incentive. There were a total of 33 employees who elected to participate in the plan. Under this five-year plan the District will contribute annually to an annuity from Mutual of Omaha to provide supplemental income to early retirees. The total amount of expected premium installments to be paid by the District is $2,339,495. The District submitted its initial payment of $467,899 prior to June 30,

160 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, Debt Issue Premium or Discount Debt issue premium arises when the market rate of interest is higher than the stated interest rate on the debt. Generally Accepted Accounting Principles (GAAP) require that the premium increase the face value of the debt and then be amortized over the life of the debt. The premium is being amortized over the life of the debt using the straight line method. Debt issue discount arises when the market rate of interest is lower than the stated interest rate on the debt. Generally Accepted Accounting Principles (GMP) require that the discount decrease the face value of the debt and then be amortized over the life of the debt. The discount is being amortized over the life of the debt using the straight line method. The following debt instruments were issued at a premium or at a discount resulting in effective interest as follows: Total Interest Less Premium Plus Discount Net Interest Bonds Bonds 1997 Series D 1997 Series E $ 30,814,643 $ 43,043,707 $ (594,306) (723,738) 30,220,337 42,319,969 Bonds Bonds 1997 Series F 1997 Series G 213,389,044 $ 88,034,116 $ (1,090,083) (925,828) 212,298,961 87,108,288 Bonds 2012 Ref. 9,538,616 (1,867,466) 7,671,150 Par Amount of COPs Periods Effective Interest Rate $ 24,619,363 $ 33,952,741 $ % 4.99% 17,599,623 $ % 28,990,884 $ % 29,860, % Total Interest Less Premium Plus Discount Net Interest COPS COPS $ 2,155,055 $ 6,835,504 $ 30,500 25,905 2,185,555 6,861,409 COPS ,698,912 $ 107,484 15,806,396 COPS ,118,495 $ (930) COPS ,853,144 39,620 10,892,764 Par Amount of COPs Periods Effective Interest Rate $ 3,050,000 $ 7,075,000 $ % 3.23% 17,000,000 $ % 7,330,000 $ % 10,409, % N. Joint Ventures (Joint Powers Agreements) The District participates in one joint venture under a joint powers agreement (JPA), the San Diego County Schools Risk Management JPA (SDCSRM). The relationship between the District and the JPA is such that the JPA is not a component unit of the District for financial reporting purposes. The JPA arranges for and provides workers' compensation, health, and property and liability insurance for its member school districts. The JPA is govemed by a board consisting of a representative from each member district. The governing board controls the operations of the JPA independent of any influence by the member districts beyond their representation on the governing board. Each member district pays a premium commensurate with the level of coverage requested and shares surpluses and deficits proportionately to its participation in the JPA. 40

161 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30,2014 The Districts share of combined unaudited financial information for the year ended June 30, 2014 is as follows: SDCSRM (Unaudited) June 30, 2014 Total Assets Total Liabilities Total Fund Balance Total Revenues Total Expenses Net Change in Fund Balance $ 2,220,055 2,079,476 $===14=0'E,5=7==9 $ 1,601, ,686 $===65=7~,0=5==2 The District had a deficit in fund balance for two funds within the JPA, the Worker's Compensation Fund and the Property and Liability Fund. The District is working on an agreement with the JPA to fund the deficits through a payment plan. The terms of that payment plan have not yet been determined. O. Employee Retirement Systems Qualified employees are covered under multiple-employer defined benefit pension plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers' Retirement System (STRS), and classified employees are members of the Public Employees' Retirement System (PERS). PERS: Plan Description The District contributes to the School Employer Pool under the California Public Employees' Retirement System (CaIPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CaIPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by state statutes, as legislatively amended, within the Public Employees' Retirement Law. CalPERS issues 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 Funding Policy Active plan members are required to contribute 7% 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 % of annual payroll. The contribution requirements of the plan members are established by state statute. The District's contributions to CalPERS for the fiscal year ending June 30, 2014, 2013 and 2012 were $758,860, $773,103 and $736,312, respectively, and equal 1 00% of the required contributions for each year. STRS: Plan Description The District contributes to the State Teachers' Retirement System (STRS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by STRS. The plan provides retirement, disability, and survivor benefits to beneficiaries. Benefit provisions are established by state statutes, as legislatively amended, within the State Teachers' Retirement Law. STRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the STRS annual financial report may be obtained from the STRS, 7667 Folsom Boulevard, Sacramento, California

162 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 Funding Policy Active plan members are required to contribute 8% 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 STRS Teachers' Retirement Board. The required employer contribution rate for fiscal year was 8.25% of annual payroll. The contribution requirements of the plan members are established by state statute. The District's contributions to STRS for the fiscal year ending June 30, 2014, 2013 and 2012 were $1,533,284, $1,591,600 and $1,655,116, respectively, and equal 1 00% of the required contributions for each year. On Behalf Payments The State of California makes contributions to STRS on behalf of the District. These payments consist of State General Fund contributions to STRS in the amount of $967,178 ( % of salaries subject to STRS). Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures. Accordingly, these amounts have been recorded in these financial statements. On behalf payments have been excluded from the calculation of available reserves, and have not been included in the budgeted amounts reported in the General Fund Budgetary Comparison Schedule. P. Postemployment Benefits Other Than Pension Benefits Plan Descriptions and Contribution Information San Ysidro School District administers a single-employer defined benefit other postemployment benefit (OPEB) plan that provides medical, dental, and vision insurance benefits to eligible retirees and their spouses. The District implemented Governmental Accounting Standards Board Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefit Plans Other Than Pension Plans in Membership in the plan consisted of the following: Retirees and beneficiaries receiving benefits Active plan members Total Annual OPEB Cost and Net OPEB Obligation The District's annual 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 Fiscal OPEB Percentage NetOPEB Year Cost Contributed Obligation $ 575,016 42% $ 336, ,555 45% 659, ,989 48% 984, ,411 59% 1,184, ,892 55% 1,504, ,774 45% 1,910,189 42

163 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 The District's annual OPES cost, the percentage of annual OPES cost contributed to the plan, and the net OPES obligation for 2014 is as follows: Annual required contribution Interest on net OPES obligation Adjustment to annual required contribution Annual OPES Cost Contributions made Increase in OPES obligation Net OPES obligation, beginning of year Net OPES obligation, end of year $ 749,046 75,237 (87,509) 736,774 (331,323) 405,451 1,504,738 $====1,,==9=10:=,::,1::=8:::=:::9 Funded Status and Funding Progress As of July 1, 2012, the most recent actuarial valuation date, the plan was not funded. This results in an unfunded actuarial accrued liability (UAAL) of $5.9 million. The covered payroll (annual payroll of active employees covered by the plan) was $24.2 million, and the ratio of UML to the covered payroll was 24.6 percent. 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 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 multi-year 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 July 1, 2012 actuarial valuation the entry age normal method was used. The actuarial assumptions included a five percent investment rate of return per year (net of administrative expenses), based on long-term historical returns for surplus funds invested pursuant to California Government Code Sections et seq. The UML is being amortized as a level percentage of payroll over a period of 30 years. The remaining amortization period at July 1, 2012, was 26 years. The actuarial value of assets was not determined in this actuarial valuation as there were none. Q. Commitments and Contingencies Litigation The District is involved in various litigation. In the opinion of management and legal counsel, the disposition of all litigation pending will not have a material effect on the financial statements. State and Federal Allowances, Awards, and Grants The District has received state and federal funds for specific purposes that are subject to view and audit by the grantor agencies. Although such audits could generate expenditure disallowances under terms of the grants, it is believed that any required reimbursement will not be material. 43

164 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 Construction Committments As of June 30, 2013, the District has suspended all construction projects. R. Subsequent Events New Accounting Pronouncement In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions - an amendment of GASB Statement No. 27. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50 Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements 27 and 50 remain applicable for pensions that are not covered by the scope of this Statement. The scope of this Statement addresses accounting and financial reporting for pensions that are provided to the employees of state and local governmental employers through pension plans that are administered through trusts that have the following characteristics: Contributions from employers and non-employer contributing entities to the pension plan and earnings on those contributions are irrevocable. Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms. Pension plan assets are legally protected from the creditors of employers, non-employer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan members. This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about pensions are also addressed. Distinctions are made regarding the particular requirements for employers based on the number of employers whose employees are provided with pensions through the pension plan and whether pension obligations and pension plan assets are shared. Employers are classified in one of the following categories for the purposes of this Statement: Single employers are those whose employees are provided with defined benefit pensions through single-employer pension plans pension plans in which pensions are provided to the employees of only one employer (as defined by this statement). Agent employers are those whose employees are provided with defined benefit pensions through agent multiple-employer pension plans - pension plans in which plan assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer's share of the pooled assets is legally available to pay the benefits of only its employees. 44

165 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 Cost-sharing employers are those whose employees are provided with defined benefit pensions through cost-sharing multiple-employer pension plans - pension plans in which the pension obligations to the employees of more than one employer are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan. In addition, this Statement details the recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit pension plan and for employers whose employees are provided with defined contribution pensions. This Statement also addresses circumstances in which a non-employer entity has a legal requirement to make contributions directly to a pension plan. This Statement is effective for the fiscal year. In November 2013, the GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - An Amendment of GASB Statement No. 68. The objective of this Statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The issue relates to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the government's beginning net pension liability. Statement No. 68 requires a state or local government employer (or nonemployer contributing entity in a special funding situation) to recognize a net pension liability measured as of a date (the measurement date) no earlier than the end of its prior fiscal year. If a state or local government employer or nonemployer contributing entity makes a contribution to a defined benefit pension plan between the measurement date of the reported net pension liability and the end of the government's reporting period, Statement No. 68 requires recognition of deferred outflows of resources and deferred inflows of resources for changes in the net pension liability of a state or local government employer or nonemployer contributing entity that arise from other types of events. At transition to Statement No. 68, if it is not practical for an employer or nonemployer contributing entity to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, paragraph 137 of Statement No. 68 required that beginning balances for deferred outflows of resources and deferred inflows of resources not be reported. Consequently, if it is not practical to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, contributions made after the measurement date of the beginning net pension liability could not have been reported as deferred outflows of resources at transition. This could have resulted in a significant understatement of an employer or nonemployer contributing entity's beginning net position and expense in the initial period of implementation. GASB Statement No. 71 amends paragraph 137 of Statement No. 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. Statement No. 68, as amended, continues to require that beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions be reported at transition only if it is practical to determine all such amounts. The provisions of this statement are required to be applied with the provisions of Statement No. 68 which is effective for the fiscal year. 45

166 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 S. Prior Period Restatements The District implemented GASB Statement No. 65 during the current fiscal year which resulted in an accounting change in the treatment of the debt issue costs. Under previous standards, debt issue costs were recorded as prepaid expenses and amortized over the life of the debt. Under newly implemented standards prepaid insurance is recorded as a deferred outflow of resources and all remaining debt issue costs are expensed in the period the debt is issued. In addition, the pronouncement requires that the gain or loss on refunding be calculated and amortized over the shorter of the life of the old or new debt. While calculating the gain or loss on refunding the district realized that general obligation bonds were understated by $280,000. The district elected to correct beginning net position. The resulting accounting policy changes and correction required a restatement to beginning net position as follows: T. Going Concern Net Position, Beginning (As Originally Stated) Change in accounting policy - debt issue costs Change in accounting policy - gain/loss on refunding Net Assets, Beginning (As Restated) $ $ 24,092,042 (3,039,774) 2,120,716 22,892,984 The District's past deficit spending coupled with reductions in revenue sources provided by the State of California and impasse in negotiations with unions, have resulted in substantial doubt about the Districts ability to continue as a going concern. The following issues indicate that the district may not be able to meet their financial obligations: 1. The District has filed negative certifications for second interim reports, first interim reports, second interim reports, and first interim reports with the San Diego County Office of Education. The negative certification status states that the District will not meet its cash flow Ineeds. 2. Decline in local enrollment of the District's students has adversely impacted state apportionment funding. In response to these issues, the San Diego County Office of Education is monitoring and overseeing activities of the District. In addition, a state mediator has been brought in to assist in negotiations between the District and the unions. The District was able to come to agreements with labor unions in October Between the agreed upon consessions and the additional funding that the district will receive through the new funding models, the district believes it will be able to continue over the course of the next fiscal year. In the event that the District cannot meet their financial obligations, the State Superintendent of Public Instruction will issue an emergency loan to help the District meet their obligations. If this occurs, the law requires that the State Superintendent of Public Instruction assume all the legal rights, duties, and powers of the governing board of the District and appoint a state administrator. The District's elected governing board serves only in an advisory capacity until a number of conditions are met. 46

167 Required Supplementary Information Required supplementary information includes financial information and disclosures required by the Govemmental Accounting Standards Board but not considered a part of the basic financial statements.

168 SAN YSIDRO SCHOOL DISTRICT GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2014 EXHIBIT B-1 Revenues: LCFF Sources: State Apportionment or State Aid Education Protection Account Funds Local Sources Federal Revenue Other State Revenue Other Local Revenue Total Revenues $ Budgeted Amounts Original Final 11,324,137 $ 12,120,060 $ 5,250,793 13,504,570 14,927,356 2,932,847 3,394,762 6,621,958 2,296,659 3,529,783 3,344,550 37,913,295 41,334,180 Actual Variance with Final Budget Positive (Negative) 11,897,153 $ (222,907) 5,250,793 15,240, ,384 2,763,321 (631,441 ) 2,316,361 19,702 3,475, ,434 40,944,352 (389,828) Expenditures: Current: Certificated Salaries Classified Salaries Employee Benefits Books And Supplies Services And Other Operating Expenditures Other Outgo Direct Support/Indirect Costs Capital Outlay Debt Service: Principal Total Expenditures 20,797,683 19,793,632 6,776,113 6,531,032 7,262,855 7,179,498 2,594,680 1,785,190 5,884,857 7,469,000 (188,587) (205,755) 16, , ,899 43,595,500 43,037,472 18,490,096 1,303,536 6,305, ,535 6,833, , , ,235 6,256,608 1,212,392 35,640 (35,640) (197,202) (8,553) 6,976 10, ,899 39,196,422 3,841,050 Excess (Deficiency) of Revenues Over (Under) Expenditures (5,682,205) (1,703,292) 1,747,930 3,451,222 Other Financing Sources (Uses): Total Other Financing Sources (Uses) Net Change in Fund Balance (5,682,205) (1,703,292) 1,747,930 3,451,222 Fund Balance, July 1 Fund Balance, June 30 $ 4,612,709 4,612,709 {1,069,496} $ 2,909,417 $ 4,612,709 6,360,639 $ 3,451,222 The accompanying notes to required supplementary information is an integral part of this statement. 47

169 SAN YSIDRO SCHOOL DISTRICT REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF FUNDING PROGRESS POST EMPLOYMENT HEAL THCARE BENEFITS YEAR ENDED JUNE 30, 2014 Actuarial Acturial Accrued Actuarial Value of Liability (AAL) Valuation Assets - Entry Age Date (b) 07/ $ $ 4,658,106 07/01/2010 5,385,216 07/01/2012 5,943,918 $ Unfunded UAALasa AAL Funded Covered Percentage of (UAAL) Ratio Payroll Covered Payroll (alb) ((b-a)/c) 4,658,106 $ 26,750, % 5,385,216 23,594, % 5,943,918 24,188, % 48

170 SAN YSIDRO SCHOOL DISTRICT NOTES TO REQUIRED SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED JUNE 30, 2014 Budgetary Comparison Schedule - General Fund The budgetary comparison schedule does not include revenue and expenses associated with on behalf payments made by the state for the fiscal year as follows: General Fund - Fund Financial Statements Revenues and Other Financing Sources Less On Behalf Payments for year ended June 30, 2014 General Fund - Budgetary Comparison Schedule Revenues and Other Financing Sources $ 40,944,352 (937,375) $====4=:=0,,==00=6=,=,9=7==7 General Fund - Fund Financial Statements Expenditures and Other Financing Uses Less On Behalf Payments for year ended June 30, 2014 General Fund - Budgetary Comparison Schedule Expenditures and Other Financing Uses $ 39,196,422 (937,375) $===,,-,3,=,8,,=25=9=,=,0=47== 49

171 Combining Statements and Budget Comparisons as Supplementary Information This supplementary information includes financial statements and schedules not required by the Governmental Accounting Standards Board, nor a part of the basic financial statements, but are presented for purposes of additional analysis.

172 SAN YSIDRO SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR GOVERNMENTAL FUNDS JUNE 30, 2014 EXHIBITC-1 Total Nonmajor Special Debt Capital Governmental Revenue Service Projects Funds (See Funds Funds Funds Exhibit ASSETS: Cash in County Treasury $ 1,159,586 $ 4,650,129 $ 2,766,691 $ 8,576,406 Cash on Hand and in Banks 1,055 1,055 Cash with a Fiscal AgentlTrustee 63,528 63,528 Accounts Receivable 423,325 2, ,625 Due from Other Funds 1,035 1,035 Stores Inventories 21,724 21,724 Total Assets 1,606,725 4,650,129 9,089,373 LIABILITIES AND FUND BALANCE: Liabilities: Accounts Payable $ 23,960 $ $ $ 23,960 Due to Other Funds 212, ,995 Total Liabilities 236, ,955 Fund Balance: Nonspendable Fund Balances: Stores Inventories 21,724 21,724 Restricted Fund Balances 1,348,046 4,650,129 2,832,519 8,830,694 Total Fund Balance 1,369,770 4,650,129 2,832,519 8,852,418 Total Liabilities and Fund Balances $ 1,606,725 $ 4,650,129 $ 2,832,519 $ 9,089,373 50

173 SAN YSIDRO SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2014 EXHIBITC-2 Total Nonmajor Special Debt Capital Governmental Revenue Service Projects Funds (See Funds Funds Funds Exhibit Revenues: Federal Revenue $ 2,175,824 $ $ $ 2,175,824 Other State Revenue 1,058,564 22,810 1,081,374 Other Local Revenue 588,916 5,354,788 2,886,481 8,830,185 Total Revenues 3,823,304 5,377,598 2,886,481 12,087,383 Expenditures: Instruction 1,024,381 1,024,381 Instruction - Related Services 185, ,192 Pupil Services 2,301,658 2,301,658 General Administration 197,202 11, ,352 Plant Services 48,314 14,903 63,217 Debt Service: Principal 3,435, ,630 3,688,630 Interest 3,946,858 3,946,858 Total Expenditures 3,756,747 7,381, ,683 11,418,288 Excess (Deficiency) of Revenues Over (Under) Expenditures 66,557 (2,004,260) 2,606, ,095 Other Financing Sources (Uses): Transfers In 2,476,977 2,476,977 Transfers Out (2,476,977) (2,476,977) Total Other Financing Sources (Uses) 2,476,977 (2,476,977) Net Change in Fund Balance 66, , , ,095 Fund Balance, July 1 1,303,213 4,177,412 2,702,698 8,183,323 Fund Balance, June 30 $ 1,369,770 $ 4,650,129 $ 2,832,519 $ 8,852,418 51

174 SAN YSIDRO SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR SPECIAL REVENUE FUNDS JUNE 30, 2014 Total Nonmajor Special Child Revenue Development Cafeteria Funds (See Fund Fund Exhibit C-1 ASSETS: Cash in County Treasury $ 44,468 $ 1,115,118 $ 1,159,586 Cash on Hand and in Banks 1,055 1,055 Accounts Receivable 104, , ,325 Due from Other Funds 1,035 1,035 Stores Inventories 21,724 21,724 Total Assets 1,457,188 1,606,725 EXHIBITC-3 LIABILITIES AND FUND BALANCE: Liabilities: Accounts Payable $ 11,055 $ 12,905 $ 23,960 Due to Other Funds 92, , ,995 Total Liabilities 103, , ,955 Fund Balance: Nonspendable Fund Balances: Stores Inventories 21,724 21,724 Restricted Fund Balances 46,330 1,301,716 1,348,046 Total Fund Balance 46,330 1,323,440 1,369,770 Total Liabilities and Fund Balances $ 149,537 $ 1,457,188 $ 1,606,725 52

175 SAN YSIDRO SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR SPECIAL REVENUE FUNDS FOR THE YEAR ENDED JUNE 30, 2014 Total Nonmajor Special Revenue Child Development Cafeteria Funds (See Fund Fund Exhibit Revenues: Federal Revenue $ 44,187 $ 2,131,637 $ 2,175,824 Other State Revenue 909, ,129 1,058,564 Other Local Revenue 482, , ,916 Total Revenues 1,435,920 2,387,384 3,823,304 EXHIBITC-4 Expenditures: Instruction 1,024,381 1,024,381 Instruction Related Services 185, ,192 Pupil Services 110,479 2,191,179 2,301,658 General Administration 86, , ,202 Plant Services 48,314 48,314 Total Expenditures 1,454,553 3,756,747 Excess (Deficiency) of Revenues Over (Under) Expenditures (18,633) 85,190 66,557 Net Change in Fund Balance (18,633) 85,190 66,557 Fund Balance, July 1 64,963 1,238,250 1,303,213 Fund Balance, June 30 $ 46,330 $ 1,323,440 $ 1,369,770 53

176 SAN YSIDRO SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR DEBT SERVICE FUNDS JUNE 30, 2014 Total Nonmajor Debt Bond Blended Service Interest Component Funds (See & Redemption Unit Exhibit C-1 ASSETS: Cash in County Treasury $ 4,650,129 $ 4,650,129 Total Assets 4,650,129 4,650,129 EXHIBITC-5 LIABILITIES AND FUND BALANCE: Liabilities: Total Liabilities Fund Balance: Restricted Fund Balances $ 4,650,129 $ 4,650,129 Total Fund Balance 4,650,129 4,650,129 Total Liabilities and Fund Balances $ 4,650,129 $ 4,650,129 54

177 SAN YSIDRO SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR DEBT SERVICE FUNDS FOR THE YEAR ENDED JUNE 30, 2014 Total Nonmajor Debt Bond Blended Service Interest Component Funds (See & Redemption Unit Exhibit C-2) Revenues: Other State Revenue $ 22,810 $ $ 22,810 Other Local Revenue 5,354,788 5,354,788 Total Revenues 5,377,598 5,377,598 EXHIBITC-6 Expenditures: Debt Service: Principal 2,770, ,000 3,435,000 Interest 2,134,881 1,811,977 3,946,858 Total Expenditures 4,904,881 2,476,977 7,381,858 Excess (Deficiency) of Revenues Over (Under) Expenditures 472,717 (2,476,977) (2,004,260) Other Financing Sources (Uses): Transfers In 2,476,977 2,476,977 Total Other Financing Sources (Uses) 2,476,977 2,476,977 Net Change in Fund Balance 472, ,717 Fund Balance, July 1 4,177,412 4,177,412 Fund Balance, June 30 $ 4,650,129 $ 4,650,129 55

178 SAN YSIDRO SCHOOL DISTRICT COMBINING BALANCE SHEET NONMAJOR CAPITAL PROJECTS FUNDS JUNE 30, 2014 EXHIBIT C-7 Total Nonmajor Capital Capital Capital Blended Projects Facilities Outlay Component Funds (See Fund Projects Unit Fund Exhibit C-1 ) ASSETS: Cash in County Treasury $ 698,377 $ 5,307 $ 2,063,007 $ 2,766,691 Cash with a Fiscal AgentlTrustee 63,528 63,528 Accounts Receivable ,608 2,300 Total Assets 2,128,143 2,832,519 LIABILITIES AND FUND BALANCE: Liabilities: Total Liabilities Fund Balance: Restricted Fund Balances $ 699,064 $ 5,312 $ 2,128,143 $ 2,832,519 Total Fund Balance 699,064 5,312 2,128,143 2,832,519 Total Liabilities and Fund Balances $ 699,064 $ 5,312 $ 2,128,143 $ 2,832,519 56

179 SAN YSIDRO SCHOOL DISTRICT COMBINING STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES NONMAJOR CAPITAL PROJECTS FUNDS FOR THE YEAR ENDED JUNE 30,2014 EXHIBITC-8 Total Nonmajor Capital Capital Capital Blended Projects Facilities Outlay Component Funds (See Fund Projects Unit Fund Exhibit C-2) Revenues: Other Local Revenue $ 209,100 $ 19 $ 2,677,362 $ 2,886,481 Total Revenues 209, ,677,362 2,886,481 Expenditures: General Administration 11,150 11,150 Plant Services 14,903 14,903 Debt Service: Principal 253, ,630 Total Expenditures 268, ,683 Excess (Deficiency) of Revenues Over (Under) Expenditures 197, ,408,829 2,606,798 Other Financing Sources (Uses): Transfers Out (2,476,977) (2,476,977) Total Other Financing Sources (Uses) (2,476,977) (2,476,977) Net Change in Fund Balance 197, (68,148) 129,821 Fund Balance, July 1 501,114 5,293 2,196,291 2,702,698 Fund Balance, June 30 $ 699,064 $ 5,312 $ 2,128,143 $ 2,832,519 57

180 Other Supplementary Information This section includes financial information and disclosures not required by the Governmental Accounting Standards Board and not considered a part of the basic financial statements. It may, however, include information which is required by other entities.

181 Supplementary Information Section

182 SAN YSIDRO SCHOOL DISTRICT LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE JUNE 30, 2014 The San Ysidro School District was established in The District boundaries include the City of San Ysidro and portions of the unincorporated area of San Diego County. There were no changes to the District's boundaries during the year. The district operates one preschool, five elementary schools, one K-8 school and one middle school. Board Name Jason Michael-Bradley Wells Antonio Martinez Jose F. Barajas Luciana Corrales Vacant Office President Vice President Clerk Member Member Term and Term Expiration Four Year Term Expires December 2014 Four Year Term Expires December 2016 Four Year Term Expires December 2016 Four Year Term Expires December 2014 Administration George J. Cameron, Ed.D. Interim Superintendent Gloria Madera Assistant Superintendent Educational Services Dena Whittington Assistant Superintendent Business Services Jason Romero Assistant Superintendent Human Resources 58

183 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF AVERAGE DAILY ATTENDANCE YEAR ENDED JUNE 30, 2014 TABLE 0-1 TKlK-3: Regular ADA Extended Year Special Education Nonpublic, Nonsectarian Schools TKlK-3 Totals Grades 4-6: Regular ADA Extended Year Special Education Nonpublic, Nonsectarian Schools Grades 4-6 Totals Grades 7 and 8: RegularAOA Extended Year Special Education Nonpublic, Nonsectarian Schools Grades 7 and 8 Totals ADA Totals Second Period Report Original Revised 2, N/A N/A 0.51 N/A 2, N/A 1, N/A N/A 0.81 N/A 1, N/A 1, N/A N/A 1.25 N/A 1, N/A 4, Annual Report Original Revised 2, N/A 1.72 N/A 0.91 N/A 2, N/A 1, N/A 1.00 N/A 0.96 N/A 1, N/A 1, N/A 0.44 N/A 1.28 N/A 1, N/A 4, N/A - There were no audit findings which resulted in necessary revisions to attendance. Average daily attendance is a measurement of the number of pupils attending classes of the district or charter school. 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 and charter schools. This schedule provides information regarding the attendance of students at various grade levels and in different programs. 59

184 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF INSTRUCTIONAL TIME YEAR ENDED JUNE 30, 2014 TABLE 0-2 Grade Level Ed. Code Minutes Requirement Ed. Code Adjusted & Reduced Number Number of Days of Days Actual Traditional Multitrack Minutes Calendar Calendar Status Transitional Kindergarten 36,000 Kindergarten 36,000 Grade 1 50,400 Grade 2 50,400 Grade 3 50,400 Grade 4 54,000 Grade 5 54,000 Grade 6 54,000 Grade 7 54,000 Grade 8 54,000 35,000 35,000 49,000 49,000 49,000 52,500 52,500 52,500 52,500 52,500 40, Complied 55, Complied 55, Complied 55, Complied 55, Complied 55, Complied 55, Complied 55, Complied 56, Complied 56, Complied School districts and charter schools must maintain their instructional minutes as defined in Education Code Section This schedule is required of all districts, including basic aid districts. 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 instruction time offered by the District and whether the District complied with the provisions of Education Code Sections through The District neither met nor exceeded its target funding. 60

185 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS YEAR ENDED JUNE 30, 2014 TABLE 0 3 Budget 2015 General Fund (see note 1) Revenues and other financial sources $ 43,952,554 Expenditures, other uses and transfers out 47,828,048 Change in fund balance (deficit) (3,875,494) Ending fund balance $ 2,485,144 Available reserves (see note 2) Available reserves as a percentage of total outgo (see note 3) Total long-term debt $ 188,861,750 Average daily attendance at P-2 $ $ $ $ ,881,727 $ 39,790,530 $ 42,486,736 40,133,797 40,548,648 42,204,433 1,747,930 (758,118) 282,303 6,360,638 $ 4,612,708 $ 5,370,826 2,904,402 $ 2,666,107 $ 3,559, ,241,763 $ 191,546,568 $ 193,148,614 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. The fund balance of the general fund has increased by $989,812 (18.4%) over the past two years. The fiscal year budget projects a decrease of $3,875,494 (60.9%). For a district of this size, the State recommends available reserves of at least 3% of total general fund expenditures, transfers out and other uses (total outgo). Total long-term debt has increased by $93,149 over the past two years. Average daily attendance has decreased by 138 over the past two years. Notes: 1 Budget 2015 is included for analytical purposes only and has not been subjected to audit. 2 Available reserves consist of all unassigned fund balances and all funds reserved for economic uncertainties contained within the General Fund. 3 On behalf payments of $937,375, $966,153, and $941,108, have been excluded from the calculation of available reserves for the fiscal years ending June 30, 2014, 2013 and

186 SAN YSIDRO SCHOOL DISTRICT RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 2014 TABLE 0-4 June 30, 2014, annual financial and budget report fund balances $ General Fund 5,308,599 $ Child Development Fund Cafeteria Fund 46,330 $ 1,323, '---'-- Adjustments and reclassifications: Increasing (decreasing) the fund balance: Inclusion of on behalf payments for CalSTRS in State Revenue Inclusion of on behalf payments for CalSTRS in Instructional Expenses Overstatement of Unearned Revenue for Common Core Funding Inclusion of noncash commodities received in Federal Revenue Inclusion of noncash commodities received in Pupil Services Expenses 937,375 (937,375) 1,052,040 29,803 (29,803) 72,414 (72,414) Net adjustments and reclassifications 1,052,040 June 30,2014, audited financial statement fund balances $ 6,360,639 $ 46,330 $===1,,==,3=23~,44===0 June 30, 2014, annual financial and budget report total net position $ Government Wide Net Position 22,096,753 Adjustments and reclassifications: Increase (decrease) in total liabilities: Deferred outflows of resources understatement General obligation bonds understatement Certificates of participation understatement Unmatured interest understatement Unearned revenue overstatement 3,445,384 (5,439,461 ) (68,187) (1,463,483) 1,052,040 Net adjustments and reclassifications (2,473,707) June 30, 2014, audited financial statement total net position $===1=9~,6=23~,0=4=6 This schedule provides the information necessary to reconcile the fund balances of all funds and the total liabilities balance of the general long-term debt account group as reported on the SACS report to the audited financial statements. Funds that required no adjustment are not presented. 62

187 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF CHARTER SCHOOLS YEAR ENDED JUNE 30, 2014 TABLE 0-5 No charter schools are chartered by San Ysidro School District. Charter Schools None Included In Audit? N/A 63

188 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED JUNE 30, 2014 TABLE 0-6 Federal Grantor! Pass-Through Grantorl Title U, S. DEPARTMENT QF HEALTH AND HUMAN SERVIQES Direct Programs: Medi-Cal Billing Option Total Medi-Cal Cluster Passed Through State Department of Education: Federal Child Care Total U. S. Department of Health and Human SeNices U, S. DEPABTMENT OF EDUQATIQN Passed Through State Department of Education: Title I: Part A Basic Special Education: IDEA Mental Health Special Education: IDEA Basic Special Education: IDEA Local Assistance Special Education: IDEA Preschool Local Special Education: IDEA Preschool Special Education: IDEA Preschool Staff Development Total Special Education Cluster Title X: McKinney-Vento Homeless Assistance Title III: Immigrant Education Title III: Limited English Proficiency Total Title III Title II: Teacher Quality Total Passed Through State Department of Education Total U. S. Department of Education U. S. DEPABTMENT QF AGRIQUL TURE Passed Through State Department of Education: School Breakfast Program National School Lunch Section 11 National School Lunch Meal Supplement National School Lunch Section 4 Commodity Supplemental Food Program * Total Child Nutrition Cluster Total U. S. Department of Agriculture TOTAL EXPENDITURES OF FEDERAL AWARDS Federal Pass-Through CFDA Entity Identifying Federal Number Number Expenditures $ 47,915 47, ,187 92, , , , , A , , A , , , , , ,031 2,719,069 2,719, , ,446, , , ,414 2,131,638 2,131,638 $ 4,942,809 * Indicates noncash expenditure The accompanying notes are an integral part of this schedule. 64

189 SAN YSIDRO SCHOOL DISTRICT NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of San Ysidro School District and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB 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 general purpose financial statements. 2. Subrecipients Of the federal expenditures presented in the schedule, San Ysidro School District provided federal awards to subrecipients as follows: Title Title I Part A: Basic Title II : Teacher Quality Title III: Limited English Proficiency Total Provided to Subrecipients Federal CFDA Number Amount Provided to Subrecipients 65

190 Other Independent Auditor's Reports

191 Independent Auditor's 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 Audjan" Standards Board of Trustees San Ysidro School District San California Members of the Board of Trustees: We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of San Ysidro School District, as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise San Ysidro School District's basic financial statements, and have issued our report thereon dated December 15, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered San Ysidro School District's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of San Ysidro School District's internal control. Accordingly, we do not express an opinion on the effectiveness of San Ysidro School District's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify al/ deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify certain deficiencies in internal control, described in the accompanying schedule of findings and questioned costs as item(s) , that we consider to be significant deficiencies. 66

192 Compliance and Other Matters As part of obtaining reasonable assurance about whether San Ysidro School District's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findings and questioned costs as item( s) San Ysidro School District's Response to Findings San Ysidro School District's response to the findings identified in our audit is described in the accompanying schedule of findings and questioned costs. San Ysidro School District's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. W~H-II~/(~p 0. LLfJ EI Cajon, California December 15,

193 Independent Auditor's Report on Compliance for Each Major Program and on Internal Control Oyer Compliance ReQuired by OMB Circular A-133 Board of Trustees San Ysidro School District San Diego, California Members of the Board of Trustees: on {;(llml:m~mc:e for Each Federal PI'I\nll'l'Im We have audited San Ysidro School District's compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of San Ysidro School District's major federal programs for the year ended June 30, San Ysidro School District's major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of San Ysidro School District's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits 01 States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about San Ysidro School District's compliance with those requirements and performing such other procedures as we considered necessary in the Circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of San Ysidro School District's compliance. Opinion on Each Major Federal Program In our opinion, San Ysidro School District complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs for the year ended June 30,

194 Other Matters The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with OMS Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as item Our opinion on each major federal program is not modified with respect to these matters. San Ysidro School District's response to the noncompliance findings identified in our audit is described in the accompanying schedule of findings and questioned costs. San Ysidro School District's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control Over Compliance Management of San Ysidro School District is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered San Ysidro School District's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMS Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of San Ysidro School District's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiences. We did not identify any deficiencies in internal control over compliance that we considered to be material weaknesses. However, material weaknesses may exist that have not been identified. San Ysidro School District's response to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs. San Ysidro School District's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMS Circular A-133. Accordingly, this report is not suitable for any other purpose. uj~h-,#'~a"7~~' LL,IJ EI Cajon, California December 15,

195 Independent Auditor's Report on State Compliance Board of Trustees San Ysidro School District San Diego, California Members of the Board of Trustees: We have audited the District's compliance with the types of compliance requirements described in the Standards and Procedures for Audits of California K-12 Local Education Agencies , published by the California Education Audit Appeals Panel that could have a direct and material effect on each of the District's state programs identified below for the fiscal year ended June 30, Management's Responsibility for State Compliance Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its state programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each applicable program as identified in the State's audit guide, Standards and Procedures for Audits of California K-12 Local Education Agencies published by the Education Audit Appeals Panel. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and the State's audit guide, Standards and Procedures for Audits of California K-12 Local Education Agencies published by the Education Audit Appeals Panel. Those standards and audit guide require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a direct and material effect on the state programs noted below occurred. An audit includes examining, on a test basis, evidence about the District's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the District's compliance with those requirements. In connection with the audit referred to above, we selected and tested transactions and records to determine the District's compliance with the state laws and regulations applicable to the following items: Description Procedures In Audit Guide Procedures Performed Attendance Accounting: Attendance Reporting Teacher Certification and Misassignments Kindergarten Continuance Independent Study Continuation Education Instructional Time for School Districts Instructional Materials, General Requirements Ratios of Administrative Employees to Teachers 6 Yes 3 Yes 3 Yes 23 N/A 10 N/A 10 Yes 8 Yes 1 Yes 70

196 Classroom Teacher Salaries 1 Yes Early Retirement Incentive 4 N/A GANN Limit Calculation 1 Yes School Accountability Report Card 3 Yes Juvenile Court Schools 8 N/A Local Control Funding Formula Certification 1 Yes California Clean Energy Jobs Act 3 Yes After School Education and Safety Program: General Requirements 4 Yes After School 5 Yes Before School 6 Yes Education Protection Account Funds 1 Yes Common Core Implementation Funds 3 Yes Unduplicated Local Control Funding Formula Pupil Counts 3 Yes For Charter Schools: Contemporaneous Records of Attendance 8 N/A Mode of Instruction 1 N/A Nonclassroom-Based Instruction/lndependent Study 15 N/A Determination of Funding for Nonclassroom-Based Instruction 3 N/A Annual Instructional Minutes - Classroom Based 4 N/A Facility Grant Program 1 N/A The term "N/A" is used above to mean either the District did not offer the program during the current fiscal year or the program applies to a different type of local education agency. Opinion on State Compliance In our opinion, San Ysidro School District complied, in all material respects, with the compliance requirements referred to above that are applicable to the statutory requirements listed in the schedule above for the year ended June 30,2014. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion of the effectiveness of the entity's internal control or on compliance outside of the items tested as noted above. This report is an integral part of an audit performed in accordance with Standards and Procedures for Audits of California K-12 Local Education Agencies , published by the Education Audit Appeals Panel in considering the entity's compliance. Accordingly, this communication is not suitable for any other purpose. uj~n-#~"<~ '~. L.UJ EI Cajon, California December 15,

197 Findings and Recommendations Section

198 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2014 A. Summary of Auditor's Results 1. Financial Statements Type of auditor's report issued: Unmodified Internal control over financial reporting: One or more material weaknesses identified? Yes X No One or more significant deficiencies identified that are not considered to be material weaknesses? X Yes None Reported Noncompliance material to financial statements noted? Yes X No 2. Federal Awards Internal control over major programs: One or more material weaknesses identified? Yes X No One or more significant deficiencies identified that are not considered to be material weaknesses? Yes X None Reported Type of auditor's report issued on compliance for major programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133? X Yes No Identification of major programs: CFDA Number(s) , , Name of Federal Program or Cluster Child Nutrition Cluster Title I Special Education Cluster Title III Limited English Proficiency Title II Teacher Quality Dollar threshold used to distinguish between type A and type B programs: $300,000 Auditee qualified as low-risk auditee? X Yes No 72

199 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, State Awards Any audit findings disclosed that are required to be reported in accordance with Standards and Procedures for Audits of California K-12 Local Education Agencies? Type of auditor's report issued on compliance for state programs: Unmodified Yes X No B. Financial Statement Findings Finding (30000) Associated Student Body Accounts Criteria or Specific Requirement Determine that the District has procedures and controls in place to safeguard assets of the associated student body accounts. Condition San Ysidro Middle School was unable to provide supporting documentation for twelve out of twelve deposits made in student body accounts. In addition, the school operates a student store but does not keep an inventory of items on hand. Questioned Costs None Context In order to detect errors and deter fraud, internal controls must be established over deposits and inventory of student body activities. Effect The associated student body funds at San Ysidro Middle School are exposed to significant risk of error and fraud because controls are not in place to detect errors and deter fraud. Causa The associated student body funds are overseen by multiple teachers without an established advisor responsible for the accounts as a whole. There is some documentation, but it is not detailed enough to verify that amounts deposited are in agreement with amounts collected. There is not a process in place to track inventory of the student body store. Recommendation Establish procedures to regularly inventory student body stores. Establish procedures over deposits to ensure amounts deposited are in agreement with amounts collected. Establish an ASB Advisor and ensure they understand that they are responsible for oversight of all associated student body activities and deposits. LEA's Response A new ASB advisor with previous experience in ASB procedures is now in charge. She has met with Business Coordinator. Sign in sheet and agenda of meeting is available. 73

200 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30,2014 Finding (60000) Going Concern Issues Criteria or Specific Requirement District financial statements are prepared on the assumption that the district will continue as a going concern. If substantial doubt about going concern arises during the course of the audit, management's plan to mitigate the effects of the adverse conditions or events is evaluated and disclosed in the notes to the financial statements. Condition The District faces numerous financial difficulties in the coming years. The District has not been able to make budget cuts sufficient to meet or exceed revenue shortfalls associated with several years of state budget cuts and declining enrollment. Management projects that absent an emergency state loan, the District will deplete its cash balances in June Questioned Costs None Effect There is a going concern issue that the District might not meet its financial obligations unless cash flow shortages can be stopped and the budget is brought into balance. Recommendation We recommend the District take necessary corrective actions to remediate looming budget and cash flow issues. LEA's Response The district continues to monitor the budget and make any appropriate and necessary budget cuts. The district was able to come to an agreement with labor unions in October The agreement will not allow for any furlough days or salary rollbacks through fiscal year. Budget cuts necessary will be required to come from other areas. C. Federal Award Findings and Questioned Costs Finding (50000) Allowable Costs, Cost Principles Federal Time Accounting Federal Program Information Title I & Special Education Cluster Title II Teacher Quality Title III Limited English Proficiency Federal Grantor Agency U.S. Department of Education Pass-Trough Grantor Agency California Department of Education Criteria or Specific Requirement Verify that amounts charged to federal major programs for payroll and benefits meet the 74

201 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30, 2014 documentation requirements for time accounting as outlined in OMB Circular A-87. Condition In our review of individuals charged to federal major programs we identified the following: A. The District was unable to provide signed semi-annual certifications or personnel activity reports (PARs) for six individuals charged to federal major programs. B. The District provided documentation for nine employees charged as substitutes or extra duty that was not in compliance with requirements for OMB Circular A-87. C. The district provided semi-annual certifications for eleven employees charged to multiple cost objectives rather than monthly PARs. Questioned Costs Estimated questioned costs are as follows: CFDA# Program Questioned Costs Title I $43, Special Education Basic $19, Title II Teacher Quality $ Title III Limited English Proficien_c -y...:.$_1_9,'-2_56_ Total Questioned Costs $82,054 Context Pursuant to OMB Circular A-87, Attachment B, Section 8(h)(3), Employees who work solely on a single federal cost objective must complete a periodic certification that meets the following requirements: 1. Be prepared at least semiannually. 2. Be signed by the employee or supervisory official having firsthand knowledge of the work performed by the employee. 3. State that the employee worked solely on that single federal program or cost objective during the period covered by the certification. 4. Be an after-the-fact certification of actual effort expended. Pursuant to OMB Circular A-87, Attachment B, Section 8(h)(4), (5), and (7), Employees who work on multiple federal programs or cost objectives must complete personnel activity reports (PARs) or equivalent documentation that meets the following requirements: 1. Reflect an after-the-fact distribution of the actual activity of each employee. 2. Account for the total activity for which each employee is compensated. 3. Be prepared at least monthly and coincide with one or more pay periods. 4. Be signed by the employee. Budget estimates or other distribution percentages determined before the services are performed do not qualify as support for charges to federal awards. Effect The district has not complied with the requirements for documenting salaries and wages charged to federal programs as required by OMB Circular A-87. ~ Individuals preparing documentation did not have a complete understanding of the requirements. 75

202 SAN YSIDRO SCHOOL DISTRICT SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED JUNE 30,2014 Recommendation Establish procedures for documenting time charged to federal programs that is consistent with the requirements of OMB Circular A-87. Procedure 905 of the California School Accounting Manual provides detailed information on the requirements and sample reports which can be used in establishing procedures. Provide training to individuals charged with preparing documentation as to the requirements of federal time accounting and district procedures. Ensure that reporting takes place based upon actual activities rather than budgeted activities. LEA's Response Director of State and Federal Projects position has been reestablished. Payroll reports with actual employees charged to federal and state programs are provided every month. D. State Award Findings and Questioned Costs None 76

203 SAN YSIDRO SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30,2014 Finding/Recommendation Finding (30000) Associated Student Body Accounts San Ysidro Middle School was unable to provide supporting documentation for nine out of ten deposits made in student body accounts. In addition, the school operates a student store but does not keep an inventory of items on hand. Establish procedures to regularly inventory student body stores. Establish procedures over deposits to ensure amounts deposited are in agreement with amounts collected. Establish an ASB Advisor and ensure they understand that they are responsible for oversight of all associated student body activities and deposits. Finding (60000) Going Concern Issues The district has not been able to make budget cuts sufficient to meet or exceed revenue shortfalls associated with several years of state budget cuts and declining enrollment. The District is at an impasse in negotiations with unions which is preventing the necessary budget cuts to eliminate deficit spending. Management projects that absent an emergency state loan, the District will deplete its cash balances in May Take necessary actions to remidiate looming budget and cash flow issues. Finding (50000) Allowable Costs, Cost Principles Federal Time Accounting District documentation of salaries and wages charged to federal programs was not in compliance with the requirements of OMB Circular A-8? Establish procedures to ensure all salaries and wages are documented in accordance with OMB Circular A-8? Current Status Not Implemented Being Implemented Partially Implemented Management's Explanation If Not Implemented See Current Year Finding See Current Year Finding See Current Year Finding 77

204 SAN YSIDRO SCHOOL DISTRICT SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FOR THE YEAR ENDED JUNE 30,2014 Finding/Recommendation Finding (50000) Special Tests and Provisions Schoolwide Plans schoolwide plans were not approved until April Establish procedures that ensure schoolwide plans are completed prior to the beginning of the fiscal year to ensure compliance with federal requirements. Finding (50000) Special Tests and Provisions Assessment of Need The district was unable to provide a copy of an assessment of local needs for professional development and hiring. Maintain a copy of the needs assessment for audit purposes. Finding (70000) Instructional Materials The district's public hearing to determine the sufficiency of instructional materials was not held within the first eight weeks of school. Establish procedures to ensure public hearing is held within the first eight weeks of school to determine sufficiency of instructional materials and supplies. Current Status Implemented Implemented Implemented Management's Explanation If Not Implemented 78

205 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE This Continuing Disclosure Agreement (this Disclosure Agreement ) is executed and delivered by the San Ysidro School District (the District ) in connection with the execution and delivery of $21,585,000 aggregate principal amount of the District s 2015 Refunding Certificates of Participation (the Certificates ). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated August 1, 2015, by and among the District, San Ysidro Schools Public Financing Corporation and The Bank of New Yrk Mellon Trust Company, N.A. (the Trust Agreement ). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Resolution. In consideration of the execution and delivery of the Certificates by the District and the purchase of such Certificates by the Underwriter described below, the District hereby covenants and agrees as follows: SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the District for the benefit of the Certificateholders and in order to assist RBC Capital Markets, LLC (the Underwriter ) in complying with Rule 15c2-12(b)(5) (the Rule ) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. SECTION 2. Additional Definitions. In addition to the above definitions and the definitions set forth in the Resolution, 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 4 and 5 of this Disclosure Agreement. Bondholder or Holder means any holder of the Certificates or any beneficial owner of the Certificates so long as they are immobilized with DTC. Dissemination Agent shall mean any Dissemination Agent, or any alternate or successor Dissemination Agent, designated in writing by the Superintendent or Assistant Superintendent, Business Services (or otherwise by the District), which Agent has evidenced its acceptance in writing. Initially, and in the absence of the specific designation of a successor or alternate Dissemination Agent, the Dissemination Agent shall be the District. Listed Event means any of the events listed in Section 6 of this Disclosure Agreement. Material Events Disclosure means dissemination of a notice of a Material Event as set forth in Section 6. MSRB shall mean the Municipal Securities Rulemaking Board, through its electronic municipal market access system, which can be found at or any repository of disclosure information that may be designated by the Securities and Exchange Commission for purposes of the Rule. SECTION 3. CUSIP Numbers and Final Official Statement. The CUSIP Numbers for the Certificates have been assigned. The Final Official Statement relating to the Certificates is dated July 30, 2015 ( Final Official Statement ). SECTION 4. Provision of Annual Reports. (a) The District shall cause the Dissemination Agent, not later than 290 days after the end of the District s fiscal year (currently ending June 30), commencing with the report for the fiscal E-1

206 year ending June 30, 2015, to provide to the MSRB an Annual Report which is consistent with the requirements of Section 5 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 5 of this Disclosure Agreement; provided that the audited financial statements of the District may be submitted, when and if available, separately from the balance of the relevant Annual Report. (b) If the District is unable to provide to the MSRB an Annual Report by the date required in paragraph (a) above, the District shall send a notice to the MSRB in substantially the form attached as Exhibit A. (c) The Dissemination Agent shall: (i) determine the name and address of the MSRB each year prior to the date established hereunder for providing the Annual Report; and (ii) if the Dissemination Agent is other than the District or an official of the District, the Dissemination Agent shall file a report with the District certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided to the MSRB. SECTION 5. Content of Annual Report. The District s Annual Report shall contain or incorporate by reference the following: (a) Financial information including the general purpose financial statements of the District for the preceding fiscal year, prepared in conformity with generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board and the American Institute of Certified Public Accountants. If audited financial information is not available by the time the Annual Report is required to be filed pursuant to Section 4(a) hereof, the financial information included in the Annual Report may be unaudited, and the District will provide audited financial information to the MSRB as soon as practical after it has been made available to the District. (b) Operating data, including the following information with respect to the District s preceding fiscal year (to the extent not included in the audited financial statements described in paragraph (a) above): (i) The approved budget for the District for the then-current fiscal year; (ii) The following information for the most recently ended fiscal year and the current year, to the extent not provided above, will be updated annually: information concerning average daily attendance, pension plans, short- and long-term borrowings, lease obligations, secured tax levies and delinquencies, largest local taxpayers, assessed valuations, total tax rates, and fiscal year revenue limits. (c) Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues of the District or related public entities, which have been submitted to the MSRB or to the Securities and Exchange Commission. If the document incorporated by reference is a final official statement, it must be available from the MSRB. The District shall clearly identify each other document so incorporated by reference. E-2

207 SECTION 6. Reporting of Significant Events. (a) The District agrees to provide or cause to be provided to the MSRB, in readable PDF or other electronic format as prescribed by the MSRB, notice of the occurrence of any of the following events with respect to the Certificates not later than ten (10) Business Days after the occurrence of the event: (i) Principal and interest payment delinquencies. difficulties. difficulties. (ii) Unscheduled draws on any debt service reserves reflecting financial (iii) Unscheduled draws on any credit enhancements reflecting financial (iv) Substitution of or failure to perform by any credit provider. (v) Issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB); (vi) Tender Offers; (vii) Defeasances; (viii) Rating changes; or person. (ix) Bankruptcy, insolvency, receivership or similar event of the obligated (b) The District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material, not later than ten (10) Business Days after the occurrence of the event: (i) Unless described in paragraph 6(a)(v) hereof, adverse tax opinions or other material notices or determinations by the Internal Revenue Service with respect to the tax status of the Certificates or other material events affecting the tax status of the Certificates; (ii) Modifications of rights to Bondholders; (iii) Optional, unscheduled or contingent Bond calls; Certificates; (iv) Release, substitution or sale of property securing repayment of the (v) Non-payment related defaults; (vi) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an E-3

208 action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; or (vii) Appointment of a successor or additional Paying Agent or Trustee or the change of name of a Paying Agent or Trustee. (c) The District shall give, or cause to be given, in a timely manner, notice of a failure to provide the annual financial information on or before the date specified in Section 4 hereof, as provided in Section 4(b) hereof. (d) Whenever the District obtains knowledge of the occurrence of a Listed Event described in Section 6(a) hereof, or determines that knowledge of a Listed Event described in Section 6(b) hereof would be material under applicable federal securities laws, the District shall within ten (10) Business Days of occurrence file a notice of such occurrence with the MSRB in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsections (a)(vii) or (b)(iii) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Certificates pursuant to the Resolution. SECTION 7. Termination of Reporting Obligation. The District s obligations under this Disclosure Agreement shall terminate when the District is no longer an obligated person with respect to the Certificates, as provided in the Rule, upon the defeasance, prior redemption or payment in full of all of the Certificates. SECTION 8. Dissemination Agent. The Superintendent may, from time to time, appoint or engage an alternate or successor Dissemination Agent to assist in carrying out the District s obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall be entitled to the protections, limitations from liability, immunities and indemnities provided to the Paying Agent as set forth in the Resolution which are incorporated by reference herein. The Dissemination Agent agrees to perform only those duties of the Dissemination Agent specifically set forth in the Agreement, and no implied duties, covenants or obligations shall be read into this Agreement against the Dissemination Agent. The Dissemination Agent shall have no duty or obligation to review the Annual Report nor shall the Dissemination Agent be responsible for filing any Annual Report not provided to it by the District in a timely manner in a form suitable for filing. In accepting the appointment under this Agreement, the Dissemination Agent is not acting in a fiduciary capacity to the registered holders or beneficial owners of the Certificates, the District, or any other party or person. The Dissemination Agent may consult with counsel of its choice and shall be protected in any action taken or not taken by it in accordance with the advice or opinion of such counsel. No provision of this Agreement shall require the Dissemination Agent to risk or advance or expend its own funds or incur any financial liability. The Dissemination Agent shall have the right to resign from its duties as Dissemination Agent under this Agreement upon thirty days written notice to the District. The Dissemination Agent shall be entitled to compensation for its services as Dissemination Agent and reimbursement for its out-of-pocket expenses, attorney s fees, costs and advances made or incurred in the performance of its duties under this Agreement in accordance with its written fee schedule provided to the District, as such fee schedule may be amended from time to time in writing. The District agrees to indemnify and hold the Dissemination Agent harmless from and against any cost, claim, expense, cost or liability related to or arising from the acceptance of and performance of the duties of the Dissemination Agent hereunder, provided the Dissemination Agent shall not be indemnified to the extent of its willful misconduct or negligence. The obligations of the District under this Section shall survive the termination or discharge of this Agreement and the Certificates. E-4

209 SECTION 9. Amendment. Notwithstanding any other provision of this Disclosure Agreement, the District may amend this Disclosure Agreement under the following conditions, provided no amendment to this Agreement shall be made that affects the rights, duties or obligations of the Dissemination Agent without its written consent: (a) The amendment may be made only 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 the obligated person, or type of business conducted; (b) This Disclosure Agreement, as amended, would have complied with the requirements of the Rule at the time of the primary offering of the Certificates, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The amendment does not materially impair the interests of Holders, as determined either by parties unaffiliated with the District or another obligated person (such as the Bond Counsel) or by the written approval of the Bondholders; provided, that the Annual Report containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. SECTION 10. Additional Information. If the District chooses to include any information from any document or notice of occurrence of a Material Event in addition to that which is specifically required by this Disclosure Agreement, the District shall have no obligation under this Disclosure Agreement to update such information or to include it in any future disclosure or notice of occurrence of a Designated Material Event. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Designated Material Event, in addition to that which is required by this Disclosure Agreement. SECTION 11. Default. The District shall give notice to the MSRB of any failure to provide the Annual Report when the same is due hereunder, which notice shall be given prior to July 1 of that year. In the event of a failure of the District to comply with any provision of this Disclosure Agreement, any Bondholder may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an event of default under the Resolution, and the sole remedy under this Disclosure Agreement in the event of any failure of the District to comply with this Disclosure Agreement shall be an action to compel performance. SECTION 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the District, the Dissemination Agent, the Underwriter and Holders from time to time of the Certificates, and shall create no rights in any other person or entity. SECTION 13. Governing Law. This Disclosure Agreement shall be governed by the laws of the State, applicable to contracts made and performed in such State. Dated: July 30, 2015 SAN YSIDRO SCHOOL DISTRICT By: Superintendent E-5

210 EXHIBIT A NOTICE TO EMMA OF FAILURE TO FILE ANNUAL REPORT Name of Issuer: Name of Issue: San Ysidro School District $21,585, Refunding Certificates of Participation Date of Delivery: August 18, 2015 NOTICE IS HEREBY GIVEN that the above-named Issuer has not provided an Annual Report with respect to the above-named Certificates as required by Section 4(a) of the Continuing Disclosure Agreement dated August 18, The Issuer anticipates that the Annual Report will be filed by. Dated: [ISSUER/DISSEMINATION AGENT] By: E-6

211 APPENDIX F BOOK ENTRY ONLY SYSTEM The information in this section concerning DTC and DTC s book-entry only system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the completeness or accuracy thereof. The following description of the procedures and record keeping with respect to beneficial ownership interests in the Certificates, payment of principal, premium, if any, and interest with respect to the Certificates to DTC Participants or Beneficial Owners, confirmation and transfers of beneficial ownership interests in the Certificates and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Reference made to presented as a link for additional information regarding DTC and is not a part of this Official Statement. 1. The Depository Trust Company ( DTC ), New York, NY, will act as securities depository for the Certificates (the Certificates ). The Certificates 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 Security certificate will be issued for each maturity of the Certificates in the aggregate principal amount of such maturity, and will be deposited with DTC. 2. 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 is rated AA+ by Standard & Poor s. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at 3. Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC s records. The ownership interest of each actual purchaser of each Security ( 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 Certificates 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 Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. 4. To facilitate subsequent transfers, all Certificates 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 Certificates 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 Certificates; DTC s records reflect only the identity of the Direct Participants to F-1

212 whose accounts such Certificates 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. 5. 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 Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as prepayments, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit 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. 6. Prepayment notices shall be sent to DTC. If less than all of the Certificates within a maturity are being prepaid, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be prepaid. 7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates 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 Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Principal, prepayment price and interest payments on the Certificates 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 Paying Agent, 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 Paying Agent, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, prepayment price and interest payments 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 Paying Agent, 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. 9. A Certificate Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Certificates by causing the Direct Participant to transfer the Participant s interest in the Certificates, on DTC s records, to the Trustee. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are transferred by Direct Participants on DTC s records and followed by a book-entry credit of tendered Certificates to the Trustee s DTC account. 10. DTC may discontinue providing its services as depository with respect to the Certificates 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, physical Certificates are required to be printed and delivered. 11. 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, Certificates will be printed and delivered to DTC. AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE CERTIFICATES, THE TRUSTEE WILL SEND ANY NOTICE OF PREPAYMENT OR OTHER NOTICES TO OWNERS ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY DTC PARTICIPANT, OR OF ANY DTC PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OF SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE PREPAYMENT OF THE CERTIFICATES CALLED FOR PREPAYMENT OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. F-2

213 APPENDIX G COUNTY INVESTMENT POLICY G-1

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215 Q2 SAN DIEGO COUNTY TREASURER S POOLED MONEY FUND INVESTMENT POLICY January 1, 2015 The Investment Policy and practices of the County Treasurer are based on prudent money management principles and California State Law, specifically Government Code Sections , , and Section shall apply to a local agency that is a county, or other local agency that pools money in deposits or investments with other local agencies, including local agencies that have the same governing body. However, Section shall apply to all local agencies that pool money in deposits or investments exclusively with local agencies that have the same governing body. The practices of this office will always comply with the legal authority and limitations placed on it by the governing legislative bodies. The implementation of these laws, allowing for the dynamics of the money markets, will be the focus of this policy statement. All matters contained in this policy are to be read and applied pursuant to and consistent with state law. Where this Investment Policy specifies a percentage limitation, compliance will be measured as of the date of purchase. When investing, reinvesting, purchasing, acquiring, exchanging, selling and managing the Fund the objectives of this office shall be: 1. The primary objective shall be to safeguard the principal of the funds under the County Treasurer's control. 2. The secondary objective shall be to meet the liquidity needs of the participants. 3. The third objective shall be to achieve an investment return on the funds under control of the County Treasurer within the parameters of prudent risk management. The Fund is an actively managed portfolio. By this it is meant that the County Treasurer and his staff will observe, review, and react to changing conditions that affect the Fund; this shall be viewed as a full time responsibility by the County Treasurer and his staff. The authority to execute investment transactions that will affect the Fund will be limited to: County Treasurer Chief Deputy Treasurer Chief Investment Officer Investment Officers The County Treasurer and the above staff will meet on a regular basis to discuss current market conditions and future trends and how each of these affects the Fund.

216 TABLE OF CONTENTS SAN DIEGO COUNTY TREASURER INVESTMENT POLICY Pool Policy Security of Principal Policy 3 Liquidity Policy 3 Return Policy 3 Maturity Policy 3-4 Prohibited Securities 4 Credit Rating Policy 4-5 Internal Controls 5-6 Permissible Investments Permissible Investments 6 Government Obligations 6-7 Local Agency Obligations 7 Banker s Acceptance 7-8 Commercial Paper 8 Medium-Term Notes 8-9 Negotiable Certificates of Deposit 9-10 Repurchase Agreements Reverse Repurchase Agreements 11 Collateralized Certificates of Deposit Covered Call/Put Options Money Market Mutual Fund CalTRUST 14 Pass-through Securities When-issued Securities 15 Supranationals 15 Other Policy Topics Illiquidity Limitations Maximum Exposure for Any One Issuer 16 Qualified Brokers & Dealers Securities Lending 17 Delegation of Investment Authority to the County Treasurer 17 Safekeeping Authority County Treasury Oversight Committee 18 Rules Governing the Acceptance of Honoraria, Gifts and Gratuities Reporting Annual Audit 20 Cost and Earning Apportionment 20 Terms and Conditions for Depositing Funds by Voluntary Participants Criteria for Withdrawal of Funds from the County Pool (Voluntary Participants) Grandfathered Agencies 22 Glossary of Terms 23-26

217 2015 SAN DIEGO COUNTY TREASURER S POOLED MONEY FUND INVESTMENT POLICY The purpose of the County Treasurer's Investment Policy is to implement the legislated parameters of the investment authority of the Fund. As an elected official of the County of San Diego, the County Treasurer must manage public monies in a way that is consistent with investment oversight, and sound investment practices. To have a policy which only concerns itself with maximizing return is a very dangerous course. The basic concept of investment return is based on a risk/reward relationship. Therefore, the higher the return, the higher the risk. Risk management must be an integral part of any investment policy. Risk management must include adequate internal controls so that Fund depositors and the public have confidence that public monies are secure. The policy stated below will concern itself with risk management. 1. SECURITY OF PRINCIPAL POLICY - The policy issues directed to protecting the principal entrusted to this office are: A. Limiting the Fund's exposure to each type of security. B. Limiting the Fund's exposure to each issuer of debt. C. Determining the minimum credit requirement for each type of security. 2. LIQUIDITY POLICY - The policy issues directed to provide necessary liquidity to the participants are: A. Limiting the length of maturity for securities in the Fund. B. Limiting the Fund's exposure to Moderately Liquid and Illiquid securities. 3. RETURN POLICY - The policy issues directed to achieving a return are: A. Attaining a market rate of return taking into account the investment risk constraints and liquidity needs. B. A majority of the investments shall be limited to low risk securities in anticipation of earning a fair return relative to the risk being taken. 4. MATURITY POLICY A. The maximum maturity allowed by the California Government Code is 5 years with shorter limitations specified for certain types of securities. The mandatory minimum for the maturity structure of the Fund shall be to have 50% of the Fund in instruments with remaining maturities of one year or less. Furthermore, at least 25% of the Fund must mature within 90 days. 3

218 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy The maximum effective duration for the Fund shall be 1.50 years. The following bullet points summarize these parameters: At least 50% of the Fund maturing within 1 year At least 25% of the Fund maturing within 90 days Maximum effective duration of 1.50 years B. The Fund will be considered in compliance with the maturity policy if it meets the maturity targets above. In the event that the Fund distribution does not comply with the table above, until such time as the Fund is within maturity targets, all securities purchased shall be of a maturity or duration that will lower the maturity and or duration of the Fund. In the event a compliance violation has occurred, a variance report shall be made to the Oversight Committee as part of the normal monthly reporting. 5. PROHIBITED SECURITIES The California Government Code prohibits a local agency to invest in any of the following derivative notes: Inverse Floater Range Notes Interest-only strips derived from a pool of mortgages Any security that could result in zero interest accrual 6. CREDIT RATING POLICY A. This Investment Policy sets forth minimum credit ratings for each type of security. These credit limits apply to the initial purchase of a security and does not automatically force the sale of a security if the credit ratings of the security fall below the policy limits. B. The monitoring of credit ratings consists of the following procedures: 1. When a credit rating downgrade occurs, the Investment Group will evaluate the downgrade on a case-by-case situation to determine whether to hold or sell the security after further analysis of the credit rating on an ongoing basis. 2. In the event a security in the Fund receives a credit rating downgrade, the Investment Group will report the rating change to the Oversight Committee in the monthly report. In the same manner, the Oversight Committee will be informed on the Investment Group s decision to hold or sell a downgraded security. 4

219 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy 3. The Investment Group shall meet at least quarterly to review and update the approved list of securities and establish credit criteria for each category of security. C. To ensure that the Fund maintains an overall credit rating of AAAf / S1, the highest rating given by Standard & Poor s, the asset allocation with respect to credit quality will be provided to S&P on a monthly basis. Investments rated below A-1 (short term) or below the A category (long term), at the time of purchase, are prohibited in this policy. 7. INTERNAL CONTROLS A. The Chief Deputy Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that: 1. The cost of a control should not exceed the benefits likely to be derived; and 2. The valuation of costs and benefits requires estimates and judgments by management. B. Accordingly, the Chief Deputy Treasurer shall establish and maintain internal controls that shall address the following points: 1. Control of Collusion - Collusion is a situation where two or more employees are working in conjunction to defraud their employer. 2. Separation of Transaction Authority from Accounting and Record Keeping - By separating the person who authorizes the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved. 3. Custodial Safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as defined by California State Law), not insured by FDIC, shall be placed with an independent third party for custodial safekeeping. 4. Avoidance of Physical Delivered Bearer Securities - Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Bearer securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with such securities. 5

220 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy 5. Clear Delegation of Authority to Subordinate Staff Members - Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities. 6. Written Confirmation of Telephone Wire Transfers - Due to the potential for error and improprieties arising from telephone transactions, all telephone transactions should be supported by written or electronic communications and approved by the appropriate person. 7. Development of a Wire Transfer Agreement with the Lead Bank or Third Party Custodian - This agreement should outline the various controls, security provisions, and delineate responsibilities of each party making and receiving wire transfers. 8. Development of the Annual Treasurer s Investment Manual - Annually, Investment staff and Accounting staff will review and update internal control policies as stated in the manual. C. Provide for an annual independent review by an external auditor to assure compliance with policies and procedures. 8. PERMISSIBLE INVESTMENTS - Government Codes 53601, , , , 53635, 53637, 53638, 53651, 53652, and address permissible investments. These investment categories are addressed individually in sections 9-23 below. 9. GOVERNMENT OBLIGATIONS - The Fund invests in two categories of Government Obligations: U.S. Treasury and Agency obligations. Both are issued at the Federal level. U.S. Treasury obligations are bills, notes and bonds issued by the Treasury and are direct obligations of the Federal Government. Agency obligations are notes and bonds of federal agencies, and government sponsored enterprises. A. Maximum Maturity - The maximum maturity of an issue shall be the current 5-year issue or an issue, which, at the time of the investment, has a term remaining to maturity not in excess of 5 years. B. Maximum Exposure of Fund - The maximum exposure to the Fund for this category is unlimited. C. Maximum Exposure Per Issuer - The maximum exposure to the Fund for an individual issuer shall be: 6

221 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy 1. Treasury - Unlimited 2. Agency - No more than 35% of the Fund value shall be invested in any single issuer. D. Minimum Credit Requirement - None E. Liquidity Category - Liquid 10. LOCAL AGENCY OBLIGATIONS - These are bonds, notes, warrants or other evidences of indebtedness of any local agency or by a department, board or authority of any local agency within this State. In addition, the Fund is further authorized to purchase bonds and notes of any of the fifty states in the United States. A. Maximum Maturity - The maximum maturity of an issue shall be 5 years. B. Maximum Exposure of Fund - The maximum exposure to the Fund for this category shall be 15%. C. Maximum Exposure Per Issuer - The maximum exposure to a single issuer shall be 10% of the Fund value. D. Minimum Credit Requirement - Issuers outside of the County must be at or above the following investment grade from one of these ratings firms: 1. Standard & Poor s - SP-1 or the A category (long-term when applicable) 2. Fitch - F-1 or the A category (long-term when applicable) 3. Moody's - MIG 1 or the A category (long-term when applicable) (For 1 year or less, use short-term rating) (For over 1 year, use long-term ratings) E. Liquidity Category - Moderately Liquid 11. BANKER'S ACCEPTANCE - This is a draft or bill of exchange, accepted by a bank or trust company and brokered to investors in a secondary market. The purpose of the Banker's Acceptance (BA) is to facilitate trade and provide liquidity to the import-export markets. Acceptances are collateralized by the pledge of documents such as invoices, trust receipts, and other documents evidencing ownership and insurance of the goods financed. Since its inception in 1914, there has been no known loss of principal to investors through the use of Banker's Acceptances. A. Maximum Maturity - the maximum maturity of an issue shall be 180 days. 7

222 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy B. Maximum Exposure of Fund - The maximum exposure to the Fund for this category shall be 40%. C. Maximum Exposure Per Issuer - The maximum exposure to a single issuer shall be 5% of the Fund value. D. Minimum Credit Requirement The security must be at or above the following investment grade from one of these rating firms. If unrated by Standard & Poor s, security would need to be authorized by Standard & Poor s with a shadow rating prior to purchase. 1. Standard & Poor's - A-1 2. Moody's - P-1 3. Fitch - F-1 E. Liquidity Category Liquid 12. COMMERCIAL PAPER - These are short-term, unsecured, promissory notes issued by firms in the open market. Commercial paper (CP) is generally backed by a bank credit facility, guarantee/bond of indemnity, or some other support agreement. A. Maximum Maturity - The maximum maturity of an issue shall be 270 days. B. Maximum Exposure of Fund - The maximum exposure to the Fund for this category shall be 40%. C. Maximum Exposure Per Issuer - The maximum exposure to a single issuer shall be 5% of the Fund value. D. Minimum Credit Requirements - The security must have the following minimum investment grade rating from one of these rating firms. If unrated by Standard & Poor s, security would need to be authorized by Standard & Poor s with a shadow rating prior to purchase. 1. Standard & Poor s - A-1 or the A category (long-term when applicable) 2. Fitch - F-1 or the A category (long-term when applicable) 3. Moody s - P-1 or the A category (long-term when applicable) E. Liquidity Category - Liquid 13. MEDIUM-TERM NOTES ( MTN ) - These are corporate notes, deposit notes, and bank notes sold by an agent in the open market on a continually offered basis. Issuers include well recognized banks and bank holding companies, thrifts, 8

223 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy finance companies, insurance companies, and industrial corporations. These medium term notes are debt obligations generally unsecured, although some issues come to market on a collateralized or secured basis. A. Maximum Maturity - The maximum maturity of an issue shall be 5 years. B. Maximum Exposure of Fund - The maximum exposure to the Fund for this category shall be 30%. C. Maximum Exposure Per Issuer - The maximum exposure to a single issuer shall be 5% of the Fund value. D. Minimum Credit Requirements - The security must have the following minimum investment grade rating from one of these rating firms. If unrated by Standard & Poor s, security would need to be authorized by Standard & Poor s with a shadow rating prior to purchase. 1. Standard & Poor s - A-1 or the A category (long-term when applicable) 2. Moody's - P-1 or the A category (long-term when applicable) 3. Fitch - F-1 or the A category (long-term when applicable) (MTN s 1 year or less, use short-term rating.) (For MTN s over 1 year, use long-term rating.) E. Liquidity Category - Liquid 14. NEGOTIABLE CERTIFICATES OF DEPOSIT - These are issued by commercial banks and thrift institutions against funds deposited for specified periods of time and earn specified or variable rates of interest. Negotiable certificates of deposit ( NCD ) differ from other certificates of deposit by their liquidity. NCD's are traded actively in secondary markets. In compliance with California Code , all FDIC insured CD s, whether directly placed or placed through a private sector entity, will be classified as a NCD. A. Maximum Maturity 1. The maximum maturity of a NCD issue shall be 5 years. 2. The maximum maturity of any FDIC insured CD s, whether directly placed or placed through a private sector entity, shall be 13 months. B. Maximum Exposure of Fund - The maximum exposure to the Fund for this category shall be 30%. D. Maximum Exposure Per Issuer - The maximum exposure to a single issuer shall be 5% of the Fund value. 9

224 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy E. Minimum Credit Requirement 1. All NCD must have the following investment grade from one of these rating firms. If unrated by Standard & Poor s, security would need to be authorized by Standard & Poor s with a shadow rating prior to purchase. a) Standard & Poor s - A-1 or the A category (long-term when applicable) b) Moody's - P-1 or the A category (long-term when applicable) c) Fitch - F-1 or the A category (long-term when applicable) (For NCD s 1 year or less, use short-term rating) (For NCD s over 1 year, use long-term rating) 2. There is no minimum credit requirement for FDIC insured CD s, whether directly placed or placed through a private sector entity. F. Liquidity Category - Liquid 15. REPURCHASE AGREEMENT - A repurchase agreement (RP) consists of two simultaneous transactions. One is the purchase of securities by an investor (the Fund); the other is the commitment by the seller (i.e. a broker/dealer) to repurchase the securities at the same price, plus interest, at some mutually agreedupon future date. A. Maximum Maturity - The maximum maturity of repurchase agreements shall be one year. B. Maximum Exposure of Fund - The maximum exposure to the Fund for this category shall be 40%. C. Maximum Exposure Per Broker/Dealer - The maximum exposure to a single broker/dealer of RP shall be 10% of the Fund when the dollar weighted average maturity is greater than 5 days, 15% of the Fund when the dollar weighted average maturity is 5 days or less. D. Eligible Broker/Dealers - Broker/Dealers shall sign a PSA Master Repurchase Agreement or a Tri-Party Repurchase Agreement. The Agreement must specify a minimum margin percentage of 102% and also provide for daily mark-to-market of the collateral by the custodian bank. E. Eligible Collateral - The securities eligible for repurchase agreement transactions shall be a security authorized in Section of the California Government Code. Collateral eligible for repurchase agreements maturing 7 days to 1 year shall be Treasuries and Government Agencies. 10

225 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy F. Delivery of Collateral - Broker/Dealers shall deliver the underlying securities to either the County s safekeeping bank or a mutually agreed upon third party custodian bank or a counterparty bank s customer book-entry account. When a third party custodian is used, it will be the custodian s responsibility to transfer funds and securities between the broker/dealer and the County Fund in accordance with the terms of the repurchase agreement. G. Liquidity Category - Liquid 16. REVERSE REPURCHASE AGREEMENT - Reverse repurchase agreements (RRPs) are essentially the mirror image of RPs. In this instance, the Fund is the seller of securities and the broker or bank is the investor. Due to the nature of RRPs, the policy regarding this instrument is different from the above RP policy. A. Maximum Maturity - The maximum maturity of a securities lending loan shall be 92 days unless the agreement includes a written guarantee of a minimum earning or spread for the entire period of the RRP. B. Maximum Exposure of Fund - No more than 20% of the Fund shall be invested in RRP s and/or securities lending at any one time. C. Maximum exposure Per Broker/Dealer - No more than 10% of the Fund shall be invested in RRP s with any one broker/dealer at any one time. D. Purpose of RRPs - The uses of RRPs shall be to invest the proceeds from the agreement into permissible securities that have the highest short-term credit ratings; to supplement the yield on securities owned; or to provide funds for the immediate payment of an obligation. The maturity of the RRP and the maturity of the security purchased shall be the same. E. Eligible Securities - A RRP may only be entered into with a security, authorized in California Government Code 53601, which has been owned and paid for 30 days prior to the settlement of the RRP. F. Eligible Broker/Dealer - Broker/Dealers shall be primary broker/dealers of the Federal Reserve Bank of New York. G. Liquidity Category - Liquid 17. COLLATERALIZED CERTIFICATES OF DEPOSIT - This is the deposit of funds made by the County Treasurer in state or national banks or state or federal savings and loan associations or federal credit unions or FDIC insured industrial loan companies in California per California Government Code Section The deposit of the funds will be made under the following conditions: 11

226 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy A. The deposit may not exceed the total of the paid up capital and surplus of a depository. B. The depository must maintain securities with a market value of at least 10% in excess of the total amount of the County Treasurer's deposits. These securities will be placed in the institution's pooled collateral account and monitored by the State Treasurer of California or a mutually agreed upon third party custodian bank. C. The County Treasurer may waive the first $250,000 of collateral for each depository, so long as that amount is insured by an agency of the Federal Government. The documents listed below in D will not be required for deposits of $250,000 or less. D. Each institution which receives County deposits must provide the County Treasurer with an up-to-date Contract, Annual Report, Affirmative Action Policy, Community Reinvestment Act Statement and EEO-1 Form. E. Maximum maturity shall be 13 months. F. Maximum exposure to the Fund for collateralized Certificates of Deposit shall be 10%. G. Institutions at or above the following investment grade, as determined by the respective rating firms, may pledge mortgage based collateral for County deposits: 1. Fitch - F-1 2. Moody's - P-1 3. Standard & Poor s - A-1 H. Liquidity Category - Illiquid 18. COVERED CALL OPTION/PUT OPTION - An option is the right to buy or sell a specific security within a specific time period at a specific price. A. A covered call is when the County Treasurer sells the option to another party, giving them the right to buy an existing security in the Fund at a specific price within a specific time period. B. A put option is when the County Treasurer sells the option to another party, giving them the right to sell to the County Treasurer a security at a specific price within a specific time period. 12

227 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy C. The seller of a covered call option/put option is paid at the time of the sale of the option. At the end of the option period, if the option is not exercised, the right to buy or sell the security is canceled. D. The County Treasurer will act only as a seller of covered call and put options with the following exception: County Treasurer may buy an option to offset an existing open option position. E. Securities subject to covered calls shall not be used for Reverse Repurchase Agreements. F. Cash sufficient to pay for outstanding puts shall be invested in securities maturing on or before the expiration date of the options. G. Maximum maturity - The maximum maturity of a covered call option/put option shall be 90 days. H. Maximum exposure - No more than 10% of the Fund may have options written against it at any given time. I. Credit risk - Options shall only be written with primary dealers. J. Liquidity Category - Liquid 19. MONEY MARKET MUTUAL FUND - Shares of beneficial interest issued by management companies. Such shares represent ownership of a diversified portfolio of securities, which are redeemable at their net asset value. The Government Code allows for purchases of mutual funds, but the Fund will limit use to money market mutual funds managed to maintain a $1.00 share price. A. Maximum exposure - The maximum exposure to the Fund for this category shall be 15%. B. Purchase price - The purchase price of the mutual fund shall not include any commission. C. Maximum exposure per fund - The maximum exposure to a single mutual fund shall be 10% of the Fund value. D. Minimum credit requirement - Mutual funds must have the following investment grade from at least one of these rating firms or retain an investment advisor registered or exempt from registration with the Securities and Exchange Commission with not less than five years of experience in managing money market mutual funds with assets under management in excess of five hundred million dollars: 13

228 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy 1. Standard & Poor s - AAAm 2. Moody's - Aaa-mf 3. Fitch - AAAmmf E. Liquidity Category - Liquid 20. INVESTMENT TRUST OF CALIFORNIA (CalTRUST) is a pooled investment program through the CalTRUST Joint Powers Authority, authorized by Government Code Section 53601(p). CalTRUST provides two pooled account options (Short-Term Account provides daily liquidity and the Medium-Term Account permits monthly deposits and withdrawals). All of the accounts comply with the limitations and withdrawals. All of the accounts comply with the limitations and restrictions placed on local investments by the Government Code; and no leverage is permitted in any of the accounts. A. Maximum Exposure - The maximum exposure to the Fund for this category shall be 2.5%, subject to limitations placed upon deposits by CalTRUST. B. Liquidity Category - Illiquid 21. PASS-THROUGH SECURITIES - These will be limited to equipment leasebacked certificates, consumer receivable pass-through certificates or consumer receivable-backed bonds. A. Maximum maturity - The maximum maturity of an issue shall be 5 years. B. Maximum exposure - The maximum exposure to the Fund for this category shall be 20%. C. Maximum exposure per issuer - The maximum exposure to a single issuer shall be 5% of the Fund value. D. Minimum credit requirement issuer - Issuers, must have the following minimum rating from one of these rating firms: 1. Fitch - A 2. Moody's - A 3. Standard & Poor s - A E. Minimum credit requirement security - The security must have the following minimum category rating from one of these firms. If unrated by Standard & Poor s, security would need to be authorized by Standard & Poor s with a shadow rating prior to purchase. 14

229 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy 1. Standard & Poor's - AA category 2. Moody's - Aa category 3. Fitch - AA category F. Liquidity Category - Liquid 22. WHEN-ISSUED SECURITIES - The Fund may invest in new issues of Government Obligations offered on a when-issued basis; that is, delivery and payment take place after the date of the commitment to purchase, normally within 15 days. Both price and interest rate are fixed at the time of commitment. This allows the Fund to lock in an interest rate that may not be available on the issue date. The Fund does not earn interest on the securities until settlement, and the market value of the securities may fluctuate between purchase and settlement. Such securities can be sold before settlement. 23. SUPRANATIONALS The fund may invest in United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by multi-national organizations. A. Issuers- International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), and Inter-American Development Bank (IADB) B. Maximum Maturity - The maximum maturity of an issue shall be 5 years. C. Maximum Exposure of Fund - The maximum exposure to the Fund for this category shall be 30%. D. Maximum Exposure Per Issuer - The maximum exposure to a single issuer shall be 10% of the Fund value. E. Minimum Credit Requirements - The security must have the following minimum investment grade rating from one of these rating firms. If unrated by Standard & Poor s, security would need to be authorized by Standard & Poor s with a shadow rating prior to purchase. 1. Standard & Poor s - A-1 or the AA category 2. Moody's - P-1 or the Aa category 3. Fitch - F-1 or the AA category F. Liquidity Category - Liquid 24. ILLIQUIDITY LIMITATIONS - The Fund may not invest more than 20% of the total Fund in combination of Local Agency Obligations, which are classified as Moderately Liquid, and Collateralized Certificates of Deposit, which are 15

230 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy classified as Illiquid. All other Investment Policy sanctioned asset categories are classified as Liquid. 25. MAXIMUM EXPOSURE FOR ANY ONE ISSUER - Unless otherwise specified in this policy, if a single issuer is involved in more than one of the above listed investment categories, the exposure to the issuer is limited to 5% of the Fund. The aforementioned does not apply to repurchase agreements. The limits for repurchase agreements are set forth in the County Treasurer's Policy in section QUALIFIED BROKERS AND DEALERS - In order to eliminate risk in making investments under this Investment Policy, all investments will be made only through qualified dealers. A. A qualified dealer must be a bank, savings and loan association, or an investment securities dealer. Commercial Paper and Certificate of Deposit issuers may be considered qualified dealers for direct issuance of their paper. B. Any dealer entering into a new business relationship to conduct security transactions with the County Treasurer is required to make application and qualify for recommendations by the Investment Group to the County Treasurer. C. The dealer must ensure that its staff is aware of the County Treasurer's Investment Policy and the California Government Code Sections and D. Investment securities dealers for Reverse Repurchase Agreements must be primary dealers regularly reporting to the Federal Reserve Bank. E. The dealer is required to have a net capital in excess of $1 million with liquidity lines of $50 million or more. F. The dealer is required to maintain an active secondary market for securities sold to the County and must be competitive in price for bids and offers. G. The dealer will be monitored by the Investment Group to ensure the services the County requires are delivered in a timely and efficient manner. H. The primary account representative must be in the institutional or middle market fixed income division with 5 years or more experience covering large municipalities. I. A qualified dealer must not have made any political contributions to the County Treasurer, any member of the Board of Supervisors, or any candidate for these offices within any consecutive 48-month period following 16

231 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy January The exception is if the broker/dealer is entitled to vote for any of these offices, the contributions shall not be in excess of $250 to each official per election. J. Each dealer every three years will be required to respond to the County s Request For Statement of Qualifications (RFSQ) providing the County with up to date financial and investment experience information. 27. SECURITIES LENDING - This is a program conducted by an agent authorized to execute securities lending under the guidelines listed under RRP's and as detailed in the Services for Securities Lending Agreement. A securities lending transaction is when the Fund transfers its securities to broker/dealers and other entities for collateral which may be cash or securities and simultaneously agrees to return the collateral for the same securities in the future. The loans must be secured continuously by cash collateral or securities and maintained at a value of at least equal to 102 % of the market value of the securities loaned. During the term of the loan, the Fund will continue to receive the equivalent of the interest paid by the issuer of the securities loaned. The Fund will have the right to call the loan and receive the securities loaned at any time with one day's notice. A. Maximum Maturity - The maximum maturity of a securities lending loan shall be 92 days. B. Maximum Exposure of Fund - No more than 20% of the Fund shall be exposed to securities lending and/or RRP's at any one time. C. Maximum Exposure Per Counterpart - No more than 10% of the Fund shall be on loan with any single counterpart at any one time. D. Reinvestment shall be limited to Government Code and the County s authorized investment list. 28. DELEGATION OF INVESTMENT AUTHORITY TO THE COUNTY TREASURER - The State of California gives the Board of Supervisors the ability to delegate the investment authority to the County Treasurer for a one-year period in accordance with Section of the California Government Code. The delegation will require renewal each year. 29. SAFEKEEPING AUTHORITY A. The State of California gives the Board of Supervisors the ability to delegate the deposit for safekeeping authority to the County Treasurer in accordance with Section of the California Government Code. Board Resolution 109 adopted September 29, 1959 delegated this authority to the County Treasurer. 17

232 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy B. In exercising this safekeeping function, the County Treasurer will require depositories to provide evidence that they are taking reasonable measures to prevent unauthorized access to the depository's electronic data files. C. The County Treasurer s Manual addresses contingency plans in the event that a disaster, natural or otherwise, disrupts normal operations. Contingency plans vary depending upon the severity and expected longevity of the disruption. 30. COUNTY TREASURY OVERSIGHT COMMITTEE - The Board of Supervisors has established a County Treasury Oversight Committee pursuant to Sections of the California Government Code. The County Treasurer shall annually prepare an investment policy that will be reviewed and monitored by the County Treasury Oversight Committee and shall be reviewed and approved at a public hearing by the Board of Supervisors. 31. RULES GOVERNING THE ACCEPTANCE OF HONORARIA, GIFTS, AND GRATUITIES: A. The County Treasury Oversight Committee: 1. Gifts and Gratuity limits: - Members may not accept a gift or gifts aggregating more than the Fair Political Practices Commission (FPPC) guidelines in a calendar year from an advisor, broker, dealer, banker, or other persons with whom the County Treasurer conducts business. 2. Honorarium limit - Members may not accept any honorarium from advisors, brokers, dealers, bankers, or other persons with whom the County Treasurer conducts business. 3. Employment - A member may not be employed by an entity that has contributed to the campaign of a candidate for the office of the County Treasurer or a candidate for a legislative body of the local agency that has deposited funds in the County Treasury in the previous three years or during the period the employee is a member of the Oversight Committee. A member may not secure employment with bond underwriters, bond counsel, security brokers or dealers, or with financial services firms during the period that the person is a member of the Committee or for one year after leaving the Committee. 4. Contributions - A member may not directly or indirectly raise money for a candidate for County Treasurer or a member of the governing board of any local agency that has deposited funds in the County Treasury while a member of the Committee. 18

233 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy B. The County Treasurer and Designated Employees: 1. Gifts and Gratuity limits - The County Treasurer and designated employees may not accept a gift or gifts aggregating more than the Fair Political Practices Commission (FPPC) guidelines in a calendar year from a single source that does business with the County Treasurer s Office. 2. Honorarium limits - The County Treasurer and designated employees may not accept any honorarium. 3. Form 700 "Statement of Economic Interests" - The County Treasurer and designated employees are required to file a 700 form annually. 32. REPORTING - The County Treasurer shall prepare an investment report monthly to be posted on the County Treasurer Tax-Collector s website. A. The report will be available to the following officials: 1. Board of Supervisors 2. Oversight Committee 3. Chief Administration Officer 4. Auditor & Controller 5. Pool Participants B. The report will include the following: 1. Market commentary 2. A summary of Fund Statistics 3. The type of investment, issuer, date of maturity, par, and dollar amount invested on all securities, investments and moneys held by the Fund; and shall additionally include a description of any of the Fund s investments or programs that are under management of contracted parties, including the securities lending program. The report shall also include a current market value and the source of the valuation as of the date of the report for all securities held by the Fund. 4. Securities Lending Portfolio, if applicable 5. Pool Purchases, Sales and Maturities 6. Pooled Money Fund Cash Flow Forecast 19

234 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy 7. Included in the monthly report shall be a statement of compliance with the Investment Policy and a statement of the Fund s ability to meet cash flow requirements for the next six months. 33. ANNUAL AUDIT - The Treasury Oversight Committee shall cause an audit to be conducted annually on a fiscal year basis to determine if the County Treasury is in compliance with Section of the California Government Code. 34. COSTS AND EARNINGS APPORTIONMENT A. Prior to quarterly interest distribution, investment costs incurred by the County Treasurer will be deducted from the interest earnings of the pool and Dedicated Portfolios based on an equitable distribution formula. The costs, which are authorized by Government Code Section 27013, are made up of direct costs (salaries, banking services, computer services, and supplies), and indirect costs (department overhead and external overhead). B. The Pool earnings distributed to each participant are proportionate to the average daily balance of the amounts on deposit by the participant. The County Auditor and Controller conducts the apportionment process based on the net earnings of the Fund each quarter. C. In the event there is a negative balance in a participant s fund at any time, it shall reduce the average daily balance for the fund. If at quarter-end there is a negative average daily balance in a participant s fund, that fund will be charged the higher of the pool s earning rate for the quarter or a proxy TRANs cost. D. The apportionment rate is set approximately ten business days after each calendar quarter end. Apportionments are not paid out by warrants; all earnings are credited to the participants' fund balance. 35. TERMS AND CONDITIONS FOR DEPOSITING FUNDS BY VOLUNTARY PARTICIPANTS - The State of California Government Code Section allows local agencies, upon adoption of a resolution by the governing body of the agency, the option of depositing excess funds in the County Treasury for the purpose of investment by the County Treasurer. A. The County, in its regional role to assist and aid other local agencies, adopted Board Resolution 11 on March 24, 1987, to allow agencies to deposit excess funds with the County Treasurer for investment. The limitation on acceptance of voluntary deposits and this Investment Policy is structured to help to ensure that, pursuant to Section of the California Government Code, the County Treasurer shall be able to find that all proposed deposits/withdrawals will not adversely affect the interests of the other depositors in the Fund. 20

235 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy B. The policy for the acceptance of local agency deposits is: 1. The local agency must sign the Investment Management Agreement. The County Treasurer will allow a maximum of 25% of the total Fund in voluntary deposits. 2. The maximum amount of transactions per month shall be 10 per local agency. 3. The local agency must provide cash flows on a quarterly basis indicating projected withdrawals from the Fund. C. Before any deposits for new accounts from non-participating Voluntary Participants can be accepted by the County Treasurer, the local agency must perform the following: 1. Provide a resolution adopted by the Board or governing body that authorizes the local agency to deposit excess funds in the County Treasury for the purpose of investment by the County Treasurer. The resolution must: a) be signed by an authorized official b) indicate the resolution number and date passed by the Board or governing body, c) indicate the persons authorized to initiate deposits to and instruct withdrawals from the Fund, d) bear the seal of the local agency, if the local agency has a seal. 2. Provide wire/ach transfer instructions for cash withdrawals from the Fund. All withdrawals and external deposits will be by the Fed Wire or Automated Clearing House (ACH). 3. Establish a trust account through the County Auditor and Controller s General Accounting Division. 36. CRITERIA FOR WITHDRAWAL OF MONIES FROM THE FUND BY VOLUNTARY PARTICIPANTS A. Before a local agency withdraws monies from the Fund it must submit a withdrawal request form a minimum of 2 working days prior to the desired withdrawal date. Although not encouraged, shorter notice may be honored at the discretion of the County Treasurer s Office if the withdrawal does not 21

236 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy cause the maturity status of the Fund to exceed its limits, or jeopardize its ability to meet cash flow requirements. B. When monies are requested for withdrawal, the County Treasurer s Office must find that the withdrawal will not adversely affect the interests of all other depositors in the Fund. 37. GRANDFATHERED AGENCIES A. The grandfathered agencies, including the Community Colleges, who use the services of the County to keep their records and/or issue warrants/wires for the agency can continue to function 100% in this manner and will be treated as a mandatory participant (this assumes that the agency shall continue to make their deposits into the Fund). B. They can also opt to be treated as a voluntary participant and elect to withdraw funds in the same fashion as the other voluntary participants. However, any agency so opting shall be subject to all of the restrictions placed upon the other Voluntary Participants. 22

237 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy GLOSSARY OF TERMS BANKERS ACCEPTANCE - Money market instrument created from transactions involving foreign trade. In its simplest and most traditional form, a banker s acceptance is merely a check, drawn on bank by an importer or exporter of goods. BID - The price offered by a buyer of securities. COLLATERALIZED CERTIFICATE OF DEPOSIT - An instrument representing a receipt from a bank for a deposit at a specified rate of interest for a specified period of time that is collateralized by the bank with securities at a minimum of 110% of the deposit amount. COMMERCIAL PAPER - Money Market instrument representing a short-term promissory note of a large corporation at a specified rate of return for a specified period of time. COUPON - The annual rate of interest that a bond s issuer promises to pay the bondholder on the bond s face value. COVERED CALL OPTION - The sale of an option to another party giving them the right to buy an existing security in the Fund at a specified price within a specified time period. CREDIT RATING - The alphanumeric scale which provides an assessment of the credit opinion of one of the Nationally Recognized Statistical Rating Organizations for a particular investment or issuing entity. By way of example, the investment grade portion of S&P s credit rating is provided below from highest to lowest: AAA AA A BBB Highest Lowest DEDICATED PORTFOLIO - Any assets, besides those held in the Fund, invested by the County Treasurer on behalf of any San Diego County agency. DOLLAR WEIGHTED AVERAGE MATURITY - The sum of the amount of each security investment multiplied by the number of days to maturity, divided by the total amount of security investments. 23

238 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy DURATION - Is a measure of the price volatility of a portfolio and reflects an estimate of the projected increase or decrease in the value of a portfolio based upon a decrease or increase in the interest rates. A duration of 1.0 means that for every one percent increase in interest rates, the market value of a portfolio would decrease by 1.0 percent. EARNINGS APPORTIONMENT - Is the quarterly interest distribution to the Pool Participants where the actual investment costs incurred by the County Treasurer are deducted from the interest earnings of the Fund. EFFECTIVE DURATION OR OPTION-ADJUSTED DURATION - Is the approximate percentage price change of a bond for a 100 basis point parallel shift in the yield curve allowing for the cash flow to change as a result of the change in yield. GOVERNMENT OBLIGATIONS - Securities issued by the U.S. Treasury and Federal Agencies. U.S. Treasuries are direct obligations of the Federal Government. Agencies are not direct obligations of the Federal Government, but involve Federal sponsorship or guarantees. Agency issuers include: Federal National Mortgage Association (FNMA) Federal Home Loan Bank (FHLB) Federal Farm Credit Bank (FFCB) Federal Agriculture Mortgage Corporation (FAMCA) Federal Home Loan Mortgage Corporation (FHLMC) Government National Mortgage Corporation (GNMA) GRANDFATHERED AGENCIES - Such as community colleges and some fire districts that use the County s banking and accounting services. ILLIQUID - Non-existent, or thinly traded secondary market resulting in the inability to access funds prior to maturity, or possibly liquidate at the cost of principal. ISSUE A discreet security of an issuing entity. ISSUER- The entity identified as the counterparty or obligator related to a security trade. INVERSE FLOATERS - An inverse floater is a note structured so that its coupon varies inversely with a designated index. INVESTMENT GROUP - Shall be made up of the County Treasurer, Chief Deputy Treasurer, Chief Investment Officer, and Investment Officers. INVESTMENT MANAGEMENT AGREEMENT - An agreement between a voluntary participant and the San Diego County Treasurer-Tax Collector. The agreement addresses the terms and conditions of local agencies deposit of funds for investment into the Fund. 24

239 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy LIQUID - Low expected yield give up due to liquidation, based on historical bid/offer spreads. LOCAL AGENCY OBLIGATION - An indebtedness issued by a local agency, department, board, or authority within the State of California. LONG-TERM - The term used to describe a security when the maturity is greater than one year. MEDIUM TERM NOTES - They are corporate notes and deposit notes that are debt obligations of banks, corporations, and insurance companies. They are issued at a specific rate of return for a specific period of time. MONEY MARKET MUTUAL FUND - A mutual fund with investments directed in short-term money market instruments only, which can be withdrawn daily without penalty. MODERATELY LIQUID - Modest expected yield give up due to liquidation, based on historical bid/offer spreads. NEGOTIABLE CERTIFICATE OF DEPOSIT - A money market instrument representing a receipt from a bank for a deposit at a specified rate of interest for a specified period of time that is traded in secondary markets. OFFERED - The price at which a holder of a security would be willing to sell the security. PASS-THROUGH SECURITIES - A debt instrument that reflects an interest in a mortgage pool, consumer receivables pool and equipment lease-backed pool that serves as collateral for a bond. PORTFOLIO VALUE - The total book value amount of all the securities held in the Fund. PRUDENT RISK - An investment system in which the investor will invest conservatively to receive a stable income with little risk. PUT OPTION - The sale of an option to another party giving them the right to sell to the Fund a security at a specified price within a specified time period. RANGE NOTES - Range notes (also called accrual notes) are bonds which accrue interest daily at a set coupon which is tied to an index. Range notes typically have two coupon levels; the higher of which is for the period that the index remains within a designated range. 25

240 2015 San Diego County Treasurer s Pooled Money Fund Investment Policy REPURCHASE AGREEMENT - A repurchase agreement consists of two simultaneous transactions. One is the purchase of securities by an investor (i.e. the Fund), the other is the commitment by the seller (i.e. a broker/dealer) to repurchase the securities at the same price, plus interest, at some mutually agreed future date. REVERSE REPURCHASE AGREEMENT - The mirror image of Repurchase Agreements. In this instance the Fund is the seller of securities to an investor (i.e. brokers). SAFEKEEPING - A custodian bank s action to store and protect an investor s securities by segregating and identifying the securities. SECURITIES LENDING - A transaction wherein the Fund transfers its securities to broker/dealers and other entitles for collateral, which may be cash or securities and simultaneously agrees to return the collateral for the same securities in the future. SHADOW RATING - A credit opinion provided by a Nationally Recognized Statistical Rating Organization for a security or entity that it had previously not rated. SHORT-TERM - The term used to describe a security when the maturity is one year or less. SUPRANATIONALS- Organizations owned by governments of two or more countries. They are usually established by international treaties in order to pursue specified policy objectives such as fighting poverty by providing financing and other developmental assistance to middle and poor income countries in both private and public sectors Inter-American Development Bank (IADB) International Bank For Reconstruction and Development (IBRD) International Finance Corporation (IFC) VOLUNTARY PARTICIPANTS - Local agencies that are not required to deposit their funds with the County Treasurer. WHEN-ISSUED SECURITIES - A security traded before it receives final trading authorization with the investor receiving the certificate/security only after the final approval is granted. 26

241 APPENDIX H SPECIMEN MUNICPAL BOND INSURANCE POLICY H-1

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243 MUNICIPAL BOND INSURANCE POLICY ISSUER: BONDS: $ in aggregate principal amount of Policy No: -N Effective Date: Premium: $ ASSURED GUARANTY MUNICIPAL CORP. ("AGM"), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the "Trustee") or paying agent (the "Paying Agent") (as set forth in the documentation providing for the issuance of and securing the Bonds) for the Bonds, for the benefit of the Owners or, at the election of AGM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. On the later of the day on which such principal and interest becomes Due for Payment or the Business Day next following the Business Day on which AGM shall have received Notice of Nonpayment, AGM will disburse to or for the benefit of each Owner of a Bond the face amount of principal of and interest on the Bond that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by AGM, in a form reasonably satisfactory to it, of (a) evidence of the Owner's right to receive payment of the principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner's rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in AGM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by AGM is incomplete, it shall be deemed not to have been received by AGM for purposes of the preceding sentence and AGM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, who may submit an amended Notice of Nonpayment. Upon disbursement in respect of a Bond, AGM shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the Bond and shall be fully subrogated to the rights of the Owner, including the Owner's right to receive payments under the Bond, to the extent of any payment by AGM hereunder. Payment by AGM to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of AGM under this Policy. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. "Business Day" means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer's Fiscal Agent are authorized or required by law or executive order to remain closed. "Due for Payment" means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity unless AGM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. "Nonpayment" means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. "Nonpayment" shall also include, in respect of a Bond, any payment of principal or interest that is Due for Payment made to an Owner by or on behalf of the Issuer which has been recovered from such Owner pursuant to the