Estrada Hinojosa & Company, Inc. First Southwest Company RBC Capital Markets

Transcription

1 NEW ISSUES BOOK-ENTRY-ONLY Ratings: Fitch AAA Moody s Aa2 (See "RATINGS" and BOND INSURANCE herein) OFFICIAL STATEMENT Dated April 2, 2009 In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under existing statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters described under TAX MATTERS, herein, including the alternative minimum tax on corporations. THE BONDS WILL NOT BE DESIGNATED AS QUALIFIED TAX-EXEMPT OBLIGATIONS FOR FINANCIAL INSTITUTIONS FRISCO INDEPENDENT SCHOOL DISTRICT (Collin and Denton Counties, Texas) $85,000,000 $14,170,000 Unlimited Tax School Building Bonds Unlimited Tax Refunding Bonds Series 2009 Series 2009 Dated Date: April 1, 2009 Due: August 15, as shown on inside of front cover page The Frisco Independent School District Unlimited Tax School Building Bonds, Series 2009 (the School Building Bonds ), and the Frisco Independent School District Unlimited Tax Refunding Bonds, Series 2009 (the Refunding Bonds ) (collectively the Bonds ) are being issued pursuant to the Constitution and general laws of the State of Texas, including particularly Chapter 45, Texas Education Code, as amended, and Chapter 1207, Texas Government Code, as amended, (with respect to the Refunding Bonds) an election held within the Frisco Independent School District (the District or Issuer ) on May 13, 2006 (with respect to the School Building Bonds); and separate orders (collectively, the Order ) adopted by the Board of Trustees of the District (the Board ). The Bonds are payable as to principal and interest from the proceeds of a continuing direct annual ad valorem tax levied, without legal limit as to rate or amount, against all taxable property located within the District. (See THE BONDS Security for Payment, Authorization and Purpose, STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS and CURRENT PUBLIC SCHOOL FINANCE SYSTEM. ) The Bonds are being issued in part as Current Interest Bonds ( CIBs ) and in part as Premium Capital Appreciation Bonds ( CABs ). Interest on such CIBs will accrue from the Dated Date and will be payable on February 15 and August 15 of each year, commencing August 15, Interest on the CABs will accrete from the date they are initially delivered to the initial purchasers (the Underwriters ), compounded semiannually on each February 15 and August 15 (each an "Accretion Date"), commencing August 15, 2009, and will be payable only upon maturity. The Bonds will be issued in fully registered form in integral multiples of $5,000 of principal amount or Maturity Value, as applicable. The Bonds will be issued in book-entry form only and when issued will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ), New York, New York. DTC will act as securities depository (the Securities Depository ). Book-entry interests in the Bonds will be made available for purchase in the principal amount or Maturity Value (see THE BONDS General Description herein) of $5,000 or any integral multiple thereof within a maturity. Purchasers of the Bonds ( Beneficial Owners ) will not receive physical delivery of certificates representing their interest in the Bonds purchased. So long as DTC or its nominee is the registered owner of the Bonds, the principal of and interest on the Bonds will be payable by the Paying Agent/Registrar to the Securities Depository, which will in turn remit such principal and interest to its participants, which will in turn remit such principal and interest to the Beneficial Owners of the Bonds. (See BOOK- ENTRY-ONLY SYSTEM herein.) (See THE BONDS- General Description.) The initial Paying Agent/Registrar shall be The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (see REGISTRATION, TRANSFER AND EXCHANGE Paying Agent/Registrar herein). Proceeds from the sale of the School Building Bonds will be used (i) for the construction, acquisition, and equipment of school buildings; (ii) to purchase school sites, and (iii) to pay costs of issuing the School Building Bonds. Proceeds from the sale of the Refunding Bonds will be used to (i) refund a portion of the District s outstanding bonds for debt service savings and (ii) to pay the costs of issuing the Refunding Bonds. (See Schedule I Schedule of Refunded Bonds herein.) (See THE BONDS - Authorization and Purpose herein.) The District reserves the right to redeem the CIBs maturing on or after August 15, 2020, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on August 15, 2019, or any date thereafter, at a price equal to the principal amount thereof, plus accrued interest to the date of redemption, as further described herein. The School Building Bonds scheduled to mature on August 15 in each of the years 2034, 2036, 2039, and 2041 are subject to mandatory sinking fund redemption. (See THE BONDS Redemption Provisions herein.) The CABs are not subject to redemption prior to maturity. The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under financial guaranty insurance policies to be issued concurrently with the delivery of the Bonds by Assured Guaranty Corp. ( Assured Guaranty.) (See BOND INSURANCE herein.) The Bonds are offered for delivery, when, as and if issued and received by the Underwriters and subject to the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel. Certain legal matters will be passed upon for the Underwriters by their counsel, Andrews Kurth LLP, Austin, Texas. It is expected that the Bonds will be available for delivery through DTC on or about April 28, Morgan Keegan & Company, Inc. Estrada Hinojosa & Company, Inc. First Southwest Company RBC Capital Markets

2 STATED MATURITY SCHEDULE (Due August 15) Base CUSIP (b) $85,000,000 Unlimited Tax School Building Bonds, Series 2009 $14,060,000 Serial Current Interest Bonds Stated Principal Interest Initial CUSIP Stated Principal Interest Initial CUSIP Maturity Amount Rate Yield (a) Suffix (b) Maturity Amount Rate Yield (a) Suffix (b) 8/15/2019 $825, % 3.880% 5B8 8/15/2025 $1,060, % 4.860% 5H5 8/15/ , % 4.060% 5C6 8/15/2026 1,110, % 4.960% 5J1 8/15/ , % 4.240% 5D4 8/15/2027 1,160, % 5.020% 5K8 8/15/ , % 4.390% 5E2 8/15/2028 1,215, % 5.070% 5L6 8/15/ , % 4.560% 5F9 8/15/2029 1,280, % 5.120% 5M4 8/15/2024 1,005, % 4.710% 5G7 8/15/2030 1,345, % 5.180% 5N2 8/15/2031 1,410, % 5.250% 5P7 $4,685,000 Term Current Interest Bonds $4,685,000, 5.250%, due August 15, 2034, Yield 5.380% (a), CUSIP (b) Suffix 5S1 $28,085,000 Term Current Interest Bonds $28,085,000, 5.250%, due August 15, 2036, Yield 5.450% (a), CUSIP (b) Suffix 5U6 $22,415,000 Term Current Interest Bonds $22,415,000, 5.375%, due August 15, 2039, Yield 5.500% (a), CUSIP (b) Suffix 5X0 $15,185,000 Term Current Interest Bonds $15,185,000, 5.500%, due August 15, 2041, Yield 5.580% (a), CUSIP (b) Suffix 5Z5 (Interest accrues from Dated Date) $570,000 Capital Appreciation Bonds (c) Original Initial Offering Stated Principal Initial Maturity Price per $5,000 CUSIP Maturity Amount Yield Value in Maturity Value Suffix (b) 8/15/2011 $235, % $820,000 $4, T0 8/15/ , % 830,000 4, U7 8/15/ , % 825,000 4, V5 8/15/ , % 825,000 4, W3 8/15/ , % 825,000 4, X1 8/15/ , % 825,000 3, Y9 8/15/ , % 825,000 3, Z6 8/15/ , % 825,000 3, A0 (Interest accretes from Date of Delivery) (a) The initial yields and prices are established by, and are the sole responsibility of the Underwriters and may subsequently be changed from time to time at the sole discretion of the Underwriters. (b) CUSIP is a registered trademark of the 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 Services. None of the District, the Financial Advisor nor the Underwriters is responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) Not subject to optional redemption prior to maturity. ii

3 STATED MATURITY SCHEDULE (Due August 15) Base CUSIP (b) $14,170,000 Unlimited Tax Refunding Bonds, Series 2009 $13,915,000 Serial Current Interest Bonds Stated Principal Interest Initial CUSIP Stated Principal Interest Initial CUSIP Maturity Amount Rate Yield (a) Suffix (b) Maturity Amount Rate Yield (a) Suffix (b) 8/15/2009 $670, % 1.000% 6A9 8/15/2018 $885, % 3.700% 6J0 8/15/ , % 1.250% 5Y8 8/15/ , % 3.900% 6K7 *** *** *** *** *** 8/15/ , % 4.080% 6L5 8/15/ , % 1.950% 6C5 8/15/2021 1,020, % 4.240% 6M3 8/15/ , % 2.380% 6D3 8/15/2022 1,070, % 4.390% 6N1 8/15/ , % 2.760% 6E1 8/15/2023 1,130, % 4.560% 6P6 8/15/ , % 3.030% 6F8 8/15/2024 1,185, % 4.710% 6Q4 8/15/ , % 3.270% 6G6 8/15/2025 1,250, % 4.860% 6R2 8/15/ , % 3.490% 6H4 (Interest accrues from Dated Date) $255,000 Capital Appreciation Bonds (c) Original Initial Offering Stated Principal Initial Maturity Price per $5,000 CUSIP Maturity Amount Yield Value in Maturity Suffix (b) 8/15/2011 $255, % $705,000 $4, B7 (Interest accretes from Date of Delivery) (a) The initial yields and prices are established by, and are the sole responsibility of the Underwriters and may subsequently be changed from time to time at the sole discretion of the Underwriters. (b) CUSIP is a registered trademark of the 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 Services. None of the District, the Financial Advisor nor the Underwriters is responsible for the selection or correctness of the CUSIP numbers set forth herein. (c) Not subject to optional redemption prior to maturity. iii

4 LOCATION OF FRISCO INDEPENDENT SCHOOL DISTRICT iv

5 FRISCO INDEPENDENT SCHOOL DISTRICT 6942 Maple Street Frisco, Texas (469) ELECTED OFFICIALS BOARD OF TRUSTEES Name Term Expires Length of Service Occupation Dan Mossakowski, President years Operations Manager Renee Ehmke, Vice President years Homemaker Laura Ellison, Secretary years Homemaker Richard Beaver, Trustee years Director Cindy DePaolantonio, Trustee years Homemaker Buddy Minett, Trustee years Sales Brenda Polk, Trustee years Homemaker CERTAIN APPOINTED OFFICIALS Name Position Length of Service Dr. Rick Reedy Superintendent 38 years Dr. Debra Nelson Assistant Superintendent for Curricular & Instruction 29 years Mr. Richard Wilkinson Assistant Superintendent for Facilities & Finance 25 years Mr. Doug Zambiasi Assistant Superintendent for Administrative Services 27 years Ms. Shana McKay Wortham Director of Communications 19 years Dr. Linda Bass Assistant Superintendent for Human Resources 28 years Dr. Rick Bankston Chief Financial Officer 2 years CONSULTANTS AND ADVISORS Bond Counsel...McCall, Parkhurst & Horton L.L.P., Dallas, Texas Financial Advisor...Southwest Securities, Inc., Dallas, Texas Certified Public Accountants...Pingleton, Howard & Company, P.C., Frisco, Texas Chief Appraiser... Collin County Appraisal District For additional Information regarding the District, please contact: Dr. Rick Reedy Jim Brooks or Brian Grubbs Superintendent Southwest Securities, Inc. Frisco Independent School District 1201 Elm Street 6942 Maple Street Suite 3500 Frisco, Texas Dallas, Texas Phone: (469) Phone: (214) v

6 USE OF INFORMATION IN THE OFFICIAL STATEMENT No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. This Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. The information set forth herein has been obtained from the District and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the Financial Advisor. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. The information and expressions of opinion contained herein are subject to change without notice, and neither the 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 other matters described. See CONTINUING DISCLOSURE OF INFORMATION for a description of the undertaking by the District to provide certain information on a continuing basis. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchaser of the Bonds. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL SCHEDULES AND APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACT. THE REGISTRATION OR QUALIFICATION OF THE BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAW OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED, IF ANY, AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES, IF ANY, CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. THE BONDS HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. NONE OF THE DISTRICT, ITS FINANCIAL ADVISOR OR THE UNDERWRITERS MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY ("DTC") OR ITS BOOK-ENTRY-ONLY SYSTEM, AS SUCH INFORMATION HAS BEEN FURNISHED BY DTC. THIS OFFICIAL STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD- LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. The prices and other terms respecting the offering and sale of the Bonds may be changed from time to time by the Underwriters after such Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering prices, including to dealers who may sell the bonds into investment accounts. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Assured Guaranty makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, Assured Guaranty 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 Assured Guaranty supplied by Assured Guaranty and presented under the heading BOND INSURANCE and APPENDIX E - SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY. vi

7 TABLE OF CONTENTS STATED MATURITY SCHEDULE... ii Unlimited Tax School Building Bonds, Series ii STATED MATURITY SCHEDULE... iii Unlimited Tax Refunding Bonds, Series iii LOCATION OF FRISCO INDEPENDENT SCHOOL DISTRICT... iv ELECTED OFFICIALS... v BOARD OF TRUSTEES... v CERTAIN APPOINTED OFFICIALS... v CONSULTANTS AND ADVISORS... v USE OF INFORMATION IN THE OFFICIAL STATEMENT... vi TABLE OF CONTENTS... vii SELECTED DATA FROM THE OFFICIAL STATEMENT...viii INTRODUCTORY STATEMENT...1 THE BONDS...1 Authorization and Purpose...1 General Description...1 Yield on Capital Appreciation Bonds...1 Redemption Provisions...2 Notice of Redemption and DTC Notices...2 Amendments...3 Refunded Bonds...3 Defeasance of Bonds...4 Security for Payment...4 Bond Insurance for Bonds...4 Payment Record...4 Sources and Uses of Funds...4 REGISTERED OWNERS REMEDIES...5 BOOK-ENTRY-ONLY SYSTEM...5 REGISTRATION, TRANSFER AND EXCHANGE...7 AD VALOREM TAX PROCEDURES...8 THE PROPERTY TAX CODE AS APPLIED TO THE FRISCO INDEPENDENT SCHOOL DISTRICT...11 STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS CURRENT PUBLIC SCHOOL FINANCE SYSTEM BOND INSURANCE BOND INSURANCE RISK FACTORS TAX RATE LIMITATIONS DEBT LIMITATIONS EMPLOYEES RETIREMENT PLAN AND OTHER POST- EMPLOYMENT BENEFITS RATINGS LEGAL MATTERS TAX MATTERS LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT INVESTMENT BANKER AUTHENTICITY OF FINANCIAL INFORMATION UNDERWRITERS School Building Bonds Refunding Bonds LITIGATION CONTINUING DISCLOSURE OF INFORMATION Annual Report Material Event Notices Availability of Information from NRMSIRs and SID Limitations and Amendments Compliance with Prior Undertakings REGISTRATION AND QUALIFICATION OF BONDS FOR SALE FORWARD LOOKING STATEMENTS CONCLUDING STATEMENT Schedule of Refunded Bonds...Schedule I Schedule of Accreted Value of the Premium Capital Appreciation Bonds...Schedule II Financial Information of the District... Appendix A General Information Regarding Frisco Independent School District, the City of Frisco, and Collin County, Texas,... Appendix B Form of Legal Opinions of Bond Counsel... Appendix C Report of examination for the 10 Months Ended June 30, Appendix D Specimen Financial Guaranty Insurance Policy... Appendix E The cover page, subsequent pages hereof and appendices attached hereto, are part of this Official Statement. vii

8 SELECTED DATA FROM THE OFFICIAL STATEMENT The selected data is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this page from this Official Statement or to otherwise use it without the entire Official Statement. The District The Bonds Paying Agent/Registrar Security Bond Insurance Redemption Provisions Tax Exemption Payment Record Legal Opinion Frisco Independent School District (the District or Issuer ) is a political subdivision located in Collin and Denton Counties, Texas. The District is governed by a seven-member Board of Trustees (the Board ). Policy-making and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilities to the Superintendent of Schools who is the chief administrative officer of the District. Support services are supplied by consultants and advisors. The Unlimited Tax School Building Bonds, Series 2009 (the School Building Bonds ) and the Unlimited Tax Refunding Bonds, Series 2009 (the Refunding Bonds ) (collectively, the Bonds ) are being issued pursuant to the Constitution and general laws of the State of Texas, including particularly Chapter 45, Texas Education Code, as amended, Chapter 1207, Texas Government Code, as amended, (with respect to the Refunding Bonds) an election held in the District on May 13, 2006 (with respect to the School Building Bonds) and separate orders (collectively, the "Order") adopted by the Board of Trustees (the Board ) of the District. Proceeds from the sale of the School Building Bonds will be used (i) for the construction, acquisition, and equipment of school buildings; (ii) to purchase school sites; and (iii) to pay the costs of issuing the School Building Bonds. Proceeds from the sale of the Refunding Bonds will be used to (i) refund a portion of the District s outstanding bonds for debt service savings and (ii) to pay the costs of issuing the Refunding Bonds. (See Schedule I Schedule of Refunded Bonds herein.) (See THE BONDS - Authorization and Purpose herein.) The Bonds are being issued in part as Current Interest Bonds ( CIBs ) and in part as Premium Capital Appreciation Bonds ( CABs ). The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, National Association, Dallas, Texas. The District intends to use the Book-Entry Only System of The Depository Trust Company. The Bonds will constitute direct and general obligations of the District, payable as to the principal and interest from continuing direct annual ad valorem tax levied without legal limitation as to rate or amount against all taxable property located within the District. (See THE BONDS Security for Payment herein.) The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under financial guaranty insurance policies to be issued concurrently with the delivery of the Bonds by Assured Guaranty Corp. (See BOND INSURANCE herein). The CIBs maturing on or after August 15, 2020, are subject to optional redemption, in whole or in part, on August 15, 2019 or any date thereafter, at a price equal to the principal amount thereof plus accrued interest to the date of redemption. The School Building Bonds scheduled to mature on August 15 in each of the years 2034, 2036, 2039, and 2041 are subject to mandatory sinking fund redemption. (See THE BONDS Redemption Provisions herein.) The CABs are not subject to optional redemption prior to maturity. In the opinion of Bond Counsel, the interest on the Bonds is excludable from gross income for federal tax purposes under existing law, and the Bonds are not private activity bonds. See Tax Matters herein, for a discussion of the opinion of Bond Counsel including the alternative minimum tax consequences for corporations. (See TAX MATTERS and APPENDIX C - FORM OF LEGAL OPINIONS OF BOND COUNSEL herein.) The District has never defaulted on the payment of its bonded indebtedness. McCall, Parkhurst & Horton L.L.P., Bond Counsel, Dallas, Texas. viii

9 INTRODUCTORY STATEMENT This Official Statement, including Appendices A, B and D, has been prepared by the Frisco Independent School District, located in Collin and Denton Counties, Texas, (the "District" or Issuer ), in connection with the offering by the District of its $85,000,000 Unlimited Tax School Building Bonds, Series 2009 (the "School Building Bonds") and its $14,170,000 Unlimited Tax Refunding Bonds, Series 2009 (the Refunding Bonds, collectively, the Bonds ), identified on the cover page hereof. All financial and other information presented in this Official Statement has been provided by the District from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the District. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future. Authorization and Purpose THE BONDS The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas, particularly Chapter 45, Texas Education Code, as amended, Chapter 1207, Texas Government Code, as amended (with respect to the Refunding Bonds) an election held in the District on May 13, 2006 (with respect to the School Building Bonds) and separate Orders (collectively, the Order ) adopted by the Board of Trustees of the District (the Board ) authorizing the issuance of the Bonds. Proceeds from the sale of the School Building Bonds will be used (i) for the construction, acquisition, and equipment of school buildings; (ii) to purchase school sites; and (iii) to pay the costs of issuing the School Building Bonds. Proceeds from the sale of the Refunding Bonds will be used to (i) refund a portion of the District s outstanding bonds for debt service savings see (the Refunded Bonds ) and (ii) to pay the costs of issuing the Refunding Bonds. (See Schedule I Schedule of Refunded Bonds herein.) (See THE BONDS - Authorization and Purpose herein.) General Description The School Building Bonds and the Refunding Bonds are dated April 1, 2009 (the Dated Date ) and are issued in part as Current Interest Bonds ( CIBs ) and in part as Premium Capital Appreciation Bonds ( CABs ). The CIBs will mature on the dates, in the principal amounts and accrue interest at the per annum rates set forth on the inside cover page of this Official Statement. Interest on the CIBs is payable on August 15, 2009 and each February 15 and August 15 thereafter until maturity or prior redemption. The CABs accrete in value from the date of delivery to the Underwriters and the total accreted value thereon is payable only at maturity. The CABs will mature on the dates and in the maturity values set forth on the inside cover page of this Official Statement. Interest on the CABs will compound on February 15 and August 15, beginning August 15, 2009, and the sum of the principal of, premium, if any, and accrued/compounded interest on the CABs (the Maturity Value ) is payable only at maturity. A table of accreted values for the CABs per $5,000 maturity amount as of each August 15 and February 15 is set forth in Schedule II hereto. Principal will be payable at maturity by the Paying Agent/Registrar (the Paying Agent/Registrar ) which initially is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas, upon presentation and surrender of the Bonds for payment. Interest on the CIBs is payable by check dated as of the interest payment date and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar on the close of business as of the last business day of the preceding month (the Record Date ). It is expected that the Bonds will be eligible for delivery to the Underwriter through The Depository Trust Company ( DTC ). If the date for the payment of the principal or interest on a Bond shall be a Saturday, Sunday, legal holiday, or a day on which banking institutions in the city where the principal corporate trust office of the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or a day on which banking institutions are authorized to close and payment on such date shall have the same force and effect as if made on the original date payment was due. The Bonds shall be transferable only on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Bonds are exchangeable for an equal principal amount or Maturity Value in any authorized denomination upon surrender of the Bonds to be exchanged at the principal corporate trust office of the Paying Agent/Registrar. Yield on Capital Appreciation Bonds The respective approximate yields of the Capital Appreciation Bonds, as set forth on the inside cover of this Official Statement, are based upon the offering prices therefor set forth on the inside cover of this Official Statement. Such offering prices include the principal amounts of the Capital Appreciation Bonds plus premiums, if any, equal to the amounts by which such offering prices exceed the respective principal amounts of such Capital Appreciation Bonds. The respective yields on the Capital Appreciation Bonds to a particular purchaser may differ depending upon the price paid by that purchaser. For various reasons, securities that do not pay interest periodically, such as the Capital Appreciation Bonds, have traditionally experienced greater price fluctuation in the secondary market than securities that pay interest on a periodic basis. 1

10 Redemption Provisions Optional Redemption: The CIBs maturing on or after August 15, 2020 are subject to optional redemption in whole or in part, on August 15, 2019, or any date thereafter at a redemption price of par, plus accrued interest to the date of redemption. If less than all of the CIBs within a stated maturity are to be redeemed, the District shall determine the principal amount and maturities to be redeemed and shall direct the Paying Agent/Registrar to select by lot or other customary method that results in a random selection, the CIBs or portions thereof, to be redeemed. The CABs are not subject to redemption prior to maturity. Mandatory Sinking Fund Redemption: The School Building Bonds maturing on August 15 in the years 2034, 2036, 2039, and 2041 (the Term Bonds ) are subject to mandatory sinking fund redemption in part prior to their stated maturity, and will be redeemed by the District at a redemption price equal to the principal amount thereof plus interest accrued thereon to the redemption date, on the date and in the principal amounts shown in the following schedule: $4,685,000 $28,085,000 Term Bonds Due Term Bonds Due August 15, 2034* August 15, 2036* Redemption Date Principal Amount Redemption Date Principal Amount August 15, 2032 $1,480,000 August 15, 2035 $11,855,000 August 15, ,560,000 August 15, 2036* 16,230,000 August 15, 2034* 1,645,000 $22,415,000 $15,185,000 Term Bonds Due Term Bonds Due August 15, 2039* August 15, 2041* Redemption Date Principal Amount Redemption Date Principal Amount August 15, 2037 $11,315,000 August 15, 2040 $5,025,000 August 15, ,815,000 August 15, 2041* 10,160,000 August 15, 2039* 9,285,000 *Stated maturity. Approximately forty-five (45) days prior to each mandatory redemption date for the Term Bonds, the Paying Agent/Registrar shall select by lot the numbers of the Term Bonds within the applicable stated maturity to be redeemed on the next following August 15 from moneys set aside for that purpose in the interest and sinking fund maintained for the payment of the Bonds. Any Term Bonds not selected for prior redemption shall be paid on the date of their stated maturity. The principal amount of the Term Bonds for a stated maturity required to be redeemed on a mandatory redemption date may be reduced, at the option of the District, by the principal amount of the Term Bonds of like stated maturity which, at least 50 days prior to the mandatory redemption date, (1) shall have been acquired by the District at a price not exceeding the principal amount of such Term Bonds plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, (2) shall have been purchased and canceled by the Paying Agent/Registrar at the request of the District at a price not exceeding the principal amount of such Bonds plus accrued interest to the date of purchase or (3) shall have been redeemed pursuant to the optional redemption provisions set forth above. Notice of Redemption and DTC Notices At least 30 days prior to the date fixed for any redemption of CIBs or portions thereof prior to maturity, the District shall cause a notice of such redemption to be sent by United States mail, first-class postage prepaid, to the registered owners of each CIB or a portion thereof to be redeemed at its address as it appeared on the registration books of the Paying Agent/Registrar on the day such notice of redemption is mailed. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING CIBS OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON BONDS OR PORTION THEREOF SHALL CEASE TO ACCRUE. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the CIBs or portions thereof which are to be so redeemed. If such notice of redemption is given and if due provision for such payment is made, all as provided above, the CIBs or portions thereof which are to be redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. Not less than 30 days prior to a redemption date for the Bonds, the District shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to each registered owner of a Bond to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on 2

11 the business day next preceding the date of mailing such notice. Any notice of redemption so mailed shall be conclusively presumed to have been duly given irrespective of whether received by the bondholder, and, subject to provision for payment of the redemption price having been made, interest on the redeemed Bonds shall cease to accrue from and after such redemption date notwithstanding that a Bond has not been presented for payment. All notices of redemption shall (i) specify the date of redemption for the Bonds, (ii) identify the Bonds to be redeemed and, in the case of a portion of the principal amount to be redeemed, the principal amount thereof to be redeemed, (iii) state the redemption price, (iv) state that the Bonds, or the portion of the principal amount thereof to be redeemed, shall become due and payable on the redemption date specified, and the interest thereon, or on the portion of the principal amount thereof to be redeemed, shall cease to accrue from and after the redemption date, and (v) specify that payment of the redemption price for the Bonds, or the principal amount thereof to be redeemed, shall be made at the designated corporate trust office of the Paying Agent/Registrar only upon presentation and surrender thereof by the registered owner. If a Bond is subject by its terms to redemption and has been called for redemption and notice of redemption thereof has been duly given or waived as provided in the Order, such Bond (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable, and on the redemption date designated in such notice, interest on said Bonds (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable, and on the redemption date designated in such notice, interest on said Bonds (or principal amount thereof to be redeemed) called for redemption shall cease to accrue and such Bonds shall not be deemed to be outstanding. The Paying Agent/Registrar and the District, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Order or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the beneficial owner, shall not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the District will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the beneficial owners. Any such selection of Bonds to be redeemed will not be governed by the Order and will not be conducted by the District or the Paying Agent/Registrar. Neither the District nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or beneficial owners of the selection of portions of the Bonds for redemption. See "BOOK-ENTRY-ONLY SYSTEM" herein. Amendments The District may amend the Order without the consent of or notice to any registered owner in any manner not detrimental to the interests of the registered owners, including the curing of any ambiguity inconsistency, or formal defect or omission therein. In addition, the District may, with the written consent of the holders of a majority in aggregate principal amount and maturity value of the Bonds then outstanding and affected thereby, amend, add to, or rescind any of the provisions of the Order; except that, without the consent of the registered owners of all of the Bonds affected, no such amendment, addition or rescission may (1) make any change in the maturity of any of the outstanding Bonds; (2) reduce the rate of interest borne by any of the outstanding Bonds; (3) reduce the amount of the principal or Maturity Value of, or redemption premium, if any, payable on any outstanding Bonds, (4) modify the terms of payment of principal or Maturity Value of interest or redemption premium on outstanding Bonds or any of them or impose any condition with respect to such payment; or (5) change the minimum percentage of the principal amount and Maturity Value of the Bonds necessary for consent to such amendment. Refunded Bonds Proceeds from the sale of the Refunding Bonds will be used to refund a portion of the District's outstanding bonds as more particularly described in Schedule I (the Refunded Bonds ) to lower the District s overall debt service and to pay costs of issuing the Refunding Bonds. Proceeds from the sale of the Refunding Bonds together with other available funds of the District, if any, shall be deposited on the date of delivery of the Refunding Bonds directly with the paying agent for the Refunded Bonds in an amount sufficient to pay all principal of and interest on the Refunded Bonds due on the dates of redemption of the Refunded Bonds. The paying agent for the Refunded Bonds, will certify at the time of delivery of the Refunding Bonds that the funds deposited as required by the Order are sufficient to pay, on the date of redemption, the principal of and interest due on the Refunded Bonds. Such funds deposited with the paying agent for the Refunded Bonds will not be available to pay debt service on the Refunding Bonds. In the Order, the District will give irrevocable instructions to provide notice to the owners of the Refunded Bonds that the Refunded Bonds will be redeemed prior to stated maturity on which date money will be made available to redeem the Refunded Bonds from money held by the paying agent for the Refunded Bonds. By the deposit of the cash with the paying agent for the Refunded Bonds, the District will have effected the defeasance of the Refunded Bonds pursuant to the terms of Chapter 1207, Texas Government Code, and the order authorizing the issuance of the 3

12 Refunded Bonds. It is the opinion of Bond Counsel that, as a result of such deposit, firm banking arrangements for the discharge and final payment of the Refunded Bonds have been made and therefore such Refunded Bonds are deemed fully paid and no longer outstanding except for the purpose of being paid from the funds deposited with the Paying Agent for the Refunded Bonds. Refunded Bonds will be discharged and thus will not be included or considered to be indebtedness of the District or for any other purpose. Upon discharge of the Refunded Bonds, the payment of such Refunded Bonds will no longer be guaranteed by the Permanent School Fund. Defeasance of Bonds The District reserves the right to defease the Bonds in any manner now or hereafter permitted by law. Under Texas law, the Bonds are defeased when the payment of the principal of and premium, if any, on the Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment and/or (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times to ensure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the Bonds. The Order provides that Defeasance Securities means (a) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United Sates of America, (b) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. Provided, however, the District has reserved the option, to be exercised at the time of the defeasance of the Bonds, to call for redemption, at an earlier date, those Bonds which have been defeased to their maturity date, if the District: (i) in the proceeding providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. The Texas Permanent School Fund Guarantee of the Bonds is released at such time as a defeasance of the Bonds occurs. Security for Payment The Bonds are direct obligations of the District and are payable as to both principal and interest from a continuing, direct annual ad valorem tax levied, without legal limitation as to maximum rate or amounts on all taxable property within the District. (See "STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS ). Bond Insurance for Bonds The scheduled payment of principal of and interest on the Bonds when due will be guaranteed under financial guaranty insurance policies to be issued concurrently with the delivery of the Bonds by Assured Guaranty Corp. (See BOND INSURANCE herein). Payment Record The District has never defaulted on the payment of its bonded indebtedness. Sources and Uses of Funds The School Building Bonds: the proceeds from the sale of the School Building Bonds will be applied approximately as follows: Sources Par Amount of School Building Bonds $85,000, Net Premium on School Building Bonds 3,234, Accrued Interest on the School Building Bonds 331, Total Sources of Funds $88,565, Uses Deposit to Construction Fund $85,000, Cost of Issuance (including Underwriter s Discount and Bond Insurance Premium) 1,921, Deposit to Interest and Sinking Fund 1,643, Total Uses of Funds $88,565,

13 Refunding Bonds: the proceeds from the sale of the Refunding Bonds will be applied approximately as follows: Sources Par Amount of Refunding Bonds $14,170, Net Premium on Refunding Bonds 382, Accrued Interest on the Refunding Bonds 39, Total Sources of Funds $14,591, Uses Deposit with Paying Agent for the Refunded Bonds $14,326, Cost of Issuance (including Underwriter s Discount and Bond Insurance Premium) 225, Deposit to Interest and Sinking Fund 39, Total Uses of Funds $14,591, REGISTERED OWNERS REMEDIES The Order does not specify events of default with respect to the Bonds. If the District defaults in the payment of principal, interest, or redemption price on the Bonds when due, or the District defaults in the observation or performance of any other covenants, conditions, or obligations set forth in the Order, the registered owners may seek a writ of mandamus to compel the District or District officials to carry out the legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the Bonds or the Order and the District's obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, so rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of the Bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W. 3rd 325 (Tex. 2006), that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. Because it is unclear whether the Texas legislature has effectively waived the District s sovereign immunity from a suit for money damages, Bondholders may not be able to bring such a suit against the District for breach of the Bonds or Order covenants in the absence of District action. Chapter 1371, Texas Government Code ("Chapter 1371"), which pertains to the issuance of public securities by issuers such as the District, permits the District to waive sovereign immunity in the proceedings authorizing its bonds, but in connection with the issuance of the Bonds, the District has not waived sovereign immunity pursuant to and is not using the legal authority provided by Chapter Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District's property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. Furthermore, the District is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bondholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Bonds are qualified with respect to the customary rights of debtors relative to their creditors. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company ( DTC ), New York, New York, while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The District cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. 5

14 DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds 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. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer 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 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).Redemption proceeds, principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Issuer or Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal 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 Issuer or the Paying Agent/Registrar, 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. 6

15 DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to Issuer or Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the Issuer believes to be reliable, but the Issuer takes no responsibility for the accuracy thereof. So long as Cede & Co. is the registered owner of the Bonds, the Issuer will have no obligation or responsibility to the DTC. Participants or Indirect Participants, or the persons for which they act as nominees, with respect to payment to or providing of notice to such Participants, or the persons for which they act as nominees. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, payment or notices that are to be given to registered owners under the Order will be given only to DTC. Paying Agent/Registrar REGISTRATION, TRANSFER AND EXCHANGE The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, National Association, Dallas, Texas. The Bonds are being issued in fully registered form in integral multiples of $5,000 of principal amount or Maturity Value, as applicable. Interest on the CIBs will be payable semiannually by the Paying Agent/Registrar (the Paying Agent/Registrar ) by check mailed on each interest payment date by the Paying Agent/Registrar to the registered owner at the last known address as it appears on the Paying Agent/Registrar's books on the Record Date hereinafter defined. Successor Paying Agent/Registrar Provision is made in the Order for replacing the Paying Agent/Registrar. If the District replaces the Paying Agent/Registrar, such Paying Agent/Registrar shall, promptly upon the appointment of a successor, deliver the Paying Agent/Registrar s records to the successor Paying Agent/Registrar, and the successor Paying Agent/Registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any successor Paying Agent/Registrar selected by the District shall be a commercial bank; a trust company organized under the laws of the State of Texas; or other entity duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Bonds. Future Registration In the event the Book-Entry Only System is discontinued, the Bonds may be transferred, registered and assigned on the registration books only upon presentation and surrender of the Bonds to the Paying Agent/Registrar, and such registration and transfer shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration and transfer. A Bond may be assigned by the execution of an assignment form on such Bond or by such other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. A new Bond or Bonds will be delivered by the Paying Agent/Registrar in lieu of the Bond being transferred or exchanged at the principal corporate office of the Paying Agent/Registrar, or sent by United States registered mail to the new registered owner at the registered owner's request, risk and expense. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the Owner in not more than three (3) business days after the receipt of the Bonds to be canceled in the exchange or transfer and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in authorized denominations and for a like aggregate principal amount as the Bond or Bonds surrendered for exchange or transfer. Record Date For Interest Payment The record date ( Record Date ) for the interest payable on any interest payment date means the close of business on the last business day of the next preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a Special Record Date ) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (the Special Payment Date which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each Owner of a CIB appearing on the books of the Paying Agent/Registrar at the close of business on the day next preceding the date of mailing of such notice. 7

16 Limitation on Transfer of Bonds Neither the District nor the Paying Agent/Registrar shall be required to issue, transfer, or exchange any CIB during a period beginning at the close of business on any Record Date and ending with the next interest payment date or, with respect to any CIB called for redemption, within 30 days of the date fixed for redemption. Replacement Bonds If any Bond is mutilated, destroyed, stolen or lost, a new Bond in the same principal amount or Maturity Value, as appropriate, as the Bond so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Bond, such new Bond will be delivered only upon surrender and cancellation of such mutilated Bond. In the case of any Bond issued in lieu of and substitution for a Bond which has been destroyed, stolen or lost, such new Bond will be delivered only (a) upon filing with the District and the Paying Agent/Registrar a certificate to the effect that such Bond has been destroyed, stolen or lost and proof of the ownership thereof, and (b) upon furnishing the District and the Paying Agent/Registrar with indemnity satisfactory to them. The person requesting the authentication and delivery of a new Bond must pay such expenses as the Paying Agent/Registrar may incur in connection therewith. Property Tax Code and County-Wide Appraisal District AD VALOREM TAX PROCEDURES The Texas Property Tax Code (the Property Tax Code ) provides for county-wide appraisal and equalization of taxable property values and establishes in each county of the State an appraisal district and an appraisal review board responsible for appraising property for all taxable units within the county. Each Appraisal District (the Appraisal District ) within which the District is located is responsible for appraising property within the District, generally, as of January 1 of each year. The appraisal values set by the Appraisal District are subject to review and change by the Appraisal Review Board for each Appraisal District (the Appraisal Review Board ), which is appointed by each Appraisal District. Such appraisal rolls, as approved by the Appraisal Review Board, are used by the District in establishing its tax rolls and tax rate. Property Subject to Taxation by the District Except for certain exemptions provided by Texas law, all real and certain tangible personal property with a tax situs in the District is subject to taxation by the District. Principal categories of exempt property (including certain exemptions which are subject to local option by the board of trustees) include property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain improvements to real property and certain tangible personal property located in designated reinvestment zones on which the District has agreed to abate ad valorem taxes; certain household goods, family supplies and personal effects; farm products owned by the producers; certain property of a nonprofit corporation used in scientific research and educational activities benefiting a college or university, and designated historic sites. Other principal categories of exempt property include tangible personal property not held or used for production of income; solar and wind-powered energy devices; real or personal property that is used wholly or partly as a facility, device or method for the control of air, water or land pollution; most individually owned automobiles; $10,000 exemption to residential homesteads of disabled persons or persons ages 65 or over; up to $12,000 exemption for real or personal property of disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; $15,000 in market value for all residential homesteads; and certain classes of intangible property. In addition, except for increases attributable to certain improvements, the District is prohibited by state law from increasing the total ad valorem tax on the residence homestead of persons who are 65 years of age or older and persons who are disabled above the amount of tax imposed in the year such residence qualified for an exemption based on the age or disability of the owner. The freeze on ad valorem taxes on the homesteads of persons who are 65 years of age or older and persons who are disabled is also transferable to a different residence homestead. Also, a surviving spouse of a taxpayer who is 65 years of age or older and qualifies for the freeze on ad valorem taxes based on such person s age is entitled to the same exemption so long as the property is the homestead of the surviving spouse and the spouse is at least 55 years of age at the time of the death of the individual s spouse. Pursuant to a constitutional amendment approved by the voters on May 12, 2007, legislation was enacted to reduce the school property tax limitation imposed by the freeze on taxes paid on residence homesteads of persons 65 years of age or over or of disabled persons to correspond to reductions in local school district tax rates from the 2005 tax year to the 2006 tax year and from the 2006 tax year to the 2007 tax year (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" herein). The school property tax limitation provided by the constitutional amendment and enabling legislation apply to the 2007 and subsequent tax years. Article VIII, Section 1-j of the Texas Constitution provides for an exemption from ad valorem taxation for freeport property, which is defined as goods detained in the state for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Taxing units that took action prior to April 1, 1990 may continue to tax freeport property and decisions to continue to tax freeport property may be reversed in the future. However, decisions to exempt freeport property are not subject to reversal. Article VIII, Section 1-n of the Texas Constitution provides for the exemption from taxation of goods-intransit. Goods-in-transit is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and 8

17 manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in-transit during the following tax year. A taxpayer may only receive either the freeport exemption or the goods-in-transit exemption for items of personal property. A city or county may create a tax increment financing district ( TIF ) within the city or county with defined boundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxing units, including school districts, may agree with the city to contribute all or part of future ad valorem taxes levied and collected against the incremental value (taxable value in excess of the base value) of taxable real property in the TIF to pay or finance the costs of certain public improvements in the TIF, and such taxes levied and collected for and on behalf of the TIF are not available for general use by such contributing taxing units. Effective September 1, 2001, school districts may not enter into tax abatement agreements under the general statute that permits cities and counties to initiate tax abatement agreements. In addition, credit will not be given by the Commissioner of Education in determining a district s property value wealth per student for (1) the appraised value, in excess of the frozen value, of property that is located in a TIF created after May 31, 1999 (except in certain limited circumstances where the municipality creating the tax increment financing zone gave notice prior to May 31, 1999 to all other taxing units that levy ad valorem taxes in the TIF of its intention to create the TIF and the TIF was created and had its final project and financing plan approved by the municipality prior to August 31, 1999), or (2) for the loss of value of abated property under any abatement agreement entered into after May 31, Notwithstanding the foregoing, in 2001 the Legislature enacted legislation known as the Texas Economic Development Act, which provides incentives for school districts to grant limitations on appraised property values and provide ad valorem tax credits to certain corporations and limited liability companies to encourage economic development within the district. Generally, during the last eight years of the ten-year term of a tax limitation agreement, the school district may only levy and collect ad valorem taxes for maintenance and operation purposes on the agreed-to limited appraised property value. The taxpayer is entitled to a tax credit from the school district for the amount of taxes imposed during the first two years of the tax limitation agreement on the appraised value of the property above the agreed-to limited value. Additional State funding is provided to a school district for each year of such tax limitation in the amount of the tax credit provided to the taxpayer. During the first two years of a tax limitation agreement, the school district may not adopt a tax rate that exceeds the district s rollback tax rate (see Public Hearing and Rollback Tax Rate ). See THE PROPERTY TAX CODE AS APPLIED TO FRISCO INDEPENDENT SCHOOL DISTRICT and Appendix A Financial Information of the District, Assessed Valuation for a schedule of exemptions allowed by the District. Valuation of Property for Taxation Generally, property in the District must be appraised by the Appraisal District at market value as of January 1 of each year. In determining the market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the District in establishing its tax rolls and tax rate. Assessments under the Property Tax Code are based on one hundred percent (100%) of market value, except as described below, and no assessment ratio can be applied. The Property Tax Code permits land designated for agricultural use, open space or timberland to be appraised at its value based on the land's capacity to produce agricultural or timber products rather than at its fair market value. Landowners wishing to avail themselves of the agricultural use designation must apply for the designation, and the appraiser is required by the Property Tax Code to act on each claimant's right to the designation individually. If a claimant receives the designation and later loses it by changing the use of the property or selling it to an unqualified owner, the District can collect taxes for previous years based on the new value, including three years for agricultural use and five years for agricultural open-space land and timberland prior to the loss of the designation. State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the property s market value in the most recent tax year in which the market value was determined by the Appraisal District or (2) the sum of (a) 10% of the property s appraised value for the preceding tax year, (b) the appraised value of the property for the preceding tax year and the market value of all new improvements to the property. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three years. The District, at its expense, has the right to obtain from the Appraisal District a current estimate of appraised values within the District or an estimate of any new property or improvements within the District. While such current estimate of appraisal values may serve to indicate the rate and extent of growth of taxable values within the District, it cannot be used for establishing a tax rate within the District until such time as the Appraisal District chooses to formally include such values on its appraisal roll. Residential Homestead Exemption The Texas Constitution permits the exemption of certain percentages of the market value of residential homesteads from ad valorem taxation. The Constitution authorizes the governing body of each political subdivision in the state to exempt up to twenty percent (20%) of the market value of all residential homesteads from ad valorem taxation, and permits an additional optional homestead exemption for taxpayers who are 65 years of age or older and for taxpayers who are disabled. 9

18 District and Taxpayer Remedies Under certain circumstances, taxpayers and taxing units, including the District, may appeal orders of the Appraisal Review Board by filing a petition for review in district court within 45 days after notice is received that a final order has been entered. In such event, the property value in question may be determined by the court, or by a jury, if requested by any party, or through binding arbitration, if requested by the taxpayer. Additionally, taxing units may bring suit against the Appraisal District to compel compliance with the Property Tax Code. Public Hearing and Rollback Tax Rate In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district's "rollback tax rate" without approval by a majority of the voters voting at an election approving the higher rate. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. For the fiscal year and thereafter, the rollback tax rate for a school district is the lesser of (A) the sum of (1) the product of the district's "state compression percentage" for that year multiplied by $1.50, (2) the rate of $0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district's current debt rate, or (B) the sum of (1) the district's effective maintenance and operations tax rate, (2) the product of the district's state compression percentage for that year multiplied by $0.06; and (3) the district's current debt rate (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a description of the "state compression percentage"). For tax years 2003 through 2008, the rollback tax rate includes the tax rate that, applied to current tax values, would impose taxes in an amount sufficient for the district to fund its minimum local effort requirement for employee health care coverage (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM"). The "effective maintenance and operations tax rate" for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 of the Texas Education Code for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and State funding for the current year had been in effect for the preceding year. Section of the Property Tax Code that provides the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Before adopting its annual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of public meeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section of the Texas Education Code. Section (e) of the Texas Education Code provides that a person who owns taxable property in a school district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with such notice requirements or the language and format requirements of such notice as set forth in Section (b), and (d) and if such failure to comply was not in good faith. Section (e) further provides the action to enjoin the collection of taxes must be filed before the date the district delivers substantially all of its tax bills. Levy and Collection of Taxes The District is responsible for the collections of its taxes, unless it elects to transfer such functions to another governmental entity. Before September 1 of each year, or as soon thereafter as practicable, the rate of taxation is set by the Board of Trustees of the District based upon the valuation of property within the District as of the preceding January 1. Taxes are due October 1, or when billed, whichever comes later, and become delinquent after January 31 of the following year. A delinquent tax incurs a penalty from six percent (6%) to twelve percent (12%) of the amount of the tax, depending on the time of payment, and accrued interest at the rate of one percent (1%) per month. If the tax is not paid by the following July 1, an additional penalty of up to twenty percent (20%) may under certain circumstances be imposed by the District. The Property Tax Code also makes provision for the split payment of taxes, discounts for early payment and the postponement of the delinquency date of taxes under certain circumstances. District's Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property. The District has no lien for unpaid taxes on personal property but does have a lien for unpaid taxes upon real property, which lien is discharged upon payment. On January 1 of each year, such tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property. The District's tax lien is on a parity with the tax liens of other such taxing units. A tax lien on real property taxes takes priority over the claims of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property, under certain circumstances, is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. Except with respect to taxpayers who are 65 years of age or older, at any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights, or by bankruptcy proceedings which restrict the collection of taxpayer debts. 10

19 THE PROPERTY TAX CODE AS APPLIED TO THE FRISCO INDEPENDENT SCHOOL DISTRICT Each Appraisal District has the responsibility for appraising property in the District located in its respective county as well as other taxing units in that county. Each Appraisal District is governed by a board of directors appointed by voters of the governing bodies of various political subdivisions located in that county. The District does not grant a local option exemption to the market value of the residence homestead of persons who are 65 years of age or older; and, the District does not grant a local option exemption to the market value of the residence homestead of the disabled. The District has not granted any part of the local option, additional exemption of up to 20% of the market value of residence homesteads. Split payments are not permitted. Discounts are not permitted. The District does not tax freeport property. For the 2008/09 fiscal year, property valued at $18,643,424 was eligible for the freeport exemption. See Appendix A Financial Information of the District, Assessed Valuation for a listing of the amounts of the exemptions described above. A resolution was adopted by the District on November 12, 2007 to tax goods-in-transit for the 2009 tax year. The District has not granted any tax abatements. Property within the District is assessed as of January 1 of each year; taxes become due October 1 of the same year and become delinquent on February 1 of the following year. The District does participate in a tax increment reinvestment zone. The City of Frisco, Texas, (the City ) pursuant to V.T.C.A., Tax Code, Chapter 311 has designated an area within the City as a reinvestment zone known as Reinvestment Zone Number One, City of Frisco, Texas (the Zone ) to promote development within the area. In designating the area as a reinvestment zone, the City has provided for certain improvements to be constructed using tax increment financing, i.e., a tax increment base is established for real property in the area within the reinvestment zone as of the year of its designation and property taxes levied by the city creating the reinvestment zone and other participating overlapping taxing units against the taxable values of such real property in excess of the tax increment base (the Captured Appraised Value ) are deposited into a tax increment fund to fund projects within the reinvestment zone in accordance with a Project Plan and Financing Plan approved for the reinvestment zone. The tax increment base value of such TIF for the District is $16,039,872 and Captured Appraised Value in said TIF for the 2008 tax year is $951,042,659. The District has agreed to participate in such TIF by contributing 100% of its taxes collected against the Captured Appraised Value in the TIF and such taxes remitted to the TIF will not be available for operations of the District. The Zone was created by the City in accordance with the requirements of Section (d) of the Texas Government Code. Accordingly, the Commissioner of Education does not include the Captured Appraised Value of property that is located in the Zone in determining the District s property value wealth per student. See AD VALOREM TAX PROCEDURES Property Subject to Taxation by the District. The Board has approved a resolution initiating an additional 20% penalty to defray attorney costs in the collection of delinquent taxes over and above the penalty automatically assessed under the Property Tax Code. Charges for penalties and interest on the unpaid balance of delinquent taxes are as follows: Month Cumulative Penalty Cumulative Interest (b) Total February 6% 1% 7% March April May June July 32 (a) 6 38 (a) (b) Includes additional penalty of up to 20% assessed after July 1 in order to defray attorney collection expenses. Interest continues to accrue after July 1 at the rate of 1% per month until paid. STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Litigation Relating to the Texas Public School Finance System On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of Travis County, Texas (the "District Court") against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education (the "Commissioner") and the Texas Comptroller of Public Accounts in a case styled West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al. The plaintiffs alleged that the $1.50 maximum maintenance and operations tax rate had become in effect a state property tax, in violation of Article VIII, Section 1-e of the Texas Constitution, because it precluded them 11

20 and other school districts from having meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the "Finance System") was inefficient, inadequate, and unsuitable, in violation of Article VII, Section 1 of the Texas Constitution, because the State of Texas (the "State") did not provide adequate funding. As described below, this case has twice reached the Texas Supreme Court (the "Supreme Court"), which rendered decisions in the case on May 29, 2003 ("West Orange-Cove I") and November 22, 2005 ("West Orange-Cove II"). After the remand by the Supreme Court back to the District Court in West Orange-Cove I, 285 other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors in their Article VII, Section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the Finance System was inefficient. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of article VII, section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve "[a] general diffusion of knowledge" as required by article VII, section 1 of the Texas Constitution, because the system was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issues remanded to it by the Supreme Court in West Orange-Cove I. In that case, the District Court rendered judgment for the plaintiffs on all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System was unconstitutional in that the Finance System violated Article VIII, Section 1-e of the Texas Constitution because the statutory limit of $1.50 per $ of taxable assessed valuation on property taxes levied by school districts for maintenance and operation purposes had become both a floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) the constitutional mandate of adequacy set forth in Article VII, Section 1, of the Texas Constitution exceeded the maximum amount of funding available under the funding formulas administered by the State; and (3) the Finance System was financially inefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion of knowledge as required by Article VII, Section 1, of the Texas Constitution. As stated above, in West Orange-Cove I the plaintiff school districts asserted that the $1.50 per $ of taxable assessed valuation tax that was generally authorized by State law to be levied for school maintenance and operations purposes (the "M&O Tax"), though imposed locally, had become in effect a State property tax prohibited by Article VIII, Section 1-e of the Texas Constitution. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of Article VII, Section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve "[a] general diffusion of knowledge" as required by Article VII, Section 1 of the Texas Constitution, because the system was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. In West Orange-Cove II, the Supreme Court's holding was twofold: (1) that the local M&O Tax had become a state property tax in violation of Article VIII, Section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amount to a violation of Article VII, Section 1 of the Texas Constitution. In reaching its first holding, the Supreme Court relied on evidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the M&O Tax. In reaching its second holding, the Supreme Court, using a test of arbitrariness determined that: the public education system was "adequate," since it is capable of accomplishing a general diffusion of knowledge; the Finance System was not "inefficient," because school districts have substantially equal access to similar revenues per pupil at similar levels of tax effort, and efficiency does not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate the constitutional requirement of "suitability," since the system was suitable for adequately and efficiently providing a public education. In reversing the District Court's holding that the Finance System was unconstitutional under Article VII, Section 1 of the Texas Constitution, the Supreme Court stated: Although the districts have offered evidence of deficiencies in the public school finance system, we conclude that those deficiencies do not amount to a violation of Article VII, Section 1. We remain convinced, however, as we were sixteen years ago, that defects in the structure of the public school finance system expose the system to constitutional challenge. Pouring more money into the system may forestall those challenges, but only for a time. They will repeat until the system is overhauled. In response to the intervenor districts' contention that the Finance System was constitutionally inefficient, the West Orange-Cove II decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that results in gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, but reiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) ("Edgewood IV") that such funding variances may not be unreasonable. The Supreme Court further stated that "[t]he standards of Article VII, Section 1 - adequacy, efficiency, and suitability - do not dictate a particular structure that a system of free public schools must have." The Supreme Court also noted that "[e]fficiency requires only substantially equal access to revenue for facilities necessary for an adequate system," and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to present sufficient evidence to prove that there was an inability to provide for a "general diffusion of knowledge" without additional facilities. 12

21 Funding Changes in Response to West Orange-Cove II In response to the decision in West Orange-Cove II, the Texas Legislature (the "Legislature") enacted House Bill 1 ("HB 1"), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the Texas state treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce M&O Tax rates, broadened the State business franchise tax, modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to herein as the "Reform Legislation"). The Reform Legislation generally became effective at the beginning of the fiscal year of each district. Recent Litigation Relating to HB 1 On June 14, 2006, an entity called Citizens Lowering Our Unfair Taxes PAC ("CLOUT") filed a lawsuit (case number GN602156) in the 345th District Court (the "District Court") in Travis County, Texas against the Texas Lieutenant Governor, the Speaker of the Texas House of Representatives, the Texas Comptroller of Public Accounts, the State of Texas and the Legislative Budget Board (the "LBB" and, collectively with the other named defendants, the "State Defendants") in a case styled Edd Hendee, individually and as Executive Director of C.L.O.U.T. v. Dewhurst, et al. ("CLOUT Lawsuit No. 1"). The plaintiffs alleged that various violations of Article VIII, Section 22(a) of the Texas Constitution and Chapter 316 of the Texas Government Code had occurred and had resulted in unconstitutional and illegal spending by the State government, including the appropriations made for the Finance System under HB 1. (See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a discussion regarding HB 1). Among other things, the plaintiffs sought a declaratory judgment that the methodology used to establish the maximum amount of non-dedicated State revenues subject to appropriation in the State biennium, and the amount appropriated by the Legislature in HB 1 to fund the Finance System during such biennium, violated Article VIII, Section 22(a), which provides that, unless a resolution is adopted by the Legislature to override the spending limit "[i]n no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this constitution exceed the estimated rate of growth of the state's economy". A series of court decisions, appeals, and other legal actions pursued by both the plaintiffs and the State Defendants has most recently resulted in the Third Court of Appeals' decision on April 2, 2008, dismissing all of the plaintiff s causes of action alleged in the CLOUT Lawsuit No. 1 for lack of subject matter jurisdiction, save and except one allegation added during the appeal process claiming that the specific amount of the State legislative appropriation from nondedicated State tax revenues exceeds the spending cap (the "CLOUT Lawsuit No. 2"). Thus, the matter remains pending. The District can make no representation or prediction concerning the outcome of the CLOUT Lawsuit No. 2 or its effects on the Finance System, and, consequently, its impact on the financial condition of the District. However, the District does not anticipate that the security for the payment of the Bonds would be affected as a result of the outcome of the CLOUT Lawsuit No. 2. Possible Effects of Litigation and Changes in Law on District Bonds The Reform Legislation did not alter the provisions of Chapter 45, Texas Education Code, that authorizes districts to secure their bonds by pledging the receipts of an unlimited ad valorem debt service tax as security for payment of the Bonds. Reference is made, in particular, to the information under the headings "THE BONDS - Security for Payment" and "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM" in the Official Statement. In the future, the Legislature could enact additional changes to the Finance System which could benefit or be a detriment to a school district depending upon a variety of factors, including the financial strategies that the district has implemented in light of past State funding systems. Among other possibilities, a district's boundaries could be redrawn, taxing powers restricted, State funding reallocated, or local ad valorem taxes replaced with State funding subject to biennial appropriation. In Edgewood IV, the Supreme Court stated that any future determination of unconstitutionality "would not, however, affect the district's authority to levy the taxes necessary to retire previously issued bonds, but would instead require the Legislature to cure the system's unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions" (collectively, the "Contract Clauses"). Consistent with the Contract Clauses, in the exercise of its police powers, the State may make such modifications in the terms and conditions of contractual covenants related to the payment of the Bonds as are reasonable and necessary for the attainment of important public purposes. Although, as a matter of law, the Bonds, upon issuance and delivery, will be entitled to the protections afforded previously existing contractual obligations under the Contract Clauses, the District can make no representations or predictions concerning the effect of future legislation or litigation, or how such legislation or future court orders may affect the District's financial condition, revenues or operations. While the disposition of any possible future litigation or the enactment of future legislation to address school funding in Texas could substantially adversely affect the financial condition, revenues or operations of the District, as noted herein, the District does not anticipate that the security for payment of the Bonds, specifically, the District's obligation to levy an unlimited debt service tax and the Permanent School Fund guarantee of the Bonds, would be adversely affected by any such litigation or legislation. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM." 13

22 CURRENT PUBLIC SCHOOL FINANCE SYSTEM General The following description of the Finance System includes material provisions of the Reform Legislation. For a more complete description of school finance and fiscal management in the State, reference is made to Vernon's Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. The Reform Legislation, which generally became effective at the beginning of the fiscal year of each district, made substantive changes to the manner in which the Finance System is funded, but did not modify the basic structure of the Finance System. The changes to the manner in which the Finance System is funded are intended to reduce local M&O Tax rates by one third over two years, with M&O Tax levies declining by approximately 11% in fiscal year and approximately another 22% in fiscal year Additional State funding needed to offset local tax rate reductions must be generated by the modified State franchise, motor vehicle and tobacco taxes or any other revenue source appropriated by the Legislature. The Legislative Budget Board ("LBB") projected that the Reform Legislation will be underfunded from the Reform Legislation revenue sources by a cumulative amount of $25 billion over fiscal years through , although State surpluses were appropriated to offset the revenue shortfall in fiscal year and for the State biennium, and the shortfall could be addressed in future years if the Reform Legislation, particularly the ad valorem tax compression measures of HB 1, should prove to be an economic stimulus for the State or if there is sustained growth in the economy of the State that generates greater State revenues than were originally forecast by the LBB. Under the Finance System, school districts are guaranteed to receive State funding necessary to provide the district the greater of (A) the amount of State and local revenue per student for the district in the fiscal year, (B) the amount of State and local revenue per student the district would have been entitled to for the fiscal year based on the funding elements in place prior to the Reform Legislation using the M&O Tax rate the district adopted for the fiscal year, or the amount of State and local revenue per student the district would have been entitled to for the fiscal year based on the funding elements in place prior to the Reform Legislation using an M&O Tax rate that would allow the district to maintain total revenue per student under the funding elements in place prior to the Reform Legislation. In addition to the greater of (A), (B) or, HB 1 provided a $2,500 salary allotment to fund a salary increase for teachers and certain other employees and a high school student allotment of $275 per student in average daily attendance for dropout prevention and college readiness programs. During the 2007 Regular Legislative Session, which convened on January 9, 2007 and adjourned on May 28, 2007, a new funding allotment was created and funded by the Legislature to provide an average $425 salary increase for educators at each school district. State funds appropriated to provide districts the guaranteed amount may only be used for maintenance and operating purposes and not to fund facilities, debt service or other purposes. If a district adopts an M&O Tax rate in any fiscal year below a rate equal to the state compression percentage for the district in that year multiplied by the M&O Tax rate adopted by the district for the fiscal year, the district's guaranteed amount is reduced in a proportionate amount. If a district would receive more State and local revenue from the Tier One and Tier Two allotments and wealth equalization than the guaranteed amount described above, the amount of State funding will be reduced by the amount of such surplus over the guaranteed amount described above. In general terms, funds are allocated to districts in a manner that requires districts to "compress" their tax rates in order to receive increased State funding at a level that equalizes local tax wealth at the 88th percentile yield for the fiscal year. A basic component of the funding formulas is the "state compression percentage". The state compression percentage is 88.67% for fiscal year and 66.67% for fiscal year For fiscal year and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a district is able to reduce its M&O Tax rate for that year, as compared to such district's adopted M&O Tax rate for the fiscal year, as a result of State funds appropriated for distribution for the current fiscal year from the property tax relief fund established under the Reform Legislation, or from any other funding source made available by the Legislature for school district property tax relief. State Funding for Local School Districts To limit disparities in school district funding abilities, the Finance System (1) compels districts with taxable property wealth per weighted student higher than the "equalized wealth level" to reduce their wealth to such amount or to divert a portion of their tax revenues to other districts as described below and (2) provides various State funding allotments, including a basic funding allotment and other allotments for "enrichment" of the basic program, for debt service tax assistance and for new facilities construction. The Finance System provides for (1) State guaranteed basic funding allotments per student ("Tier One") and (2) State guaranteed revenues per student for each cent of local tax effort to provide operational funding for an "enriched" educational program ("Tier Two"). In addition, to the extent funded by the Legislature, the Finance System includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits ("EDA"), the Instructional Facilities Allotment ("IFA"), and an allotment to pay operational expenses associated with the opening of a new instructional facility. Tier One, Tier Two, EDA and IFA are generally referred to as the Foundation School Program. Tier One and Tier Two allotments represent the State funding share of the cost of maintenance and operations of school districts and supplement local ad valorem M&O Taxes levied for that purpose. Tier One and Tier Two allotments and prior year IFA allotments are generally required to be funded each year by the Legislature. EDA and future year IFA allotments supplement local ad valorem taxes levied for debt service on bonds issued by districts to construct, acquire and improve facilities and are generally subject to appropriation by the Legislature. 14

23 State funding allotments may be altered and adjusted to penalize school districts with high administrative costs and, in certain circumstances, to account for shortages in State appropriations or to allocate available funds in accordance with wealth equalization goals. Tier One allotments are intended to provide all districts a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the State will subsidize local tax receipts at a tax rate of $.86 per $100 of property value to ensure that the cost to a district of the basic program is met. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity to supplement that program at a level of its own choice, however Tier Two allotments may not be used for the payment of debt service or capital outlay. The cost of the basic program is based on an allotment per student known as the "Tier One Basic Allotment." The Tier One Basic Allotment is adjusted for all districts by a cost-of-living factor known as the "cost of education index." In addition, a district-size adjustment further adjusts the Tier One Basic Allotment for districts that have less than 5,000 students in average daily attendance. For the fiscal year the Tier One Basic Allotment was funded at $2,748 based upon a guaranteed yield of $31.95 for each cent of tax effort. For fiscal year , the Tier One Basic Allotment is $3,135 based upon a guaranteed yield of $36.45 for each cent of tax effort. Tier Two consists of State equalization funding for local M&O Tax levies that exceed $0.86. For fiscal year , State funding to equalize local M&O Tax levies above $0.86, up to a district's compressed rate, was funded at a guaranteed yield of $31.95 per student in weighted average daily attendance ("WADA") for each cent of tax effort; any amount above a district's compressed rate up to $0.04 was funded at a guaranteed yield of $41.25 per WADA for each cent of tax effort; and any tax effort associated with a tax approved by voters at a roll back election was funded at a guaranteed yield of $31.95 per WADA for each cent of tax effort above a district's compressed rate plus $0.04. For fiscal year , these three levels of Tier Two are funded at $36.45, $46.94 and $31.95, respectively. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a discussion of the state compression percentage. The IFA guarantees each school district a specified amount per student (the "IFA Guaranteed Yield") in State and local funds for each cent of tax effort to pay principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instructional facilities. To receive an IFA, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with State assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in average daily attendance. The IFA is also available for lease-purchase agreements and refunding bonds meeting certain prescribed conditions. If the total amount appropriated by the State for IFA in a year is less than the amount of money school districts applying for IFA are entitled to for that year, districts applying will be ranked by the Commissioner by wealth per student, and State assistance will be awarded to applying districts in ascending order of adjusted wealth per student beginning with the district with the lowest adjusted wealth per student. In determining wealth per student for purposes of IFA, adjustments are made to reduce wealth for certain fast growing districts. Once a district receives an IFA award for bonds, it is entitled to continue receiving State assistance without reapplying to the Commissioner and the guaranteed level of State and local funds per student per cent of tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for IFA allotments and added funding for qualified debt to be issued for instructional facilities in the State's fiscal biennium, however, the Texas Education Agency has indicated that it intends to reserve all such new appropriation for the second year of the biennium. State financial assistance is provided for certain existing debt issued by school districts (referred to herein as EDA) to produce a guaranteed yield (the "EDA Yield"), which for the State Biennium is $35.00 (subject to adjustment as described below) in State and local revenue per student for each cent of debt service tax levy; however, for bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance for such eligible bonds may be less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. Effective September 1, 2003, the portion of the local debt service rate that has qualified for equalization funding by the State has been limited to the first 29 cents of debt service tax or a greater amount for any year provided by appropriation by the Legislature. In general, a district's bonds are eligible for the allotment if, during the fiscal year, the district (i) made payments on such bonds or (ii) levied and collected debt service taxes for the payment of principal and interest on such bonds. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for EDA allotments, provided additional EDA funding for the State's fiscal biennium for new bonds that qualify for the allotment and rolled forward the eligibility date from to fiscal year. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives overlapping IFA funding. A district may also qualify for an allotment for operational expenses associated with opening new instructional facilities. This funding source may not exceed $25,000,000 in one school year on a State-wide basis. For the first school year in which students attend a new instructional facility, a district is entitled to an allotment of $250 for each student in average daily attendance at the facility. For the second school year in which students attend that facility, a district is entitled to an allotment of $250 for each additional student in average daily attendance at the facility. The new facility operational expense allotment will be deducted from wealth per student for purposes of calculating a district's Tier Two State funding. Local Revenue Sources - Property Tax Authority The primary source of local funding for school districts is ad valorem taxes levied against the local tax base. The former provision of the Education Code, Section , that in general limited the M&O Tax rate to $1.50 per $100 of taxable assessed 15

24 value, was replaced with a formula using the state compression percentage so that the maximum tax rate that may be adopted by a district in any fiscal year is limited based on the amount of State funds to be received by the District in that year. For the and fiscal years, districts may generate additional local funds by raising their M&O Tax rate by $0.04 above the compressed tax rates (without taking into account changes in taxable valuation) without voter approval, and such amounts will generate equalized funding dollars from the State under the Tier Two program. In fiscal year and thereafter, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing effort so long as the voters approve such tax rate increase. Many school districts, however, voted their M&O Tax under prior law and may be subject to other limitations on the M&O Tax rate. School districts are also authorized to levy a bond debt service tax that may be unlimited in rate. See "TAX RATE LIMITATIONS" herein. The governing body of a school district cannot adopt an annual tax rate which exceeds the district's "rollback tax rate" without submitting such proposed tax rate to the voters at a referendum election. See "AD VALOREM TAX PROCEDURES-Public Hearing and Rollback Tax Rate" herein. Wealth Transfer Provisions Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted student ("wealth per student") for each school year to no greater than the "equalized wealth level", determined in accordance with a formula set forth in the Reform Legislation. A district may effectively reduce its wealth per student either by reducing the amount of taxable property within the district relative to the number of weighted students, by transferring revenue out of the district or by exercising any combination of these remedies. The wealth level that required wealth reduction measures for fiscal year was $319,500 per student in average daily attendance. For that wealth level has been increased to $364,500 per student in average daily attendance with respect to that portion of a district's M&O tax effort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district's local tax effort that is beyond its compressed rate plus $.04. For that wealth level has been increased to $374,200 per student in average daily attendance with respect to that portion of a district s M&O tax effort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district s local tax effort that is beyond its compressed rate plus $.04. Property wealthy districts may also be able to levy up to an additional four cents (six cents beginning with fiscal year ) per $100 of assessed valuation of M&O Taxes above their compressed rate to provide revenue that is not subject to recapture. A district has four options to reduce its wealth per student so that it does not exceed the equalized wealth level: (1) A district may consolidate by agreement with one or more districts to form a consolidated district. All property and debt of the consolidating districts vest in the consolidated district. (2) Subject to approval by the voters of all affected districts, a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either M&O Taxes or both M&O Taxes and debt service taxes. (3) A district may detach property from its territory for annexation by a property-poor district. (4) A district may educate students from other districts who transfer to the district without charging tuition to such students. A district has three options to transfer tax revenues from its excess property wealth. First, a district with excess wealth per student may purchase "attendance credits" by paying the tax revenues to the State for redistribution under the Foundation School Program. Second, it can contract to disburse the tax revenues to educate students in another district, if the payment does not result in effective wealth per student in the other district to be greater than the equalized wealth level. Both options to transfer property wealth are subject to approving elections by the transferring district's qualified voters. Third, a wealthy district may reduce its wealth by paying tuition to a non-wealthy district for the education of students that reside in the wealthy district. A district may not adopt a tax rate until its effective wealth per student is the equalized wealth level or less. If a final court decision holds any of the preceding permitted remedial options unlawful, districts may exercise any remaining option under a revised schedule approved by the Commissioner. If a district fails to exercise a permitted option, the Commissioner must reduce the district's property wealth per student to the equalized wealth level by detaching certain types of property from the district and annexing the property to a property-poor district or, if necessary, consolidate the district with a property-poor district. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district's existing debt. Possible Effects of Wealth Transfer Provisions on the District's Financial Condition The District's wealth per student for the school year is more than the equalized wealth value. Accordingly, the District has been required to exercise one of the permitted wealth equalization options. As a district with wealth per student in excess of the equalize wealth value, the District has reduced its wealth per student by exercising Options 3 and 4 under Chapter 41, Texas Education Code, for the purpose of achieving property wealth equalization. A district's wealth per student must be tested for each future school year and, if it exceeds the maximum permitted level, must be reduced by exercise of one of the permitted wealth equalization options. Accordingly, if the District's wealth per student should exceed the maximum permitted level in future school years, it will be required each year to exercise one or more of the wealth reduction options. If the District were to consolidate (or consolidate its tax base for all purposes) with a property-poor district, the outstanding debt of each district could become payable from the consolidated district's combined property tax base, and the 16

25 District's ratio of taxable property to debt could become diluted. If the District were to detach property voluntarily, a portion of its outstanding debt (including the Bonds) could be assumed by the district to which the property is annexed, in which case timely payment of the Bonds could become dependent in part on the financial performance of the annexing district. BOND INSURANCE The following information is not complete and reference is made to Appendix E for a specimen of the financial guaranty insurance policies (the Policies ) of Assured Guaranty Corp. ( Assured Guaranty or the Insurer ). The Insurance Policies Assured Guaranty has made a commitment to issue the Policies relating to the Bonds, effective as of the date of issuance of such Bonds. Under the terms of the Policies, Assured Guaranty will unconditionally and irrevocably guarantee to pay that portion of principal of and interest on the Bonds that becomes Due for Payment but shall be unpaid by reason of Nonpayment (the Insured Payments ). Insured Payments shall not include any additional amounts owing by the Issuer solely as a result of the failure by the Trustee or the Paying Agent to pay such amount when due and payable, including without limitation any such additional amounts as may be attributable to penalties or to interest accruing at a default rate, to amounts payable in respect of indemnification, or to any other additional amounts payable by the Trustee or the Paying Agent by reason of such failure. The Policies are non-cancelable for any reason, including without limitation the non-payment of premium. Due for Payment means, when referring to the principal of the Bonds, the stated maturity date thereof, or the date on which such Bonds 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 a call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless Assured Guaranty in its sole discretion elects to make any principal payment, in whole or in part, on such earlier date) and, when referring to interest on such Bonds, means the stated dates for payment of interest. Nonpayment means the failure of the Issuer to have provided sufficient funds to the Trustee or the Paying Agent for payment in full of all principal and interest Due for Payment on the Bonds. It is further understood that the term Nonpayment in respect of a Bond also includes any amount previously distributed to the Holder (as such term is defined in the Policy) of such Bond in respect of any Insured Payment by or on behalf of the Issuer, which amount has been recovered from such Holder pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction that such payment constitutes an avoidable preference with respect to such Holder. Nonpayment does not include nonpayment of principal or interest caused by the failure of the Trustee or the Paying Agent to pay such amount when due and payable. Assured Guaranty will pay each portion of an Insured Payment that is Due for Payment and unpaid by reason of Nonpayment, on the later to occur of (i) the date such principal or interest becomes Due for Payment, or (ii) the business day next following the day on which Assured Guaranty shall have received a completed notice of Nonpayment therefor in accordance with the terms of the Policies. Assured Guaranty shall be fully subrogated to the rights of the Holders of the Bonds to receive payments in respect of the Insured Payments to the extent of any payment by Assured Guaranty under the Policies. The Policies are not covered by any insurance or guaranty fund established under New York, California, Connecticut or Florida insurance law. The Insurer Assured Guaranty Corp. ( Assured Guaranty ) is a Maryland-domiciled insurance company regulated by the Maryland Insurance Administration and licensed to conduct financial guaranty insurance business in all fifty states of the United States, the District of Columbia and Puerto Rico. Assured Guaranty commenced operations in Assured Guaranty is a wholly owned, indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, structured finance and mortgage markets. Neither AGL nor any of its shareholders is obligated to pay any debts of Assured Guaranty or any claims under any insurance policy issued by Assured Guaranty. Assured Guaranty is subject to insurance laws and regulations in Maryland and in New York (and in other jurisdictions in which it is licensed) that, among other things, (i) limit Assured Guaranty s business to financial guaranty insurance and related lines, (ii) prescribe minimum solvency requirements, including capital and surplus requirements, (iii) limit classes and concentrations of investments, (iv) regulate the amount of both the aggregate and individual risks that may be insured, (v) limit the payment of dividends by Assured Guaranty, (vi) require the maintenance of contingency reserves, and (vii) govern changes in control and transactions among affiliates. Certain state laws to which Assured Guaranty is subject also require the approval of policy rates and forms. 17

26 Assured Guaranty s financial strength is rated AAA (stable) by Standard & Poor s, a division of The McGraw-Hill Companies, Inc. ( S&P ), AAA (stable) by Fitch, Inc. ( Fitch ) and Aa2 (stable) by Moody s Investors Service, Inc. ( Moody s ). Each rating of Assured Guaranty should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of any security guaranteed by Assured Guaranty. Assured Guaranty does not guaranty the market price of the securities it guarantees, nor does it guaranty that the ratings on such securities will not be revised or withdrawn. Recent Developments On November 14, 2008, AGL announced that it had entered into a definitive agreement to purchase Financial Security Assurance Holdings Ltd. ( FSA ), the parent of financial guaranty insurance company Financial Security Assurance, Inc. For more information regarding the proposed acquisition by AGL of FSA, see the Annual Report on Form 10-K filed by AGL with the Securities and Exchange Commission (the SEC ) on February 26, Capitalization of Assured Guaranty Corp. As of December 31, 2008, Assured Guaranty had total admitted assets of $1,803,146,295 (unaudited), total liabilities of $1,425,012,944 (unaudited), total surplus of $378,133,351 (unaudited) and total statutory capital (surplus plus contingency reserves) of $1,090,288,113 (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of December 31, 2007, Assured Guaranty had total admitted assets of $1,361,538,502 (audited), total liabilities of $961,967,238 (audited), total surplus of $399,571,264 (audited) and total statutory capital (surplus plus contingency reserves) of $982,045,695 (audited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. The Maryland Insurance Administration recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under the Maryland Insurance Code, and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the Maryland Insurance Administration to financial statements prepared in accordance with accounting principles generally accepted in the United States in making such determinations. Incorporation of Certain Documents by Reference The portions of the following documents relating to Assured Guaranty are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof: The Annual Report on Form 10-K of AGL for the fiscal year ended December 31, 2008 (which was filed by AGL with the SEC on February 26, 2009); and The Current Reports on Form 8-K filed by AGL with the SEC, as they relate to Assured Guaranty. All consolidated financial statements of Assured Guaranty and all other information relating to Assured Guaranty included in documents filed by AGL with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date of this Official Statement and prior to the termination of the offering of the Bonds shall be deemed to be incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such consolidated financial statements. Any statement contained in a document incorporated herein by reference or contained herein under the heading BOND INSURANCE - The Insurer shall be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any subsequently filed document which is incorporated by reference herein also modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement. Copies of the consolidated financial statements of Assured Guaranty incorporated by reference herein and of the statutory financial statements filed by Assured Guaranty with the Maryland Insurance Administration are available upon request by contacting Assured Guaranty at 1325 Avenue of the Americas, New York, New York or by calling Assured Guaranty at (212) In addition, the information regarding Assured Guaranty that is incorporated by reference in this Official Statement that has been filed by AGL with the SEC is available to the public over the Internet at the SEC s web site at and at AGL s web site at from the SEC s Public Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, D.C , and at the office of the New York Stock Exchange at 20 Broad Street, New York, New York Assured Guaranty makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, Assured Guaranty 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 Assured Guaranty supplied by Assured Guaranty and presented under the heading BOND INSURANCE. 18

27 BOND INSURANCE RISK FACTORS In the event the Insurer is unable to make payment of principal and interest as such payments become due under the Policies, the Bonds are payable solely from the moneys received by the Paying Agent/Registrar pursuant to the Order. In the event the Insurer becomes obligated to make payments with respect to the Bonds, no assurance is given that such event will not adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds. The long-term ratings on the Bonds 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 Bonds insured by the Insurer will not be subject to downgrade and such event could adversely affect the market price of the Bonds or the marketability (liquidity) for the Bonds. 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 to the Bondholders may be limited by applicable bankruptcy law or other similar laws related to insolvency. Neither the District nor the Underwriters 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. TAX RATE LIMITATIONS A school district is authorized to levy maintenance and operation taxes ( M & O Tax ) subject to approval of a proposition submitted to district voters under Section (d) of the Texas Education Code, as amended. The maximum M&O Tax rate that may be levied by a district cannot exceed the voted maximum rate or the maximum rate described in the next succeeding paragraph. The maximum voted maintenance tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an election held on October 6, 2001 under Chapter 45, Texas Education Code. For any fiscal year beginning with the fiscal year, the maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.50 and (B) the sum of (1) the rate of $0.17, and (2) the product of the "state compression percentage" multiplied by $1.50. The state compression percentage was 88.67% for fiscal year and 66.67% for fiscal year For fiscal year and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year which is based on the amount of State funds appropriated for distribution to the District for the current fiscal year. For a more detailed description of the state compression percentage (See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General"). Furthermore, a school district cannot annually increase its tax rate in excess of the district's "rollback tax rate" without submitting such tax rate to a referendum election and a majority of the voters voting at such election approving the adopted rate. (See "AD VALOREM TAX PROCEDURES-Public Hearing and Rollback Tax Rate.") A school district is also authorized to issue bonds and levy taxes for payment of bonds subject to voter approval of a proposition submitted to the voters under Section (b)(1), Texas Education Code, as amended, which provides a tax unlimited as to rate or amount for the support school district bonded indebtedness (See "THE BONDS - Security for Payment", and STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS ). Chapter 45 of the Texas Education Code, as amended, requires a district to demonstrate to the Texas Attorney General that it has the prospective ability to pay debt service on a proposed issue of bonds, together with debt service on other outstanding "new debt" of the district, from a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. In demonstrating the ability to pay debt service at a rate of $0.50, a district may take into account State allotments to the district which effectively reduces the district's local share of debt service. Once the prospective ability to pay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied to pay debt service on bonds approved by district voters at an election held on or before April 1, 1991 and issued before September 1, 1992 (or debt issued to refund such bonds) are not subject to the foregoing threshold tax rate test. In addition, taxes levied to pay refunding bonds issued pursuant to Chapter 1207, Texas Government Code, are not subject to the $0.50 tax rate test; however, taxes levied to pay debt service on such bonds are included in the calculation of the $0.50 tax rate test as applied to subsequent issues of "new debt." The School Building Bonds are issued as "new debt" and are subject to the $0.50 threshold tax rate test. The Refunding Bonds are issued as refunding bonds pursuant to Chapter 1207, Texas Government Code, and are not subject to the $0.50 threshold tax rate test. Under current law, a district may demonstrate its ability to comply with the $0.50 threshold tax rate test by applying the $0.50 tax rate to an amount equal to 90% of projected future taxable value of property in the district, as certified by a registered professional appraiser, anticipated for the earlier of the tax year five years after the current tax year or the tax year in which the final payment for the bonds is due. However, if a district uses projected future taxable values to meet the $0.50 threshold tax rate test and subsequently imposes a tax at a rate greater than $0.50 per $100 of valuation to pay for bonds subject to the test, then for subsequent bond issues, the Attorney General must find that the district has the projected ability to pay principal and interest on the proposed bonds and all previously issued bonds subject to the $0.50 threshold tax rate test from a tax rate of $0.45 per $100 of valuation. The District has not used projected property values to satisfy this threshold test. DEBT LIMITATIONS Under State law, there is no explicit bonded indebtedness limitation, although the tax rate limits described above under Tax Rate Limitations effectively impose a limit on the incurrence of debt. Such tax rate limits require school districts to demonstrate the ability to pay new debt secured by the district s debt service tax from a tax rate of $0.50, and to pay all debt and operating 19

28 expenses which must be paid from receipts of the district s maintenance and operations tax from a tax not to exceed the maintenance and operations tax limit described under the caption TAX RATE LIMITATIONS. In demonstrating compliance with the requirement, a district may take into account State equalization payments, and, effective September 1, 1997, if compliance with such requirement is contingent on receiving State assistance, a district may not adopt a tax rate for a year for purposes of paying the principal of and interest on the bonds unless the district credits to the interest and sinking fund of the bond the amount of state assistance received or to be received in that year. The State Attorney General reviews a district s calculations showing the compliance with these tests as a condition to the legal approval of the debt. The School Building Bonds constitute new debt and are, therefore, subject to the $0.50 limitation. See also "TAX RATE LIMITATIONS". EMPLOYEES RETIREMENT PLAN AND OTHER POST-EMPLOYMENT BENEFITS The District s employees participate in a retirement plan with the State of Texas; the Plan is administered by the Teacher Retirement System of Texas ( TRS ). State contributions are made to cover costs of the TRS retirement plan up to certain statutory limits. The District is obligated for a portion of TRS costs relating to employee salaries that exceed the statutory limit. As a result of its participation in TRS and having no other postemployment retirement benefit plans, the District has no obligations for other postemployment benefits within the meaning of Governmental Accounting Standards Board Statement No. 45. (See Note 5.G. - Pension Plan Obligations in the audited financial statements of the District for the year ended June 30, 2008, set forth in Appendix D hereto). Formal collective bargaining agreements relating directly to wages and other conditions of employment are prohibited by State law, as are strikes by teachers. There are various local, state and national organized employee groups who engage in efforts to better terms and conditions of employment of school employees. Some districts have adopted a policy to consult with employer groups with respect to certain terms and conditions of employment. Some examples of these groups are the Texas State Teachers Association, the Texas Classroom Teachers Association, the Association of Texas Professional Educators and the National Education Association. RATINGS The Bonds are rated AAA by Fitch Ratings ( Fitch ) and Aa2 by Moody s Investor Service Inc. ( Moody s ) as a result of the issuance of financial guaranty insurance policies by Assured Guaranty Corp. The presently outstanding unlimited tax supported debt of the District is rated Aa3 by Moody s and A+ by Fitch, without regard to credit enhancement. The District also has outstanding bonds that are rated Aaa and AAA by Moody s and Fitch, respectively, based upon the Permanent School Fund Guarantee. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The rating reflects only the respective view of such organization and the County makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by the rating company, if in the judgment of the company, circumstances so warrant. Any such downward revision or withdrawal of such rating, may have an adverse effect on the market price of the Bonds. Financial guaranty insurance was purchased by the District for the purpose of reducing its interest rate expense by utilizing the rating of Assured Guaranty instead of the District s rating. As of closing of this transaction, the rating of Assured Guaranty is Aa2 by Moody s, AAA by Fitch and AAA by Standard & Poor s Rating Services, a division of the McGraw-Hill Companies, Inc. The Bonds were sold in the initial offering based upon the ratings of Assured Guaranty (see BOND INSURANCE and BOND INSURANCE RISK FACTORS herein). It should be noted that the state of the financial guaranty insurance industry is under stress with multiple financial guaranty insurers having been downgraded. Further downgrades of certain financial guaranty insurers could occur, including Assured Guaranty. Any change in the ratings of Assured Guaranty could have a material adverse impact on the price of the Bonds as well as affect the liquidity of the Bonds. Accordingly, investors should evaluate the underlying credit quality of Assured Guaranty as well as the District. The District has no obligation to maintain the rating on the Bonds after delivery of the Bonds to the Underwriters. LEGAL MATTERS The District will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of the State of Texas as to the Bonds to the effect that the Bonds are valid and legally binding obligations of the District, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, with respect to the Bonds issued in compliance with the provisions of the Order. A form of such opinion is attached hereto as Appendix C. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Bonds, or which would affect the provisions made for their payment or security, or in any manner questioning the validity of said Bonds will also be furnished. In connection with the issuance of the Bonds, Bond Counsel has been engaged by and only represents the District. Except as noted below, Bond Counsel was not requested to participate, and did not take part, in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein, except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under captions or subcaptions THE BONDS (except under the subcaptions Yield on Capital Appreciation Bonds, Payment Record and Sources and Uses of Funds ), REGISTERED OWNERS REMEDIES, 20

29 REGISTRATION, TRANSFER AND EXCHANGE, STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS, CURRENT PUBLIC SCHOOL FINANCE SYSTEM (except under the subcaption Possible Effects of Wealth Transfer Provisions on the District s Financial Condition ), TAX RATE LIMITATIONS, TAX MATTERS, LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS, CONTINUING DISCLOSURE OF INFORMATION (except for subcaption Compliance with Prior Undertakings ), and REGISTRATION AND QUALIFICATION OF BONDS FOR SALE, and such firm is of the opinion that the information relating to the bonds and legal matters contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Bonds, such information conforms to the Order. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent upon the sale and delivery of the Bonds. Certain legal matters will be passed upon for the Underwriters by their counsel, Andrews Kurth LLP, Austin, Texas, whose fee is contingent upon the sale and delivery of the Bonds. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinion as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. School Building Bonds TAX MATTERS Opinion On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the School Building Bonds for federal income tax purposes will be excludable from the "gross income" of the holders thereof and (2) the School Building Bonds will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the School Building Bonds. See Appendix C -- Form of Legal Opinions of Bond Counsel. In rendering its opinion, Bond Counsel will rely upon (a) certain information and representations of the Issuer, including information and representations contained in the Issuer's federal tax certificate and (b) covenants of the Issuer contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the Refunded Bonds and the property financed or refinanced therewith. Failure by the Issuer to observe the aforementioned representations or covenants could cause the interest on the Bonds to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel is conditioned on compliance by the Issuer with such requirements, and Bond Counsel has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. Bond Counsel's opinion represents its legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the property financed or refinanced with proceeds of the Bonds or the Refunded Bonds. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds. Bond Counsel s opinion is not binding on the Internal Revenue Service. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. Federal Income Tax Accounting Treatment of Original Issue Discount The initial public offering price to be paid for one or more maturities of the Bonds may be less than the maturity amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year (the "Original Issue Discount Bonds"). In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. 21

30 Under Existing Law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under Existing Law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. Collateral Federal Income Tax Consequences The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. State, Local and Foreign Taxes Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. Refunding Bonds Opinion On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the Refunding Bonds for federal income tax purposes will be excludable from the "gross 22

31 income" of the holders thereof and (2) the Refunding Bonds will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Refunding Bonds. See Appendix C -- Form of Legal Opinions of Bond Counsel. In rendering its opinion, Bond Counsel will rely upon (a) certain information and representations of the Issuer, including information and representations contained in the Issuer's federal tax certificate and (b) covenants of the Issuer contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the Refunded Bonds and the property financed or refinanced therewith. Failure by the Issuer to observe the aforementioned representations or covenants could cause the interest on the Bonds to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel is conditioned on compliance by the Issuer with such requirements, and Bond Counsel has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. Bond Counsel's opinion represents its legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the property financed or refinanced with proceeds of the Bonds or the Refunded Bonds. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds. Bond Counsel s opinion is not binding on the Internal Revenue Service. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. Federal Income Tax Accounting Treatment of Original Issue Discount The initial public offering price to be paid for one or more maturities of the Bonds may be less than the maturity amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year (the "Original Issue Discount Bonds"). In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under Existing Law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under Existing Law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon 23

32 redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. Collateral Federal Income Tax Consequences The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Interest on the Refunding Bonds will be includable as an adjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Section 55 of the Code imposes a tax equal to 20 percent for corporations, or 26 percent for noncorporate taxpayers (28 percent for taxable income exceeding $175,000), of the taxpayer's "alternative minimum taxable income," if the amount of such alternative minimum tax is greater than the taxpayer's regular income tax for the taxable year. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. State, Local and Foreign Taxes Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. In addition, various provisions of the Texas Finance Code provide that, subject to a prudence standard, the Bonds are legal investments for state banks, savings banks, trust companies with at least $1 million of capital, and savings and loans associations. In accordance with the Public Funds Investment Act, Chapter 2256, Texas Government Code, the Bonds must be rated not less than A or its equivalent as to investment quality by a national rating agency in order for most municipalities or other political subdivisions or public agencies of the State of Texas to invest in the Bonds, except for purchases for interest and sinking funds of such entities. (See RATINGS herein.) Moreover, municipalities or other political subdivisions or public agencies of the State of Texas that have adopted investment policies and guidelines in accordance with the Public Funds Investment Act may have other, more stringent requirements for purchasing securities, including the Bonds. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. The District has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bonds for such purposes. The District has made no review of laws in other states to determine whether the Bonds are legal investments for various institutions in those states. 24

33 INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board of Trustees. Both state law and the District's investment policies are subject to change. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code) that are issued by or through an institution that either has its main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for District deposits; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (13) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for District funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the District's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived." At least quarterly the District's investment officers must submit an investment report to the Board of Trustees detailing: (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, and 25

34 any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest District funds without express written authority from the Board of Trustees. Under Texas law, the District is additionally required to: (1) annually review its adopted policies and strategies, (2) require any investment officers with personal business relationships or family relationships with firms seeking to sell securities to the District to disclose the relationship and file a statement with the Texas Ethics Commission and the District, (3) require the registered principal of firms seeking to sell securities to the District to: (a) receive and review the District's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and deliver a written statement attesting to these requirements; (4) in conjunction with its annual financial audit, perform a compliance audit of the management controls on investments and adherence to the District's investment policy, (5) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement, (6) restrict the investment in non-money market mutual funds in the aggregate to no more than 15% of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements and (8) provide specific investment training for the Treasurer, the chief financial officer (if not the Treasurer) and the investment officer. of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements and (8) provide specific investment training for the Treasurer, the chief financial officer (if not the Treasurer) and the investment officer. INVESTMENT BANKER Southwest Securities, Inc. is employed as Investment Banker ( Banker ) to the District to assist in the issuance of Bonds. In this capacity, the Banker has compiled certain data relating to the Bonds that is contained in this Official Statement. The Banker has not independently verified any of the data contained herein or conducted a detailed investigation of the affairs of the District to determine the accuracy or completeness of this Official Statement. Because of their limited participation, the Banker assumes no responsibility for the accuracy or completeness of any of the information contained herein. The fee of the Banker for services with respect to the Bonds is contingent upon the issuance and sale of the Bonds. In the normal course of business, the Banker may also from time to time sell investment securities to the District for the investment of bonds proceeds or other funds of the District upon the request of the District. AUTHENTICITY OF FINANCIAL INFORMATION The financial data and other information contained herein have been obtained from the District s records, audited financial statements and other sources which are believed to be reliable. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. School Building Bonds UNDERWRITERS Morgan Keegan & Company, Inc., acting as senior manager on behalf of Estrada Hinojosa & Company, Inc., First Southwest Company, and RBC Capital Markets Corporation (collectively, the "Underwriters"), have agreed, subject to certain customary conditions, to purchase the School Building Bonds at a price equal to the initial offering prices to the public, as shown on page ii of this Official Statement, less an Underwriters Discount of $656, The Underwriters obligations are subject to certain conditions precedent, and the Underwriters will be obligated to purchase all of the School Building Bonds if any School Building Bonds are purchased. The School Building Bonds may be offered and sold to certain dealers and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriters. Refunding Bonds The Underwriters have agreed, subject to certain customary conditions, to purchase the Refunding Bonds at a price equal to the initial offering prices to the public, as shown on page iii of this Official Statement, less an Underwriters Discount of $84, The Underwriters obligations are subject to certain conditions precedent, and the Underwriters will be obligated to purchase all of the Refunding Bonds if any Refunding Bonds are purchased. The Refunding Bonds may be offered and sold to certain dealers and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriters. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the Federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. 26

35 LITIGATION The District is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the District, would have a material adverse effect on the financial statements or operations of the District. CONTINUING DISCLOSURE OF INFORMATION In the Order, the District has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The District is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. Annual Report The District will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement in Appendix A, FINANCIAL INFORMATION OF THE DISTRICT and in Appendix D. The District will update and provide this information within six months after the end of each fiscal year. The District will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to any state information depository ( SID ) that is designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission (the SEC ). The District may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12, as amended (the Rule ). The updated information will include audited financial statements, if the District commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the District will provide unaudited financial statements by the required time and audited financial statements when and if the audit report becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix D or such other accounting principles as the District may be required to employ from time to time pursuant to state law or regulation. The District's current fiscal year end has changed from August 31 to June 30, effective September 1, Accordingly, beginning with updated information in respect of its fiscal year ending June 30, 2008, the District must provide updated information by the last day of December in each year, unless the District changes its fiscal year again. The District has notified each NRMSIR and SIDs of the change. Material Event Notices The District will also provide timely notices of certain events to certain information vendors. The District will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes (neither the Bonds nor the Order make any provision for debt service reserves or, liquidity enhancement). In addition, the District will provide timely notice of any failure by the District to provide information, data, or financial statements in accordance with its agreement described above under Annual Reports. The District will provide each notice described in this paragraph to any SID and to each NRMSIR. Availability of Information from NRMSIRs and SID The District has agreed to provide the foregoing information only to NRMSIRs and any SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID, and the SEC staff has determined that it is a qualified SID. The address of the Municipal Advisory Council is 600 West 8th Street, P.O. Box 2177, Austin, Texas , and its telephone number is 512/ The MAC has also received SEC approval to operate, and has begun to operate, a central post office for information filings made by municipal issuers, such as the District. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at ( Disclosure USA ). The District may utilize Disclosure USA for the filing of information relating to the Bonds. 27

36 The SEC has approved amendments to the Rule, to become effective July 1, 2009, to designate the MSRB as the sole NRMSIR. To make such continuing disclosure information available to investors free of charge, the MSRB has established the Electronic Municipal Market Access ("EMMA") system. The District will be required to file its continuing disclosure information using the EMMA system beginning on July 1, Investors will be able to access continuing disclosure information filed with the MSRB at Limitations and Amendments The District has agreed to update information and to provide notices of material events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The District makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders and beneficial owners of Bonds may seek a writ of mandamus to compel the District to comply with its agreement. This continuing disclosure agreement may be amended by the District from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, but only if (1) the provisions, as so amended, would have permitted an underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (2) either (a) the registered owners of a majority in aggregate principal amount (or any greater amount required by any other provision of this Order that authorizes such an amendment) of the outstanding Bonds consent to such amendment or (b) a person that is unaffiliated with the District (such as nationally recognized bond counsel) determined that such amendment will not materially impair the interest of the registered owners and beneficial owners of the Bonds. The District may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. Compliance with Prior Undertakings During the last five years, the District has complied in all material respects with all continuing disclosure agreements in accordance with the Rule. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE No registration statement relating to the Bonds has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2). The Bonds have not been approved or disapproved by the Securities and Exchange Commission, nor has the Securities and Exchange Commission passed upon the accuracy or adequacy of the Official Statement. The Bonds have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities acts of any other jurisdiction. The District assumes no responsibility for registration or qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions. FORWARD LOOKING STATEMENTS The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District s expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. It is important to note that the District s actual results could differ materially from those in such forward-looking statements. The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement would prove to be accurate. 28

37 CONCLUDING STATEMENT The information set forth herein has been obtained from the District's records, audited financial statements and other sources which are considered to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will ever be realized. All of the summaries of the statutes, documents and the Order contained in this Official Statement are made subject to all of the provisions of such statutes, documents, and the Order. These summaries do not purport to be complete statements of such provisions and reference is made to such summarized documents for further information. Reference is made to official documents in all respects. The Order authorizing the issuance of the Bonds approved the form and content of this Official Statement and any addenda, supplement or amendment thereto and authorized its further use in the re-offering of the Bonds by the Underwriters. This Official Statement was approved by the Board of Trustees of the District for distribution in accordance with the provisions of the Securities and Exchange Commission s rule codified at 17 C.F.R. Section c2-12, as amended. FRISCO INDEPENDENT SCHOOL DISTRICT ATTEST: /s/ Laura Ellison Secretary, Board of Trustees Frisco Independent School District /s/ Dan Mossakowski President, Board of Trustees Frisco Independent School District 29

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39 Schedule I - Schedule of Refunded Bonds Principal Series Original Original Principal Amount to be Dated Principal Maturity Amount Being Interest Redemption Refunded Date Amount Dates Outstanding Refunded Rate Date Unlimited Tax School Building Bonds, Series 1998 February 15, 1998 $ 17,700,000 8/15/2009 $ 515,000 $ 515, % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/ , , % May 5, Par 8/15/2025 7,480,000 (1) 7,480, % May 5, Par $ 14,170,000 $ 14,170,000 (1) Represents term bond outstanding in the principal amount of $7,480,000 that matures August 15, 2025.

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41 Schedule II - School Building Bonds Schedule of Accreted Values of Capital Appreciation Bonds ("CABs") (Per $5,000 Maturity Value) CABs Delivery Date: April 28, 2009 Accreted Accreted Accreted Accreted Accreted Accreted Accreted Accreted Value of Value of Value of Value of Value of Value of Value of Value of 8/15/2011 8/15/2012 8/15/2013 8/15/2014 8/15/2015 8/15/2016 8/15/2017 8/15/2018 Maturity Maturity Maturity Maturity Maturity Maturity Maturity Maturity Date: 2.00% 2.30% 2.73% 3.11% 3.35% 3.50% 3.75% 3.94% 04/28/2009 $ 4, $ 4, $ 4, $ 4, $ 4, $ 3, $ 3, $ 3, /15/2009 4, , , , , , , , /15/2010 4, , , , , , , , /15/2010 4, , , , , , , , /15/2011 4, , , , , , , , /15/2011 5, , , , , , , , /15/2012 4, , , , , , , /15/2012 5, , , , , , , /15/2013 4, , , , , , /15/2013 5, , , , , , /15/2014 4, , , , , /15/2014 5, , , , , /15/2015 4, , , , /15/2015 5, , , , /15/2016 4, , , /15/2016 5, , , /15/2017 4, , /15/2017 5, , /15/2018 4, /15/2018 5,000.00

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43 Schedule II - Refunding Bonds Schedule of Accreted Values of Capital Appreciation Bonds ("CABs") (Per $5,000 Maturity Value) CABs Delivery Date: April 28, 2009 Accreted Value of 8/15/2011 Maturity Date: 2.00% 04/28/2009 $ 4, /15/2009 4, /15/2010 4, /15/2010 4, /15/2011 4, /15/2011 5,000.00

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45 APPENDIX A FINANCIAL INFORMATION OF THE DISTRICT

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47 FRISCO INDEPENDENT SCHOOL DISTRICT FINANCIAL INFORMATION OF THE DISTRICT (As of March 1, 2009) ASSESSED VALUATION 2008 Actual Total Valuation $ 18,972,790,691 Exemption/Deductions Residential Homestead $ 482,785,387 Freeport 18,643,424 Over-65/Disabled 28,722,784 Disabled/Deceased Vet 3,352,000 Homestead Cap Adjustment 29,595,965 Productivity/Cap Loss 1,844,393,517 HB 366/Other 10,694,136 Total (13.31% of actual value) $ 2,418,187, Net Taxable Valuation $ 16,554,603,478 VOTED GENERAL OBLIGATION DEBT PRINCIPAL Unlimited Tax Bonds Outstanding $ 1,078,469, Less: Bonds to be Refunded 14,170, Series 2009 Refunding Bonds 14,170, Series 2009 School Building Bonds 85,000, Total General Obligation Debt (Stated Principal Amount) (1) $ 1,163,469, Ratio of Net GO Debt Principal to 2009 Net Taxable Valuation 7.03% Per Capita Actual 2008 Valuation $ 152, Population Estimate 124,254 Per Capita Net 2008 Valuation $ 133, /09 Enrollment 30,932 Per Capita Net G.O. Debt Principal $ 9,364 (1) Excludes interest accreted on outstanding capital appreciation bonds. PROPERTY TAX RATES AND COLLECTIONS Net % Collections Tax Year Taxable Valuation Tax Rate Current Total (1) F/Y Ended Source 2000/2001 $ 3,430,012,041 $ % 99.62% 8/31/01 (2) 2001/2002 4,855,789,194 $ % 98.96% 8/31/02 (2) 2002/2003 6,115,556,513 $ % % 8/31/03 (2) 2003/2004 7,247,491,385 $ % % 8/31/04 (2) 2004/2005 8,565,309,234 $ % % 8/31/05 (2) 2005/ ,151,128,417 $ % 99.56% 8/31/06 (2) 2006/ ,291,132,177 $ % 99.57% 8/31/07 (2) 2007/ ,927,611,286 $ % 99.35% 6/30/08 * (2) 2008/ ,554,603,478 $ % 93.37% (Partial collections through 1/31/2009) (1) Excludes penalties and interest. (2) District Tax Office and Audit Reports. *Beginning September 1, 2007, the district changed its fiscal year end to June 30th. A-1

48 DEBT SERVICE FUND COMPARATIVE STATEMENTS OF REVENUE AND EXPENDITURES Fiscal Year Ending June 30* Fiscal Years Ending August 31* Beginning Fund Balance $ 4,965,217 $ 779,182 $ 747,290 Revenues: Local, Intermediate, and Out-of-State 63,926,276 52,797,676 37,541,601 State Program Revenues Federal Program Revenues Total Revenues $ 63,926,276 $ 52,797,676 $ 37,541,601 Expenditures Total Expenditures $ 22,676,979 $ 48,916,249 $ 38,645,827 Excess (Deficiency) Revenues over Expenditure $ 41,249,297 $ 3,881,427 $ (1,104,226) Other Uses Other Resources 56, ,608 1,136,118 Fund Balance - End of Year $ 46,270,566 (1)(2) $ 4,965,217 $ 779,182 *Beginning September 1, 2007, the District changed its fiscal year end to June 30th. (1) Represents results for ten-month period ending June 30, (2) Includes $33,988, which was disbursed to pay debt service on the District s outstanding bonds due on August 15, As a result of the change to a June 30 fiscal year end, the District s annual tax levy includes an amount sufficient to pay debt service coming due in August of the fiscal year following the fiscal year in which the tax is levied. See AD VALOREM TAX PROCEDURES. TAX RATE DISTRIBUTION Fiscal Year Ending Fiscal Years Ending June 30* August 31* Maintenance & Operation $ $ $ Interest & Sinking Fund Total $ $ $ *Beginning September 1, 2007, the district changed its fiscal year end to June 30th. FUND BALANCES (unaudited as of January 31, 2009)* General Fund $ 124,883,320 Interest & Sinking Fund $ 50,979,299 Capital Projects or Improvement Fund $ 87,272,034 *Beginning September 1, 2007, the district changed its fiscal year end to June 30th. A-2

49 2008 PRINCIPAL TAXPAYERS (1) Total Name of Taxpayer Principal Line of Business Taxable Value % A.V. Tenet Frisco LTD Medical $ 91,569, % Tollway/121 Partners LTD Real Estate Development 85,997, % Rodman LLC Real Estate Development 69,027, % Capital One National Association Finance 50,118, % Virtu Investments LLC Real Estate Development 50,044, % Stonebriar Mall LTD. Partnership Retail 45,542, % GP Park II LLC Real Estate Development 44,000, % Granite Park I LLC Real Estate Development 44,000, % OTR Real Estate Development 43,767, % Teachers Insurance & Annuity Association Finance 42,102, % Total $ 566,171, % (1) Source: Information provided by the Collin Central Appraisal District. CLASSIFICATION OF ASSESSED VALUATION Total Tax Roll for Fiscal Years Property Use Category Real Property Single-Family Residential $ 10,932,540,985 $ 9,798,010,024 $ 7,972,987,001 Multi-Family Residential 818,695, ,691, ,010,822 Vacant Lots/Tracts 380,018, ,328, ,550,761 Acreage (Land Only) 2,282,033,533 2,258,395,104 2,170,730,485 Farm and Ranch Improvements 23,276,723 21,299,008 18,018,840 Commercial and Industrial 3,178,652,666 2,640,463,134 2,097,327,042 Real & Tangible Personal Utilities 127,215, ,861, ,286,747 Tangible Personal Commercial & Industrial 734,025, ,539, ,087,927 Other 496,331, ,876, ,052,130 Total Assessed Valuation $ 18,972,790,691 $ 17,219,465,613 $ 14,442,051,755 Less Exemptions: Residential Homestead $ 482,785,387 $ 433,613,492 $ 384,742,095 Freeport 18,643,424 19,787,432 16,685,647 Disabled/Deceased Veterans 3,352,000 2,701,000 2,340,000 Over-65 and/or Disabled 28,722,784 22,880,000 18,038,679 Homestead Cap Adjustment 29,595,965 42,943,418 28,625,677 Productivity/Loss 1,844,393,517 1,768,076,750 1,698,078,379 HB 366/Other 10,694,136 1,852,235 2,409,101 Total Exemptions $ 2,418,187,213 $ 2,291,854,327 $ 2,150,919,578 Taxable Assessed Valuation $ 16,554,603,478 $ 14,927,611,286 $ 12,291,132,177 Note: The Taxable Assessed Valuation includes the Captured Appraised Value of property that is located in the City of Frisco Reinvestment Zone Number One. See "AD VALOREM TAX PROCEDURES - Property Subject to Taxation by the District." The Zone was created by the City in accordance with the requirements of Section (d) of the Texas Government Code. Accordingly, the Commissioner of Education does not include the Captured Appraised Value of property that is located in the Zone in determining the District's property value wealth per student. A-3

50 COMPARATIVE STATEMENT OF GENERAL FUND REVENUES AND EXPENDITURES Fiscal Year Ending June 30* Fiscal Years Ending August 31* Beginning Fund Balance $ 26,675,356 $ 11,446,048 $ 10,399,834 Revenues: Local and Intermediate Sources $ 154,610,346 $ 162,908,672 $ 145,239,518 State Sources 59,931,616 33,903,946 13,862,662 Federal or Other Resources - 18,373 - Total Revenues $ 214,541,962 $ 196,830,991 $ 159,102,180 Expenditures: Instruction & Instructional Related Resources $ 121,864,979 $ 103,914,648 $ 84,252,257 Instructional and School Leadership 13,071,610 12,539,975 10,556,497 Support Services - Student (Pupil) 17,538,410 15,160,580 12,475,553 Administrative Support Services 5,470,242 4,811,057 4,141,717 Support Services - Nonstudent Based 17,784,247 16,710,483 14,512,324 Ancillary Services 2,548,485 2,573,597 2,669,619 Capital Outlay - 1,175 25,162 Debt Services - - Intergovernmental Charges 19,465,659 25,770,469 29,304,840 Total Expenditures $ 197,743,632 $ 181,481,984 $ 157,937,969 Excess (deficiency) of revenues over (under) expenditures $ 16,798,330 $ 15,349,007 $ 1,164,211 Other Resources (Uses): Other Resources - (119,699) 24,850 Other Uses - - (142,847) Adjustment Total Other Resources (Uses) $ 16,798,330 $ (119,699) $ (117,997) Excess (Deficiency) of Revenues and Other Sources over Expenditures and Other Uses $ 16,798,330 $ 15,229,308 $ 1,046,214 Ending Fund Balance - August 31 $ 43,473,686 (1) $ 26,675,356 $ 11,446,048 *Beginning September 1, 2007, the district changed its fiscal year end to June 30th. (1) The District s financial statements for the period ending June 30, 2008 cover only ten months of expenditures due to the District s change in its fiscal year end. The increase in general fund balance is due, in part, to the ensuing conservation of revenues that otherwise would have been utilized to pay expenditures realized in the months of July and August, prior to the change in the District s fiscal year. A substantial portion of such revenues are comprised of collections of local ad valorem tax receipts, which were received prior to June 30. A-4

51 DEBT SERVICE REQUIREMENTS Less: Plus: Plus: Year Outstanding Refunded Series 2009 Refunding Bonds Series 2009 School Building Bonds Combined Ending 8/31* Debt Service Debt Service Principal Interest Total Principal Interest Total Fiscal Total 2009 $ 73,166, $ 867, $ 670, $ 194, $ 864, $ - $ 1,643, $ 1,643, $ 74,808, ,567, ,207, , , , ,415, ,415, ,435, ,480, ,209, , , ,205, , ,000, ,235, ,712, ,476, ,212, , , ,210, , ,100, ,245, ,720, ,479, ,217, , , ,214, , ,160, ,240, ,716, ,475, ,226, , , ,221, , ,190, ,240, ,712, ,477, ,232, , , ,228, , ,215, ,240, ,715, ,478, ,236, , , ,233, , ,225, ,240, ,716, ,479, ,243, , , ,239, , ,230, ,240, ,716, ,477, ,247, , , ,242, , ,230, ,240, ,713, ,479, ,255, , , ,254, , ,415, ,240, ,720, ,479, ,262, , , ,262, , ,382, ,242, ,722, ,479, ,272, ,020, , ,268, , ,348, ,238, ,713, ,476, ,279, ,070, , ,277, , ,312, ,247, ,721, ,479, ,294, ,130, , ,292, , ,273, ,238, ,715, ,480, ,300, ,185, , ,297, ,005, ,230, ,235, ,713, ,476, ,314, ,250, , ,309, ,060, ,185, ,245, ,716, ,477, ,110, ,135, ,245, ,723, ,475, ,160, ,082, ,242, ,718, ,479, ,215, ,024, ,239, ,719, ,475, ,280, ,963, ,243, ,719, ,477, ,345, ,899, ,244, ,722, ,480, ,410, ,832, ,242, ,722, ,479, ,480, ,760, ,240, ,720, ,478, ,560, ,682, ,242, ,721, ,476, ,645, ,600, ,245, ,722, ,353, ,855, ,514, ,369, ,723, ,600, ,230, ,892, ,122, ,722, ,366, ,315, ,039, ,354, ,721, ,475, ,815, ,431, ,246, ,722, ,103, ,285, ,334, ,619, ,722, ,860, ,025, , ,860, ,720, ,160, , ,718, ,718, $ 2,164,971, $ 20,879, $ 14,170, $ 6,112, $ 20,282, $ 85,000, $ 125,156, $ 210,156, $ 2,374,530, *Beginning September 1, 2007, the district changed its fiscal year end to June 30th. Represents debt service payments from September 1 through August 31. The District changed its fiscal year end from August 31 to June 30, effective with the fiscal period that began September 1, 2007 and ended June 30, However, due to timing of tax collection receipts, the District budgets for its August debt service payments in the previous fiscal year. See AD VALOREM TAX PROCEDURES. TAX ADEQUACY WITH RESPECT TO THE DISTRICT'S OUTSTANDING BONDS Maximum Principal and Interest Requirements, Year Ending 8/31/2026 $80,723,006 Less indicated combined State Funds available (1) 0 Net Estimated Maximum Requirements $80,723,006 A $ Interest and Sinking Fund Tax 100% Collections based on 2008/09 Net AV produces: $80,723,061 (1) The District does not currently receive assistance from the State for the payment of debt service. The amount of State aid for debt service, if any, may vary substantially from year to year, depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas Legislature and a school district's wealth per student. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM State Funding for Local School Districts" and DEBT LIMITATIONS. A-5

52 PRINCIPAL REPAYMENT SCHEDULE Less: Plus: Plus: Year Series 2009 Series 2009 Bonds Percent of Ending Outstanding Refunded Refunding School Unpaid At Principal 8/31* Bonds Bonds Bonds Building Bonds Total Year End Retired 2009 $ 18,998, $ 515, $ 670, $ - $ 19,153, $ 1,144,315, % ,202, , , ,817, ,123,497, % ,716, , , , ,631, ,102,866, % ,709, , , , ,959, ,080,907, % ,080, , , , ,250, ,055,657, % ,295, , , , ,420, ,029,237, % ,585, , , , ,675, ,001,562, % ,950, , , , ,020, ,542, % ,245, , , , ,300, ,242, % ,865, , , , ,910, ,332, % ,565, , , , ,420, ,912, % ,784, , , , ,669, ,242, % ,432, ,005, ,020, , ,337, ,905, % ,175, ,060, ,070, , ,120, ,784, % ,946, ,125, ,130, , ,916, ,868, % ,544, ,185, ,185, ,005, ,549, ,319, % ,337, ,255, ,250, ,060, ,392, ,926, % ,699, ,110, ,809, ,116, % ,456, ,160, ,616, ,499, % ,335, ,215, ,550, ,949, % ,289, ,280, ,569, ,380, % ,701, ,345, ,046, ,333, % ,082, ,410, ,492, ,841, % ,138, ,480, ,618, ,222, % ,679, ,560, ,239, ,982, % ,307, ,645, ,952, ,030, % ,725, ,855, ,580, ,450, % ,305, ,230, ,535, ,915, % ,820, ,315, ,135, ,780, % ,535, ,815, ,350, ,430, % ,730, ,285, ,015, ,415, % ,230, ,025, ,255, ,160, % ,160, ,160, % $ 1,078,469, $ 14,170, $ 14,170, $ 85,000, $ 1,163,469, * Beginning September 1, 2007, the District has changed its fiscal year end to June 30th. Represents debt service payments from September 1 through August 31. The District changed its fiscal year end from August 31 to June 30, effective with the fiscal period that began September 1, 2007 and ended June 30, However, due to timing of tax collection receipts, the District budgets for its August debt service payments in the previous fiscal year. See AD VALOREM TAX PROCEDURES. AUTHORIZED BUT UNISSUED BONDS Following the issuance of the 2009 Bonds, the District will have $523,501, of authorized but unissued Bonds. The District anticipates issuance of approximately $80,000,000 of additional authorized unlimited tax school building bonds within the next 12 months. In addition to unlimited tax bonds, the District may incur other financial obligations payable from its collection of taxes and other sources of revenue, including maintenance tax notes payable from its collection of maintenance taxes, public property finance contractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplus maintenance taxes. A-6

53 APPENDIX B GENERAL INFORMATION REGARDING FRISCO INDEPENDENT SCHOOL DISTRICT, CITY OF FRISCO COLLIN COUNTY, TEXAS

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55 GENERAL INFORMATION REGARDING FRISCO INDEPENDENT SCHOOL DISTRICT, CITY OF FRISCO AND COLLIN COUNTY, TEXAS GENERAL AND ECONOMIC INFORMATION The District is a residential, commercial, and agricultural area, which covers approximately 72 total square miles in the western portion of Collin County extending into the eastern section of neighboring Denton County. The District includes the City of Frisco, which is the primary commercial and population center of the District. The 2008 population estimate for the District is 124,254 compared to the 2000 population estimate of 34,000. The District's economic base is primarily comprised of commercial and governmental concerns which provide a variety of goods and services. The following table illustrates the leading employers located within the City of Frisco Approximate Number of Employer Employees Frisco Independent School District 4,287 T-Mobile 2,500 Rodman Companies 780 IntegraSys 550 Mario Sinacola & Sons 500 City of Frisco 455 IKEA 400 Tenet Texas RBO 340 Option One Mortgage Co. 250 Aastra Telecom 250 *Sources: Metro Study 4 th QTR 2008 Population Estimate, Oncor Economic Development Department 2008 Community Profile, Frisco Economic Development Corp., and Frisco ISD. SCHOLASTIC INFORMATION The District is a Texas Education Agency Recognized District with twenty-one campuses receiving exemplary status, eleven campuses receiving a recognized rating, and four campuses receiving academically acceptable status. The District offers a fully accredited and comprehensive educational program. Presently four high schools, nine middle schools, twenty-seven elementary schools, and three special program centers serve the District. The Frisco ISD Board of Trustees was selected as the Outstanding Board in the State of Texas for 2008 by the Texas Association of School Administrators and Texas Association of School Boards. The District is accredited by the Southern Association of Colleges and Secondary Schools and by the Accreditation Division of the Texas Education Agency on a K-12 basis. The District s personnel totals 4,287. Approximately percent of the teachers and percent of administration hold master s degrees. Currently, the District reflects a pupil-teacher ratio of 9.77:1 for high school, 11.09:1 for middle school and 14.90:1 for elementary. Computer labs are in every school and the District has a ratio of four students to every computer. Through a technology outreach program, older computers that are no longer suitable for the school setting have been refurbished and loaded with appropriate software to be placed in homes of students in need of a computer. In addition to the core curriculum, the District offers a wide variety of classes and training for students including: Physical Education, Music and Art for elementary students After-school programming and Spanish Language classes are offered at elementary schools through partnerships with the YMCA and other educational entities. Duke University Talent Search, Math/Science Competition, pre Advanced Placement courses, Mock Trial, Band, Choir, Art, Theatre Arts, Robotics, Video production and may other opportunities are available at the middle school level. Advance Placement and Honors courses are being offered in the high schools including Language, Literature, Composition, Computer Science, US History, Government, Macroeconomics, Chemistry, Biology, Physics, Calculus, Art, Statistics. Dual credit classes are offered in conjunction with community colleges for English IV, Government and Economics. Additionally, Tech Prep courses are available. The Independent Study Mentorship Program is offered for qualifying, committed juniors and seniors, enabling them to explore a career through a community mentor. Comprehensive special education programs for students with special learning needs, including Gifted Instruction, Special Education, ESL/Bilingual, Dyslexia, Head Start, Early Literacy, Career and Technology Education, Credit Recovery and GED. Clubs and activities include band, color guard, chorale music, drill team, cheerleading, National Honor Society, Student Council, Academic Decathlon, National Junior Statesman, Theatre, Agriculture, Key Club, Spanish Club, Yearbook, Fellowship of Christian Athletes, Science Club, French Club, Future Homemakers of America and Art Club. UIL competition is at the 4A level which includes football, basketball, baseball, soccer, softball, volleyball, track and cross-country, swimming, golf, power lifting and wrestling. B-1

56 PRESENT SCHOOL PLANTS A description of the present school facilities is as follows: School Capacity Grades Provided Current Enrollment Teachers Aides Admin. Others (a) Anderson Elementary 760 K Ashley Elementary 760 K Bledsoe Elementary 760 K Boals Elementary 760 K Borchardt Elementary 760 K Bright Elementary 760 K Carroll Elementary 760 K Christie Elementary 760 K Corbell Elementary 760 K Curtsinger Elementary 760 K Elliott Elementary 760 K Fisher Elementary 760 K Gunstream Elementary 760 K Isbell Elementary 760 K Mooneyham Elementary 760 K Ogle Elementary 760 K Pink Elementary 760 K Riddle Elementary 760 K Robertson Elementary 760 K Rogers Elementary 760 K Sem Elementary 760 K Shawnee Trail Elementary 760 K Smith Elementary 760 K Sparks Elementary 760 K Spears Elementary 760 K Tadlock Elementary 760 K Taylor Elementary 760 K Clark Middle School Fowler Middle School Griffin Middle School Pioneer Heritage Middle School Roach Middle School Scoggins Middle School Stafford Middle School Staley Middle School Wester Middle School Centennial High School 1, , Frisco High School 1, , Liberty High School 1, , Wakeland High School 1, , Z.T. Acker Special Programs Center (b) 400 K Career and Technical Education (c) Student Opportunity Center (d) Total 37,745 30,932 2, (a) Includes counselors, librarians, nurses, diagnosticians and psychologist. (b) Acker Special Programs Center has additional students who attend K-8 Disciplinary Alternative Education Program or (DAEP). These students are counted on their assigned home campus. (c) The Career and Technical Education (CATE) Center does not have students assigned as a home campus. All students who attend classes here are counted as enrolled at another high school campus. (d) The Student Opportunity Center (SOC) does not have students assigned as a home campus. This is the districts discipline center. B-2

57 STUDENT ENROLLMENT BY GRADES AVERAGE DAILY ATTENDANCE INCREASES/(DECREASES) Grade 2005/ / / /09 E.C Pre-K K 2,244 2,613 2,801 3, ,110 2,390 2,436 3, ,976 2,301 2,512 3, ,851 2,112 2,542 2, ,732 2,089 2,416 2, ,628 1,914 2,339 2, ,497 1,763 2,143 2, ,427 1,653 2,028 2, ,318 1,530 1,782 2, ,211 1,461 1,585 1, ,159 1,290 1,532 1, ,224 1,480 1, ,251 1,330 Total 20,215 23,798 27,419 30,932 Increase(Decrease) School Year ADA Actual Percent (%) , , , , , , , , , , , , , , , , (estimate) 29, , SCHOLASTIC ENROLLMENT INCREASE/(DECREASES) STUDENT ENROLLMENT PROJECTIONS Increase(Decrease) School Year Enrollment Amount Percent (%) , , , , , , , , ,161 1, ,292 2, ,412 2, ,672 2, ,677 3, ,215 3, ,798 3, ,419 3, ,932 3, Grade 2009/ / / /13 Pre-K K 3,320 3,585 3,890 4, ,238 3,484 3,759 3, ,203 3,447 3,706 3, ,185 3,391 3,646 3, ,915 3,387 3,602 3, ,901 3,180 3,690 3, ,609 3,031 3,285 3, ,527 2,773 3,185 3, ,340 2,619 2,840 3, ,230 2,464 2,725 2, ,047 2,261 2,469 2, ,768 2,071 2,261 2, ,439 1,696 1,964 2,112 Total 34,346 38,063 41,750 44,834 B-3

58 GENERAL INFORMATION REGARDING THE CITY OF FRISCO AND COLLIN COUNTY, TEXAS The City of Frisco, Texas (the City ) is located approximately 20 miles north of Dallas off State Highway 289. The northern extension of the Dallas North Tollway service road to Main Street (FM 720) and north to U.S. 380 provides direct access to downtown Dallas. The City s estimated population reached 89,905 in 2009, which is a 167% increase over the 2000 census of 33,714. The City projects its population to reach 120,000 by North Texas continues to grow faster than the national average and Frisco is at the heart of this growth. In July 2007, Frisco was named one of the Fastest Growing Cities in the United States (ranked highest in Texas at #7) by Forbes.com. In addition, Collin County schools were ranked as the number two best school districts for the buck in the Country per Forbes.com in August of The City is home to three sports teams: the Frisco Rough Riders professional baseball, Texas Tornado amateur hockey, and FC Dallas - major league soccer. The City of Frisco, Frisco Independent School District, Collin County and Hunt Sports Group teamed up to build the $65 million soccer facility named Pizza Hut Park, the first large scale soccer facility of its type in the United States. The stadium features a 20,000 seat stadium; 17 soccer fields serving the amateur players which include a 600 seat stadium and turf field dedicated for the high school football and soccer teams. POPULATION TRENDS City of Frisco Collin County 2009 Estimate 89, , Census 33, , Census 6, , Census 3, , Census 1,845 66, Census 1,184 41,247 Sources: U.S. Census Bureau Frisco Economic Development Corporation, and Oncor Economic Development Corporation. EMPLOYMENT STATISTICS The Texas Work Force Commission reports the following employment statistics for the City of Frisco, Collin County and the State of Texas. December 2008 City of Frisco Collin County State of Texas Civilian Labor Force 46, ,736 11,833,300 Total Employed 43, ,814 11,162,700 Total Unemployed 2,646 21, ,600 December 2007 City of Frisco Collin County State of Texas Civilian Labor Force 41, ,203 11,637,500 Total Employed 40, ,203 11,142,600 Total Unemployed 1,701 15, ,900 Source: Texas Employment Commission, Austin, Texas UNEMPLOYMENT RATES Source: Texas Work Force Commission, Austin, Texas December 2008 December 2007 City of Frisco 5.7% 4.1% Collin County State of Texas United States of America B-4

59 OVERLAPPING DEBT DATA AND INFORMATION Estimated Direct and Overlapping Ad Valorem Tax Supported Gross Debt Statement (As of March 2009) Taxing Body Amount % Overlap Amount Overlap Collin County $ 389,985, $ 63,723,549 Denton County 285,616, ,849,280 Collin County Community College District 50,595, ,267,223 Frisco, City of 299,783,150 (1) $ 270,344,445 Hackberry, City of 220, ,000 Little Elm, City of 19,290,150 (1) ,161,656 McKinney, City of 194,830, ,665,478 Denton County FWSD # 8-C 11,140,000 (1) ,140,000 Plano, City of 334,577,907 (1) ,833,148 Total Net Overlapping Debt $ 431,204,779 Frisco ISD $ 1,163,469,342 (2) ,163,469,342 Total Direct and Overlapping Debt $ 1,594,674,121 Direct and Overlapping Debt to 2008 Net Taxable Valuation 9.63% Direct and Overlapping Debt to Actual Total Valuation 8.41% Per Capita Direct and Overlapping Debt $ 12,834 (1) Excludes self-supporting debt. (2) Includes the Series 2009 Bonds. Source: Texas Municipal Advisory Council Reports B-5

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61 APPENDIX C FORM OF LEGAL OPINIONS OF BOND COUNSEL

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63 Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET 1800 ONE AMERICAN CENTER NINTH FLOOR 1525 ONE RIVERWALK PLACE AUSTIN, TEXAS DALLAS, TEXAS SAN ANTONIO, TEXAS Telephone: Telephone: Telephone: Facsimile: Facsimile: Facsimile: FRISCO INDEPENDENT SCHOOL DISTRICT UNLIMITED TAX SCHOOL BUILDING BONDS, SERIES 2009, DATED APRIL 1, 2009, IN THE AGGREGATE PRINCIPAL AMOUNT OF $85,000,000 AS BOND COUNSEL FOR THE ISSUER (the "Issuer") of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates specified in the text of the Bonds, until maturity or redemption, at the rates and payable on the dates as stated in the text of the Bonds, and maturing in serial installments on August 15 in each of the years 2011 through 2031, inclusive, 2034, 2036, 2039 and 2041, with the Bonds being subject to redemption prior to maturity, all in accordance with the terms and conditions stated in the text of the Bonds. WE HAVE EXAMINED the Constitution and laws of the State of Texas, certified copies of the proceedings of the Issuer and other documents authorizing and relating to the issuance of said Bonds, including two of the executed Bonds (Bonds Number R-1 and CR-1). BASED ON SAID EXAMINATION, IT IS OUR OPINION that said Bonds have been authorized, issued and duly delivered in accordance with law; and that except as may be limited by laws applicable to the Issuer relating to federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, which rights may be limited by general principles of equity which permit the exercise of judicial discretion, the Bonds constitute valid and legally binding obligations of the Issuer; and that ad valorem taxes sufficient to provide for the payment of the interest on and principal of said Bonds have been levied and pledged for such purpose, without legal limit as to rate or amount. IN EXPRESSING SUCH OPINION, we have considered the effect of the November 22, 2005 decision by the Texas Supreme Court in West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al., upholding, in part, a lower court judgment concluding that the local ad valorem maintenance and operation tax authorized under the school finance system then in effect had become a State property tax in violation of article VIII, section 1-e of the Texas Constitution, in that school districts did not have meaningful discretion in levying the tax. The Court's opinion further noted that the court "...remain convinced...that defects in the structure of the public school finance system expose the system to constitutional challenge.... [Such challenges] will repeat until the system is overhauled." Subsequent to such decision, legislation was enacted by the Texas Legislature to address the constitutional issues raised in the court's ruling. Reference is made to the Official Statement for the Bonds for a further description of the rulings and the legislation enacted by the Texas Legislature. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners thereof for federal income tax purposes under the statutes, regulations, published rulings and court decisions existing on the date of this opinion. We are further of the

64 opinion that the Bonds are obligations described in section 1503 of The American Recovery and Reinvestment Act of 2009 and that, accordingly, interest on the Bonds will not be included in an owner's alternative minimum taxable income under Section 55 of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, and assume compliance by the Issuer with, certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or upon failure by the Issuer to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds and have relied solely on certificates executed by officials of the Issuer as to the current outstanding indebtedness of, and assessed valuation of taxable property within the Issuer. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of a result and are not binding on the Internal Revenue Service (the "Service"). Rather, our opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, might result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. Respectfully,

65 Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET 1800 ONE AMERICAN CENTER NINTH FLOOR 1525 ONE RIVERWALK PLACE AUSTIN, TEXAS DALLAS, TEXAS SAN ANTONIO, TEXAS Telephone: Telephone: Telephone: Facsimile: Facsimile: Facsimile: FRISCO INDEPENDENT SCHOOL DISTRICT UNLIMITED TAX REFUNDING BONDS, SERIES 2009, DATED APRIL 1, 2009, IN THE AGGREGATE PRINCIPAL AMOUNT OF $14,170,000 AS BOND COUNSEL FOR THE ISSUER (the "Issuer") of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates specified in the text of the Bonds, until maturity or redemption, at the rates and payable on the dates as stated in the text of the Bonds, and maturing in serial installments on August 15 in each of the years 2009 through 2025, inclusive, with the Bonds being subject to redemption prior to maturity, all in accordance with the terms and conditions stated in the text of the Bonds. WE HAVE EXAMINED the Constitution and laws of the State of Texas, certified copies of the proceedings of the Issuer and other documents authorizing and relating to the issuance of said Bonds, including two of the executed Bonds (Bonds Number R-1 and CR-1). BASED ON SAID EXAMINATION, IT IS OUR OPINION that said Bonds have been authorized, issued and duly delivered in accordance with law; and that except as may be limited by laws applicable to the Issuer relating to federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, which rights may be limited by general principles of equity which permit the exercise of judicial discretion, the Bonds constitute valid and legally binding obligations of the Issuer; and that ad valorem taxes sufficient to provide for the payment of the interest on and principal of said Bonds have been levied and pledged for such purpose, without legal limit as to rate or amount. IN EXPRESSING SUCH OPINION, we have considered the effect of the November 22, 2005 decision by the Texas Supreme Court in West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al., upholding, in part, a lower court judgment concluding that the local ad valorem maintenance and operation tax authorized under the school finance system then in effect had become a State property tax in violation of article VIII, section 1-e of the Texas Constitution, in that school districts did not have meaningful discretion in levying the tax. The Court's opinion further noted that the court "...remain convinced...that defects in the structure of the public school finance system expose the system to constitutional challenge.... [Such challenges] will repeat until the system is overhauled." Subsequent to such decision, legislation was enacted by the Texas Legislature to address the constitutional issues raised in the court's ruling. Reference is made to the Official Statement for the Bonds for a further description of the rulings and the legislation enacted by the Texas Legislature. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners thereof for federal income tax purposes under the statutes, regulations, published rulings and court decisions existing on the date of this opinion. We are further of the

66 opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under Section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, and assume compliance by the Issuer with, certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or upon failure by the Issuer to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as the Bonds is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by Section 55 of the Code. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds and have relied solely on certificates executed by officials of the Issuer as to the current outstanding indebtedness of, and assessed valuation of taxable property within the Issuer. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of a result and are not binding on the Internal Revenue Service (the "Service"). Rather, our opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, might result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. Respectfully,

67 APPENDIX D The information contained in this Appendix has been reproduced from the Frisco Independent School District Annual Financial Report (the "Report") for the 10 month period Ended June 30, 2008 as prepared by Pingleton, Howard & Company, P.C., Certified Public Accountants, Frisco, Texas THE INFORMATION PRESENTED REPRESENTS ONLY A PART OF THE REPORT AND DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE DISTRICT'S FINANCIAL CONDITION. REFERENCE IS MADE TO THE COMPLETE REPORT FOR ADDITIONAL INFORMATION.

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69 FRISCO INDEPENDENT SCHOOL DISTRICT Financial Report For the Ten Months Ended June 30, 2008

70 FRISCO INDEPENDENT SCHOOL DISTRICT Financial Report For the Ten Months Ended June 30, 2008 TABLE OF CONTENTS Page Exhibit CERTIFICATE OF BOARD... iii FINANCIAL SECTION Independent Auditor's Report...1 Management s Discussion and Analysis...3 Basic Financial Statements: Government-Wide Financial Statements: Statement of Net Assets...12 A-1 Statement of Activities...13 B-1 Fund Financial Statements: Balance Sheet - Governmental Funds...14 C-1 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets...17 C-2 Statement of Revenues, Expenditures, and Changes in Fund Balance - Governmental Funds...18 C-3 Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance to the Statement of Activities...21 C-4 Statement of Net Assets - Proprietary Funds...22 D-1 Statement of Revenues, Expenses, and Changes in Net Assets - Proprietary Funds...23 D-2 Statement of Cash Flows - Proprietary Funds...24 D-3 Statement of Net Assets - Fiduciary Funds...25 E-1 Notes to the Financial Statements...26 Required Supplementary Information: Budgetary Comparison Schedule - General Fund...46 F-1 Combining Statements: Combining Balance Sheet - Nonmajor Governmental Funds...48 G-1 Combining Statement of Revenues, Expenditures, and Changes in Fund Balance - Nonmajor Governmental Funds...54 G-2 Required T.E.A. Schedules: Schedule of Delinquent Taxes Receivable...60 H-1 Fund Balance and Cash Flow Calculation Worksheet - General Fund...62 H-2 Budgetary Comparison Schedule - Child Nutrition Fund...63 H-3 Budgetary Comparison Schedule - Debt Service Fund...64 H-4 i

71 FRISCO INDEPENDENT SCHOOL DISTRICT Financial Report For the Ten Months Ended June 30, continued- TABLE OF CONTENTS Page Exhibit FEDERAL AWARDS SECTION Report on Internal Control Over Financial Reporting and on Compliance Based on an Audit of Basic Financial Statements Performed in Accordance with Government Auditing Standards...67 Report on Compliance with Requirements Applicable to Each Major Program and Internal Control Over Compliance in Accordance with OMB Circular A Schedule of Findings and Questioned Costs...71 Schedule of Status of Prior Findings...72 Corrective Action Plan...73 Schedule of Expenditures of Federal Awards...74 I-1 ii

72 CERTIFICATE OF BOARD Frisco Independent School District Collin Name of School District County Co.- Dist. Number We, the undersigned, certify that the attached financial reports of the above-named school district were reviewed and ( X ) approved ( ) disapproved for the ten months ended June 30, 2008, at a meeting of the Board of School Trustees of such school district on the 10th day of November, /s/ Laura Ellison Signature of Board Secretary /s/ Dan Mossakowski Signature of Board President If the auditor's report was disapproved, the reason(s) therefore is/are (attach list if necessary): iii

73 FINANCIAL SECTION

74 PINGLETON, HOWARD & COMPANY, P. C. CERTIFIED PUBLIC ACCOUNTANTS P. O. BOX 148 FRISCO, TEXAS /FAX TOM W. PINGLETON, CPA MEMBERS RANDY HOWARD, CPA AMERICAN INSTITUTE of CPAs R. WAYNE NABORS, CPA AICPA DIVISION for CPA FIRMS ROBIN J. TURNBULL, CPA TEXAS SOCIETY of CPAs WHITNEY YOUNTS, CPA UNQUALIFIED OPINION ON BASIC FINANCIAL STATEMENTS ACCOMPANIED BY REQUIRED SUPPLEMENTAL INFORMATION AND OTHER SUPPLEMENTARY INFORMATION AND THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Independent Auditor s Report Board of School Trustees Frisco Independent School District 6942 Maple Frisco, Texas Members of the Board: We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Frisco Independent School District, Frisco Texas (the District) as of and for the ten months ended June 30, 2008, which collectively comprise the District s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's administrators. Our responsibility is to express an opinion on them 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of governmental activities, each major fund, and the aggregate remaining fund information of Frisco Independent School District as of June 30, 2008, and the respective changes in financial position for the ten months then ended in conformity with accounting principles generally accepted in the United States of America. Management s discussion and analysis on pages 3 through 9 and the budgetary comparison information on pages 46 and 63 through 64 are not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. 1

75 Board of Trustees Page Two In accordance with Government Auditing Standards, we have also issued our report dated October 8, 2008 on our consideration of the District s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Governmental Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District s basic financial statements. The accompanying 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 not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and the T.E.A. required schedules listed in the table of contents are presented for additional analysis and are not a required part of the basic financial statements. The schedule of expenditures of federal awards, combining and individual nonmajor fund financial statements and the T.E.A. required schedules (except for Exhibit G-3, the Fund Balance and Cash Flow Calculation Worksheet, which is marked UNAUDITED and on which we express no opinion) have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Pingleton, Howard & Company, P.C. October 8,

76 Management s Discussion and Analysis This section of the Frisco Independent School District annual financial report presents the discussion and analysis of the District s financial performance during the fiscal period ending June 30, The following report and analysis will be an extension to the District s financial statements. Overview of the Financial Statements This annual report consists of a series of financial statements. The government-wide financial statements include the Statement of Net Assets (Exhibit A-1) and the Statement of Activities (Exhibit B-1). These reports provide information about the activities of the District as a whole, long-term view of the District s property, debt obligations, and other financial matters. They reflect the flow of total economic resources in a manner similar to the financial reports of a business enterprise. Fund financial statements (starting with Exhibit C-1) report the District s operations in more detail than the government-wide statements by providing information about the District s most significant funds. For government activities, these statements tell how services were financed in the short term as well as what resources remain for future spending. They also reflect the flow of current financial resources, and supply the basis for tax levies and the appropriations budget. The remaining statements provide financial information about activities for which the District acts solely as a trustee or agent for the benefits of those outside of the District. The notes to the financial statements (following Exhibit E-1) provide narrative explanations or additional data needed for full disclosure in the government-wide statements or the fund financial statements. The combining statements for non-major funds contain even more information about the District s individual funds. These are not required by TEA and are contained in Exhibits G-1 and G-2. The sections labeled TEA Required Schedules and Federal Awards Section contain data used by monitoring or regulatory agencies for assurance that the District is using funds supplied in compliance with the terms of the grants. Reporting the District Financial Performance as a Whole Government-wide Statements: The Statement of Net Assets and the Statement of Activities The government-wide statements report information about the District as a whole using accounting methods similar to those used by private-sector companies. The Statement of Net Assets, Exhibit A-1, includes all of the government s assets and liabilities. The Statement of Activities, Exhibit B-1, accounts for all of the current period s revenue and expenses. The two government-wide statements report the District s net assets and how they have changed. Net assets, the difference between District s assets and liabilities, is one way to measure the District s financial health or position. Within the government-wide financial statements of the District, most of the District s basic services are included, such as instructions, extracurricular activities, curriculum and staff development, health services, and general administration. Property taxes, grants, and state revenues finance most of the activities. 3

77 Reporting the District s Most Significant Funds Fund Financial Statements The fund financial statements provide detailed information about the District s most significant funds, not the District as a whole. Funds are accounting devices that the District uses to keep track of specific sources of funding and spending for a particular purpose. Some funds are required to State law and bond covenants Other funds are established to control and manage money for particular purposes or to show that it is properly using certain taxes and grants. This District has three kinds of funds: Governmental funds - Most of the District s basic services are reported in governmental funds. These use modified accrual accounting (a method that measures the receipt and disbursement of cash and all other financial assets that can be readily converted to cash) and report balances at the end of the fiscal period. The governmental funds statements provide a detailed, shortterm view of the District s general operations and the basic services it provides. The difference between the governmental activities (reported in the Statement of Net Assets and Statement of Activities) and governmental funds are described in reconciliation narratives following each of the fund financial statements. (Exhibits C-2 and C-4) Proprietary funds - Services for which the District charges customers a fee are generally reported in proprietary funds. Proprietary funds, like the government-wide statements, provide both long and short-term financial information. Internal Service Funds are used to report activities that provide supplies and services for the District s other programs and activities, such as the District s Self-Insurance Fund. Fiduciary funds - The District is the trustee, or fiduciary, for money raised by student activities and alumnae scholarship programs. All of the District s fiduciary activities are reported in separate Statements of Fiduciary Net Assets (Exhibit E-1). We exclude these resources from the District s other financial statements because the District cannot use these assets to finance its operations. The District is only responsible for ensuring that the assets reported in these funds are used for their intended purpose. Financial Analysis of the District The District implemented GASB Statement #34 for the fiscal year. As of fiscal year, the analysis will present both current and prior year data and discuss significant changes in the accounts. Our analysis focuses on the net assets (Table A1) and changes in net assets (Table A2) of the District s governmental and business-type activities. Net Assets - The District s combined net assets were ($40,383,010) on June 30, The prior year s net assets were ($65,201,624) (See Table A1). 4

78 Statement of Net Assets (Exhibit A-1) Table A-1 District s Net Assets Percentage Governmental Governmental Change Current and other assets $ 240,957, ,208, % Capital and non-current assets 844,426, ,467, % Total assets 1,085,383, ,675, % Current liabilities 93,858,773 44,520, % Long term liabilities 1,031,907, ,356, % Total liabilities 1,125,766, ,877, % Net assets: Invested in capital assets (net of related debt) (122,276,884) (116,874,349) -4.6% Restricted 51,515,881 26,688, % Unrestricted 30,377,993 24,984, % Total net assets $ (40,383,010) (65,201,624) 38.1% 5

79 Statement of Activities (Exhibit B-1) Table A2 Changes in Net Assets Percentage Governmental Governmental Change REVENUES Program revenues Charges for services $ 10,334,116 10,159, % Operating grants and contributions 16,447,353 13,654, % Total program revenues 26,781,469 23,813, % General revenues Property taxes 188,769, ,493, % State aid-formula 52,027,127 27,599, % Investment earnings 6,400,879 7,878, % Grants and contributions 18, % Other revenue 28,255,988 19,502, % Total general revenues 275,453, ,492, % Total Revenues 302,234, ,305, % EXPENSES Instructional and instructional related 140,764, ,805, % Instructional leadership and administration 13,389,118 12,794, % Guidance, social work, health and transportation 15,527,620 13,407, % Food services 10,181,062 10,826, % Extracurricular activities 9,456,889 8,638, % General administration 5,800,055 7,463, % Plant maintenance and security 20,348,847 19,782, % Data processing services 1,785,957 2,301, % Community services 850,082 1,104, % Debt 39,696,630 46,443, % Contracted instructional services 19,614,719 25,813, % Total expenses 277,415, ,380, % Increase/(decrease) in net assets 24,818,614 (8,074,903) 307.4% Beginning net assets (65,201,624) (57,126,721) -14.1% Ending net assets $ (40,383,010) (65,201,624) 38.1% The decrease in expenses for the school year is a result of the District s decision to change the year end from August 31 to June 30 beginning with the school year. The impact of the reduced school year and the opening of three (3) elementary schools and one (1) middle school contributed to the instructional, transportation, and plant maintenance & security cost increases from the prior year. 6

80 Budgetary Highlights: (Information from Exhibit F-1) General Fund At the end of the 2007 fiscal period, the Ending Fund Balance of $26,675,356 represented 12.8% of the operating budget. For the 2008 fiscal period, the Ending Fund Balance of $43,473,686 represents 18.5% of the operating budget. Total Revenues increased from $196,830,991 in to $214,541,962 for or a 9.0% increase. Total local revenue continues to increase due to the increase in the District s property values of 10.4% in from the previous year. The District received an increase of $26,027,670 from the State compared to the previous year. Regarding expenditures, the District had two areas where the variances were substantial; however, these variances were favorable to the District. In Function 11, the variance in instructional costs of approximately $11.3M was due to changes during the year. The majority of the District s approximately 4,300 employees are included in Function 11. During the year, the District moved its accounting to a new software package. Based on preliminary estimates of salary accruals, the District increased the budget in Function 11 by $6.2M. Upon later review, it came to management s attention that the salary accrual function was not performing as anticipated, thereby creating an approximately $7.9M variance. In addition to these changes, the District budgeted for personnel benefits for TRS On Behalf, Workers Compensation Program, and Medicare with the final cost being $1.7M less than expected. In Function 51, the budget for utilities was based on a 12 month year, and the actual was based on a 10 month year, thus creating a $2.8M favorable variance. 7

81 Capital Assets and Debt Administration At the end of 2008, the District had invested $920,692,714 in various fixed assets, including land, equipment, buildings, and construction in progress. The following table (A3) represents the District s total Capital Assets: Table A3 Capital Assets Total Costs Total Costs Percentage Description Change Land $ 114,467,329 91,744, % Buildings and improvements 622,386, ,681, % Furniture and equipment 18,829,150 15,315, % Construction in progress 165,009, ,390, % Total cost (historical) 920,692, ,131, % Total accumulated depreciation (78,874,174) (63,946,229) 23.3% Net capital assets $ 841,818, ,184, % The District s fiscal year 2009 capital budget will include expenditures for the completion of the District s new Early Childhood School. The construction of one elementary school is also scheduled for completion in (Allen Elementary). Also, Heritage High School and Lone Star High School will be completed for the start of Additional information on capital assets is contained in Note 4, Section E of the Notes to the Financial Statements. At the end of the 2008 fiscal year, the District had $1,041,816,224 in bonds outstanding as compared to $848,762,960 the previous fiscal year Table A4 Long Term Debt Analysis Total Total Percentage Description Change Bonds payable $ 1,041,816, ,762, % Total bonds payable $ 1,041,816, ,762, % More detailed information is available about the District s debt in Note 4, Section G of the Notes to the Financial Statements. 8

82 Economic Factors and Next Year s Budget and Rates Appraised values used for the 2008 budget preparation has increased to approximately $14,927,611,286 which represents an increase of 21.5% from the prior year appraised values. The assessed property values for the budget year is approximately $16,276,550,271 or a 9.0% increase. The District s student enrollment is expected to be approximately 31,200 which represents a 13.5% increase over the enrollment in Even with the extraordinary growth for several years, the District continues to have sufficient classrooms for all students. Chapter 41 costs will continue to be a component in the operating expenditures of the District. Also, the District s debt obligations will continue to have a financial impact as long as the District continues to add additional buildings and campuses. Frisco ISD has received a rating of Superior Achievement under Texas new financial accountability rating system. The Superior Achievement rating is the state s highest, demonstrating the quality of the District s financial management and reporting system. This is the sixth year of Schools FIRST (Financial Integrity Rating System of Texas), a financial accountability system for school districts developed by the Texas Education Agency. The primary goal of FIRST is to achieve quality performance in the management of the District s financial resources. Frisco ISD has received a superior rating for all six years of the program. Contacting the District s Financial Management This financial report is designed to provide our citizens, taxpayers, customers, investors and creditors with a general overview of the District s finances and to demonstrate the District s accountability for the money it receives. If you have any questions about this report or need additional financial information, contact the District s Financial Services Office. 9

83 BASIC FINANCIAL STATEMENTS 11

84 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS JUNE 30, 2008 EXHIBIT A-1 Data Control Codes Primary Government Governmental Activities ASSETS 1110 Cash and Cash Equivalents $ 1220 Property Taxes Receivable (Delinquent) 1230 Allowance for Uncollectible Taxes 1240 Due from Other Governments 1290 Other Receivables, net 1420 Capitalized Bond and Other Debt Issuance Costs Capital Assets: 1510 Land 1520 Buildings, Net 1530 Furniture and Equipment, Net 1580 Construction in Progress 233,021,120 4,513,742 (320,463) 3,658,793 84,510 2,607, ,467, ,439,540 9,901, ,009, Total Assets 1,085,383,726 LIABILITIES 2110 Accounts Payable 2140 Interest Payable 2150 Payroll Deductions & Withholdings 2160 Accrued Wages Payable 2180 Due to Other Governments 2200 Accrued Expenses 2300 Deferred Revenues Noncurrent Liabilities 2501 Due Within One Year 2502 Due in More Than One Year 2600 Deferred Gain on Refunding Bonds 18,088,721 17,812,023 1,256,741 22,906, ,375,035 10,594,433 14,825,000 1,030,338,317 1,569, Total Liabilities 1,125,766,736 NET ASSETS 3200 Invested in Capital Assets, Net of Related Debt 3820 Restricted for Federal and State Programs 3850 Restricted for Debt Service 3860 Restricted for Capital Projects 3900 Unrestricted Net Assets (122,276,884) 2,161,968 46,270,566 3,083,347 30,377, Total Net Assets $ (40,383,010) The notes to the financial statements are an integral part of this statement. 12

85 Data Control Codes Primary Government: FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE TEN MONTHS ENDED JUNE 30, 2008 Program Revenues EXHIBIT B-1 Net (Expense) Revenue and Changes in Net Assets Expenses Charges for Services Operating Grants and Contributions Primary Gov. Governmental Activities GOVERNMENTAL ACTIVITIES: 11 Instruction $ 133,565,149 $ 73,267 $ 9,778,227 $ (123,713,655) 12 Instructional Resources and Media Services 4,759, ,712 (4,569,336) 13 Curriculum and Instructional Staff Development 2,440, ,272 (2,071,431) 21 Instructional Leadership 2,513, ,523 (2,247,094) 23 School Leadership 10,875, ,513 (10,351,988) 31 Guidance, Counseling and Evaluation Services 6,888,436-2,255,321 (4,633,115) 32 Social Work Services 275,107-84,452 (190,655) 33 Health Services 2,474, ,889 (2,345,600) 34 Student (Pupil) Transportation 5,889, ,340 (5,711,248) 35 Food Services 10,181,062 8,619,622 1,666, , Extracurricular Activities 9,456, , ,806 (8,539,390) 41 General Administration 5,800, ,765 (5,661,290) 51 Plant Maintenance and Operations 19,271, , ,676 (18,462,857) 52 Security and Monitoring Services 1,077,827-22,889 (1,054,938) 53 Data Processing Services 1,785,957-55,091 (1,730,866) 61 Community Services 850, ,047 17,520 (293,515) 72 Debt Service - Interest on Long Term Debt 39,593, (39,593,981) 73 Debt Service - Bond Issuance Cost and Fees 102, (102,649) 91 Contracted Instructional Services Between Schools 8,276, (8,276,629) 93 Payments to Fiscal Agent/Member Districts of SSA 149, , Payments to Juvenile Justice Alternative Ed. Prg. 115, (115,834) 97 Payments to Tax Increment Fund 11,073, (11,073,196) [TP] TOTAL PRIMARY GOVERNMENT: $ 277,415,879 $ 10,334,116 $ 16,447,353 (250,634,410) Data Control Codes MT DT SF IE MI TR General Revenues: Taxes: Property Taxes, Levied for General Purposes Property Taxes, Levied for Debt Service State Aid - Formula Grants Investment Earnings Miscellaneous Local and Intermediate Revenue Total General Revenues 134,235,359 54,533,671 52,027,127 6,400,879 28,255, ,453,024 CN NB Net Assets--Beginning Change in Net Assets 24,818,614 (65,201,624) NE Net Assets--Ending $ (40,383,010) The notes to the financial statements are an integral part of this statement. 13

86 FRISCO INDEPENDENT SCHOOL DISTRICT BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2008 Data Control Codes 10 General Fund 50 Debt Service Fund 60 Capital Projects ASSETS Cash and Cash Equivalents $ 77,996,026 $ 46,645,219 $ 101,498,554 Property Taxes - Delinquent 3,280,137 1,233,605 - Allowance for Uncollectible Taxes (Credit) (254,828) (65,635) - Due from Other Governments 3,296, Due from Other Funds ,471 Other Receivables Total Assets $ 84,318,682 $ 47,813,189 $ 101,997, LIABILITIES AND FUND BALANCES Liabilities: Accounts Payable $ 2,437,081 $ - $ 14,339,774 Interest Payable - Current - 374,653 - Payroll Deductions and Withholdings Payable 1,256, Accrued Wages Payable 21,542, ,359 Due to Other Funds 498, Due to Other Governments Accrued Expenditures 1,652,290-6,722,745 Deferred Revenues 13,457,565 1,167, Total Liabilities $ 40,844,996 $ 1,542,623 $ 21,192, Fund Balances: Reserved For: Retirement of Long Term Debt $ - $ 46,270,566 $ - Food Service Unreserved Designated For: Construction ,804,147 Other Purposes 21,000, Unreserved and Undesignated: Reported in the General Fund 22,473, Reported in Special Revenue Funds Total Fund Balances $ 43,473,686 $ 46,270,566 $ 80,804, Total Liabilities and Fund Balances $ 84,318,682 $ 47,813,189 $ 101,997,025 The notes to the financial statements are an integral part of this statement. 14

87 EXHIBIT C-1 Other Funds Total Governmental Funds $ 4,875,958 $ 231,015,757-4,513,742 - (320,463) 361,911 3,658, , $ 5,237,869 $ 239,366,765 $ - $ 16,776, ,653-1,256,741 1,233,602 22,906, , ,375, ,177 14,787,712 $ 1,395,790 $ 64,976,287 $ - $ 46,270,566 2,161,968 2,161,968-80,804,147-21,000,000-22,473,686 1,680,111 1,680,111 $ 3,842,079 $ 174,390,478 $ 5,237,869 $ 239,366,765 15

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89 FRISCO INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2008 EXHIBIT C-2 Total Fund Balances - Governmental Funds 1 The District uses internal service funds to charge the costs of certain activities, such as self-insurance and printing, to appropriate functions in other funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net assets. The net effect of this consolidation is to increase net assets. $ 174,390, ,542 2 Capital assets used in governmental activities are not financial resources and therefore are not reported in governmental funds. At the beginning of the year, the cost of these assets was $768,131,075 and the accumulated depreciation was $63,946,229. In addition, long-term liabilities, including bonds payable of $802,862,979, are not due and payable in the current period, and, therefore are not reported as liabilities in the funds. The net effect of including the beginning balances for capital assets (net of depreciation) and long-term debt in the governmental activities is to decrease net assets. 3 Current period capital outlays of $152,767,257 and current period disposals of $(205,618) are expenditures in the fund financial statements,but they should be shown as increases in capital assets in the government-wide financial statements. The net effect of including the current period capital outlays is to increase net assets. (98,678,133) 152,561,639 4 Accrued interest payable on long-term debt is not shown on the fund financial statements, but is shown on the government-wide financial statements. The effect of including accrued interest payable is to decrease net assets. (17,437,370) 5 Accreted interest on capital appreciation bonds on not included on the fund financial statements, but is included on the government-wide financial statements. The effect of including accreted interest is to decrease net assets. (48,953,245) 6 The current period depreciation expense increases accumulated depreciation. The net effect of the current year's depreciation is to decrease net assets. (14,927,945) 7 Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing deferred revenue as revenue, eliminating interfund transactions, reclassifying the proceeds of bond sales as an increase in bonds payable, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to decrease net assets. 19 Net Assets of Governmental Activities $ (188,115,976) (40,383,010) The notes to the financial statements are an integral part of this statement. 17

90 Data Control Codes FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS FOR THE TEN MONTHS ENDED JUNE 30, General Fund 50 Debt Service Fund 60 Capital Projects REVENUES: Total Local and Intermediate Sources $ 154,610,346 $ 63,926,276 $ 3,141,972 State Program Revenues 59,931, Federal Program Revenues Total Revenues 214,541,962 63,926,276 3,141,972 EXPENDITURES: Current: 0011 Instruction 0012 Instructional Resources and Media Services 0013 Curriculum and Instructional Staff Development 0021 Instructional Leadership 0023 School Leadership 0031 Guidance, Counseling and Evaluation Services 0032 Social Work Services 0033 Health Services 0034 Student (Pupil) Transportation 0035 Food Services 0036 Extracurricular Activities 0041 General Administration 0051 Facilities Maintenance and Operations 0052 Security and Monitoring Services 0053 Data Processing Services 0061 Community Services Debt Service: 0072 Debt Service - Interest on Long Term Debt 0073 Debt Service - Bond Issuance Cost and Fees Capital Outlay: 0081 Facilities Acquisition and Construction Intergovernmental: 0091 Contracted Instructional Services Between Schools 0093 Payments to Fiscal Agent/Member Districts of SSA 0095 Payments to Juvenile Justice Alternative Ed. Prg Payments to Tax Increment Fund 115,168, ,484, ,212, ,344, ,727, ,864, , ,478, ,913, ,082, ,470, ,784, ,006, ,274, , ,670, , , ,908,619 8,276, , ,073, Total Expenditures 197,743,632 22,676, ,447, Excess (Deficiency) of Revenues Over (Under) Expenditures OTHER FINANCING SOURCES (USES): 7911 Capital Related Debt Issued (Regular Bonds) 7912 Sale of Real and Personal Property 7916 Premium or Discount on Issuance of Bonds 16,798,330 41,249,297 (158,305,990) ,000, ,103-56, , Total Other Financing Sources (Uses) - 56, ,878, Net Change in Fund Balances 16,798,330 41,305,349 32,572, Fund Balance - September 1 (Beginning) 26,675,356 4,965,217 48,231, Fund Balance - June 30 (Ending) $ 43,473,686 $ 46,270,566 $ 80,804,147 The notes to the financial statements are an integral part of this statement. 18

91 EXHIBIT C-3 Other Funds Total Governmental Funds $ 10,629,838 $ 232,308,432 2,450,723 62,382,339 6,092,141 19,172,702 6,092, ,782,912 3,285, , ,638-2,034,243 75, ,325,193 1,344,602 64, , ,453,890 4,484,132 2,444,288 2,517,202 10,727,046 6,899, ,107 2,478,074 4,913,154 9,325,193 6,426,914 5,534,560 17,784,247 1,006,037 1,274, ,783 22,670, , ,908,619-8,276, , , ,834-11,073,196 17,264, ,133,333 1,907,942 (98,350,421) - 190,000, , , ,934,498 1,907,942 92,584,077 1,934,137 81,806,401 $ 3,842,079 $ 174,390,478 19

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93 EXHIBIT C-4 FRISCO INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE TEN MONTHS ENDED JUNE 30, 2008 Total Net Change in Fund Balances - Governmental Funds The District uses internal service funds to charge the costs of certain activities, such as self-insurance and printing, to appropriate functions in other funds. The net income (loss) of internal service funds are reported with governmental activities. The net effect of this consolidation is to increase net assets. $ 92,584, ,336 Current period capital outlays of $152,767,257 and current period disposals of $(205,618) are expenditures in the fund financial statements, but they should be shown as increases in capital assets in the government-wide financial statements. The net effect of removing the current period capital outlays is to increase net assets. 152,561,639 Accrued interest payable on long-term debt is not shown on the fund financial statements, but is shown on the government-wide financial statements. The net effect of showing accrued interest payable is to decrease net assets. (13,849,793) Accreted interest on capital appreciation bonds is not included on the fund financial statements, but is included on the government-wide financial statements. The effect of including accreted interest is to decrease net assets. (3,053,264) Depreciation is not recognized as an expense in governmental funds since it does not require the use of current financial resources. The net effect of the current period's depreciation is to decrease net assets. (14,927,945) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing deferred revenue as revenue, adjusting current year revenue to show the revenue earned from the current year's tax levy, eliminating interfund transactions, reclassifying the proceeds of bond sales, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to decrease net assets. Change in Net Assets of Governmental Activities $ (188,882,436) 24,818,614 The notes to the financial statements are an integral part of this statement. 21

94 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS PROPRIETARY FUNDS JUNE 30, 2008 EXHIBIT D-1 Governmental Activities - Internal Service Fund ASSETS Current Assets: Cash and Cash Equivalents $ Other Receivables 2,005,363 84,045 Total Assets 2,089,408 LIABILITIES Current Liabilities: Accounts Payable 1,311,866 NET ASSETS Total Liabilities 1,311,866 Unrestricted Net Assets 777,542 Total Net Assets $ 777,542 The notes to the financial statements are an integral part of this statement. 22

95 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS PROPRIETARY FUNDS FOR THE TEN MONTHS ENDED JUNE 30, 2008 EXHIBIT D-2 Governmental Activities - OPERATING REVENUES: Local and Intermediate Sources $ Internal Service Fund 10,652,600 Total Operating Revenues 10,652,600 OPERATING EXPENSES: Other Operating Costs 10,294,150 Total Operating Expenses 10,294,150 Operating Income 358,450 NONOPERATING REVENUES (EXPENSES): Earnings from Temporary Deposits & Investments 27,886 Total Nonoperating Revenues (Expenses) 27,886 Change in Net Assets Total Net Assets - September 1 (Beginning) 386, ,206 Total Net Assets - June 30 (Ending) $ 777,542 The notes to the financial statements are an integral part of this statement. 23

96 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE TEN MONTHS ENDED JUNE 30, 2008 EXHIBIT D-3 Governmental Activities - Cash Flows from Operating Activities: Internal Service Fund Cash Received from User Charges $ 10,652,600 Cash Payments for Other Operating Expenses (10,049,480) Net Cash Provided by Operating Activities 603,120 Cash Flows from Investing Activities: Interest and Dividends on Investments 27,886 Net Increase in Cash and Cash Equivalents 631,006 Cash and Cash Equivalents at Beginning of the Period: 1,374,357 Cash and Cash Equivalents at the End of the Period: $ 2,005,363 Reconciliation of Operating Income to Net Cash Provided by Operating Activities: Operating Income: $ 358,450 Effect of Increases and Decreases in Current Assets and Liabilities: Decrease (increase) in Receivables 168,841 Increase (decrease) in Accounts Payable 75,829 Net Cash Provided by Operating Activities $ 603,120 The notes to the financial statements are an integral part of this statement. 24

97 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS FIDUCIARY FUNDS JUNE 30, 2008 EXHIBIT E-1 Agency Fund ASSETS Cash and Cash Equivalents $ 588,426 Total Assets $ 588,426 LIABILITIES Accounts Payable $ Due to Student Groups 1, ,203 Total Liabilities $ 588,426 The notes to the financial statements are an integral part of this statement. 25

98 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, 2008 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Frisco Independent School District (the "District") is a public educational agency operating under the applicable laws and regulations of the State of Texas. It is governed by a seven member Board of Trustees (the Board ) elected by registered voters of the District. The District prepares its basic financial statements in conformity with accounting principles generally accepted in the United States of America promulgated by the Governmental Accounting Standards Board and other authoritative sources identified in Statement on Auditing Standards No. 69 of the American Institute of Certified Public Accountants; and it complies with the requirements of the appropriate version of Texas Education Agency s Financial Accountability System Resource Guide (the Resource Guide ) and the requirements of contracts and grants of agencies from which it receives funds. A. Reporting Entity The Board is elected by the public and it has the authority to make decisions, appoint administrators and managers, and significantly influence operations. It also has the primary accountability for fiscal matters. Therefore, the District is a financial reporting entity as defined by the Governmental Accounting Standards Board ( GASB ) in its Statement No. 14, The Financial Reporting Entity. There are no component units included within the reporting entity. B. Government-wide and Fund Financial Statements The government-wide financial statements (i.e., the Statement of Net Assets and the Statement of Activities) report information on all of the non-fiduciary activities of the District. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The Statement of Activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds are reported as separate columns in the fund financial statements. C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and -continued- 26

99 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation (continued) fiduciary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets, current liabilities and fund balances are included on the balance sheet. Operating statements of these funds present net increases and decreases in current assets (i.e., revenues and other financing sources and expenditures and other financing uses). The modified accrual basis of accounting recognizes revenues in the accounting period in which they become both measurable and available, and it recognizes expenditures in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest and principal on long-term debt, which is recognized when due. The expenditures related to certain compensated absences and claims and judgements are recognized when the obligations are expected to be liquidated with expendable available financial resources. The District considers all revenues available if they are collectible within 60 days after year end. 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, that is, when they are both measurable and available. The District considers them available if they will be collected within 60 days of the end of the fiscal year. 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. Grant funds are considered to be earned to the extent of expenditures made under the provisions of the grant. Accordingly, when such funds are received, they are recorded as deferred revenues until related and authorized expenditures have been made. If balances have not been expended by the end of the project period, grantors sometimes require the District to refund all or part of the unused amount. The Proprietary Fund Types and Fiduciary Funds are accounted for on a flow of economic resources measurement focus and utilize the accrual basis of accounting. This basis of accounting recognizes revenues in the accounting period in which they are earned and become measurable and expenses in the accounting period in which they are incurred and become measurable. The District applies all GASB pronouncements as well as the Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless these pronouncements conflict or contradict GASB pronouncements. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the fund Statement of Net Assets. The fund equity is segregated into invested in capital assets net of related debt, restricted net assets, and unrestricted net assets. -continued- 27

100 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) D. Fund Accounting The District reports the following major governmental funds: 1. General Fund - The general fund is the District s primary operating fund. It accounts for all financial resources except those required to be accounted for in another fund. 2. Debt Service Fund - The District accounts for resources accumulated and payments made for principal and interest on long-term general obligation debt of governmental funds in a debt service fund. 3. Capital Projects Fund - The proceeds from long-term debt financing and revenues and expenditures related to authorized construction and other capital asset acquisitions are accounted for in a capital projects fund. Additionally, the District reports the following fund types(s): Governmental Funds: 1. Special Revenue Funds - The District accounts for resources restricted to, or designated for, specific purposes by the District or a grantor in a special revenue fund. Most Federal and some State financial assistance is accounted for in a Special Revenue Fund, and sometimes unused balances must be returned to the grantor at the close of specified project periods. Proprietary Funds: 2. Internal Service Fund - Revenues and expenses related to services provided to organizations inside the District on a cost reimbursement basis are accounted for in an internal service fund. The District s Internal Service Fund is a self-funded health insurance fund. Fiduciary Funds: 3. Agency Funds - The District accounts for resources held for others in a custodial capacity in agency funds. The District s Agency Fund is for student groups. E. Assets, Liabilities, and Net Assets or Equity 1. Deposits and Investments The District s cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- -continued- 28

101 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Liabilities, and Net Assets or Equity (continued) 2. Due From (To) Other Funds Interfund receivables and payables arise from interfund transactions and are recorded in all affected funds in the period in which transactions are executed in the normal course of operations. 3. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the applicable governmental activities columns in the government-wide financial statements. Capital assets are defined by the government as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of two years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Property, plant, and equipment of the district is depreciated using the straight line method over the following estimated useful lives: 4. Vacation and Sick Leave Assets Years Buildings 40 Building improvements 20 Vehicles 10 Office equipment 7 Computer equipment 5 Vacations are to be taken within the same year they are earned, and any unused days at the end of the year are forfeited. Therefore, no liability has been accrued in the accompanying basic financial statements. Employees of the District are entitled to sick leave based on category/class of employment. Sick leave is allowed to be accumulated but does not vest. Therefore, a liability for unused sick leave has not been recorded in the accompanying basic financial statements. -continued- 29

102 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Liabilities, and Net Assets or Equity (continued) 5. Long-term Obligations In the government-wide financial statements, and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 6. Fund Equity In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. Debt Service Fund reserves total $46,270,566 for retirement of funded indebtedness as of June 30, A total of $80,804,147 has been designated for authorized construction programs in the Capital Projects Fund, and $21,000,000 has been designated for other purposes in the General Fund. The Special Revenue Fund reserves total $2,161,968 for Food Service. Unreserved Designated Fund balances for other purposes included $21,000,000 in the General Fund. 7. When the District incurs an expense for which it may use either restricted or unrestricted assets, it uses the restricted assets first whenever they will have to be returned if they are not used. 8. Data Control Codes The Data Control Codes refer to the account code structure prescribed by T.E.A. in the Financial Accountability System Resources Guide. Texas Education Agency requires school districts to display these codes in the financial statements filed with the Agency in order to insure accuracy in building a Statewide data base for policy development and funding plans. -continued- 30

103 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Liabilities, and Net Assets or Equity (continued) 9. School Districts are required to report all expenses by function, except certain indirect expenses. General administration and data processing service functions (data control codes 41 and 53, respectively) include expenses that are indirect expenses of other functions. These indirect expenses are not allocated to other functions. NOTE 2 RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATE- MENTS A. Explanation of Certain Differences Between the Governmental Fund Balance Sheet and the Government-Wide Statement of Net Assets Exhibit C-2 provides a reconciliation between fund balance - total governmental funds and net assets - governmental activities as reported in the government-wide statement of net assets. One element of that reconciliation explains that various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to the full accrual basis of accounting. The details of this $(188,115,976) adjustment are as follows: Long-term debt: Issuance of bonds payable $ (190,000,000) Premium and discount on bonds (3,347,093) Deferred gain on refunding bonds (1,569,646) Issuance costs on bonds 2,607,484 (192,309,255) Deferred revenue: To remove the current year uncollected tax levy from deferred revenue 3,517,124 To remove prior year collectible delinquent tax levy receivable from deferred revenue 676,155 4,193,279 Net adjustment to reduce fund balance - total governmental funds to arrive at net assets - governmental activities $ (188,115,976) B. Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances and the Government-Wide Statement of Activities Exhibit C-4 provides a reconciliation between net changes in fund balances - total governmental funds and changes in net assets of governmental activities as reported in the governmentwide statement of activities. One element of that reconciliation explains that various other reclassifications are necessary to convert from the modified accrual basis of accounting to the full accrual basis of accounting. The details of this $(188,882,436) adjustment are as follows: -continued- 31

104 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 2 RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATE- MENTS (continued) B. Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances and the Government-Wide Statement of Activities (continued) Long-term debt: Issuance of bonds payable $ (190,000,000) Current period amortization (116,593) Premium and discount on bonds (595,395) Issuance costs on bonds 539,343 (190,172,645) Taxes: To move the current year uncollected tax levy to revenue 3,517,124 To remove the prior year tax collection from current year revenue (2,226,915) 1,290,209 Net adjustment to decrease net changes in fund balance - total governmental funds to arrive at changes in net assets of governmental activities $ (188,882,436) NOTE 3 STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary Data The Board of Trustees adopts an appropriated budget for the General Fund, Debt Service Fund and the Food Service Fund which is included in the Special Revenue Funds. The District is required to present the adopted and final amended budgeted revenues and expenditures for each of these funds. The District compares the final amended budget to actual revenues and expenditures. The General Fund Budget report appears in Exhibit F-1 and the other two reports are in Exhibit H-3 and H-4. The following procedures are followed in establishing the budgetary data reflected in the basic financial statements: 1. Prior to June 19, the District prepares a budget for the next succeeding fiscal year beginning July 1. The operating budget includes proposed expenditures and the means of financing them. 2. A meeting of the Board is then called for the purpose of adopting the proposed budget. At least ten days public notice of the meeting must be given. -continued- 32

105 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 3 STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY (continued) A. Budgetary Data (continued) 3. Prior to July 1, the budget is legally enacted through passage of a resolution by the Board. Once a budget is approved, it can only be amended at the function and fund level by approval of a majority of the members of the Board. Amendments are presented to the Board at its regular meetings. Each amendment must have Board approval. As required by law, such amendments are made before the fact, are reflected in the official minutes of the Board and are not made after fiscal year end. The budget was properly amended throughout the year by the Board of Trustees. 4. Each budget is controlled by the budget coordinator at the revenue and expenditure function/object level. Budgeted amounts are as amended by the Board. All budget appropriations lapse at year end. A reconciliation of fund balances for both appropriated budget and nonappropriated budget special revenue funds is as follows: June 30, 2008 Fund Balance Appropriated budget funds - Food Service Special Revenue Fund $ 2,161,968 Nonappropriated budget funds 1,680,111 All Special Revenue Funds $ 3,842,079 B. Encumbrance Accounting The District employs encumbrance accounting, whereby encumbrances for goods or purchased services are documented by purchase orders and contracts. An encumbrance represents a commitment or Board appropriation related to unperformed contracts for goods and services. The issuance of a purchase order or the signing of a contract creates an encumbrance but does not represent an expenditure for the period, only a commitment to expend resources. Appropriations lapse at June 30 and encumbrances outstanding at that time are either canceled or appropriately provided for in the subsequent year's budget. There were no outstanding encumbrances at year end. NOTE 4 DETAILED NOTES ON ALL FUNDS A. Deposits and Investments The funds of the District must be deposited and invested under the terms of a contract, contents of which are set out in the Depository Contract Law. The depository bank places approved pledged securities for safekeeping and trust with the District s agent bank in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank s dollar amount of Federal Deposit Insurance Corporation ( FDIC ) insurance. -continued- 33

106 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) A. Deposits and Investments (continued) At June 30, 2008, the carrying amount of the District's cash, savings, and time deposits was $5,036,066. The bank balance was $7,972,939. The District's combined deposits at June 30, 2008, and during the ten months ended June 30, 2008 were fully insured by federal depository insurance or collateralized with securities pledged to the District and held by the District's agent. In addition the following is disclosed regarding coverage of combined balances on the date of highest deposit: a. Name of bank JPMorgan Chase Bank, Frisco, Texas. b. The market value of securities pledged as of the date of the highest combined balance on deposit was $ 61,934,746. c. The highest combined balances of cash, savings, and time deposit accounts amounted to $ 58,958,261 and occurred during the month of September. d. Total amount of FDIC coverage at the time of highest combined balance was $ 100,000. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires the District to adopt, implement, and publicize an investment policy. That policy must address the following areas: (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, and (9) bid solicitation preferences for certificates of deposit. Statutes authorize the District to invest in (1) obligations of the U.S. Treasury, certain U.S. agencies, and the State of Texas; (2) certificates of deposit; (3) certain municipal securities; (4) money market savings account; (5) repurchase agreements, (6) bankers acceptances, (7) Mutual Fund; (8) Investment pools; (9) guaranteed investment contracts; and (10) common trust funds. The Act also requires the District to have independent auditors perform test procedures related to investment practices as provided by the Act. The District is in substantial compliance with the requirements of the Act and with local policies. In compliance with the Public Funds Investment Act, the District has adopted a deposit and investment policy. That policy addresses the following risks: a. Custodial Credit Risk - Deposits: In the case of deposits this is the risk that, in the event of a bank failure, the District s deposits may not be returned to it. The District s policy regarding types of deposits allowed and collateral requirements is: the Depository may be a state bank authorized and regulated under Texas law; a national bank, savings and loan association, or savings bank authorized and regulated by federal law; or a savings and loan association or savings bank organized under Texas law; but shall not be any bank the deposits of which are not insured by the Federal Deposit Insurance Corporation (FDIC). The District is not exposed to custodial credit risk for its deposits, as all are covered by depository insurance and pledged securities. -continued- 34

107 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) A. Deposits and Investments (continued) b. Custodial Credit Risk - Investments: For an investment, this is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The District investments are with the Lone Star Investment Pool ( LoneStar ). The pool is a public funds investment pool created to provide a safe environment for the placement of local government funds in authorized short-term investments. Local investment pools operate in a manner consistent with the Security and Exchange Commission s Rule 2a7 of the Investment Company Act of Administration of LoneStar is performed by a Board of Directors, which is an administrative agency created under the Interlocal Act. The District is not exposed to custodial credit risk for its investments. c. Credit Risk - This is the risk that an issuer of an investment will be unable to fulfill its obligations. The rating of securities by nationally recognized rating agencies is designed to give an indication of credit risk. The credit quality rating for LoneStar at year end was Aaa by Moody s Investor Service. d. Interest Rate Risk - This is the risk that changes in interest rates will adversely affect the fair value of an investment. The District manages its exposure to declines in fair values by limiting the weighted average maturity of its investment portfolio to less than one year from the time of purchase. The weighted average maturity for the District s investment in external investment pools is less than 60 days. e. Foreign Currency Risk - This is the risk that exchange rates will adversely affect the fair value of an investment. The District is not exposed to foreign currency risk. f. Concentration of Credit Risk - This is the risk of loss attributed to the magnitude of the District s investment in a single issuer (i.e., lack of diversification). Concentration risk is defined as positions of 5 percent or more in the securities of a single issuer. Investments issued by the U. S. Government and investments in investment pools are excluded from the 5 percent disclosure requirement. The District is not exposed to concentration of credit risk. The District's temporary investments at June 30, 2008, were as follows: B. Property Taxes Investment type: Fair Value Lone Star investment pool $ 228,420,187 Property taxes are considered available when collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period. The District levies its taxes on October 1 in conformity with Subtitle E, Texas Property Tax Code. Taxes are due upon receipt of the tax bill and are past due and subject to interest if not paid -continued- 35

108 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) B. Property Taxes (continued) by February 1 of the period following the October 1 levy date. The assessed value of the property tax roll on August 1, 2007, upon which the levy for the fiscal year was based, was $15,950,988,830. The roll was subsequently decreased to a period end assessed value of $15,944,195,572. Taxes are delinquent if not paid by January 31. Delinquent taxes are subject to both penalty and interest charges plus 15% delinquent collection fees for attorney costs after June 30. The tax rates assessed for the ten months ended June 30, 2008, to finance General Fund operations and the payment of principal and interest on general obligation long-term debt were $0.96 and $0.39 per $100 valuation, respectively, for the total of $1.35 per $100 valuation. Total tax collections for the ten months ended June 30, 2008 were 99.4% of the period end adjusted tax levy. Delinquent taxes are prorated between maintenance and debt service based on rates adopted for the year of the levy. Allowances for uncollectible taxes within the General and Debt Service Funds are based on historical experience in collecting taxes. Uncollectible personal property taxes are periodically reviewed and written off, but the District is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature. As of June 30, 2008, property taxes receivable, net of estimated uncollectible taxes, totaled $3,025,309 and $1,167,970 for the General and Debt Service Funds, respectively. C. Due From Other Governments The District participates in a variety of federal and state programs from which it receives grants to partially or fully finance certain activities. In addition, the District receives entitlements from the State through the School Foundation and Per Capita Programs. Amounts due from federal and state governments as of June 30, 2008, are summarized below. All federal grants shown below are passed through the TEA and are reported on the combined financial statements as Due from Other Governments. State Federal Fund Entitlements Grants Total General $ 3,296,882 3,296,882 Special revenue 77, , ,911 Total $ 3,374, ,400 3,658,793 -continued- 36

109 NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) D. Interfund Receivables and Payables Interfund balances at June 30, 2008, consisted of the following individual fund receivables and payables: Fund Receivable Payable General Fund: Capital Projects Fund $ 498,471 Capital Projects Fund: General Fund 498,471 Total $ 498, ,471 E. Capital Assets Capital asset activity for the period ended June 30, 2008, was as follows: Primary Government Beginning Ending Balance Additions Retirements Balance Government activities: Land $ 91,744,191 22,928,756 (205,618) 114,467,329 Buildings and improvements 526,681,219 95,705, ,386,344 Furniture and equipment 15,315,549 3,513,601 18,829,150 Construction in progress 134,390, ,324,900 (95,705,125) 165,009,891 Totals at historical cost 768,131, ,472,382 (95,910,743) 920,692,714 Less accumulated depreciation for: Buildings and improvements (56,943,862) (13,002,942) (69,946,804) Furniture and equipment (7,002,367) (1,925,003) (8,927,370) Total accumulated depreciation (63,946,229) (14,927,945) (78,874,174) Governmental activities capital assets, net $ 704,184, ,544,437 (95,910,743) 841,818,540 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- -continued- 37

110 NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) E. Capital Assets (continued) Depreciation expense was charged to governmental functions as follows: Instruction $ 9,840,159 Instructional resources and media 282,085 School leadership 166,378 Student transportation 990,772 Food services 879,132 Extracurricular activities 1,283,149 General administration 269,035 Plant maintenance and operations 620,731 Security monitoring 71,790 Data processing services 514,686 Community services 10,028 Total depreciation expense $ 14,927,945 F. Construction Commitments At June 30, 2008, the District had several projects under construction. A summary of the status of these projects and the related binding contracts with contractors is as follows: Costs Scheduled Incurred Completion Contract Through Amount Project Name Date Amount 06/30/08 Retained Heritage HS 08/09 64,004,731 31,032,922 1,382,659 Lone Star HS 08/09 64,825,441 23,119, ,052 Cate Center 08/08 26,597,655 24,252,510 1,120,702 Stafford MS 08/08 23,229,000 22,856,057 1,064,796 Scoggins MS 08/08 20,874,000 19,947, ,765 Craig Ranch ES 08/09 10,500, ,553 Frisco Hills ES 08/09 10,500, ,384 Stonebridge ES 08/09 11,000, ,680 Elliott ES 08/08 10,834,297 10,881,183 10,000 Allen ES 08/09 11,130,000 3,342, ,503 Tadlock ES 08/08 11,648,018 11,467, ,453 Grayhawk ES 08/10 16,500,000 9,297 Carter Service Ctr. 08/08 7,187,048 7,003, ,164 Various projects 09/08 4,539,690 2,596, ,648 Pink Stadium 12,747, ,637 Transportation West 08/08 6,640,000 6,243, ,418 MS #10 08/10 18,480,000 93,621 Early Child Ctr. 08/09 15,000, ,043 20,586 Elem. School 08/10 11,000,000 65,143 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- -continued- 38

111 NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) G. Bonds Payable Bonds payable activity for the ten months ended June 30, 2008, was as follows: Interest Amounts Rate Original Beginning Ending Due Within Governmental Activities Payable Issue Balance Additions Reductions Balance One Year Bonded Indebtedness: 1997 School Building 7.75% 8,300, , , , School Building 7.25% 17,700,000 14,655,000 14,655, , A School Building 6.50% 25,000,000 22,180,000 22,180, , Refunding & School Building 5.75% 40,033,092 33,808,092 33,808,092 1,490, School Building 7.00% 45,000,000 14,565,000 14,565, , A School Building 7.00% 28,000,000 26,640,000 26,640, , School Building 6.50% 60,000,000 56,995,000 56,995,000 1,115, School Building 7.25% 75,000,000 72,135,000 72,135,000 1,085, A Refunding & School Building 5.77% 38,019,141 37,834,141 37,834,141 1,705, A School Building 2.60% 1,900, , , , B School Building 7.00% 38,100,000 38,100,000 38,100, Refunding & School Building 5.25% 60,661,071 58,139,395 58,139,395 1,378, A School Building 5.50% 40,000,000 39,505,000 39,505, , B School Building 5.50% 25,000,000 24,560,000 24,560, , C Refunding & School Building 5.00% 104,595, ,839, ,839,756 1,869, School Building 4.58% 85,000,000 85,000,000 85,000, , A School Building 4.86% 80,000,000 80,000,000 80,000,000 1,000, Refunding & School Building 4.41% 95,186,595 95,186,595 95,186, A School Building 4.83% 100,000, ,000, ,000, School Building 5.00% 90,000, ,000,000 90,000,000 0 Subtotal 802,862, ,000, ,862,979 14,393,638 Accreted interest 45,899,981 3,053,264 48,953, ,362 Total bonded indebtedness $ 848,762, ,053,264 1,041,816,224 14,825,000 General obligation bonds consist of 1995 through 2008 School Building Bonds bearing interest at % per annum and 1994, 1999, 2002, 2004, 2005, and 2007 Refunding Bonds bearing interest at % per annum. Interest expense for the ten months on all bonded indebtedness was $22,670,113. Debt service requirements for the general obligation bonds are as follows: FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- -continued- 39

112 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) G. Bonds Payable (continued) Year Ending Total June 30, Principal Interest Requirements 2009 $ 14,393,638 47,567,623 61,961, ,998,596 46,983,149 65,981, ,202,773 46,019,384 67,222, ,026,134 47,247,708 67,273, ,239,605 45,965,945 67,205, ,410, ,854, ,264, ,327, ,263, ,591, ,365, ,793, ,158, ,822, ,458, ,280, ,977,423 79,156, ,133, ,100,000 3,161,644 60,261,644 Total $ 992,862, ,471,984 1,960,334,963 There are a number of limitations and restrictions contained in the various general obligation bonds indentures. The District is in compliance with all significant limitations and restrictions at June 30, H. Defeasance of Debt In prior years, the District defeased previously issued and outstanding bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the District s financial statements. On June 30, 2008, $26,470,000 of the bonds outstanding are considered defeased. NOTE 5 OTHER INFORMATION A. Risk Management The District is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. During fiscal 2008, the District purchased commercial insurance to cover general liabilities. There were no significant reductions in coverage in the past fiscal year, and there were no settlements exceeding insurance coverage for each of the past three fiscal years. B. Litigation and Contingencies The District is a party to various legal actions none of which is believed by administration to have a material effect on the financial condition of the District. Accordingly, no provision for losses has been recorded in the accompanying combined financial statements for such contingencies. -continued- 40

113 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 5 OTHER INFORMATION (continued) B. Litigation and Contingencies (continued) The District participates in numerous state and federal grant programs which are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies; therefore, to the extent that the District has not complied with the rules and regulations governing the grants, if any, refunds of any money received may be required and the collectability of any related receivable at June 30, 2008, may be impaired. In the opinion of the District, there are no significant contingent liabilities relating to compliance with the rules and regulations governing the respective grants; therefore, no provision has been recorded in the accompanying combined financial statements for such contingencies. C. Revenues from Local and Intermediate Sources During the current period, revenues from local and intermediate sources consisted of the following: Special Debt Capital Internal General Revenue Service Projects Service Fund Fund Fund Fund Fund Total Property taxes $ 132,501,242 54,167, ,668,456 Food sales 8,619,622 8,619,622 Investment income 2,547,031 62, ,354 3,087,972 27,886 6,400,879 Penalties, interest and other tax related income 6,460, ,485 6,869,840 Co-curricular student activities 564, ,693 Other 12,537,025 1,947,580 8,674,223 54,000 10,652,600 33,865,428 Total $ 154,610,346 10,629,838 63,926,276 3,141,972 10,680, ,988,918 D. Deferred Revenue Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, the various components of deferred revenue reported in the governmental funds were as follows: Special Debt General Revenue Service Fund Fund Fund Total Net tax revenue $ 3,025,309 1,167,970 4,193,279 Advanced placement incentives 29,099 29,099 Non-education community based 2,300 2,300 Foundation 10,432,256 10,432,256 Technology allotment 130, ,678 Early Childhood Summer Program Total $ 13,457, ,177 1,167,970 14,787,712 -continued- 41

114 NOTE 5 OTHER INFORMATION (continued) E. Health Care Coverage The District sponsors a health self-insurance plan (the plan ). The District contributes $250 per month per employee to the plan and the employees, at their option authorized payroll withholdings to pay premiums for dependents health insurance coverage. A third party administrator acting on behalf of the District processes health claim payments. Claims incurred after October 1, 2007 are subject to an individual stop-loss of $175,000 per participant annually. Individual employee health claims are self insured by the District up to $175,000 annually and H.C.C. Benefits provides stop-loss benefits above $175,000 up to an aggregate district wide attachment point of $12,132,211. At June 30, 2008, the District has recorded current health claim short term liabilities of $1,311,866 in the Internal Service Fund representing claims reported but not paid and incurred but not reported. These liabilities are based on requirements of Governmental Accounting Standards Board Statement No. 10, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The latest financial statements available for H.C.C. Benefits are filed with the Texas State Board of Insurance, Austin, Texas, and are public records. The District does not provide any post-retirement health benefits to its employees. Changes in the medical claims liability amounts for the two previous years are as follows: Year Ended Ten Months Ended August 31, 2007 June 30, 2008 Unpaid claims, beginning of period $ 720,416 1,236,037 Incurred claims (including IBNR s) 9,136,846 8,111,937 Claim payments (8,621,225) (8,036,108) Unpaid claims, end of fiscal period $ 1,236,037 1,311,866 F. Pension Plan Obligations Plan Description - The District contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer defined benefit pension plan. TRS administers retirement and disability annuities, and death and survivor benefits to employees and beneficiaries of employees of the public school systems of Texas. It operates primarily under the provisions of the Texas Constitution, Article XVI, Sec. 67, and Texas Government Code, Title 8, Subtitle C. TRS also administers proportional retirement benefits and service credit transfer under Texas Government Code, Title 8, Chapters 803 and 805, respectively. The Texas state legislature has the authority to establish and amend benefit provisions of the pension plan and may, under certain circumstances, grant special authority to the TRS Board of Trustees. TRS issues a publicly available financial report that includes financial FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- -continued- 42

115 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 5 OTHER INFORMATION (continued) F. Pension Plan Obligations (continued) statements and required supplementary information for the defined benefit pension plan. That report may be obtained by writing to the TRS Communications Department, 1000 Red River Street, Austin, Texas 78701, by calling the TRS Communications Department at , or by downloading the report from the TRS Internet website, under the TRS Publications heading. Funding Policy - Contribution requirements are not actuarially determined but are established and amended by the Texas state legislature. The state funding policy is as follows: (1) The state constitution requires the legislature to establish a member contribution rate of not less than 6.0% of the member s annual compensation and a state contribution rate of not less than 6.0% and not more than 10% of the aggregate annual compensation of all members of the system; (2) A state statute prohibits benefit improvements or contribution reductions if, as a result of the particular action, the time required to amortize TRS unfunded actuarial liabilities would be increased to a period that exceeds 31 years, or, if the amortization period already exceeds 31 years, the period would be increased by such action. State law provides for a member contribution rate of 6.4% for fiscal year 2006, 2007 and 2008 and a state contribution rate of 6.0% for fiscal years 2006 and 2007 and 6.58% for fiscal year In certain instances the reporting district is required to make all or a portion of the state s 6.00% contribution for fiscal years 2006 and 2007 and 6.58% for fiscal year State contributions to TRS made on behalf of the District s employees for the years ended August 31, 2006, 2007 and the ten months ended June 30, 2008 were $5,092,817, $6,304,763, and $7,904,489, respectively. The District paid additional state contributions for the years ended August 31, 2006, 2007 and the ten months ended June 30, 2008 in the amount of $1,114,326, $1,447,237, and $1,424,850, respectively, on the portion of the employees salaries that exceeded the statutory minimum. G. Retiree Health Plan Plan Description - The District contributes to the Texas Public School Retired Employees Group Insurance Program (TRS-Care), a cost-sharing multiple-employer defined benefit postemployment health care plan administered by the Teacher Retirement System of Texas. TRS-Care Retired Plan provides health care coverage for certain persons (and their dependents) who retired under the Teacher Retirement System of Texas. The statutory authority for the program is Texas Insurance Code, Chapter Section grants the TRS Board of Trustees the authority to establish and amend basic and optional group insurance coverage for participants. The TRS issues a publicly available financial report that includes financial statements and required supplementary information for TRS-Care. That report may be obtained by visiting the TRS Web site at by writing to the Communications Department of the Teacher Retirement System of Texas at 1000 Red River Street, Austin, Texas 78701, or by calling continued- 43

116 FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Ten Months Ended June 30, continued- NOTE 5 OTHER INFORMATION (continued) G. Retiree Health Plan (continued) Funding Policy - Contribution requirements are not actuarially determined but are legally established each biennium by the Texas Legislature. Texas Insurance Code, Sections , 203, and 204 establish state, active employee, and public school contributions, respectively. The State of Texas and active public school employee contribution rates were 1.0% and 0.65% of public school payroll, respectively, with school districts contributing a percentage of payroll set at 0.55% for fiscal years 2006, 2007, and Per Texas Insurance Code, Chapter 1575, the public school contribution may not be less than 0.25% or greater than 0.75% of the salary of each active employee of the public school. For the years ended August 31, 2006, 2007, and ten months ended June 30, 2008, the State s contributions to TRS-Care were $946,978, $1,220,259, and $1,217,470, respectively, the active member contributions were $615,535, $793,173, and $790,341, respectively, and the school district s contributions were $520,838, $671,147, and $669,601, respectively, which equaled the required contributions each year. H. Workers Compensation Insurance For its workers' compensation insurance, the District is a participant in the East Texas Educational Insurance Association (ETEIA), a public entity risk pool. The District pays premiums to ETEIA for its workers' compensation insurance. The ETEIA has obtained reinsurance from Safety National Casualty Corporation for claims exceeding $225,000. At June 30, 2008, the District's unpaid claims total $1,652,290 including incurred but not reported (IBNR) claims of $640,237, estimated. The District has reported the unpaid claims as a liability in the General Fund. Changes in the balances of claims liability amounts in fiscal years 2007 and 2008 are as follows: Unpaid claims, beginning of year $ 1,100, ,541 Incurred claims (including IBNR) 231, ,608 Claim payments (414,408) (163,859) Unpaid claims, end of year $ 917,541 1,652,290 I. Subsequent Event On October 16, 2008, the District approved the issuance of $100,000,000 of School Building Bonds to construct, renovate, and equip school facilities and to pay costs associated with the issuance of the bonds. The District has $ 708,501,286 of authorized, but unissued bonds. NOTE 6 ARBITRAGE COMPLIANCE The District is monitoring its compliance with Federal arbitrage regulations. As of June 30, 2008, the District is in compliance with Federal regulations and the District has no liability for arbitrage rebates. 44

117 APPENDIX E SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY

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119 Financial Guaranty Insurance Policy Issuer: Policy No.: Obligations: Premium: Effective Date: Assured Guaranty Corp., a Maryland corporation ( Assured Guaranty ), in consideration of the payment of the Premium and on the terms and subject to the conditions of this Policy (which includes each endorsement hereto), hereby unconditionally and irrevocably agrees to pay to the trustee (the Trustee ) or the paying agent (the Paying Agent ) for the Obligations (as set forth in the documentation providing for the issuance of and securing the Obligations) for the benefit of the Holders, that portion of the Insured Payments which shall become Due for Payment but shall be unpaid by reason of Nonpayment. Assured Guaranty will make such Insured Payments to the Trustee or the Paying Agent on the later to occur of (i) the date applicable principal or interest becomes Due for Payment, or (ii) the Business Day next following the day on which Assured Guaranty shall have Received a completed Notice of Nonpayment. If a Notice of Nonpayment by Assured Guaranty is incomplete or does not in any instance conform to the terms and conditions of this Policy, it shall be deemed not Received, and Assured Guaranty shall promptly give notice to the Trustee or the Paying Agent. Upon receipt of such notice, the Trustee or the Paying Agent may submit an amended Notice of Nonpayment. The Trustee or the Paying Agent will disburse the Insured Payments to the Holders only upon receipt by the Trustee or the Paying Agent, in form reasonably satisfactory to it of (i) evidence of the Holder's right to receive such payments, and (ii) evidence, including without limitation any appropriate instruments of assignment, that all of the Holder's rights to payment of such principal or interest Due for Payment shall thereupon vest in Assured Guaranty. Upon and to the extent of such disbursement, Assured Guaranty shall become the Holder of the Obligations, any appurtenant coupon thereto and right to receipt of payment of principal thereof or interest thereon, and shall be fully subrogated to all of the Holder's right, title and interest thereunder, including without limitation the right to receive payments in respect of the Obligations. Payment by Assured Guaranty to the Trustee or the Paying Agent for the benefit of the Holders shall discharge the obligation of Assured Guaranty under this Policy to the extent of such payment. This Policy is non-cancelable by Assured Guaranty for any reason. The Premium on this Policy is not refundable for any reason. This Policy does not insure against loss of any prepayment premium or other acceleration payment which at any time may become due in respect of any Obligation, other than at the sole option of Assured Guaranty, nor against any risk other than Nonpayment. Except to the extent expressly modified by any endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. Avoided Payment means any amount previously distributed to a Holder in respect of any Insured Payment by or on behalf of the Issuer, which amount has been recovered from such Holder pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction that such payment constitutes an avoidable preference with respect to such Holder. Business Day means any day other than (i) a Saturday or Sunday, (ii) any day on which the offices of the Trustee, the Paying Agent or Assured Guaranty are closed, or (iii) any day on which banking institutions are authorized or required by law, executive order or governmental decree to be closed in the City of New York or in the State of Maryland. Due for Payment means (i) when referring to the principal of an Obligation, the stated maturity date thereof, or the date on which such Obligation 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 a call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless Assured Guaranty in its sole discretion elects to make any principal payment, in whole or in part, on such earlier date) and (ii) when referring to interest on an Obligation, the stated date for payment of such interest. Holder means, in respect of any Obligation, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Obligation to payment of principal or interest thereunder, except that Holder shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Obligations. Insured Payments means that portion of the principal of and interest on the Obligations that shall become Due for Payment but shall be unpaid by reason of Nonpayment. Insured Payments shall not include any additional amounts owing by the Issuer solely as a result of the failure by the Trustee or the Paying Agent to pay such amount when due and payable, including without limitation any such additional amounts as may be attributable to penalties or to interest accruing at a default rate, to amounts payable in respect of indemnification, or to any other additional amounts payable by the Trustee or the Paying Agent by reason of such failure. Nonpayment means, in respect of an Obligation, the failure of the Issuer to have provided sufficient funds to the Trustee or the Paying Agent for payment in full of all principal and interest Due for Payment on such Obligation. It is further understood that the term "Nonpayment" in respect of an Obligation includes any Avoided Payment. Receipt or Received means actual receipt or notice of or, if notice is given by overnight or other delivery service, or by certified or registered United States mail, by a delivery receipt signed by a person authorized to accept delivery on behalf of the person to whom the notice was given. Notices to Assured Guaranty may be mailed by registered mail or personally delivered or telecopied to it at 1325 Avenue of the Americas, New York, New York 10019, Telephone Number: (212) , Facsimile Number: (212) , Attention: Risk Management Department Public Finance Surveillance, with a copy to the General Counsel, or to such other address as shall be specified by Assured Guaranty to the Trustee Page 1 of 2 Form NY-FG (05/07)

120 or the Paying Agent in writing. A Notice of Nonpayment will be deemed to be Received by Assured Guaranty on a given Business Day if it is Received prior to 12:00 noon (New York City time) on such Business Day; otherwise it will be deemed Received on the next Business Day. Term means the period from and including the Effective Date until the earlier of (i) the maturity date for the Obligations, or (ii) the date on which the Issuer has made all payments required to be made on the Obligations. At any time during the Term of this Policy, Assured Guaranty may appoint a fiscal agent (the Fiscal Agent ) for purposes of this Policy by written notice to the Trustee or the Paying Agent, specifying the name and notice address of such Fiscal Agent. From and after the date of Receipt of such notice by the Trustee or the Paying Agent, copies of all notices and documents required to be delivered to Assured Guaranty pursuant to this Policy shall be delivered simultaneously to the Fiscal Agent and to Assured Guaranty. All payments required to be made by Assured Guaranty under this Policy may be made directly by Assured Guaranty or by the Fiscal Agent on behalf of Assured Guaranty. The Fiscal Agent is the agent of Assured Guaranty only, and the Fiscal Agent shall in no event be liable to the Trustee or the Paying Agent for any acts of the Fiscal Agent or any failure of Assured Guaranty to deposit, or cause to be deposited, sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, Assured Guaranty hereby waives, in each case for the benefit of the Holders only, all rights and defenses of any kind (including, without limitation, the defense of fraud in the inducement or in fact or any other circumstance that would have the effect of discharging a surety, guarantor or any other person in law or in equity) that may be available to Assured Guaranty to deny or avoid payment of its obligations under this Policy in accordance with the express provisions hereof. Nothing in this paragraph will be construed (i) to waive, limit or otherwise impair, and Assured Guaranty expressly reserves, Assured Guaranty s rights and remedies, including, without limitation: its right to assert any claim or to pursue recoveries (based on contractual rights, securities law violations, fraud or other causes of action) against any person or entity, in each case, whether directly or acquired as a subrogee, assignee or otherwise, subsequent to making any payment to the Trustee or the Paying Agent, in accordance with the express provisions hereof, and/or (ii) to require payment by Assured Guaranty of any amounts that have been previously paid or that are not otherwise due in accordance with the express provisions of this Policy. This Policy (which includes each endorsement hereto) sets forth in full the undertaking of Assured Guaranty with respect to the subject matter hereof, and may not be modified, altered or affected by any other agreement or instrument, including, without limitation, any modification thereto or amendment thereof. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. This Policy will be governed by, and shall be construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, Assured Guaranty has caused this Policy to be affixed with its corporate seal, to be signed by its duly authorized officer, and to become effective and binding upon Assured Guaranty by virtue of such signature. (SEAL) ASSURED GUARANTY CORP. By: [Insert Authorized Signatory Name] [Insert Authorized Signatory Title] Signature attested to by: Counsel Page 2 of 2 Form NY-FG (05/07)

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122 Financial Advisory Services Provided By: INVESTMENT BANKERS